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Treas.
HJ

10
.A13
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v.421

Department of the Treasury

PRESS RELEASES

The following numbers were not used:

JS-2200,2202,2204

Department of the TrtaSury
Ubrary

AUG 2 6 2005

is- ? 177:

Stakment by Trea~~try Secretary John Snow on Congressman Robert Matsui

Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
January 3, 2005
IS-2177

Statement by Treasury Secretary John Snow on Congressman Robert Matsui
"This weekend, America lost a great leader and a great intellect, and the people of
California lost a great friend. I knew and worked with Congressman Matsui for three
decades. I deeply admired and appreciated his knowledge, his compassion, and his
ability to reach across the aisle to achieve progress for his country He will be
remembered fondly, and with tremendous respect, for all that he gave as both a
public servant and as an individual. I especially appreciated the opportunity to work
closely with him over the last two years and am grateful for all of the courtesies he
extended to me."
-30-

htt~.://www.treas.gov/prcss/re~ases/js2177.htm

4/22/2005

J~ 2178: Statement by Treas.~lry Secretary John Snow on World Bank President Jam...

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FROM THE OFFICE OF PUBLIC AFFAIRS
January 3, 2005
JS-2178

Statement by Treasury Secretary John Snow on
World Bank President James Wolfensohn
"Over the past ten years, Jim Wolfensohn has been an outstandlllg leader of the
World Bank. I have worked closely with him over the past two years on a number
of Initiatives Includlllg President Bush's grants and measurable results programs,
the reconstruction of Iraq and Afghanistan, among countless other issues. I
particularly want to commend him for his leadership on anti-corruption efforts,
"I am rewarded to have known him as a colleague and a friend Because of Jim's
leadership, the World Bank today is a more dynamic and effective development
organization. I view hiS accomplishments as historic, Jim's tireless efforts to assist
the world's poor have been marked by unmatched passion and accomplishment.
The world's poorest people have clearly benefited from Jim's tenure at the World
Bank. He deserves great thanks and praise for his service. I look forward to
working with him over the next six months as he continues to lead the Bank His
counsel will be IIlvaluable as we go through the transition process"

http:7 Iwww.treas.gO\"/prcss/reie?ses/js2178.htm

4/22/2005

FROM THE OFFICE OF PUBLIC AFFAIRS
January 4, 2005
2005-1-4-12-9-7 -8125

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 $87,104 million as of the end of that week, compared to $87,534 million as of the end of the prior week.

I. Official U.S. Reserve Assets (In US nul/ions)
December 24, 2004

December 31,2004

87,534

87,104

TOTAL
1. Foreign Currency Reserves

a. Securities

Euro

Yen

TOTAL

Euro

Yen

TOTAL

12.359

15,176

27.535

12,354

15,319

27,673

Of which, Issuer headquartered in the US

b. Total deposits with'
bJ Other central banks and BIS

12,130

3,050

15,180

12,137

3,079

15,216

b.ii. Banks headquartered in the US.

b.ii. Of which, banks located abroad

b.iii. Banks headquartered outside the US.

b.iii. Of which, banks located in the US

20,210

19,544

13,566

13,628

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 24, 2004
Euro
1. Foreign currency loans and securities
2. Aggregate short and long positions
2.a. Short positions
2b. Long positions
3. Other

Yen

December 31, 2004

TOTAL

Euro

Yen

TOTAL

forwards and futures In foreign currencies vis-a-vis the US. dollar:

o
o
o

o
o

III. Contingent Short-Term Net Drains on Foreign Currency Assets
December 31, 2004

December 24, 2004
Euro

Yen

TOTAL

Euro

Yen

TOTAL

2. Foreign currency securities with embedded options

3. Undrawn, unconditional credit lines

o
o

1. Contingent liabilities In foreign currency
1.a. 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 tnstitutions
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:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
2/ The items, "2. IMF Reserve POSition" and "3. Special Drawing Rights (SDRs)," are based on data prOVided by the IMF and are
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entnes for the latest week reflect any
necessary adjustments, Including revaluation, by the U.S. Treasury to IMF data for the prior month end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.

JS-:? 179: Treasury

PrO\IJe~

c/uidance on Cross-Border Mergers

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FROM THE OFFICE OF PUBLIC AFFAIRS
To view 01 punt the PDF content 011 tlli~ IJage. (fown/oael tile free Adobe® Acrobat® Reader®.

January 5, 2005
}s-2179

Treasury Provides Guidance on Cross-Border Mergers
The Treasury Depar1ment and the Internal Revenue Service have Issued proposed
regulations providlrlg gUidance on the tax consequences of cer1alll cross-border
corporate mergers
EXlstlrlg regulations under section 368 of the Internal Revenue Code provide rules
regarding the necessary conditions for corporate transactions to qualify as tax-free
reorganizations One type of transaclJon that may qualify as a tax-free
reorganization IS a "statutory merger." The eXlstlrlg regulations limit the scope of
the term "statutory merger" to mergers of domestic corporations. In 2003,
temporary and proposed regulations were Issued to provide a functional definition
of the term "statutory merger," in order to reflect developments In state corporation
laws since the term was first defllled In 1935.
The preamble to the 2003 regulations Irldlcated that Treasury and the Internal
Revenue Service were considering fur1her reVISions to the regulations under section
368 to address mergers that involve one or more foreign corporations Many
foreign JUrisdictions now have merger laws that operate In material respects like
those of the states, such that transactions effected under these laws could satisfy
the functional CrIteria of the 2003 regulations The Treasury Depar1ment and the
Internal Revenue Service believe that consistent treatment of functionally
equivalent transactions IS warranted III light of the purpose of section 368. The new
proposed regulations would permit mergers JJlvolvJJlg foreign corporations to qualify
as statutory mergers
The new gUidance also contains detailed rules regarding the collateral
consequences of cross-border corporate reorganizations, including cross-border
mergers. This gUidance Includes proposed rules regardJJlg the determJJlatlon of
stock baSIS In cer1aln triangular reorganizations and proposed rules under section
367 of the Internal Revenue Code relating to cross-border corporate
reorganizations.

The proposed regulations and the related notice are attachecl
REPORTS

•

Notice 2005-6

http·.·/www.treas.go\!presslrele~.... es/js21

79,htl11

4/22/2005

Part III - Administrative, Procedural, and Miscellaneous

Announcement of rule to be included in final regulations under section 367(a) regarding
certain exchanges of securities for stock or securities

Notice 2005-6

This notice announces that Treasury and the Internal Revenue Service ("the
Service") will amend Treas. Reg. § 1.367(a)-3 regarding certain exchanges under section
354 by U.S. persons of securities of a foreign corporation in a reorganization described in
section 368(a)( 1)(E) or securities of a domestic or foreign corporation pursuant to an
asset reorganization described in section 368(a)( 1).
BACKGROUND
Section 354(a)( 1) provides that no gain or loss shall be recognized by a shareholder if
stock or securities in a corporation that is a party to a reorganization are, in pursuance of the plan
of reorganization, exchanged solely for stock or securities in such corporation or in another
corporation a party to the reorganization. Section 354 further provides that a security holder may
surrender securities and receive securities in the same principal amount or in a lesser principal
amount without the recognition of gain or loss.
Under section 367(a), gain is recognized if a U.S. person transfers property to a foreign
corporation in connection with an exchange described in section 354 unless an exception applies.
Treasury Reg. § 1.367(a)-3(a) provides, in part, that if in an exchange described in section 354, a
U.S. person exchanges stock of a foreign corporation in a reorganization described in section
368(a)( 1)(E), or a U.S. person exchanges stock of a domestic or foreign corporation for stock of
a foreign corporation pursuant to an asset reorganization described in section 368(a)( 1)(C), (D)

2
or (F) that is not treated as an indirect stock transfer under Treas. Reg. § 1.367(a)-3(d), such
section 354 exchange is not a transfer to a foreign corporation subject to section 367(a). This
language excludes from the scope of section 367(a) certain stock-for-stock exchanges under
section 354 by U.S. persons. but does not address whether exchanges of securities for stock or
exchanges of securities for securities, that would qualify for nonrecognition under section 354,
are subject to section 367(a).
DISCUSSION
The Treasury Department and the Service will issue regulations under Treas. Reg.

§ 1.367(a)-3 to provide that an exchange described in section 354 by a U.S. person of securities
of a foreign corporation for stock or securities of the foreign corporation in a reorganization
described in section 368(a)( I )(E) will not be subject to section 367(a). The regulations will
further provide that an exchange described in section 354 by a U.S. person of securities ofa
domestic or a foreign corporation for stock or securities of a foreign corporation pursuant to an
asset reorganization described in section 368(a)(l), that is not treated as an indirect transfer
described in Treas. Reg. § 1.367(a)-3(d), will not be subject to section 367(a). Conforming
amendments to other portions of the regulations under sections 367 and 6038B will be made as
well.
EFFECTIVE DATE
Regulations to be issued incorporating the guidance set forth in this notice will apply to
transfers of securities after January 5, 2005. Until such regulations are issued, taxpayers may
rely on this notice. Taxpayers also may apply the provisions of this notice to trans fers of
securities occurring on or after July 20, 1998 (the effective date of Treas. Reg. § 1.367(a)-3(a)
2

and on or before January 5, 2005. Taxpayers applying this notice, however, must do so
consistently to all transactions within its scope.
COMMENTS
Written comments on the issues addressed in this notice may be submitted to the Office
of Associate Chief Counsel International, Attention: Mark R. Pollard (Notice 2004-6), room
4555, CC:INTL:BR3, Internal Revenue Service, IIII Constitution Avenue, NW, Washington,
DC, 20224. Alternatively, taxpayers may submit comments electronically to
Notice.Comments((pmi.irscounse1.treas.gov. Comments will be available for public inspection
and copying. Treasury and the IRS request comments by April 28, 2005.
DRAFTING INFORMATION

The principal author of this notice is Mark R. Pollard of the Office of Associate Chief
Counsel (International). For further infonnation regarding this notice contact Mr. Pollard
at (202) 622-3860 (not a toll-free call).

[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-125628-0 1]
RIN- 1545-BA65
Revision of Income Tax Regulations under Sections 358, 367, and 884 dealing with
statutory mergers or consolidations under section 368(a)( 1)(A) involving one or more
foreign corporations
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains proposed regulations amending the income tax
regulations under various provisions of the Internal Revenue Code (Code) to account for
statutory mergers and consolidations under section 368(a)( I )(A) (including
reorganizations described in section 368(a)(2)(D) and (E» involving one or more foreign
corporations. These proposed regulations are issued concurrently with proposed
regulations (REG-I 17969-00) that would amend the definition of a reorganization under
section 368(a)( 1)(A) to include certain statutory mergers or consolidations effected
pursuant to foreign law.
DATES: Written and electronic comments and requests to speak and outlines of topics to
be discussed at the public hearing scheduled for May 19, 2005, at 10:00 a.m. must be
received by April 28, 2005.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-125628-01), room 5203,
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC

20044. Submissions may be hand delivered Monday through Friday between the hours
of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-125628-01), Courier's Desk, Internal
Revenue Service, IIII Constitution Avenue, NW., Washington, DC, or sent
electronically, via the IRS Internet site at: www.irs.gov/regs or via the Federal
eRulemaking Portal at www.regulations.gov (IRS and REG-125628-0 I). The public
hearing will be held in the Auditorium, Internal Revenue Building, I III Constitution
Avenue, NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning tre proposed regulations,
Robert W. Lorence, Jr., (202) 622-3860; concerning submissions, the hearing, or
placement on the building access list to attend the hearing, Guy Traynor, (202) 622-7180
(not toll- free numbers).
SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act
The collection of information contained in this notice of proposed rulemaking has
been submitted to the Office of Management and Budget for review in accordance with
the Paperwork Reduction Act (44 U.S.c. 3507(d». Comments on the collection of
information should be sent to the Office of Management and Budget, Attn: Desk
Officer for the Department of the Treasury, Office of Information and Regulatory Affairs,
Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS
Reports Clearance Officer, SE:W:CAR:MP:T:T:SP Washington, DC 20224. Comments
on the collection of information should be received no later than March 7, 2005.
Comments are specifically requested concerning:

Whether the proposed collection of information is necessary for the proper
performance of the functions of the IRS, including whether the information will have
practical utility;
The accuracy of the estimated burden associated with the proposed collection of
infonnation (see below);
How the quality, utility, and clarity of the information to be collected may be
enhanced;
How the burden of complying with the proposed collection of information can be
minimized, including through the application of automated collection techniques or other
forms of information technology; and
Estimates of capital or start-up costs and costs of operation, maintenance, and
purchase of services to provide information.
The collection of information in this proposed regulation is in § 1.367(a)3(d)(2)(vi)(B)(1)(ii). This informatnn is required to inform the IRS of a domestic
corporation that is claiming an exception from the application of section 367(a) and (d) to
certain transfers of property to a foreign corporation that is re- transferred by the foreign
corporation to a domest£ corporation controlled by the foreign corporation. The
information is in the form of a statement attached to the domestic corporation's U.S.
income tax return for the year of the transfer certifying that if the foreign corporation
disposes of the stock of the domestic controlled corporation with a tax avoidance
purpose, the domestic corporation will file an income tax return (or amended return, as
the case may be) reporting gain. The collection of information is mandatory. The likely
respondents are domestic corporations.

Estimated total annual reporting burden: 50 hours.
Estimated average annual burden hours per respondent: 1 hour.
Estimated number of respondents: 50.
Estimated annual frequency of responses: on occasIon.
An agency may not conduct or sponsor, and a person is not required to respond to,
a collection of information unless it displays a valid control number assigned by the
Office of Management and Budget.
Books or records relating to a collection of information must be retained as long
as their contents may become material in the administration of any internal revenue law.
Generally, tax returns and tax return information are confidential, as required by 26
U.S.c. 6lO3.

Background
Section 368(a)( 1)(A) defines a reorganization to include a statutory merger or
consolidation (A reorganization). For transactions completed before January 24, 2003,
regulations under section 368(a)(l )(A) provided that a reorganization was a merger or
consolidation effected pursuant to the corporation law of the United States or a State or
Territory or the District of Columbia. See § 1.368-2(b)( 1), as in effect before January 24,
2003.
On January 24, 2003, the IRS and the Treasury Department issued proposed
regulations (REG-126485-0 1,2003-9 I.RB. 542,66 FR 57400) and temporary
regulations (TD 9038, 2003-9 I.R.B. 524, 68 FR 3384), revising the definition of a
statutory merger or consolidation. The proposed and temporary regulations define a
statutory merger or consolidation in a manner intended to ensure that those transactions

are not divisive in nature. Accordingly, the regulations generally require that all the
assets and liabilities of the merged corporation (other than assets distributed or liabilities
discharged in the transaction) are transferred to the acquiring corporation and that the
separate legal identity of the merged corporation ceases to exist in the transaction.
Pursuant to a notice of proposed rulemaking (proposed section 368 regulations)
published contemporaneously with this document, the IRS and Treasury are proposing
further revisions to the definition of a statutory merger or consolidation to take into
account those transactions effected pursuant to foreign law. The proposed section 368
regulations amend the 2003 proposed regulations and provide that an A reorganization
may occur, if certain conditions are satisfied, pursuant to the laws of a foreign
jurisdiction, including a U.S. possession.
In light of this change, this document contains proposed amendments to the
regulations under certain international Code provisions (sections 367, 884, and 6038B) to
account for statutory mergers and consolidations involving one or more foreign
corporations. Current international tax regulations are premised on an A reorganization
being limited to a statutory merger or consolidation involving domestic corporations
effected pursuant to domestic law. See, e.g., Rev. Rul. 57-465 (1957-2 C.B. 250). As a
result, conforming changes must be made to these international tax regulations to ensure
that they apply appropriately to statutory mergers and consolidations effected pursuant to
foreign law. The proposed regulations also modify the section 367(a) and (b) regulations
to address several other related issues.

Explanation of Provisions
A.

Basis and Holding Period Rules

The proposed regulations provide basis and holding period rules for certain
transactions involving foreign corporations with section 1248 shareholders in order to
preserve relevant section 1248 amounts. A section 1248 shareholder is aU. S. person that
satisfies the ownership requirements of section 1248(a) with respect to a foreign
corporation. Section 1248(a) applies to a U.S. person that owns stock (directly,
indirectly, or constructively) with 10 percent or more of the voting power in the foreign
corporation at any time during the 5- year period ending on the sale or exchange of the
stock when the foreign corporation was a controlled foreign corporation (CFC). Gain
recognized by a section 1248 shareholder on the sale or exchange of stock of the foreign
corporation is included in gross income as a dividend to the extent of the earnings and
profits of the foreign corporation that are attributable to the stock sold or exchanged and
that were accumulated while the stock was held by the U.S. person when the foreign
corporation was a CFC (the section 1248 amount).
The IRS and Treasury believe that it is important to preserve section 1248
amounts in certain nonrecognition exchanges of foreign corporation stock. PreservatDn
of section 1248 amounts is a function of the holding period and basis in the stock of the
foreign corporation being exchanged. One of the underlying policies of section 367(b) is
the preservation of the potential application of section 1248 in connection with certain
th

nonrecognit ion exchanges. H. Rep. No. 94-658, 94 Cong., 1st Sess., at 242 (Nov. 12,
1975). These proposed regulations provide basis and holding period rules to preserve
section 1248 amounts in the context of certain section 354 exchange s and certain
triangular reorganizations.

The basis and holding period rules of the proposed regulations also apply to a
foreign corporate shareholder of a foreign corporation that is a party to the
reorganization, provided that the foreign corporate shareholder has at least one U.S.
person that is a section 1248 shareholder with respect to the foreign corporate shareholder
and to the foreign corporation. This rule is necessary to preserve application of section
964( e) to the foreign corporate shareholder with respect to lower-tier foreign
corporations. Under section 964(e), if a CFC sells or exchanges stock in another foreign
corporation, gain recognized on the sale or exchange is included in the income of the
CFC as a dividend to the same extent that it would have been included under section
1248(a) if the CFC were a U.S. person. Such dividend income may be treated as subpart
F income that is included in the income of U.S. shareholders of the CFC.
I.

Section 354 exchanges
The proposed regulations apply to certain section 354 exchanges involving

foreign corporations, including exchanges of multiple blocks of stock. The proposed
regulations preserve the bases and holding periods in different blocks of stock in certain
foreign target corporations by requiring the exchanging shareholder to establish the
particular shares of stock that were received in exchange for shares of a particular block
of target stock. If the exchanging shareholder cannot establish the particular shares of
target stock that were received for shares of a particular block of stock, then the
shareholder must designate which shares of stock were received in exchange for shares of
a particular block of stock, provided that the designation is consistent with the terms of
the exchange. These tracing methods are used to determine the resulting tax
consequences when stock received in a nonrecognition exchange is subsequently sold or

otherwise exchanged. If the exchanging shareholder cannot establish, and does not
designate, the particular

sl~ues

received, the shareholder is treated as selling or otherwise

exchanging a share received in a nonrecognition exchange for a share that was purchased
or acquired at the earliest time.
The IRS and Treasury recently published proposed section 358 regulations (REG116564-03) that determine the basis of stock or securities received in section 354
exchanges (proposed section 358 regulations). The proposed section 358 regulations
generally provide that the basis of each share of stock or security received in an exchange
to which section 354, 355, or 356 applies will be the same as the basis of the share of
stock or security exchanged therefor. For these purposes, the determination of which
share of stock or security is received in exchange for a particular share of stock or
security is made in accordance with the terms of the exchange or distribution.
These proposed regulations apply the principles of the proposed section 358
regulations to certain exchanges of stock of a foreign corporation by either a section 1248
shareholder, or a foreign corporate shareholder where at least one U.S. person is a section
1248 shareholder with respect to such foreign corporate shareholder and to the foreign
corporation whose shares are exchanged (collectively and individua lly, section 367(b)
shareholder), to ensure the preservation of section 1248 amounts. The proposed
regulations also include specific guidance on the shareholder's holding period in the
stock received in the section 354 exchange. The proposed regulations do not, however,
apply to distributions described in section 355.
Consistent with the proposed section 358 regulations, the proposed regulations
hereunder would not apply to section 351 exchanges or to exchanges to which both

section 351 and section 354 (or section 356) apply, if, in addition to stock being received,
other property is received or liabilities are assumed. This limitation is intended to
prevent a conflict between the rules for determining basis in a section 351 exchange
(including the application of section 357(c» and the rules proposed in this document.
The IRS and Treasury are considering approaches for the preservation of section 1248
amounts in section 351 transactions in which liabilities are assumed or other property is
received, and comments are requested in this regard.
In addition, the IRS and Treasury are considering developing specific rules for
situations in which stock of the foreign acquiring corporation is not issued in the
exchange (for example, when the exchanging shareho lder owns all the stock of the
foreign acquiring corporation). One possible approach may be for each existing share of
stock in that corporation to be divided into portions to account for the different basis and
holding periods of the stock of the foreign acquiring corporation and the stock of the
acquired corporation in order to preserve section 1248 amounts. Comments are requested
regarding this approach or possible alternative approaches.
2.

Triangular reorganizations
The proposed regulations provide special basis and holding period rules for

triangular reorganizations where the merging or surviving corporation is a foreign
corporation with a section 367(b) shareholder. These rules apply to reorganizations
described in section 368(a)(1)(A) and (a)(2)(O) (forward triangular merger) and to
parenthetical section 368(a)( I )(C) reorganizations. In these transactions, the surviving
corporation (S) acquires substantially all the assets of the acquired corporation (T), and
the T shareholders exchange their T stock for stock of the corporation (P) that is in

control (within the meaning of section 368(c)) of S. These rules also apply to
reorganizations described in section 368(a)( I )(A) and (a)(2)(E) (reverse triangular
merger). In a reverse triangular merger, S, a controlled subsidiary of P, merges into T,
the surviving corporation, and the T shareholders exchange their T stock for stock of P.
Under current regulations, in a forward triangular merger or a parenthetical C
reorganization, P's basis in its S stock is adjusted as if P had acquired the T assets
directly from T in a section 362(b) exchange and then had transferred the T assets to S in
a transaction in which P's basis in S stock is determined under section 358. See § 1.3586(c)(1) (commonly referred to as the "over-the-top" basis rules). Under current
regulations, in a reverse triangular merger, P's basis in the T stock it receives
immediately after the transaction is equal to its basis in its S stock immediately before the
transaction adjusted as if T had merged into S in a forward triangular merger and the
over- the- top basis rules had applied. See § 1.358-6( c )(2). If a reverse triangular merger
also qualifies as a section 351 transfer or a section 368(a)( 1)(B) reorganization, P can
determine its basis in its S stock either by using the over-the-top basis rules as described
in the prior sentence or by treating P as if it had acquired the T stock from the former
shareholders of T in a transaction in which basis is determined under section 362(b)
(carryover stock basis).
The IRS and Treasury are concerned that, in certain exchanges involving foreign
corporations, application of the over- the- top basis rules would not properly preserve the
section 1248 or 964( e) amounts with respect to the stock of S or T. The proposed
regulations provide that, in determining the stock basis of the surviving corporation in
certain triangular reorganizations, outside stock basis will be used instead of inside asset

basis pursuant to § 1.358-6(c). For example, in the case ofa forward triangular merger (or
a parenthetical C reorganization), where P is a domestic corporation, S is a foreign
corporation, T is a foreign corporation, and T has a section 1248 shareholder, the basis
and holding period in the T stock, not the T assets, are used to determine P's basis in the
S stock. The same rules apply to certain reverse triangular mergers, where S merges into
T with T surviving. In that case, P's basis in the T stock immediately after the
transaction would reflect the basis and mlding period of the T stock instead of the T
assets.
Under this stock basis approach for triangular reorganizations, the proposed
regulations provide for a divided basis and holding period in each share of stock in the
surviving corporation to reflect tre relevant section 1248 amounts in the S stock and T
stock. In particular, each share of S stock in a forward triangular merger, and each share
of T stock in a reverse triangular merger, where P is a section 367(b) shareholder
immediately after the transaction, is divided into portions reflecting the basis and holding
period of the S stock and the T stock before the transaction. However, the proposed
regulations contain a de minimis exception to this rule. Under this exception, if the value
of the S stock immediately before the transaction is de minimis (for example, where S is
a corporation formed to facilitate the transaction), then each share of the surviving
corporation is not divided; instead, the basis of the S stock is added to the basis of the
stock of the surviving corporation held by P. The value of the S stock would be de
minimis for this purpose if it is less than 1 percent of the value of the surviving
corporation (S or T) immediately after the transaction.

If there are two or more blocks of stock in T or S held by a section 367(b)
shareholder immediately before the transaction, then each share of the surviving
corporation (S or T) is further divided to account for each block of stock. If two or more
blocks of stock are held by one or more shareholders that are not section 367(b)
shareholders, then shares in these blocks are aggregated into one divided portion for basis
purposes. If none of the SorT shareholders is a section 367(b) shareholder, then the
over-the-top basis rules of § 1.358-6 apply instead of the rules in these proposed
regulations.
The proposed regulations provide special rules when stock of the surviving
corporation has a divided basis and holding period. Earnings and profits accumulated
prior to the reorganization are attributed to a divided portion of a share of stock based on
the block of stock whose basis and holding period the divided portion reflects. Postreorganization earnings and profits are attributed to each divided share of stock pursuant
to section 1248 and the regulations thereunder. The amount of earnings and profits
attributed to a divided share of stock pursuant to section 1248 are further attributed to a
divided portion of such share of stock based on its fair market value in relation to the
other divided portions. Finally, shares of stock are no longer divided into separate
portions if section 1248 or 964( e) becomes inapplicable to a subsequent sale or exchange
of the stock.
The special basis rules in these proposed regulations apply to all triangular
reorganizations where T has at least one section 367(b) shareholder, even if such
shareholders own less than a controlling interest in T. The IRS and Treasury are
considering whether the current basis rules of § 1.358-6 should apply in cases where

section 367(b) shareholders do not own a substantial percentage of the stock ofT, or
whether taxpayers should be permitted to elect to apply the current basis rules under
§ I .358-6 to detem1ine P's basis in the stock of the surviving corporation (S or T),
provided that all section 367(b) shareholders ofT include in income the section 1248
amounts with respect to the stock exchanged. Comments are requested in this regard.
The use of stock basis to determine P's basis in the surviving corporation also
presents administrative concerns when a portion of the stock of T is widely held. In the
case of a reorganization described in section 368(a)( I )(B), which presents similar issues,
Rev. Proc. 8 I -70 (1980-2

c.B.

729) provides that statistical sampling techniques, if

appropriate, are permitted to determine the basis of stock received by the acquiring
corporation. In this regard, the IRS and Treasury recently have requested comments
whether Rev. Proc. 81- 70 should be revised to reflect changes in the marketplace since its
publication. See Notice 2004-44 (2004-28 I.R.B. 32). Comments are requested on
expanding this guidance to apply under the proposed regulations, for example in cases
where blocks of T stock are held by persons that are not section 367(b) shareholders and
such shares are aggregated into a single divided portion for basis and holding period
purposes.

Exceptions to the Application of Section 367(a)
Under section 367(a), a U.S. person recognizes gain, but not loss, on the transfer

of property to a foreign corporation in an exchange described in section 351, 354, 356, or
361, unless an exception applies. Section 367(a), however, does not apply to a section
354 exchange by a U.S. person of: (I) stock of a foreign corporation in a section
368(a)( 1)(E) reorganization; or (2) stock of a domestic or foreign corporation for stock of

a foreign corporation in an asset reorganization described in section 368(a)(l )(C), (D), or
(F) that is not treated as an indirect stock transfer under § 1.367(a)-3(a).

The proposed regulations amend § 1.367(a)-3(a) so that this exception to the
application of section 367(a) also applies to A reorganizations (including forward and
reverse triangular mergers). In addition, the proposed regulations clarify that § 1.367(a)3(a) applies to exchanges described in section 356, as well as in section 354. Section 356
applies to an exchange that would qualify as a section 354 exchange except for the fact
that money or other property is received in the exchange.
Taxpayers have questioned why the exception to the application of section 367(a)
in § 1.367(a)-3(a) includes exchanges of stock but not exchanges of securities in section
368(a)( I )(E) reorganizations and certain asset reorganizations. The IRS and Treasury
believe that it is appropria te to provide comparable treatment for exchanges of securities
in this context. Accordingly, Notice 2005-6 (2005-5 IRB), published contemporaneously
with these proposed regulations, announces that the IRS and Treasury intend to amend

§ 1.367(a)-3(a) to apply the exception from section 367(a) to exchanges of stock or
securities. Notice 2005-6 provides that the applicable date of the amendment will be

(INSERT DATE OF PUBLICATION OF THIS DOCUMENT IN THE FEDERAL
REGISTER].
The proposed regulations also provide rules concerning the application of section
367(a) to reverse triangular mergers, where stock of P, a corporation that controls the
merging corporation S, is treated as transferred (along with any other property of S) to the
surviving corporation T in a section 361 transfer. If S is a domestic corporation and T is

a foreign corporation, section 367(a) applies to the transfer by S of the P stock to T,
unless an exception applies.
The IRS and Treasury believe that, if the stock of P is provided to S pursuant to
the plan of reorganization, the section 361 transfer of the P stock from S to T should not
be subject to section 367(a), and the proposed regulations so provide. If P does not
provide its stock to S pursuant to the plan of reorganization, then tre P stock will be
treated as property of S and the transfer of such stock will be subject to section 367(a).
The IRS and Treasury intend to amend the regulations under section 6038B to
conform with the changes made in these regulations.

Concurrent Application of Section 367(a) and (b)
The proposed regulations modify the current application of section 367(a) and (b)

to transactions that require the inclusion in income of the all earnings and profits amount
under section 367(b). Section 1.367(a)-3(b)(2) provides rules for the concurrent
application of section 367(a) and (b) to transfers of stock of a foreign corporation. This
may occur, for example, when a U.S. shareholder exchanges stock of a foreign
corporation (foreign acquired corporation) for stock of another foreign corporation
(foreign acquiring corporation). See § 1.367(a)-3(b)(1). It may also occur when an
acquiring corporation (foreign or domestic) acquires the assets of a foreign acquired
corporation, and the U.S. shareholder exchanges stock of the foreign acquired corporation
for stock of the foreign parent of the acquiring corporation in a triangular reorganization.
The U. S. person's exchange of stock of the foreign acquired corporation for stock
of either the foreign acquiring corporation or the foreign parent is subject to section

367(a). See § 1.367(a)-3(b) and (d). If the exchanging u.S. shareholder owns 5 percent
or more (by vote or value) of the stock of the foreign acquiring corporation or the foreign
parent immediately after the exchange, the shareholder recognizes gain, if any, under
section 367(a), unless the shareholder enters into a gain recognition agreement as
provided in § l.367(a)-8. If the exchanging shareholder is not a 5-percent shareholder,
then the exchanging shareholder does not recognize gain, if any, on the exchange.
The U.S. shareholder's exchange described above also may be subject to section
367(b). If the exchanging U.S. shareholder is a section 1248 shareholder of the foreign
acquired corporation, and the stock of the foreign acquiring corporation (or its foreign
parent corporation) is not stock in a corporation that is a CFC as to which the U.S.
shareholder is a section 1248 shareholder immediately after the exchange, then the
exchanging shareholder must include in income the section 1248 amount with respect to
the stock exchanged. See § 1.367(b )-4. If, instead, a domestic acquiring corporation
acquires the assets of a foreign acquired corporation, and the U.S. shareholder exchanges
stock of the foreign acq uired corporation for stock of the foreign parent of the acquiring
corporation in a triangular reorganization, then the exchanging shareholder must include
in income the all earnings and profits amount with respect to the stock of the acquired
corporation. See §l.367(b)-3. Unlike the section 1248 amount, the all earnings and
profits amount is not limited by the shareholder's gain inherent in the stock of the foreign
acquired corporation.
In cases where section 367(a) and (b) apply concurrently to a transaction, existing
§l.367(a)-3(b)(2) provides that section 367(b) will not apply if the transfer is taxable
under section 367(a). If the transfer is taxable under section 367(a), the exchanging U.S.

shareholder will recognize gain inherent in the exchanged stock (subject to
recharacterization as dividend income under section 1248). If the transfer is not taxable
under section 367(a), because the exchanging U.S. shareholder either is not a 5-percent
shareholder or enters into a gain recognition agreement, then section 367(b) applies and
the exchange is subject to either § 1.367(b)-3 or 1.367(b)-4 at the shareholder level.
Questions with respect to the concurrent application of section 367(a) and (b)
have arisen in situations that otherwise would require inclusion of the all earnings and
profits amount under § 1.367(b )-3. If the all earnings and profits amount is greater than
the section 367(a) gain with respect to the stock of the foreign acquired corporation,
under current law the exchanging shareholder effectively may elect to be taxed on the
lesser amount of gain under section 367(a) simply by failing to file a gain recognition
agreement. In that case, section 367(b) would not apply and the shareholder would avoid
inclusion in income of the greater all earnings and profits amount.
The ability to elect to recognize the lesser gain inherent in the stock exchanged in
such cases is inconsistent with the policies of section 367(b) that apply to inbound
transactions, including preventing conversion of tax deferral into tax forgiveness and
ensuring that the domestic acquiring corporation's section 381 carryover basis reflects an
after-tax amount. Accordingly, the IRS and Treasury believe that the all earnings and
profits amount provisions under § 1.367(b)-3 should not operate electively in these cases.
The proposed regulations require that, for exchanges subject to § 1.367(b)-3 and section
367(a), section 367(b) would apply before section 367(a). In that case, inclusion of the
all earnings and profits amount would increase the exchanging shareholder's stock basis
for purposes of computing the shareholder's gain under section 367(a). Thus, if the all

earnings and profits amount exceeds the inherent gain in the exchanged stock, gain is not
recognized under section 367(a). If the transaction does not involve inclusion of the all
earnings and profits amount (for example, if § 1.367(b )-4 applies), the existing ordering
rules continue to apply.
D.

Parenthetical Section 368(a)( I )(B) Reorganizations
In a parenthetical reorganization under section 368(a)(l )(B), if a U.S. shareholder

exchanges stock of an acquired corporation for voting stock of a foreign corporation that
controls (within the meaning of section 368(c» the acquiring corporation, the U.S.
shareholder is treated as making an indirect transfer of stock of the acquired corporation
to the foreign controlling corporation in a transfer subject to section 367(a). See
§ 1.367(a)-3(d)(l )(iii). This result occurs even if the acquiring corporation is domestic. If
the U.S. shareholder owns five percent or more (by vote or value) of the stock of the
foreign controlling corporation, the shareholder must recognize gain inherent in the
exchanged stock, unless a gain recognition agreement is filed. A gain recognition
agreement filed with respect to the transfer may be triggered (and gain on the initial
transfer of stock will be recognized) if the foreign controlling corporation disposes of the
stock of the acquiring corporation, or the acquiring corporation disposes of the stock of
the acquired corporation, within 5 years of the initial transfer. See § 1.367(a)-3( d)(2)(ii).
The proposed regulations revise the indirect stock transfer rules to include
triangular section 368(a)(I)(B) reorganizations in which a U.S. shareholder exchanges
stock of the acquired corporation for voting stock of a domestic corporation that controls
a foreign acquiring corporation. In such a case, the gain recognition agreement may be
triggered if the domestic controlling corporation disposes of the stock of the foreign

acquiring corporation, or the foreign acquiring corporation disposes of the stock of the
acquired corporation, within 5 years of the initial transfer.

Transfers of Assets Following Certain Asset Reorganizations
If a U.S. shareholder exchanges stock or securities of an acquired corporation for

stock or securities of a foreign acquiring corporation in a reorganization described in
section 368(a)( I )(C), and the foreign acquiring corporation transfers all or part of the
assets of the acquired corporation to a subsidiary controlled (within the meaning of
section 368(c» by the foreign acquiring corporation in a transaction described in section
368(a)(2)(C), the U.S. shareholder is treated, for purposes of section 367(a), as
transferring the stock of the acquired corporation to the foreign acquiring corporation to
the extent of the assets transferred to the controlled subsidiary. §1.367(a)-3(d)(l)(v).
Section 368(a)(2)(C) provides that a transaction otherwise qualifying as a reorganization
under section 368(a)( 1)(A), (B), (C), and (0) will not be disqualified because all or part
of the assets or stock acquired in the transaction are transferred to a corporation
controlled by the acquiring corporation.
On August 16, 2004, the IRS and Treasury issued proposed regulations under
§ 1.368-2(k) that permit assets or stock acquired in any reorganization under section
368(a)( I) to be transferred to a corporation controlled by the acquiring corporation
without disqualifying the reorganization. Prior to these proposed regulations, the IRS and
Treasury issued Rev. Rul. 2002-85 (2002-2 C.B. 986) which extended this treatment to
section 368(a)(1 )(D) reorganizations. Notice 2002-77 (2002-2 C.B. 997) issued
contemporaneously with Rev. Rul. 2002-85, provided that § 1.367(a)-3(d)(l )(v) would be
amended to treat transactions described in Rev. Rul. 2002-85 as indirect stock transfers, if

the transfer of assets by the acquiring corporation to its controlled subsidiary occurred
pursuant to the plan of reorgmization.
The effect of the proposed regulations under § 1.368-2(k) is to pennit transfers of
assets or stock to a controlled subsidiary in reorganizations not specifically identified or
mentioned in section 368(a)(2)(C) (section 368(a)( I )(0) and (F) reorganizations). The
proposed regulations amend the indirect stock transfer rules to conform to the changes in
the section 368 regulations. As a result, the proposed regulations provide that the transfer
of assets to a controlled subsidiary subsequent to an asset reorganization under section
368(a)( I) would constitute an indirect transfer of stock, provided the transfer of assets by
the foreign acquiring corporation to its controlled subsidiary occurs as part of the same
transacti on.
F. Indirect Transfers Involving a Change in Domestic or Foreign Status of Acquired
Corporation
As indicated above, under existing § 1.367(a)-3(d)(l )(v), a u.S. shareholder of an
acquired corporation is treated as transferring the stock of the acquired corporation to the
foreign acquiring corporation to the extent of the assets transferred to the controlled
subsidiary. Thus, if the acquired corporation is foreign, the U.S. shareholder is treated as
transferring stock of a foreign corporation to the foreign acquiring corporation in a
transaction that is subject to the § 1.367(a)-3(b) stock transfer rules. If the acquired
corporation is domestic, the U.S. shareholder is treated as transferring stock of a domestic
corporation to the foreign acquiring corporation in a transaction that is subject to
§1.367(a)-3(c). This deemed transfer of domestic stock prevails even if the controlled
subsidiary is foreign. Similar rules apply to parenthetical C reorganizations.

Some commentators have suggested that the determination of whether domestic
or foreign stock is deemed transferred should be based on the status of the controlled
subsidiary, rather than the status of the acquired corporation. Under this approach, if the
acquired corporation were domestic and the controlled subsidiary were foreign, the U.S.
shareholders would be deemed to transfer foreign corporation stock subject to § 1.367(a)3(b), rather than domestic corporation stock subject to § 1.367(a)-3(c). The IRS and
Treasury believe that, consistent with the framework of the current regulations, it is
appropriate for the rules to continue to apply based on the stock that is owned and
exchanged by the U.S. person in the transaction (rather than on the stock of the controlled
subsidiary). The IRS and Treasury are considering the application of §§ 1.367(a)-3(b),
1.367(a)-3(c), and 1.367(a)-8 to situations where the foreign acquiring corporation
transfers assets of the acquired corporation to multiple controlled subsidiaries (including
both domestic and foreign subsidiaries), comments are requested in this regard.
G.

Coordination of the Indirect Stock Transfer Rules and the Asset Transfer Rules
In the case of an indirect stock transfer that also involves a transfer of assets by a

domestic corporation to a foreign corporation, §1.367(a)-3(d)(2)(vi) generally provides
that section 367(a) and (d) apply to the transfer of assets prior to application of the
indirect stock transfer rules. However, section 367(a) does not apply to such transfers to
the extent that the foreign acquiring corporation transfers the assets received in the asset
transfer to a domestic corporation controlled (within the meaning of section 368(c» by
the foreign acquiring corporation in a transfer described in section 368(a)(2)(C) or in a
transfer described in section 351, provided the domestic transferee's basis in the assets is
no greater than the basis that the domestic acquired corporation had in such assets. The

initial asset transfer to the foreign corporation is not subject to section 367(a) in such
cases because the assets re-transferred to the domestic corporation remain subject to U.S.
corporate tax.
The IRS and Treasury are concerned that asset reorganizations subject to this
coordination rule may be used to facilitate corporate inversion transactions. An inversion
generally involves a U.S. multinational corporation reincorporating outside the United
States for tax purposes (either as a foreign corporation or as a subsidiary of a new foreign
corporation). The IRS and Treasury also are concerned that the coordination rule might
be used to facilitate divisive transactions. The proposed regulations address both of these
concerns by modifying the scope of the coordination rule.
The revised coordination rule operates as follows. Section 367(a) and (d)
generally apply to the transfer of assets to a foreign corporation even if the foreign
corporation transfers all or part of the assets received to a controlled domestic
corporation. This general rule, however, is subject to two exceptions which do not
require income recognition under section 367(a) and (d) on the transfer of assets to the
foreign corporation to the extent that assets are re-transferred to the domestic controlled
corporation.
The first exception applies if the domestic acquired corporation is controlled
(within the meaning of section 368( c» by 5 or fewer domestic corporations, appropriate
basis adjustments as provided in section 367(a)(5) are made to the stock of the foreign
acquiring corporation, and any other conditions provided in regulations under section
367(a)(5) are satisfied. Although there currently are no regulations under section

367(a)(5), this exception will incorporate any conditions or limitations in future
regulations once published.
In cases where the first exception does not apply, the second exception applies if
the following two conditions are satisfied: (I) the indirect transfer of stock of the
domestic acquired corporation satisfies the requirements of § 1.367(a)-3(c)( l)(i), (ii), and
(iv), and (c)(6); and (2) the domestic acquired corporation attaches a statement (described
below) to its tax return for the taxable year of the transfer.
The statement that the domestic acquired corporation files must certify that, if the
foreign acquiring corporation disposes of any stock of the dome stic controlled
corporation with a principal purpose of avoiding U.S. tax that would have been imposed
on the domestic acquired corporation had it disposed of the re- transferred assets, the
domestic acquired corporation will amend its return for the year of the initial transaction
and recognize gain (described below). The disposition of stock is presumed to have a
principal purpose of tax avoidance if the disposition occurs within 2 years of the transfer.
The presumption may be rebutted, however, if the domestic acquired corporation (or the
foreign acquiring corporation on its behalf) demonstrates to the satisfaction of the
Commissioner that the transaction did not have a principal purpose of tax avoidance.
If the domestic acquired corporation recognizes

~in

pursuant to the statement, it

is treated as if, immediately prior to the exchange, it had transferred the re-transferred
assets, including any intangible assets, directly to a domestic corporation in exchange for
stock of the corporation in a transaction that is treated as a section 351 exchange, and
immediately sold the stock to an unrelated party at fair market value in a sale in which it
recognizes gain, if any, but not loss. For purposes of this rule, the deemed transfer to a

domestic corporation is treated as a section 351 exchange regardless of whether all the
requirements for nonrecognition under section 351 are otherwise satisfied. Treating the
domestic acquired corporation as recognizing gain on the disposition of stock, rather than
assets, is intended to approximate the consequences that would have resulted had the
domestic acquired corporation transferred the assets to a corporation and sold the stock
received in such transfer prior to the outbound reorganization. In addition, this treatment
is consistent with other provisions that address divisive transactions. See, e.g., section
355(e) and § 1.367(e)-(2)(b)(2)(iii).
The basis that the foreign acquiring corporation has in the stock of the domestic
controlled corporation is increased by the amount of gain recognized by the domestic
acquired corporation under these rules immediately prior to its disposition; however, the
basis of the re-transferred assets held by the domestic controlled corporation will not be
increased by such gain. Finally, the anti-abuse provision under § 1.367( d)-I T(g)(6) will
not apply to intangible property included in the re-transferred assets.
H.

Application of Section 367(b) Regulations to Certain Triangular Reorganizations
Section 367(b) applies to exchanges under sections 332, 351, 354, 355, 356, and

361 (except to the extent described in section 367(a)(1» in which the status ofa foreign
corporation as a corporation for tax purposes is necessary for application of the relevant
nonrecognition provisions. Except as provided in regulations, under section 367(b) a
foreign corporation that is a party to such an exchange is considered to be a corporation
for tax purposes, and therefore the parties involved in the transaction are eligible for
nonrecognition treatment.
Section 1.367(b )-4 applies to acquisitions by a foreign corporation (the foreign

acquiring corporation) of the stock or assets of another foreign corporation (the foreign
acquired corporation) in certain nonrecognition exchanges (a section 367(b) exchange).
Consistent with section 1248, §1.367(b)-4(b)(l)(i) addresses exchanges by a section 1248
shareholder (or, in certain cases, a CFC shareholder that has a section 1248 shareholder),
and generally requires such a shareholder to include in income its section 1248 amount as
a result ofa section 367(b) exchange, if immediately after the exchange (i) the stock
received in the exchange is not stock in a corporation that is a controlled foreign
corporation as to which the section 1248 shareholder described above is a section 1248
shareholder, or (ii) the foreign acquiring corporation or the foreign acquired corporation
(if any, such as in a transaction described in section 368(a)(l )(B) or 351), is not a
controlled foreign corporation as to which the section 1248 shlreholder described above
is a section 1248 shareholder.
Therefore, in a triangular reorganization (such as a triangular reorganization
described in section 368(a)(l )(C» that is within the scope of § 1.367(b )-4, a section
367(b) shareholder must include in income the section 1248 amount if, for example, it
receives stock of a domestic corporation in exchange for its stock in a controlled foreign
corporation. This is the case because, immediately after the exchange, the section 367(b)
shareholder does not hold stock in a corporation that is a controlled foreign corporation as
to which such shareholder is a section 367(b) shareholder.
Pursuant to the basis rules contained in this proposed regulation under § 1.367(b)13, the section 1248 amount with respect to the stock of the foreign acquired corporation
that is exchanged can be properly preserved in the stock of a foreign corporation owned
by a domestic corporation when the section 367(b) shareholder receives stock of the

domestic corporation in a triangular reorganization. Consequently, the proposed
regulations provide that a section 367(b) shareholder receiving stock of a domestic
corporation in a triangular reorganization is not required to include in income the section
1248 amount under § 1.367(b)-4(b)( 1)(i), provided that the domestic corporation,
immediately after the exchange, is a section 1248 shareholder of the surviving
corporation (or in the case of a parenthetical section 368( a)(l )(B) reorganization, of the
acquired corporation) that is itself a controlled foreign corporation

Application of Section 367(b) Regulations to Certain Outbound Reorganizations
I fa domestic corporation is a section 1248 shareholder with respect to a foreign

corporation and transfers the stock in such foreign corporation to another foreign
corporation in a section 361 transfer, the domestic corporation must include in income the
section 1248 amount, if any, with respect to the stock of the transferred foreign
corporation. See section 1248(f)(l) and § 1.367(b )-4(b )(2)(ii), Example 4.
Taxpayers have commented that this rule may result in income inclusions in some
cases where the section 1248 amount could be preserved, such that a current inclusion
may not be necessary or appropriate. The IRS and Treasury are considering the
application of section 367(a)(5) and section 1248(f)(l) to such transactions, in
conjunction with § 1.367(b )-13 of these regulations, to preserve section 1248 amounts,
and comments are requested in this regard. The IRS and Treasury also are considering,
and request comments, on situations in which there are multiple shareholders (including
minority shareholders) of the domestic corporation; multiple assets (including
appreciated and depreciated assets being transferred as part of the section 361 transfer);
and liabilities being assumed in connection with the transaction.

Nonrecognition Transactions under the FIRPTA and PFIC Provisions
Section 897(a) generally treats gain or loss from the disposition of a U.S. real

property interest by a nonresident alien individual or a foreign corporation as gain or loss
that is effectively connected with the conduct of a trade or business within the United
States. Sections 897(d) and (e) provide rules that apply section 897 in the context of
distributions and mnrecognition exchanges of U.S. real property interests. Temporary
regulations were issued under sections 897(d) and (e) providing guidance on the
application of section 897 to certain corporate transactions involving U.S. real property
interests. See §1.897-5T, 1.897-6T, and Notice 89-85 (1989-2 C.B. 403). These rules do
not specifically address A reorganizations because such regulations were based on A
reorganizations being limited to statutory mergers between domestic corporations. The
IRS and Treasury intend to revise these regulations to reflect A reorganizations and
welcome comments on revisions that are necessary to apply these regulations to A
reorganizations, as well as comments on other issues under the regulations.
Section 1291 (f) provides authority to issue regulations concerning the exchange
of stock in a passive foreign investment company (PFIC) in a nonrecognition transaction.
Proposed regulations were published in the Federal Register (57 FR 11047) on April 1,
1992, providing rules for the disposition of PFIC stock by U.S. shareholders in
nonrecognition exchanges. See § 1.1291-6 of the proposed regulations. The application
of these proposed regulations is based on A reorganizations being limited to statutory
mergers between domestic corporations. The IRS and Treasury intend to revise these
proposed regulations to reflect A reorganizations and welcome comments on revisions

that are necessary in this regard, as well as comments on other issues under these
regulations.
Proposed Effective Date
Except as otherwise specified, these regulations are proposed to apply to
transactions occurring after the date these regulations are published as final regulations in
the Federal Register.
Special Analyses
The IRS and the Treasury Department have detennined that this notice of
proposed rulemaking is not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment pursuant to that Order is not required. It has
also been detennined that section 553(b) of the Administrative Procedure Act (5 U.S.c.
chapter 5) does not apply to these regulations, and that because this regulation does not
impose a collection of infonnation on small entities, the Regulatory Flexibility Act (5
U.S.c. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, this regulation
will be submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.
Comments and Public Hearing
Before these proposed regulatio ns are adopted as final regulations, consideration
will be given to any written comments (a signed original and eight (8) copies) or
electronic comments that are submitted timely to the IRS. The IRS and Treasury
Department specifically request comments on the clarity of the proposed regulations and
on how they can be made easier to understand. All comments will be available for public
inspection and copying.

A public hearing has been scheduled for May 19,2005, beginning at 10:00 a.m. in
the Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW.,
Washington, DC. Due to building security procedures, visitors must enter at the
Constitution Avenue entrance. In addition, all visitors must present photo identification
to enter the building. Because of access restrictions, visitors will not be admitted beyond
the immediate entrance area more than 30 minutes before the hearing starts. For
inforn1ation about having your name placed on the building access list to attend the
hearing, see the FOR FURTHER INFORMATION CONTACT portion of this preamble.
The rules of 26 CFR 601.601 (a)(3) apply to the hearing. Persons who wish to
present oral comments must submit written or electronic comments and an outline of the
topics to be discussed and the time to be devoted to each topic (a signed original and
eight (8) copies) by April 28, 2005. A period of 10 minutes will be allotted to each
person for making comments. An agenda showing the scheduling of the speakers will be
prepared after the deadline for receiving outlines has passed. Copies of the agenda will
be available free of charge at the hearing.

Drafting Information
The principal author of these regulations is Robert W. Lorence, Jr., of the Office
of Associate Chief Counsel (International). However, other personnel from the IRS and
Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1
Income taxes. Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART I--INCOMETAXES
Paragraph I. The authority citation for part 1 continues to read, in part, as
follows:
Authority: 26 U.S.c. 7805 * * *
Par. 2. In section 1.358-1, paragraph (a) is amended by adding a sentence at the
end of the paragraph to read as follows:

§ 1.358-1 Basis to distributes.
(a) * * * In the case of certain section 354 or 356 exchanges of stock in a foreign
corporation, § 1.367(b )-13 applies instead of the rules of § 1.358-2.

*****
Par. 3. In §1.358-6, paragraph (e) is amended by adding a sentence at the end of
the paragraph to read as follows:

§ 1.358-6 Stock basis in certain triangular reorganizations.

*****
(e) * * * For certain triangular reorganizations where the surviving corporation (S
or T) is foreign, see § 1.367(b )-13.

*****
Par.4. Section 1.367(a)-3 is amended as follows:
1. In paragraph (a), remove the third and fourth sentences, and add five sentences
in their place.
2. Revise paragraph (b)(2)(i).
3. Revise paragraph (c)(5)(vi).

4. In paragraph (d)( 1), introductory text, first sentence, add the parenthetical "(or
in a domestic corporation in control of a foreign acquiring corporation in a triangular
section 368(a)( 1)(B) reorganization)" after the words "for stock or securities in a foreign
corporation".
5. In paragraph (d)(1), introductory text, remove the last sentence and add three
sentences in its place.
6. In paragraph (d)(l )(i), remove the last sentence and add a sentence in its place.
7. In paragraph (d)(l)(ii), add a sentence at the end of the paragraph.
8. Paragraph (d)(l )(iii) is revised.

9. In paragraph (d)(1 )(iv), remove the language "Example 7" and add "Example
~"

in its place, and remove "Example 11 " and add "Example 14" in its place.
10. Revise paragraph (d)(1)(v).
11. Revise paragraphs (d)(2)(i) and Oi).
12. In paragraph (d)(2)(iv), last sentence, remove the language "Example 4" and

add "Examples 5 and 5 A" in its place.
13. Revise paragraph (d)(2)(v)(C).
14. Redesignate paragraph (d)(2)(v)(D) as paragraph (d)(2)(v)(F).
15. Add new paragraphs (d)(2)(v)(D) and (E).
16. Revise paragraph (d)(2)(vi).
17. In paragraph (d)(3), redesignate the examples as follows and add the
following new examples:
Redesignate

Example 12

Example 16

Add

Example 15
Examples 11 and 1 1A

Examples 14 and 14A

Examples 10 and lOA

Examples 13 and 13 A

Example 9

Example 12
Examples 10 and 11

Example 8

Example 9
Examples 8, 8A, 8B, and

Examples 7, 7 A, 7B, and 7C
8C
Examples 6 and 6A

Examples 7 and 7 A

Examples 5, 5 A, and 5B

Examples 6, 6A, and 6B
Examples 6C and 6D

Example 4

Example 5
Example 5A

Example 3

Example 4

Example 2

Example 3
Example 2

18. In paragraph (d)(3), newly designated Example 6A, paragraph (i), the first
and last sentences are revised.
19. In paragraph (d)(3), newly designated Example 6B and Example 9 are
revised.

20. In paragraph (d)(3), for each of the newly designated examples listed in the
first column, replace the language in the second column with the language in the third
column:

Redesignated Examples

Remove

Add

Example 6A, paragraph (i),
first sentence

Example 5

Example 6

Example 7, paragraph (i)

Example 5

Example 6

Example 7& paragraph (i)
and paragraph (ii),
penultimate sentence

Example 6

Example 7

Example 8, paragraph (i)

Example 5

Example 6

Example 8& paragraph (i)

Example 7

Example 8

Example 8B, paragraph (i)

Example 7

Example 8

Example 8C, paragraph (i)

Example 7

Example 8

Example 12, paragraph (i),
third sentence

Example 9

Example 12

Example 13& paragraph (i)
and paragraph (ii), first
sentence

Example 10

Example 13

Example 14& paragraph (i)

Example II

Example 14

22. In paragraph (e)(l), remove the first sentence and add two sentences in its
place.
The revisions and additions are as follows:
§ 1.367(a)-3 Treatment of transfers of stock or securities to foreign corporations.

