Full text of Press Releases of the United States Department of the Treasury : Volume 422

View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Treas.
HJ
10
.A13
P4

vA22

Department of the Treasury

PRESS RELEASES

The following numbers were not used:
JS-2281, 2286 and 2313

J~·1116: Minlltc~4

Of The Meeting Of The Treasury Borrowing Advisory Committee OfT ... Page I of 3

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or pont the PDF content on this page. download the free A(lo/w i ,,) ACID/JiI/ C ) Reader"'),

February 2, 2005
JS-2226
Minutes Of The Meeting Of The Treasury Borrowing Advisory Committee Of
The Bond Market Association
The Committee convened In closed session at the Hay-Adams Hotel at 1:25 p.m.
All members of the Committee were present. Assistant Secretary for Financial
Markets Timothy Bitsberger welcomed the Committee and gave them the charge.
During the course of the meeting, Mr. Bitsberger referred to the series of charts that
were released on January 31,2005 on Treasury's current financing situation, its
debt portfolio, risks to financing needs, and Treasury's share of global and domestic
markets.
The Committee addressed the first question in the Committee charge (attached) on
whether Treasury needs to reevaluate its current issuance pattern in light of a
modest increase in expected borrowing needs. Assistant Secretary Bitsberger
noted that the "modest increase" was in reference to OMB deficit estimates from
the Mid-Session Review in 2004 and their most recent estimates released last
week. He commented that Treasury does not currently see a need to change its
issuance pattern at this time.
One Committee member suggested that Treasury should increase issuance of
longer-term debt (5-years or greater) given that the average length of maturity of
Treasury debt outstanding is projected to continue to decline and that the level of
debt outstanding maturing within the next three years is expected to increase. One
member observed that the majority of net new issuance is already in longer
maturities, including longer-dated TIPS. The Committee then had a general
discussion of rollover risk and interest rate risk. This led into a discussion of targets
or floors for average maturity of debt.
A Committee member brought up the issue of flexibility and noted that Treasury is
in a good position to meet a variety of financing needs because it has created
flexibility in its issuance structure. One Committee member pointed out that the
Treasury market is having no problem digesting the current levels or mix of debt
issuance and reiterated that Treasury has a lot of flexibility. The Committee
discussed the need to balance the benefits of flexibility against cost.
The Committee discussed the question of portfolio optimization and how Treasury
should look at its optimal debt structure. One Committee member noted that
Treasury was clear about increasing reliance on the bill market for issuance
because of the lower cost of financing. Assistant Secretary Bitsberger wrapped up
the discussion by reminding the Committee that the Treasury has tried to respond
to the change in the government's financing position from surplus to deficit in part
through increased issuance of longer-dated debt. He also noted the slow pace at
which Treasury is able to change measures such as the average maturity of the
debt outstanding, given the large size of the Treasury's portfolio. Implicit in the
concluding remarks on this topic was the Committee's view that the Treasury's
current financing pattern did not need to change to meet changes in deficit
projections.
Next the Committee turned to the second question in the charge 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. A
Committee member presented a series of charts on this topic

http://www.treas.gov/press/rekases/js2226.htm

4/25/2005

JS-222(J. Millutes Of The Meeting Of The Treasury Borrowing Advisory Committee OfT .. Pat2c:2 of 3
( www.treas.gov/offiees/cloI1l8stlc-fin3nedcl8ht-l11ilI1<1g el118n II ilrJ v -com/m in u Ie sl mm2005-q1.pcif). The conclusions were that having a broader, global investor base
was good for the Treasury and that foreign ownership by itself does not present a
significant risk to future Treasury funding or the broader U.S. economy. The
presenting member did recommend that Treasury encourage foreign official
accounts to lend out Treasury securities in the financing market to help maintain
market liquidity. The presentation concluded that overall demand for Treasury debt
is robust and the capacity to absorb debt Issuance is high, and that Treasury is in a
good funding position relative to some other G-7 countries.
Several members on the Committee agreed that Treasury should encourage
foreign official investors who hold Treasury seCUrities to lend those seCUrities in the
Treasury financing market, as the potential for reduced lending is a tangible market
risk. Assistant Secretary Bitsberger indicated that Treasury has discussed this issue
with several foreign counterparts. Committee members noted that ownership of
Treasury securities by foreigners itself may not present a risk, but that
concentration of ownership among certain types of accounts or countries could
present more of a risk.
The Committee discussed whether or not there are other risks that Treasury should
consider and what might cause foreign holders to sell their Treasury holdings or
precipitate a crisis that would affect future Treasury financing or pose a broader risk
to the U.S. economy. Treasury officials indicated that they would like the Committee
to help them better understand the specific risk scenarios. One Committee member
noted that a Treasury debt ceiling impasse that leads to default would precipitate a
crisis. Another member commented that changes in the tax code affecting foreigner
holders of Treasury debt could cause these investors to sell their holdings. Another
member commented that foreign purchases of Treasuries have had an impact on
the level of interest rates, and in the transmission mechanism of monetary policy.
The Committee then discussed its final borrowing recommendations for the
February refunding and the remaining financing for this quarter as well as the AprilJune quarter. Those charts are attached.
The Committee was then asked if there were any other issues they would like to
bring to Treasury's attention. The Committee raised the issue of proposed changes
to Social Security and noted how important it is that Treasury fully recognizes the
potential impact of these changes on the Treasury market and Treasury's financing
needs.
The meeting adjourned at 2:55 p.m.
The Committee reconvened at the Hay-Adams Hotel at 6:00 p.m. All members of
the Committee were present. The Chairman presented the Committee report to
Assistant Secretary for Financial Markets, Timothy Bitsberger. A brief discussion
followed the Chairman's presentation but did not raise significant questions
regarding the report's content.
The meeting adjourned at 6:15 p.m.