*****
(a) * * * However, if, in an exchange described in section 354 or 356, a U.S.
person exchanges stock of a foreign corporation in a reorganization described in section
368(a)( I )(E), or a U.S. person exchanges stock of a domestic or foreign corporation for
stock of a foreign corporation pursuant to an asset reorganization that is not treated as an
indirect stock transfer under paragraph (d) of this section, such section 354 or 356
exchange is not a transfer to a foreign corporation subject to section 367(a). See
paragraph (d)(3), Example 16, of this section. For purposes of this section, an asset
reorganization is defined as a reorganization described in section 368(a)( I) involving a
transfer of assets under section 361. If, in a transfer described in section 361, a domestic
merging corporation transfers stock of a controlling corporation to a foreign surviving
corporation in a reorganization described in sections 368(a)( I )(A) and (a)(2)(E), such
section 361 transfer is not subject to section 367(a) if the stock of the controlling
corporation is provided to the merging corporation by the controlling corporation
pursuant to the plan of reorganization; a section 361 transfer of other property, including
stock of the controlling corporation not provided by the controlling corporation pursuant
to the plan of reorganization, by the domestic merging corporation to the foreign
surviving corporation pursuant to such a reorganization is subject to section 367(a). For
special basis and holding period rules involving foreign corporations that are parties to
certain reorganizations under section 368(a)(1), see §1.367(b)-13.*
(b)

***

(2) * * *

(i) In general. A transfer of foreign stock or securities described in section 367(a)
and
the regulations thereunder as well as in section 36 7(b) and the regulations tJ-ereunder
shall be subject concurrently to sections 367(a) and (b) and the regulations thereunder,
except as provided in paragraph (b)(2)(i)(A) or (B) of this section. See paragraph (d)(3),
Example 11, of this section.
(A) If a foreign corporation transfers assets to a domestic corporation in a
transaction to which § 1.367(b)-3(a) and (b) and the indirect stock transfer rules of
paragraph (d) of this section apply, then the section 367(b) rules shall apply prior to the
section 367(a) rules. See paragraph (d)(3), Example 15, of this section. This paragraph
(b)(2)(i)(A) applies only to transactions occurring after the date these regulations are
published as final regulations in the Federal Register.
(B) Except as provided in paragraph (b )(2)(i)(A) of this section, section 367(b)
and the regulations thereunder shall not apply if the foreign corporation is not treated as a
corporation under section 367(a)(l). See paragraph (d)(3), Example 14, of this section.

*****
(c)

***

(5)

***

(vi) Transferee foreign corporation. Except as provided in paragraph
(d)(l)(iii)(B) of this section, the transferee foreign corporation shall be the foreign
corporation that issues stock or securities to the U.S. person in the exchange.

*****
Cd)

***

(I) * * * For examples of the concurrent application of the indirect stock transfer

rules under section 367(a) and the rules of section 367(b), see paragraph (d)(3), Examples
Hand 12. of this section. For purposes of this paragraph (d), if a corporation acquiring
assets in a reorganization described in section 368(a)( I) transfers all or a portion of such
assets to a corporation controlled (within the meaning of section 368(c» by the acquiring
corporation as part of the same transaction, the subsequent transfe r of assets to the
controlled corporation will be referred to as a controlled asset transfer. See section
368(a)(2)(C).
(i) * * * See paragraph (d)(3), Example 1 of this section for an example of a
reorganization described in sections 368(a)( 1)(A) and (a)(2)(D) involving domestic
acquired and acquiring corporations, and see paragraph (d)(3), Example 10 of this section
for an example involving a domestic acquired corporation and a foreign acquiring
corporation.
(ii) * * * See paragraph (d)(3), Example 2 of this section for an example ofa
reorganization described in sections 368(a)( 1)(A) and (a)(2)(E) involving domestic
acquired and acquiring corporations, and see paragraph (d)(3), Example 11 of this section
for an example involving a domestic acquired corporation and a foreign acquiring
corporation.
(iii) Triangular reorganizations described in section 368(a)(l)(B)--(A) A U.S.
person exchanges stock of the acquired corporation for voting stock of a foreign
corporation that is in control (as defined in section 368( c» of the acquiring corporation in
a reorganization described in section 368(a)(l)(B). See paragraph (d)(3), Example 5 of
this section.

(B) A U.S. person exchanges stock of the acquired corporation for voting stock of
a domestic corporation that is in control (as defined in section 368(c» of a foreign
acquiring corporation in a reorganization described in section 368(a)( I )(B).
(1) For purposes of paragraphs (b) and (c) of this section, the foreign acquiring
corporation is considered to be the transferee foreign corporation even though the U.S.
transferor receives stock of the domestic controlling corporation in the exchange.
(~)

If stock of a foreign acquired corporation is exchanged for the voting stock of

a domestic corporation in control of a foreign acquiring corporation, then the exchange
will be subject to the rules of paragraph (b) of this section. If the exchanging shareholder
is a section 1248 shareholder with respect to the foreign acquired corporation, the indirect
transfer will be subject to sections 367(a) and (b) concurrently. For the application of
section 367(b) to the exchange, see §§ 1.367(b)-4 and 1.367(b )-13( c).
(1) If stock of a domestic acquired corporation is exchanged for the voting stock

of a domestic corporation in control of a foreign acquiring corporation, then the exchange
will be subject to the rules of paragraph (c) of this section.
(1) For purposes of applying the gain recognition agreement provisions of

paragraph (d)(2) of this section and § 1.367(a)-8, the domestic controlling corporation will
be treated as the transferee foreign corporation. Thus, a disposition of foreign acquiring
corporation stock by the domestic controlling corporation, or a disposition of acquired
corporation stock by the foreign acquiring corporation, will trigger the gain recognition
agreement. See paragraph (d)(3), Example 5Aofthis section.
(~)

This paragraph (d)(l)(iii)(B) applies only to transactions occurring after the

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

*****
(v) Transfers of assets to subsidiaries in certain section 368(a)( I) reorganizations.
A U.S. person exchanges stock or securities of a corporation (the acquired corporation)
for stock or securities of a foreign acquiring corporation in an asset reorganization (other
than a triangular section 368( a)(l )( C) reorganization described in paragraph (d)(I)( iv) of
this section or a reorganization described in sections 368(a)(I )(A) and (a)(2)(O) or
(a)(2)(E) described in paragraphs (d)(l )(i) or (ii) of this section) that is followed by a
controlled asset transfer. In the case of a transaction described in this paragraph (d)(I )(v)
in which some but not all of the assets of the acquired corporation are transferred in a
controlled asset transfer, the transaction shall be considered to be an indirect transfer of
stock or securities subject to this paragraph (d) only to the extent of the assets so
transferred. The remaining assets shall be treated as having been transferred in an asset
transfer rather than an indirect stock transfer, and such asset transfer shall be subject to
the other provisions of section 367, including sections 367(a)(l), (3), and (5), and (d) if
the acquired corporation is a domestic corporation. See paragraph (d)(3), Examples 6A
and 6 B of this section.

*****
(2)

***

(i) Transferee foreign corporation. Except as provided in paragraph (d)(l )(iii)(B)

of this section, the transferee foreign corporation shall be the foreign corporation that
issues stock or securities to the U.S. person in the exchange.
(ii) Transferred corporation. The transferred corporation shall be the acquiring
corporation, except as provided in this paragraph (d)(2)(ii). In the case of a triangular

section 368(a)(I )(8) reorganization described in paragraph (d)( I )(iii) of this section, the
transferred corporation shall be the acquired corporation. In the case of an indirect stock
transfer described in paragraph (d)( I )(i), (ii), or (iv) of this section followed by a
controlled asset transfer, or an indirect stock transfer described in paragraph (d)( I)(v) of
this section, the transferred corporation shall be the controlled corporation to which the
assets are transferred. In the case of successive section 351 transfers described in
paragraph (d)(l )(vi) of this section, the transferred corporation shall be the corporation to
which the assets are transferred in the final section 351 transfer. The transferred property
shall be the stock or securities of the transferred corporation, as appropriate under the
circumstances.
*

****
(v) * *

(C) In the case of an asset reorganization followed by a controlled asset transfer,
as described in paragraph (d)(l)(v) of this section, the assets of the acquired corporation
that are transferred to the corporation controlled by the acquiring corporation;
(D) In the case of a triangular reorganization described in section 368(a)(l)(C)
followed by a controlled asset transfer, or a reorganization described in sections
368(a)(1 )(A) and (a)(2)(D) followed by a controlled asset transfer, the assets of the
acquired corporation including those transferred to the corporation controlled by the
acquiring corporation;
(E) In the case of a reorganization described in sections 368(a)( 1)(A) and
(a)(2)(E) followed by a controlled asset transfer, the assets of the acquiring corporation
including those transferred to the corporation controlled by the acquiring corporation; and

*****
(vi) Coordination between asset transfer rules and indirect stock transfer rules-(A) General rule. I f, pursuant to any of the transactions described in paragraph (d)(l) of
this section, a U.S. person transfers (or is deemed to transfer) assets to a foreign
corporation in an exchange described in section 351 or 361, the rules of section 367,
including sections 367(a)( I), (a)(3), and (a)(5), as well as section 367(d), and the
regulations thereunder shall apply prior to the application of the rules of this section.
(B) Exceptions. (1) If a transaction is described in paragraph (d)(2)(vi)(A) of

this section, sections 367(a) and (d) shall not apply to the extent a domestic corporation
(domestic acquired corporation) transfers its assets to a foreign corporation (foreign
acquiring corporation) in an asset reorganization, and such assets (re-transferred assets)
are transferred to a domestic corporation (domestic controlled corporation) controlled
(within the meaning of section 368(c» by the foreign acquiring corporation as part of the
same transaction, provided that the domestic controlled corporation's basis in such assets
is no greater than the basis that the domestic acquired corporation had in such assets and
the conditions contained in either of the following paragraphs are satisfied:
(j) The domestic acquired corporation is controlled (within the meaning of

section 368(c» by 5 or fewer domestic corporations, appropriate basis adjustments as
provided in section 367(a)(5) are made to the stock of the foreign acquiring corporation,
and any other conditions as provided in regulations under section 367(a)(5) are satisfied.
For purposes of determining whether the domestic acquired corporation is controlled by 5
or fewer domestic corporations, all members of the same affiliated group within the
meaning of section 1504 shall be treated as 1 corporation.

Oi)

The requirements of paragraphs (c)( I )(i), (ii), and (iv), and (c)(6) of this

section are satisfied with respect to the indirect transfer of stock in the domestic acquired
corporation, and the domestic acquired corporation attaches a statement described in
paragraph (d)(2)(vi)(C) of this section to its U.S. income tax return for the taxable year of
the transfer.
(l) Sections 367(a) and (d) shall not apply to transfers described in paragraph
(d)( 1)( vi) of this section where a U.S. person transfers assets to a foreign corporation in a
section 351 exchange, to the extent that such assets are transferred by such foreign
corporation to a domestic corporation in another section 351 exchange, but only if the
domestic transferee's basis in the assets is no greater than the basis that the U.S.
transferor had in such assets.
(C) Required statement. The statement required by paragraph (d)(2)(vi)(B)(1)(ii)
of this section shall be entitled "Required Statement under § 1.367(a)-3(d) for Assets
Transferred to a Domestic Corporation" and shall be signed under penalties of perjury by
an authorized officer of the domestic acquired corporation and by an authorized officer of
the foreign acquiring corporation. The required statement shall contain a certification
that, if the foreign acquiring corporation disposes of any stock of the domestic controlled
corporation in a transaction described in paragraph (d)(2)(vi)(D) of this section, the
domestic acquired corporation shall recognize gain as described in paragraph
(d)(2)(vi)(E)(1) of this section. The domestic acquired corporation (or the foreign
acquiring corporation on behalf of the domestic acquired corporation) shall file a U.S.
income tax return (or an amended U.S. tax return, as the case may be) for the year of the
transfer reporting such gain.

(D) Gain recognition transaction. (1) A transaction described in this paragraph
(d)(2)(vi)(D) is one where a principal purpose of the transfer by the domestic acquired
corporation is the avoidance of U.S. tax that would have been imposed on the domestic
acquired corporation on the disposition of the re-transferred assets. A transfer may have
a principal purpose of tax avoidance even though the tax avoidance purpose is
outweighed by other purposes when taken together.

Q) For purposes of paragraph (d)(2)(vi)(D)(l) of this section, a transaction is
deemed to have a principal purpose of tax avoidance if the foreign acquiring corporation
disposes of any stock of the domestic controlled corporation (whether in a recognition or
non-recognition transaction) within 2 years of the transfer. The rule in this paragraph
(d)(2)(vi)(D)(~)

shall not apply if the domestic acquired corporation (or the foreign

acquiring corporation on behalf of the domestic acquired corporation) demonstrates to the
satisfaction of the Commissioner that the avoidance of U.S. tax was not a principal
purpose of the transaction.
(E) Amount of gain recognized and other matters. (1) In the case of a
transaction described in paragraph (d)(2)(vi)(D) of this section, solely for purposes of this
paragraph (d)(2)(vi)(E), the domestic acquired corporation shall be treated as if,
immediately prior to the transfer, it transferred the re-transferred assets, including any
intangible assets, directly to a domestic corporation in exchange for stock of such
domestic corporation in a transaction that is treated as a section 351 exchange, and
immediately sold such stock to an unrelated party for its fair market value in a sale in
which it shall recognize gain, if any (but not loss). Any gain recognized by the domestic
acquired corporation pursuant to this paragraph (d)(2)(vi)(E) will increase the basis that

the foreign acquiring corporation has in the stock of the domestic controlled corporation
immediately before the transaction described in paragraph (d)(2)(vi)(D) of this section,
but will not increase the basis of the re-transferred assets held by the domestic controlled
corporation. Section 1.367( d)-I T(g)( 6) shall not apply with respect to any intangible
property included in the re-transferred assets described in the preceding sentence.
(~)

If additional tax is required to be paid as a result of a transaction described in

paragraph (d)(2)(vi)(D) of this section, then interest must be paid on that amount at rates
determined under section 6621 with respect to the period between the date prescribed for
filing the domestic acquired corporation's income tax return for the year of the transfer
and the date on which

additional tax for that year is paid.

(F) Examples. For illustrations of the rules in paragraph (d)(2)(vi) of this section,
see paragraph (d)(3), Examples 68, 6C, 60,2, and 13A of this section.
(G) Effective dates. Paragraph (d)(2)(vi) of this section applies only to
transactions occurring after the date these regulations are published as final regulations in
the Federal Register. See § 1.367(a)-3(d)(2)(vi), as contained in 26 CFR Part 1 revised
as of April 1, 2004, for transactions occurring on or after July 20, 1998, until the date
these regulations are published as final regulations in the Federal Register.

(3)

***

Example 2. Section 368(a)( 1)(A)/(a)(2)(E) reorganization--(i) Facts. The facts
are the same as in Example 1, except that Newco merges into Wand Newco receives
stock of W which it distributes to F in a reorganization described in sections 368(a)( I )(A)
and (a)(2)(E). Pursuant to the reorganization, A receives 40 percent of the stock ofF in
an exchange described in section 354.
(ii) Result. The consequences of the transfer are similar to those described in
Example 1. Pursuant to paragraph (d)(1 )(ii) of this section, the reorganization is subject
to the indirect stock transfer rules. F is treated as the transferee foreign corporation, and
W is treated as the transferred corporation. Provided that the requirements of paragraph

(c)(l) of this section are satisfied, including the requirement that A enter into a five-year
gain recognition agreement as described in §1.367(a)-8, A's exchange ofW stock for F
stock under section 354 will not be subject to section 367(a)(I).

*****
Example 5A. Triangular section 368(a)(l )(B) reorganization--(i) Facts. The facts
are the same as in Example 5, except that F is a domestic corporation and S is a foreign
corporation.
(ii) Result. U's exchange of Y stock for stock of F, a domestic corporation in
control of S, the foreign acquiring corporation, is treated as an indirect transfer of Y stock
to a foreign corporation under paragraph (d)(l)(iii) of this section. U's exchange ofY
stock for F stock will not be subject to section 367(a)(l) provided that all of the
requirements of paragraph (c)( I) are satisfied, including the requirement that U enter in a
five-year gain recognition agreement. In satisfying the 50 percent or less ownership
requirements of paragraph (c)(l)(i) and (ii) of this section, U's indirect ownership ofS
stock (through its direct ownership of F stock) will determine whether the requirement of
paragraph (c)(1)( i) is satisfied and will be taken into account in determining whether the
requirement of paragraph (c)(I )(ii) is satisfied. See paragraph (c)( 4 )(iv». For purposes of
applying the gain recognition agreement provisions of paragraph (d)(2) of this section
and § 1.367(a)-8, F is treated as the transferee foreign corporation. The gain recognition
agreement would be triggered if F sold all or a portion of the stock of S, or if S sold all or
a portion of the stock of Y.

*****
Example 6A. Section 368(a)( I )(C) reorganization followed by a controlled asset
transfer--(i) Facts. The facts are the same as in Example 6, except that the transaction is
structured as a section 368(a)(l)(C) reorganization, followed by a controlled asset
transfer, and R is a foreign corporation. * * * F then contributes Businesses Band C to R
in a controlled asset transfer. * * *

*****
Example 68. Section 368(a)( I )(C) reorganization followed by a controlled asset
transfer to a domestic controlled corporation--(i) Facts. The facts are the same as in
Example 6& except that R is a domestic corporation.
(ii) Result. As in Example 6& the outbound transfer of the Business A assets to
F is not affected by the rules of this paragraph (d) and is subject to the general rules under
section 367. However, the Business A assets qualify for the section 367(a)(3) active
trade or business exception. The Business Band C assets are part of an indirect stock
transfer under this paragraph (d) but must first be tested under sections 367(a) and (d).
The Business B assets qualify for the active trade or business exception under section
367(a)(3); the Business C assets do not. However, pursuant to paragraph (d)(2)(vi)(B) of

this section, the Business C assets are not subject to section 367(a) or (d), provided that
the basis of the Business C assets in the hands of R is no greater than the basis of the
assets in the hands of Z, and appropriate basis adjustments are made pursuant to section
367(a)(5) to the stock of F held by V. (In this case, no adjustments are required because,
pursuant to section 358, V takes a basis of $30 in the stock of F, which is equal to V's
proportionate share of the basis in the assets of Z ($30) transferred to F.) V also is
deemed to make an indirect transfer of stock under the rules of paragraph (d). To
preserve non-recognition treatment under section 367(a), V must enter into a 5-year gain
recognition agreement in the amount of $50, the amount of the appreciation in the
Business Band C assets, as tre transfer of such assets by Z was not taxable under section
367(a)( 1) and constituted an indirect stock transfer.
Example 6C. Section 368(a)(l )(C) reorganization followed by a controlled asset
transfer to a domestic controlled corporation--(i) Facts. The facts are the same as in
Example 6B, except that Z is owned by individuals, none of whom qualify as five-percent
target shareholders with respect to Z within the meaning of paragraph (c)(5)(iii) of this
section. The following additional facts are present. No U.S. persons that are either
officers or directors of Z own any stock of F immediately after the transfer. F is engaged
in an active trade or business outside the United States that satisfies the test set forth in
paragraph (c )(3) of this section.
(ii) Result. The transfer of the Business A assets is not affected by the rules of
this paragraph (d). However, the transfer of such assets is subject to gain recognition
under section 367(a)(l), because the section 367(a)(3) active trade or business exception
is inapplicable pursuant to section 367(a)(5). The Business Band C assets are part of an
indirect stock transfer under this paragraph (d) but must first be tested under sections
367(a) and (d). The transfer of the Business Bassets (which otherwise would satisfy the
section 367(a)(3) active trade or business exception) generally is subject to section
367(a)(l) pursuant to section 367(a)(5). The transfer of the Business C assets generally is
subject to sections 367(a)(l) and (d). However, pursuant to paragraph (d)(2)(vi)(8) of
this section, the transfer of the Business Band C assets is not subject to sections
367(a)(l) and (d), provided the basis of the Business Band C assets in the hands ofR is
no greater than the basis in the hands ofZ and certain other requirements are satisfied.
Since Z is not controlled within the meaning of section 368( c) by 5 or fewer domestic
corporations, the indirect transfer of Z stock must satisfy the requirements of paragraphs
(c)(l)(i), (ii), and (iv), am (c)(6) of this section, and Z must attach a statement described
in paragraph (d)(2)(vi)(C) of this section to its U.S. income tax return for the taxable year
of the transfer. In general, the statement must contain a certification that, if F disposes of
the stock of R (in a recognition or nonrecognition transaction) and a principal purpose of
the transfer is the avoidance of U.S. tax that would have been imposed on Z on the
disposition of the Business Band C assets transferred to R, then Z (or F on behalf of Z)
will file a return (or amended return as the case may be) recognizing gain ($50), as if,
immediately prior to the reorganization, Z transferred the Business Band C assets to a
domestic corporation in exchange for stock in a transaction treated as a section 351
exchange and immediately sold such stock to an unrelated party for its fair market value.
A transaction is deemed to have a principal purpose of U.S. tax avoidance if F disposes of

R stock within two years of the transfer, unless Z (or F on behal f of Z) can rebut the
presumption to the satisfaction of the Commissioner. See paragraph (d)(2)(vi)(D)(~) of
this section. With respect to the indirect transfer of Z stock, the requirements of
paragraphs (c)( I )(i), (ii), and (iv) of this section are satisfied. Thus, assuming Z attaches
the statement described in paragraph (d)(2)(vi)(C) of this section to its U.S. income tax
retum and satisfies the reporting requirements of (c)( 6) of this section, the transfer of
Business Band C assets is not subject to section 367(a) or (d).
Example 60. Section 368(a)( I )(C) reorganization followed by a controlled asset
transfer to a domestic controlled corporation--(i) Facts. The facts are the same as in
Example 6C, except that the Z shareholders receive 60 percent of the F stock in exchange
for their Z stock in the reorganization.
(ii) Result. The requirement of paragraph (c)(1 )(i) ofthis section is not satisfied
because the Z shareholders that are U.S. persons do not receive 50 percent or less of the
total voting power and the total value of the stock of F in the transaction. Accordingly, Z
shareholders that are U.S. persons are subject to section 367(a)(l) on their exchange of Z
stock for F stock pursuant to the reorganization. For the same reason, the conditions of
paragraph (d)(2)(vi)(B)(1)(iD of this section are not met. Accordingly, the transfer of
Business Band C assets is subject to sections 367(a)(l) and (d), even though such assets
are re-transferred to R, a domestic corporation. As in Example 6C, the transfer of
Business A assets, which is not affected by the rules of paragraph (d) of this section, is
subject to gain recognition under sections 367(a)( 1) and (5).

*****
Example 9. Concurrent application with a controlled asset transfer--(i) Facts.
The facts are the same as in Example 8, except that R transfers the Business A assets to
M, a wholly owned domestic subsidiary of R, in a controlled asset transfer. In addition,
V's basis in its Z stock is $90.
(ii) Result. Pursuant to paragraph (d)(2)(vi)(B) of this section, sections 367(a)
and (d) do not apply to Z' s transfer of the Business A assets to R, because such assets are
re- transferred to M, a domestic corporation, provided that the basis of the Business A
assets in the hands of M is no greater than the basis of the assets in the hands of Z, and
certain other requirements are satisfied. Because Z is controlled (within the meaning of
section 368(c» by V, a domestic corporation, appropriate basis adjustments must be
made pursuant to section 367(a)(5) to the stock ofF held by V. (In this case, no
adjustments are required because, pursuant to section 358, V takes a basis of $90 in the
stock of F, which is less than V's proportionate share of the basis in the assets of Z
($ 100) transferred to R.) Section 367(a)(l) does not apply to Z's transfer of its Business
B assets to R (which are not re-transferred to M) because such assets qualify for an
exception to gain recognition under section 367(a)(3). With respect to the indirect
transfer of Z stock, such transfer is not subject to gain recognition under section 367(a)( I)
if the requirements of paragraph (c) of this section are satisfied, including the requirement
that Venter into a 5-year gain recognition agreement and comply with the requirements

of § 1.367(a)-8 with respect to the gain ($100) realized on the Z stock. Under paragraphs
(d)(2)(i) and (ii) of this section, the transferee foreign corporation is F and the transferred
corporation is M. Pursuant to paragraph (d)(2)(iv) of this section, a disposition by F of
the stock of R, or a disposition by R of the stock of M, will trigger the gain recognition
agreement. To determine whether an asset disposition constitutes a deemed disposition
of the transferred corporation's stock under the rules of § 1.367(a)-8( e )(3 )(i), both the
Business A assets in M and the Business B assets in R must be considered.
Example 10. Concurrent application in section 368(a)(l )(A)/(a)(2)(D)
reorganization--(i) Facts. The facts are the same as in Example 8, except that R acquires
all of the assets ofZ in a reorganization described in sections 368(a)(l)(A) and (a)(2)(D).
Pursuant to the reorganization, V receives 30 percent of the stock of F in a section 354
exchange.
(ii) Result. The consequences of the transaction are similar to those in Example
8. The assets of Businesses A and B that are transferred to R must be tested under
section 367(a) prior to the consideration of the indirect stock transfer rules of this
paragraph (d). The Business B assets qualify for the active trade or business exception
under section 367(a)(3). Because the Business A assets do not quality for the exception,
Z must recognize $40 of gain under section 367(a) on the transfer of Business A assets to
R. Because V and Z file a consolidated return, V's basis in the stock of Z is increased
from $100 to $140 as a result of Z's $40 gain. V's indirect transfer of Z stock will be
taxable under section 367(a) unless Venters into a gain recognition agreement in the
amount of $60 ($200 value of Z stock less $140 adjusted basis) and the other
requirements of paragraph (c)( I) of this section are satisfied.
Example II. Section 368(a)( 1)(A)/(a)(2)(E) reorganization--(i) Facts. F, a
foreign corporation, owns all the stock of D, a domestic corporation. V, a domestic
corporation, owns all the stock of Z, a foreign corporation. V has a basis of $100 in the
stock of Z which has a fair market value of $200. D is an operating corporation with
assets valued at $100 with a basis of $60. In a reorganization described in sections
368(a)(1)(A) and (a)(2)(E), D merges into Z, and V exchanges its Z stock for 55 percent
of the outstanding F stock.
(ii) Result. Under paragraph (d)(l)(ii) of this section, V is treated as making an
indirect transfer of Z stock to F. V's exchange of Z stock for F stock will be taxable
under section 367(a) (and section 1248 will be applicable) if V fails to enter into a 5-year
gain recognition agreement in accordance with the requirements of § 1.367(a)-8. Under
paragraph (b)(2) of this section, if V enters into a gain recognition agreement, the
exchange will be subject to the provisions of section 367(b) and the regulations
thereunder as well as section 367(a). Under § 1.367(b )-4(b) of this chapter, however, no
income inclusion is required because both F and Z are controlled foreign corporations
with respect to which V is a section 1248 shareholder immediately after the exchange.
Under paragraphs (d)(2)(i) and (ii) of this section, the transferee foreign corporation is F,
and the transferred corporation is Z (the acquiring corporation). If F disposes (within the
meaning of § 1.367(a)-8( e» of all (or a portion) of Z stock within the 5-year term of the

agreement (and V has not made a valid election under § 1.367(a)-8(b)(I )(vii», V is
required to file an amended return for the year of the transfer and include in income, with
interest, the gain realized but not recognized on the initial section 354 exchange. To
determine whether Z (the transferred corporation) disposes of substantially all of its
assets, the assets of Z immediately prior to the transaction are taken into account,
pursuant to paragraph (d)(2)(v)(B) of this section. Because 0 is owned by F, a foreign
corporation, section 367(a)(S) precludes any assets of 0 from qualifying for
nonrecognition under section 367(a)(3). Thus, 0 recognizes $40 of gain on the transfer
of its assets to Z under section 367(a)( I).

*****
Example IS. Concurrent application of indirect stock transfer rules and section
367(b)--Ji) Facts. F, a foreign corporation, owns all of the stock of Newco, a domestic
corporation. P, a domestic corporation, owns all of the stock of FC, a foreign
corporation. P's basis in the stock of FC is $50 and the value of FC stock is $100. The
all earnings and profits amount with respect to the FC stock held by P is $60. See
§1.367(b)-2(d). In a reorganization described in sections 368(a)(l)(A) and (a)(2)(0) (and
paragraph (d)(1)(i) of this section), Newco acquires all of the properties ofFC, and P
exchanges its stock in FC for 20 percent of the stock in F.
(ii) Result. Because a domestic corporation, Newco, acquires the assets of a
foreign corporation, FC, in an asset reorganization to which §1.367(b)-3(a) and (b) and
the indirect stock rules of paragraph (d) of this section apply, the section 367(b) rules
apply before the section 367(a) rules apply. See § 1.367(a)-3(b )(2)(i)(A). Under the rules
of section 367(b), P must include in income the all earnings and profits amount of $60
with respect to its FC stock. See § 1.367(b )-3. Although P's exchange of FC stock for F
stock under section 354 is an indirect stock transfer, no gain is recognized under section
367(a), because P's basis in the FC stock is increased by the amount ($60) included in
income under the rules of section 367(b). See § 1.367(b )-2( e )(3 )(ii). Alternatively, if P's
all earnings and profits amount were $30, then the amount of the income inclusion and
basis adjustment under the rules of section 367(b) wo uld be $30, and the amount of gain
subject to section 367(a)(1) would be $20 unless P entered into a S-year gain recognition
agreement in accordance with § 1.367(a)-8.

*
(e)

***

(I) In general Except as provided in paragraphs (b)(2)(i)(A), (d)(I)(iii)(B), and
(d)(2)(vi)(G), or in this paragraph (e), the rules in paragraphs (a), (b), and (d) of this
section apply to transfers occurring on or after July 20, 1998. The rules in paragraphs (a)
and (d) of this section, as they apply to section 368(a)( 1)(A) reorganizations (including

reorganizations described in section 368(a)(2)(D) or (E» involving a foreign acquiring or
acquired corporation, apply only to transfers occurring after the date these regulations are
published as final regulations in the Federal Register. * * *

*****
Par.5. Section 1.367(a)-8 is amended as follows:
1. In paragraphs (c )(2) and (d), remove the words "district director" and add
"Director of Field Operations" in their place.
2. In paragraph (e)(l)(i), a sentence is added after the first sentence.
The addition reads as follows:
§ 1.367(a)-8 Gain recognition agreement requirements.

*****
(e) * * *

(I) * * *

(i) * * * It also includes an indirect disposition of the stock of the transferred
corporation as described in § 1.367(a)-3(d)(2)(iv). * * *

*****
Par. 6. In §1.367(b)-1(a), remove the third and fourth sentences and add a
sentence in their place to read as follows:
§ 1.367(b )-1 Other transfers.
(a) * * * For rules coordinating the concurrent application of sections 367(a) and
(b), including the extent to which section 367(b) does not apply if the foreign corporation
is not treated as a corporation under section 367(a), see § 1.367(a}3(b)(2)(i). * * *

*****

Par.7. In ~1.367(b)-3(b)(3)(ii), revise paragraph (i) of Example 5 to read as
follows:
~ 1.367(b )-3 Repatriation of foreign corporate assets in certain nonrecognition

transactions.

*****
(b) * * *
(3)

***

(ii) * * *
Example 5--(i) Facts. DC 1, a domestic corporation, owns all of the outstanding
stock of FC 1, a foreign corporation. FC 1 owns all of the outstanding stock of FC2, a
foreign corporation. The all earnings and profits amount with respect to the FC2 stock
owned by FC 1 is $20. In a reorganization described in section 368(a)(1 )(A), DC2, a
domestic corporation unrelated to FC 1 or FC2, acquires all of the assets and liabilities of
FC2 pursuant to a State W merger. FC2 receives DC2 stock and distributes such stock to
FC 1. The FC2 stock held by FC 1 is canceled, and FC2 ceases its separate legal
existence.

*****
Par.8. Section 1.367(b )-4 is amended as follows.
1. Paragraph (a) is revised.
2. Redesignate paragraph (b)(1 )(ii) as paragraph (b)(1 )(iii), and add new
paragraph (b)( 1)(ii).
3. In newly designated paragraph (b)(1 )(iii), after Example 3, add Examples 3A
and 3B.
The revisions and additions read as follows:

§ 1.367(b )-4 Acquisition of foreign corporate stock or assets by a foreign corporation in
certain nonrecognition transactions.

(a) Scope. This section applies to an acquisition by a foreign corporation (the
foreign acquiring corporation) of the stock or assets of a foreign corporation (the foreign
acquired corporation) in an exchange described in section 35 J or a reorganization
described in section 368(a)( 1). In the case of a reorganization described in sections
368(a)( I )(A) and (a)(2)(E), this section applies if stock of the foreign surviving
corporation is exchanged for stock of a foreign corporation in control of the merging
corporation; in such a case, the foreign surviving corporation is treated as a foreign
acquired corporation for purposes of this section. A foreign corporation that undergoes a
reorganization described in section 368(a)( 1)(E) is treated as both the foreign acquired
corporation and foreign acquiring corporation for purposes of this section. See
§ 1.367(a)-3(b )(2) for transactions subject to the concurrent application of this section and
section 367(a).
(b)

***

(I)

***

(ii) Exception. In the case of a triangular reorganization described in section
368(a)(l )(B) or (C), or a reorganization described in sections 368(a)(I)(A) and (a)(2)(D)
or (E), an exchange is not described in paragraph (b)(l)(i) of this section if the stock
received in the exchange is stock of a domestic corporation and, immediately after the
exchange, such domestic corporation is a section J 248 shareholder of the acquired
corporation (in the case of a triangular section 368(a)(l )(B) reorganization) or the
surviving corporation (in the case of a reorganization described in sections 368(a)(l )(A)
and (a)(2)(D) or (E» and such acquired or surviving corporation is a controlled foreign

corporation. See paragraph (b)( 1)(iii) of this section, Example 3B for an illustration of
this rule.

... ) * * *
(III
Example 3A. (i) Facts. The facts are the same as in Example 3, except that FC I
merges into FC2 in a reorganization described in sections 368(a)(1 )(A) and (a)(2 )(E).
Pursuant to the reorganization, DC exchanges its FC2 stock for stock of FP.
(ii) Result. The result is similar to the result in Example 3. The transfer is an
indirect stock transfer subject to section 367(a). See §1.367(a)-3(d)(1)(ii). Accordingly,
DC's exchange of FC2 stock for FP stock will be taxable under section 367(a) (and
section 1248 will be applicable) if DC fails to enter into a gain recognition agreement,. If
DC enters into a gain recognition agreement, the exchange will be subject to the
provisions ofsectbn 367(b) and the regulations thereunder, as well as section 367(a). If
FP and FC2 are controlled foreign corporations as to which DC is a (direct or indirect)
section 1248 shareholder immediately after the reorganization, then paragraph (b)(1)( i) of
this section does not apply to require inclusion in income of the section 1248 amount and
the amount of the gain recognition agreement is the amount of gain realized on the
indirect stock transfer. If FP or FC2 is not a controlled foreign corporation as to which
DC is a (direct or indirect) section 1248 shareholder immediately after the exchange, then
DC must include in income the section 1248 amount ($20) attributable to the FC2 stock
that DC exchanged. Under these circumstances, the gain recognition agreement would be
the amount of gain realized on the indirect transfer, less the $20 section 1248 income
inclusion.
Example 38. (i) Facts. The facts are the same as Example 3, except that USP, a
domestic corporation, owns the controlling interest (within the meaning of section
368(c» in FCI stock. FC2 merges into FCI in a reorganization described in sections
368(a)(l )(A) and (a)(2)(D). Pursuant to the reorganization, DC exchanges its FC2 stock
for USP stock.
(ii) Result. Because DC receives stock of a domestic corporation, USP, in the
section 354 exchange, the transfer is not an indirect stock transfer subject to section
367(a). Accordingly, the exchange will be subject only to the provisions of section
367(b) and the regulations thereunder. Under paragraph (b)(1 )(ii)(A) of this section,
because the stock received is stock of a domestic corporation (USP) and, immediately
after the exchange, USP is a section 1248 shareholder of FC I (the acquiring corporation)
and FC I is a controlled foreign corporatbn, the exchange is not described in paragraph
(b)(1 )(i) of this section and DC includes no amount in its gross income. See § 1.367(b)13(b) and (c) for the basis and holding period rules applicable to this transaction, which
cause USP's adjusted basis and holding period in the stock of FCl after the transaction to
reflect the basis and holding period that DC had in its FC2 stock.

*****
56

Par. 9. In § 1.367(b)-6, paragraph (a)(I), add a sentence to the end to read as
follows:
§ 1.36 7(b )-6 Effective dates and coordination rules.
(a)

***

(1)

***

The rules of §§ 1.367(b)-3 and 1.367(b)-4, as they apply to

reorganizations described in section 368(a)(l)(A) (including reorganizations described in
section 368(a)(2)(D) or (E» involving a foreign acquiring or foreign acquired
corporation, apply only to transfers occurring after the date these regulations are
published as final regulations in the Federal Register.

*****
Par. 10. Section 1.367(b )-13 is added to read as follows:

§ 1.367(b )-13 Special rules for detennining basis and holding period.
(a) Scope and definitions--(l) Scope. This section provides special basis and
holding period rules for certain transactions involving the acquisition of property by a
foreign acquiring corporation in nonrecognition exchanges. Special rules apply to
detennine the basis and holding period of stock in a foreign corporation received by
certain shareholders in a section 354 or 356 exchange. In addition, special rules apply to
detennine the basis and holding period of stock of certain foreign surviving corporations
held by a controlling corporation whose stock is issued in an exchange under section 354
or 356 in a triangular reorganization. This section applies to transactions that are subject
to section 367(b) as well as section 367(a), including transactions concurrently subject to
sections 367(a) and (b).
(2) Definitions. For purposes of this section, the following definitions apply:

(i) A foreign acquired corporation is a foreign corporation whose stock or assets
are acquired by a foreign corporation in a reorganization described in section 368(a)( I).
In a reverse triangular merger, where T is a foreign corporation, T is treated as a foreign
acquired corporation. A foreign corporation that undergoes a reorganization described in
section 368(a)( I )(E) is treated as a foreign acquired corporation.
(ii) A block of stock has the meaning provided in § 1.1248-2(b).
(iii) A triangular reorganization is a reorganization described in § 1.358-6(b)(2)(i),
(ii), or (iii) (but not a reorganization described in § 1.358-6(b)(2)(iv». A triangular C
reorganization, a forward triangular merger, and a reverse triangular merger each is a
reorganization described in § 1.358-6(b )(2)(i), (ii), or (iii), respectively. For purposes of
triangular reorganizations-(A) P is a corporation that is a party to a reorganization that is in control (within
the meaning of section 368(c» of another party to the reorganization and whose stock is
transferred pursuant to the reorganization;
(8) S is a corporation that is a party to the reorganization and that is controlled by

P;and
(C) T is a corporation that is another party to the reorganization.

(b) Determination of basis and holding period for exchanges of foreign stock --(1)
Application Except as provided in paragraph (b)(4) of this section, this paragraph (b)
applies to a shareholder that exchanges stock of a foreign acquired corporation in an
exchange under section 354 or 356 for stock of a controlled foreign corporation, if-(i) Immediately before the exchange either such shareholder is a section 1248
shareholder with respect to the foreign acquired corporation, or such shareholder is a

foreign corporation and a United States person is a section 1248 shareholder with respect
to both such foreign corporation and the foreign acquired corporation; and
(ii) The exchange is not described in §1.367(b)-4(b)(J)(i), (2)(i), or (3).
(2) Basis and holding period rules--(i) If a shareholder surrenders a share of
stock in an exchange under the terms of section 354 or 356, the basis and holding period
of each share of stock received in the exchange shall be the same as the basis and holding
period of the allocable portion of the share or shares of stock exchanged therefor, as
adj usted under § 1.358-1 (such that the section 1248 amount of each share of stock
exchanged is preserved in the share or shares of stock received). If more than one share
of stock is recei ved in exchange for one share of stock, the basis of the share of stock
surrendered shall be allocated to the shares of stock received in the exchange in
proportion to the fair market value of the shares of stock received. If one share of stock
is received in respect of more than one share of stock or a fraction of a share of stock is
received, the basis of the shares of stock surrendered must be allocated to the share of
stock received, or a fraction thereof received, in a manner that reflects, to the greatest
extent possible, that a share of stock is received in respect of shares of stock acquired on
the same date and at the same price. The provisions of this paragraph may be applied, to
the extent possible, on the basis of blocks of stock.
(ii) If a shareholder that purchased or acquired shares of stock in a corporation on
different dates or at different prices exchanges such shares of stock under the terms of
section 354 or 356, and the shareholder is not able to identify which particular share or
shares of stock (or portion of a share of stock) is received in exchange tOr a particular
share or shares of stock, the shareholder may designate which share or shares of stock is

received in exchange for a particular share or shares of stock, provided that such
designation is consistent with the terms of the exchange or distribution. The designation
must be made on or before the first date on which the basis of a share of stock received is
re levant. The basis of a share received, for example, is relevant when such share is sold
or otherwise transferred. The designation will be binding for purposes of determining the
Federal tax consequences of any sale or transfer of a share received. If the shareholder
fails to make a designation, then the shareholder will not be able to identify which share
is sold or transferred for purposes of determining the basis of property sold or transferred
under section 1012 and § 1.1012-1 (c) and, instead, will be treated as selling or transferring
the share received in respect of the earliest share purchased or acquired. See paragraph
(e), Example 1 of this section for an illustration of this paragraph (b).
(3) In the case of a triangular reorganization, this paragraph (b) applies only to
the exchange of T stock for P stock by T shareholders. See paragraph (c) of this section
to determine the basis and holding period of stock of the surviving corporation (S or T)
held by P immediately after a triangular reorganization.
(4) Paragraphs (b)(1) through (3) of this section shall not apply to determine the
basis of a share of stock received by a shareholder in an exchange described in both
section 351 and section 354 or 356, if, in connection with the exchange, the shareholder
exchanges property for stock in an exchange to which neither section 354 nor 356 applies
or liabilities of the shareholder are assumed.
(c) Determination of basis and holding period for triangular reorganizations--(l)
Application In the case of a triangular reorganization, this paragraph (c) applies, if-(i) In the case of a reverse triangular merger-

(A) Immediately before the transaction, either P is a section 1248 shareholder
with respect to S, or P is a foreign corporation and a United States person is a section
1248 shareholder with respect to both P and S; and
(B) P's exchange of S stock is not described in § 1.367(b)-3(a) and (b) or in

§ 1.367(b)-4(b)( I )(i), (2)(i), or (3); or
(ii)(A) Immediately before the transaction, a shareholder of T is either a section
1248 shareholder with respect to T or a foreign corporation and a United States person is
a section 1248 shareholder with respect to both such foreign corporation and T; and
(B) With respect to at least one of the exchanging shareholders described in

paragraph (c)(l)(ii)(A) of this section, the exchange ofT stock is not described in
§ 1.36 7(b )-3( a) and (b) or in § 1.367(b )-4(b)( I )(i), (2)( i), or (3).
(2) Basis and holding period rules. In the case of a triangular reorganization
described in this paragraph (c), each share of stock of the surviving corporation (S or T)
held by P must be divided into portions attributable to the S stock and the T stock
immediately before the exchange. See paragraph (e) of this section, Examples 2 through

.2. for illustrations of this rule.
(i) Portions attributable to S stock--(A) In the case of a forward triangular

merger or a triangular C reorganization, the basis and holding period of the portion of
each share of surviving corporation stock attributable to the S stock is the basis and
holding period of such share of stock immediately before the exchange.
(B) In the case of a reverse triangular merger, the basis and holding period of the
portion of each share of surviving corporation stock attributable to the S stock is the basis
and the holding period immediately before the exchange of a proportionate amount of the

S stock to which the portion relates. If P is a shareholder described in paragraph
(c)( 1)(i)(A) of this section with respect to S, and P exchanges two or more blocks of S
stock pursuant to the transaction, then each share of the surviving corporation (T)
attributable to the S stock must be further divided into separate portions to account for the
separate blocks of stock in S.
(C) If the value of S stock immediately before the triangular reorganization is less
than one percent of the value of the surviving corporation stock immediately after the
triangular reorganization, then P may determine its basis in the surviving corporation
stock by applying the rules of paragraph (c)(2)(ii) of this section to detennine the basis
and holding period of the surviving corporation stock attributable to the T stock, and then
increasing the basis of each share of surviving corporation stock by the proportionate
amount of P's aggregate basis in the S stock immediately before the exchange (without
dividing the stock of the surviving corporation into separate portions attributable to the S
stock).
(ii) Portions attributable to T stock--(A) If any exchanging shareholder ofT
stock is described in paragraph (c)(1)( ii) of this section, the basis and holding period of
the portion of each share of stock in the surviving corporation attributable to the T stock
is the basis and holding period immediately before the exchange of a proportionate
amount of the T stock to which such portion relates. If any exchanging shareholder of T
stock is described in paragraph (c)(1)( ii) of this section, and such shareholder exchanges
two or more blocks of T stock pursuant to the transaction, then each share of surviving
corporation stock attributable to the T stock must be further divided into separate portions
to account for the separate blocks of T stock.

(8) lfno exchanging shareholder ofT stock is described in paragraph (c)(l)(ii) of

this section, the rules of ~ 1.3 58-6( c) apply to detennine the basis of the portion of each
share of the surviving corporation attributable to T immediately before the exchange.
(d) Special rules applicable to divided shares of stock --(1) In general-(i) Shares
of stock in different blocks can be aggregated into one divided portion for basis purposes,
if such shares immediately before the exchange are owned by one or more shareholders
that are-(A) Neither section 1248 shareholders with respect to the corporation nor foreign
corporate shareholders; or
(8) Foreign corporate shareholders, provided that

ill

United States persons are

section 1248 shareholders with respect to both such foreign corporate shareholders and
the corporation.
(ii) For purposes of detennining the amount of gain realized on the sale or
exchange of stock that has a divided portion pursuant to paragraph (c) of this section, any
amount realized on such sale or exchange will be allocated to each divided portion of the
stock based on the relative fair market value of the stock to which the portion is
attributable at the time the portion; were created.
(iii) Shares of stock will no longer be required to be divided if section 1248 or
section 964( e) would not apply to a disposition or exchange of such stock.
(2) Pre-exchange earnings and profits. All earnings and profits (or deficits)
accumulated by a foreign corporation before the reorganization and attributable to a share
(or block) of stock for purposes of section 1248 are attributable to the divided portion of
stock with the basis and holding period of that share (or block). See §1.367(b)-4(d).

(3) Post-exchange earnings and profits. Any earnings and profits (or deficits)
accumulated by the surviving corporation subsequent to the reorganization are attributed
to each divided share of stock pursuant to section 1248 and the regulations thereunder.
The amount of earnings and profits (or deficits) attributable to a divided share of stock is
further attributed to the divided portions of such share of stock based on the relative fair
market value of each divided portion of stock.
(e) Examples. The rules of this section are illustrated by the following examples:
Example 1. (i) Facts. USI is a domestic corporation that owns all the stock of
FT, a foreign corporation with 100 shares of stock outstanding. Each share of FT stock is
valued at $1 Ox. Because US I acquired the stock of FT at two different dates, US I owns
two blocks of FT stock for purposes of section 1248. The first block consists of 60
shares. The shares in the first block have a basis of $300x ($5x per share), a hol:ling
period of 10 years, and $240x ($4x per share) of earnings and profits attributable to the
shares for purposes of section 1248. The second block consists of 40 shares. The shares
in the second block have a basis of $600x ($l5x per share), a holding period of 2 years,
and $80x ($2x per share) of earnings and profits attributable to the shares for purposes of
section 1248. US2, a domestic corporation, owns all of the stock ofFP, a foreign
corporation, which owns all of the stock of FS, a foreign corporation. FT merges into FS
with FS surviving in a reorganization described in section 368(a)(l )(A). Pursuant to the
reorganization, US 1 receives 50 shares of FS stock with a value of $1 ,000x for its FT
stock in an exchange that qualifies for nonrecognition under section 354.
(ii) Basis and holding period determination--(A) USI is a section 1248
shareholder of FT immediately before the exchange and exchanges its FT stock for stock
of a controlled foreign corporation (FS) as to which US 1 is a section 1248 shareholder
immediately after the exchange. USI is not required to include income under §1.367(b)4(b) with respect to the exchange. Accordingly, the basis and holding period of the FS
stock received by US 1 is determined pursuant to paragraph (b) of this section.
(B) Pursuant to paragraph (b) of this section, 30 shares of the FS stock received
by USI in the reorganization (valued at $20x per share and exchanged for USl 's first
block of 60 shares of FT stock) have a basis of $300x ($1 Ox per share), a holding period
of 10 years, and $240x of earnings and profits ($8x per share) attributable to such shares
for purposes of section 1248. In addition, 20 shares of the FS stock (valued at $20 per
share and exchanged for US I 's second block of 40 shares of FT stock) have a basis of
$600x ($30x per share), a holding period of 2 years, and $80x of earnings and profits
($4x per share) attributable to such shares for purposes of section 1248.

(iii) Subsequent Disposition Assume, subsequent to the exchange, US I disposes
of 20 shares of FS stock. On or before the date of the disposition when the basis of the
F I shares received by US I becomes relevant, US I can designate the 20 shares from the
first block, the second block, or from any combination of shares in both blocks.
Example 2. (i) Facts. The facts are the same as in Example I, except that US I
receives 50 shares of FP stock (instead of FS stock) with a value of $1 ,000x in exchange
for its FT stock. Accordingly, the merger of FT into FS qualifies as forward triangular
merger, and immediately after the exchange US I is a section 1248 shareholder with
respect to FP and FS. Additionally, prior to the transaction, FP owned two blocks of FS
stock. Each block consisted of 10 shares with a value of $200x ($20x per share). The
shares in the first block had a basis of $50x ($5x per share), a holding period of 10 years,
and $50x ($5x per share) of earnings and profits attributable to such shares for purposes
of section 1248. The shares in the second block had a basis of $IQOx ($1 Ox per share), a
holding period of 5 years, and $20x ($2x per share) of earnings and profits attributable to
such shares for purposes of section 1248.
(ii) Basis and holding period determination (A) The basis and holding period of
the FP shares received by US I in the exchange are determined pursuant to paragraph (b)
of this section and are identical to the results in Example I.
(B )(1) US 1 is a section 1248 shareholder of FT immediately before the
transaction. Moreover, US I is not required to include income under § 1.367(b)-3(b) or
1.367(b)-4(b) as described in paragraph (c)(2) of this section. Accordingly, the basis and
holding period of the FS stock held by FP immediately after the triangular reorganization
is determined pursuant to paragraph (c) of this section.

Pursuant to paragraph (c) of this section, each share of FS stock is divided
into portions attributable to the basis and holding period of the FS stock held by FP
immediately before the exchange (the FS portion) and the FT stock held by US I
immediately before the exchange (the FT portion). The basis and holding period of the
FS portion is the basis and holding period of the FS stock held by FP immediately before
the exchange. Thus, each share of FS stock in the first block has a portion with a basis of
$5x, a value of $20x, a holding period of 10 years, and $5x of earnings and profits
attributable to such portion for purposes of section 1248. Each share of FS stock in the
second block has a portion with a basis of $1 Ox, a value of $20x, a holding period of 5
years, and $2x of earnings and profits attributable to such portion for purposes of section
1248.
(1) Because the exchanging shareholder of FT stock (US I) is a section 1248
shareholder, the holding period and basis of the FT portion is the holding period and the
proportionate amount of the basis of the FT stock immediately before the exchange to
which such portion relates. Further, because US I exchanged two blocks of FT stock, the
FT portion must be divided into two separate portions attributable to the two blocks of FT
stock. Thus, each share of FS stock will have a second portion with a basis of $15x
($300x basis / 20 shares), a value of $30x ($600x value / 20 shares), a holding period of

10 years, and $12x of earnings and profits ($240x / 20 shares) attributable to such portion
for purposes of section 1248. Each share of FS stock will have a third portion with a
basis of$30x ($600x basis / 20 shares), a value of$20x ($400x value / 20 shares), a
holding period of 2 years, and $4x of earnings and profits ($80x / 20 shares) attributable
to such portion for purposes of section 1248.
(iii) Assume, immediately after the transaction, FP disposes of a share of FS
stock from the first block. When FP disposes of any share of its FS stock, it is treated as
disposing of each divided portion of such share. With respect to the first portion
(attributable to the FS stock), FP recognizes a gain of $15x ($20x value - $5x basis), $5x
of which is treated as a dividend under section 1248. With respect to the second portion
(attributable to the first block of FT stock), FP recognizes a gain of $15x ($30x value $15x basis), $12x of which is treated as a dividend under section 1248. With respect to
the third portion (attributable to the second block of FT stock), FP recognizes a capital
loss of $1 Ox ($20x value - $30x basis).
(iv) Assume further, immediately after the transaction, FP also disposes of a
share of stock from the second block of FS stock. With respect to the first portion
(attributable to the FS stock), FP recognizes a gain of $ lOx ($20x value - $1 Ox basis), $2x
of which is treated as a dividend under section 1248. With respect to the second portion
(attributable to the first block of FT stock), FP recognizes a gain of $15x ($30x value $15x basis), $12x of which is treated as a dividend under section 1248. With respect to
the third portion (attributable to the second block of FT stock), FP recognizes a capital
loss of $1 Ox ($20x value - $30x basis).
Example 2A. (i) Facts. The facts are the same as in Example 2, except that FS
merges into FT with FT surviving in a reverse triangular merger. Pursuant to the merger,
US 1 receives FP stock with a value of $1 ,000x in exchange for its FT stock, and FP
receives 10 shares of FT stock with a value of $1 ,400x in exchange for its FS stock.
Immediately after the exchange, US 1 is a section 1248 shareholder with respect to FP and
FT.
(ii) Basis and holding period determination--(A) The basis and holding period of
the FP shares received by US 1 and the stock of the surviving corporation held by FP are
the same as in Example 2, except that each share of the surviving corporation (FT,
instead of FS) will be divided into four portions instead of three portions. Because FP
exchanges two blocks of FS stock, the FS portion must be divided into two separate
portions attributable to the two blocks of FS stock. Because US 1 exchanges two blocks
of FT stock, the FT portion must be divided into two separate portions attributable to the
two blocks of FT stock.
(B) Thus, each share of the surviving corporation (FT) will have a first portion
(attributable to the first block ofFS stock) with a basis of$5x ($50x / 10 shares), a value
of $20x ($200x / 10 shares), a holding period of 10 years, and $5x of earnings and profits
($50x / 10 shares) attributable to such portion for purposes of section 1248. Each share
of FT stock will have a second portion (attributable to the second block of FS stock) with

a basis of $1 Ox ($1 OOx / 10 shares). a value of $20x ($200x / 10 shares), a holding period
of 5 years, and $2x of earnings and profits ($20x / 10 shares) attributable to such portion
for purposes of section 1248. Moreover, each share of FT stock will have a third portion
(attributable to the first block of FT stock) with a basis of $30x ($300x basis / 10 shares),
a value of $60x ($600x value / 10 shares), a holding period of 10 years, and $24x of
earnings and profits ($240x / 10 shares) attributable to suc h portion for purposes of
section 1248. Lastly, each share of FT stock will have a fourth portion (attributable to the
second block of FT stock) with a basis of $60x ($600x basis / 10 shares), a value of $40x
($400x value / 10 shares), a holding period of2 years, and $8x of earnings and profits
($80x / 10 shares) attributable to such portion for purposes of section 1248.
Example 3. (i) Facts. USP, a domestic corporation, owns all the stock of FS, a
foreign corporation with 10 shares of stock outstanding. Each share of FS stock has a
value of $1 Ox, a basis of $5x, a holding period of 10 years, and $7x of earnings and
profits attributable to such share for purposes of section 1248. FP, a foreign corporation,
owns the stock of FT, another foreign corporation. FP and FT do not have any section
1248 shareholders. FT has assets with a value of $1 OOx, a basis of $50x, and no
liabilities. The FT stock held by FP has a value of $1 OOx and a basis of $75x. FT merges
into FS with FS surviving in a forward triangular merger. Pursuant to the reorganization,
FP receives USP stock with a value of $1 OOx in exchange for its FT stock.
(ii) Basis and holding period determination--(A) Because USP is a section 1248
shareholder of FS immediately before the transaction, the basis and holding period of the
FS stock held by USP immediately after the triangular reorganization is determined
pursuant to paragraph (c) of this section.
(B) Pursuant to paragraph (c) of this section, each share of FS stock is divided
into portions attributable to the basis and holding period of the FS stock held by USP
immediately before the exchange (the FS portion) and the basis of FT's net assets (the FT
portion) immediately before the exchange. The basis of FT's net assets (and not FT
stock) is used to determine the FT portion because FT does not have a section 1248
shareholder immediately before the transaction. As a result, the rules of § 1.358-6( c)
apply to determine the basis of the FT portion of each share of FS stock. The bas is and
holding period of the FS portion is the basis and holding period of the FS stock held by
USP immediately before the exchange. Thus, each share of FS stock has a portion with a
basis of $5x, a value of $1 Ox, and a holding period of 10 years. The basis of the FT
portion is the basis of the FT assets to which such portion relates. Thus, each share of FS
stock has a second portion with a basis of $5x ($50x basis in FT's assets / 10 shares) and
a value of$10x ($100x value ofFT's assets /10 shares). All ofFS's earnings and profits
prior to the transaction ($70x) is attributed solely to the FS portion in each share of FS
stock. The FS portion of each share of FS stock has earnings and profits of $7x ($70x /
10 shares) attributable to such portion for purposes of section 1248. As a result of each
share of stock being divided into portions, the basis of the FS stock is not averaged with
the basis of the FT assets to increase the section 1248 amount with respect to the stock of
the surviving corporation (FS).

Example 4. (i) Facts. US, a domestic corporation, owns all of the stock of FT, a
foreign corporation. The FT stock held by US constitutes a single block of stock with a
value of$I,OOOx, a basis of$600x, and holding period of5 years. USP, a domestic
corporation, forms FS, a foreign corporation, pursuant to the plan of reorganization and
capitalizes it with $1 Ox of cash. FS merges into FT with FT surviving in a reverse
triangular merger and a reorganization described in section 368(a)( 1XB). Pursuant to the
reorganization, US receives USP stock with a value of $1 ,000x in exchange for its FT
stock, and USP receives 10 shares of FT stock with a value of $1 ,0 1Ox in exchange for its
FS stock.
(ii) Basis and holding period determination. (A) US and USP are section 1248
shareholders of FT and FS, respectively, immediately before the transaction. Neither US
nor USP is required to include income under § 1.367(b )-3(b) or 1.367(b )-4(b) as described
in paragraph (c )(2) of this section. The basis and holding period of the FT stock held by
USP is determined pursuant to paragraph (c) of this section.
(B) Pursuant to paragraph (c) of this section, because the exchanging shareholder
of FT stock (US) is a section 1248 shareholder of FT, each sha re of the surviving
corporation (FT) has a proportionate amount of the basis and holding period of the FT
stock immediately before the exchange to which such share relates. Thus, the portion of
each share of FT stock attributable to the FT stock has a basis of $60x ($600x basis / 10
shares), a value of $1 OOx ($1 ,000x value / 10 shares), and a holding period of 5 years.
Because the value of FS stock immediately before the triangular reorganization ($1 Ox) is
less than one percent of the value of the surviving corporation (FT) immediately after the
triangular reorganization ($1,0 lOx), USP may determine its basis in the stock of the
surviving corporation (FT) by increasing the basis of each share of FT stock by the
proportionate amount of USP's aggregate basis in the FS stock immediately before the
exchange (without dividing each share of FT stock into separate portions to account for
FS and FT). IfUSP so elects, USP's basis in each share ofFT stock is increased by $lx
($ lOx basis in FS stock / 10 shares). As a result, each share of FT stock has a basis of
$61 x, a value of $101 x, and a holding period of 5 years.
Example 5. (i) Facts. US, a domestic corporation, owns all of the stock of FT, a
foreign corporation. The FT stock held by US constitutes one block of stock with a basis
of $170x, a value of $200x, a holding period of 5 years, and $1 Ox of earnings and profits
attributable to such stock for purposes of section 1248. FP, a foreign corporation, owns
all the stock of FS, a foreign corporation. FS has 10 shares of stock outstanding. No
United States person is a section 1248 shareholder with respect to FP or FS. The FS
stock held by FP has a value of $1 OOx and a basis of $50x ($5x per share). FT merges
into FS with FS surviving in a forward triangular merger. Pursuant to the merger, US
receives FP stock with a value of $200x for its FT stock in an exchange that qualifies for
non-recognition under section 354. FP is a controlled foreign corporation and US is a
section 1248 shareholder with respect to FP and FS immediately after the exchange.
(ii) Basis and holding period determination (A) Because US is a section 1248
shareholder of FT immediately before the transaction, and US is not required to include

income under §§ 1.367(b)-3(b) and 1.367(b)-4(b) as described in paragraph (c)(2) of this
section, the basis and holding period of the FS stock held by FP immediately after the
triangular reorganization is determined pursuant to paragraph (c) of this section.
(B) Pursuant to paragraph (c) of this section, each share of FS stock is divided
into portions attributable to the basis and holding period of the FS stock held by FP
immediately before the exchange (the FS portion) and the FT stock held by US
immediately before the exchange (the FT portion). The basis and holding period of the
FS portion is the basis and holding period of the FS stock held by FP immediately before
the exchange. Thus, each share of FS stock has a portion with a basis of $5x and a value
of $1 Ox. Because the exchanging shareholder of FT stock (US) is a section 1248
shareholder of FT, the basis and holding period of the FT portion is the proportionate
amount of the basis and the holding period of the FT stock immediately before the
exchange to which such portion relates. Thus, each share of FS stock will have a second
portion with a basis of $17x ($170x basis / I 0 shares), a value of $20x ($200x value / 10
shares), a holding period of 5 years, and $1 x of earnings and profits ($1 Ox earnings and
profits / 10 shares) attributable to such portion for purposes of section 1248.
(iii) Subsequent disposition (A) Several years after the merger, FP disposes of
all of its FS stock in a transaction governed by section 964( e). At the time of the
disposition, FS stock has decreased in value to $21Ox (a post- merger reduction in value
of $90x), and FS has incurred a post- merger deficit in earnings and profits of $30x.
(B) Pursuant to paragraph (d)(l)(ii) of this section, for purposes of determining
the amount of gain realized on the sale or exchange of stock that has a divided portion,
any amount realized on such sale or exchange is allocated to each divided portion of the
stock based on the relative fair market value of the stock to which the portion is
attributable at the time the portions were created. Immediately before the merger, the
value of the FS stock in relation to the value of both the FS stock and the FT stock was
one-third ($100x / ($1 OOx plus $200x». Likewise, immediately before the merger, the
value of the FT stock in relation to the value of both the FT stock and the FS stock was
two-thirds ($200x / $100x plus $200x). Accordingly, one-third of the $21Ox amount
realized is allocated to the FS portion of each share and two-thirds to the FT portion of
each share. Thus, the amount realized allocated to the FS portion of each share is $7x
(one-third of$2lOx divided by 10 shares). The amount realized allocated to the FT
portion of each share is $14x (two-thirds of$210x divided by 10 shares).
(e) Pursuant to paragraph (d)(3) of this section, any earnings and profits (or

deficits) accumulated by the surviving corporation subsequent to the reorganization are
attributed to the divided portions of shares of stock based on the relative fair market value
of each divided portion of stock. Accordingly, one-third of the post- merger earnings and
profits deficit of $30x is allocated to the FS portion of each share and two-thirds to the
FT portion of each share. Thus, the deficit in earnings and profits allocated to the FS
portion of each share is $lx (one-third of$30x divided by 10 shares). The deficit in
earnings and profits allocated to the FT portion of each share is $2x (two-thirds of$30x
divided by 10 shares).

(D) When FP disposes of its FS stock, FP is treated as disposing of each divided
portion of a share of stock. With respect to the FS portion of each share of stock, FP
recognizes a gain of $2x ($7x value - $5x basis), which is not recharacterized as a
dividend because a deficit in earnings and profits of $1 x is attributable to such portion for
purposes of section 1248. With respect to the FT portion of each share of stock, FP
recognizes a loss of $3x ($14x value - $17x basis).
(e) Effective date. This section applies to exchanges occurring after the date
these regulations are published as final regulations in the Federal Register.
Par. II. Section 1.884-2 is amended as follows:
I. Paragraphs (c)(3) through (c)(6)(i)(A) are revised.
2. Paragraphs (c)(6)(i)(B), (C), and (D) are added.
3. Paragraphs (c)(6)(ii) through (f) are revised.
4. Paragraph (g) is amended by adding a sentence at the end.
The revisions and additions read as follows:

§ 1.884-2 Special rules for termination or incorporation of a U.S. trade or business or
liquidation or reorganization of a foreign corporation or its domestic subsidiary.

(c)(3) through (c)(6)(i)(A) [Reserved]. For further guidance, see §1.884-2T(c)(3)
through (c)(6)(i)(A).

(c)(6)(i)(B) Shareholders of the transferee (or of the transferee's parent in the
case of a triangular reorganization described in section 368(a)( I )(C) or a reorganization
described in sections 368(a)(1 )(A) and 368(a)(2)(D) or (E» who in the aggregate owned
more than 25 percent of the value of tre stock of the transferor at any time within the 12month period preceding the close of the year in which the section 381(a) transaction
occurs sell, exchange or otherwise dispose of their stock or securities in the transferee at

any time during a period of three years from the close of the taxable year in which the
section 381 (a) transaction occurs.
(c)(6)(i)(C) In the case ofa triangular reorganization described in section
368(a)( I )(C) or a reorganization described in sections 368(a)( 1)(A) and 368(a)(2)(0) or
(E), the transferee's parent sells, exchanges, or otherwise disposes of its stock or
securities in the transferee at any time during a period of three years from the close of the
taxable year in which the section 381 (a) transaction occurs.
(c)(6)(i)(0) A corporation related to any such shareholder or the shareholder
itself if it is a corporation (subsequent to an event described in paragraph (c)(6)(i)(A) or
(B) of this section) or the transferee's parent (subsequent to an event described in
paragraph (c)(6)(i)(C) of this section), uses, directly or indirectly, the proceeds or
property received in such sale, exchange or disposition, or property attributable thereto,
in the conduct of a trade or business in the United States at any time during a period of
three years from the date of sale in the case of a disposition of stock in the transferor, or
from the close of the taxable year in which the section 381(a) transaction occurs in the
case ofa disposition of the stock or securities in the transferee (or the transferee's parent
in the case of a triangular reorganization described in section 368(a)(1 )(C) or a
reorganization described in sections 368(a)( 1)(A) and (a)(2)(0) or (E». Where this
paragraph (c)(6)(i) applies, the transferor's branch profits tax liability for the taxable year
in which the section 381 (a) transaction occurs shall be determined under § 1.884-1, taking
into account all the adjustments in U.S. net equity that result from the transfer of U.S.
assets and liabilities to the transferee pursuant to the section 381 (a) transaction, without
regard to any provisions in this paragraph (c). If an event described in paragraph

(c)(6)(i)(A), (B), or (C) of this section occurs after the close of the taxable year in which
the section 381 (a) transaction occurs, and if additional branch profits tax is required to be
paid by reason of the application of this paragraph (c)(6)(i), then interest must be paid on
that amount at the underpayment rates determined under section 6621 (a)(2), with respect
to the period between the date that was prescribed for filing the transferor's income tax
return for the year in which the section 381 (a) transaction occurs and the date on which
the additional tax for that year is paid. Any such additional tax liability together with
interest thereon shall be the liability of the transferee within the meaning of section 6901
pursuant to section 6901 and the regulations there under.
(c)(6)(ii) through (t) [Reserved]. For further guidance, see §1.884-2T(c)(6)(ii)
through (t).
(g)

* * * Paragraphs (c)(6)(i)(B), (C), and (D), are applicable for tax years

beginning after December 31, 1986, except that such paragraphs are applicable to
transactions occurring after the date these regulations are published as final regulations in
the Federal Register in the case of reorganizations described in sections 368(a)(1 )(A)
and 368(a)(2)(0) or (E).
Par. 12. In § 1.884-2T, paragraphs (c)(6)(i)(B), (C), and (D) are revised to read as
follows:

§ 1.884-2T Special rules for termination or incorporation of a U.S. trade or business or
liquidation or reorganization of a foreign corporation or its domestic subsidiary
(Temporary).

*
(c)

***

(6)

(i)

***
***

74
(B), (C), and (D) [Reserved]. For further guidance,

see § 1.884-2(c)(6)(i)(B), (C), and (D).

Mark E. Matthews,
Deputy Commissioner for Services and
Enforcement.

js-2180: Treasury and IRS lssu:: Clarifications of Transition Rules for Deferred Compens ...

Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
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January 5, 2005
)s-2180

Treasury and IRS Issue Clarifications of Transition Rules for Deferred
Compensation Plans Under 409a
The Treasury Department and IRS today Issued clarifications to Notice 2005-1
today which provide additional guidance regarding tranSition rules under section
409A for nonqualified deferred compensation plans An advance version of Notice
2005-1 was released to the public on December 20, 2004. Two clarifications are
belllg added to the transition rules in the notice. The revised notice, incorporating
these two clarifications, will be included as scheduled in Internal Revenue Bulletin
2005-2, to be published on January 10, 2005.
A copy of the revised Notice 2005-1 and the accompanying IRS announcement are
attached.

REPORTS
•

Notice 2005-1

http://\', ww.treas.goy/prcss/rc1ca:)('\(js2180.htlll

4/22/2005

ANNOUNCEMENT
Clarification of Certain Transition Rules in Notice 2005-1
Notice 2005-1 provides guidance on the executive compensation provisions of
new section 409A of the Internal Revenue Code, which was added by the
American Jobs Creation Act of 2004. An advance version of the notice was
released to the public on December 20,2004. Two small but helpful clarifications
are being added to the transition rules in the notice. Notice 2005-1 , revised to
incorporate these two clarifications, will be included as scheduled in Internal
Revenue Bulletin 2005-2, to be published on January 10,2005.
Specifically. the revisions are being made to paragraph (c) of Q&A 19 and to the
first sentence of Q&A 20. Paragraph (c) of Q&A 19 in the December 20 version
of the notice provides transition relief under which certain amendments and
elections will not be treated as a change in the form or timing of a payment under
section 409A(a)(4). The revisions to the paragraph make it clear that those
amendments and elections also will not be treated as an acceleration of the
payment under section 409A(a)(3). The first sentence of Q&A 20 provides
transition relief with respect to certain terminations of participation in a plan and
certain cancellations of deferrals by participants. The revisions to that sentence
make it clear that the relief in that sentence also applies to deferrals prior to 2005
that are subject to section 409A (and that otherwise meet the conditions for the
transition relief).
Q&A 19, paragraph (c) now reads as follows: 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) or an acceleration of a payment under § 409A(a)(3), provided
that the plan is so amended and the participant makes the election on or before
December 31, 2005. Similarly, an 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) or an acceleration of a payment under
§ 409A(a)(3), provided that the option or right is so amended and any elections
are made, on or before December 31,2005.
The first sentence of Q&A 20, paragraph (a) now reads as follows: 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, without causing the plan to fail to conform to the
provisions of § 409A(a)(2), (3) or (4), 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

calendar year 2005, or if later, the taxable year in which the amounts are earned
and vested (as defined in Q&A 16).
Accordingly, the revised Notice 2005-1 reads as follows:

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 substantial 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 arrargements, 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 services 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 applyirg 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
(including 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 adequate transition relief to allow modification of pia ns 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 (Cha nge 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 plan, 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 anticipate 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 involving 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 non partner 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.gov.
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 equal 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 of
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 dealh 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 recipient's 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 constructively received by the service provider by,
the later of (i) the date that is 2 'Y:! 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 'Y:! 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 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 eection 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, other 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.

0-5 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 any 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 defe rral 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 that govern 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)(1 0) 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.

0-8 To Which Service Providers Does § 409A Apply?
A-S 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 § 44S(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.

0-9 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 0)), the stock underlying the
option is not treated as owned by the individual who holds the option. In addition,
mutual and cooperative corporations are treated as having stock for purposes of
this 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 voting power of the stock of
a corporation, the acquisition of additional stock by the same person or persons
is not considered to cause a change in the ownership of the corporation (or to

cause a change in the effective control of the corporation (within the meaning of
Q&A 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 a nd not with
respect to the ownership interest in the other corporation. See § 1.2BOG-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
during any 12-month period by directors whose appointment or election is not
endorsed by a majority of the members of the corporation's board of directors
prior to the date of the appointment or election, provided that for purposes of this
paragraph (ii) the term corporation refers solely to the relevant corporation
identified in Q&A 11, paragraph (b) for which no other corporation is a majority
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 shareholders in a corporation only with respect to the ownership
in that corporation prior to the transaction giving rise to the change and not with
respect to the ownership interest in the other corporation.
(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 ownership
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)(8)).
(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 plan; (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 ta x 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 considered
deferred before January 1,2005 if (i) the service provider has a legally binding
right to be paid the amount and (ii) the right to the amount is earned and vested.
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 amount of 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 value 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 an 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 p Ian 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 other 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) or an acceleration of a
payment under § 409A(a)(3), provided that the plan is so amended and the
participant makes the election on or before December 31,2005. Similarly, an
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)
or an acceleration of a payment under § 409A(a)(3), 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)(B)(i)) that satisfies the conditions in 29 CFR § 251 0.3-2(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.
0-20 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, without causing
the plan to fail to conform to the provisions of § 409A(a)(2), (3) or (4), 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 calendar year 2005 or, if later, 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 durirg 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 participant's 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, witho ut 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 balance plans, and all other plans does not apply.
0-21 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 requirement 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.
0-22 Until additional guidance is issued, under what conditions may
deferral elections be made with respect to bonus compensation?

A-22 Section 409A(a)(4)(B)(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 certain 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 have 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
0-24 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.
0-25 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.
0-26 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 will 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-MISC 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 cons tructively 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 nonemployee
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).

js-2181: S~atcll1ent by Treasury S~crctary John Snow on the President's Panel on Federal...

Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
January 7, 2005
IS-2181

Statement by Treasury Secretary John Snow on the President's Panel on
Federal Tax Reform
"The President's bipartisan panel on tax reform, announced today, brings together
some of our nation's brightest minds. Reforming our tax code to give Americans a
tax system that fosters economic growth and is fairer and simpler will be a historic
effort. I look forward to working with this group of extraordinarily distinguished
Individuals to make recommendations to help achieve this important goal."

http://wv-w.treas.gov/press/releases<r2181.htm

4/2212005

js-218L: Statement by Treasury Secretary John Snow on the Resignation of Carole ...

Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
January 7, 2005
js-2182

Statement by Treasury Secretary John Snow on the ReSignation of
Carole Brookins, U.S. Executive Director of the World Bank
"I deeply appreciate the work Carole Brookins has done In representing the Bush
Administration on the executive board of the World Bank for nearly four years. In
this role, Carole has been a tireless and effeclive advocate for our reform efforts.
Because of her work, World Bank programs are better able to serve the needs of
the world's poorest Citizens. I particularly want to recognize the role Carole played
In encouraging the Bank to focus attention on private sector development and the
creation of strong investment climates in developing countries. Carole played a
leading role in developing collaborative programs between the World Bank's
International Development Agency (IDA) and the International Finance Corporation,
providing Critical support to small enterprise development in sub-Saharan Africa.
She also helped In achieving President Bush's initiatives to deliver IDA assistance
in the form of grants instead of loans, and to adopt results-based measurement
programs In addition, Carole was a consistent advocate of partnering the private
and public sectors to develop infrastructure in the poorest countries. Her service at
the Bank on behalf of President Bush will be noted for her determination to ensure
that scarce development resources are used effectively and efficiently to lift people
out of poverty. I wish Carole the best as she moves on to new challenges."

-30-

http://v,ww.treas,goY/press/rckzL-,~'(js21X2.htm

4/22/2005

js-218:;: Statement of Trcasmy Secretary John W. Snow on December Employment ...

Page 1 of I

FROM THE OFFICE OF PUBLIC AFFAIRS
January 7. 2005
)s-2183
Statement of Treasury Secretary John W. Snow
on December Employment Report
The creation of 157,000 new Jobs III December shows the continulllg good strength
of the American economy The past year was a very good one for our economy,
and for workers seeking employment. December's report brings the total number of
Jobs created over the course of 2004 to 2.3 million. GOP growth was strong while
busllless IIlvestment posted substantial gains, and the housing market turned in
another exceptional performance, likely toppling a number of records in 2004.
The President's economic leadership is clearly having a lasting effect, and we are
reminded by today's report that it remains critically important to keep pro-growth
policies like lower tax rates in place. This type of steady economic expansion needs
to contlllue, and making the President's tax cuts permanent will help ensure that Job
creation continues, providing opportunities and offering great prospects to all
Americans who are seeking work
-30-

http://vww.treas.gov/press/rc;l.d:->L ./js2183.htlll

4/22/2005

js-2184: Statement by ti7 !'lll,I:'~c Ministers 011 Assisting Countries Devastated by the Ind ... Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
January 7, 2005
)s-2184
Statement by G7 Finance Ministers on Assisting Countries Devastated by the
Indian Ocean Tsunami
Following the ASian earthquake and tsunami disaster which has had such a
devastating effect on so many people, there is an urgent need for assistance. All
G7 countries have already committed substantial finance, from governments, their
publics, and companies, to help affected countries cope with the immediate
humanitarian crisis. But their needs, both humanitarian and for reconstruction, are
enormous. The international community must continue to work together to help
meet those needs.
In response G7 Finance Ministers agreed that:
•

we would not expect debt payments from affected countries that request it
until the World Bank and IMF have completed a full needs assessment of
their reconstruction and financing requirements, recognising that some
countries may be unable to make debt payments. We will work, within the
Paris Club, with other creditors to achieve a consensus for this approach;

•

depending on the conclusions of the needs assessments, we also stand
ready to consider all appropriate measures for further assistance;

•

the IMF, World Bank, Asian Development Bank and other multilateral
institutions should make the strongest efforts possible to provide financial
assistance, including through emergency post-disaster facilities; and

•

we support urgent consideration by relevant fora of the international
community to put in place an effective tsunami early warning system in the
Indian Ocean, and the infrastructure necessary to make it effective

We ask creditors at the next Pans Club meeting on 12 January to positively
consider assisting affected countnes In this way. We call on the World Bank and
IMF to complete their needs assessment thiS month. We will consider what further
steps are necessary in the light of this assessment, at our meeting on 4-5
February. All the actions and expectations set forth in this statement will be
implemented consistent with the national laws of creditor countries.
-30-

http://~·ww.treas.gov/presslrck:hL·'(js2184.htm

4/22/2005

js-2l8). f\1EDIA ADVIS()I\,

',ecrctary Snow on Wall StrL:et Next Week

Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
January 7, 2005
js-2185
MEDIA ADVISORY: Secretary Snow on Wall Street Next Week
Secretary John W Snow will travel to New York City January 10-12 to promote
President Bush's second-term economiC agenda. DUring three days of meetings
with Wall Street leaders, Secretary Snow will discuss a wide array of economic
Issues while placlllg special emphasIs on President Bush's plan to reform America's
Social Security system for future generations
"One of the tests of leadership is to confront problems before they become a
crisis. President Bush came to Washington to solve problems, not pass them on to
future Presidents and future generations," Secretary Snow said.
Throughout the week Secretary Snow will discuss the benefits of voluntary
personal accounts which, as part of a comprehensive bipartisan solution, will
give younger workers the option to save some payroll taxes in a personal account a nest egg they can call their own, government cannot take away, and they can
pass on to their children.
The following events are open to credentialed media. Please note RSVP
requirements:
Monday, January 10
Closing of the NASDAO
400 p.m. EDT
4 Times Square
NASDAO Events Studio, 2nd Floor
New York, NY
** Media must RSVP to Silvia Davi, 646-441-5014
*' A brief press availability will take place at the conclusion of the event.
Wednesday, January 12
Opening bell at New York Stock Exchange
930 a.m. EDT
18 Broad Street
New York, NY
** Media must RSVP to Danielle Martinez, 212-656-2268
** A brief press availability will take place at the conclusion of the event.
-30-

http://w.vw.treas.gov/preSSirck·;\.;·~6s21~5.htm

4/2212005

federal finc't11C~in(J
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FEDERAL FINANCING BANK

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December 2004

Brian D. Jackson, Chief Financial Officer, Federal Financing
Bank (FFB) announced the following activity for the month of
November 2004.
FFB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $27.6 billion on November 30,
2004, posting a decrease of $197.4 million from the level on
October 31, 2004.
This net change was the result of a decrease
in holdings of agency debt (U.S. Postal Service) of $200.0
million and an increase in ne't holdings of government-guaranteed
loans of $2.6 million. The FFB made 51 disbursements and received
10 prepayments during the month of November.
Attached to this release are tables presenting FFB November
loan activity and FFB holdings as of November 30, 2004.

J8-2186

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Page 2
FEDERAL FINANCING BANK
NOVEMBER 2004 ACTIVITY
Borrower

Date

Amount
of Advance

Final
Maturity

Interest
Rate

GOVERNMENT-GUARANTEED LOANS
GENERAL SERVICES ADMINISTRATION
San
San
San
San
San

Francisco
Francisco
Francisco
Francisco
Francisco

Bldg Lease
OB
OB
Bldg Lease
OB

11/03
11/08
11/19
11/22
11/26

$500.00
$161,878.93
$69,070.26
$3,289,943.30
$20,000.00

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

2.384%
2.477%
2.535%
2.564%
2.601%

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

11/01
11/05
11/05
11/15
11/17

$2,000,000.00
$39,868.42
$1,197,920.37
$1,316,010.43
$307,299.84

5/02/05
7/01/31
1/02/32
7/03/34
11/02/26

2.134%
4.622%
4.634%
4.773%
4.578%

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

11/01
11/02
11/05
11/05
11/05
11/08
11/08
11/08
11/08
11/09
11/09
11/09
11/09
11/09
11/10
11/12
11/12
11/15
11/15
11/15
11/15
11/15
11/15

$6,700,000.00
$2,000,000.00,
$3,452,000.00
$463,464.00
$320,000.00
$1,000,000.00
$2,000,000.00
$5,000,000.00
$1,200,000.00
$2,000,000.00
$1,700,000.00
$550,000.00
$1,056,000.00
$392,000.00
$500,000.00
$45,000.00
$1,350,000.00
$5,000,000.00
$5,000,000.00
$5,000,000.00
$5,000,000.00
$5,000,000.00
$3,200,000.00

12/31/30
12/31/36
1/03/34
12/31/35
12/31/29
4/02/07
1/02/35
12/31/36
12/31/35
1/02/24
12/31/37
3/31/05
1/02/35
12/31/36
12/31/14
12/31/36
4/02/07
3/31/05
3/31/05
3/31/05
3/31/05
3/31/05
3/31/05

4.547%
4.718%
4.645%
4.636%
4.553%
2.890%
4.767%
4.797%
4.782%
4.442%
4.817%
2.220%
4.778%
4.805%
4.149%
4.852%
2.917%
2.217%
2.217%
2.217%
2.217%
2.217%
2.217%

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

DEPARTMENT OF EDUCATION
*Tuskegee Univ.
Livingstone College
Tuskegee Univ.
Miles College
Tuskegee Univ.
RURAL UTILITIES SERVICE
East Kentucky Power #753
Mecklenburg Electric #882
Empire Electric #627
Orcas Power and Light #775
Union County Elec. #614
Federal Rural Elec. #728
Federal Rural Elec. #728
Meriwether Lewis Elec. #2006
REA Energy Cooperative #772
Chibardun Tele. Coop. #2073
Coastal Electric #2082
Darien Telephone Co. #719
Delaware County Elec. #682
Northern Electric Coop. #827
Sangre De Cristo Elec. #732
Swan's Island Electric #2037
Yellowstone Valley Elec. #847
Brazos Electric #2086
Brazos Electric #2086
Brazos Electric #2086
Brazos Electric #2086
Brazos Electric #2086
Brazos Electric #2086

Page 3
FEDERAL FINANCING BANK
NOVEMBER 2004 ACTIVITY
Borrower
East Kentucky Power #753
East Kentucky Power #828
Red River Rural Tel. #2113
South Miss. Elec. #2109
Lighthouse Elec. #2090
Hemingford Co-operative #2105
Coop. Power Assoc. #722
Fox Islands Elec. Coop. #2106
Great River Energy #739
Mountrail-Williams #665
Navopache Electric #2100
united Power Assoc. #721
CARTERET-CRAVEN ELECTR #2033
Endless Mtns. Wireless #2103
Navopache Electric #2021
Associated Electric #894
South Slope Cooperative #741
Canoochee Elec. #2112
Victory Electric #782

Date
11/16
11/16
11/16
11/16
11/17
11/18
11/19
11/19
11/19
11/19
11/19
11/19
11/22
11/23
11/23
11/26
11/26
11/29
11/30

Amount
of Advance
$3,240,000.00
$5,644,000.00
$400,000.00
$1,758,000.00
$1,840,000.00
$351,740.00
$5,644,000.00
$24,000.00
$1,000,000.00
$1,684,000.00
$1,443,000.00
$9,100,000.00
$2,000,000.00
$1,041,000.00
$5,000,000.00
$2,002,000.00
$1,274,083.00
$400,000.00
$629,000.00

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

Final
Maturity

Interest
Rate

12/31/30
12/31/24
3/31/05
1/03/34
12/31/37
12/31/35
1/02/29
12/31/37
12/31/30
1/02/35
1/02/35
12/31/30
1/03/33
12/31/09
12/31/09
1/03/33
1/02/18
12/31/37
12/31/35

4.670%
4.452%
2.247%
4.738%
4.794%
4.700%
4.422%
4.696%
4.471%
4.657%
4.658%
4.471%
4.697%
3.551%
3.531%
4.665%
4.032%
4.783%
4.850%

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

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

Program

November 30, 2004

SOT
Agency Debt:
U.S. Postal Service

October 31, 2004

Monthly
Net Change
11/1/04-11/30104

Fiscal Year
Net Change
10/1/04-11130104

Subtotal*

$0.0
$0.0

$200.0
$200.0

-$200.0
-$200.0

-$11800.0
-$1.800.0

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

$200.0
$680.0
$4 1270.2
$5,150.2

$200.0
$680.0
$4,270.2
$5,150.2

$0.0
$0.0
$0.0
$0.0

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 -Secti on 511
Subtotal*

$1.449.3
$120.7
$0.2
$971.9
$2,140.7
$7.6
$498.6
$17,161. 7
$52.9
$2.9
$22,406.6

$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

-$15.6
$2.7
-$0.2
-$82.9
-$0.6
$0.0
$0.0
$200.7
-$3.6
$0.0
$100.4

---------

-----------

-$12.9
$2.8
$0.0
-$82.9
-$4.7
$0.0
$0.0
$102.4
-$2.1
$0.0
$2.6

$27,556.8

$27,754.2

-$197.4

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

=====

-$1. 699.6

JS-21~7: Statement of Treasury :~ccrctary John W. Snow on the Resignation of Treas ... Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or pl/nt the Microsoft Word content on this page, download the free Microsoft Word
Viewer.

January 10,2005
JS-2187

Statement of Treasury Secretary John W. Snow on the Resignation of
Treasury Assistant Secretary for Financial Institutions Wayne A. Abernathy
"The Treasury Department is preparing to say farewell to one of the more
dedicated, passionate public servants whom I have had the pleasure to work with,
Wayne Abernathy has given generously of his time and his heart for the past two
years, serving the Bush Administration extremely well His leadership in
the fight against identity theft, expanding access to financial services. promoting the
resilience of the financial sector, and financial education stand out in particular, In
each case, Wayne Identified the need for change, worked With his staff on
thoughtful solutions, and moved the ball down the field effectively, He has done
terrific work here and he will be missed, On behalf of the Department, I wish him all
the best in his future endeavors,"

REPORTS
•

Assistant Secretary Wayne A. Abernathy ReSignation Letter

http://,',ww.treas.goy/pressireieasc;;/js21R7.htm

4/22/2005

January 10, 2005
Dear Mr. President,
I hereby resign from the office of Assistant Secretary of the Treasury for Financial
Institutions, efTective after January 31, 2005.
It has been my great honor and privilege to serve you and the people of this nation for a
little over two years as a member of your Administration. I look back
with deep satisfaction on the achievements of this Administration, including those with
which I have been involved. Under your leadership, we have worked to promote
expanded access to financial services for ever more Americans, while strengthening the
resilience of our financial institutions to provide those services despite threats from
terrorists or dangers from natural disasters. Our nation's financial institutions are stronger
and more prepared today, and our citizens have greater tools to save, invest, and build for
their families' future.
It is with confidence that I leave government service to enter work in the private sector,
knowing of your continued dedication to good government that recognizes that private
initiative and innovation and freedom are the engines for growth and progress. Thank
you for the opportunity that I have had to serve with you. I in turn pledge my continued
dedication to the principles of freedom and good government that will make for progress
in the days ahead.

Yours respectfully,
Wayne A. Abernathy
Assistant Secretary for Financial Institutions

JS-21~X:

Assistant Secretary W(~yne A. Abernathy Resignation Letter

Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
January 10. 2005
JS-2188

Assistant Secretary Wayne A. Abernathy Resignation Letter
Dear Mr. President,
I hereby resign from the office of Assistant Secretary of the Treasury for Financial
Institutions, effective after January 31, 2005.
It has been my great honor and privilege to serve you and the people of this nation
for a little over two years as a member of your Administration. I look back
with deep satisfaction on the achievements of this Administration, including those
with which I have been involved. Under your leadership, we have worked to
promote expanded access to financial services for ever more Americans, while
strengthening the resilience of our financial institutions to provide those services
despite threats from terrorists or dangers from natural disasters. Our nation's
financial institutions are stronger and more prepared today, and our citizens have
greater tools to save, invest, and build for their families' future.
It is with confidence that I leave government service to enter work in the private
sector, knowtng of your continued dedication to good government that recognizes
that private tniliative and innovation and freedom are the engines for growth and
progress Thank you for the opportunity that I have had to serve with you I in turn
pledge my continued dedication to the prinCiples of freedom and good government
that will make for progress in the days ahead.
Yours respectfully,
Wayne A. Abernathy
Assistant Secretary for Financial Institutions

http://www.treas.gov/press/releasts/)s2188.htm

4/2212005

"~-~'''·~~

U
J._

PRESS ROOM

.... ~

FROM THE OFFICE OF PUBLIC AFFAIRS
January 10, 2005
2005-1-10-16-15-25-16639

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 $85,289 million as of the end of that week, compared to $87,104 million as of the end of the prior week.

I. Official U,S, Reserve Assets (Ill US nJ/l/lons)
December 31,2004

January 7, 2005

87,104

85,289

TOTAL

Euro

Yen

TOTAL

Euro

Yen

TOTAL

12,354

15,319

27,673

11,934

14,991

26,925

1. Foreign Currency Reserves
a. Securities
Of which, Issuer headquartered

III

the US.

b. Total depOSits with
12,137

b.1. Other central banks and BIS
b.ii. Banks headquartered

3,079

15,216

the US.

11.715

3,013

14,728

b.il Of which, banks located abroad

b.iii. Banks headquartered outside the US

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

19,544

19,203

13,628

13,390

11,043

III

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 31,2004
Euro
1. Foreign currency loans and seCUrities
2. Aggregate short and long POSitions In forwards and futures

Yen

January 7, 2005

TOTAL
0

Yen

TOTAL

foreign currencies Vis-a-VIS the U S dollar

2.a. Short positIOns

2b. Long positIOns

o
o

3. Other

Euro

o
o
o

~Ia
..

III. Contingent Short-Term Net Drains on Foreign Currency Assets
December 31, 2004
Euro

Yen

January 7, 2005

TOTAL

Euro

Yen

TOTAL

2. Foreign currency securities with embedded options

3. Undrawn, unconditional credit lines

1. Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within 1 year
1.b. Other contingent liabilities

Ja. With other central banks
Jb. With banks and other financial institutions
Headquartered in the US.

Jc. 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 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
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 SDRldoliar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.

JS-2~~9: Statement b)' Assista~lt Secretary Juan Zarate Before the United Nations Sec ... Page 1 of 6

FROM THE OFFICE OF PUBLIC AFFAIRS
January 10. 2005
JS-2189
Statement by Assistant Secretary Juan Zarate Before the United
Nations Security Council 1267 Sanctions Committee
Chairman Mayoral and distinguished members of the 1267 al Oalda and Taliban
Sanctions Committee, thank you for inviting us to discuss the United States'
ongoing campaign to combat terrorist financing It is truly an honor to be here. This
Committee has distinguished itself as one of the most potent bodies in the world III
combating terrorist financing. Faced with a deadly enemy that recognizes no
borders, any nation's unilateral efforts to combat terrorism are bound to fail. Our
greatest hope lies in bodies like thiS, which are uniquely empowered to take SWift
and global action directing countries around the world to freeze terrorist accounts,
prevent facilitators from traveling, and stop the flow of arms to terrorist groups.
I will focus my remarks on the development and implementation of financial
sanctions against those parties designated by the U.S. Government and this
Committee
Specifically I would like to address the following four themes:
1) the Importance of thiS Committee and the UN process
worldwide, targeted, terrorist fillanclllg sanctions regime.

III

developing a

2) the importance of targeted financial sanctions In the global campaign agalilst
terrorist fillancing and the war on terrorism more generally:

the development and implementation of targeted terrorist financing sanctions in
US.: and

measures to protect the civil liberties and rights of designees and other effected
parties.

The importance of the 1267 Committee and the UN process in developing a
worldwide, targeted, terrorist financing sanctions regime
The importance of this Committee's work and the UN generally in our global
campaign against terrorist financing stems from the international nature of the
financial system and fact that terrorism knows no borders. The great majority of
terrorist financiers and facilitators operate and store their money outside the United
States. For designations to have a maximum Impact, we must work collaboratively
With countries from around the world to develop, implement and apply effective
terrorist financing sanctions programs agalilst high value targets.
ThiS is not a simple task. In some cases there is a failure of will, and in others there
are insufficient means to take effective action. In either case, we must continue to
apply political pressure or prOVide needed technical assistance to make sure that
our designations are more than just words on paper.
Over the past three years, we have all labored tirelessly in this cause, and its
persistent work has yielded promising initial results dozens of countries have
joined us in submitting 296 al Oaida-linked targets for designation by this
Committee: scores of countries in every region of the world have either adopted
new laws and regulations to fight terrorist financing or are in the process of doing
so: and several countries have joined the U.S to provide technical assistance and
training to help front-line states develop counter-terrorist financing and anti-money

http://www.treas.gov/press/releas~s/js2189.htm

4/22/2005

JS-21 ~9: Statement by Assistant Secretary Juan Zarate Before the United Nations Sec... Page 2 of 6
laundering regimes.
However, this must be the beginning, and not the encl, of our efforts The U Sand
all countries can ancl must improve our Individual ancl collective efforts to develop
and implement effeclive terrorist financing sanctions regimes

The importance of targeted financial sanctions in the global eFT campaign
Targeted financial sanctions are the cornerstone of our campaign against terrorist
financing. In addition to its primary function of swiftly freezing funds and keeping
them out of the hands of terrorists, If used properly and implemented
comprehensively, designations can be Invaluable by:
(1) shutting down the pipeline througll which designated parties raise and move
money;
(2) Informing third parties, who may be unwittingly financing terrorist activity, of their
association with supporters of terrorism;
(3) deterring non-deSignated parties, who might otherwise be willing to finance
terrorist activity; and
(4) forcing terrorists to use potentially more costly, less efficient and/or less reliable
means of flllancing.
These benefits of designation cannot be measured by simply totaling the amount of
terrorist-related assets frozen Terrorist-related accounts are not pools of water
awaiting discovery as much as they are rivers, with funds constantly flowing in and
out. By freezing accounts, we dam that river, thus not only capturing whatever
water happens to be in the river at that moment but, more importantly, also
ensuring that the targeted individual or organization can never in the future act as a
conduit of funds to terrorists. Indeed, if fully implemented, a designation isolates
supporters of terrorism from the formal financial system, incapacitating them or
driving them to more expensive, more cumbersome, and riskier channels.
The effective implementation of designations can also uncover invaluable
Information about terrorist financing networks. Investigation of accounts and
transactions frozen or blocked in accordance with UN member state obligations can
lead to terrorist financiers, intermediaries and operatives for further action. In the
U.S, authorities can qUietly gather this information through the application of a new
tool under Section 314(a) of the USA PATRIOT Act. Section 314 allows the
Treasury Department, through our Financial Intelligence Unit (FlU), the Financial
Crimes Enforcement Network (FInCEN), to circulate requests for information about
specifiC targets throughout our banking system. Banks having any such information
report back to FInCEN, which then passes this along to appropriate law
enforcement authorities for follow up action. This invaluable tool allows us to
identify and unravel terrorist networks without alerting them to ongoing
investigations. However, for states that lack this capability, designations may be
the best way to discover and immediately interdict terrorist financial activity
occurring within their financial systems.

Developing and implementing terrorist financing designations in U.S.
The effectiveness of designations largely depends upon broader systemic reforms
by UN member states to combat terrorist financing and financial crimes more
generally. These broader systemic reforms are evident in the development and
implementation of global anti-money laundering and counter-terrorist financing
standards, promulgated by the UN and other international bodies such as the
Financial Aclion Task Force (FATF). These standards promote the financial
transparency and accountability that provide a necessary foundation for the
development of effective terrorist financing sanctions regimes
Fully utilizing targeted financial sanctions to identify, disrupt and dismantle terrorist
financing networks also requires a comprehensive terrorist financing sanctions
regime. In the U.S., we have developed a legal framework and devoted significant
attention and resources to create such a regime.

http://www.treas.gov/press/releaxs/js2189.htl11

4/22/2005

JS-21~l):

Statement by

Assistar~(

Secretary Juan Zarate Before the United Nations Sec ... Page 3 of6

The legal authority for our terrorist financing sanctions regime is described
comprehensively in the reports that we have submitted to this Committee and the
UN 1373 Counter-Terrmism Committee. This legal framewmk gives us the ability
to impose terrmlst finanCing sanctions on those parties whom we have reason to
believe are providing support to terrorists.
EmploYing our terrmlst fillanclllg sanctions regime begins with the full dedication of
analysts from several agencies to develop potential designation targets. Targets
are selected based on threat assessments and the vulnerability of these threats to
the effects of designation We Identify high value targets that serve Critical
functions In terrorist finanCing networks. Designating such targets cripples and
disables terrOI'ist groups and their support networks not only by cutting off finanCial
flows, but also by Impeding key capabilities such as recruitment, trainlllg, logistical,
technological or organizational support, and leadership. ThiS targetlllg approach
focuses our designation investigative resources where we can be most effective in
Identifying, preventing, disrupting and dismantling terrorists and their support
networks.
In addition to a robust targeting process, our terrorist financlllg sanctions regime
relies upon the development of evidentiary records to fully support a legal basis for
designation. Importantly, these eVldentiaries can Include critically important
Information from law enforcement and classified sources. A team of interagency
lawyers rigorously reviews these evidentiaries in order to ensure legal suffiCiency.
Actual deciSions to designate a party under our terrorist financing sanctions regime
are made pursuant to an Executive Order in which the President directs the
Secretary of the Treasury, or the Secretary of State, in consultation with the
Attorney General and the Secretary of the Department of Homeland Security, to
designate those parties that meet the specifiC criteria set forth In the Order. These
deciSions are taken III close consultation with the interagency community, led by a
Terrorist FinanCing Policy Coordination Committee as described by Assistant
Secretary Wayne. ThiS Committee meets on a regular baSIS to review prospective
targets for deSignation and the evidentlaries that support such action. The
Committee consists of representatives from multiple U.S. governmental agencies
engaged In the global war on terrorism, and conSiders and coordinates any decision
to designate with other actions that are or can be taken against the prospective
target. This interagency deliberative process is essential to ensure that
designations advance the larger counter-terrorism mission
Upon a determination that a designation action against a proposed target is
appropriate, the Treasury Department and the State Department work with the
interagency community to draft an unclassified Statement of the Case. This
Statement of the Case represents the factual bases for the public announcement of
a deSignation and serves several purposes, Including:
1)
allowlllg the U.S. government to consult in advance with those countries
that are directly impacted by a proposed designation,
2)
enabling the U.S government to pre-notify the UN and other countries
before formal submitting a proposed designation before this Committee; and
3)
proViding Identifier IIlformation about the designated party to enable
effective Implementation by financial sectors and the general public.
The process of developing adequate identifiers is particularly important and is a
common challenge. We welcome and rely on other countries to help us uncover
identifier information about proposed designees in order to ensure effective
implementation. Without adequate identifiers, deSignations simply cannot work.
We strongly encourage mme assistance and International cooperation III
developing this information, not only in our ongoing designation efforts, but also
with respect to those parties that have already been designated.
Over the past three years, we have made great strides to Improve the quality and
quantity of thiS identifier information The overwhelming majority of designations
issued over this period have Included essential identifier IIlfmmation. And we are
constantly improving our efforts in thiS regard The question of sufficiency is difficult
to measure, because it will depend on the target, and additional identifier
information is always beneficial. But we cannot allow identifiers to serve as an

http://www.treas.gov/press/relea~~s/js2189.htm

4/22/2005

JS-2 dN: Statement by Assistanr Secretary Jllall Zarate Before the United Nations Sec... Page 4 of 6
excuse for JurlSUlctlOI1S to dVOIU 1111f-llelllelltdtloll when essential Identifier
information is available.
Only after exhausting this IIltenslve pre-designation process do we actually issue
and implement a terrorist fillancing designation. We then initiate the postdesignation Implementation processes of our ten-orist financing sanctions regime
Because all U.S. pel'sons are obligated to observe our terrorist financing sanctions,
our post-designation Implementation process begins With active notification and
dissemination to our financial sectors, high risk industries, and general public. Such
notification occurs through a number of specific processes, and ensures that
vulnerable Industries and organizations -- such as banks, charities, money service
businesses - are alerted when designations are issued. These notification
processes include:
1)
updating the list of Specially Designated Nationals (the SON List) on the
website of Treasury's Office of Foreign Assets Control (OFAC);

2)
incorporating deSignations IIlto several downloadable versions of OFAC's
targeting list posted on the OFAC website so that they can be Immediately
Incorporated Into software screening programs at banks and other businesses;
3)

updating sanctions program and industry brochures distributed by OFAC;

4)
delivering priOrity electronic notification to all federal banking regulatory
agencies, which then distribute thiS Information to their examiners and institutions
under their supervision;
delivering a systems bulletin to the member banks of the Clearing House
5)
Interbank Payment System (CHIPS);
6)

emailing over 15,000 indiVidual subscribers to on OFAC's Internet listserv;

7)
faxing through a broadcast system and e-Alert system more than 300
financial and securities associations, which in turn, transmit this notice to their
members:
8)
emalling new designation information to various points of contact among
several law enforcement agencies; and
9)

publishing official notice in the U.S. Government's Federal Register.

ThiS comprehenSive notification system ensures that the private sector and general
publiC, in addition to the regulatory and law enforcement communities, are actively
made aware of our terrorist financing designations.
Such notification is essential in promoting compliance by all U.S. persons, and
particularly the financial sectors and other high risk industries. US banks and
other businesses have developed sanction compliance programs to immediately
run checks and block accounts upon the deSignation of a new name. In the
banking industry, federal regulators work with OFAC to provide guidance for the
development of effective compliance programs. In addition, OFAC maintains a
Compliance Division of personnel dedicated to educating the private sector and
promoting compliance through a number of avenues, Including industry outreach, a
comprehensive website with answers to frequently asked questions, and telephone
and email hotlines.
All U.S persons freezing property and blocking transactions are required to report
those actions in writing to OFAC within ten business days. This allows OFAC to
record and administer all blocked accounts and transactions under our terrorist
financing sanctions regime.
A critical component to our success in implementing terrorist financing sanctions is
compliance enforcement. OFAC includes Enforcement and Civil Penalties
Divisions that work closely with the Compliance Division to investigate, audit and
penalize as appropriate US. persons that fali to comply With terrorist financing

http·llwww.treas.goY/press/rele<::'3es/js2189.htJl1

4/22/2005

JS-21 X9: Statcmcnt by

Assist(~lt

Secretary Juan Zarate Before the United Nations Sec... Page 5 of 6

sanctions. In leSiJOllse to sucll vlolatlollS, Of'AC may take anyone of several
actions, including issuing a cease and desist order, a warning letter or cautionary
letter, or assessing a civil penalty. For willful violations, OFAC makes referrals to
the Department of Justice for criminal charges OFAC also works with the
regulatory community concerning potential violations by supervised Institutions to
promote adequate oversight of sanctions compliance
Finally, OFAC works with law enforcement agencies to facilitate investigative followup whenever funds or transactions implicating a terrorist financing designation are
Identified or blocked. This advances ongoing Investigations and can initiate new
Investigations into potential terrorist financing activity.
Clearly, all of this activity requires a substantial commitment of resources and
sustained political will. It also requires accountability for administering,
implementing and enforcing terrorrst financing sanctions. And, it requires constant
and close communication and collaboration across the US government, and with
the prrvate sector. We believe that such an Investment of time, attention and
resources is Imperative to making targeted terrorist financing sanctions effective.
And, for all of the reasons that I stated earlier, we know that thiS investment is
worthwhile.

The delisting process, licensing and the protection of civil liberties
In order to be effective, our terrorist financing sanctions regime must also be fair.
We expend additional considerable resources to ensure that our terrorist finanCing
sanctions program respects the ciVil liberties and rrghts of designated parties and
others affected by our terrorist financing sanctions. Federal regulation affords all
deSignated parties with a right to seek dellsting On two occasions in 2002,
Treasury's former Under Secretary Gurule appeared before this Committee to
discuss and explain the US. dellsting process, which assisted in the development
of a delisting process eventually adopted by this Committee. Both our US delisting
process and that of this Committee have been successfully utilized by petitioners
who have demonstrated that circumstances underlying their designations no longer
applied It is important to recognize that these delisting actions not only
demonstrated an appropriate consideration of the rights of deSignated parties, but
they also validated the effectiveness of deSignations as a tool in our overall efforts
to combat terrorist financing. In those instances, our designations, and those of thiS
Committee, eliminated a terrorist financing threat by changing behavior of parties
previously presenting such a threat.
Licensing represents another Important element of our terrorist finanCing sanctions
regime that addresses the rrghts of designees and other effected parties. OFAC
maintains a Licensing Division that reviews licensing requests and issues and
administers licenses authorizing activities otherwise prohibited by our sanctions
programs. Parties designated under our terrorist financing sanctions program have
successfully petitioned for licenses to access funds for a number of purposes,
Including contesting their designations by OFAC In U.S. federal courts.
In addition to the administrative dellstlng process, a designated party may challenge
its designation In federal court. Several organizations have sought Judicial relief
and, to date, none of their designations has been overturned.
These elements of our terrorist financing sanctions regime that protect the rights of
designated and other effected parties also require a significant investment of
resources. This investment is essential to preserving the integrity and credibility of
our sanctions regime.
As we move forward In our global campaign to combat terrorist financing, it IS
encouraging to realize the progress that we have made together. This progress is
eVident not only from the accomplishments that I have described, but also in effects
that our collective efforts are haVing on the terrorrst organizations we are at war
against. In this respect. intelligence often reflects the ease or difficulty With which
terrorists are able to raise, move, and store money. If reporting suggests that fewer
and fewer donors are willing to rrsk sending money to terrorist groups - that is a
sign of success If we see that a terrorrst group is resorting to rrskler and more
cumbersome ways of moving money - that is also a sign of success. And if we
receive intelligence that a terrorist group like al Oaida is desperate for money, that
is the best indicator we have that we are making a real difference.

http: l.www.treas.gov/press/relcc~.)cs/is2189.htm

4/22/2005

JS-:?l89: Statement by Assisbnt Secretary Juan Zarate Ikfore the United Nations Sec... Page 6 of 6
Tile IIllmmatlon available to us IIHJlcates
to these questions. Not surprislllgly, the
a lot of work to do. I think It is fair to say
campaign against terrorist financing, our
and we are headed In the right direction.

that there are some encouraging answers
information also suggests that we still have
that, while we must prepare for a long term
policies are beginning to achieve results,

Assistant Secretary Tony Wayne, my colleague and friend from the State
Department, will share Just a few of the many ways In which we can build from this
promising beginning I look forward to contlnulllg our work together and welcome
our diSCUSSion here today. Thank you again for the opportunity to meet with you all
on these Vitally Important issues of International security.

http://www.treas.gov/press/reJc'f'cs/js2189.htJ11

4/2212005

1S-2190: The Honorable JOll11 W. Snow Statcl11cnt on Social Security Reform New York, NY<b... Page 1 of2

f-'HLSS Hl)UM

FROM THE OFFICE OF PUBLIC AFFAIRS
January 12, 2005
JS-2190
The Honorable John W. Snow
Statement on Social Security Reform
New York, NY
January 12, 2004
It's terrific to be in New York, to see our great financial markets in action and spend
time with the people who make Wall Street run. I've spent the last two days talking
with the financial community about how much the continued strength of our
economy will be dependent on a successful re-vamping of our Social Security
system. Leaders here on Wall Street share this view, and our conversations have
been extremely productive.
Social Security is a great American institution. The President is committed to
keeping its promise for today's retirees and those nearing retirement, and to
strengthening Social Security for our children and grandchildren. But the current
system is financially unsustainable and needs to be fixed.
The demographics that led to this fate were becoming apparent by the 1970s - not
enough babies born to support the baby boom generation when they retire - and
life expectancy was already increasing.
We've gone from a program in 1950 that was adequately paid for by 16 workers for
every one beneficiary, to one that is now paid for by about three workers for every
one beneficiary today. Those numbers will soon be two-to-one.
Because of this demographic reality, the current social security system will payout
more in benefits than it brings in revenue beginning in 2018 and shortfalls will grow
larger with each passing year. And, by 2042. when workers in their 20's begin to
retire, the system will be bankrupt.
What this means is that people who are now retired or near retirement will be taken
care of. They will receive their full benefits. But in order to pay the
scheduled benefits for future generations the government would need to
find massive amounts of additional money. This could be done through additional
borrowing, raising taxes, or cutting other federal spending. Each option would have
a very negative impact on our economy and our financial markets. This is
something Wall Street understands, and it is why they are interested in credible
reform.
As these leaders know, the United States has an expensive problem on our hands,
and waiting to fix it would be financially foolish. Given the repercussions that denial
and delayed action would have on both domestic and global financial markets - and
on future beneficiaries -- it would be irresponsible to leave this problem to another
day.
From Wall Street's leaders, I'm hearing broad consensus for the need to reduce
Social Security's long-term structural deficit - currently forecast to be more than a
$10 trillion shortfall. The people behind the institutions of Wall Street understand
that if we fix the system and put it on a sustainable course, it will benefit our
country's financial future.

http://wv.;w.treas.gov/pless/rclcases/js2f~O.htm

7/5/200')

JS-2190: The lionorable John W. Snow Statcmcnt on Social Security Reform New York, NY<b ... Page 2 of2

During my time here in New York, we've had discussions about the President's
belief that the establishment of personal retirement accounts should be one part of
a comprehensive plan to fix Social Security for future generations. People here on
Wall Street understand that the structure of those accounts would be designed to
benefit retirees, not Wall Street investment firms. They welcome a sincere solution
to Social Security for the right reasons, for the broader financial stability that a
solution will bring to our economy and to our markets.
A bi-partisan effort in the 109th Congress can achieve the goal of preserving Social
Security benefits for retirees and near-retirees, while modernizing the program,
without increasing payroll taxes. As I have expressed to the financial community
here this week, the Bush Administration is dedicated to achieving that goal. We look
forward to working with both sides of the aisle in Congress on Social Security
solutions, based on our shared understanding that not acting would be
irresponsible.

http://w\vw.treas.gov/pless/rclcases/js2J90.htl11

7/5/2005

js-2191: Treasury Designates Mexican Money Laundcring Cell

Page I of2

FROM THE OFFICE OF PUBLIC AFFAIRS
To View or pnnt the PDF content on tills page. download the free Adobe®Acrobat® Reader®.