Jeff Huther
Director
Office of Debt Management
February 1, 2005
Certified by:

Ian Banwell, Chairman
Treasury Borrowing Advisory Committee
of The Bond Market Association
FebruClry 1. 2005

http://www.treas.gov/press/r~kases/js2226.htm

4/25/2005

.i~~-2226~ M;ntltc~ Of Thc IYkcting Of The Treasury Borrowing Advisory Committee Of 1'... P<lgc.~ of 3

Treasury Borrowing Advisory Committee Quarterly Meeting
Committee Charge
Reexamination of Issuance Pattern
Expected borrowing needs have risen modestly since the Committee last met. Does
the Committee see any need at this point for Treasury to reevaluate its current
issuance pattern?

Foreign ownership of Treasury Securities
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 high
proportion of total debt held by foreigners creates risks for the Treasury. We would
like the Committee's views on whether the high percentage of foreign ownership of
total 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.

Financing this Quarter
We would like the Committee's advice on the following:
•
•
•

The composition of Treasury notes to refund approximately $11.3 billion of
privately held notes and bonds maturing on February 15.
The composition of Treasury marketable financing for the remainder of the
January - March quarter, including cash management bills.
The composition of Treasury marketable financing for the April - June
quarter.

Other Issues
Are there other issues relating to the current state of the Treasury market that the
Committee would like to bring to Treasury's attention?

h ttp-i/ www .treas.gov/prcss/rcteases/js2226.htm

4/25/2005

is-:~227:

Secretary Snow will not attend the G7 meetings in London

Pagl' I of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
February 3, 2005
js-2227

Secretary Snow will not attend the G7 meetings in London
Secretary Snow has a bad chest cold and will not be traveling to the meeting of G7
finance ministers and central bank governors in London, UK, on February 4-5.
John B. Taylor, Under Secretary for International Affairs, will represent the U.S.
Treasury at the meetings Secretary Snow will spend the rest of the week at his
home in Richmond, VA, and return to Washington, DC, on Monday.