January 12, 2005
js-2191

Treasury Designates Mexican Money
Laundering Cell
The US Department of the Treasury today identified 15 companies and 24
individuals associated with a money laundering cell of the Arellano Felix
Organization (AFO), a violent drug trafficking ring operating out of Mexico.
"Over a three year period, this cell laundered more than $120 million in illicit
proceeds from the sale of narcotiCS," said Robert Werner, Director of the Treasury's
Office of Foreign Assets Control (OFAC). "By freezing these individuals and
companies out of the U.S. financial system, we are dealing a significant blow to the
fiscal underbelly fueling the notorious drug trade of the Arellano Felix Organization."
OFAC added the names of these 39 entities to its list of persons designated
pursuant to the Foreign Narcotics Kingpin Designation Act (Kingpin Act). AFO,
which was named as a drug kingpin by President Bush on June 1, 2004, is based in
Tijuana, a large city in the Mexican state of Baja California which borders the United
States.
This money laundering cell was developed by Ivonne Soto Vega, also known as "La
Pantera" (the Panther), and Jose Manuel Ruelas Martinez, who were designated
today. The cell is involved in an AFO money laundering scheme centered on the
use of casas de cambia, or currency exchange houses. These front companies
launder U.S currency illicitly earned through narcotics sales in the United States
and bulk smuggled into Mexico. Soto Vega and Ruelas Martinez are both in the
custody of Mexican authorities awaiting trial on charges stemming from their
involvement with the AFO.
In Tijuana, the cell consisted of several currency exchange houses including Centro
Cambiario Kino. S.A. de C V, GS Plus Consultores SA de C V., and Mult/servicios
Gamal S.A. de C V. The cell also has a presence in Guadalajara with Grupo
Gamal, S.A. de C V. In addition to currency exchange houses, the cell also
includes Casa de Empeno Rio Tijuana, SA de C v., a pawn shop in Tijuana, and
Hacienda de Don Jose Restaurant Bar. SA de C. v., a restaurant and bar supply
company also located in Tijuana.
"Today's action is a testament to our collaboration with the San Diego office of
Immigration and Customs Enforcement (ICE)," said Werner. "OFAC remains
committed to working with our partners in the U.S Government and our foreign law
enforcement counterparts to expose front companies controlled by drug cartels in
Mexico and around the globe"
This action prohibits US persons from engaging in financial and commercial
transactions with the designees and freezes any assets of the designees found in
the United States.
The action taken today follows the designation of six lieutenants of the AFO in
November 2004. The 39 new names bring the total number of Tier I and Tier II
Kingpins under the Kingpin Act to 160 48 drug kingpins worldwide, 30 companies

http://w\vw.treas.gov/pless/rclcases/js2r91.htm

7/5/2005

js-2191: Treasury lJesignatcs Mexican Money Laundcring Cell

Page 2 of2

in Mexico. Peru. and the Caribbean. and 82 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. Signed Into law on December 3. 1999. the Kingpin Act applies
economic sanctions against nal·cotics 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 administered by
OFAC.
For a complete list of the entities designated today, please visit:
http://www.treas.gov/offices/enforcement/ofac/actions/20050112.shtml

REPORTS
•

A diagram of the individuals and companies named by OFAC

http://w\vw.treas.gov/pless/rclcases/js2T91.htm

7/5/2005

ARELLANO FELIX

u.s. Department of the Treasury
Office of Foreign Assets Control

ORGANIZATION (AFO)
January 2005

All individuals and companies
shown on this chart are Mexican.

AFO Money Laundering Cell

Foreign Narcotics Kingpin
Designation Act
--------~> :::~~J"'E~------In the custody of
Mexican authorities

Ivonne "La Pantera"
SOTO VEGA

Ruelas Martinez
Currency Exchange Houses

Jose Manuel
RUELAS MARTINEZ

Ruelas Martinez Family Members

...

Felipe

RUELAS MARTINEZ

...
...

Eduardo
RUELAS TOPETE

Jose De La Cruz
RUELAS MARTINEZ

CENTRO CAMBIARIO
KINO SADE CV

Sandra Angelica
ESCOBEDO MORALES

...

...
~

Carlos Antonio

RUELAS TOPETE

Other Ruelas
Martinez Companies

Miguel Angel

Silvia Patricia

QUINTERO HERNANDEZ

SANCHEZ CURIEL

Jose Luis
RUELAS TOPETE

CASA DE EMPENO
RIO TIJUANA
SA DE CV
Tijuana. Mexico

Tijuana, Mexico

CONSUL TORIA DE
INTERDIVISAS SA DE CV

CONSULTORIA DE
OCCIDENTE SA DE CV

Tijuana, Mexico

Tijuana, Mexico;
Guadalajara, Mexico

-I

GS PLUS
CONSUL TORES
SADE CV
Tijuana, Mexico

"-----

r_----'..-----

GRUPOGAMAL
SA DE CV
Guadalajara, Mexico

Ruelas Martinez Business Associates

Evangelina

Maria Teresa

AGUILAR TORRES

....

MUL TISERVICIOS
GAMAL SA DE CV
Tijuana, Mexico

MULTISERVICIOS
ALPHA SA DE CV
Tijuana. Mexico

BECERRA RODRIGUEZ

...

....

Edman Manuel
DONO MORALES

Daniel
GONZALEZ MUNOZ

....

...
~

Luis Miguel
PEREIRA BERUMEN

Sofia
PEREZ ELIAS

...

"-,

Associated Companies

Elias
DELGADO GUTIERREZ

Omar Axel
MARTINEZ PLAZA

MUL TISERVICIOS
SIGLO SA DE CV
Tijuana, Mexico

Mario Alberto

Mario Alberto
CARRILLO CUEVAS

'-,
MULTISERVICIOS DEL
NOROESTE DE MEXICO
SA DE CV
Tijuana, Mexico

...

Carlos Alberto
SANCHEZ OSUNA

Juan Gabriel
VELASQUEZ HERNANDEZ

GLOBAL FILMS
SADE CV
Tijuana. Mexico

ALVAREZ HERNANDEZ

M Q CONSUL TORES
SADE CV
Tijuana, Mexico

Arnalda
ARMENTA ZAVALA

...

....

HACIENDA DE DON JOSE
RESTAURANT BAR
SA DE CV
Tijuana, Mexico

filii

MEGADOLAR
SA DE CV
Tijuana, Mexico

Jorge Miguel
VILLASENOR COVARRUBIAS

MULTISERVICIOS
BRAVIO SA DE CV
Tijuana, Mexico

AFO Money Laundering Cell's Methodology
'/'
Narcotics are smuggled into
the United States from
Mexico

> ~----------------------------------~ .:,'
U.S. currency from narcotics sales
in the United States is bulk
smuggled to Mexico

The smuggled currency Is then brought back across the
U.S. border In the names of currency exchange houses;
Declaring the currency in the name of currency exchange
houses hides the Illegal origin of the money

The currency is then deposited into
U.S. bank accounts held in the name
of the currency exchange companies

> \~:;
Wire transfers are sent from these
accounts to banks around the world to
complete the laundering of drug money

1S-2192: FinancIal LIteracy and Education Commission to lIold Fourth Meeting

Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
January 12, 2005
JS-2192
Financial Literacy and Education Commission to Hold Fourth Meeting
Treasury Assistant Secretary for Financial Institutions Wayne Abernathy will open
the fourth meeting of the Financial Literacy and Education Commission tomorrow in
the Treasury Department's Cash Room. U.S. Mint Director Henrietta Holsman Fore,
Rep. Judy Biggert (IL), and Deputy Assistant Secretary for Financial Education Dan
lannicola, Jr. will deliver remarks to representatives of the Financial Literacy and
Education Commission. The Commission will also hear from guest speakers on
best practices for financial education.
Treasury's Office of Financial Education coordinates the efforts of the Financial
Literacy and Education Commission, which is composed of representatives from 20
federal departments, agencies and commissions. The Commission works to
improve financial literacy and education throughout the United States.
WHAT: Fourth Meeting of the Financial Literacy and Education Commission
WHO: Wayne Abernathy, Assistant Secretary for Financial Institutions, Treasury
Department
Henrietta Holsman Fore, Director, United States Mint
Judy Biggert, Member, US. House of Representatives
Dan lannicola, Jr., Deputy Assistant Secretary for Financial Education, Treasury
Department
WHEN:
January 13, 2005
1030 a.m. (EST)
WHERE:
Treasury Department
Cash Room
1500 Pennsylvania Avenue
Washington, D.C.
News media without Treasury press credentials planning to attend should contact
Frances Anderson in Treasury's Office of Public Affairs at (202) 622-2960 by 3 p.m.
today with the following information: name, social security number and date of birth.
This information may also be faxed to (202) 622-1999 or emailed to
frances.anderson@do.treas.gov.

http./Jwww.tr~as.gov/presslreleaseslis2~92.htm

7/5/2005

JS-21lJ3:

Tr~n8ury

and IRS AnnoLlnce Clari i'icatiolls to lIandling ofTaxpayer Infor...

Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
To view 01 punt tile PDF content on

tillS

IJd(]e, liown/odci tilt! froo Adobe® Acrobat® Reader®.

January 12. 2005
JS-2193
Treasury and IRS Announce Clarifications to Handling of Taxpayer
Information by Subcontractors
-- Today the Treasury Department and the IRS announced a proposed regulation to
clarify the restrictions that apply to confidential tax return Information that the IRS
releases to contractol's and, In turn, subcontractors, performing tax administration
services, The proposed regulation clarifies that subcontractors must comply with
the same strict protocols as contractors in handling return information The
proposed regulation clarifies that subcontractors, like contractors, are subject to civil
and criminal penalties for improper disclosure.
The Internal Revenue Code protects the privacy of return rnformation, but permits
disclosure for tax administration purposes to IRS employees and IRS contractors
Under the Code, an IRS contractor may see return information if access to the
Information is necessary to process returns, program equipment. or perform other
contractual serVices, The IRS and Its contractors must comply with strict protocols
In handling return information, and are subject to Civil and criminal penalties for
Improper disclosure,
The proposed regulation clarifies the treatment of subcontractors, who may perform
services similar to the services performed by contractors,
While contractors have long been used to perform specific services for Federal
agencies, including the IRS, loday's proposed regulation clarifies that IRS privacy
protections apply to all contractors and subcontractors,

REPORTS
•

A copy of the proposed regulations

http://w\vw.treas.govfplessfrclcasesfjs2193.htm

4/22/2005

[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
[REG-148867 -03]
RIN 1545-BC92
Disclosure of Returns and Return Information in Connection with Written Contracts or
Agreements for the Acquisition of Property and Services for Tax Administration
Purposes
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains proposed regulations relating to the disclosure of
returns and return information pursuant to section 61 03(n) of the Internal Revenue Code
(Code). The proposed regulations describe the circumstances under which officers or
employees of the Treasury Department, a State tax agency, the Social Security
Administration, or the Department of Justice may disclose returns and return information
to obtain property or services for tax administration purposes, pursuant to a written
contract or agreement. The proposed regulations clarify the existing regulations with
respect to redisclosures of returns or return information by contractors, especially with
regard to redisclosures by contractors to agents or subcontractors, and clarify that the
civil and criminal penalties of sections 7431,7213, and 7213A apply to the agents or
subcontractors. The proposed regulations also clarify that section 61 03(n) applies to
written contracts or agreements that are entered into to obtain property or services for

purposes of tax administration, including contracts that are not awarded under the
Federal Acquisition Regulations (FAR), 48 CFR pts. 1-53.
The proposed regulations will affect officers and employees of the Treasury
Department, a State tax agency, the Social Security Administration, or the Department
of Justice who disclose returns or return information in connection with a written
contract or agreement for the acquisition of property or services for tax administration
purposes. The proposed regulations will also affect any person, or officer, employee,
agent, or subcontractor of the person, or officer or employee of the agent or
subcontractor, who receives returns or return information in connection with a written
contract or agreement for the acquisition of property or services.
DATES: Written or electronic comments and requests for a public hearing must be
received by April 12, 2005.
ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-148867-03), room 5203,
Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044.
Submissions may be hand-delivered Monday through Friday between the hours of 8
a.m. and 4 p.m. to CC:PA:LPD:PR (REG-148867-03), Courier's Desk, Internal Revenue
Service, 1111 Constitution Avenue, NW., Washington, DC, or sent electronically, via the
IRS Internet site at www.irs.gov/regs or via the Federal eRulemaking Portal at
www.regulations.gov (indicate IRS and REG-148867-03). The public hearing will be
held in the IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW.,
Washington, DC.
FOR FURTHER INFORMATION CONTACT: Helene R. Newsome, 202-622-4570 (not
a toll-free number).

SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained in this notice of proposed rulemaking
have been submitted to the Office of Management and Budget for review in accordance
with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the
collections of information should be sent to the Office of Management and Budget, Attn:
Desk Officer for the Department of the Treasury, Office of Information and Regulatory
Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS
Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Comments
on the collections of information should be received by March 14, 2005. Comments are
specifically requested concerning:
Whether the proposed collections of information are necessary for the proper
performance of the functions of the Internal Revenue Service, including whether the
information will have practical utility;
The accuracy of the estimated burden associated with the proposed collections
of information (see below);
How the quality, utility, and clarity of the information to be collected may be
enhanced;
How the burden of complying with the proposed collections of information may be
minimized, including through the application of automated collection techniques or other
forms of information technology; and
Estimates of capital or start-up costs and costs of operation, maintenance, and
purchase of service to provide information.

The collections of information in this proposed regulation are in §§ 301.61 03(n)1(d) and 301.61 03(n)-1 (e)(3). This information is required and will be used to ensure
compliance with the internal revenue laws and regulations, and to protect the privacy of
American taxpayers. The collections of information are required to obtain a benefit.
The likely respondents are state or local governments, business or other for-profit
institutions, federal agencies, and/or small businesses or organizations.
Estimated total annual reporting burden: 250 hours. Estimated average annual
burden per respondent: 6 minutes.
Estimated number of respondents: 2500.
Estimated annual frequency of responses: Annually.
An agency may not conduct or sponsor, and a person is not required to respond
to, a collection of information unless it displays a valid control number assigned by the
Office of Management and Budget.
Books or records relating to a collection of information must be retained as long
as their contents may become material in the administration of any internal revenue law.
Generally, tax returns and return information are confidential, as required by 26 U.S.C.
6103.
Background
Under section 61 03(a), returns and return information are confidential unless the
Code authorizes disclosure. Section 61 03(n) authorizes, pursuant to regulations
prescribed by the Secretary, returns and return information to be disclosed to any
person, including any person described in section 7513(a), for purposes of tax
administration, to the extent necessary in connection with: (1) the processing, storage,

transmission, and reproduction of returns and return information; (2) the programming,
maintenance, repair, testing, and procurement of equipment; and (3) the providing of
other services.
Clarification is needed with respect to whether the existing regulations permit
redisclosures by persons authorized to receive the returns and return information to
their agents or subcontractors, and if so, whether certain penalty provisions, written
notification requirements, and safeguard requirements are applicable to these agents
and subcontractors. The proposed regulations make these clarifications. The existing
regulations provide that any person, or officer or employee of the person, who receives
returns or return information under the existing regulations, may redisclose the returns
or return information when authorized in writing by the IRS. The proposed regulations
clarify that redisclosures to agents or subcontractors are permissible provided that the
IRS authorizes the redisclosures in writing. The proposed regulations clarify that agents
and subcontractors are persons described in section 61 03(n) and, accordingly, are
subject to the civil and criminal penalty provisions of sections 7431,7213, and 7213A
for the unauthorized inspection or disclosure of returns or return information. The
proposed regulations clarify that agents and subcontractors are required to comply with
any written notification requirements and safeguard restrictions that may be imposed by
the IRS.
Finally, the proposed regulations clarify that section 61 03(n) applies to written
contracts or agreements that are entered into to obtain property or services for tax
administration purposes, including contracts that are not awarded under the FAR.
Explanation of Provisions

The structure of the proposed regulations is very similar to that of the existing
regulations, with the exception of modifications to clarify: the redisclosure authority of
contractors, especially to agents or subcontractors; the applicability to agents and
subcontractors of written notification requirements, safeguard requirements, and the
civil and criminal penalty provisions of sections 7431,7213, and 7213A; and the
applicability of section 61 03(n) to written contracts or agreements for tax administration
purposes, including contracts that are not awarded under the FAR. The proposed
regulations also elaborate on the safeguard protections that the IRS may require.
Finally, the proposed regulations contain other minor changes for organizational and
clarity purposes.
Redisclosures to Agents or Subcontractors
The proposed regulations, at §301.61 03(n)-1 (a)(2)(ii), provide that any person, or
officer or employee of the person, who receives returns or return information under the
proposed regulations, may further disclose the returns or return information, when
authorized in writing by the IRS, to the extent necessary to carry out the purposes of the
written contract or agreement. To eliminate any ambiguity as to whether this provision
applies to agents and subcontractors, the proposed regulation states that disclosures
may include redisclosures to a person's agent or subcontractor, or officer or employee
of the agent or subcontractor. The proposed regulations, at §301.61 03(n)-1 (a)(3),
provide guidance applicable if agents or subcontractors, or officers or employees of the
agents or subcontractors, who receive returns or return information under §301.61 03(n)1(a)(2)(ii), are to exercise the authority to redisclose the returns or return information to
another officer or employee of the agent or subcontractor whose duties or

responsibilities require the returns or return information for a purpose described in the
proposed regulations. The proposed regulations, at §301.6103(n)-1(c), set forth the civil
and criminal penalties to which agents, subcontractors, and their officers or employees,
are subject for unauthorized inspection or disclosure of returns or return information.
The proposed regulations, at §301.61 03(n)-1 (d), extend the written notification
requirements to agents and subcontractors. In particular, agents or subcontractors who
receive returns or return information under the proposed regulations must provide
written notice to their officers and employees of the purposes for which returns or return
information may be used and of the potential civil and criminal penalties for
unauthorized inspections or disclosures. The proposed regulations, at §301.61 03(n)1(e), clarify that agents or subcontractors who receive returns or return information
under the proposed regulations are subject to all safeguard requirements described in
the proposed regulations.
Section 6103(n) Applies to Written Tax Administration Contracts or Agreements,
Including Contracts Not Awarded Under the FAR
The proposed regulations clarify that section 6103(n) applies to written contracts
or agreements that are entered into to obtain property or services for purposes of tax
administration, including contracts that are not awarded under the FAR. The existing
regulations use the term contractual procurement to describe the acquisition of property
or services. Clarification is needed as to whether this term is limited to the acquisition of
property or services under the FAR or whether the term refers more broadly to any
written contract or agreement to acquire property or services relating to tax
administration. The FAR applies only to contracts involving acquisitions with
appropriated funds. FAR 1.104 and 2.101,48 CFR 1.104 and 2.101. The existing and

proposed regulations under section 6103(n), however, are intended to apply to any
written contract or agreement for tax administration that creates obligations that are
enforceable or otherwise recognizable at law, regardless of the form of the contract

(e.g., interagency agreement, memorandum of understanding, purchase order), the
statutory or regulatory authority for the contract, if any (e.g., the FAR, the Contract
Disputes Act, 41 U.S.C. 601 through 613, the Economy Act, 31 U.S.C. § 1535), or the
nature of the consideration exchanged (monetary or non-monetary). Accordingly, the
proposed regulations replace the term contractual procurement with the phrase "written
contract or agreement" in all instances where the term appeared.
Other Changes to the Existing Regulations
The proposed regulations, at §301.61 03(n)-1 (a)(4), clarify that any person, or
officer, employee, agent or subcontractor of the person, or officer or employee of the
agent or subcontractor, who receives returns or return information under the proposed
regulations, may redisclose the returns or return information pursuant to
§301.6103(p)(2)(8)-1 (concerning disclosures by a Federal, State, or local agency, or its
agents or contractors, for a purpose authorized, and subject to all applicable conditions
imposed, by section 6103). The proposed regulations, at §301.61 03(n)-1 (e), add the
requirement that any person, or agent or subcontractor of the person, who may receive
returns or return information under the proposed regulations, must agree, before the
disclosure of any returns or return information to the person, agent, or subcontractor, to
an IRS inspection of his, her, or its site or facilities. Finally, the proposed regulations, at
§301.6103(n)-1(e)(3), set forth the condition that before the execution of a contract or
subcontract for the acquisition of property or services under which returns or return

information will be disclosed in accordance with the proposed regulations, the contract
must be made available to the IRS.

Special Analyses
It has been determined that this notice of proposed rulemaking is not a significant
regulatory action as defined in Executive Order 12866. Therefore, a regulatory
assessment is not required. It also has been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations.
It is hereby certified that the collections of information in these regulations will not have
a significant economic impact on a substantial number of small entities. This
certification is based on the fact that any burden on taxpayers is minimal in that the
estimated average burden per respondent for complying with the collections of
information imposed by these regulations is 6 minutes. Therefore, a Regulatory
Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not
required. Pursuant to section 7805(f), this notice of proposed rulemaking will be
submitted to the Chief Counsel of the Small Business Administration for comment on its
impact on small businesses.

Comments and Request for a Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any electronic and written comments (a signed original
and eight (8) copies) that are submitted timely to the IRS. The IRS and Treasury
Department request comments on the clarity of the proposed rule and how it may be
made easier to understand. All comments will be available for public inspection and
copying. A public hearing may be scheduled if requested in writing by a person that

timely submits written comments. If a public hearing is scheduled, notice of the date,
time, and place of the hearing will be published in the Federal Register.

Drafting Information
The principal author of these regulations is Helene R. Newsome, Office of the
Associate Chief Counsel (Procedure & Administration), Disclosure & Privacy Law
Division.

List of Subjects in 26 CFR part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes,
Penalties, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations
Accordingly, 26 CFR part 301 is proposed to be amended as follows:
PART 301--PROCEDURE AND ADMINSTRATION
Paragraph 1. The authority citation for part 301 continues to read, in part, as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2 Section 301.6103(n)-1 is revised to read as follows:
§301.6103{n)-1 Disclosure of returns and return information in connection with written
contracts or agreements for the acquisition of property and services for tax
administration purposes.
(a) General rule. (1) Pursuant to the provisions of section 61 03(n) of the Internal
Revenue Code and subject to the conditions of this section, officers and employees of
the Treasury Department, a State tax agency, the Social Security Administration, or the
Department of Justice, are authorized to disclose returns and return information (as

defined in section 61 03(b)) to any person (including, in the case of the Treasury
Department, any person described in section 7513(a)), or to an officer or employee of
the person, for purposes of tax administration (as defined in section 6103(b)(4)), to the
extent necessary in connection with a written contract or agreement for the acquisition
of-(i) Equipment or other property; or
(ii) Services relating to the processing, storage, transmission, or reproduction of
returns or return information, the programming, maintenance, repair, or testing of
equipment or other property, or the providing of other services.
(2) Any person, or officer or employee of the person, who receives returns or
return information under paragraph (a)(1) of this section, may-(i) Further disclose the returns or return information to another officer or
employee of the person whose duties or responsibilities require the returns or return
information for a purpose described in this paragraph; or
(ii) Further disclose the returns or return information, when authorized in writing
by the Internal Revenue Service (IRS), to the extent necessary to carry out the
purposes described in this paragraph. Disclosures may include disclosures to an agent
or subcontractor of the person, or officer or employee of the agent or subcontractor.
(3) An agent or subcontractor, or officer or employee of the agent or
subcontractor, who receives returns or return information under paragraph (a)(2)(ii) of
this section, may further disclose the returns or return information to another officer or
employee of the agent or subcontractor whose duties or responsibilities require the
returns or return information for a purpose described in this paragraph (a).

(4) Any person, or officer, employee, agent or subcontractor of the person, or
officer or employee of the agent or subcontractor, who receives returns or return
information under this paragraph, may, subject to the provisions of §301.61 03(p )(2)(8)-1
(concerning disclosures by a Federal, State, or local agency, or its agents or
contractors), further disclose the returns or return information for a purpose authorized,
and subject to all applicable conditions imposed, by section 6103.
(b) Limitations. (1) Disclosure of returns or return information in connection with
a written contract or agreement for the acquisition of property or services described in
paragraph (a) of this section will be treated as necessary only if the performance of the
contract or agreement cannot otherwise be reasonably, properly, or economically
carried out without the disclosure.
(2) Disclosure of returns or return information in connection with a written
contract or agreement for the acquisition of property or services described in paragraph
(a) of this section shall be made only to the extent necessary to reasonably, properly, or
economically perform the contract. For example, disclosure of returns or return
information to employees of a contractor for purposes of programming, maintaining,
repairing, or testing computer equipment used by the IRS or a State tax agency shall be
made only if the services cannot be reasonably, properly, or economically performed
without the disclosure. If it is determined that disclosure of returns or return information
is necessary, and if the services can be reasonably, properly, and economically
performed by disclosure of only parts or portions of a return or if deletion of taxpayer
identity information (as defined in section 6103(b)(6)) reflected on a return would not
seriously impair the ability of the employees to perform the services, then only the parts

or portions of the return, or only the return with taxpayer identity information deleted,
may be disclosed.
(c) Penalties. Any person, or officer, employee, agent or subcontractor of the
person, or officer or employee of the agent or subcontractor, who receives returns or
return information under paragraph (a) of this section, is subject to the civil and criminal
provisions of sections 7431,7213, and 7213A for the unauthorized inspection or
disclosure of the returns or return information.
(d) Notification requirements. Any person, or agent or subcontractor of the
person, who receives returns or return information under paragraph (a) of this section
shall provide written notice to his, her, or its officers and employees receiving the
returns or return information that-(1) Returns or return information disclosed to the officer or employee may be
used only for a purpose and to the extent authorized by paragraph (a) of this section;
(2) Further inspection of any returns or return information for a purpose or to an
extent not authorized by paragraph (a) of this section constitutes a misdemeanor,
punishable upon conviction by a fine of as much as $1,000, or imprisonment for as long
as 1 year, or both, together with costs of prosecution;
(3) Further disclosure of any returns or return information for a purpose or to an
extent not authorized by paragraph (a) of this section constitutes a felony, punishable
upon conviction by a fine of as much as $5,000, or imprisonment for as long as 5 years,
or both, together with the costs of prosecution;
(4) Further inspection or disclosure of returns or return information by any person
who is not an officer or employee of the United States for a purpose or to an extent not

authorized by paragraph (a) of this section may also result in an award of civil damages
against that person in an amount not less than $1,000 for each act of unauthorized
inspection or disclosure, or the sum of actual damages sustained by the plaintiff as a
result of the unauthorized inspection or disclosure plus, in the case of a willful inspection
or disclosure or an inspection or disclosure that is the result of gross negligence,
punitive damages. In addition, costs and reasonable attorneys fees may be awarded;
and
(5) A conviction for an offense referenced in paragraph (c)(2) or (3) of this
section shall, in addition to any other punishment, result in dismissal from office or
discharge from employment if the person convicted is an officer or employee of the
United States.
(e) Safeguards. (1) Any person, or agent or subcontractor of the person, who
may receive returns or return information under paragraph (a) of this section, shall
agree, before disclosure of any returns or return information to the person, agent, or
subcontractor, to permit an inspection by the IRS of his, her, or its site or facilities.
(2) Any person, or officer, employee, agent or subcontractor of the person, or
officer or employee of the agent or subcontractor, who receives returns or return
information under paragraph (a) of this section, shall comply with all applicable
conditions and requirements as the IRS may prescribe from time to time (prescribed
requirements) for the purposes of protecting the confidentiality of returns and return
information and preventing disclosures or inspections of returns or return information in
a manner not authorized by this section.

(3) The terms of any written contract or agreement for the acquisition of property
or services as described in paragraph (a) of this section shall provide, or shall be
amended to provide, that any person, or officer, employee, agent or subcontractor of the
person, or officer or employee of the agent or subcontractor, who receives returns or
return information under paragraph (a) of this section, shall comply with the prescribed
requirements. Any contract or agreement shall be made available to the IRS before
execution of the contract or agreement. For purposes of this paragraph (e)(3), a written
contract or agreement shall include any contract or agreement between a person and
an agent or subcontractor of the person to provide the property or services described in
paragraph (a) of this section.
(4) If the IRS determines that any person, or officer, employee, agent or
subcontractor of the person, or officer or employee of the agent or subcontractor, who
receives returns or return information under paragraph (a) of this section, has failed to,
or does not, satisfy the prescribed requirements, the IRS may take any actions it deems
necessary to ensure that the prescribed requirements are or will be satisfied, including-(i) Suspension of further disclosures of returns or return information by the IRS to
the State tax agency, the Social Security Administration, or the Department of Justice,
until the IRS determines that the conditions and requirements have been or will be
satisfied;
(ii) Suspension of further disclosures by the Treasury Department otherwise
authorized by paragraph (a) of this section; and
(iii) Suspension or termination of any duty or obligation arising under a contract
or agreement with the Treasury Department.

(f) Definitions. For purposes of this section-(1) The term Treasury Department includes the IRS, the Office of the Chief
Counsel for the IRS, and the Office of the Treasury Inspector General for Tax
Administration;
(2) The term State tax agency means an agency, body, or commission described
in section 6103(d); and
(3) The term Department of Justice includes offices of the United States
Attorneys.

(g) Effective date. This section is applicable on or after the date final regulations
are published in the Federal Register.

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.

JS-21~4: MED1A ADVISORY' Treasury and IRS to Hold Background Briefing on .. ,

Page 1 of 1

PHLSS HOOM

FROM THE OFFICE OF PUBLIC AFFAIRS
January 13, 2005
JS-2194
MEDIA ADVISORY:
Treasury and IRS to Hold Background Briefing on Repatriation Guidance
WHAT: Press Background briefing on repatriation guidance under the American
Jobs Creation Act
WHEN:1 :30 PM Today
WHERE:U.S Treasury Department
Room 5116
CALL-IN: 202-927-2255; Pass Code: 363344#
COVERAGE: Pen and Pad Only
Please e-mail dates of birth and social security numbers for clearance to Treasury
to Frances Anderson at frances.anderson@do.treas.gov by 12:30 PM.

httll'/treasgovipressircleasesi]s 2194 .htm

4/22/2005

JS-2195: Treasury Elnd IItG Announce Guidance on Repatriation ofForeign Earnings... Page I of 1

PRESS F~OOM

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Arl!)i)t]'''! AOO/Jilt" , Reade1''''.

January 13,2005
JS-2195

Treasury and IRS Announce Guidance on Repatriation
of Foreign Earnings Under the American Jobs Creation Act
WSHINGTON DC - The Treasury Department and IRS today announced the first in
a series of notices that will provide guidance for U.S. companies planning to
repatriate earnings from overseas subsidiaries subject to the temporary reduced tax
rate available under the American Jobs Creation Act (AJCA).
Internal Revenue Code Section 965, enacted as part of the AJCA in October 2004,
allows U.S. companies to repatriate earnings from their foreign subsidiaries at a
reduced tax rate. Section 965 provides that U.S. companies may elect, for one
taxable year, an 85% dividends received deduction for eligible dividends from their
foreign subsidiaries.
Section 965 contains several limitations on the repatriated dividends that are
eligible for the reduced tax rate. One key requirement is that the repatriated funds
must be invested by the company in the United States pursuant to a domestic
reinvestment plan approved by company management before the funds are
repatriated.
Today's notice provides detailed guidance regarding the parameters for a domestic
reinvestment plan and the kinds of investments in the United States for which
repatriated funds may be used under this provision. The notice also provides
guidance on the requirement that the repatriation be in the form of a cash dividend.
In addition, the notice provides guidance on electing application of the provision and
on required information reporting regarding repatriated dividends and associated
U.S. Investments, and provides a safe harbor mechanism for taxpayers to use in
establishing that the domestic reinvestment plan requirement is satisfied.
"Given the importance of the new repatriation provision to U.S. companies, coupled
with the immediate effective date of the provision and its temporary nature,
issuance of prompt guidance was a major priority," said Eric Solomon, Treasury's
Acting Deputy Assistant Secretary for Tax Policy. "In today's notice we focused on
addressing the most urgent questions, particularly the required U.S. investment of
the repatriated earnings."
"This guidance will allow taxpayers to be able to comply with the new provision
regarding the repatriation of earnings while at the same time giving the IRS
examination function the necessary road map to ensure compliance with the new
rules," said IRS Chief Counsel Don Korb.

REPORTS
•
•

RcpLltriatlon Notice N 2005 10
Repatriation Fact Sheet Final

httJl'/treasgov!press!rcleases!Js 2195 .htm

4/22/2005

Part III - Administrative, Procedural, and Miscellaneous

Domestic reinvestment plans and other guidance under section 965

Notice 2005-1 0

SECTION 1. OVERVIEW
This notice provides guidance concerning new section 965 of the Internal
Revenue Code (Code). It sets forth general principles and specific guidance on
domestic reinvestment plans and on investments in the United States described in
section 965(b)(4)(8). The Treasury Department and the Internal Revenue Service (IRS)
intend to issue additional notices providing guidance concerning section 965, including
rules relating to the foreign tax credit and expense allocation, rules for adjusting the
calculation of the base period amounts to take into account mergers, acquisitions and
spin-offs, and rules regarding controlled groups. The Treasury Department and the IRS
expect to issue regulations that incorporate the guidance provided in this and the
subsequent notices.
The remainder of this notice is divided into eleven sections. Section 2 provides
background information with respect to section 965. Section 3 addresses the meaning
of the term "cash dividends." Section 4 sets forth general guidance concerning
domestic reinvestment plans. Section 5 lists certain expenditures that, if made pursuant

to a domestic reinvestment plan, are investments in the United States described in
section 965(b)(4)(B) (permitted investments). Section 6 lists certain expenditures that
are not permitted investments. Section 7 describes how a taxpayer elects to apply
section 965 to a taxable year. Section 8 provides guidance on reporting requirements
and on how a taxpayer may, under the facts and circumstances, establish to the
satisfaction of the Commissioner that the dividend proceeds are invested in the United
States pursuant to a domestic reinvestment plan, including a safe harbor for making
such a demonstration. Section 9 provides transition rules that apply to certain
taxpayers that, prior to the issuance of this notice, either adopted a domestic
reinvestment plan and received a dividend, or filed a tax return for a taxable year to
which section 965 applies. Section 10 provides the effective date of this notice. Section
11 provides information required under the Paperwork Reduction Act of 1995. Finally,
section 12 provides drafting information.
This notice provides guidance on several of the requirements for eligibility for the
deduction provided under section 965(a). Section 965 contains additional requirements,
which are briefly outlined in section 2 of this notice but which are not addressed in detail
in this notice, that must be satisfied in order for a cash dividend to be eligible for the
deduction provided under section 965(a).

SECTION 2. BACKGROUND
The American Jobs Creation Act of 2004 (P.L. 108-357) (the Act), enacted on
October 22,2004, added new section 965 to the Code. In general, and subject to
2

limitations discussed below, section 965(a) provides that a corporation that is a U.S.
1

sharehotder of a controlled foreign corporation (CFC) may elect, for one taxable year,
an 85 percent dividends received deduction (ORO) with respect to certain cash
dividends it receives from its CFCs. For this purpose, all U.S. shareholders that are
members of an affiliated group filing a consolidated return under section 1501 are
treated as one U.S. shareholder. Section 965(c)(5).
For purposes of section 965, the term "dividends" includes cash amounts
included in gross income as dividends under sections 302 and 304, but does not include
amounts treated as dividends under section 78 or 1248 or, in certain cases, section
367.

H.R. Conf. Rep. No. 108-755, at 314-15. For this purpose a cash dividend also

includes a cash distribution from a CFC that is excluded from gross income under
section 959(a) to the extent of inclusions under section 951 (a)(1 )(A) as a result of a
cash dividend during the election year to: (1) such CFC from another CFC in a section
958(a) chain of ownership; or (2) any other CFC in such chain of ownership to the
extent of cash distributions described in section 959(b) made during such year to the
CFC from which such U.S. shareholder received such distribution.
The ORO under section 965(a) is subject to several limitations. First, section

1 The term U.S. shareholder means, with respect to any foreign corporation, a U.S. person who owns
(within the meaning of section 958(a», or is considered as owning by applying the rules of ownership of
section 958(b), 10 percent or more of the total combined voting power of all classes of stock entitled to
vote of such foreign corporation. Section 951 (b).
2 Dividends resulting from liquidations qualifying under section 332 to which section 367(b) applies qualify
as cash dividends to the extent the U.S. shareholder receives cash as part of the liquidation. Section
965(c)(3). A deemed liquidation effectuated through an election under §301.7701-3(c), however, does not
result in an actual distribution of cash as required under section 965. See H.R. Conf. Rep. No.1 08-755, at
315, footnote 108.

965(b)(1) limits the amount of dividends eligible for the deduction to the greatest of the
following three amounts: (1) $500 million; (2) the amount shown on the taxpayer's
3

applicable financial statement as earnings permanently reinvested outside the United
States; or (3) in the case of an applicable financial statement that does not show a
specific amount of earnings permanently reinvested outside the United States and that
shows a specific amount of tax liability attributable to such earnings, the amount of such
liability divided by 0.35.
Second, section 965(b)(2) limits the amount of dividends eligible for the
deduction to the excess (if any) of the dividends received during the taxable year by the
U.S. shareholder from CFCs over the annual average for the base period years of: (1)
the dividends received during each base period year by such shareholder from CFCs;
(2) the amounts includible in such shareholder's gross income for each base period
year under section 951 (a)(1)(8) with respect to CFCs; and (3) the amounts that would
have been included for each base period year but for section 959(a) with respect to
CFCs. The base period years are the three taxable years which are among the five
most recent taxable years ending on or before June 30, 2003, determined by
disregarding the year for which such total amount is highest and the year for which such
total amount is lowest among such five years. Section 965(c)(2).
Third, section 965(b)(3) provides that the amount of dividends eligible for the

3 The term "applicable financial statement" means the most recently audited financial statement which is
certified on or before June 30, 2003, as being prepared in accordance with generally accepted accounting
principles, which is used for the purposes of a statement or report to creditors or shareholders or for any
other substantial nontax purpose, and, if the taxpayer is required to file with the SEC. is so filed on or
before June 30, 2003. Section 965(c)(1).

deduction is reduced by any increase in related-party indebtedness of the CFC between
October 3,2004, and the close of the election year. For this purpose, all CFCs with
respect to which the taxpayer is a U.S. shareholder are treated as a single CFC.
Finally, section 965(b)(4) provides that the amount of the dividend must be
invested in the United States pursuant to a domestic reinvestment plan that is approved
by the taxpayer's president, chief executive officer, or comparable official before the
payment of the dividend, and that is subsequently approved by the taxpayer's board of
directors, management committee, executive committee, or similar body. The domestic
reinvestment plan must provide for the investment of the dividend in the United States
(other than as a payment for executive compensation), including as a source for the
funding of worker hiring and training, infrastructure, research and development, capital
investments, or the financial stabilization of the corporation for the purposes of job
retention or creation. This list is not intended to be exclusive. H. R. Conf. Rep. No. 108755, at 316.
Section 965(c) provides definitions and special rules, including rules for adjusting
the calculation of the base period amounts to take into account mergers, acquisitions
and spin-offs. Sections 965(d) and (e) provide special rules limiting foreign tax credits
and expense deductions and limiting the attributes available to offset the nondeductible
portion of dividends, respectively.
Section 965(f) provides that taxpayers may elect the application of section 965
for either the taxpayer's last taxable year which begins before October 22,2004, or the
taxpayer's first taxable year which begins during the one-year period beginning on

October 22,2004.

SECTION 3. CASH DIVIDENDS
.01 In General

The ORO under section 965(a) applies only to cash dividends 4 received by a
corporate U.S. shareholder from CFCs with respect to which it is a U.S. shareholder.
For this purpose, the term "cash" includes both U.S. dollars and foreign currency. A
CFC may effect distributions of cash by wire transfer or check.
The Treasury Department and the IRS anticipate that, in some cases, a CFC will
liquidate investments in cash equivalents in order to pay a cash dividend as required
under section 965. It is also anticipated that the U.S. shareholder that receives such a
cash dividend from the CFC may temporarily invest all or a portion of the dividend
proceeds in cash equivalents, which may be similar in nature to those that had been
held by the CFC. For purposes of section 965, the mere fact that the CFC held cash
equivalents prior to the payment of a cash dividend and the U.S. shareholder holds
cash equivalents after the payment of such dividend will not itself cause the
Commissioner to recharacterize the dividend as a distribution by the CFC of the cash
equivalents (rather than as a required distribution of cash), under the step transaction
doctrine, or other similar authorities. For purposes of this paragraph, the term "cash
equivalents" has the meaning provided in §1.897-7T(a).

For purposes of section 965, a cash dividend includes cash amounts treated as a dividend pursuant to
section 356(a)(2).

.02 Treatment of Distributions to Intermediary Pass- Through Entities

To qualify as a cash dividend within the meaning of section 965, cash must be
distributed from a CFC to the U.S. shareholder in the taxable year for which an election
under section 965 applies. For purposes of section 965(a), a cash dividend paid by a
CFC to a pass-through entity (a partnership or disregarded entity) that is owned by a
U.S. shareholder shall be treated as received by such U.S. shareholder only if and to
the extent that such shareholder receives cash in the amount of the CFC dividend
during the taxable year for which such election is in effect. In addition, in the case of a
partnership, a cash dividend is treated as received by a U.S. shareholder that is a
partner in such partnership only if the amount of the dividend is: (i) allocated to the U.S.
shareholder-partner under the rules of sections 702 and 704 and the regulations
thereunder; and (ii) separately stated to the partner under §1.702-1 (a)(8)(ii).
For example, if a U.S. shareholder owns a disregarded entity that, in turn, owns a
CFC that pays a cash dividend to the disregarded entity, such dividend will qualify as a
cash dividend received by the U.S. shareholder within the meaning of section 965 only
to the extent the disregarded entity distributes cash in the amount of the dividend
proceeds to the U.S. shareholder during the taxable year to which an election under
section 965 applies. A loan of cash from the disregarded entity to the U.S. shareholder
would not be considered a distribution of cash for this purpose because, even though
the loan would not otherwise be regarded for tax purposes, there would be a legal
obligation for the U.S. shareholder to repay the cash to the disregarded entity.

.03 Amount of Cash Dividend Not Reduced by Related Deductions or Expenses

The amount otherwise qualifying as a cash dividend is not reduced by expenses
or deductions of the taxpayer related to such cash dividend, including any foreign
withholding tax and U.S. federal, state or local income tax imposed thereon. Taxpayers
must invest the gross amount of the dividend (not reduced by expenses or deductions
related to such dividend) in order for the total cash dividend to qualify under section
965(b)(4). Thus, for example, if a CFC distributes $1 OOx of cash to its U.S. shareholder
with respect to its stock that is treated as a dividend, and such distribution is subject to a
foreign withholding tax of $5x (such that the U.S. shareholder receives a net amount of
$95x), the amount of the cash dividend is $100x. Accordingly, the taxpayer must invest
$100x in the United States pursuant to a domestic reinvestment plan in order for the
$100x cash dividend to satisfy the requirements of section 965(b)(4) .

.04 Interaction with Section 959

Except as provided in section 965(a)(2), the term "dividends" does not include
amounts that are not included in gross income pursuant to section 959(a). In other
words, distributions by a CFC to its U.S. shareholder with respect to its stock out of its
earnings and profits described in section 959(c)(1) and (c)(2) do not qualify as dividends
(except to the extent provided in section 965(a)(2)). Thus, for example, if a CFC has
earnings and profits described in section 959(c)(1) of 100u and earnings and profits
described in section 959(c)(3) of 50u, under the ordering rules of section 959(c) the
CFC must distribute 150u to its U.S. shareholder with respect to its stock in order to be

considered to have paid a 50u dividend within the meaning of section 965.

SECTION 4. DOMESTIC REINVESTMENT PLANS
01. In General

A domestic reinvestment plan is a written plan prepared by the taxpayer that
describes the planned investment in the United States of the amount of the dividend
otherwise qualifying for the deduction under section 965(a) in reasonable detail and
specificity. It may encompass more than one cash dividend from one or more CFCs. A
taxpayer may adopt separate domestic reinvestment plans to apply to different cash
dividends made during the taxable year to which it elects to apply section 965. Under
section 965, amounts invested in the United States pursuant to the domestic
reinvestment plan are not required to exceed investments made in prior years or
investments that were planned by the taxpayer prior to the enactment of section 965.

02. Procedural Requirements

Pursuant to section 965(b)(4)(A), a domestic reinvestment plan must be
approved by the taxpayer's president, chief executive officer, or an official exercising
comparable authority over the taxpayer before the cash dividend to which it relates is
paid. The taxpayer's board of directors, management committee, executive committee,
or the body which exercises similar authority over the taxpayer must subsequently
approve the domestic reinvestment plan. Such approval may be granted after the
payment of the dividend subject to the domestic reinvestment plan, and no special
meeting of the board or other body is required to grant this approval. Where the U.S.
9

shareholder of a CFC is a member of a consolidated group within the meaning of
§1.1502-1 (h), the domestic reinvestment plan must be approved by the president, chief
executive officer, or comparable official, and by the board of directors, management
committee, executive committee, or similar body, of the common parent of the
consolidated group. In such a case, the domestic reinvestment plan need not be
separately approved by other members of the consolidated group, even if such
members make permitted investments pursuant to such plan.

03. Specificity
The domestic reinvestment plan must describe specific anticipated investments
in the United States. The Treasury Department and the IRS do not intend to provide a
template for a domestic reinvestment plan. The composition of a taxpayer's domestic
reinvestment plan may vary depending on the type of permitted investments
contemplated by the plan (for example, research and development or capital
improvements to plant and facility), the time period over which permitted investments
will be made, and whether factors beyond the taxpayer's control could affect its ability to
make the contemplated investment. These and other relevant facts and circumstances
should be taken into account in applying the reasonable specificity standard set forth in
this notice.
In general, the domestic reinvestment plan must provide sufficient detail to
enable the taxpayer to demonstrate upon examination that the expenditures that
subsequently occur were of the kind that were in fact contemplated at the time of the
10

adoption of such plan. Thus, a domestic reinvestment plan that merely recites the
statutory language without further detail, or that merely refers generically to
expenditures on whatever uses may be permitted for purposes of section 965, will not
be considered to have met the statutory requirements.
The domestic reinvestment plan need not indicate precise dollar amounts
expected to be incurred for each specific component of an investment, but must state
the total dollar amount that will be invested for each respective principal investment in
the United States pursuant to such plan (e.g., a total dollar amount for expenditures for
research and development on product lines A, Band C and a total dollar amount for
expenditures for advertising for brands D and E). A taxpayer may shift expenditures
between investments specified in the plan without amending the plan and, to that
extent, the additional amounts spent on one investment would be considered an
alternative investment (as described below). For example, if a $100x dividend
reinvestment plan calls for expenditures of $30x on research and development and
$70x on advertising, and the taxpayer in fact expends $90x on the advertising, the
additional $20x expenditures on advertising is an alternative investment.
The domestic reinvestment plan must state a reasonable time period, taking into
account the nature of the investments to be made in the United States and other facts
and circumstances, during which the taxpayer anticipates completing all such
investments pursuant to such plan.
The Treasury Department and the IRS recognize that, after a domestic
reinvestment plan is approved, certain investments specified in such plan may no longer

be practicable or desirable for various reasons. This may occur, for example, if an
investment is dependent on actions of other persons, or upon reasonably anticipated
business conditions that subsequently change. For example, a taxpayer's domestic
reinvestment plan may contemplate as a principal investment a plant in the United
States the construction of which cannot proceed absent certain governmental approvals
and, subsequent to the adoption of the plan, the necessary governmental approvals are
denied. Accordingly, the domestic reinvestment plan may provide alternative
investments, which are themselves permitted investments, for investing the amount of
the dividend in the United States in cases where principal investments are subsequently
delayed or rejected. Such alternative investments must be described in the domestic
reinvestment plan under the same standard of specificity provided above. The domestic
reinvestment plan need not, however, set forth the conditions under which the
alternative investments will be substituted for the principal investments .

.04 Amending the Domestic Reinvestment Plan

In general, the taxpayer is not permitted to modify or amend a domestic
reinvestment plan after payment of the dividend to which such plan relates. See section
9.02 of this notice for a special transition rule in the case of certain dividends paid prior
to January 13, 2005 .

.05 Tracing or Segregating Funds

A taxpayer is not required to trace or segregate the specific dividend proceeds it
receives to demonstrate that it has properly invested the amount of the dividend in the

United States pursuant to the domestic reinvestment plan. Moreover, provided a
sufficient amount of funds is properly invested in the United States pursuant to the
domestic reinvestment plan (and such plan otherwise satisfies the requirements under
section 965(b)(4) and this notice), the fact that other non-permitted investments are
made during the period covered by such plan generally will not affect the eligibility of the
dividend under section 965.
For example, if, pursuant to a domestic reinvestment plan, a taxpayer plans to
invest an amount equal to the dividend in infrastructure over a three-year period, the
taxpayer is not required to trace or otherwise account for the specific funds that were
distributed to the taxpayer and ensure that the same specific funds are invested in the
infrastructure over the three-year period. Rather, the taxpayer must demonstrate to the
satisfaction of the Commissioner that an amount equal to the dividend is invested in
infrastructure pursuant to the domestic reinvestment plan.
In certain cases, however, the fulfillment of a domestic reinvestment plan may be
subject to greater scrutiny by the Commissioner because the plan provides that the
investment in the United States will only occur over the course of many years, and
during such period the taxpayer also is making expenditures that would not be permitted
investments. In that case, a segregated account in the amount of the dividend
proceeds, with disbursements from the account expended for the permitted investments
described in the domestic reinvestment plan, would be a positive factor in establishing
that the requirements of section 965(b)(4) are satisfied.
A domestic reinvestment plan may include an investment that, prior to the

adoption of the plan, was anticipated to be made by the taxpayer. This is the case even
if, prior to the adoption of the domestic reinvestment plan, such investment was
budgeted and expected to be made with other funds .

.06 Expenditures in Taxable Year of Election
In general, expenditures made during the taxable year for which the taxpayer
elects to apply section 965 may be considered to be made pursuant to the domestic
reinvestment plan, regardless of when they are made during such year. Thus, for
example, expenditures on permitted. investments made in the election year but prior to
the payment of the cash dividend described in section 965(a) (or prior to the adoption of
the domestic reinvestment plan) may qualify as permitted investments made pursuant to
the domestic reinvestment plan. Expenditures made during taxable years prior to the
taxable year to which the taxpayer elected section 965 to apply, however, will not qualify
as permitted investments made pursuant to the domestic reinvestment plan .

.07 Partially Completed Domestic Reinvestment Plans
A cash dividend that would otherwise qualify for the ORO under section 965(a) is
considered to qualify pursuant to section 965(b)(4) only to the extent the amount of the
dividend is expended on permitted investments pursuant to the domestic reinvestment
plan. If the domestic reinvestment plan provides for expenditures on permitted
investments of the full amount of the dividend, but the U.S. shareholder in fact expends
less than the full amount of the dividend on such permitted investments, the dividend
satisfies the requirements of section 965(b)(4) only to the extent of the amount so

expended. Thus, for example, assume a CFC pays a cash dividend of $100x to its U.S.
shareholder pursuant to a domestic reinvestment plan that properly specifies $1 OOx of
permitted investments pursuant to section 4 of this notice (and the dividend otherwise
qualifies for the ORO under section 965(a)), but the U.S. shareholder in fact only makes
$90x of the permitted investments provided for under the plan. In such a case, $10x of
the $1 OOx cash dividend does not qualify for the ORO under section 965(a); the
remaining $90x qualifies for the ORO under section 965(a).

SECTION 5. EXPENDITURES THAT ARE INVESTMENTS IN THE UNITED STATES
PURSUANT TO SECTION 965(b)(4)
.01 In General
(a) Scope. Except as provided in sections 5.01 (b) and (c) of this notice,
expenditures described in section 5 of this notice that are made pursuant to a domestic
reinvestment plan, as provided under section 965(b)(4) and this notice, are permitted
investments. Because this list of permitted investments is not an exclusive list, other
investments in the United States made pursuant to a domestic reinvestment plan may
also be permitted investments.
(b) Payments to Unrelated Persons. Expenditures described in this section 5 are
permitted investments only if they are made to a person that is not related to the
taxpayer (within the meaning of section 267(b), other than section 267(b)(8) in the case
of an expenditure with respect to a qualified plan pursuant to section 5.02 or 5.05(b)).
(c) Cash Payments. In general, permitted investments must be made in the form
of cash. If a taxpayer issues a note in payment for what would otherwise be a permitted
15

investment, the permitted investment is considered to be made only as the taxpayer
satisfies its obligation under the note in cash.
Stock may not be used to make permitted investments. Thus, for example, if a
taxpayer issues stock to acquire a target corporation, such acquisition is not a permitted
investment (unless, and only to the extent that, cash also is paid for the target
company).5 Similarly, compensation in the form of stock grants or stock options is not a
permitted investment.

.02 Funding of Worker Hiring, Training, and Other Compensation

Expenditures incurred in connection with the funding of worker hiring and training
(other than as provided in section 6.02 of this notice) are permitted investments. In
general, the funding of worker hiring and training includes expenditures incurred in
connection with hiring new workers and training both existing and newly-hired workers
and expenditures incurred on compensation and benefits (including the funding of a
qualified plan within the meaning of section 401 (a)) of existing and newly-hired workers.
Expenditures do not qualify, however, to the extent described in section 6.02 of
this notice, related to executive compensation. In addition, expenditures qualify only to
the extent attributable to services performed by the workers within the United States. If
the services are performed partly within and partly without the United States, the
amount of permitted investments shall be determined under the principles of §1.861-

This is the case even if the acquisition of the target would qualify, in whole or in part, as a permitted
investment under section 5.06 of this notice if cash, rather than taxpayer stock, were used to make the
acquisition.
5

4(b)(1). Expenditures in this case may be permitted investments even if the workers are
not employees of the taxpayer, provided such expenditures are borne by the taxpayer
and the activities are performed in the United States.
In the case of funding a qualified plan, a taxpayer may use a reasonable method
to apportion the funding between amounts related to executive compensation and nonexecutive compensation, and between amounts related to services performed within
and without the United States. See also section 5.05(b) of this notice (relating to the
qualification of satisfaction of an obligation to fund a qualified plan as financial
stabilization for the purposes of job retention or creation in the United States) .

.03 Infrastructure and Capital Investments
Expenditures incurred in connection with the funding of infrastructure and capital
investments are permitted investments. Expenditures for infrastructure and capital
investments include physical installations and facilities that support the taxpayer's
business, and other assets integral to the conduct of a business, provided that the
infrastructure and capital investments are located and used in the United States. Such
expenditures also include payments for services performed in the United States that are
related to, or provided in connection with, otherwise qualified infrastructure or capital
investments described in this section.
Infrastructure and capital investments include plant, property and equipment,
communications and distribution systems, computer hardware and software, databases,
and supporting equipment. Improvements to the items described above also are

qualified expenditures.
Expenditures are incurred for infrastructure and capital investments as described
above regardless of whether incurred to construct, develop, purchase, rent, or license
such items.
If the infrastructure or capital investment is partly within and partly without the
United States, the amount of the expenditure that constitutes a permitted investment
with respect to such item is limited to amounts attributable to assets that are located
and used within the United States. Similarly, if services related to, or provided in
connection with, qualified infrastructure or capital investments are performed partly
within and partly without the United States, the amount of the expenditure that
constitutes a permitted investment shall be determined under the principles of §1.8614{b)(1 ) .

.04 Research and Development

Expenditures incurred in connection with the funding of research and
development are permitted investments. In general, expenditures for research and
development are expenditures that are described in § 1.174-2, provided that the
research and development activities are performed in the United States. In addition, if
the research and development is performed partly within and partly without the United
States, the amount of the expenditure that constitutes a permitted investment shall be
determined under the principles of §1.861-4{b)(1).
Expenditures for research and development constitute a permitted investment
18

only to the extent they are borne by the taxpayer. Thus, for example, expenditures
incurred on research and development performed by employees of the taxpayer within
the United States are not permitted investments to the extent the taxpayer is reimbursed
by another party for such activities pursuant to a cost sharing arrangement under
§1.482-7.
Expenditures for research and development may be permitted investments even
if the research and development is not performed by employees of the taxpayer,
provided such expenditures are borne by the taxpayer and the activities are performed
in the United States .

.05 Financial Stabilization of the Corporation for the Purposes of Job Retention or
Creation
(a) Repayment of debt. The repayment by the taxpayer of debt, regardless of
whether the lender or holder is a U.S. person, is a permitted investment so long as the
repayment contributes to the financial stabilization of the taxpayer for the purposes of
job retention or creation in the United States. The repayment of debt ordinarily will be
considered to contribute to the financial stabilization of the taxpayer because it improves
the taxpayer's debt-equity ratio and reduces the taxpayer's obligations for debt service.
An increase in the taxpayer's credit rating due to the debt repayment is not required.
Such an increase, however, would be an indication of a contribution to financial
stabilization. The requirement that financial stabilization be for the purposes of job
retention or creation in the United States is satisfied if, at the time the domestic
reinvestment plan is approved by the taxpayer's president, chief executive officer, or

comparable official, the taxpayer's reasonable business judgment is that the resulting
financial stabilization will be a positive factor in its ability to retain and create jobs in the
United States. In this regard, a plan developed by the taxpayer as part of its strategic
planning process that evidences expected use of savings attributable to reduced debt
service principally for expenditures incurred in connection with permitted investments is
one method of demonstrating a purpose of job retention or creation in the United States
because such expenditures likely would have direct or indirect positive effects on
employment in the United States.
A repayment of debt is not a permitted investment to the extent, at the time of the
repayment, the taxpayer has a plan or intent to incur additional debt on substantially the
same terms following the date of the dividend, and the taxpayer in fact incurs such
additional debt. In that case, the additional debt, in effect, replaces the repaid debt.
Such a temporary or transitory reduction in taxpayer indebtedness is not a permitted
investment. The determination of whether the taxpayer had such a plan or intent shall
be determined based on all the relevant facts and circumstances, taking into account all
relevant provisions and general principles of tax law, including the substance over form
doctrine. See, e.g., Rev. RuL 89-73, 1989-1 C.B. 258.
The taxpayer is not required to demonstrate that there has been a net global
reduction in indebtedness of the taxpayer's corporate group in order for the repayment
of debt to be a permitted investment. Thus, for example, if a CFC incurs debt (and is
treated as the obligor on such debt) to fund a cash dividend it pays to its U.S.
shareholder, and the U.S. shareholder uses the dividend proceeds to repay debt owed

to an unrelated party, the U.S. shareholder may be able to demonstrate that such
repayment is a permitted investment even though the total debt of the taxpayer and its
CFCs, taken in the aggregate, is not reduced. If, however, the facts and circumstances
are such that, in substance, the taxpayer (rather than the CFC) is the obligor of the debt
nominally incurred by the CFC,6 then the taxpayer simply incurred debt to repay other
debt. In such a case, the repayment of the existing debt is transitory and not a
permitted investment.
The repayment or acquisition of an intercompany obligation between members of
the same consolidated group does not qualify as the repayment of debt for purposes of
this section. However, if the consolidated group member receiving funds equal to the
repayment or acquisition amount also makes a permitted investment of such amount,
such investment may qualify under section 5 of this notice. See section 6.03 of this
notice.
(b) Qualified Plan Funding. The satisfaction of an obligation to fund a qualified
plan (within the meaning of section 401 (a)) ordinarily will contribute to the financial
stabilization of the taxpayer. The taxpayer is not required to demonstrate the extent to
which the plan covers current employees or the extent to which those covered by the
plan perform (or performed) services within the United States. The requirement that
financial stabilization be for the purposes of job retention or creation in the United States
is satisfied if, at the time the domestic reinvestment plan is approved by the taxpayer's

See, e.g., Plantation Patterns v. Comm'r, 462 F.2d 712 (5 Cir. 1972), cert. denied, 409 U.S. 1076
(1972).

president, chief executive officer, or comparable official, the taxpayer's reasonable
business judgment is that the resulting financial stabilization will be a positive factor in
its ability to retain and create jobs in the United States. See also section 5.02 of this
notice (relating to the qualification of expenditures for worker hiring, training and other
compensation in the United States as permitted investments).
(c) Other Expenditures. Expenditures other than those described in sections
5.05(a) or (b) of this notice also are permitted investments if such expenditures
contribute to the financial stabilization of the taxpayer for the purposes of job retention
or creation in the United States. Whether such an expenditure contributes to the
financial stabilization of the taxpayer for the purposes of job retention or creation in the
United States will be determined based on all the facts and circumstances. Such an
expenditure generally will be considered to be a permitted investment if the expenditure
reduces financial constraints on the taxpayer's U.S. operations and if, at the time the
domestic reinvestment plan is approved by the taxpayer's president, chief executive
officer, or comparable official, the taxpayer's reasonable business judgment is that such
reduction in financial constraints will be a positive factor in its ability to retain and create
jobs in the United States .

.06 Acquisitions of Interests in Business Entities
(a) General Rule. Except as provided in section 5.06(b) of this notice, the
acquisition of an ownership interest in a business entity (such as a corporation or a
partnership), regardless of whether such entity is domestic or foreign,. is a permitted
22

investment to the extent of the percentage of the total value of the assets owned
(directly or indirectly) by the business entity that, if acquired directly, would be permitted
investments as described in this notice. The direct or indirect acquisition of an interest
in a business entity is a permitted investment only if the taxpayer directly or indirectly
owns an interest representing at least 10 percent of the value of such business entity
after the acquisition. For purposes of determining whether a taxpayer indirectly owns a
10-percent interest in a business entity, and for purposes of determining whether
business entities indirectly own interests in other entities, rules similar to the rules of
section 267(c) shall apply.
In general, amounts expended to acquire a direct interest in a business entity
shall be allocated between permitted and non-permitted investments on the basis of the
relative values of the business entity's assets that, if acquired directly, would be
permitted or non-permitted investments. If a business entity owns an interest in another
business entity in which the taxpayer indirectly owns a 1O-percent interest, the assets
taken into account for this purpose are the upper-tier entity's share of the assets held by
the lower-tier entity, not the upper-tier entity's interest in the lower-tier entity. In valuing
assets for this purpose, the taxpayer must use the same methodology under §1.8619T(g) (Le., tax book value, alternative tax book value or fair market value) that the
taxpayer uses for purposes of allocating and apportioning interest expense for the
taxable year under section 864(e). In applying this section 5.06, however, asset
amounts shall be characterized as permitted or non-permitted investments based on
whether the assets are located and used within the United States, and not on the basis

of the source of the income generated by the assets.
(b) De Minimis Rule. If a taxpayer acquires an interest in a business entity as
described in section 5.06(a) of this notice, and more than 95 percent of such
expenditure would be a permitted investment or a non-permitted investment as
determined under section 5.06(a) of this notice, the entire acquisition shall be treated as
a permitted investment or a non-permitted investment, respectively .

.07 Advertising and Marketing Expenditures
Expenditures incurred on advertising or marketing with respect to trademarks,
trade names, brand names, or similar intangible property are permitted investments,
provided the advertising or marketing activities are performed in the United States. If
the advertiSing or marketing activities are performed partly within and partly without the
United States, the amount that constitutes a permitted investment shall be determined
under the principles of §1.861-4(b)(1). As is the case with research and development
(discussed in section 5.04 of this notice), the advertising or marketing expenditures
must be borne by the taxpayer, but the advertising or marketing activities need not be
performed by employees of the taxpayer.

.08 Intangible Property
Expenditures to acquire the rights to intangible property, through purchase or
license, are permitted investments to the extent the rights to the intangible property are
used in the United States.

SECTION 6. EXPENDITURES THAT ARE NOT INVESTMENTS IN THE UNITED
STATES PURSUANT TO SECTION 965(b)(4)
.01 In General
The expenditures described in this section 6 are not permitted investments by the
taxpayer in the United States within the meaning of section 965(b)(4). Section 965(b)(4)
explicitly provides that executive compensation is not a permitted investment. The other
non-permitted investments listed in this section are not reasonably expected to maintain
or add to the value of the taxpayer as a going concern. Because this list of nonpermitted investments is not an exclusive list, other expenditures may also be nonpermitted investments .

.02 Executive Compensation
Executive compensation is not a permitted investment. Executive
compensation is defined as compensation paid, directly or indirectly, by or on behalf of,
the taxpayer, to any employee or former employee, in exchange for services (past,
present, or future) performed for the taxpayer, if: (a) the individual is an employee who
is subject to the requirements of section 16(a) of the Securities Exchange Act of 1934
with respect to the taxpayer; (b) the individual is an employee who would be subject to
such requirements if the taxpayer were an issuer of equity securities referred to in such
section; or (c) the individual is a former employee who was described in clauses (a) or
(b) of this section 6.02 at the time of his or her severance from employment. A taxpayer
may treat the ten employees who received the highest wages in the most recently
ended calendar year as being the individuals described in clause (b) of this section
25

6.02 .

.03 Intercompany Distributions, Obligations, and Transactions
For purposes of section 965, all U.S. shareholders that are members of an
affiliated group filing a consolidated return under section 1501 are treated as one U.s.
shareholder. Section 965(c)(5). Therefore, intercompany distributions, intercompany
obligations, and intercompany transactions (all as defined in §1.1502-13) between
corporations that are members of the same consolidated group are disregarded for
purposes of section 965 and cannot be permitted investments under section 5 of this
notice. However, if a consolidated group member initially receives a cash dividend from
its CFC, an investment of an amount equal to such dividend amount made by another
consolidated group member may be a permitted investment under section 5 of this
notice .

.04 Dividends and Other Distributions With Respect to Stock
Dividends and other distributions made by the taxpayer to its shareholders with
respect to its stock, without regard to how such distributions are treated under section
301, are not permitted investments because they do not constitute investments by the
taxpayer for purposes of section 965.
Moreover, although intercompany distributions between members of a
consolidated group are disregarded for purposes of section 965, a distribution with
respect to the stock of a consolidated group member that is held by a person that is not
a member of the same consolidated group is not a permitted investment.
26

.05 Stock Redemptions
The redemption of outstanding stock of a taxpayer or, through one or more steps
as part of a plan, of a corporation related to the taxpayer (within the meaning of section
267(b» without regard to whether such redemption is treated as an exchange in part or
full payment for the stock under section 302(b), is not a permitted investment. As is the
case with dividends, such expenditures do not constitute investments by the taxpayer
for purposes of section 965.
Moreover, although an intercompany transaction in which a consolidated group
member acquires its own stock from another consolidated group member is disregarded
for purposes of section 965, a redemption of shares of stock of a consolidated group
member that are held by a person that is not a member of the same consolidated group
is not a permitted investment.

.06 Portfolio Investments in Business Entities
Except as provided in section 5.06 of this notice, the acquisition of an interest in
a business entity is not a permitted investment.

.07 Debt Instruments or other Evidences of Indebtedness
The acquisition of a debt instrument or other evidence of indebtedness,
including an acquisition of such instrument or indebtedness from the debtor, is not a
permitted investment.

.08 Tax Payments

Payments of federal, state, local or foreign taxes, and associated interest and
penalties, including foreign withholding tax and U.S. federal, state or local income tax
imposed on distributions that qualify as cash dividends under section 965(a), are not
permitted investments.

SECTION 7. ELECTION TO APPLY SECTION 965 TO A TAXABLE YEAR
In general, a taxpayer elects to apply section 965 to a taxable year by filing Form
8895 with its timely-filed tax return (including extensions) for such taxable year. If,
however, a taxpayer files its tax return for the taxable year to which the taxpayer intends
to elect section 965 to apply prior to the issuance of Form 8895, the election must be
made on a statement that is attached to its timely-filed tax return (including extensions)
for such taxable year. See section 9.03 for a special transition rule for certain tax
returns filed prior to January 13, 2005.

SECTION 8. REPORTING AND OTHER ADMINISTRATIVE REQUIREMENTS
.01 In General

The determination of whether the dividend has been invested in the United
States pursuant to the domestic reinvestment plan as provided under section 965(b)(4)
is generally made under the facts and circumstances of the particular taxpayer, as
described in section 8.04 of this notice. However, section 8.03 of this notice provides a
safe harbor method under which the taxpayer will be considered to have established to
28

the satisfaction of the Commissioner that the amount of the dividend has been invested
in the United States pursuant to the domestic reinvestment plan.
Section 8.02 of this notice sets forth reporting and documentation requirements
with respect to section 965 .

.02 Reporting and Documentation Requirements
(a) Annual Reporting. The taxpayer shall attach a statement which includes the
items described below to its timely-filed tax return (including extensions) for the taxable
year to which the taxpayer's election under section 965 applies and for each
subsequent taxable year at the beginning of which the taxpayer has not made all
investments required to be made under one or more of its domestic reinvestment plans
(unless the annual reporting requirement is terminated earlier pursuant to sections
8.03(c)(i) or 8.04(c)(ii) of this notice):
(i) A statement that the document is submitted pursuant to section 965(b)(4) and
this notice.
(ii) A general description of any permitted investment made during the taxable
year pursuant to the domestic reinvestment plan and a reconciliation over the entire
term of such plan through the last day of the taxable year for which the statement is filed
of the specific expenditures made with respect to each such investment. The
description must include a calculation of the percentage of completion of the domestic
reinvestment plan. The percentage of completion of the plan is calculated as the sum of
the expenditures made and amounts subject to a binding contract or commitment (as
29

described in section 8.03(b)(i) of this notice) through such last day, divided by the total
amount to be invested pursuant to the plan.
(iii) A statement indicating whether any of the permitted investments that have
been made pursuant to the domestic reinvestment plan are alternative investments.
(iv) Such additional items, as applicable, pursuant to sections 8.03 and 8.04 of
this notice.
(b) Documentation and Production. The taxpayer shall, with respect to each of its
domestic reinvestment plans, prepare, maintain, and, upon a request by the
Commissioner, make available within 30 days of such request, the following:
(i) Records that display in reasonable detail the amount invested in the United
States pursuant to the domestic reinvestment plan as required under section
965(b)(4)(8). The documentation must also include an allocation between permitted
investments and non-permitted investments and, as relevant, a demonstration that the
methodology used is consistent with the principles prescribed in this notice. For
example, if the taxpayer acquires a 10-percent interest in a business entity that directly
or indirectly owns assets that, if acquired directly, would consist of both permitted and
non-permitted investments, an analysis of the allocation of the expenditure between
permitted and non-permitted assets under the principles described in section 5.06 of
this notice is required.
(ii) A copy of the domestic reinvestment plan and any supporting documents.
(iii) In the case of a cash dividend that is effectuated through an intermediary
partnership (as described in section 3.02 of this notice) that is foreign and is not
30

required under section 6031 to file an information return, substantiation that the
applicable requirements set forth in section 3.02 of this notice (regarding allocations
under sections 702 and 704, and the separate statement of items pursuant to §1.7021(a)(8)(ii)) were met.

.03 Safe Harbor
(a) In General. If a taxpayer meets the requirements under sections 8.03(b),
8.03(c), and 8.03(d) of this notice, then the taxpayer will have established to the
satisfaction of the Commissioner that the amount of the dividend has been invested in
the United States pursuant to the domestic reinvestment plan as required under section
965(b)(4). This safe harbor is not the exclusive method of satisfying the Commissioner.
If the safe harbor is not met, the determination will be made under a facts and
circumstances analysis described in section 8.04 of this notice.
(b) Substantive Requirements. Expenditures comprising at least 60 percent of
the amount of total funds with respect to permitted investments to be made pursuant to
the domestic reinvestment plan meet both of the following requirements:
(i) Such expenditures have been made, or are the subject of a binding contract or
commitment entered into with persons unrelated to the taxpayer (within the meaning of
section 267(b), other than section 267(b)(8)), by the end of the second taxable year
following the taxable year for which the taxpayer elected to apply section 965; and -(ii) Such expenditures constitute permitted investments listed in section 5 of this
notice (other than investments described in section 5.05(c) of this notice).
31

(c) Annual Reporting. The taxpayer satisfies the reporting requirements of
section 8.02(a) of this notice for the taxable year for which the taxpayer elected section
965 to apply and each of the two subsequent taxable years (unless all investments have
been made pursuant to the domestic reinvestment plan prior to the beginning of either
such taxable year) and includes in such reporting the representations set forth below, as
applicable:
(i) In an annual report filed for a taxable year no later than the second taxable
year following the taxable year to which the taxpayer elected to apply section 965,
representations -(A) that the requirements of section 8.03(b) of this notice have been met; and

(8) that the taxpayer intends to make the remaining amount of investments, if
any, pursuant to the domestic reinvestment plan no later than the end of the fourth
taxable year following the taxable year to which the taxpayer elected to apply section
965.
A taxpayer may cease annual reporting pursuant to section 8.02(a) and this
section 8.03(c) after such statement including such representations is filed.
(ii) If the repayment of debt during the taxable year is intended to qualify as a
permitted investment pursuant to section 5.05(a) of this notice, representations -(A) That such repayment of debt contributes to the financial stabilization of the
taxpayer in the United States in accordance with section 5.05(a) of this notice;

(8) That at the time the domestic reinvestment plan was approved by the
taxpayer's president, chief executive officer, or comparable official, the taxpayer's
32

reasonable business judgment was that the financial stabilization resulting from such
repayment of debt will be a positive factor in its ability to retain and create jobs in the
United States in accordance with section 5.05(a) of this notice; and
(C) That, at the time of the repayment, the corporation had no plan or intent to
incur additional debt under substantially the same terms in accordance with section
5.05(a) of this notice.
(iii) If the satisfaction of an obligation to fund a qualified plan (within the meaning
of section 401 (a)) is intended to qualify as a permitted investment pursuant to section
5.05(b) of this notice, representations -(A) That such satisfaction of a qualified plan funding obligation contributes to the
financial stabilization of the taxpayer in accordance with section 5.05(b) of this notice;
and
(8) That at the time the domestic reinvestment plan was approved by the
taxpayer's president, chief executive officer, or comparable official, the taxpayer's
reasonable business judgment was that the financial stabilization resulting from such
satisfaction of a qualified plan funding obligation will be a positive factor in its ability to
retain and create jobs in the United States in accordance with section 5.05(b) of this
notice.
(d) Documentation and Production. The taxpayer satisfies the documentation ani
production requirements of section 8.02(b) of this notice .

.04 Facts and Circumstances

(a) In General. If a taxpayer does not satisfy the safe harbor described in section
8.03 of this notice, the taxpayer must establish to the satisfaction of the Commissioner
that, taking into account the facts and circumstances, the amount of the dividend has
been, or will be, invested in the United States pursuant to the domestic reinvestment
plan as required under section 965(b}(4}. The fact that the safe harbor has not been
satisfied, however, is not relevant in determining whether the dividend has been
invested in the United States pursuant to the domestic reinvestment plan as required
under section 965(b}(4}. Among the facts and circumstances that may be relevant in
establishing to the satisfaction of the Commissioner that the amount of the dividend has
been invested in the United States pursuant to the domestic reinvestment plan as
required under section 965(b}(4} are those in sections 8.04(b), 8.04(c), and B.04(d) of
this notice.
(b) Relevant Facts and Circumstances. Relevant facts and circumstances for
purposes of this section 8.04 include:
(i) The time period prescribed in the domestic reinvestment plan, taking into
account the nature of the investments to be made in the United States and other facts
and circumstances, during which the taxpayer anticipates completing all investments to
be made pursuant to the domestic reinvestment plan. See section 4.03 of this notice.
(ii) The degree of specificity used in the domestic reinvestment plan describing
anticipated permitted investments. See section 4.03 of this notice.
(iii) The extent to which the taxpayer has completed the investment of the
dividend in the United States as required under section 965(b)(4), taking into account
34

the nature of the investments to be made in the United States and other facts and
circumstances.
(c) Annual Reporting. Relevant facts and circumstances also include the extent
to which the taxpayer has complied with the reporting requirements described in section
8.02(a) of this notice, and whether the taxpayer includes in an annual report filed for the
taxable year no later than the second taxable year following the taxable year to which
the taxpayer elected to apply section 965 the following representations:
(i) that the taxpayer will agree, upon a request by the Commissioner, to enter into
an agreement to extend the statute of limitations on assessment and collection with
respect to the ORO claimed under section 965(a) for the taxable year to which the
taxpayer elected to apply section 965; and
(ii) that the taxpayer will agree, upon a request by the Commissioner, to enter
into a multi-year agreement with respect to the taxpayer's completion of the domestic
reinvestment plan.
An agreement entered into with the Commissioner may determine the extent of
any continuing reporting and documentation requirements pursuant to this section
8.04(c) and section 8.04(d) of this notice.
(d) Documentation and Production. Relevant facts and circumstances also
include the extent to which the taxpayer satisfies the documentation and production
requirements of section 8.02(b) of this notice.

SECTION 9: TRANSITION RULES

.01 In General.
All domestic reinvestment plans are subject to the guidance provided in this
notice. Thus, for example, expenditures described in Section 6 of this notice are nonpermitted investments, even if such expenditures were made prior to the issuance of
this notice .

.02 Dividends Paid Prior to January 13, 2005.
If a domestic reinvestment plan approved prior to January 13, 2005 is not in
conformity with the guidance provided in this notice, the taxpayer may modify such plan
to comply with the guidance herein not later than March 14,2005, even if the dividend
(or dividends) to which the plan relates has already been paid. Any domestic
reinvestment plan that is so modified must be subsequently approved by the taxpayer's
president, chief executive officer, or comparable official, and by the taxpayer's board of
directors, management committee, executive committee, or similar body .

.03 Tax Returns Filed Prior to January 13, 2005.
A taxpayer that has filed its tax return for the taxable year for which it elects
section 965 to apply prior to January 13, 2005 may satisfy the reporting requirements of
sections B.02(a), B.03(c) or B.04(c) of this notice on an amended tax return that is filed
by the due date (including extensions) of the tax return for such taxable year.

SECTION 10: EFFECTIVE DATE
This notice is effective for the taxable year for which taxpayers have
elected section 965 to apply, and subsequent taxable years as relevant.

SECTION 11: PAPERWORK REDUCTION ACT
The collections of information contained in this notice have been reviewed and
approved by the Office of Management and Budget in accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number 1545-1926.
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.
The collections of information are in sections 7, 8, and 9 of this notice. This
information is required to provide the IRS sufficient information to determine whether a
taxpayer has properly elected to apply section 965 to a taxable year, to determine
whether a dividend has been invested in the United States pursuant to a domestic
reinvestment plan under section 965(b)(4), and to determine whether a taxpayer has
properly applied certain transition rules. The collections of information are required to
obtain the benefit of section 965 for a taxable year. The likely respondents are business
corporations.
Estimated total annual reporting and/or recordkeeping burden: 3,750,000 hours.
Estimated average annual burden hours per respondent: 150 hours.
Estimated number of respondents: 25,000.
37

Estimated annual frequency of responses: on occasion and annually.

The collections of information contained in this notice have been submitted to the
Office of Management and Budget for review in accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the collections of information
should be received by February 14,2005. Comments are specifically requested
concerning:
Whether the proposed collections of information are necessary for the proper
performance of the functions of the Internal Revenue Service, including whether the
information will have practical utility;
The accuracy of the estimated burden associated with the proposed collections
of information (see below);
How the quality, utility, and clarity of the information to be collected may be
enhanced;
How the burden of complying with the proposed collections of information may be
minimized, including through the application of automated collection techniques or other
forms of information technology; and
Estimates of capital or start-up costs and costs of operation, maintenance, and
purchase of services to provide information.
Comments concerning the accuracy of the burden estimate and suggestions for
reducing the burden of the final or temporary regulations should be sent to the Office of
Management and Budget, Attn: Desk Officer for the Department of the Treasury,

Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the
Internal Revenue Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:T:T:SP,
Washington DC 20224.
Books or records relating to a collection of information must be retained as long
as their contents may become material in the administration of any internal revenue law.
Generally, tax returns and tax return information are confidential, as required by 26
U.S.C.6103.

SECTION 12: DRAFTING INFORMATION
The principal author of this notice is Jeffrey L. Vinnik of the Office of Associate
Chief Counsel (International). However, other personnel from the IRS and the Treasury
Department participated in its development. For further information regarding this
notice contact Mr. Vinnik at (202) 622-3840 (not a toll-free call).

DEPARTMENT OF THE TREASURY
Office of Public Affairs
January 13, 2005

FACT SHEET:
Guidance on Repatriation of Foreign Earnings Under the American Jobs Creation Act
Overview:
The Treasury Department and IRS today announced the first in a series of notices that
will provide detailed guidance for U.S. companies planning to repatriate earnings from
overseas subsidiaries subject to the temporary reduced tax rate available under the
American Jobs Creation Act (AJCA). The notice released today gives guidance to
companies on how to satisfy the domestic reinvestment plan requirement and on the
kinds of investments in the United States for which the repatriated funds may be used
under this provision.

Background:
Internal Revenue Code Section 965, enacted as part of the AJCA in October 2004, is a
temporary provision that allows U.S. companies to repatriate earnings from their foreign
subsidiaries at a reduced tax rate provided that the specified conditions and restrictions
are satisfied. Section 965 provides that U.S. companies may elect, for one taxable year,
an 85% dividends received deduction for eligible dividends from their foreign
subsidiaries.
Section 965 contains several limitations on the repatriated dividends that are eligible for
the reduced tax rate. One such requirement is that the repatriated funds must be invested
by the company in the United States pursuant to a domestic reinvestment plan approved
by company management before the funds are repatriated. Today's notice focuses on this
requirement and provides detailed guidance to assist companies in satisfying this
requirement.

How it works:
~

Under the new law, for one year only, companies that repatriate earnings from
foreign subsidiaries to the United States and meet the specified requirements are
subject to a reduced tax rate on the repatriated earnings.
Before repatriating the earnings, the company must have a domestic reinvestment
plan for such earnings that is approved by the company's CEO or President and is
subsequently approved by its board of directors.
There are limits on what constitutes an investment in the United States as required
under this provision.

Domestic Reinvestment Plan:
The domestic reinvestment plan must be approved by the company's president, CEO, or
comparable official before the dividend is paid. The plan must also be approved

subsequently by the company's board of directors, management committee, executive
committee, or similar body.
The plan must describe specific anticipated investments in the United States. There is no
required form or template that must be used for the plan. The plan must describe the
anticipated U.S. investments in reasonable detail and specificity.
The plan must state a reasonable time period during which the company anticipates
completing the investments. The plan may provide for alternative investments to be
made if the principal investments specified cannot be made. The plan must state the total
dollar amount for each principal investment.
Permitted investments:
Section 965 identifies types ofU.S. investments for which repatriatedfunds may be used
under a domestic reinvestment plan.
Today's notice provides guidance on the following U.S. investments:
./ Hiring and training workers
./ Infrastructure and capital investments
./ Research and development
./ Financial stabilization for the purposes of U.S. job retention or creation
o This would include debt repayment and the funding of qualified
benefit plan obligations
./ Certain acquisitions of business entities with U.S. assets
./ Advertising and marketing
./ Acquisition of rights to intangible property, such as a patent rights
Expenditures that are not permitted investments:
Some expenditures do not constitute investments for which repatriated funds may be used
under a domestic reinvestment plan.
Today's notice provides guidance on the following non-permitted investments:
./ Executive compensation
./ Intercompany transactions
./ Dividends and other shareholder distributions
./ Stock redemptions
./ Portfolio investments
./ Debt instruments
./ Tax payments
Neither the list ofpermitted investments nor the list of non-permitted investments is
exhaustive.
Administrative guidance:
The election to apply the section 965 repatriation provision is made by attaching an
election form or statement to the tax return for the year.

Information must be reported to the IRS annually regarding investments made under a
domestic reinvestment plan.
A safe harbor, based on a showing of progress toward completion of the planned u.s.
investments, may be used to establish that the domestic reinvestment plan requirement
has been satisfied.

QUESTIONS AND ANSWERS
When is the provision effective?
The provision generally applies to the first taxable year beginning on or after the October
22,2004 enactment (which means 2005 for calendar-year taxpayers). Alternatively, the
provision could be applied to the preceding taxable year (which means 2004 for calendaryear taxpayers).
Exactly what is the tax reduction to companies on the foreign earnings they
repatriate?
The U.S. company is permitted to deduct 85% of the repatriated dividends. If the
company is subject to the 35% corporate tax rate on the other 15% of the repatriated
amount, that represents effectively a 5.25% tax rate on the total repatriated dividend.
Do firms have to use the tax break in 2005 or could they save it and use it in 2006 or
in later years?
The provision applies only for the year specified and cannot be used in later years.
Are companies required to use the exact funds they repatriate to make the required
U.S. investment?
No, companies are not required to trace or segregate the repatriated funds. Companies
simply must demonstrate that an amount equal to the amount of repatriated funds is
invested under the domestic reinvestment plan.
Do the investments have to be completed in a specific time frame? Do they have to
be completed in the same year that the company takes the tax break?
No, there is no specific time limit for making the investments. Investments may be
completed in a tax year after the year in which the funds are repatriated. The domestic
reinvestment plan must state a reasonable time period anticipated for completion of the
investments.

Does payment of tort liabilities qualify as a permitted use of repatriated funds?
Today's notice provides general guidance on the domestic investment of repatriated funds
and provides specific guidance on several categories of permitted and non-permitted
investments. The investments addressed in the guidance are illustrative and the guidance
is not intended to provide an exhaustive list. The notice does not specifically address
expenditures for tort liabilities. The notice does provide general guidance that
expenditure for financial stabilization for domestic job retention or creation is a permitted
use, which could encompass payments to satisfy a company's outstanding liabilities.

JS-219G~

Pinancial Literacy and Education Commission Holds Fourth Meeting

Page 1 of2

PF-llSS HOOM

FROM THE OFFICE OF PUBLIC AFFAIRS
January 13, 2005
JS-2196

Financial Literacy and Education Commission Holds Fourth Meeting
Treasury Assistant Secretary for Financial Institutions Wayne Abernathy today
opened the fourth meeting of the Financial Literacy and Education Commission.
Abernathy welcomed Commission representatives and thanked them for their hard
work in establishing a national financial education toll-free hotline and Web site, as
well as for working toward the development of the first ever national strategy for
financial education. Abernathy was joined by Treasury's Deputy Assistant Secretary
for Financial Education Dan lannicola, as well as guest speakers and leaders in the
financial services community including Rep. Judy Biggert (IL), United States Mint
Director Henrietta Holsman Fore, National Credit Union Administration Chairman
JoAnn Johnson, Commodity Futures Trading Commission Chairman Sharon
Brown-Hruska, and Comptroller of the Currency Julie Williams.
"I'd like to commend the 20 agencies represented here for the continued
commitment each has demonstrated to improving financial education, and in
particular for successfully launching wwwmymoney.gov and the 1-888-mymoney
toll-free hotline," said Abernathy. "Special thanks to Chairman JoAnn Johnson and
her staff at the National Credit Union Administration for hosting the MyMoney
launch at NCUA headquarters this October."
Abernathy highlighted the Commission's important work in developing a national
strategy for financial education, and thanked those who responded to a request for
public comment on the national strategy. "The insightful comments we received
from individuals, government, private, non-profit and local organizations have
provided the Commission with valuable insights for developing the national
strategy," he said.
In her address to the Commission, United States Mint Director Henrietta Holsman
Fore remarked on the important work the Commission is undertaking and on the
Mint's support through its financial education initiatives. "The Commission
recognizes that a good credit rating, good money management and saving for the
future sets a person on the road to a stable, prosperous life," said Director Fore. "At
the United States Mint, we have an extensive educational outreach program for
children, called H.I.P. Pocket Change, that not only uses coins to teach history,
mathematics and geography, but also financial literacy."
Rep. Biggert expressed her commitment to raising levels of financial literacy and
the need for solid personal finance skills to help improve lives. "If our young people
learn how to manage money, credit, and debt, they can become responsible
workers, heads of households, investors and business leaders," said Rep. Biggert.
"But financial literacy is a lifelong process, and it's crucial that we continue our
efforts to reach out to people of all ages and economic backgrounds."
The Commission heard from the toll-free hotline and Web site subcommittees on
the launch of www.mymoneygov and 1-888-mymoney in English and Spanish.
Commodity Futures Trading Commission Chairman Sharon Brown-Hruska also
presented comments on the Web site's launch, milestones and future
enhancements.
Federal Deposit Insurance Corporation Deputy Director for Compliance and
Consumer Protection Donna J. Gambrell presented comments on the launch of the
toll-free hotline, caller feedback and continued promotion
Treasury's Deputy Assistant Secretary for Financial Education Dan lannicola also
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JS-2196~ P;n~ncial

Literacy and Education Commission Holds Fourth Meeting

Page 2 of2

commented on behalf of the Commission's national strategy working group.
lannicola remarked on the Commission's progress to date in developing the
national strategy. lannicola stated that the national strategy working group is
working diligently toward its completion in summer of 2005.
Other guest speakers also discussed financial education best practices in their
organizations including: Securities and Exchange Commission's Director for
Investor Education, Susan Ferris Wyderko; Citigroup's Office of Financial Education
Director, Dara Duguay; Students In Free Enterprise President and CEO, Alvin
Rohrs; and United Parcel Service Corporate Compensation Manager, Steven Nord.
The Financial Literacy and Education Commission was created by Title V of the
Fair and Accurate Credit Transactions Act, signed by President Bush on December
4, 2003. The Commission is composed of the Secretary of the Treasury and the
heads of the Office of the Comptroller of the Currency; the Office of Thrift
Supervision; the Federal Reserve; the Federal Deposit Insurance Corporation; the
National Credit Union Administration; the Securities and Exchange Commission;
the Departments of Education, Agriculture, Defense, Health and Human Services,
Housing and Urban Development, Labor, and Veterans Affairs; the Federal Trade
Commission; the General Services Administration; the Small Business
Administration; the Social Security Administration; the Commodity Futures Trading
Commission; and the Office of Personnel Management.
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.tleas.gov/financlaledllcation.

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4/22/2005

JS-21 CfJ~

Tre~sury

am] IRS Release Guidance Clarifying the Tax Treatment ofHSA ...

Page 1 of 1

PHLSS HOOM

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Al/oile r,) Auu/Jal") Redc/el").

January 11 , 2005
JS-2197
Treasury and IRS Release Guidance Clarifying the Tax
Treatment of HSA Contributions by Partnerships and S corporations
WASHINGTON, DC -- The Treasury Department and the IRS todrlY issued
guidance clarifying the tax treatment of a partnership's contributions to a partner's
Health Savings Account (HSA) and an S corporation's contributions to a 2-percent
(or greater) shareholder-employee's HSA. Generally, in such cases, the HSA
contributions are treated as payments to the partner or shareholder and are not
treated as excludable employer contributions. The contributions will be treated as
the individual partner's or shareholder's contribution and allowed as above-the-line
deductions on their individual income tax returns, similar to the treatment for any
eligible individual who makes a contribution to an HSA directly with after-tax funds.
The guidance also addresses the employment tax treatment of the contributions.

REPORTS
•

A copy ot the gUidance

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4/22/2005

Part III - Administrative, Procedural, and Miscellaneous
Health Savings Accounts - Partnership contributions to a partner's Health
Savings Account (HSA); S corporation contributions to a 2-percent shareholderemployee's HSA.
Notice 2005-8
PURPOSE
This notice provides guidance on a partnership's contributions to a partner's
Health Savings Account (HSA) and an S corporation's contributions to a 2percent shareholder-employee's HSA.
BACKGROUND
Section 1201 of the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003, Pub. L. No. 108-173, added section 223 to the
Internal Revenue Code to permit eligible individuals to establish Healh Savings
Accounts (HSAs) for taxable years beginning after December 31, 2003.
Generally, contributions made to an HSA, within permissible limits, by or on
behalf of a taxpayer who is an eligible individual are deductible by a taxpayer
under section 223(a). The deduction is an adjustment to gross income (Le., an
above the line deduction) under section 62(a)(19). If an employer makes a
contribution, within permissible limits, to the HSA on behalf of an employee who
is an eligible individual, the contribution is excluded from the employee's gross
income and wages. See section 106(d). A partnership may also contribute to a
partner's HSA and an S corporation may contribute to the HSA of a 2-percent
shareholder-employee (as defined below). The Questions and Answers below
discuss the tax treatment of HSA contributions made on behalf of such partners
and 2-percent shareholder-employees who are eligible individuals.
QUESTIONS AND ANSWERS

0-1. What is the tax treatment of a partnership's contributions to a partner's HSA
that are treated as distributions to the partner under section 731?
A-1. Contributions by a partnership to a bona fide partner's HSA are not
contributions by an employer to the HSA of an employee. See Rev. Rul. 69-184,
1969-1.C.B. 256. Contributions by a partnership to a partner's HSA that are
treated as distributions to the partner under section 731 are not deductible by the
partnership and do not affect the distributive shares of partnership income and
deductions. See Rev. Rul. 91-26,1991-1 C.B. 184 (analysis of situation 1, last

paragraph). The contributions are reported as distributions of money on
Schedule K-1 (Form 1065). These distributions are not included in the partner's
net earnings from self-employment under section 1402(a) because the
distributions under section 731 do not affect a partner's distributive share of
partnership income or loss under section 702(a)(8). The partner, if an eligible
individual as defined in section 223(c)(1), is entitled under sections 223(a) and
62(a)(19) to deduct the amount of the contributions made to the partner's HSA
during the taxable year as an adjustment to gross income on his or her federal
income tax return.

Q-2. What is the tax treatment of a partnership's contributions to a partner's HSA
that are treated as guaranteed payments under section 707(c), are derived from
the partnership's trade or business, and are for services rendered to the
partnership?
A-2. Contributions by a partnership to a bona fide partner's HSA are not
contributions by an employer to the HSA of an employee. See Rev. Rul. 69-184.
Contributions by a partnership to a partner's HSA for services rendered to the
partnership that are treated as guaranteed payments under section 707(c) are
deductible by the partnership under section 162 (if the requirements of that
section are satisfied (taking into account the rules of section 263)) and are
includible in the partner's gross income. The contributions are not excludible
from the partner's gross income under section 106( d) because the contributions
are treated as a distributive share of partnership income under Treas. Reg. §
1.707-1 (c) for purposes of all Code sections other than sections 61 (a) and
162(a). See Rev. Rul. 91-26. Contributions by a partnership to a partner's HSA
that are treated as guaranteed payments under section 707(c), are reported as
guaranteed payments on Schedule K-1 (Form 1065). Because the contributions
are guaranteed payments that are derived from the partnership's trade or
business, and are for services rendered to the partnership, the contributions are
included in the partner's net earnings from self-employment under section
1402(a) on the partner's Schedule SE (Form 1040). The partner, if an eligible
individual as defined in section 223(c)(1), is entitled under sections 223(a) and
62(a)(19) to deduct the amount of the contributions made to the partner's HSA
during the taxable year as an adjustment to gross income on his or her federal
income tax return.
The following example illustrates the answers in A-1 and A-2.
Example. Partnership is a limited partnership with three equal individual
partners, A (a general partner), B (a limited partner), and C (a limited partner). C
is to be paid $500 annually for services rendered to Partnership in his capacity as
a partner and without regard to Partnership income (a section 707(c) guaranteed
payment). The $500 payment to C is derived from Partnership's trade or
business. Partnership has no employees. A, B, and C are eligible individuals as

defined in section 223(c)(1) and each has an HSA. During Partnership's Year 1
taxable year, Partnership makes the following contributions: a $300 contribution
to each of A's and B's HSAs which are treated by Partnership as section 731
distributions to A and B; and a $500 contribution to C's HSA in lieu of paying C
the guaranteed payment directly.
Partnership's contributions to A's and B's HSAs are not deductible by Partnership
and, therefore, do not affect Partnership's calculation of its ta xable income or
loss. See Rev. Rul. 91-26. A and B are entitled to an above the line deduction,
under sections 223(a) and 62(a)(19), for the amount of the contributions made to
their individual HSAs. The section 731 distributions to A's and B's individual
HSAs are reported as cash distributions to A and B on A's and B's Schedule K-1
(Form 1065). The distributions to A's and B's HSAs are not includible in A's and
B's net earnings from self employment under section 1402(a), because
distributions under section 731 do not affect a partner's distributive share of the
partnership's income or loss under section 702(a)(8).
Partnership's contribution to C's HSA that is treated as a guaranteed payment
under section 707(c) for services rendered to the partnership is deductible by
Partnership under section 162 (if the requirements of that section are satisfied
(taking into account the rules of section 263)) and is includible in C's gross
income. The contribution is not excludible from C's gross income under section
106( d) because the contribution is treated as a distributive share of partnership
income for purposes of all Code sections other than sections 61 (a) and 162(a),
and a guaranteed payment to a partner is not treated as compensation to an
employee. See Rev. Rul. 91-26. The payment to C's HSA should be reported as
a guaranteed payment on Schedule K-1 (Form 1065). Because the contribution
is a guaranteed payment that is derived from the partnership's trade or business
and is for services rendered to the partnership, the contribution constitutes net
earnings from self-employment to C under section 1402(a) which should be
reported on Schedule SE (Form 1040). C is entitled under sections 223(a) and
62(a)(19) to deduct as an adjustment to gross income the amount of the
contribution made to C's HSA.
Q-3. What is the tax treatment of an S corporation's contributions to the HSA of
a 2-percent shareholder (as defined in section 1372(b)) who is also an employee
(2-percent shareholder-employee) in consideration for services rendered to the S
corporation?
A-3. Under section 1372, for purposes of applying the provisions of Subtitle A
that relate to fringe benefits, an S corporation is treated as a partnership, and any
2-percent shareholder of the S corporation is treated as a partner of such
partnership. Therefore, contributions by an S corporation to an HSA of a 2percent shareholder-employee in consideration for services rendered are treated
as guaranteed payments under section 707(c). Accordingly, the contributions
are deductible by the S corporation under section 162 (if the requirements of that

section are satisfied (taking into account the rules of section 263)) and are
includible in the 2-percent shareholder-employee's gross income. In addition, the
2-percent shareholder-employee is not entitled to exclude the contribution from
gross income under section 106(d). See Rev. Rul. 91-26.
For employment tax purposes, when contributions are made by an S corporation
to an HSA of a 2-percent shareholder-employee, the 2-percent shareholderemployee is treated as an employee subject to Federal Insurance Contributions
Act (FICA) tax and not as an individual subject to Self-Employment Contributions
Act (SECA) tax. (See Announcement 92-16, 1992-5 I.R.B. 53, clarifying the
FICA (Social Security and Medicare) tax treatment of accident and health
premiums paid by an S corporation on behalf of a 2-percent shareholderemployee.) However, if the requirements for the exclusion under section
3121(a)(2)(B) are satisfied, the S corporation's contributions to an HSA of a 2percent shareholder-employee are not wages subject to FICA tax, even though
the amounts must be included in wages for income tax withholding purposes on
the 2-percent shareholder-employee's Form W-2, Wage a nd Tax Statement.
The 2-percent shareholder-employee, if an eligible individual as defined in
section 223(c)(1), is entitled under sections 223(a) and 62(a)(19) to deduct the
amount of the contributions made to the 2-percent shareholder-employee's HSA
during the taxable year as an adjustment to gross income on his or her federal
income tax return. See Notice 2004-2, Q&A 19, 2004-2 I.R.B. 269, for
employment tax rules for employer contributions to HSAs of employees other
than 2-percent shareholder-employees.
DRAFTING INFORMATION
The principal authors of this notice are Elizabeth Purcell of the Office of Division
Counsel/Associate Chief Counsel (Tax Exempt and Government Entities) and
Pietro E. Canestrelli of the Office of Associate Chief Counsel (Passthroughs and
Special Industries). For further information regarding HSA issues in this notice,
contact Ms. Purcell on (202) 622-6080. For information regarding partnership or
S corporation issues, contact Mr. Canestrelli on (202) 622-3060 (not toll-free
calls).

PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
January 17,2005
2005-2-10-16-26-6-17231

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 $85,772 million as of the end of that week, compared to $85,289 million as of the end of the prior week.

I. Official U.S. Reserve Assets (in US millions)
TOTAL
1. Foreign Currency Reserves

a. Securities

January 71 2005

January: 14, 2005

85,289

85,772

Euro

Yen

TOTAL

Euro

Yen

TOTAL

11,934

14,991

26,925

11,989

15,346

27,335

Of which, issuer headquartered in the US.

b. Total deposits with:
11,715

b.i. Other central banks and BIS

3,013

14,728

11.759

3,084

14,843

b.ii. Banks headquartered in the US.

b.ii. Of which, banks located abroad

b.iii. Banks headquartered outside the US.

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

19,203

19,177

13,390

13,372

11,043

11,045

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
January: 141 2005

January 7,2005
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.a. Short positions
2.b. Long positions

3. Other

o
o

o
o
o

III. Contingent Short-Term Net Drains on Foreign Currency Assets
January 7, 2005
Euro
1. Contingent liabilities in foreign currency

Yen

January 14, 2005
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:

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 exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.

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

js-2198: Treasury InternaTional Capital (TIC) Data for November

Page 1 of2

PRLSS HOOM

FROM THE OFFICE OF PUBLIC AFFAIRS
We recommend printing this release using the PDF file below.
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January 18, 2005
js-2198

Treasury International Capital (TIC) Data for November
Treasury International Capital (TIC) data for October are released today and posted on the US. Treasury web site (w
which will report on data for December, is scheduled fOi February 15, 2005.

Long-Term Domestic Securities
Gross purchases of domestic securities by foreigners were $1,411.7 billion in November, exceeding gross sales of de
$1,312.0 billion during the same month.
Foreign purchases of domestic securities reached $99.7 billion on a net basis in November, relative to $65.4 billion dl
flows reached $71.8 billion in November. Net private purchases of Treasury Bonds and Notes increased to $11.0 billil
Net private purchases of Government Agency Bonds were $24.4 billion, up from $22,9 billion the previous month, Ne
rose to $23,5 billion from $18.2 billion the previous month. Net private purchases of Equities rose to $13.0 billion fronr
Official net purchases of U.S. securities were $27.9 billion in November, relative to $14.9 billion in October. Official nE
of $21.0 billion accounted for the bulk of official inflows in November, up from $15.6 billion the previous month.

Long-Term Foreign Securities
Gross purchases of foreign securities owned by U,S. residents wme $270,0 billion in November, relative to gross salE
$288.7 billion during the same month.
Gross sales of foreign securities to U.S. reSidents exceeded purchases by $18,7 billion, highlighting net foreign sales
$2.6 billion In Foreign Bonds to U.S. residents.

Net Long-Term Securities Flows
Net foreign purchases of both domestic and foreign long-term securities from U.S. residents were $81.0 billion in Nov
October. Net foreign purchases of long-term securities were $827.8 billion in the 12-months through November 2004
twelve months through November 2003.
The full data set, including adjustments for repayments of principal on asset-backed securities, as well as historical
wwwtreasgov/tlC!.

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

Foreigners' Transactions in Long-Term Securities with U.S. R
(Billions of dollars, not seasonally adjusted)
2003

12 Months Through
Nov-03 Nov-04

13,022.9 14,374.7
12,475.4 13,628.8

14,268.8 15,117.1
13,555.4 14,206.3

2002
1 Gross Purchases of Domestic Securities
2 Gross Sales of Domestic Securities
3 Domestic Securities Purchased, net (line 1 less line

httJl'/treasgov!press!rclefises!Js 2198. htm

547.6

745.9

713.5

910.9

4/22/2005

js-2198: Treasury Inlernational Capital (TIC) Data for November
4
5
6
7

Page 20f2

Private, net /2
Treasury Bonds & Notes, net
GOy't Agency Bonds, net
Corporate Bonds, net
Equities, net

508.3
112.8
166.6
176.7
52.2

602.8
160.5
140.9
263.3
38.2

574.3
148.0
141.6
256.7
27.9

671.2
171.2
198.2
269.9
32.0

9
10
II
12
13

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

143.1
113.5
24.3
5.6
-0.3

139.2
111.1
23.4
5.0
-0.2

239.6
204.8
23.7
10.4
0.7

2,640.0
2,613.0

2,891.0
2,953.4

2,869.9
2,936.0

3,146.9
3,230.0

27.0

-62.3

-66.0

-83.1

28.5
-1.5

20.1
-82.4

12.2
-78.2

7.5
-90.6

574.6

683.6

647.4

827.8

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 Purchascd, net

17
18
19

Net foreign purchases of U.S. securities (+)
Includes International and Regional Organizations
Net U.S. acquisitions offoreign securities (-)

/l
12
13

Source: U.S. Department of the Treasury

REPORTS
•

(PDF) Foreigners' Transactions in Long-Term Securities with U.S. Residents (Billions of dollars, not s(

DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
January 18, 2005
EMBARGOED UNTIL 9:00 AM

Contact:

Tony Fratto
202-622-2910

TREASURY INTERNATIONAL CAPITAL DATA FOR NOVEMBER
Treasury International Capital (TIC) data for November are released today and posted on the
U.S. Treasury web site (www.treas.gov/tic). The next release date, which will report on data for
December, is scheduled for February 15,2005.
Long-Term Domestic Securities
Gross purchases of domestic securities by foreigners were $1,411.7 billion in November,
exceeding gross sales of domestic securities by foreigners of $1,312.0 billion during the same
month.
Foreign purchases of domestic securities reached $99.7 billion on a net basis in November,
relative to $65.4 billion during the previous month. Private net flows reached $71.8 billion in
November. Net private purchases of Treasury Bonds and Notes increased to $11.0 billion from
$5.2 billion the preceding month. Net private purchases of Government Agency Bonds were
$24.4 billion, up from $22.9 billion the previous month. Net private purchases of Corporate
Bonds rose to $23.5 billion from $18.2 billion the previous month. Net private purchases of
Equities rose to $13.0 billion from $4.2 billion.
Official net purchases of U.S. securities were $27.9 billion in November, relative to $14.9 billion
in October. Official net purchases of Treasury Bonds and Notes of $21.0 billion accounted for
the bulk of official inflows in November, up from $15.6 billion the previous month.
Long-Term Foreign Securities
Gross purchases of foreign securities owned by U.S. residents were $270.0 billion in November,
relative to gross sales of foreign securities to U.S. residents of$288.7 billion during the same
month.

Gross sales of foreign securities to U.S. residents exceeded purchases by $18.7 billion,
highlighting net foreign sales of $16.1 billion in Foreign Equities and $2.6 billion in Foreign
Bonds to U.S. residents.
Net Long-Tenn Securities Flows
Net foreign purchases of both domestic and foreign long-tenn securities from U.S. residents
were $81.0 billion in November compared with $48.3 billion in October. Net foreign purchases
oflong-tenn securities were $827.8 billion in the 12-months through November 2004 as
compared to $647.4 billion during the twelve months through November 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.gov/tic/.

Foreigners' Transactions in Long-Term Securities with U.S. Residents
(Billions of dollars, not seasonally adjusted)
2003

12 Months Through
Nov-03 Nov-04

Aug-04

Sep-04

Oct-04

Nov-04

13,022.9 14,374.7
12,475.4 13,628.8
547.6
745.9

14,268.8 15,117.1
13,555.4 14.206.3
910.9
713.5

1,229.1
1,174.3
54.S

1,264.6
1,198.9
65.7

1,213.6
1,148.2
65.4

1,411.7
1,312.0
99.7

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

50S.3
112.8
166.6
176.7
52.2

602.S
160.5
140.9
263.3
38.2

574.3
148.0
141.6
256.7
27.9

671.2
171.2
198.2
269.9
32.0

35.6
-1.6
15.0
23.4
-\.2

51.4
5.7
6.2
42.3
-2.9

50.5
5.2
22.9
18.2
4.2

71.8
11.0
24.4
23.5
13.0

9
10
II
12
13

Official, net
Treasury Bonds & Notes, net
GOV'! Agency Bonds, net
Corporate Bonds, net
Equities, net

39.3
7.1
28.6
5.6
-2.0

143.1
113.5
24.3
5.6
-0.3

139.2
111.1
23.4
5.0
·0.2

239.6
204.8
23.7
10.4
0.7

19.2
15.5
2.5
1.1
0.1

14.3
10.9
2.2
1.2
0.0

14.9
15.6
-0.9
0.9
-0.7

27.9
21.0
3.5
1.9
1.5

2,640.0
2,613.0
27.0

2,891.0
2.953.4
-62.3

2,869.9
2,936.0
-66.0

3,146.9
3,230.0
-83.1

241.2
244.1
-3.0

243.2
247.8
-4.6

254.2
271.2
-17.1

270.0
288.7
-18.7

28.5
-1.5

20.1
-82.4

12.2
-78.2

7.5
-90.6

-3.2
0.2

-0.8
-3.8

-4.5
-12.6

-2.6
-16.1

574.6

683.6

647.4

827.8

51.8

61.\

48.3

81.0

14
IS
16
17
18

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)

II
12
13

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

JS-2199. Anna Escobedo CabrB.rto be Sworn in as U.S. Treasurer Secretary Snow and Se...

Page 1 of 1

PHlSS HOOM

FROM THE OFFICE OF PUBLIC AFFAIRS
January 18, 2005
JS-2199
Anna Escobedo Cabral to be Sworn in as U.S. Treasurer Secretary Snow and
Sen. Hatch to Deliver Remarks
Anna Escobedo Cabral will be sworn in by Treasury Secretary John W. Snow as
the 42nd U.S. Treasurer today at 3:30 p.m. EST in the Treasury Department's Cash
Room. U.S. Sen. Orrin G. Hatch will join Secretary Snow and Treasurer Cabral for
the ceremony.
As Treasurer, Cabral will advise the Secretary, Deputy Secretary, Director of the
United States Mint and the Director of the Bureau of Engraving and Printing on
matters relating to coinage, currency and the production of other instruments by the
United States. Cabral will also serve as a spokesperson for Treasury on a range of
issues before the Department. President Bush nominated her to the post on July
22, 2004 and the U.S. Senate confirmed Cabral on November 20,2004.
At teday's swearing in, Secretary Snow will deliver remarks about the role of the
U.S. Treasurer as it relates to financial education and financial literacy and he will
place special emphasiS on one of the great financial responsibilities of our nation:
strengthening Social Security for our children and grandchildren.
WHAT
Swearing In Ceremony for 42nd U.S. Treasurer
WHO
Treasury Secretary John W. Snow
Treasurer Anna Escobedo Cabral
Sen. Orrin G. Hatch
WHEN
January 19, 2005
3:30 p.m. (EST)
WHERE
Treasury Department
Cash Room
1500 Pennsylvania Avenue
Washington, D.C.
News media without Treasury press credentials planning to attend should contact
Frances Anderson in Treasury's Office of Public Affairs at (202) 528-9086 a.s.a.p.
today with the following information: name, Social Security number and date of
birth. This information may also be faxed to (202) 622-1999 or emailed to
francesanderson@do.tl·eas gov.

- 3.0 -

httJl'/treasgov!press!rcleases!Js 2199 .htm

4/22/2005

JS-220 l: Trea£ury ond IRS Issue Guidance on Manufacturing Deduction

Page 1 of 1

:·~~;~. 1

IJ
...... __~

PHLSS HOC)M

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on thIs page download the free /1r/llilt:,,! /\U( ,I)df') F~l.'cI(ir:I"'.

January 19, 2005
JS-2201

Treasury and IRS Issue Guidance on Manufacturing Deduction
WASHINGTON, DC - Today, the Treasury Department and IRS issued a Notice to
help taxpayers calculate the newly enacted deduction relating to domestic
production activities The Notice provides interim guidance on which taxpayers may
rely until regulations are issued.
The deduction relating to domestic production activities was enacted In October
2004 as part of the American Jobs Creation Act. The deduction generally equals
three percent of income from domestic production activities for 2005 and, by 2010,
nine percent of such income. The activities eligible for the deduction include not
only the manufacture of personal property such as clothing, goods, and food, but
also software development, film and music production, production of electricity,
natural gas, or water, construction, and engineering and architectural services.
The domestic productton activities deduction provides a tax savings on profits from
production activities in the United States. The deduction is a portion of the
taxpayer's profits from domestic production and increases proportionally as those
profits increase,
"The Notice provides comprehensive rules and definitions to assist taxpayers in
implementing this new provision," said Eric Solomon, Treasury's Acting Deputy
Assistant Secretary for Tax Policy, "The Treasury Department and IRS antiCipate
that forthcoming proposed regulations will incorporate the rules set forth in the
Notice. We request comments on the rules in the Notice and on any additional
guidance that should be provided in the proposed regulations."
"This provision has widespread impact across our complex economy" said IRS
Commissioner Mark W. Everson. "The guidance strikes a balance. It provides clear
practical guidelines that are administrable both from the taxpayers' and the IRS'
point of view."
A fact sheet providing further information on the Notice as well as a copy of the
Notice are attached.

REPORTS

•

199 - Fact Sheet GUlfJ?l11Ce 011 SectloCl Hl9

•

Notice 2005 - 14

httJl'/treasgov!press!rcleases!js 220 1.htm

4/22/2005

DEPARTMENT OF THE TREASURY
Office of Public Affairs
January 191 2005

FACT SHEET:
Guidance on Section 199 - Income Attributable to Manufacturing Activities.
Overview:
On January 19,2005, the Treasury Department and IRS issued a Notice under section
199 of the Internal Revenue Code regarding the deduction relating to income attributable
to domestic production activities. The Notice provides interim guidance on which
taxpayers may rely until proposed regulations are issued.

Background:
On October 22, 2004, President Bush signed into law the American Jobs Creation Act,
which included a tax benefit for certain domestic production activities.

When is the provision effective?
The provision is effective for taxable years beginning after December 31, 2004.
How is the deduction computed?
For 2005, the deduction equals three percent of the lesser of: (a) taxable income derived
from a qualified production activity; or (b) taxable income, for the taxable year.
However, the deduction for a taxable year is limited to 50 percent of the W-2 wages paid
by the taxpayer during the calendar year that ends in such taxable year. In 2010, when the
deduction is fully phased-in, the three percent rate will have increased to nine percent.
What constitutes a "qualified production activity?"
The following activities are qualified production activities:
• The manufacture, production, growth, or extraction in whole or significant part in
the United States of tangible personal property (e.g., clothing, goods, and food),
software development, or music recordings;
• Film production (with exclusions provided in the statute), provided at least 50
percent of the total compensation relating to the production of the film is
compensation for specified production services performed in the United States;
• Production of electricity, natural gas, or water in the United States;
• Construction or substantial renovation of real property in the United States
including residential and commercial buildings and infrastructure such as roads,
power lines, water systems, and communications facilities; or
• Engineering and architectural services performed in the United States and relating
to construction of real property.

How is taxable income derived from the manufacture, production, growth, or
extraction of tangible personal property determined?
Gross receipts derived from a lease, rental, license, sale, exchange, or other disposition of
tangible personal property manufactured, produced, grown, or extracted by the taxpayer
in whole or in significant part within the United States are reduced by allocable costs and
deductions.
What constitutes "in significant part"?
Property will be treated as manufactured by the taxpayer "in significant part" if:
• based on all of the taxpayer's facts and circumstances, the manufacturing,
production, growth, or extraction activity performed by the taxpayer in the United
States is substantial in nature; or
• the labor and overhead costs incurred by the taxpayer in the United States for the
manufacture, production, growth, and extraction of the property are at least
twenty percent of the taxpayer's total cost for the property.
For example, assume that a taxpayer purchases a small motor and various parts and
materials for $75 and incurs $25 in labor costs at its factory in the United States to
fabricate a plastic car body from the materials and to assemble a toy car. The taxpayer
also incurs packaging, selling and other costs of $2 and sells the toy car in 2005 for $112.
The toy car will be treated as manufactured by the taxpayer "in significant part" because
the taxpayer's labor costs are more than twenty percent of the taxpayer's total cost for the
toy car ($25/ ($25 + $75) = 25%). The taxpayer's domestic production activities
deduction will be three percent of the taxpayer's $10 profit on the toy car or 30¢ (3% *
($112-$75-$25-$2). If the sale occurred in 2010, when the deduction is fully phased in,
the deduction would be nine percent of the taxpayer's $10 profit on the car or 90¢ (9% *
($112-$75-$25-$2).
The domestic production activities deduction provides a tax savings on profits from
production activities in the United States. If a taxpayer has satisfied the "significant part"
test and the other requirements for the deduction, the deduction is a portion of the
taxpayer's profits from domestic production and increases as those profits increase.

Are packaging, design, and development activities taken into account in applying
the "significant part" test for tangible personal property?
Packaging, repackaging, labeling, and minor assembly operations are not taken into
account for purposes of the "significant part" test. Thus, a taxpayer cannot qualify for the
domestic production activities deduction if the taxpayer's only activities in the United
States are packaging and labeling property produced outside the United States. Design
and development activities also do not constitute manufacturing activities for purposes of
the "significant part" test for tangible personal property because these activities produce
an intangible asset (the design) rather than tangible personal property.
Is a contract manufacturer eligible for the deduction?
If one taxpayer performs manufacturing activities for another taxpayer, only the taxpayer
with the benefits and burdens of ownership of the tangible personal property during the

manufacturing process will be treated as the manufacturer. As a result, only one taxpayer
will be entitled to the deduction with respect to a manufacturing activity performed with
respect to an item of tangible personal property.

Are there any safe harbor or de minimis rules?
Several safe harbor and de minimis rules will reduce computational and recordkeeping
burdens, including:
• Simplified formulas to assist small taxpayers in determining taxable income from
qualifying activities;
• De minimis rules to avoid the difficulty of making revenue and expense
allocations as a result of small amounts of income from non-qualifying activities;
and
• Simplified formulas for determining a taxpayer's W-2 wages.
What construction activities qualify for the deduction?
Qualifying activities include construction and substantial renovation of real property,
including residential and commercial buildings and infrastructure such as roads, power
lines, water systems, and communications facilities.
The statute does not provide that qualifying gross receipts for construction activities must
be derived from a lease, rental, license, sale, exchange, or other disposition of the
property. As a result, a taxpayer engaged in construction activities may qualify for the
deduction even if the taxpayer does not have the benefits and burdens of ownership of the
property being constructed. Therefore, more than one taxpayer may be regarded as
constructing real property with respect to the same activity and the same construction
project. For example, a general contractor and a subcontractor may both be engaged in
construction activities with respect to the installation of a roof on a new building. Each
taxpayer's benefit will be a percentage of its profit on its work with respect to the
installation of the roof.
Gross receipts derived from the rental of real property that the taxpayer constructs are not
derived from construction, but rather are income for the use or forbearance of the
property. As a result, rental income for real property is not eligible for the qualified
production activities deduction. Gain on the later sale of the property may qualify for the
deduction if all other requirements are satisfied.

Does the preparation of food and beverages qualify for the deduction?
Food and beverages prepared at a retail establishment do not qualify for the deduction. A
retail establishment is real property used in the trade or business of selling food or
beverages to the public if retail sales occur at the facility. For example, a restaurant at
which food and beverages are prepared, sold, and served to customers would be a retail
establishment. However, the Treasury Department and IRS recognize that some retail
establishments prepare food and beverages for both wholesale and retail sale. As a result,
the Notice provides that even if a taxpayer's facility is a retail establishment, food or
beverages prepared at the facility and sold at wholesale are not considered prepared at a

retail establishment and the taxable income related to the wholesale transactions is
therefore eligible for the deduction.

How does a taxpayer compute W-2 wages for purposes of the wage limitation?
There are three alternative methods for computing W-2 wages. The first method permits
a taxpayer to use the lesser of the W-2 wages reported in Box I or Box 5 of Forms W-2.
Alternatively, there are two methods that, although more complex, provide a more
precise determination ofW-2 wages. The Notice provides that the W-2 wages are those
wages of common law employees of the taxpayer.

What income derived from computer software is eligible for the deduction?
In general, income from a lease, rental, license, sale, exchange, or other disposition of
software developed in the United States qualifies for the deduction, regardless of whether
the customer purchases the software off the shelf or takes delivery of the software by
downloading the software from the Internet. Computer software is not limited to
software for computers and includes, for example, video game software. However,
subject to certain de minimis rules, the following income does not qualify for the
deduction because the income is attributable to the provision of a service and is not
derived from a lease, rental, license, sale, exchange, or other disposition of the software:
• Fees for on-line use of software;
• Fees for customer support with respect to computer software;
• On-line services;
• Fees for telephone services provided in part through use of software;
• Fees for playing computer games on-line; and
• Provider-controlled online access services.

How does a partnership or S corporation compute the section 199 deduction?
The deduction attributable to the qualifying production activities of a partnership or S
corporation (pass-through entity) is determined at the partner or shareholder (partner)
level. As a result, each partner must compute its deduction separately. In general, each
partner is allocated its share of items (including items of income, gain, loss, and
deduction) allocable or attributable to qualifying production activities of the pass-through
entity, along with any other items of income, gain, loss, deduction or credit of the passthrough entity. The partner must aggregate its share of the items allocable or attributable
to the pass-through entity's qualified production activities, any expenses incurred by the
partner directly that are allocable to the pass-through entity's qualified production
activities, and items allocable or attributable to the partner's other qualified production
activities to determine its qualified production activities deduction for the taxable year.
Simplifying rules are provided for certain small partnerships.

How does a taxpayer allocate cost of goods sold and other deductions to qualifying
production activities?
If a taxpayer cannot specifically identify the cost of goods sold, the taxpayer may use a
reasonable method to determine the cost of goods sold related to the taxpayer's
qualifying production activities. If the taxpayer uses a method to determine the allocable

portion of its gross receipts derived from qualifying production activities, the taxpayer
must use the same method for purposes of determining the allocable cost of goods sold.
Two methods are provided for allocating deductions (other than cost of goods sold) to
qualified production activities:
• Method 1, which is available to all taxpayers and generally follows existing
rules applicable to taxpayers required to determine taxable income from
within and outside the United States; and
• Method 2, which is available to taxpayers with average annual gross receipts
(over the three prior years) of $25,000,000 or less, provides a simplified
formula that allocates deductions based on the ratio of the taxpayer's receipts
derived from qualifying production activities as compared to the taxpayer's
receipts from all sources.
Lastly, the Notice provides a third method for small taxpayers that allocates both cost of
goods sold and all other deductions based on the same ratio applicable to Method 2. This
third method is available to taxpayers with average annual gross receipts of $5,000,000 or
less and certain other small taxpayers permitted to use the cash method of accounting.

Will the Treasury Department and the IRS issue additional guidance regarding the
deduction?
The Treasury Department and IRS anticipate that forthcoming proposed regulations will
incorporate the rules set forth in the Notice. The Treasury Department and IRS request
comments on the rules contained in the Notice and any additional guidance that should be
provided in the regulations. Written comments must be received on or before March 31,
2005.

Part III - Administrative, Procedural, and Miscellaneous

Section 199.--lncome Attributable to Domestic Production Activities

Notice 2005-14
CONTENTS
SECTION 1. PURPOSE
SECTION
.01
.02
.03
.04
.05
.06
.07
.08
. 09

2. OVERVIEW OF § 199
In General.
Qualified Production Activities Income .
Pass-thru Entities .
Individuals .
Patrons of Certain Cooperatives .
Expanded Affiliated Groups .
Trade or Business Requirement.
Alternative Minimum Tax .
Authority to Prescribe Regulations.

SECTION 3. EXPLANATION OF INTERIM GUIDANCE
.01 In General.
.02 Wage Limitation.
(1) In general.
(2) Wages paid by other entities.
(3) Acquisitions and dispositions of a trade or business
(or major portion).
(4) Non-duplication rule.
(5) Definition of W-2 wages.
(a) In general.
(b) Methods for calculating W-2 wages .
.03 Determining Qualified Production Activities Income .
.04 Determining Domestic Production Gross Receipts
(1) In general.
(2) Definition of "gross receipts. "
(3) Definition of "manufactured, produced, grown, or extracted."
(a) In general.
(b) Consistency with § 263A.

JS-220~:

Anna J2scobedo Cabral Sworn in as U.S. Treasurer

Page 1 of 1

PHLSS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
January 19. 2005
JS-2203
Anna Escobedo Cabral Sworn in as U.S. Treasurer
Anna Escobedo Cabral was sworn in today by Secretary John W. Snow as the
42nd U.S. Treasurer. President Bush nominated her to the post on July 22. 2004
and the U.S. Senate confirmed Cabral on November 20.2004.
As Treasurer. Cabral will advise the Secretary. Deputy Secretary. Director of the
United States Mint and the Director of the Bureau of Engraving and Printing on
matters relating to coinage. currency and the production of other instruments by the
United States. Cabral will also
serve as a spokesperson for Treasury on a range of issues before the Department.
Prior to joining the Administration. Cabral served as Director of the Smithsonian
Institution's Center for Latino Initiatives. where she led a pan-institutional effort to
improve Latino representation in exhibits. and public programming among the
Institution's 19 museums. five research centers, and the National Zoo. From 1999
to 2003. Cabral served as President and CEO of the Hispanic Association on
Corporate Responsibility. a non-profit organization which partners with Fortune 500
companies to increase Hispanic representation in employment, procurement.
philanthropy and governance. Under her leadership. the organization published a
best practices series. and instituted a partnership with Harvard Business School to
provide executive training programs in Corporate Governance Best Practices to
community leaders.
From 1993 to 1999. Cabral served as Deputy Staff Director for the United States
Senate Judiciary Committee under Chairman Orrin G. Hatch. Additionally.
beginning in 1991. she served as Executive Staff Director of the U.S. Senate
Republican Conference Task Force on Hispanic Affairs. a caucus of 25 senators
dedicated to ensuring that the concerns and needs of the Hispanic community are
addressed by Congress through legislation.
A native of California. Cabral majored in political science at the University of
California, Davis and earned a Master's degree in Public Administration with an
emphasis in international trade and finance from the John F. Kennedy School of
Government at Harvard University.
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J8-2205: Statel1lt::lIl ufthe Honorable John W. Snow on the <hr>swearing-in of U.S. Trea...

Page 1 of2

I)
.......

.... "~ .. ;
I-'HLSS

f~()OM

FROM THE OFFICE OF PUBLIC AFFAIRS
January 19, 2005
JS-2205
Statement of the Honorable John W, Snow on the
swearing-in of U.S. Treasurer Anna Escobedo Cabral
Good afternoon. I want to extend a warm welcome to Anna's family and friends who
have come here to be part of this very special day. This is a momentous occasion
not just for Anna, but for everyone who holds her dear. It is a day to feel proud of
her, proud to know her, and the first of many days ahead in which your support of
her will be essential to the job she is embarking upon.
Family has been the strong foundation upon which Anna has built a full life and a
brilliant career, and I suspect this new position will not change that fact. As the third
generation of a family who immigrated to the United States from Mexico, Anna has
been inspired by her family's vision - and fulfillment - of the American dream. Her
grandparents were Americans-by-choice and their love for this country, for freedom
and opportunity, engendered a love for the same in the generations that followed,
including Anna.
Anna knows that she is the manifestation of her family's American dream; and I
know that humbles her. It is also one of the many reasons why I know she will, as
the oath says, faithfully discharge the duties of the office of which she is about to
enter.
Like so many American families, Anna's passionately embraced their citizenship
here while also holding dear their native culture and traditions. Anna has dedicated
much of her career to representing Latinos and Latino culture in the corporate
world, the non-profit community of art and learning, and in the Congress.
She believes that the United States offers great hope and opportunity to Latinos and that Latinos make enormous contributions, every day, to this great country.
In her role as U.S. Treasurer, Anna will be reaching out to all citizens to talk about
some of the most important financial issues of the day: from financial literacy to
deficit reduction and reform of the Social Security system. Each of these issues is
instrumental in keeping the American promise of economic opportunity and
security.
The promises made by Social Security are of great concern at this particular time,
as a passionate debate on the issue is already underway. The President is leading
an effort to enact change this year, because it is clear that a lack of action would
have serious implications for both the future performance of the American economy
and as well as the retirement security of our children and grandchildren.
Social Security has served retirees well for 70 years. For millions of Americans, it is
a critical element in their plans for a stable retirement. And for today's senior
citizens and those nearing retirement, the system will fulfill all of its promises. But
for younger workers, Social Security is on an unsustainable path. If we do not fix it
now, the system will not be able to pay the benefits promised to our children and
grandchildren
The problem IS one of arithmetic. Our demographics have changed in a way that is
incompatible with the pay-as-you-go structure of the Social Security system.
Current retirees are supported by the taxes paid by current workers. And while that
ratio was strong for quite some time, today it is plummeting. In the 1950s, there
were about 16 workers paying in for each person drawing out. Today, it's about
three workers for every beneficiary. And by the time today's workers in their mid
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Page 2 of2

20s begin to retire, there will be just over two.
The total projected shortfall is around $10 trillion, and with each year that we wait to
act, to fix the system, that shortfall will increase by about $600 billion. If we do not
act now, government will eventually be left with two choices: dramatically reduce
benefits, or impose huge, economically harmful tax increases. Leaving our children
with such a mess would be, as President Bush has called it, a generational
betrayal.
A bi-partisan effort in the 109th Congress can achieve the goal of reform this year.
Furthermore, we can and should achieve reform that: protects the benefits of those
currently and near retirement age; does not increase payroll taxes; and includes a
promising future for younger workers by allowing them to start a nest egg in the
form of a personal retirement account.
I am looking forward, as I know Anna is, to the lively debate in the coming months,
and most of all to working with both sides of the aisle in Congress on Social
Security solutions. I am confident that out of the debate we will see a shared
understanding that the problem is real and that acting today is the responsible thing
to do.

Anna, you are joining this historic department at an historic time. On behalf of the
Treasury, I welcome you.

I look forward to working with Anna and benefiting from her counsel. I know that the
entire Department feels so fortunate to have her here, and it is my strong belief that
her country will benefit greatly from her service.
Congratulations, Anna, and welcome to the Treasury.
-30-

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J8-2206: Tu:asury Designates 1ndividual Financially Fueling Iraqi Insurgency, al Qaida

Page 1 of2

PHlSS fiOOM

FROM THE OFFICE OF PUBLIC AFFAIRS
January 25, 2005
JS-2206
Treasury Designates Individual Financially Fueling Iraqi Insurgency, al Qaida
The U.S. Department of the Treasury today took action against an individual to help
stem cash flows to the Iraqi insurgency and al Qaida. Sulayman Khalid Darwish,
who is located in Syria, was designated under Executive Order 13224 for providing
financial and material support to the al-Zarqawi Network and al Qaida.
"This terrorist financier is helping support Zarqawi, who has launched violent acts
against our troops, coalition partners and the Iraqi people," said Treasury Secretary
John W. Snow. "Identifying financial operatives and choking off the flow of blood
money moves us closer to our ultimate goal of fracturing the financial backbone of
the Iraqi insurgency and al Qaida."
The U.S. is submitting Darwish to the United Nations 1267 Committee, which will
consider adding him to the consolidated list of terrorists tied to al Qaida, Usama bin
Laden and the Taliban.
The United States has now designated 397 individuals and entities as terrorists,
their financiers or facilitators since September 2001. In addition, the global
community has frozen over $147 million in terrorist-related assets.
Zarqawi was named a Specially Designated Global Terrorist (SDGT) on September
23, 2003. The Zarqawi Network, also know as Jama'at al Tawhid wal Jihad and
Tanzim Qa'idat ai-Jihad fi Bilad al-Rafidayn, was designated as a Foreign Terrorist
Organization (FTO) and a SDGT on October 15,2004.
According to information available to the U.S. Government, Darwish is a member of
the Advisory (Shura) Council of the Zarqawi organization and served as one of
Zarqawi's operatives. Moreover, Darwish, who was also involved in fundraising and
recruiting for the organization, is a close associate of Zarqawi and one of the most
prominent members of the Zarqawi Network in Syria.
While in Afghanistan, Darwish received training - on Zarqawi's orders - in the
following areas: weapons, topography, artillery training, electronics training,
explosives production and the use of explosives. Darwish also received training in
Afghanistan, Iran, Turkey and Lebanon in document forging and is considered an
expert in preparing forged documents for the Zarqawi Network.
Darwish handles mostly financial issues for Zarqawi, collecting, and distributing
funds for him. Specifically, Darwish sent donations of $10,000-$12,000 to Zarqawi
in Iraq every 20-25 days. Darwish sent the money into Iraq through suicide attack
volunteers who were entering the country.
Darwish also was essential to recruiting and dispatching terrorist operatives, both
for the planned attacks in Jordan and for operations elsewhere, particularly Iraq.
For example, Darwish contacted jihadists who had been in Afghanistan and who
were, by 2004, scattered in different countries; he recruited among these jihadists
for fighters to join Zarqawi in Iraq.
In addition, Darwish was assigned by Zarqawi to train members of Asbat al-Ansar in
preparing forged documents; Darwish also brought $10,000 for Abu Muhjin, the
leader of Asbat al-Ansar, from Zarqawi. Asbat al-Ansar was designated a SDGT on
September 24,2001 and as a FTO on March 27, 2002.

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Page 2 of2

Identifying Information
SULAYMAN KHALID DARWISH
AKA: Abu AI-Ghadiya
DOB: 1976
DOB: Circa 1974
POB: Outside Damascus, Syria
Nationality: Syrian
Passport No.: Syrian 3936712
Passport No.: Syrian 11012
Address: Syria
Sulayman Khalid Darwish was designated today pursuant to Executive Order
13224 chiefly pursuant to paragraphs (d)(i) and (d)(ii) based on a determination that
he assists in, sponsors or provides financial, material, or technological support for,
or financial or other services to or in support of, or is otherwise associated with,
persons listed as subject to E.O. 13224. This individual also meets 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.
Blockin~ 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 engendering international
cooperation and compliance with obligations under UN Security Council
Resolutions.

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- .. _ ..
PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
January 25, 2005
2005-1-25-14-20-44-11923

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 $85,436 million as of the end of that week, compared to $85,772 million as of the end of the prior week.

I. Official U.S. Reserve Assets (in US millions)
January 14, 2005

January 21, 2005

85,772

85,436

TOTAL
1. Foreign Currency Reserves

a. Securities

Euro

Yen

TOTAL

Euro

Yen

TOTAL

11,989

15,346

27,335

11,940

15,294

27,234

Of which, issuer headquartered in the US.

b. Total deposits with:

b.i. Other central banks and BIS

11,759

14,843

3,084

11,712

3,074

14,786

b.ii. Banks headquartered in the US.

b.ii. Of which, banks located abroad

b.iii. Banks headquartered outside the US.

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

19,177

19,073

13,372

13,299

11,045

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
January 21, 2005

January 14, 2005
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.a. Short positions

2.b. Long positions

o
o

3. Other

o
o
o

III. Contingent Short-Term Net Drains on Foreign Currency Assets
January 14,200
Euro

Yen

January 21, 2005
TOTAL

Euro

Yen

TOTAL

2. Foreign currency securities with embedded options

3. Undrawn, unconditional credit lines

1. Contingent liabilities in foreign currency
1.a. 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 U. S.
3.c. With banks and other financial institutions
Headquartered outside the U.S.

4. Aggregate short and long positions of options in
foreign
Currencies vis-a-vis the U.S. dollar
4.a. Short positions

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

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

Notes:

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.
2/ The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.

JS-220'i: Treasury und IRS A"'uounce Final Regulations for Certain Defined Contrib... Page 1 of 1

PHLSS HClOM

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Ai/()/),'" ; Au, )/lel/" RI"fC!Pt"'.

January 25, 2005
JS-2207
Treasury and IRS Announce Final Regulations for
Certain Defined Contribution Retirement Plans
WASHINGTON, DC -- The Treasury Department and IRS issued final regulations
today to conform to changes made under section 411 (d )(6)(E), as added by the
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), relating to
defined contribution retirement plans that offer lump sum distributions. The
regulations are substalltially similar to proposed regulatiolls that were issued ill
2003,
The regulations are effective immediately.

REPORTS
• A copy of the regulations

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[4830-0 1-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1
[TO 9176]
RIN 1545-BC35
Elimination of Forms of Distribution in Defined Contribution Plans
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final regulations that would modify the
circumstances under which certain forms of distribution previously available are
permitted to be eliminated from qualified defined contribution plans. These final
regulations affect qualified retirement plan sponsors, administrators, and participants.
DATES: These regulations are effective January 25, 2005.
FOR FURTHER INFORMATION CONTACT: Vernon S. Carter, 202-622-6060 (not a
toll free number).
SUPPLEMENTARY INFORMATION:
Background

This document contains final amendments to 26 CFR part 1 under section
411 (d)(6) of the Internal Revenue Code of 1986 (Code) as amended by the Economic
Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) (115 Stat. 117).
Section 411 (d)(6)(A) of the Code generally provides that a plan will not be treated
as satisfying the requirements of section 411 if the accrued benefit of a participant is

decreased by a plan amendment. Section 411 (d)(6)(8) prior to amendment by
EGTRRA provided that an amendment is treated as reducing an accrued benefit if, with
respect to benefits accrued before the amendment is adopted, the amendment has the
effect of either eliminating or reducing an early retirement benefit or a retirement-type
subsidy, or, except as provided by regulations, eliminating an optional form of benefit.
The IRS published TO 8900 in the Federal Register on September 6,2000 (65
FR 53901). TD 8900, which amended §1.411(d)-4 of the Income Tax Regulations,
added paragraph (e) of Q&A-2 to provide for additional circumstances under which a
defined contribution plan can be amended to eliminate or restrict a participant's right to
receive payment of accrued benefits under certain optional forms of benefit.
Section 1.411 (d)-4, Q&A-2(e)(1), provides that a defined contribution plan may
be amended to eliminate or restrict a participant=s right to receive payment of accrued
benefits under a particular optional form of benefit without violating the section 411 (d)(6)
anti-cutback rules if, once the plan amendment takes effect for a participant, the
alternative forms of payment that remain available to the participant include payment in
a single-sum distribution form that is otherwise identical to the eliminated or restricted
optional form of benefit. The amendment cannot apply to a participant for any
th

distribution with an annuity starting date before the earlier of the 90 day after the
participant receives a summary that reflects the plan amendment and that satisfies
Department of Labor=s requirements for a summary of material modifications under 29
CFR 2520.1 04b-3, or the first day of the second plan year following the plan year in
which the amendment is adopted. Section 1.411(d)-4, Q&A-2(e)(2), provides that a
single-sum distribution form is otherwise identical to the optional form of benefit that is

being eliminated or restricted only if it is identical in all respects (or would be identical
except that it provides greater rights to the participant), except for the timing of
payments after commencement. A single-sum distribution form is not otherwise
identical to a specified installment form of benefit if the single-sum form:
• is not available for distribution on any date on which the installment form
could have commenced;
• is not available in the same medium as the installment form; or
• imposes any additional condition of eligibility.
Further, an otherwise identical distribution form need not retain any rights or features of
the eliminated or restricted optional form of benefit to the extent those rights or features
would not be protected from elimination under the anti-cutback rules. The single-sum
distribution form would not, however, be disqualified from being an otherwise identical
distribution form if the single-sum form provides greater rights to participants than did
the eliminated or restricted optional form of benefit.
Section 645(a)(1) of EGTRRA added section 411(d)(6)(E), which provides that,
except to the extent provided in regUlations, a defined contribution plan is not treated as
reducing a participant's accrued benefit where a plan amendment eliminates a form of
distribution previously available under the plan if a single-sum distribution is available to
the participant at the same time as the form of distribution eliminated by the amendment
and the single-sum distribution is based on the same or greater portion of the
participant's account as the form of distribution eliminated by the amendment. Thus,
section 411 (d)(6)(E) includes conditions that are similar to those in existing §1.411 (d)-4,
Q&A-2(e), but without the advance notice condition.

On July 8, 2003, a notice of proposed rulemaking (REG-112039-03) was
published in the Federal Register (68 FR 40581) to reflect the addition of section
411 (d)(6)(E) by EGTRRA. The proposed regulations amended §1.411 (d)-4, Q&A-2(e)
to eliminate the 90-day advance notice condition on plan amendments otherwise
permitted under §1.411 (d)-4, Q&A-2(e). Following publication of the proposed
regulations, comments were received, but no public hearing was requested. After
consideration of the comments received, the proposed regulations are adopted as
revised by this Treasury decision.
Explanation of Provisions
These final regulations retain the general structure and much of the substance of
the proposed regulations, including an example illustrating the provisions. Some
changes have been made in connection with a specific recommendation for modification
and clarification. The comments received in response to the proposed regulations are
generally summarized below.
Two commentators were concerned that, following the elimination of the gO-day
notice requirement, plan participants who counted on being able to retire with an annuity
could discover that option is suddenly gone. The commentators argued that the
participant may have made plans based on the expectation of receiving an annuity, and
that, although participants can purchase annuities with their lump sums, they may find
that annuities purchased outside the plan cost more or pay lower amounts than what
they were expecting from the plan. The commentators recommended that, to the extent
plan sponsors adopt amendments that terminate an annuity option, those plan sponsors
should allow participants within 90 days of retiring at the time of the amendment to be

permitted to elect that annuity.
The legislative history to section 645(a)(1) of EGTRRA shows that Congress was
aware of the notice requirement in existing §1.411(d)-4, Q&A-2(e)(2), and adopted all of
the same provisions in section 411 (d)(6)(E) as are in existing §1.411 (d)-4, Q&A-2(e)(2),
except for the notice requirement. See Conference Report No 107-84, 10th Cong., 1st
Session 253-254. Accordingly, these final regulations adopt the amendments in the
proposed regulation. The regulations retain the rules under which a defined contribution
plan may be amended to eliminate or restrict a participant=s right to receive payment of
accrued benefits under a particular optional form of benefit without violating the section
411 (d)(6) anti-cutback rules if, once the plan amendment takes effect for a participant,
the alternative forms of payment that remain available to the participant include
payment in a single-sum distribution. The regulations clarify that such an amendment
can apply on[y to distributions with annuity starting dates after the amendment is
adopted and, therefore, cannot apply to distributions that have already commenced.
However, these final regulations remove the gO-day notice condition previously
applicable to these plan amendments.

One commentator commented on the example in §1.411 (d)-4, Q&A-2(e), of the
proposed regulations. The commentator stated it is not clear from the example why the
amendment does not apply to P (the participant in the Plan) if P elects to have annuity
payments begin before July 1, 2004. The commentator stated that the confusion may
result because the example provided that the amendment is adopted on May 2, 2004,
1 The Department of Labor has advised Treasury and the IRS that plans covered by Title I of ERISA are
subject to the requirement under Title I that plan amendments be described in a timely summary of
material modifications (SMM) or a revised summary plan description (SPD) to be distributed to plan
partiCipants and beneficiaries in accordance with applicable Department of Labor disclosure rules (see 29
CFR 2520. 104b-3).

but does not provide when the amendment is effective. The example has been revised
to reflect the comment.
Under section 101 of Reorganization Plan No.4 of 1978 (43 FR 47713), the
Secretary of the Treasury has interpretive jurisdiction over the subject matter addressed
in these regulations for purposes of the Employee Retirement Income Security Act of
1974 (ERISA). Section 204(g)(2) of ERISA, as amended by EGTRRA, provides a
parallel rule to section 411 (d)(6)(E) of the Code that applies under Title I of ERISA, and
authorizes the Secretary of the Treasury to provide exception to this parallel ERISA
requirement. Therefore, regulations issued under section 411 (d)(6)(E) of the Code
apply for purposes of the parallel requirements of section 204(g)(2) of ERISA, as well as
for section 411 (d)(6)(E) of the Code.

Special Analyses
It has been determined that this Treasury decision is not a significant regulatory
action as defined in Executive Order 12866. Therefore, a regulatory assessment is not
required. It also has been determined that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because
the regulation does not impose a collection of information on small entities, the
Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section
7805(f) of the Code, the notice of proposed rulemaking preceding these regulations was
submitted to the Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business.

Drafting Information
The principal author of these regulations is Vernon S. Carter of the Office of the

Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities).
However, other personnel from the IRS and Treasury participated in their development.

List of Subjects in 26 CFR Parts 1
Income taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:

Paragraph 1. The authority citation for part 1 is amended to read, in part, as
follows:

Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.411{d)-4, Q&A-2{e) is revised to read as follows:
§1.411(d)-4 Section 411(d)(6) protected benefits.
*****
A-2: * * *
(e) Permitted plan amendments affecting alternative forms of payment under
defined contribution plans--(1) General rule. A defined contribution plan does not
violate the requirements of section 411 (d)(6) merely because the plan is amended to
eliminate or restrict the ability of a participant to receive payment of accrued benefits
under a particular optional form of benefit for distributions with annuity starting dates
after the date the amendment is adopted if, after the plan amendment is effective with
respect to the participant, the alternative forms of payment available to the participant

include payment in a single-sum distribution form that is otherwise identical to the
optional form of benefit that is being eliminated or restricted.
(2) Otherwise identical single-sum distribution. For purposes of this paragraph
(e), a single-sum distribution form is otherwise identical to an optional form of benefit
that is eliminated or restricted pursuant to paragraph (e)(1) of this Q&A-2 only if the
single-sum distribution form is identical in all respects to the eliminated or restricted
optional form of benefit (or would be identical except that it provides greater rights to the
participant) except with respect to the timing of payments after commencement. For
example, a single-sum distribution form is not otherwise identical to a specified
installment form of benefit if the single-sum distribution form is not available for
distribution on the date on which the installment form would have been available for
commencement, is not available in the same medium of distribution as the installment
form, or imposes any condition of eligibility that did not apply to the installment form.
However, an otherwise identical distribution form need not retain rights or features of
the optional form of benefit that is eliminated or restricted to the extent that those rights
or features would not be protected from elimination or restriction under section 411 (d)(6)
or this section.
(3) Example. The following example illustrates the application of this paragraph
(e):

Example. (i) P is a participant in Plan M, a qualified profit-sharing plan with a
calendar plan year that is invested in mutual funds. The distribution forms available to P
under Plan M include a distribution of P'S vested account balance under Plan M in the
form of distribution of various annuity contract forms (including a single life annuity and
a joint and survivor annuity). The annuity payments under the annuity contract forms
begin as of the first day of the month following P'S severance from employment (or as of
the first day of any subsequent month, subject to the requirements of section 401 (a)(9)).

P has not previously elected payment of benefits in the form of a life annuity, and Plan
M is not a direct or indirect transferee of any plan that is a defined benefit plan or a
defined contribution plan that is subject to section 412. Distributions on the death of a
participant are made in accordance with plan provisions that comply with section
401 (a)(11 )(8)(iii)(I). On September 2, 2004, Plan M is amended so that, effective for
payments that begin on or after November 1, 2004, P is no longer entitled to any
distribution in the form of the distribution of an annuity contract. However, after the
amendment is effective, P is entitled to receive a Single-sum cash distribution of P'S
vested account balance under Plan M payable as of the first day of the month following
P'S severance from employment (or as of the first day of any subsequent month, subject
to the requirements of section 401 (a)(9».
(ii) Plan M does not violate the requirements of section 411 (d)(6) (or section
401 (a)(11)) merely because, as of November 1, 2004, the plan amendment has
eliminated P'S option to receive a distribution in any of the various annuity contract
forms previously available.

(4) Effective date. This paragraph (e) is applicable on January 25, 2005.

*****
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.

Approved: January 10, 2005

Eric Solomon
Acting Deputy Assistant Secretary of the Treasury (Tax
Policy)

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'

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PHLSS HOOM

IJ~
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FROM THE OFFICE OF PUBLIC AFFAIRS
January 25, 2005
JS-2208
Economic Policies in the Western Hemisphere:
Recent Accomplishments and Future Challenges
John B. Taylor
Under Secretary of Treasury for International Affairs
Remarks at a Luncheon for the
Ambassadors of the Latin American Group
Brazilian Embassy
Washington, D.C.
January 25, 2005
Thank you very much, Ambassador Abdenur, for inviting me to join you and your
ambassadorial colleagues today. It is an honor to be here and to have the
opportunity to speak before members of the diplomatic corps of the Latin American
region. I have enjoyed working with many of you while I have served as Under
Secretary at the U.S. Treasury. And I appreciate the warm hospitality I have
received on visits to many of your countries during the last four years.
I would like to take this opportunity to talk to you about the remarkable economic
accomplishments we have seen in many countries in the region over the past
several years. I have heard some critics say that the United States has been too
busy elsewhere to work with our neighbors in the region. I think the record and the
results say otherwise By working together in many different fora and by
encouraging and implementing good economic policies, we have accomplished the
best economic performance in the hemisphere in a quarter century.

To be sure, there are still challenges. Simply put, we need to work together to
make the current economic recovery long-lasting, broader, and stronger so that
people throughout the region can see significant increases in income and
reductions in poverty. The Bush Administration in its second term plans to continue
to work closely with the region to advance an ambitious agenda and meet these
challenges.
Recent Accomplishments
The economic news from the region has been exceptional, exceeding even the
most optimistic forecasts. Forecasters are now estimating that economic growth in
Latin America was 5.8 percent in 2004, a significant acceleration from 1.9 percent
in 2003 and the fastest growth rate since 1980. Private forecasters expect regional
growth to be 4 percent in 2005, so the expansion is expected to continue.
There have also been dramatic improvements in economic stability. There are no
countries in the region that are in a recession or financial crisis. Capital flows to
Latin America are increasing. Market analysts estimate that governments in the
region have already met about half of their financing needs for the entire year. The
average risk spread for the region is near its lowest levels in seven years, even as
the U.S. Federal Reserve has increased interest rates over the past several
months. Mexico just placed a bond issue with its lowest-ever spread over U.S.
Treasuries for the 10-year maturity.
I contrast this with the situation when I entered my current job four years ago, when
I remember being briefed on the latest $14 billion IMF rescue package for Argentina
approved in January 2001, hearing from Mexico's economic leadership about the
sinking economy, and getting calls from my friends in Brazil about the fragile
situation there.

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It is also instructive to contrast the current situation with the wave of financial crises
and contagion in the 1990s. Ten years ago Mexico plunged into crisis when the
government nearly defaulted on its debt and was forced float the peso. Contrast
this situation with today. where the Mexican economy is one of the most stable in
emerging markets, enjoying an investment grade rating and some of the lowest
risks spreads over U.S. Treasuries in emerging markets. There is also no sign or
talk of financial market contagion anymore. The lack of contagion following
Argentina's default in 2001--compared to the contagion seen after the Asian and
Russian crises in 1997 -8--exemplifies how far we have come.
What have been the causes of this improved growth and stability? Good economic
policies. both in the region and the United States. The strong economic recovery in
the United States, based on timely changes in monetary and fiscal policy such as
President Bush's tax cuts in 2001 and 2003, have been a big factor in spurring Latin
America's recovery through the close linkages we have through trade.
Within the region. governments have taken very significant steps during the last few
years to improve fiscal policies aimed at reducing debt levels. Monetary policies
have also improved, supported by a move to more flexible exchange rates and
inflation-targeting regimes. Brazil, Chile, Colombia, and Peru all have wellestablished monetary policies based on inflation-targeting. Better monetary policies
in Brazil and Argentina, for example, prevented the large depreciations in 2002 from
translating into uncontrolled inflationary spirals. The United States has supported
good policies in the region by strongly supporting IMF. World Bank, and InterAmerican Development Bank assistance to countries that were pursuing good
economic policies.
These good economic policies set the stage for the robust recovery in economic
growth that we have observed in Latin America. They also underlie the
improvements in economic stability in financial markets, as investors have taken
note of better policies. Brazil. Mexico, Chile. Ecuador, Paraguay, and Uruguay-among others--received ratings upgrades from the credit rating agencies during the
last two years.
Future Challenges

Despite these accomplishments, this is no time to be complacent. I see the current
situation as a moment of historic opportunity for the region and emerging markets in
general to put themselves on a robust growth path and act as stabilizing force in the
world economy rather than being vulnerable to developments in the rest of the
world. Emerging markets are accounting for an increasingly large share of global
growth. inflation, and financing and as a consequence are playing an increasingly
important role in determining their patterns.
Despite the political challenges in the region, I think there is the strong political
leadership needed to take up this challenge. Just to name a few, we have been
particularly impressed by what President Lula and Finance Minister Palocci have
accomplished in Brazil. how President Gutierrez and Finance Minister Yepez in
Ecuador have maintained disciplined fiscal policies in an unsettled political
environment, how President Uribe in Colombia has simultaneously tackled
economic reform and improved security, and how President Frutos has moved
forward a broad-based reform agenda in Paraguay.
This is the time to be ambitious on economic policy and put in place what is needed
for sustained growth by pursuing reforms aimed at, first, locking-in improvements in
macroeconomic policy and, second, creating the microeconomic environment for
higher productivity growth.
On the first of these, a lot of progress was made in 2004 in strengthening fiscal
balances and lowering debt levels. However. debt levels in the region at 55 percent
of GDP are still too high and a source of financial vulnerability. Further fiscal efforts
will be needed to bring them down and to give the region greater financial flexibility
as it encounters shocks in the future.
Part of this effort will involve advancing what we call structural fiscal reforms in
order to ensure continued strong fiscal performance and lock-in the improvements
we have seen over the past couple of years. Key among these include reforms to
strengthen tax administration and broaden the tax base, pension reform to ensure

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the sustainability and solvency of pension systems, and fiscal responsibility regimes
to institutionalize fiscal discipline at the provincial and regional levels On the
monetary side, additional work can be undertaken to bolster the operational and
institutional underpinnings of inflation-targeting regimes. Chief among these is
legislation to increase central bank autonomy and independence; Mexico, Chile,
Peru, and Colombia have independent central banks.
The second challenge is to raise the region's growth rate so that we see the nearly
6% growth in 2004 not only in one year but every year. Growth of 4% as expected
this year is simply not high enough to generate the large, sustained reductions in
poverty that we all want to see. I think the region can do better.
The key to achieving higher per capita income growth is boosting productivity
growth. Higher productivity growth translates into higher wages, and higher wages
reduce poverty. Productivity growth in Latin America has been unacceptably low
compared to other regions of the world. According to the lOB's "The Business of
Growth" study, productivity growth was 0.7 percent per year in the region as a
whole in the 1990s after being negative in the 1980s. The improvement is
attributable to some significant economic reforms undertaken in the early 1990s.
However, Latin America's performance compares poorly to that of other countries.
During the 1990s, productivity growth was 1.7 percent in the developed countries
and 2.7 percent in the East Asian countries. That 1 percent or 2 percent
productivity difference could have made a huge difference in living standards in the
region. Productivity growth in Latin America can and should be higher than 2
percent--or more than triple what it was in the 1990s.
The "Business of Growth" study also discusses the range of policy issues that need
to be addressed in order to achieve higher rates of productivity growth.
Improvements to the business climate, or microeconomic reforms as we call them,
are central for creating the incentives to innovate and invest that are essential for
boosting productivity. These are reforms that include trade liberalization, business
deregulation, labor market reform, financial market reform, strengthening property
rights, and fighting corruption. They also include investment in physical
infrastructure and human capital or skills development.
The Bush Administration is firmly committed to working with countries in the region-both through our bilateral relationships and in multilateral fora--to help achieve
higher rates of productivity growth and rising living standards.
We remain committed to further regional integration through advancing our
ambitious trade agenda. We have concluded or are in the process of concluding a
raft of FTA agreements throughout the region. These include the U.S.-Chile FTA,
the Central American Free Trade Agreement (CAFT A), as well as our ongoing
negotiations with Panama and the Andean region. All told, these FTAs will cover
90 percent of U.S. trade with Latin America.
The recent economic recovery in Latin America shows just how important trade is
for economic growth. Exports have been a key driver of this growth throughout the
region, rising an estimated 22 percent last year, up from 10 percent in 2003. More
impressively, this is not just a commodity price phenomenon, with exports volumes
rising an estimated 11 percent last year. Strong export performance has led to the
second year in a row that Latin America has posted a current account surplus--at
an estimated 1 percent of GOP in 2004, up from 0.5 percent of GOP in 2003 when
the region ran its first current account surplus in 35 years.
We are committed to working with the countries of the region to seize the
opportunity of the November 2005 Summit of the Americas to advance concrete
initiatives for boosting economic growth and creating jobs. These initiatives aim to
support the microeconomic conditions needed to boost productivity growth. At the
Special Summit of the Americas held last January in Monterrey, Mexico, our
leaders made important commitments to halve the cost of remittances, triple credit
to small businesses catalyzed by lOB programs, and halve the lime and cost of
starting a new business.
At the upcoming Summit this November in Argentina, we are thinking of similar
types of initiatives. I believe infrastructure will be an important focus of the Summit
and we have a number of ideas on how we can promote mo.re investment in
infrastructure in an efficient and sustainable manner. I also think mortgage market
development is an important potential initiative as it helps broaden capital markets

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and expands the opportunity of home and property ownership to the poor. The
Summit also provides a chance for the region's leaders to support continued efforts
by the multilateral development banks to show measurable results in their activities
by increasing discipline over budget and project lending programs to achieve
quantifiable results with strong controls over where the money goes. I look forward
to working with the people in this room over the next few months to make the
upcoming Summit a success.
Our bilateral dialogues continue to be a critical resource for sharing experiences
and policy views about how to boost productivity growth. To take a couple of
examples, we have made important progress in reducing the cost of sending
remittances from the United States to Mexico in part through the work of the U.S.Mexico Partnership for Prosperity launched in 2001. We have had valuable policy
exchanges in the U.S.-Brazil Group for Growth that have helped refine approaches
to reforms in areas like small business regulation.
A major way in which we are working with countries to meet the challenge of
increasing productivity growth is through the Millennium Challenge Account (MCA).
The MCA is an important bilateral initiative that the Bush Administration has
developed to help the poorest countries in the region and around the world-countries that are putting in place the policies that encourage innovation and
investment. I am particularly pleased to see that three countries in the region,
Bolivia, Nicaragua and Honduras, have qualified for MCA assistance this year. It is
also important to note that we are seeing countries develop very specific and well
targeted programs to use their MCA assistance that have a greater chance of
producing real, measurable results. Focusing on a few areas where a meaningful
difference can be made, rather than undertaking a broad diffuse effort is much more
likely to yield positive results.

Conclusion
In conclusion, let me say that I am pleased to have had the opportunity to work with
you over the past few years--years in which we can be proud of a number of
significant achievements. I look forward to carrying forward this work In our joint
efforts to create better lives for all the peoples of our hemisphere.

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PRLSS HOOM

FROM THE OFFICE OF PUBLIC AFFAIRS
January 26, 2005
js-2209
Snow Applauds New States Offering Health Coverage Tax Credit Plans for

2005
Kentucky, Louisiana and New Jersey now offer plans

WASHINGTON, DC -- U.S. Treasury Secretary John W. Snow applauded Governor
Fletcher of Kentucky, Governor Blanco of Louisiana and Acting Governor Codey of
New Jersey for implementing a state qualified health plan option under the federal
Health Coverage Tax Credit Program (HCTC) to help cover the cost of health
insurance premiums for certain residents in those states. The plans went into effect
January 1st, allowing citizens of these three states to take full advantage of the
Health Coverage Tax Credit through approved health care plans.
"The HCTC will now bring affordable, quality health care to more hard working
families in Kentucky, Louisiana and New Jersey," said Treasury Secretary John
Snow. "The officials in these states have worked hard to ensure thousands of
families will have the peace of mind that health care coverage brings. I applaud
their leadership in establishing a qualified plan to provide coverage for eligible
individuals and their families."
The Trade Adjustment Assistance Act President Bush signed into law in 2002
included the new Health Coverage Tax Credit (HCTC). ReCipients can receive the
HCTC either in advance, to help pay qualified health plan premiums as they come
due, or in a lump sum when they file their federal tax returns. The HCTC advance
payments program began nationally in August 2003 This program provides an
advanced payment of 65 percent of the premium cost for a qualified health plan for
individuals and their families who are eligible to receive Trade Adjustment
Assistance (T AA) benefits or certain individuals who receive pension benefit
payments from the Pension Benefit Guaranty Corporation (PBGC).
**MORE**
"The HCTC program is cutting edge tax policy. Bold ideas like the HCTC will lead
the charge for innovative solutions to help real people obtain needed health care
coverage in a flexible, reliable way," Snow continued. "We want to ensure that
those who qualify for the credit get the help they need as quickly as possible."
To receive the credit, eligible individuals must enroll in qualified health insurance,
such as a COBRA health plan or State Qualified Health Plan (SQHP). Forty states
and the District of Columbia have SQHPs that will enable more than 200,000 of
those potentially eligible for the HCTe to purchase health coverage. Nationwide,
there are approximately 230,000 individuals potentially eligible for the HCTC.
For more information on a particular state and the health insurance programs that
qualify, please Visit the HCTC website at www.lrs gov and enter IRS Keyword:
HCTC.

-30-

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vi. Snow Prepared Remarks: Real Estate Roundtable's ... Page 1 of 4

PHLSSHOOM

FROM THE OFFICE OF PUBLIC AFFAIRS
January 27, 2005
js-2210

The Honorable John W. Snow
Prepared Remarks: Real Estate Roundtable's State of the Industry Meeting
January 27, 2005
Thank you so much for having me here today. It's great to see all of you, and I'm
looking forward to our conversation.
This is an exciting time for the real estate industry. Over the last few years, you've
played an integral part in a remarkable, national economic recovery. Today, there is
growth in your industry and the country's overall economy is very strong.
The housing market in particular has been vibrant in the past few years, and it truly
dampened the effects of the recession as well as helped fuel the recovery. In 2004,
housing starts climbed to a 26-year high. We expect that final data for 2004, which
will be released soon, will show that sales of single-family homes set a new annual
record. And boosted by new home building, jobs in the construction industry have
increased by nearly 300,000 over the past 16 months, accounting for over 10
percent of the more than two and a half million jobs created since August of 2003.
This is exceptional news, and I deeply appreciate the economic contributions of the
people represented in this room today. You are part of a vibrant national economy ~
the fastest-growing economy of any major industrialized nation in the world.
The American economy has posted steady job gains for each of the last fifteen
months The unemployment rate is down to 5.4 percent ~ lower than the average
rate of the 1970s, 1980s and 1990s. After-tax income is up by over ten percent
since the end of 2000 and household wealth ~ reflecting, among other things, rising
home values - is at an all-time high. Inflation, interest rates, and mortgage rates
remain at low levels. And, as you well know, homeownership rates are at record
highs.
Is it enough? Can we do better? Yes - continued economic growth is important to
every person in this room, and to every worker in America who is looking for a Job.
We still face considerable economic challenges as a country, and this is a superb
time to tackle those challenges. Our underlying economic fundamentals have been
strengthened, thanks largely to well-timed tax cuts and sound monetary policy, and
now we must address the next set of issues, each of which comes with significant
short and long-term implications.
First up, it's budget time for the federal government, and I want you to know that the
Bush administration is cognizant of both the short and the long-term implications
when it comes to budgeting the taxpayers' money.
We're not happy with our deficit. It's unwelcome, although it is understandable,
given what our economy and our country went through in recent history.
We're dealing with the deficit in two key ways: first. controlled spending and,
second, implementation of policies that encourage continued economic growth.
Growth is important for so many reasons .. and at this time most valued for creating
jobs and reducing deficits. Four rounds of Bush tax cuts clearly stimulated growth;
millions of jobs have been created and we are also seeing an increase in Treasury
receipts - they are up 10.5% in the last three months versus the same three

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months last year.
The real key is spending discipline - we are not under-taxed - and the President's
2006 budget will control spending. We will remain on track to cut the deficit in half
by 2009.
We're also focusing on the longer-term deficit situation including, importantly Social
Security and other federal programs.
The current Social Security system is unsustainable; it's a matter of arithmetic.
Demographic changes have brought us from circumstances where we had 16
workers paying into a system for everyone beneficiary in the 1950s, to today where
we have three workers for every beneficiary. That ratio will drop to two-to-one by
the time today's young workers retire.
People are living longer and having fewer children. And that has made the pay-asyou-go Social Security system financially unsustainable. I've called for all sides of
the reform debate to, first, agree on these simple facts.
Social Security is a sacred trust, and it has made a critical difference for millions of
retirees. It has kept its promise to America's seniors since it was enacted in
1935. Social Security is secure for loday's retirees and for those nearing retirement
but it is offering empty promises to future generations.
It is the future of the program that President Bush is concerned about, and it is the
future of the program that we must address, this year, in Congress.
We can, and should, do this without increasing payroll taxes. Many of you in this
room are employers, and you know what a terrible impact massive payroll tax
increases would have on our economy. It would negatively impact economic
growth; jobs would be lost. We don't have to go that way.
We can, and should, reform the system in a way that encourages younger
generations of workers to build a nest egg that they own and control and can pass
on to their loved ones.
Those of you who are part of the housing industry likely appreciate how powerful
this concept of ownership is. Owning your own house is the centerpiece of a free
and independent way of life.
When you own your own home, you are proud of it, you look after it, you spend
hours, days and years improving it and increasing its value. A retirement nest egg
holds that same power, and that same promise. And that's why personal savings
accounts should be part of Social Security reform.
The President is the nation's greatest advocate for owning your own home, owning
your own retirement savings, and owning your own business. In a free country, we
as individuals are uniquely positioned to achieve ownership, and the government
should never impede us from doing so; it should encourage us.
Some of our laws, and a big part of our legal system, can make ownership
frustrating. I'm thinking specifically of our civ,1 justice system - an area that I know
your group would like to see changed.
Abuse of the civil justice system is rampant. Trial attorneys make millions in cases
where plaintiffs are paid pennies. Business owners are subject to what amounts to
extortion - settling frivolous cases out of court rather than subject themselves to
unknown legal costs at trial. And even if a suit is never filed, businesses and
doctors pay the price of an out-of-control system through insurance fees, recordkeeping and legal counsel.
There are few things that create a greater disincentive to job creation than an
atmosphere where little stands between every business owner, ever manager,
every doctor and professional of almost any kind ... and the next frivolous lawsuit.
I want you all to know the priority that lawsuit abuse reform is to President Bush and

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his administration. We are deeply committed to ensuring that victims are
compensated fairly when they are injured due to the fault of another person, but we
also know that key job creators - the top ones being small-business owners - live
in fear of frivolous suits that can damage or destroy their businesses and all the
jobs they support.
We know that the current tort system is costing America well over $200 billion each
year ... that's a tort tax - paid in the form of lower wages, higher product prices, and
reduced investments - of over $800 for every individual and more than $3200 for a
family of four. And this is a regressive tax, imposed indiscriminately across our
economy.
To make the situation even less fair, less than 50 cents of each dollar of those tort
costs go to victims ... and, of that, only 22 cents goes to compensate them for actual
economic losses they have suffered ... meanwhile the personal injury lawyers profit
enormously.
At a time when our economy needs to continue expanding, at time when we need
to reduce deficits and increase savings, this is unacceptable.
Because a frivolous lawsuit has never created a single job - except jobs for
personal injury lawyers - but baseless and excessive suits have killed many. Every
small-business owner knows this, as they are on the front lines of Job creation.
Our economy is resilient. Our free market system is strong, and the envy of the
world. Imagine if we freed it from frivolous suits
Class action reform was re-introduced in the U.S. Senate on Monday. It has the
unwavering support of the President, and I am optimistic this legislation will move
LIS away from a system of jackpot justice and back to a more rational method
for resolving genuine disputes. Predatory class action lawsuits have been the bane
of innovation for many companies, and the time for ending this abuse of the system
- and of the plaintiffs who are targeted to put their names on these suits - is long
overdue.

Nothing, however, is longer overdue for reform than the U.S. tax code.
As you know, this is another top agenda item for President Bush's second term.
The tax code is terribly long, mind-numbingly complicated, and ultimately leads to a
lack of fairness and a disincentive for eco:lomic growth.
The President recently appointed an Advisory Panel on Tax Reform. It is made up
of some of the sharpest minds in the tax policy community, chaired by two solid
leaders: Senators Connie Mack and John Breaux. That panel will report
recommendations to me later this year, and I will present them to the President by
year's end. I am looking forward to reviewing proposals that increase the fairness of
the code, reduce its length and complexity, and promote economic growth.
And, as the President has said, any proposal that goes forward will also retain our
country's commitment to encouraging homeownership and charitable giving. These
are elements of the current code that should be carried over into a new structure.
So much can be done to promote and protect the economic health of our country. A
few issues of particular interest to your group include the regulation of government
sponsored enterprises (GSEs) and the Terrorism Risk Insurance Act, and I'd like to
touch briefly on each of those issues.
Promoting homeownership is a top priority of President Bush and thisdmlnistration
has enacted policies that have helped make owning a home a reality for millions of
Americans. Our national system of housing finance plays a key role in promoting
homeownership, and the housing GSEs, Fannie Mae, Freddie Mac and the Federal
Home Loan Banks, have played a vital role in that system.
GSEs are among the world's largest financial institutions, and this administration
has long noted that the GSEs' potential to create systemic risk warrants close
examination.

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js-2210: The Honorable John W. Snow Prepared Remarks: Real Estate Roundtable's ... Page 4 of4
Because of the important role the GSEs play in helping to fund our mortgage
markets and in the financial markets as a whole, we need to be sure they are
operating safely, prudently. and efficiently.
While GSEs have continued to grow in size, complexity, and importance, the
regulatory structure governing their activities has not. Therefore, we need a strong,
credible, and well-resourced regulator with a clear mandate and all the powers of
other world class financial regulators. The new regulator should have at heart two
guiding principles: promoting a sound and resilient housing financing system and
increasing homeownership for less advantaged Americans.
The administration is committed to fully examining this complex issue and these
critical questions, with the goal that the homebuyers and taxpayers are fully
protected.
As for another issue that I know is on your mind ... I want to talk a little bit about
Terrorism Risk Insurance. First, by saying that we haven't forgotten how the horror
of September 11 th was particularly hard on your industry. I've heard from many of
you and I know that the Terrorism Risk Insurance Act of 2002 - and the extension
of the "make available" provision of the act - helped you through that difficult.
We made the decision to extend the "make available" provision because we wanted
to ensure the continuation of the key elements of the re-insurance program. At the
time we did so, I noted that the terrorism risk insurance program had been an
important confidence builder as this country recovered from the attacks of
September 11 and the recession.
The issue of reauthorization of TRIA is one that will involve a detailed analysis and
more data than we have at this time. The Act requires that Treasury study its
effectiveness and report to Congress by June 30, 2005. Through our study, ongoing
at this time, we are seeking to answer the questions Congress posed in the Act,
such as the financial capacity of the insurance industry, the pricing and take-up of
terror risk insurance, whether risk can be priced and managed, the return of reinsurers to the market, and what is the most efficient mechanism to produce
insurance for the risk.
We are looking forward to a prompt completion of our study, so that we and
Congress can have a full and open discussion about these important questions.
It's an important issue, and Treasury is dedicated to the most thorough study and
analysis possible so that Congress may make a fully informed decision about
terrorism risk insurance in the future.
I know I've covered a lot of ground here today, and I'm looking forward to taking
your questions.
Once again, I want to commend this group and your industry for your hard work and
contributions to this great American economy ... and of course to thank you so
much for having me here today. I'll take your questions now.

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JS-2211. Treasury Deputy

A~~igtant

Secretary Iannicola to Teach Personal Finance S... Page 1 of 1

PHLSS H()()M

FROM THE OFFICE OF PUBLIC AFFAIRS
January 27, 2005
JS-2211
Treasury Deputy Assistant Secretary lannicola to Teach
Personal Finance Skills to Washington, D.C. High School Students
Treasury's Deputy Assistant Secretary for Financial Education, Dan lannicola, Jr.
will teach personal finance skills to 10th, 11th and 12th graders at three high
schools in Washington, DC On Fnday, lannicola will teach a financial education
lesson on budgeting and managing credit wisely to 12th graders at Margaret Murray
Washington Career High School, and to 10th and 11 th graders at Theodore
Roosevelt Senior High School. On Monday, lannicola will teach 12th graders at
Howard D. Woodson Senior High School Academy of Finance.
Treasury's Office of Financial Education 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, homeownership and retirement planning.
Friday, January 28, 2005
• Margaret Murray Washington Career High School
270 Street, N.W.
Washington, D.C.
9 a.m. (EST)
• Theodore Roosevelt Senior High School
4301 13th Street, N.W.
Washington, D.C.
11:15 a.m. (EST)
Monday, January 31, 2005
• Howard D. Woodson Senior High School Academy of Finance
5500 Eads Street, NE
Washington, D.C.
10:45 a.m. (EST)

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js-2212. ~tat8ment on Getting nle Millennium Development Goals Back on Track Jo... Page 1 of 2

PHLSS HOOM

FROM THE OFFICE OF PUBLIC AFFAIRS
January 27, 2005
js-2212

Statement on Getting the Millennium Development Goals Back on Track
John B. Taylor, Under Secretary for International Affairs
United States Department of the Treasury
Davos, Switzerland
January 27, 2005
Thank you for inviting me to participate in this discussion. Since we are here to talk
about "getting the millennium development goals (MOGs) back on track," the first
question one must ask is why they are off track, particularly in Africa. In my view, a
significant part of the answer has to do with the lack of measurable results. What
gets measured gets done, and my experience has been that aid is increasingly
being delivered in a way that is disconnected from the results we are trying to
achieve. Donors and recipients share responsibility in this. For example, donors
are engaging in budget support operations without demanding a serious effort to
measure how those resources result in progress toward meeting the MDGs. On the
recipient side, the Poverty Reduction Strategies -- which serve as the basis for
budget support operations - are very weak when it comes to results
measurement. I have traveled to developing countries throughout the world and
visited many development projects, and I am still amazed, and frankly disappointed,
at the unevenness of the results measurement efforts. Getting the MDGs on track
will require all of us to aim development assistance squarely at the goals
themselves, and to focus on tangible results that will allow us to chart our progress.
The report from the Millennium Project, Investing in Development: A Practical Plan
to Achieve the Millennium Development Goals, takes a serious look at the steps the
international community should take to deliver on time-bound development targets.
The report's attention to an entrepreneurial private sector as an essential element
for development is laudable. I am especially pleased by the forceful call for
directing aid towards countries that have established a track record of governing
both justly and wisely. Targeting such good performers has many merits. First,
and as the report notes, quality of governance and a commitment to sound
economic policies are necessary preconditions for any country that hopes to
undertake and sustain the ambitious investment programs that are necessary to
achieve the MDGs. In the absence of those preconditions, both donor resources as
well as precious recipient country resources are likely to be wasted. A policy of
targeting good performers can also provide other countries with strong incentives to
govern more justly and wisely by further increasing the economic rewards to be
gained through reform.
Indeed, the considerations that underpin the report's call for targeting "MOG fasttrack countries" are precisely the same considerations that persuaded us in the
U.S. to introduce the Millennium Challenge Account (MCA). The MCA is one of the
only instruments in place that systematically directs aid to poor countries that.
despite their economic condition, exhibit both quality of governance and a
commitment to sound economic policies and investment in their people. The
concessional windows of the multilateral development banks have a somewhat
similar performance-based system in place; countries that rank higher on their
Country Policy and Institutional Assessment (CPIA) indicators receive, all else
being equal, a larger allocation of funds. We have been urging the World Bank to
adopt the transparency standards of the MCA in its Country Policy and Institutional
Assessment (CPIA) indicators so countries have clear incentives to improve and to
hold the World Bank more accountable for its ratings. We have also worked to
ensure that the weight of governance remains high in the calculation of those
indicators. To reduce the weight of governance would reward countries like
Zimbabwe at the expense of countries like Tanzania.
Regarding the relationship between aggregate aid flows and MOGs, the United
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js-221~:

Statement on Getting the Millennium Development Goals Back on Track 10... Page 2 of2
States has significantly increased ODA, but we think that it is simply impossible at
this point in time to forecast how much will ultimately be required and disagree with
the concept of specific ODA targets. Aid is just one of many important inputs to
development, and the amount of aid that will be needed to meet the MDGs will
depend critically on the quantity and quality of the supply of these other inputs.
Indeed, the argument for targeting good performers grows out of the recognition
that aid is most effective when coupled with good governance, and sound policy.
As we increase aid to poor but well-governed countries, it is particularly important
that we do not cripple them with debt in the process. Through the increased use of
grant funding to these very poor countries as they work to achieve sustainable
development, we can help them to break free of recurrent "lend and forgive"
cycles. Such cycles are Signals of poor governance on the part of donors and
recipients alike, and more importantly, can act to stifle the investments that are
necessary to achieve growth. I am pleased to see that the report endorses the use
of grants to the poorest countries.
The report mentions the need for countries to live up to the Monterrey Consensus
commitments. In fact, the U.S. committed to increase our aDA by 50% from 2000
to 2006 and it was already up by 60% through 2003. In Sub-Saharan Africa, the
U.S. has more than quadrupled its aid contributions in just three years alone, from
$1.1 billion in 2000 to over $4.6 billion in 2003. As part of our concerted efforts to
combat the specter of HIV/AIDS, the U.S. committed $1.2 billion in bilateral
assistance for 2003, or $800 million more than the next largest donor. In FY 2004,
the total U.S. budget for international HIV/AIDS programs was $2.4 billion and the
U.S. is the largest investor in the Global Fund. With the help of our development
partners, the U.S. is spearheading the global effort to eradicate Polio, having
committed roughly $1 billion and now leading the way in mobilizing support for the
World Health Organization's Polio Eradication Initiative.
None of these increases in assistance will be sustainable, and talk of even greater
increases will be unrealistic, without measurable results. In my own experience, the
best way to encourage more generosity from U.S. taxpayers is to provide them with
clear evidence of results. Moving forward, we will need to present increased
development assistance as a clear means towards an end rather than as an end in
itself. This will require us (first) to define clear objectives for development funding
and (then) to identify demonstrable results associated with those objectives. In
addition to helping us persuade U.S. taxpayers, our efforts in this vein will teach us
to use aid more effectively by providing the opportunity to evaluate and draw
lessons from what works and what doesn't work.

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1S-2213. Romarks of D. Ek"ott Parsons Deputy Assistant Secretary for Critical In... Page 1 of 3

PHLSS HL)UM

FROM THE OFFICE OF PUBLIC AFFAIRS
January 25, 2005
JS-2213
Remarks of
D. Scott Parsons
Deputy Assistant Secretary for Critical Infrastructure Protection
before the Outreach Meeting of the
Financial and Banking Information Infrastructure
Committee and the
Financial Services Sector Coordinating Council
New York, NY
I want to begin today by thanking the Federal Deposit Insurance Corporation for
their work in putting together these conferences across our great country, The
professionalism of the men and women of the FDIC has been exemplary, and we
appreciate their dedication to this important outreach,
Winston Churchill's words more than a half-century ago are an appropriate
description of our position today as we work together to protect our homeland.
Churchill said, "This is not the end. It is not even the beginning of the end. But it is,
perhaps, the end of the beginning."
Today is the culmination of an outreach program on critical infrastructure protection
that took us to 29 cities across the country. In many ways, the idea for the outreach
began here in New York City on September 11,2001,
The spirit of America is one of steadfast resolve with an inclination toward action.
And shortly after the cowardly attacks of September 11, we swung into action. The
Administration put forward plans to protect our critical physical and cyber
infrastructures, Even before the 9/11 commission was created, we began to break
down old barriers that inhibited information sharing in the government.
At the Treasury, we have two important roles in protecting the homeland, The
President deSignated Treasury as the lead agency for protecting the financial
infrastructure that is the engine of our economy, The second role is to work to stop
the flow of blood money to the terrorists. As Secretary Snow has said, "while hatred
fuels the terrorist agenda, money makes it possible," To date, the global community
has frozen over $147 million in terrorist-related assets,
But I want to return to the Important role of leading the effort to protect our critical
infrastructure, My office has the responsibility for discharging this obligation for the
Department of the Treasury, I'm very pleased to note that the financial sector is
strong and resilient. We know this because the sector has been tested, and we
know this because of the significant attention the sector pays on a daily basis to
business continuity and security, It was tested on 9/11, it was tested during the
Northeast power outage in August of 2003, and it was tested again when the threat
level for the financial sector in New York, New Jersey, and Washington, D,C. was
elevated in August of 2004, It has survived tornadoes, hurricanes, and blizzards,
Each incident proved the financial sector to be adaptable and resilient.
Today, we are engaged in a two-front war to protect our nation's critical
infrastructure, One front is physical, with the focus on protecting people, property,
plants, and equipment. The other front is cyber, and our efforts there center on
protecting systems and data,
President Bush has stated that protection is "a shared responsibility", requiring
close cooperation between government and the private sector at all levels," As we
face a changing threat matrix, we must mount a powerful, coordinated defense: a

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JS-221 j: Remarks of D. Scott Parsons Deputy Assistant Secretary for Critical In... Page 2 of 3
partnership between the public and private sectors to minimize disruptions in the
event of an attack and to quickly restore our way of life, which is the ultimate in
defiance against terrorism.
We've organized our efforts to protect the critical infrastructure of the financial
sector based on this perspective.
Our strategy is built on two pillars - a public sector pillar comprised of the federal
and state financial regulators, and a private sector pillar that includes an
organization of the leading financial industry trade associations and institutions.
Communication between these government and business channels is the
cornerstone of our strategy. Generating accurate and timely information about
threats to our physical and cyber infrastructure and then sharing that information
are essential outcomes of this communication.
The Treasury chairs an organization comprised of the federal and state financial
regulators. This organization is the Financial and Banking Information Infrastructure
Committee, or FBIIC. The FBIIC is chartered under the President's Working Group
on Financial Markets, and is charged with improving coordination and
communication among financial regulators, enhancing the resiliency of the financial
sector, and promoting the public/private partnership.
You will hear shortly about two of our most important private sector organizations,
the Financial Services Sector Coordinating Council and the Financial Services
Information Sharing and Analysis Center. Each of these organizations works closely
together to share information and collaborate on initiatives that advance the
financial sector's preparedness.
Four principles guided our actions in the aftermath of September 11 and they
continue to guide our actions today These principles form the bedrock of our
collaboration with the financial sector.
As I outline these principles, it is important to note that financial sector is highly
resilient. The sector has been a target for criminals since its very beginnings. And
while we have a strong regulatory regime in place that ensures the safety and
soundness of financial institutions, I believe that protecting critical infrastructure is
fundamentally a risk management Issue, and that there is no "one size fits all
solution" to be achieved through additional regulation. In fact, such regulation may
actually harm our goal of ensuring a reliable and resilient financial services sector,
by depriving the sector of the flexibility it needs to counter the threats that exist.
The first principle is the protection of people. People, not buildings or computers,
produce financial services. And it is people who benefit from financial services.
We depend on people - tellers, technicians, loan officers, technologists - to operate
the financial system and to see the system through during times of stress. Indeed, it
was the commitment of these professionals to their institutions, customers, and
colleagues that helped the financial system recover from the September 11 attacks.
Just as we depend on people to operate the financial system, people around the
globe depend on the U.S. financial system to stay up and running. This leads to our
second prinCiple: maintaining confidence. We rely on financial services to process
our paychecks, buy groceries, purchase a house, finance our children's education,
or save for retirement. We must ensure that consumers trust in the financial system.
And this in turn produces confidence. Rock-solid confidence in the ability of
financial institutions to clear checks, execute transactions, and satisfy insurance
obligations, despite disruptions, assures our citizens and the world that America is a
good place in which to invest.
The third principle is to ensure that the financial system remains accessible and
helps keep America "open for business" When a disaster occurs, investors rely on
markets to price the impact of the disruption on assets. The longer markets are
closed, the longer investors must go without knowing the effects of the disaster.
This uncertainty can itself be harmful to the economy, compounding the ,mpact of
any disruption An ability to re-open financial institutions quickly helps eliminate
uncertainty, enabling us to dull the pain of an attack and speed recovery

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JS-2213: RemarkE; of D. Seott Parsons Deputy Assistant Secretary for Critical In ... Page 3 of3
Fourth, we encourage decentralized decision-making and swift, responsible action
by the private sector. In general, financial institutions should engage in problemsolving and make appropriate decisions without waiting for or depending on
guidance from Washington. After all, it is the private sector that owns and operates
the majority of the financial systems, and therefore the private sector knows best
how to mend these systems after a disruption.
As government and pr'lvate industry share more and better information, financial
institutions become better prepared to estimate the risks they bear and better
equipped to effectively reduce the probability of a disruption through strategic
investments Furthermore, as more institutions enhance security and reliability, the
incentive increases for competitors to invest in innovative solutions as well. This
cascading effect delivers an efficient and effective means of encouraging optimal
investment in corporate resilience. In some firms, it may shift critical infrastructure
protection from a corporate liability to an asset and competitive differentiator.
Finally, an industry that responsibly protects itself reduces the need or desire for the
government to impose costly, inflexible, and potentially ineffective regulation.
Thank you all both for your attendance here, and for all t'lat you do to better secure
America's vital financial services infrastructure.

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JS-2214: Tf'OOsury and IRS Announce Guidance On Like-Kind Home Exchanges

Page 1 of 1

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PHLSS HOOM

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Ado/Je"" AI.IP/lal": Reacier"·'.

January 27,2005
JS-2214
Treasury and IRS Announce Guidance On
Like-Kind Home Exchanges

-- Today the Treasury Department and the IRS published a revenue procedure
providing guidance on a like-kind exchange of a home. The revenue procedure
clarifies that a homeowner, who may exclude gain upon a sale or exchange of a
home, also may benefit from a deferral of gain for a like-kind exchange with respect
to the same property.
Generally, a homeowner may exclude up to $250,000 ($500,000 for certain joint
returns) of gain upon the sale or exchange of a home. The homeowner must have
owned and used the property as his or her principal residence, for periods
aggregating two years or more, during the five-year period ending on the date of the
sale or exchange, and must not have used the exclusion during the two-year period
ending on that date. The home-sale exclusion may apply to a home office, or other
business portion of a home, but not to depreciation from the business use.
In the case of business property, a property owner generally would not recognize
gain upon the exchange of the business property for replacement property of a like
kind. The property owner would recognize gain to the extent received in cash or
property that is not of a like kind (commonly called boot). Property used solely as a
home would not constitute business property.
The revenue procedure indicates that, in certain cases, a homeowner may benefit
from both the home-sale exclusion and the like-kind deferral. In such cases, the
property would have been used consecutively or concurrently as a home and a
business (e.g. rental residence). The revenue procedure sets forth six examples,
illustrating the treatment of depreciation and boot.

REPORTS
•

A copy of the revenue procedure

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4/22/2005

Part III

Administrative, Procedural, and Miscellaneous

26 CFR 601.105: Examination of returns and claims for refund, credit, or abatement;
determination of correct tax liability.
(Also Part 1, §§ 121,1031; 1.121-1, 1.1031(a)-1.)

Rev. Proc. 2005-14

SECTION 1. PURPOSE
This revenue procedure provides guidance on the application of §§ 121 and
1031 of the Internal Revenue Code to a single exchange of property.
SECTION 2. BACKGROUND
.01 Section 121 (a) provides that a taxpayer may exclude gain realized on the
sale or exchange of property if the property was owned and used as the taxpayer's
principal residence for at least 2 years during the 5-year period ending on the date of
the sale or exchange. Section 121 (b) provides generally that the amount of the
exclusion is limited to $250,000 ($500,000 for certain joint returns). Under § 121 (d)(6),
any gain attributable to depreciation adjustments (as defined in § 12S0(b)(3)) for periods

2
after May 6, 1997, is not eligible for the exclusion. This limitation applies only to
depreciation allocable to the portion of the property to which the § 121 exclusion
applies. See § 121-1(d)(1) .
.02 Under § 1.121-1 (e) of the Income Tax Regulations, a taxpayer who uses a
portion of a property for residential purposes and a portion of the property for business
purposes is treated as using the entire property as the taxpayer's principal residence for
purposes of satisfying the 2-year use requirement if the residential and business
portions of the property are within the same dwelling unit. The term "dwelling unit" has
the same meaning as in § 280A(f)(1), but does not include appurtenant structures or
other property. If, however, the business portion of the property is separate from the
dwelling unit used for residential purposes, the gain allocable to the business portion of
the property is not excludable unless the taxpayer has also met the 2-year use
requirement for the business portion of the property .
.03 Section 1.121-1 (e)(3) provides that, for purposes of determining the amount
of gain allocable to the residential and business portions of the property, the taxpayer
must allocate the basis and the amount realized using the same method of allocation
the taxpayer used to determine depreciation adjustments (as defined in § 1250(b)(3)).
Allocation based on the square footage of the residential and business portions of the
property is an appropriate method of allocating the basis and the amount realized.
Poague v. United States, 66 A.F.T.R.2d (RIA) 5825 (E.D. Va. 1990), aff'd, 947 F.2d 942

(4th Cir. 1991) .
.04 Section 1031 (a) provides that no gain or loss is recognized on the exchange

3
of property held for productive use in a trade or business or for investment (relinquished
property) if the property is exchanged solely for property of like kind (replacement
property) that is to be held either for productive use in a trade or business or for
investment. Under § 1031 (b), if a taxpayer also receives cash or property that is not
like-kind property (boot) in an exchange that otherwise qualifies under § 1031 (a), the
taxpayer must recognize gain to the extent of the boot. Section 1031 does not apply to
property that is used solely as a personal residence .
.05 Section 1012 provides that the basis of property is its cost. The basis of
property acquired in an exchange is its fair market value, unless otherwise provided in
the Code or regulations (for example, § 1031(d». See Philadelphia Park Amusement
Co. v. United States, 126 F. Supp. 184 (Ct. CI. 1954) .
.06 Under § 1031 (d), the basis of the replacement property is the same as the
basis of the relinquished property, decreased by the amount of cash received and
increased by the amount of gain recognized by the taxpayer in the exchange .
.07 Neither § 121 nor § 1031 addresses the application of both provisions to a
single exchange of property. Section 121(d)(5)(8), however, provides rules for applying

§ 121 and another nonrecognition provision, § 1033, to a single replacement of
property. Under § 1033, in general, gain is recognized only to the extent the amount
realized from a compulsory or involuntary conversion of property exceeds the cost of
qualifying replacement property, and the basis of the replacement property is its cost
reduced by the amount of the gain not recognized .
.08 Section 121 (d)(5)(8) provides that, in applying § 1033, the amount realized

4
from the sale or exchange of property is treated as the amount determined without
regard to § 121, reduced by the amount of gain excluded under § 121. Under §
121 (d)(5)(B), the amount realized from an exchange of a taxpayer's principal residence
for purposes of applying § 1033 is the fair market value of the relinquished property
reduced by the amount of the gain excluded from gross income under § 121. Thus,
Congress concluded that for exchanges meeting the requirements of both § 121 and §
1033, (1) the § 121 exclusion should be applied to gain from the exchange before the
application of § 1033, (2) for purposes of determining gain that may be deferred under §
1033, the § 121 exclusion should be applied first against amounts received by the
taxpayer that are not reinvested in the replacement property (amounts equivalent to
boot that would result in gain recognition absent the application of § 121), and (3) the
gain excluded under § 121 should be added in the calculation of the taxpayer's basis in
the replacement property. See S. Rep. No. 830, 88th Cong., 2d Sess. 52-53, 1964-1
C.B. (Part 2) 505, 556-7 ("the basis of the taxpayer in the newly acquired residence will
be his basis for the old residence increased by any exclusion of gain obtained by him
under the provision which is reinvested in the new residence"); H.R. Rep. No. 749, 88

Cong., 1st Sess. 47,1964-1 C.B. (Part 2) 125, 171.
SECTION 3. SCOPE
This revenue procedure applies to taxpayers who exchange property that
satisfies the requirements for both the exclusion of gain from the exchange of a principal
residence under § 121 and the nonrecognition of gain on the exchange of like-kind
properties under § 1031. Thus, this revenue procedure applies only to taxpayers who

5
satisfy the held for productive use in a trade or business or for investment requirement
of § 1031(a)(1) with respect to the relinquished business property and the replacement
business property (as defined below).
SECTION 4. APPLICATION
.01 In general. Taxpayers within the scope of this revenue procedure may apply
both the exclusion of gain from the exchange of a principal residence under § 121 and
the nonrecognition of gain from the exchange of like-kind properties under § 1031 to an
exchange of property by applying the procedures set forth in this section 4 .
.02 Computation of gain.
(1) Application of § 121 before § 1031. Section 121 must be applied to
gain realized before applying § 1031.
(2) Application of § 1031 to gain attributable to depreciation. Under §
121 (d)(6), the § 121 exclusion does not apply to gain attributable to depreciation
deductions for periods after May 6, 1997, claimed with respect to the business or
investment portion of a residence. However, § 1031 may apply to such gain.
(3) Treatment of boot.

In applying § 1031, cash or other non-like kind

property (boot) received in exchange for property used in the taxpayer's trade or
business or held for investment (the relinquished business property), is taken into
account only to the extent the boot exceeds the gain excluded under § 121 with respect
to the relinquished business property .
.03 Computation of basis. In determining the basis of the property received in
the exchange to be used in the taxpayer's trade or business or held for investment (the

6
replacement business property), any gain excluded under § 121 is treated as gain
recognized by the taxpayer. Thus, under § 1031 (d), the basis of the replacement
business property is increased by any gain attributable to the relinquished business
property that is excluded under § 121.
SECTION 5. EXAMPLES
In each example below, the taxpayer is an unmarried individual and the property
or a portion of the property has been used in the taxpayer's trade or business or held for
investment within the meaning of § 1031 (a) as well as used as a principal residence as
required under § 121.
Example 1. (i) Taxpayer A buys a house for $210,000 that A uses as A's
principal residence from 2000 to 2004. From 2004 until 2006, A rents the house to
tenants and claims depreciation deductions of $20,000. In 2006, A exchanges the
house for $10,000 of cash and a townhouse with a fair market value of $460,000 that A
intends to rent to tenants. A realizes gain of $280,000 on the exchange.
(ii) A's exchange of a principal residence that A rents for less than 3 years for a
townhouse intended for rental and cash satisfies the requirements of both §§ 121 and
1031. Section 121 does not require the property to be the taxpayer's principal
residence on the sale or exchange date. Because A owns and uses the house as A's
principal residence for at least 2 years during the 5-year period prior to the exchange, A
may exclude gain under § 121. Because the house is investment property at the time of
the exchange, A may defer gain under § 1031.
(iii) Under section 4.02(1) of this revenue procedure, A applies § 121 to exclude

7
$250,000 of the $280,000 gain before applying the nonrecognition rules of § 1031. A
may defer the remaining gain of $30,000, including the $20,000 gain attributable to
depreciation, under § 1031. See section 4.02(2) of this revenue procedure. Although A
receives $10,000 of cash (boot) in the exchange, A is not required to recognize gain
because the boot is taken into account for purposes of § 1031(b) only to the extent the
boot exceeds the amount of excluded gain. See section 4.02(3) of this revenue
procedure.
These results are illustrated as follows.
Amount realized ......................... .

$470,000

Less:

Adjusted basis .. . . . . . . . . . . . . .

$190,000

Realized gain ................

$280,000

Less:

Gai n excl uded under §.-;1;.:2:....;..1...:...-,-.. .;. .,,-..:....;.'-"._--=$=25=-0"-',..:..00=-0=Gain to be deferred .............

$ 30,000

(iv) A's basis in the replacement property is $430,000, which is equal to the
basis of the relinquished property at the time of the exchange ($190,000) increased by
the gain excluded under § 121 ($250,000), and reduced by the cash A receives
($10,000)). See section 4.03 of this revenue procedure.
Example 2. (i) Taxpayer B buys a property for $210,000. The property consists
of two separate dwelling units (within the meaning of § 1.121-1 (e)(2)), a house and a
guesthouse. From 2001 until 2006, B uses the house as B's principal residence and
uses the guesthouse as an office in B's trade or business. Based on the square footage
of the respective parts of the property, B allocates 2/3 of the basis of the property to the

8
house and 1/3 to the guesthouse. In 2006, B exchanges the entire property for a
residence and a separate property that B intends to use as an office. The total fair
market value of B's replacement properties is $360,000. The fair market value of the
replacement residence is $240,000 and the fair market value of the replacement
business property is $120,000, which is equal to the fair market value of the
relinquished business property. From 2001 to 2006, B claims depreciation deductions
of $30,000 for the business use. B realizes gain of $180,000 on the exchange.
(ii) Under § 121, B may exclude gain of $100,000 allocable to the residential
portion of the house (2/3 of $360,000 amount realized, or $240,000, minus 2/3 of
$210,000 basis, or $140,000) because B meets the ownership and use requirements for
that portion of the property. Because the guesthouse is business property separate
from the dwelling unit and B has not met the use requirements for the guesthouse, B
may not exclude the gain allocable to the guesthouse under § 1.121-1 (e). However,
because the fair market value of the replacement business property is equal to the fair
market value of the relinquished business property and B receives no boot, B may defer
the remaining gain of $80,000 (1/3 of $360,000 amount realized, or $120,000, minus
$40,000 adjusted basis, which is 1/3 of $210,000 basis, or $70,000, adjusted by
$30,000 depreciation) under § 1031.
These results are illustrated as follows:

Amount realized
Basis
Depreciation adjustment
Adjusted basis

Total
property
$360,000
$210,000
$ 30,000
$180,000

2/3 residential
property
$240,000
$140,000
$140,000

1/3 business
property
$120,000
$ 70,000
$ 30,000
$ 40,000

Realized gain
Gain excluded under
§ 121
Gain deferred under
§ 1031

$180,000
$100,000

$100,000
$100,000

$ 80,000

(iii) Because no portion of the gain attributable to the relinquished business
property is excluded under § 121 and B receives no boot and recognizes no gain or loss
in the exchange, B's basis in the replacement business property is equal to B's basis in
the relinquished business property at the time of the exchange ($40,000). B's basis in
the replacement residential property is the fair market value of the replacement
residential property at the time of the exchange ($240,000).
Example 3. (i) Taxpayer C buys a property for $210,000. The property consists
of a house that constitutes a single dwelling unit under § 1.121-1(e)(2). From 2001 until
2006, C uses 2/3 of the house (by square footage) as C's principal residence and uses
1/3 of the house as an office in C's trade or business. In 2006, C exchanges the entire
property for a residence and a separate property that C intends to use as an office in
C's trade or business. The total fair market value of C's replacement properties is
$360,000. The fair market value of the replacement residence is $240,000 and the fair
market value of the replacement business property is $120,000, which is equal to the
fair market value of the business portion of the relinquished property. From 2001 to
2006, C claims depreciation deductions of $30,000 for the business use. C realizes
gain of $180,000 on the exchange.
(ii) Under § 121, C may exclude the gain of $100,000 allocable to the residential
portion of the house (2/3 of $360,000 amount realized, or $240,000, minus 2/3 of

10
$210,000 basis, or $140,000) because C meets the ownership and use requirements for
that portion of the property.
(iii) The remaining gain of $80,000 (1/3 of $360,000 amount realized, or
$120,000, minus $40,000 adjusted basis, which is 1/3 of $210,000 basis, or $70,000,
adjusted by $30,000 depreciation) is allocable to the business portion of the house (the
office). Under section 4.02(1) of this revenue procedure, C applies § 121 before
applying the nonrecognition rules of § 1031. Under § 1.121-1(e}, C may exclude
$50,000 of the gain allocable to the office because the office and residence are part of a
single dwelling unit. C may not exclude that portion of the gain ($30,000) attributable to
depreciation deductions, but may defer the remaining gain of $30,000 under § 1031. These results an

Amount realized
Basis
Depreciation adjustment
Adjusted basis
Realized gain
Gain excluded under
§ 121
Gain deferred under
§ 1031

Total
2I"operty
$360,000
$210,000
$ 30,000

2/3 residential
prop_erty
$240,000
$140,000

1/3 business
property
$120,000
$ 70,000
$ 30,000

$180,000
$180,000
$150,000

$140,000
$100,000
$100,000

$ 40,000
$ 80,000
$ 50,000

$ 30,000

11
See section 4.03 of this revenue procedure.
Example 4. (i) The facts are the same as in Example 3 except that C also
receives $10,000 of cash in the exchange and the fair market value of the replacement
business property is $110,000, which is $10,000 less than the fair market value of the
business portion of the relinquished property ($120,000).

(ii) Under § 121, C may exclude the gain of $100,000 allocable to the residential
portion of the house (2/3 of $360,000 amount realized, or $240,000, minus 2/3 of
$210,000 basis, or $140,000).
(iii) The remaining gain of $80,000 (1/3 of $360,000 amount realized, or
$120,000, minus $40,000 adjusted basis) is allocable to the business portion of the
house. Under section 4.02(1) of this revenue procedure, C applies § 121 to exclude
gain before applying the nonrecognition rules of§ 1031. Under§ 1.121-1(e), C may
exclude $50,000 of the gain allocable to the business portion of the house but may not
exclude the $30,000 of gain attributable to depreciation deductions. Under section
4.02(2) of this revenue procedure, C may defer the $30,000 of gain under § 1031.
Although C receives $10,000 of cash (boot) in the exchange, C is not required to
recognize gain because the boot is taken into account for purposes of § 1031(b) only to
the extent the boot exceeds the amount of excluded gain attributable to the relinquished
business property. See 4.02(3) of this revenue procedure.
These results are illustrated as follows:
Total property
Amount realized

$360,000

2/3 residential
property
$240,000

1/3 business
property
$110,000 + 10,000

12
Basis
Depreciation adjustment
Adjusted basis
Realized gain
Gain excluded under
§ 121
Gain deferred under
§ 1031

$210,000
$ 30,000
$180,000
$180,000
$150,000
$ 30,000

$140,000
$140,000
$100,000
$100,000

$
$
$
$
$

70,000
30,000
40,000
80,000
50,000

$ 30,000

(iv) C's basis in the replacement residential property is the fair market value of
the replacement residential property at the time of the exchange ($240,000). C's basis
in the replacement business property is $80,000, which is equal to C's basis in the
relinquished business property ($40,000), increased by the gain excluded under § 121
($50,000), and reduced by the cash ($10,000) received. See section 4.03 of this
revenue procedure.
Example 5. (i) The facts are the same as in Example 3 except that the total fair
market value of the replacement properties is $540,000. The fair market value of the
replacement residence is $360,000, the fair market value of the replacement business
property is $180,000, and C realizes gain of $360,000 on the exchange.
(ii) Under § 121, C may exclude the gain of $220,000 allocable to the residential
portion of the house (2/3 of $540,000 amount realized, or $360,000, minus 2/3 of
$210,000 basis, or $140,000).
(iii) The remaining gain of $140,000 (1/3 of $540,000 amount realized, or
$180,000, minus $40,000 adjusted basis) is allocable to the business portion of the
house. Under section 4.02(1) of this revenue procedure, C excludes the gain before
applying the nonrecognition rules of § 1031. Under § 1.121-1(e), C may exclude

13
$30,000 of the gain allocable to the business portion, at which point C will have
excluded the maximum limitation amount of $250,000. C may defer the remaining gain
of $110,000 ($140,000 realized gain minus the $30,000 gain excluded under § 121),
including the $30,000 gain attributable to depreciation, under § 1031.
These results are illustrated as follows:

Amount realized
Basis
Depreciation adjustment
Adjusted basis
Realized gain
Gain excluded under
§ 121
Gain deferred under
§ 1031

Total
property
$540,000
$210,000
$ 30,000

property
$360,000
$140,000

1/3 business
property
$180,000
$ 70,000
$ 30,000

$180,000
$360,000
$250,000

$140,000
$220,000
$220,000

$ 40,000
$140,000
$ 30,000

$110,000

2/3 residential

$110,000

(iv) C's basis in the replacement residential property is the fair market value of
the replacement residential property at the time of the exchange ($360,000). C's basis
in the replacement business property is $70,000, which is equal to C's basis in the
relinquished business property ($40,000), increased by the amount of the gain excluded
under § 121 ($30,000). See section 4.03 of this revenue procedure.
Example 6. (i) The facts are the same as in Example 3 except that the total fair
market value of the replacement properties is $750,000. The fair market value of the
replacement residence is $500,000, the fair market value of the replacement business
property is $250,000, and C realizes gain of $570,000 on the exchange.

14
(ii) The gain allocable to the residential portion is $360,000 (2/3 of $750,000
amount realized, or $500,000, minus 2/3 of $210,000 basis, or $140,000). C may
exclude gain of $250,000 from gross income under § 121. C must include in income the
gain of $110,000 allocable to the residential portion that exceeds the § 121 (b) exclusion
limitation amount.
(iii) The remaining gain of $210,000 (1/3 of $750,000 amount realized, or
$250,000, minus $40,000 adjusted basis) is allocable to the business portion of the
house. C may defer the $210,000 of gain, including the $30,000 gain attributable to
depreciation, under § 1031.
These results are illustrated as follows:
Total
property
$750,000
$210,000
$ 30,000

2/3 residential
property
$500,000
$140,000

1/3 business
property
$250,000
$ 70,000
$ 30,000

Adjusted basis
Realized gain
Gain excluded under
§ 121

$180,000
$570,000
$250,000

$140,000
$360,000
$250,000

$ 40,000
$210,000

Gain deferred under

$210,000

Amount realized
Basis
Depreciation adjustment

$210,000

§ 1031
Gain recognized

$110,000

(iv) C's basis in the replacement residential property is the fair market value of
the replacement residential property at the time of the exchange ($500,000). C's basis
in the replacement business property is $40,000, which is equal to C's basis in the

15
relinquished business property at the time of the exchange.
SECTION 6. EFFECTIVE DATE
This revenue procedure is effective January 27,2005. However, taxpayers may
apply this revenue procedure in taxable years for which the period of limitation on
refund or credit under § 6511 has not expired.
DRAFTING INFORMATION
The principal author of this revenue procedure is Sara Paige Shepherd of the
Office of Associate Chief Counsel (Income Tax & Accounting). For further information
regarding this revenue procedure, contact Ms. Shepherd at (202) 622-4960 (not a toll
free call).

JS-2215. Statement

ofTrt~{lsllrySecretary

John W. Snow on Fourth Quarter GDP Growth
,-r---,
.:~ .-.: ' ~
J

•

PFiL:SS 800M

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Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
January 28, 2005
JS-2215
Statement of Treasury Secretary John W. Snow on Fourth Quarter GOP
Growth
Today's report on GOP wraps up a strong year of economic expansion and job
creation. The addition of 2.3 million jobs and a solid year-over-year growth rate of
4.4 percent show the strength of our nation's economy. Real gross domestic
purchases increased at a 4.7 percent rate in the fourth quarter, versus the GOP
growth rate of 3.1 percent, underscoring the health of U.S. demand and the need
for our trading partners to adopt policies that accelerate economic growth. With the
President's economic leadership and the resolve of the American people, we will
push forward with the important policies and reforms that will keep our economy on
this upward path. This administration is focused on the fundamentals: cutting the
deficit; establishing a fairer, simpler, pro-growth tax code; encouraging savings;
reducing the burden of frivolous lawsuits on our economy and strengthening social
security.

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----------------------~~
- - ~~ -··8l@J-/;..rI'~
:

.... :

~--

PHLSS HOOM

FROM THE OFFICE OF PUBLIC AFFAIRS
January 28, 2005
JS-2216

The Private Sector's Role in
Promoting Economic Growth in the Broader Middle East and North Africa
John B. Taylor
Under Secretary for International Affairs
United States Treasury
Remarks at the World Economic Forum Business Dialogue:
The Arab Business Council and the G-8/BMENA Forum for the Future
Davos, Switzerland
January 28, 2005
I would like to thank the World Economic Forum for inviting me to participate in this
distinguished panel. I would also like to thank Shafik Gabr, Chairman of the Arab
Business Council, for moderating this discussion as well as for his able and
energetic stewardship of the Council'S activities.

Engagement with business leaders, through the Forum for the Future and other
venues, underscores the deep link between economic and political reform. As
Secretary Powell said in Rabat on the occasion of the first Forum for the Future,
"Political freedom and economic freedom go hand in hand." And economic
freedom, our subject for today's discussion, is not achievable without the active
participation of independent business voices like that of the Arab Business Council.
Evidence has shown that increased incomes and poverty reduction can only be
achieved via productivity growth. Productivity is simply the amount of goods and
services that can be produced with by workers per unit of time. Productivity
increases as the skills and tools that workers have to work with increase. Higher
productivity growth means higher wages and thereby higher incomes.
Unfortunately, the recent trends in productivity growth in the Middle East are not
good. Guido Tabellini, a colleague of mine when I was a Professor at Stanford
University, has noted that productivity actually fell in the Middle East in the last 20
years, by 0.7 percent per year. In contrast, this is a period when productivity was
increasing in the United States, Europe and East Asia. This contrast is particularly
strong and worrisome. And ttle pressure on increasing productivity and creating
jobs will only grow more intense in the years ahead, as the economic and
demographic challenges confronting the Middle East and North Africa are
significant. Regional unemployment levels are 15 percent and reach 30 percent
among younger workers. The region will need to generate over 100 million jobs in
the next 12 years just to maintain current levels of unemployment.
In his speech at the National Endowment for Democracy on the greater Middle East
last November, President Bush stated, "As we watch and encourage reforms in the
region, we are mindful that modernization is not the same as Westernization ...
There are, however, essential principles common to every successful society, in
every cUlture."
The Council's Blueprint for Economic Reform, ratified in this forum one year ago,
discusses precisely those universal principles to which President Bush referred economic reform and liberalization, human resources development and governance
reform. The regional business community is a natural partner and ally for reform
minding governments because business people have strong incentives to counter
backward looking isolationist tendencies that challenge both the economic and
political stability of the region. They stand to benefit from reforms that can improve
the lives of all the region's inhabitants. They also understand very well the need for
reform.

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I am very pleased that the Arab Business Council has turned from the elaboration
of principle to the advancement of specific initiatives since the last meeting here at
Davos. Two specific initiatives deserve strong support:
•

First. I'd like to applaud the Arab Business Council for taking steps towards
establishing a series of national competitiveness councils with the goal of
benchmarking major business climate indicators and promoting
competitiveness. It is important to continue to spread this work to more
countries in the region. One aspect of this program that President Bush is
firmly committed to is measuring results. What gets measured gets done.
This is, in fact, a core component of the Administration's development
strategy. We have pushed it in the Multilateral Development Banks, and
have made it a centerpiece of the approach taken by the Millennium
Challenge Account.
• I'd also like to applaud the Council for its work with the OECD to organize a
Task Force on Investment. Productivity, as we know from economic theory
and economic history, depends on the amount of capital each person has to
work with and the level of technology. This region, unlike many others, has
sufficient capita/. It is reported that $ 1 trillion in local funds are invested
abroad. Improvements in investment environment can help these funds
come to rest closer to home, resulting in productivity improvements and,
ultimately, jobs and economic growth.

There is a window of opportunity for reform in the broader Middle East today, and
the members of the Arab Business Council are among the foremost of those who
recognize the importance of acting now.
We in the United States recognize the importance of promoting the forces of
economic advancement and integration. We are pleased that there are many voices
in the Arab business community who share this vision.

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PHLSSHI)OM

FROM THE OFFICE OF PUBLIC AFFAIRS
January 25, 2005
JS-2217
Remarks By United States Treasury Assistant Secretary Quarles at the
Third Annual European Financial Services Conference
Brussels, Belgium
January 25, 2005
Introduction
I am delighted to participate in this Third Annual European Financial Services
Conference on the "The New Policy Agenda for Financial Services." The agenda
refers to the Commission's post-Financial Service Action Plan actiVities. But there
are other reasons to discuss new agendas at this time. One is that it is the first 100
days of the new Commission. There is a relatively new European Parliament.
Another is that it is the first week of the second term of the U.S. Administration and
President Bush will soon be visiting Brussels. And even this late in January, it is
never too late to make a New Year's resolution.
US-EU Economic and Financial Cooperation
US-European economic cooperation runs deep. The United States and the
European Union have a special responsibility to promote economic growth and act
as a model for global economic cooperation. Although it has been said many times,
it is no less true: there is more that brings the US and EU together than pulls us
apart. That doesn't sell newspapers; but it is a sound basis for working together. I
think we have done well in recent years. I expect cooperation to intensify. let me
give you some examples.
One of the best contributions the US and EU can offer the world is to put in place
sound policies for economic growth. The United States continues to grow SOlidly.
We are working with EU members through the G-7 Agenda for Growth Initiative to
help better understand the imperative of structural reforms to boost productivity and
employment in our countries. European Commission President Barroso's pledge to
place a premium on growth and jobs is extremely encouraging He has hit the mark
by suggesting that a renewed lisbon strategy should focus on a more dynamic
market place and the improved functioning of labor markets with greater attention to
skills and training
Of course, we work with our European friends in the G-? on other global issues as
well - how to best promote development in the low-income countries; how to
address the debt problems of the Heavily Indebted Poor Countries; how to respond
to financial crises through the IMF.
Treasury has participated in recent months in each of the outreach sessions with
US stakeholders in the transatlantic relationship as a follow-up to last year's US-EU
summit. We have met with a wide range of business leaders spanning many
sectors from clicks to bricks, and learned from them how important Europe's market
is to their well-being.
We are working closely with our EU colleagues on combating terrorist financing.
Last September, we created an informal dialogue on combating terrorist financing.
We have had a good working relationship with the EU in this field, although we
have pressed for improvements in the EU designation process. The informal, ad
hoc dialogue will facilitate the sharing of information, experiences and best
practices, support implementation of the Financial Action Task Force Special
Recommendations, especially on cash couriers and non-profit organizations, and
explore options for joint technical assistance in priority countries. We will continue

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to pursue counter terrorist financing issues with all European Member States and
with them through other relevant organizations, such as the United Nations Security
Council, the Financial Action Task Force, the Group of Seven and the International
Financial Institutions.
We are also collaborating on financial services negotiations in the WTO as part of
the larger talks called the Doha Development Agenda. Together we have called for
a "floor" level of liberalization to be complemented by disciplines on regulatory
transparency. WTO members are to table their offers by May. To date, few
countries have done so and almost none have offered to cut significantly market
access barriers on financial services.
Research by the World Bank has shown that countries with open financial markets
experience higher economic growth. I am grateful that the private sector Financial
Leaders Group -- that includes US and European participation -- will hold a seminar
early next month to highlight successful experiences of countries that have
liberalized their financial services sectors.
Last but not leasl, the informal US-EU Financial Markets Regulatory Dialogue that
began three years ago is another testimonial to how our strong commonality of
interests brings us together. The dialogue addresses issues of immediate
importance and those we anticipate arising in the medium term; and it manages
"spillover" effects that actions taken in one jurisdiction may have on another. The
U.S. Treasury, the lead in the United States Administration for the dialogue, is
joined by the SEC and the Federal Reserve Board in our meetings with the
European Commission. The dialogue works informally, quietly and professionally.
The stakes are too large to operate any other way.
The Securities Industry Association underscored the large stakes involved in its
written submission for the stakeholder outreach. The two-way flow of trade,
portfolio and direct investment between our two regions exceeds $1 trillion
annually.
US. companies raised more than $171 billion in EU capital markets in 2003. 53%
of US investors' foreign equity holdings are EU shares. And in 2003 EU investors
acquired $225 billion of US stocks and bonds. These numbers are impressive.
US-EU Informal Financial Markets Regulatory Dialogue
The informal Financial Markets Regulatory Dialogue promotes economic growth as
well as economic cooperation. The assessment of the Lisbon strategy by former
Dutch Prime Minister Kok was that "dynamic and highly competitive financial
markets are not only desirable in themselves - they are an essential driver of
growth in all other sectors of the economy and must be a cornerstone of efforts to
boost the EU's economic performance." Robust EU financial markets are good for
economic growth not only in the EU, but also in the US and the world.
With the legislative phase of the Financial Services Action Plan completed, and with
many of the initial transatlantic financial tensions having been addressed, it is only
natural that the Dialogue will evolve. In my mind, the forthcoming agenda will be
dominated by: problem solving; implementation of existing FASP measures; a
forward looking agenda; and deepening cooperation.
Problem Solving
Admittedly, the dialogue has been at times reactive. In the first two plus years of
the Dialogue, both sides needed to respond quickly to events as they arose.
Hence, partiCipants focused on ways to address "spillover effects" of complex
issues. The Financial Conglomerates Directive and Sarbanes-Oxley are the two
best examples. Participants recognized that each side shared similar objectives of
promoting dynamic and sound global capital markets, even if we went about our
business differently. Through frequent discussion and taking each other's views
into account, we created a process and engendered mutual trust.
The Financial Conglomerates Directive was one of the first FSAP measure~ to take
root. Despite our close tracking of this directive and on-going diSCUSSions, It
required nurturing to stay on track. The US side needed to explain how It conducts

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comprehensive consolidated supervision of US financial institutions to the EU. The
SEC formalized its structure of consolidated supervision of US investment houses.
Results to date look good. The European Financial Conglomerates Committee has
verified that US supervision is broadly equivalent with that in the directive, an
assessment that national supervisors have respected,
From the EU side, US implementation of Sarbanes-Oxley legislation has reflected
many of our discussions and accommodated many EU concerns, Most recently,
the Public Company Accounting Oversight Board has indicated that it is prepared to
rely on oversight of relevant firms by foreign supervisors in appropriate
circumstances. The PCAOB has already begun to intensify its contacts with
member state auditing authorities to explore details about implementation.
While we are striving to anticipate looming issues rather than react as they arise, it
would be na'fve to think we can be successful at every turn. A good example is our
recent discussion of de-registration of securities in the United States, European
companies argue that disclosure requirements for listings in the US, created
decades ago before the evolution of global capital markets, prevent firms that now
wish to leave the US capital market from doing so. Partly in light of US-EU
discussions on this matter, SEC staff is now examining a number of possible
solutions,
Implementation

I want to commend the Commission, Council and Parliament for completing the
FSAP - basically retooling much of the EU's framework rules for securities and
banking legislation. That is good news.
While FSAP measures have been promulgated, they also need to be implemented
- that means transposition into national law and implementation by the supervisory
structures in EU countries. But if 25 different supervisors implement the same
measure 25 different ways, then obviously Europe will not reap the fruits of creating
a single, dynamic, and integrated capital market, nor will the US and EU achieve a
transatlantic capital market
So the other news is that the practicalities of implementation will prove every bit as
challenging as the work already completed, These practicalities will arise in many
contexts. Let me give you a few examples,
Most obvious, the 25 supervisors need to implement, apply and enforce the FSAP
measures in a consistent manner. How can this be achieved? In Europe these
tasks will fall to three new committees The Committee of European Securities
Regulators (CESR) and the Committee of European Banking Supervisors (CEBS)
have made a quick start. No doubt the Committee of European Insurance and
Occupational Pension Supervisors (CIEOPS) will follow once new insurance
legislation is adopted,
We believe that these three committees will playa vital role in determining whether
the promise of the FSAP is achieved. It is natural that as they carry out their work
on supervisory convergence within the EU that a dialogue commence between
them and their US counterparts. The SEC and CESR have established a formal
dialogue. The NAIC and CEIOPs are in the process of so doing. CEBs officials are
in Washington for a round of consultations today,
We have all heard that the devil lies in the details, We are now watching
implementation of the Market in Financial Instruments Directive (MiFIO), The final
legislation, however, reflected a general compromise, leaving important
interpretations and details to be nailed down later. The delicate balance between
and spirit of compromises reached on that legislation should be respected in the
implementation process.
Moreover, firms need to be given adequate time to put in place new systems so that
compliance with the legislation can be effective on day-one, This will help ensure
robust competition among investment firms and exchanges that can benefit
investors and enhance market efficiency,
Implementation also presents an unavoidable reality that can encourage

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Page 4 of 5

improvements in our respective markets. As noted, the Financial Conglomerates
DIrectIve engendered measures taken by US supervisory authorities to make clear
that financial entities are supervised on a consolidated basis. Enhanced auditing
and corporate governance rules in the US have been paralleled by changes in the
EU. As we share the objectives of sound, stable, and efficiently operating capital
markets, we learn from each other, while respecting the uniqueness of each of our
markets.

Forward Looking Agenda
The dialogue also continues to look ahead. Identifying issues today that are
important for building a more vibrant transatlantic capital market tomorrow can
enhance international cooperation and global growth.
Implementation of Basle II In the US and EU has been taken up at all Dialogue
sessions. Through these discussions, each side has gained a much better
appreciation for the other's approach and timing toward Basle implementation.
While the Basle Accord Implementation Group has many details yet to resolve, it is
important to bear in mind that the basic rationale for such an international
agreement is to promote fair competition among major financial institutions. In this
respect, the EU's capital adequacy directive - CAD III - should reflect the
provisions emerging from Basle, including those being developed on trading
books.
Clearing and settlement, mutual funds, and insurance - both reinsurance as well as
the Solvency II project to strengthen capital adequacy standards -- are upcoming
topics on which the dialogue already has exchanged views.
Convergence of international accounting standards and the implications for listings
is a critical forward agenda issue. As you know, the FASB and IASB are now
working on a process to converge accounting standards. At the end of the day, the
objective is that the same accounting question yields a similar accounting answer,
whether in the United States or Europe.
For years, US firms have listed in the Euromarkets on the basis of statements
based on US GAAP. In contrast, foreign firms listing in US markets needed to
submit financial statements using US GAAP or accounts reconciled to GAAP. As of
2005, all EU listed firms in Europe must use accounts prepared under International
Financial Reporting Standards. Europe has already decided that until 2007, US
firms listing on European exchanges may continue to use statements based on US
GAAP.
Many Europeans have understandably expressed interest in their firms being able
to list on US markets using accounts prepared in IFRS. To do so, it will be
important for US authorities to have reviewed statements prepared on the basis of
IFRS, thereby gaining a better understanding of them and whether they yield similar
accounting answers. Also, it will be important for US authorities to see that Europe
is applying, implementing and enforcing accounting standards in a consistent
manner. SEC staff have indicated that they are ready to do their part as quickly as
possible ensure that this standard is met.
Some in Europe have suggested that after 2007 Europe should no longer accept
statements for foreign issuers that are prepared on the basis of US GAAP for
meeting the requirements of the Prospectus and Transparency Directives. I think
such an approach would be a mistake. A broad capital market is essential to
promote economic growth. This means preserving the depth and liquidity of the
Euromarkets.
In the meantime, CESR is advising the Commission whether US GAAP accounts
should be considered equivalent for use in meeting the requirements of the
Prospectus and Transparency Directives. In our view, the answer is a clear "yes."
Closing off the existing market for US issuers with accounts prepared under US
GAAP would be contrary to the EU's own economic interests. Individual member
state supervisors have recognized that such accounts provide investors with
adequate information. This has not changed, even as we all hope for the
convergence of accounting standards I mentioned earlier
Another area that we look forward to discussing with our colleagues is the potential

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Page 5 of 5

for cross-border retail banking throughout the EU. Surely this is another area that
holds significant promise for reducing transaction costs and bringing benefits to
consumers.

Deepening Cooperation
Implementation, problem solving and discussing issues arising in the medium term
will entail more work for the Dialogue. To understand the technical Implications of
implementation that can affect policy decisions or the ramifications of new issues
arising in the medium term means that the dialogue will need to be more inclusive
while retaining its informal nature.
We will be continuing to reach out to the academic community, private sector,
member state governments and legislatures. As the EU supervisory committees
develop the EU jurisprudence from their joint experiences in implementing the EU
directives, their topics of discussion will expand with their US counterparts. The
dialogue will need to be infused with the substance of such supervisory dialogues.

Conclusion
The informal Financial Markets Regulatory Dialogue thus far has been a success.
But in dynamic markets, there must be constant re-assessment and retooling of the
old to keep up with the new. What is "new" for the Dialogue is: 1) challenges
arising on both sides of the Atlantic from implementation; 2) more opportunities for
transatlantic and international cooperation; 3) fresh topics to be addressed; and 4)
outreach to a wider array of views.
My New Year's resolution is to keep the dialogue fresh, to help it evolve with the
changing times and issues. I invite you to work with me to keep it fresh.
Thank you for your attention.

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js-2218: Oe.Pllty Assistant Se.cretary Iannicola Teaches Personal Finance Skills to Student... Page 1 of 1

f-'HLSS HOOM

FROM THE OFFICE OF PUBLIC AFFAIRS
January 28, 2005
js-2218
Deputy Assistant Secretary lannicola Teaches Personal Finance Skills to
Students in Washington D.C. High Schools
Treasury's Deputy Assistant Secretary for Financial Education Dan lannicola today
taught personal finance skills, such as budgeting and managing credit wisely, to
students at two Washington, D.C. high schools. lannicola first taught a financial
education lesson to 12th graders at Margaret Murray Washington Career High
School, marking Treasury's 1OOth financial education event in the last twelve
months. lannicola later taught students in the 10th and 11 th grades at Theodore
Roosevelt Senior High School.
During both lessons, lannicola emphasized the importance of budgeting and
savings. He also explained how the credit reporting system works and how to avoid
common credit pitfalls.
"Knowing how to responsibly use credit is an important skill for all Americans. But
with high school students we have a unique opportunity to arm them with
knowledge before they encounter credit cards, student loans, car loans and all the
dangers and opportunities that go along with borrowing," said lannicola. "Financial
education in our schools is the ounce of prevention our young people need,
precisely when they need it."
lannicola praised both Margaret Murray Washington Career High School teacher
Aloha Cobb and Theodore Roosevelt Senior High School teacher Gladys
Pemperton, who are actively integrating financial education lessons into different
subjects with the help and support of financial literacy partner organizations.
"Educators like these are an essential link in delivering good financial education
programs to our young people," he said.
Established in 1912, the Margaret Murray Washington Career High School vision is
to create a curriculum that prepares students for undergraduate study, technical
training, or for careers in health, education or food services. Theodore Roosevelt
Senior High School provides students who complete the 9th grade a selected
course of study in communications, travel and tourism or the 21 st Century
entrepreneurs academies. Today's financial education lesson at Theodore
Roosevelt Senior High School was a collaborative effort with District of Columbia
Public Schools and Junior Achievement.
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, homeownership 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/financialeriLJcation

- 30 -

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2005- i -5 1-\ 0-47-41-14326: PREsiDENT'S ADVISORY PANEL ON FEDERAL TAX ...

Page 1 of 2

PHlSS fWOM

FROM THE OFFICE OF PUBLIC AFFAIRS
January 31, 2005
2005-1-31-10-47-41-14326
PRESIDENT'S ADVISORY PANEL ON FEDERAL TAX REFORM:
Tax Panel Announces First Meeting
WASHINGTON, DC - Senators Connie Mack and John Breaux, Chairman and Vice
-Chairman of the President's Advisory Panel on Federal Tax Reform, today
announced that the panel will hold its first meeting on Wednesday, February 16,
2005 at 10 am. The meeting will be held at the Ronald Reagan Building &
International Trade Center Amphitheater, Concourse Level, 1300 Pennsylvania
Avenue NW, Washington, DC.
The first meeting will provide an opportunity for the panel members to hear general
background information about the federal tax code. This meeting is the first in a
series of public meetings that the panel will hold before it submits its final report by
July 31,2005.
The President's Advisory Panel on Federal Tax Reform was established by
President Bush on January 7, 2005. President Bush has charged the bipartisan
panel with recommending reforms to the tax code that will make the U.S. tax
system simpler, fairer and more growth oriented.
Further details, including the list of witnesses, will be provided in a later release.
The meeting notice, which will appear in the Federal Register, is attached.

####

DEPARTMENT OF THE TREASURY 4810-25
Public Meeting of the
President's AdviSOry Panel on Federal Tax Reform
AGENCY: Department of the Treasury.
ACTION: Notice of Meeting.
SUMMARY: This notice advises all interested persons of the initial public meeting
of the President's Advisory Panel on Federal Tax Reform.

Background: Executive Order 13369 (January 7,2005) established the President's
Advisory Panel on Federal Tax Reform. The Order provides that the purpose of the
Advisory Panel shall be to submit to the Secretary of the Treasury a report with
revenue neutral policy options for reforming the Federal Internal Revenue Code.
The options should (a) simplify Federal tax laws to reduce the costs and
administrative burdens of compliance with such laws; (b} share the burdens and
benefits of the Federal tax structure in an appropriately progressive manner while
recognizing the importance of homeownership and charity in American society; and
(c) promote long-run economic growth and job creation, and better encourage work
effort, saving, and investment, so as to strengthen the competitiveness of the
United States in the global marketplace. At least one option submitted by the
Advisory Panel should use the Federal income tax as the base for its recommended
reforms.

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2005·1·3t.1O-47-41-14326: PRESIDENT'S ADVISORY PANEL ON FEDERAL TAX ...

Page 2 of2

Purpose: This is the first meeting of the Advisory Panel. The meeting will include
background information presentations concerning the Federal tax system.
Comments. Interested parties are invited to attend the meeting; however, no
public comments will be heard at this meeting. The public will be provided
additional opportunities to submit comments regarding issues of tax reform at later
dates. Any written comments with respect to this meeting must be submitted by
mail to The President's Advisory Panel on Federal Tax Reform, 1440 New York
Avenue NW, Suite 2100, Washington, DC 20220. An electronic address will be
provided as soon as it is available. All written comments will be made available to
the public.
Records: Records are being kept of Advisory Panel proceedings and will be
available at the Internal Revenue Service's FOIA Reading Room at 1111
Constitution Avenue, N.W, Room 1621, Washington, DC 20024 The Reading
Room is open to the public from 9 a.m. to 4 pm., Monday through Friday except
holidays. The public entrance to the reading room is on Pennsylvania Avenue
between 10th and 1ih streets. The phone number is (202) 622-5164 (not a toll-free
number). Advisory Panel documents, including meeting announcements, agendas,
and minutes, will also be available on the Advisory Panel's web site, which is
currently under construction.
DATES: The meeting will be held on Wednesday, February 16, 2005, at 10 a.m.
ADDRESSES: The meeting will be held at the Ronald Reagan Building &
International Trade Center Amphitheater, Concourse Level, 1300 Pennsylvania
Avenue NW, Washington, DC 20004. Seating will be available to the public on a
first-come, first-served basis.
FOR FURTHER INFORMATION CONTACT: Mark S. Kaizen, DeSignated Federal
Officer, (202) 283-7900 (not a toll-free call).
Dated: January 28, 2005
Mark S. Kaizen
DeSignated Federal Officer

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4/22/2005

1S-2219. Assistant Secretary of the Office of Economic Policy Mark 1. Warshawsky... Page 1 of 3

PH[SS HOOM

FROM THE OFFICE OF PUBLIC AFFAIRS
January 31,2005
JS-2219

Assistant Secretary of the Office of Economic Policy
Mark J. Warshawsky
Statement for the Treasury Borrowing Advisory Committee
of the Bond Market Association
The economy continued to grow at a solid pace over the final three months of 2004,
bringing real GOP growth on an average annual basis to 4.4 percent last year, up
from 3.0 percent in 2003. Last week's advance report on fourth-quarter Gross
Domestic Product showed that real GOP grew at a 3.1 percent annual rate following
a 4.0 percent gain in the third quarter. Virtually all of the slowdown in the fourth
quarter reflected a wider trade deficit. Excluding net exports, gross domestic
purchases grew by a strong 4.7 percent annualized rate in the quarter.
Consumers maintained a healthy spending pace. After increasing at a 51 percent
rate in the third quarter, the largest quarterly gain in almost three years, real
personal consumption expenditures were up at a 4.6 percent annual rate in the
fourth quarter. Real disposable personal income grew by an outsized 8.4 percent
annual rate in the fourth quarter, boosted by a $32 billion special dividend payout by
Microsoft, most of which went into personal income. Loan delinquencies on
consumer loans and residential real estate loans are very low, suggesting
consumers are not over-extended.
Business fixed investment rose at a 10.3 percent rate in the fourth quarter, down a
bit from 13.0 percent in the prior quarter. Investment in equipment and software
continued to post rapid growth of 14.9 percent on top of the 17.5 percent gain in the
third quarter. Equipment and software investment was up 13.4 percent in 2004 on
an average annual basis, and followed an annual increase of 6.4 percent in 2003
and a decline of 5.5 percent in 2002. Investment in structures, typically one of the
slowest sectors to recover after an economic downturn, has shown only a few
quarters of sporadic growth since the recession, and declined at a 4.1 percent rate
in the fourth quarter.
Business investment has been boosted over the past several years by bonus
expensing, initiated with the Job Creation and Worker Assistance Act of 2002 and
expanded by the Jobs and Growth Act of 2003. That incentive expired at the end of
last year, but corporate profits from current production (adjusted to measure
inventories and depreciation at replacement cost) are providing strong support to
investment going forward. The profit share of gross domestic income rose to a
recent peak of 10.2 percent in the first quarter of 2004, the highest since 1997, due
to rapid gains in productivity and benign labor costs. In the third quarter (latest
available), the profit margin held close to that 10.2 percent share (excluding the
effects on profits from the recent hurricanes). Rising profits have led to large gains
in cash flow - the internal funds that are available to corporations for investment.
Not all of those funds have been tapped for capital expenditures, and the "financing
gap" (capital expenditures less cash flow and inventory profits) has been negative
on average for the past two years. With the business sector running a financial
surplus, corporations have been able to improve their balance sheets.
The trade deficit continued to widen in the fourth quarter and has been a drag on
growth for five straight quarters. The deficit increased by $48.7 billion in real terms
in the fourth quarter, reaching a record $631.9 billion, and subtracted 1.73
percentage points from GOP growth. Over all of 2004, the deficit took about 1
percentage point from real GDP growth. The increase in the deficit in the latest
quarter reflected a 9.1 percent annual rate rise in total imports. In contrast, real
exports decreased 3.9 percent The relatively stronger performance of the U.S.
economy compared to its major trading partners, such as the eurozone countries

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4/22/2005

JS-2219. Assistant Secretary of the Office of Economic Policy Mark 1. Warshawsky... Page 2 of 3
and Japan. continues to be a factor in the widening trade gap. This trade profile
underscores the need for our trading partners to adopt policies that accelerate
economic activity. so that the United States is not the only engine of world growth.
Greater currency flexibility in those economies that lack flexibility would also help to
improve trade imbalances.
The U.S. labor market continued its upward trend during the fourth quarter as
606.000 jobs were added to nonfarm payrolls after 402.000 new jobs were created
in the third quarter. Those gains brought the increase in the number of new payroll
jobs in 2004 to 2.23 million. an average of 186.000 per month and the best year for
job creation since 1999. Those figures do not even include the expected upward
revision to payroll employment due to the annual benchmarking. the results of
which will be reported this Friday by the Bureau of Labor Statistics along with the
release of January labor market data. The unemployment rate has come down from
5.7 percent at the beginning of 2004 to an average of 5.4 percent in the final three
months of the year. almost a full percentage pOint below the June 2003 peak.
Prospects for the first quarter of 2005 and throughout the year are highly favorable.
The economy's basic fundamentals - high productivity, low inflation. and expanding
employment - are sound and point to continued expansion economic activity at a
healthy pace this year.
The U.S. economy now appears to be on solid footing after the challenges of the
past few years. Return to a healthy economy allows us to turn our attention to some
of the issues that will affect the longer-term well-being of our citizens, specifically
retirement income security.
The Administration recently released the outlines of our proposal to reform the
single-employer defined benefit pension system; the Treasury Department played
an active role in the design of this proposal. The retirement security of the 34 million
Americans participating in single employer defined benefit pension plans depends
on employers keeping the promises they make; however, the current system does
not ensure that penSion plans are adequately funded. Underfunded plan
terminations are also placing an increasing financial strain on the pension insurance
system and, through that system, impose an increasing burden on healthy
employers who sponsor well-funded pension plans.
To protect participating workers and retirees. to improve the financial status of the
Pension Benefit Guaranty Corporation, and to encourage continued voluntary
sponsorship of defined benefit pension plans by companies. the President's
proposal focuses on three areas:
•

Ensuring pension promises are kept by Improving opportunities, incentives
and requirements for funding plans adequately;
• Improving disclosure to workers. investors and regulators about pension
plan status; and
• Adjusting the pension insurance premiums to better reflect each plan's risk
and ensure the pension insurance system's financial solvency.
The Social Security system is an even larger and more essential part of Americans'
retirement income security. The current system is secure for today's seniors but is
not financially stable for future generations and must be fixed. Because of
demographic changes and benefit growth. the current system will not be able to
afford to pay the benefits scheduled for our children and grandchildren without
enormous payroll tax increases or huge benefit cuts. Fortunately, this untenable
situation is fixable. 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.
The President wants to see Social Security permanently strengthened for our
children and grandchildren, without raising payroll taxes. The President's focus on a
permanent strengthening of the system reflects a prinCipled decision not to leave
problems to future generations. Delaying permanent reform implicitly places
additional burdens on future generations - our children and grandchildren - to foot
the bill. By contrast, the permanent and timely reform the President has called for
will allow us the most options for strengthening Social Security for future
generations.

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4/22/2005

js-2220: Trr.asllry Annollnc.es Mctrket Financing Estimates

Page 1 of 1

""i!<'
· " _ r--1
·

f-'HLSS HOOM

""t'~~_

:
I

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FROM THE OFFICE OF PUBLIC AFFAIRS
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January 31,2005
js-2220
Treasury Announces Market Financing Estimates

The Treasury Department announced today that it expects net borrowing of
marketable debt to total $147 billion in the January - March 2005 quarter. The
estimated cash balance on March 31 is $10 billion. Today's estimate is unchanged
from Treasury's announcement on November 1, 2004.
Treasury also announced that it expects net borrowing of marketable debt to total
$12 billion in the April - June 2005 quarter. The estimated cash balance on June
30 is $15 billion.
During the October - December 2004 quarter, Treasury's net borrowing of
marketable debt totaled $98 billion and the cash balance on December 31 was $25
billion. On November 1, Treasury announced that it expected net borrowing of
marketable debt to total $100 billion with an estimated end-of-quarter cash balance
of $25 billion.
Additional financing details relating to Treasury's Quarterly Refunding will be
released at 9:00 AM. on Wednesday, February 2.
- 30REPORTS
•

Report

httJl'/treasgov/press/rcleases/Js2220. htm

4122/2005

TREASURY ANNOUNCES MARKET FINANCING ESTIMATES

Today, the Treasury Department announced net borrowing of marketable
debt for the January - March 2005 and April- June 2005 quarters.

Quarter

Estimated
Borrowing
($ billion)

Estimated
End-or-Quarter
Cash Balance
($ billion)

Jan-Mar 2005
Apr-Jun 2005

$147
$12

$10
$15

Since 1997, the average absolute forecast error in net borrowing of
marketable debt for the current quarter is $9 billion and the average absolute
forecast error for the end-of-quarter cash balance is $9 billion. Similarly, the
average absolute forecast error for the following quarter is $30 billion and
the average absolute forecast error for the end-of-quarter cash balance is $11
billion.
The following tables reconcile the variation between forecasted and actual
net borrowing of marketable debt in the October - December 2004 quarter.

Quarter

Estimated
Borrowing
($ billions)

Actual
Borrowing
($ billions)

Estimated
End-or-Quarter
Cash Balance
($ billions)

Actual
End-or-Quarter
Cash Balance
($ billions)

Oct - Dec 2004

$100

$98

$25

Categories
Receipts
Outlays
Other

Chg from
Nov Estimate

+$7
(I)

(4)

Additional financing details relating to Treasury's Quarterly Refunding will
be released at 9:00 A.M. on Wednesday, February 2.

PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
January 31, 2005
2005-2-10-15-38-16-12857

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 $85.425 million as of the end of that week, compared to $85.436 million as of the end of the prior week.

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

TOTAL
1. Foreign Currency Reserves

a. Securities

January. 28, 2005

21, 2005

85,425

85,436
Euro

Yen

TOTAL

Euro

Yen

TOTAL

11,940

15,294

27,234

11,932

15205

27,137

Of which, issuer headquartered in the US.
b. Total deposits with:
11,712

bJ. Other central banks and BIS

3,074

14,786

11,702

3,056

14,758

b.ii. Banks headquartered in the US.

b.ii. Of which, banks located abroad

b.iii. Banks headquartered outside the US.

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

19,073

19,139

13,299

13,345

11,045

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
January. 28, 2005

January. 21, 2005
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
2.b. Long positions

3. Other

o
o

o
o
o

III. Contingent Short-Term Net Drains on Foreign Currency Assets
January 21, 2005
Euro

Yen

January 28, 2005

TOTAL

Euro

Yen

TOTAL

2. Foreign currency securities with embedded options

3. Undrawn, unconditional credit lines

1. Contingent liabilities in foreign currency
1.a. 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 U. S.
3.c. With banks and other financial institutions
Headquartered outside the U. S.

4. Aggregate short and long positions of options in
foreign
Currencies vis-a-vis the U.S. dollar

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

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

Notes:

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-lo-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 exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.

31 Gold stock is valued monthly al $42.2222 per fine troy ounce.

JS·2221: Report to Thc Secretary ofTh'e Treasury from the Treasury Borrowing Advisory Co...

Page 1 of 4

PR[SS f400M

FROM THE OFFICE OF PUBLIC AFFAIRS
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Reader"".

February 2, 2005
JS-2221
Report to The Secretary of The Treasury
from the
Treasury Borrowing Advisory Committee Of The Bond Market Association
Dear Mr. Secretary:
Since the Committee's last meeting in November, the expansion has remained on
track with real GOP in 04 growing at an annualized pace of 3.1 %. 03 GOP growth
has been revised higher to 4.0% from the originally reported 3.4%. During the
second half of 2004, domestic demand rose at an exceptionally strong 4.6% pace.
The latest economic readings point to a continuation of above trend growth in 01,
as a likely strengthening in exports offsets a slight moderation in domestic demand.
The latest data also indicate that home sales are near record high levels and are
likely to remain firm given mortgage applications for purchasing new homes.
Notwithstanding an expected January slowdown due to unseasonably cold weather,
economic conditions seem supportive of another year of good economic
performance in 2005. Consumer spending grew 4.6% in 04, following an
impressive 5.1 % growth rate during 03. Strong consumer spending is being fueled
by a powerful secular trend of wealth creation. The trend is evident in not only the
highest income quintile, where it has traditionally been focused, but also in the
second and middle income quintiles. According to Federal Reserve Flow of Funds
data, household wealth has nearly doubled over the last decade to over $46 trillion.
These positive outcomes are being reinforced by ongoing improvements in the
labor market outlook and prospects for strong household income gains. The trend in
payroll employment has remained solid, with job gains averaging over 200,000 per
month in 04. While this was softer than payroll growth in 02, it does represent a
pickup over 03's moderate job growth. Payroll growth looks to remain strong in
2005. The 4-week moving average of jobless claims has remained fairly low and
surveys of hiring intentions among firms are at recovery highs. While oil prices are
below their October peak, they remain elevated. The impact of higher oil prices over
the past year has moderated real output from what would have been spectacular
levels to above trend growth.
Following core inflation's rise in the first half of 2004, its upward trajectory slowed in
the second half of the year. The core CPI rose an annualized 2.3% in 04, higher
than the 1.5% annualized pace of 03 but below the 3.0% annualized pace of 02.
The core PCE deflator increased at only a 1.6% annualized pace in Q4, holding the
year-aver-year change in December to 1.6%, while the year-over-year change in
the core CPI rose to 2.3%. Despite a renewed fall in airline fares, the decline in the
value of the dollar and the pick-up in unit labor costs suggest a risk of increases in
core inflation ahead. Similarly, a risk of future inflation is emerging in higher rates of
utilization and the declining pool of available labor. The persistence of higher
energy and other raw material prices may be prompting numerous industries to try
to pass through higher costs in order to support earnings. The trade-weighted dollar
has depreciated nearly 15% from its highs two years ago. The decline in the value
of the dollar has resulted in a pick-up in import prices excluding food and energy. In
particular, prices of imported consumer goods rose in 2004 for the first time since
1995. In addition, capital goods import prices were nearly unchanged in 2004 after

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being a drag on inflation for the prior 9 years.
After rising before the first FOMC tightening in June, long-term treasury yields have
declined by roughly 50 basis points since this tightening cycle began. As the FOMC
has since increased its short-term target by 125 basis pOints, this has led to a
substantial flattening of the yield curve, even compared to previous tightening
cycles of 1994 and 1999. However, the spread between long and short interest
rates remains near mean historical levels in the 2- to 1O-year portion of the curve.
Over 04, while the 1O-year yields rose by 25bp, the 2s/1 Os curve has flattened by
almost 25 basis points. Two-year yields are currently 170bp higher than the lows
observed in mid-March and the yield curve is almost 70bp flatter than its steepest
levels during 04. The market is currently pricing in nearly a 100% probability that
the Fed will raise rates by 25bp at the February FOMC meeting and is pricing in a
funds rate of roughly 3% by mid-2005.
Fourth quarter reported earnings appear to be pointing toward signs of moderation
in early 2005. After a strong acceleration over the past year and a half, and with half
of the S&P 500 reporting, approximately two-thirds have exceeded expectations
while 17% have failed to meet expectations. Slower growth of earnings in financials,
specifically among insurance and brokerage concerns, and a moderation of
earnings in software, old-line industrial and consumer discretionary sectors, are
largely behind the slowdown in earnings growth. The peak in earnings growth for
this cycle appears to be behind us. Equity markets have risen approximately 5%
over the past three months ending January 28 th
The Federal budget performance on a twelve-month rolling basis was better than
expected, mainly reflecting the effects of solid income and profit growth on tax
receipts. However, ongoing military operations in the Middle East present upside
risks to overall budget outlays. That said, cyclical forces suggest that the peak in
the twelve-month rolling budget deficit has passed.
Against this economic and financial backdrop, the members of the Committee
responded to Treasury's Charge. The charge was composed of four questions. In
the initial section, Treasury asked the Committee to comment on its issuance
pattern given the recent growth in its expected borrowing needs.
In general the Committee felt there was no need to change issuance patterns as
sufficient flexibility exists within the current framework. One member noted that the
average maturity of the debt has shortened and advised consideration of
lengthening the issuance maturity profile. Others pointed out that Treasury has
increased issuance of 3-, 5- and 1O-year maturities as well as longer-dated TIPS to
account for this, as it has reduced net borrowing in bills and the 2-year note.
Another member pOinted out that the average maturity of issuance was shorter than
the average maturity of debt outstanding and this would lead to a continued
shortening of the maturity profile. Other members were more comfortable with this
trend, but advised further consideration of this issue over time with portfoliO
optimization analytics and techniques. The Committee concluded that retaining a
focus on new issuance of longer-duration instruments is appropriate and that further
examination is warranted
In the second part of the charge the Treasury asked to comment on the following
topic:
While the stock of Treasury debt is well within historical and international norms as
a percentage of GOP, questions have been raised about whether the large
proportion of total debt held by foreigners creates risk for the Treasury. We would
like the Committee's views on whether the high percentage of foreign ownership of
Treasuries outstanding creates risks for future Treasury financing, broader risks to
the U.S. economy or. instead, reflects the efficient use of Treasury securities as a
financing and investment vehicle.
As a means of framing the discussion, one member presented the Committee with
a presentation comprised of a series of charts and comments that summarized the
degree of foreign participation in the Treasury market. These included portrayals of

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the stock of Treasury debt currently held by foreigners, just over 50%, a depiction of
the split of this stock between private and official foreign sectors and a comparison
of the amount of Treasuries held as a percentage of the gross foreign holding of
fixed income assets, amongst others. The entire presentation is appended to the
TBAC discussion charts.
The presenting Committee member concluded that the large portion of debt held by
foreigners does not create a substantial risk for the Treasury. A broader, global
investor base should be more stable than a narrow, concentrated, solely domestic
one. Moreover, if foreign buying slowed or stopped, there is ample scope for
domestic investors to fill the void given broad based observance of portfolio
underweighting in fixed income portfolios. US market liquidity is deep and domestic
holdings of Treasuries are at historic lows. For all of these reasons, the high
proportion of foreign ownership of Treasuries should pose no risk to future
financing. Similarly, high foreign ownership of US Treasuries - and of US financial
assets in general -- should pose little risk to the economy. It is a reflection of the
globalization of financial markets as well as the particular attraction of US assets,
that foreign ownership of virtually all US financial assets has risen sharply. US
financial markets are the most liquid by most measures. The majority of
international transactions, revenues and contracts, are denominated in US dollars,
and the dollar remains by far the largest reserve currency, It is true that the growth
in foreign ownership of US assets is a reflection of the rise in the current account
deficit. That said, financial market adjustments to this imbalance, which could
include a lower dollar and higher interest rates, would represent a natural corrective
process, and currently there is no reason to expect it to become destabilizing. The
presenting member's conclusion was that the increase in foreign ownership of US
assets reflects more efficient financial markets, and any efforts to reduce foreign
ownership would be counterproductive.
Committee members in general agreed with the conclusions of the presenting
member. Several members urged Treasury to continue to encourage the growth of
foreign participation in financing markets. Members felt that with higher short rates
would come greater risks of chronic or intractable fails if foreign participation in repo
markets was not assured. Other members encouraged Treasury to examine stress
scenarios which would be observed in the tails of the probable distribution of
outcomes. Members also encouraged Treasury to consider extending the maturity
of its newly issued debt to meet the strong external demand for its offerings. In
general, most members felt that Treasury enjoys an enviable position with foreign
investors, one which should be vigilantly maintained.
In the next section of the charge, the Committee considered the composition of
marketable financing for the January-March quarter to refund $11.3 billion of
privately held notes and bonds maturing on 2/15/05. The Committee recommended
a $22 billion three-year note due 2/15/08, a $15 billion five-year note due 2/15/10
and a $14 billion 1O-year note due 2/15/15. For the remainder of the quarter, the
Committee recommended a $24 billion 2-year note issued in February and a $24
billion 2-year note issued in March, a $15 billion five-year note issued in March and
a $9 billion reopening of the 1O-year note in March. For the April-June quarter, the
Committee recommended financing as contained in the attached tables. Relevant
features include three $24 billion 2-year notes, a $22 billion 3-year note, three $15
billion 5-year notes, a $14 billion 1O-year note in May followed by a $9 billion
reopening of that 10-year in June. The Committee further recommended a $10
billion 1O-year TI PS for issuance in April as well as a $9 billion re-opening of the
same in June, and a $12 billion 5-year TIPS in April.
In the last section of the charge, Treasury asked the Committee to bring to its
attention any other issues the group felt important with regard to the Treasury
market. Members commented upon the need for market participants to comprehend
in full the administration's upcoming proposal for Social Security reform. As
finanCing requirements are likely to be impacted, a greater understanding of the
proposal would allow market participants to better judge what, if any, impact those
changes might bring in total debt outstanding and its composition.
Respectfully submitted,
Mark B. Werner

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Chairman

Ian Banwell
Vice Chairman
Attachments (2)

- 30REPORTS
•
•

Tables: 01
Tables 02

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US TREASURY FINANCING SCHEDULE FOR 1st QUARTER 2005
BILLIONS OF DOLLARS

ISSUE

ANNOUNCEMENT AUCTION SETILEMENT
DATE
DATE
DATE

4·WEEKAND
3&6 MONTH BILLS

12/30
1/6
1/13
1/20
1/27
2/3
2/10
2/17
2/24
3/3
3/10
3/17
3/24

CASH MANAGEMENT BILLS
15-0AY BILL
12/28
Matures 1/18
5·DAY BILL
1/7
Matures 1/18
11-0AY BILL
2/2
Matures 2/15
11-0AY BILL
3/2
Matures 3/15

113
1/10
1/18
1/24
1/31
2/7
2/14
2/22
2/28
3/7
3/14
3/21
3/28

1/6
1/13
1/20
1/27
2/3
2/10
2/17
2/24
3/3
3/10
3/17
3/24
3/31

4-WK

OFFERED
AMOUNT
3-MO

6-MO

10.00
8.00
B.OO
8.00
12.00
15.00
18.00
21.00
24.00
27.00
27.00
27.00
24.00

19.00
19.00
19.00
19.00
20.00
20.00
20.00
20.00
20.00
20.00
19.00
19.00
19.00

17.00
16.00
16.00
16.00
17.00
17.00
17.00
17.00
17.00
17.00
17.00
16.00
16.00

MATURING
AMOUNT

NEW
MONEY

54.01

-8.01

44.84
45.64
46.93
46.95

-1.84
-2.64
-3.93

46.00
44.00
44.00
48.00
51.00
53.00
56.00
60.00

2.06
6.00
11.00
14.00
13.00
13.00
10.00
6.00
-1.00

698.00

640.37

57.63

12/30

113

15.00

0.00

1/11

1/12

4.00

0.00

2/3

2/4

8.00

0.00

3/3

3/4

15.00

0.00
0.00

COUPONS
CHANGE
IN SIZE
5-Year Note
10-Year TIPS

1/10
1/10

1/12
1/13

1/18
1/18

15.00
10.00

20-Year TIPS (R)
2-Year Note

1/20
1/24

1/25
1/26

1/31
1/31

B.OO
24.00

3-Year Note
5-Year Note
10-Year Note

2/2
2/2
2/2

2/8
2/9
2/10

2/15
2/15
2/15

2-Year Note

2/22

2/24

5-year Note
10-Year Note (R)

3/7
3/7
3/28

2-Year Note

15.00
10.00

1.00

25.84

B.OO
-1.B4

22.00
15.00
14.00

11.30

22.00
15.00
2.70

2/28

24.00

27.00

-3.00

3/9
3/10

3/15
3/15

15.00
9.00

3/30

3/31

24.00

27.00

·3.00

180.00

91.13

88.87

-3.00'

15.00
9.00

'First Reopening
R = Reopening
A = Announced
Actual Amounts in Italics

Treasury announced a Q1
borrowing need of $147
billion on Jan 31st

NET CASH RAISED THIS QUARTER:

146.50

US TREASURY FINANCING SCHEDULE FOR 2nd QUARTER 2005
BILLIONS OF DOLLARS

ISSUE

4·WEEKAND
3&6 MONTH BILLS

ANNOUNCEMENT AUCTION SETTLEMENT
DATE
DATE
DATE

3/31
4/7
4/14
4/21
4/28
5/5
5/12
5/19
5/26
6/2
6/9
6/16
6/23

CASH MANAGEMENT BILLS
4/5
9-DAY BILL
Matures 4/15
12-DAY BILL
6/1
Matures 6/15

4/4
4/11
4/18
4/25
5/2
5/9
5/16
5/23
5/31
6/6
6/13
6/20
6/27

4/7
4/14
4/21
4/28
5/5
5/12
5/19
5/26
6/2
6/9
6/16
6/23
6/30

4-WK

OFFERED
AMOUNT
3-MO

6-MO

20.00
16.00
12.00
14.00
16.00
18.00
18.00
18.00
18.00
16.00
14.00
14.00
14.00

18.00
18.00
18.00
19.00
20.00
20.00
20.00
20.00
20.00
20.00
20.00
20.00
20.00

15.00
15.00
15.00
16.00
16.00
17.00
17.00
18.00
18.00
18.00
18.00
17.00
17.00

MATURING
AMOUNT

NEW
MONEY

63.00
63.00
64.00
62.00
59.00
55.00
49.00
51.00
53.00
55.00
54.00
54.00
54.00

-10.00
-14.00
-19.00
-13.00
-7.00
0.00
6.00
5.00
3.00
-1.00
-2.00
-3.00
-3.00

678.00

736.00

-58.00

4/5

4/6

20.00

0.00

6/2

6/3

25.00

0.00
0.00

COUPONS
CHANGE
IN SIZE
15.00
10.00

5-Year Note
10-Year TIPS (R)

4/11
4/11

4/13
4/14

4/15
4/15

15.00
10.00

5-Year TIPS ®
2-Year Note

4/21
4/25

4/26
4/27

4/29
4/29

12.00
24.00

26.30

12.00
-2.30

3-Year Note
5-Year Note
10-Year Note

5/4
5/4
5/4

5/10
5/11
5/12

5/16
5/16
5/16

22.00
15.00
14.00

22.00
17.63

22.00
-7.00
-3.63

2-Year Note

5/23

5/25

5/31

24.00

23.91

0.09

5-year Note
10-Year Note (R)

6/6
6/6

6/8
6/9

6/15
6/15

15.00
9.00

6/27

6/29

6/30

24.00

23.73

0.27

184.00

113.56

70.43

2-Year Note

R
A

=Reopening
=Announced

Treasury announced a Q2
borrowing need of $12
billion on Jan 31 st

15.00
9.00

NET CASH RAISED THIS QUARTER:

12.43

IS.2222: Assistaut St;J.;rt;tary fur Financial Markets Timothy S. Bitsberger February 2005 Quarterly Refu... Page 1 of 2

- ":...$
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PHCSS HOOM

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FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free AtioiJo('" AClOiJat('j Reac/ol'."J.

February 2, 2005
JS-2222

Assistant Secretary for Financial Markets Timothy S. Bitsberger February
2005 Quarterly Refunding Statement
We are offering $51.0 billion of notes to refund approximately $11.4 billion of
privately held securities and Government account holdings maturing or called on
February 15, raising approximately $39.6 billion. The securities are:
• A new 3-year note in the amount of $22 billion, maturing February 15, 2008;
• A new 5-year note in the amount of $15 billion, maturing February 15, 2010;
• A new 1O-year note in the amount of $14 billion, maturing February 15,
2015.
These securities will be auctioned on a yield basis at 1:00 PM Eastern time on
Tuesday, February 8, Wednesday, February 9, and Thursday, February 10,
respectively. All of these auctions will settle on Tuesday, February 15. The balance
of our financing requirements will be met with weekly bills, monthly 2-year and 5year notes, the March 1O-year note reopening, and the April 5-year and 10-year
TIPS reopenings. Treasury is also likely to issue cash management bills in early
March and April.

Data Review
Following the November 2004 refunding, Treasury received many comments and
suggestions on data we currently publish on Treasury auctions and holdings. We
are continuing to assess the data in terms of what additional data we should make
public and the relevance of existing data that we publish. We expect to implement
changes soon. A list of the data under review can be found in the primary dealer
meeting agenda released on October 22, at the following link:
http://www .trea s, gov / office sid omes tic- fi na nce/ debt -ma nagem entl dea Ie ragenda/2004-q4. pd f

Policies under Consideration
Setting of Coupons in Decimal Increments
Treasury is considering a coupon format change for Treasury notes and bonds.
Currently coupons are set in 118 percent increments. Under consideration is a
proposal to set coupons in decimal increments (with the increment yet to be
decided) rather than the current 1/8 percent increments. This change, if
implemented, would apply to all nominal Treasury and TIPS coupon securities and
would lower the probability of unintended reopenings of outstanding securities.

"Stepping Down" Coupons to Prevent Unintended Reopenings
Treasury is also considering implementing a policy of "stepping down" the coupon

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5.2222: Assistant Secretary fur financial Markets Timothy S. Bitsberger February 2005 Quarterly Refu... Page 2 of 2
on newly auctioned securities by one increment to avoid unintended reopenings of
existing securities that occasionally occur when a new security has the same
maturity and same coupon as an existing security. Under the proposal, when an
auction results in a coupon that creates an unintended reopening, Treasury would
set the coupon 1/8 percent increment lower than normal on the newly-auctioned
security and adjust the price of the new security downward (bigger price discount).
The yield established at the auction would be identical to the yield set under the
current practice. This proposed process would avoid unintended reopenings.
Please send comments and suggestions on these subjects or others relating to
debt management to debl.lllC1llagelllelll@dotreC1sgov.
The next quarterly refunding announcement will take place on Wednesday, May 4,

2005.
-30-

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PHLSS HOtJM

FROM THE OFFICE OF PUBLIC AFFAIRS
January 26, 2005
js-2223
Remarks of Wayne A. Abernathy
Assistant Secretary for Financial Institutions
at the Secretary's Honor Awards Ceremony
Mr. Secretary, thank you for the kind award and recognition, and to my friends and
colleagues, for the remembrances of this office. Thank you for your kind and
generous attendance at this ceremony.
In addition to my kind friends who have made presentations today, I am grateful for
the presence of NCUA Chairman JoAnn Johnson, OFHEO Director Armando
Falcon, Fed Governor Mark Olson, SEC Commissioner Cynthia Glassman, CFTC
Commissioner Walt Lukken, Federal Housing Finance Board Members Alicia
Castaneda and Allan Mendelowitz and each you who has taken the time and
trouble to be here with me today in this historic room.
You honor me with your presence.
I would like to indulge in a liberal paraphrasing of Bilbo Baggins: two years is far too
short a time to serve among such excellent and admirable gnomes and gremlins of
the Treasury. Soon to be a gnome alumnus, this ceremony is mostly a pleasant
opportunity for me to say thank you to so many with whom I have worked so
closely, inside and outside of the Treasury, over the last 26 months.
But not 26 months alone. Since this is also my departure from over 20 years of
government service, I have taken the liberty to gather, as much as could be done,
friends with whom I have worked during all of that time. And to all of you, I say
thank you for the kindness, the mentoring, the friendship and the fellowship that
have helped to make that service worthwhile.
President Reagan is reported to have said that there is no limit to the amount of
good you can do in Washington if you are not worried about who gets the credit.
That is very appropriate for our work here at Treasury (as much as it was in the
Congress). It is certainly true for the work that I have been involved in, because I
cannot recall anything that I have been involved in that has not been the product
and effort of many people.
When I worked at my last job, for Senator Phil Gramm on the Senate Banking
Committee, Senator Gramm liked to say that all the work was done by others, that
he was just the front guy Well, he knew better then, but I even more so now know
better his feelings as I have so often played the roll of front guy for the great work
done by my team here at Treasury.
There is a little town in western New York, where I grew up as a teenager. It has I
think an unusual distinction for towns of its size anywhere in America. That little
town, of not more than 10,000 people, has had two of its children serve as Assistant
Secretaries of the Treasury. What is more unusual, we both graduated in the same
high school class and in fact we both were two-thirds of three young fellows who
were inseparable in high school and all three of which came to school here in
Washington.
I remember as a young college student walking with my friend, John Rogers (who
later served with Secretary Baker as Assistant Secretary for Management). I
remember he and I walking on a street close by this building, speculating on what

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js-2223: Remarks of Wayne A. Abemathy Assistant Secretary for Financial Institutio... Page 2 of2
jobs we would some day have here in Washington. We both knew that we would
work for the federal government--that's why we were here, why we were studying
here, those were our plans, and we as typical youngsters thought big.
Neither of us thought big enough. I did not think at that time that I would be
privileged enough to work for the Treasury Department. I am glad that America is a
place where young people can think big and where big thoughts can become
reality.
I hope that my non-Treasury friends will pardon me if I say that Treasury is the best
place to work in the Executive Branch. It is the best Department, a place where a
wonderful combination of things that really matter to hundreds of millions of people
every day are worked on by a team close enough for us all to know one another by
name and face and work together without stultifying layers of bureaucracy.
As I have been packing my things this past week, I have been stunned by the
number and variety of important matters that we at Treasury have been involved in.
Just in the two years that I have personally witnessed we've worked on:
• reinforcing our national credit information system;
• fighting identity theft;
• strengthening the resilience of our financial infrastructure;
• implementing a model community development program;
• designing an effective supervisory structure for our GSEs;
• taking the Terrorism Risk Insurance Program from nothing to fully
operational in no time at all;
• completing the privatization of Sallie Mae; and
• spreading financial education standards and promoting efforts all over the
nation.
And all the while fighting regulatory burden, promoting the idea that the role of
government is service to the governed, that regulation should add value, and if it
doesn't, then its value should be questioned.
Those are just some highlights. And the plate is full with more to do.
I am grateful to have been able to serve in the government. It has been an honor to
serve in the Administration of President George W. Bush. But I must admit that I am
also excited to join my friends in the private sector in the cause of building
prosperity and opportunity in America, and to keep thinking big.
My friend and colleague, Matt Shimkus, gave me a rugged sign that I have kept in
my office. It says, "Who Is John Galt?" I am ready to go and find out.
-30-

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js.2224: PresIdent Bush's :'WUo Budget to Request Boost for IRS Enforcement

...

Page 1 of 1

PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
February 1, 2005
js-2224
President Bush's 2006 Budget to Request Boost for IRS Enforcement
WASHINGTON, DC - President Bush's 2006 budget will request an additional $500
million for IRS enforcement activities. This represents a 7.8% increase in funding
over FY 2005.
"Americans who play by the rules and pay their taxes deserve confidence that
others pay their fair share as well," stated Secretary of the Treasury John Snow.
"Increasing enforcement not only catches tax cheats, but discourages others from
avoiding paying their taxes. The vast majority of Americans pay their taxes. The
IRS is committed to striking a balance between catching those who would avoid
paying and providing excellent service to all taxpayers."
"Enforcement more than pays for itself," IRS Commissioner Mark W. Everson said.
"Particularly in a period of deficit reduction, funding IRS enforcement is a wise
investment."
Congress enacted $6.392 billion for IRS enforcement in FY 2005, the President's
FY 2006 budget requests $6.893 billion. The increase will provide additional
resources to examine more tax returns, collect past due taxes and investigate
cases of tax avoidance.
####

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7/5/2005

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federal financing
WASHINGTON, D.C. 20220

FEDERAL FINANCING BANK

January 2005

Brian D. Jackson, Chief Financial Officer, Federal Financing
Bank (FFB) announced the following activity for the month of
December 2004.
FFB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $27.9 billion on December 31,
2004, posting an increase of $391.4 million from the level on
November 30, 2004. This net change was the result of an increase
in net holdings of government-guaranteed loans of $391.4 million,
representing primarily an increase in Rural utilities Service
("RUS
loans. The FFB made 61 disbursements and received 12
prepayments during the month of December.
U

)

Attached to this release are tables presenting FFB December
loan activity and FFB holdings as of December 31, 2004.

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Page 2
FEDERAL FINANCING BANK
DECEMBER 2004 ACTIVITY
~-------------------------------~~----~~~--~~------

Borrower

Date

Amount
of Advance

Final
Maturity

Interest
Rate

GOVERNMENT - GUARANTEED LOANS
GENERAL SERVICES ADMINISTRATION
San Francisco OB
Foley Services Contract
Foley Square Office Bldg.

12/02
12/07
12/07

$162,967.93
$23,540.41
$839,523.00

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

2.593% S/A
4.665% S/A
4.665% S/A

12/22

$209,505.25

11/02/26

4.508% S/A

12/03
12/06
12/07
12/07
12/07
12/07
12/10
12/10
12/13
12/13
12/13
12/14
12/15
12/15
12/15
12/16
12/16
12/16
12/16
12/16
12/17
12/17
12/17
12/20
12/20
12/21
12/21
12/21
12/21
12/21
12/22
12/22
12/22
12/23
12/23

$2,975,000.00
$700,000.00
$704,411.00
$4[550,000.00
$2,500,000.00
$8,312,678.31
$1,000,000.00
$2,000,000.00
$2,000,000.00
$2,500,000.00
$630,000.00
$850,000.00
$398,000.00
$300,000.00
$2,500,000.00
$50,000,000.00
$2,000,000.00
$741,000.00
$406,000.00
$2,000,000.00
$2,000,000.00
$4[500,000.00
$2,000,000.00
$1,845,000.00
$1,000,000.00
$5,000,000.00
$400,000.00
$4,598,000.00
$4,963,000.00
$31,379,000.00
$50,000,000.00
$1,694,000.00
$175,000.00
$20,000,000.00
$20,000,000.00

12/31/24
12/31/37
3/31/05
12/31/37
12/31/37
3/31/05
12/31/29
12/31/36
1/03/39
1/02/35
1/03/33
3/31/08
1/02/35
1/03/06
12/31/37
1/03/39
3/31/05
12/31/35
12/31/29
3/31/05
12/31/37
12/31/31
12/31/37
3/31/05
12/31/36
12/31/36
12/31/36
12/31/36
12/31/25
1/03/34
1/03/39
12/31/37
1/03/06
3/31/05
3/31/08

4.635%
4.717%
2.314%
4.799%
4.799%
2.307%
4.593%
4.712%
4.722%
4.674%
4.768%
3.219%
4.640%
2.659%
4.678%
4.619%
2.257%
4.587%
4.483%
2.257%
4.725%
4.641%
4.726%
2.250%
4.726%
4.717%
4.717%
4.717%
4.472%
4.679%
4.700%
4.691%
2.720%
2.221%
3.242%

DEPARTMENT OF EDUCATION
Tuskegee Uni v .
RURAL UTILITIES SERVICE
Arizona Electric #2128
pointe Coupee Electric #2042
Citizens Tel (VA) #680
North Georgia Elec. #2135
Prince George Elec. #2111
Twin Valley-Ulen Tel. #2177
Ravalli #641
Wood County Electric #826
Cental Virginia Elec. #2126
East River Power #793
Red River Valley #484A
Orange County Elec. #2179
Burt County Public #669
Consolidated Elec. #2072
Sho-Me Power #2160
East Kentucky Power #2171
Farmer's Rural Elec. #2046
Harrison County #799
Missoula Elec. #688
Southeastern Indiana #2062
Medina Electric #2050
Petit Jean Electric #887
Rutherford Electric #2091
Clark Energy Coop. #2087
Kankakee Valley Elec. #857
Arkansas Valley Elec. #895
Dunn Electric Coop. #861
Hart Elec. #885
Tri-State #757
Tri-State #2052
East Kentucky Power #2171
Jefferson Davis Elec. #2076
Pataula Electric #2121
Brazos Electric #2181
Brazos Electric #2181

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 3
FEDERAL FINANCING BANK
DECEMBER 2004 ACTIVITY
Borrower
Brazos Electric #2181
Brazos Electric #2181
Brazos Electric #2181
Brazos Electric #2181
Brazos Electric #2181
Brazos Electric #2182
Brazos Electric #2182
E. Iowa Coop. #807
GOLDEN VALLEY ASSOC. #639A
Hancock-Wood Elec. #842
KEM Electric #537
Lamar Electric #716
Chariton Valley #524
Arizona Electric #2128
Dunbarton Telephone #2183
East Kentucky Power #2171
McLennan County Elec. #784
Tri-County EMC #814
Dairyland Power #588
Dairyland Power #589
Logan County Coop. #749
North Western Elec Coop #880
S/A is a Semiannual rate.
Qtr. is a Quarterly rate.

Date

Amount
of Advance

Find.l
Maturity

Interest
Rate

12/23
12/23
12/23
12/23
12/23
12/23
12/23
12/23
12/27
12/27
12/27
12/27
12/28
12/29
12/29
12/29
12/29
12/29
12/30
12/30
12/30
12/30

$20,000,000.00
$20,000,000.00
$20,000,000.00
$8,186,000.00
$16,500,000.00
$5,000,000.00
$2,180,000.00
$1,000.00
$35,000,000.00
$1,200,000.00
$849,000.00
$55,000.00
$615,000.00
$5,068,000.00
$712,000.00
$50,000,000.00
$1,787,000.00
$1,600,000.00
$2,326,691.00
$1,003,310.00
$909,000.00
$2,000,000.00

3/31/10
4/02/12
3/31/15
3/31/05
3/31/15
3/31/05
3/31/05
3/31/06
12/31/24
12/31/36
1/03/34
12/31/35
12/31/29
12/31/24
1/02/24
1/03/39
12/31/35
12/31/36
1/03/28
1/03/28
12/31/35
12/31/36

3.581%
3.883%
4.120%
2.221%
4.120%
2.221%
2.221%
2.785%
4.445%
4.736%
4.696%
4.724%
4.695%
4.523%
5.405%
4.821%
4.690%
4.802%
4.787%
4.662%
4.813%
4.823%

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 HOLDINGS
(in millions of dollars)

Program
SOT
Agency Debt:
U.S. Postal Service

December 31, 2004

November 30, 2004

Monthly
Net Change

Fiscal Year
Net Change

12/1/04-12/31/04

10/1/04-12/31/04

Subtotal *

$0.0
$0.0

-$1 800.0
-$1,800.0

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

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*

$1,429.7
$120.9
$0.2
$971.9
$2.140.0
$7.6
$498.6
$17,574.6
$51.5
$2.8
$22,797.9

$1,449.3
$120.7
$0.2
$971.9
$2.140.7
$7.6
$498.6
$17,161. 7
$52.9
$2.9
$22,406.6

-$19.6
$0.2
$0.0
$0.0
-$0.7
$0.0
$0.0
$413.0
-$1.4
$0.0
$391.4

-$35.2
$2.9
-$0.2
-$82.9
-$1.4
$0.0
$0.0
$613.6
-$5.0
$0.0
$491.7

===

======

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

$27,948.1

$27,556.8

$391.4

-$1,308. 3

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10117738

Full text of Press Releases of the United States Department of the Treasury : Volume 421

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