http:/.·www.treas.gov/press/relc~lses/js2227.htm

4/25/2005

js-2n~~

Worlo

L..:UllUIIIIC

!'tnum's lntormalliathenng of World Economic Leaders

/Jage I ot

""'_ES$"ROOM
.~-

FROM THE OFFICE OF PUBLIC AFFAIRS
February 3, 2005
)s-2228
World Economic Forum's Informal Gathering of World Economic Leaders
Working Together to Raise Economic Growth in the Broader Middle East and
North Africa
John B. Taylor
Under Secretary for International Affairs
United States Treasury
World Economic Forum's Informal Gathering of World Economic Leaders
Panel on Alternative Futures for the Middle East
Davos, Switzerland
January 29, 2005
I would like to thank the World Economic Forum for inviting me to participate in this
exchange of ideas with officials from the Middle East/North Africa region and the G8
countries. I believe that the practical initiatives that emerge from such exchanges
can greatly benefit the people of the region.
Indeed, for more than a year, the United States and other G8 countries along with
the countries from the Broader Middle East and North Africa have been engaging in
a dialogue with the aim of creating initiatives to benefit the people in the region.
Last summer the leaders from the G8 and Broader Middle East and North African
countries agreed at the Summit in Sea Island, Georgia, to pursue a series of bold
initiatives, including the Forum for the Future. The Forum supports efforts to
advance freedom, democracy and prosperity in the region.
U.S. Treasury Secretary John Snow led the finance channel of the Forum during its
start-up phase. He hosted several meetings with regional finance and economic
ministers - beginning in Dubai in 2003 and continuing with two meetings in
Washington in 2004. And most recently, just last December he joined Moroccan
Finance Minister Oualalou to co-chair the finance ministers' component of the
Forum for the Future in Rabat. The ministers - meeting together as a group for the
first time last year - developed a joint vision of what is needed to answer the
region's call to increase economic growth and reduce poverty. I believe that this
new partnership is one of the most important and exciting developments in the area
of international economic cooperation in many years. I am happy to say that U.K.
Chancellor Brown and the new Bahraini Finance Minister AI-Khalifa will co-chair the
finance ministers' channel this year and are already planning a meeting in
Washington in the spring.
And there is much to do. True, notable progress has been made in the region with per capita income in the region rising to $2,080 in 2000 from $1,800 in 1985.
But stronger economic growth must be achieved to address the region's economic
and social challenges in the 21 st century. According to the widely cited 2002 UNDP
Arab Human Development Report, within twenty years the Middle East and North
Africa region's total population is expected to exceed 400 million. Nearly 38 percent
of the region's approximately 280 million inhabitants are under the age of 14.
Projections are that the working age population in the Middle East and North Africa
will increase by about 50 million in the next ten years. Unemployment in region is

httn:! /www.treas.gov/presslrele~ses/js2228.htm

4/25/2005

j~-222X:

\Vorlct

\;COn01"'C

hnllm's lntoflnal Gathering of World Economic Leaders

Page 2 of 3

15 percent, with unemployrnent exceeding 20 percent in Algeria, the West Bank
and Gaza, Libya, and Morocco.
How can the necessary economic growth be achieved? The broad consensus is
that economic growth is achievable only when governments adopt economic
policies that enable the private sector to become the main driver of growth.
Yesterday, I participated in a panel organized by the Arab Business Council. The
Council leads the Forum for the Future's business dialogue with ministers, and the
business leaders know better than any of us about the challenges - and immense
opportunities - of doing business in the region.

I am proud to say that, through the Forum for the Future, we have already taken the
first steps in implementing this vision:

The International Finance Corporation (IFC) launched its facility for technical
assistance to support small and medium enterprises (SMEs) in the BMENA region
in September 2004. Activities are underway to train SME managers, develop
financial institutions and markets, and promote an enabling environment for
businesses. For example, the IFC is expanding its SME management training to
Yemen, holding a regional conference on SME lending practices, and negotiating
with several banks in the region on specific SME lending training packages. Donors
have pledged more than $43 million to the facility, in addition to the IFC's own $20
million - bringing the total level of financing to about $63 million thus far.

The creation of a Network of Funds was agreed to facilitate greater cooperation
among regional and international development institutions to improve the
effectiveness of official financing in the region. Building on existing mechanisms,
the Network of Funds will serve also as an advisory group for G8 and BMENA
governments. The Arab Monetary Fund will convene the first meeting of Network
institutions this year to discuss and develop its initiatives.

Jordan has taken lead in working with the Consultative Group to Assist the Poor
(CGAP) to establish a regional microfinance technical hub and training center to
build capacity and introduce best practices. Yemen has committed to launch its own
microfinance pilot project. The U.S. plans to contribute $125 million to
microenterprise in the BMENA region over the next 5 years, to further the G8 goal
of reaching 2 million entrepreneurs.

Under the UK's chairmanship of the G8, work has already begun with the World
Bank on identifying the specific impediments to growth and investment in the
BMENA region.
We recognize that the G8-BMENA channel does not operate on its own. We can
learn from and build on experiences of the European Commission with the
Barcelona Process, Euro-Mediterranean partnerships, and the European
Neighborhood policies. We are also impressed to hear about a European Central
Bank meeting with governors of central banks from region.
The United States applauds and provides support to countries in the region that are
making good progress on reform. A few examples of market-oriented measures that
are removing barriers to growth include:
In Egypt, Minister Boutros-Ghali and his colleagues have made significant
strides in recent months by reducing tariff rates, introducing legislation that would
slash personal and corporate income tax rates, and increasing exchange rate
flexibility - exactly the kinds of poliCies needed to attract foreign investors and boost

http:!Nv'ww.treas.goY/press/re Iea~es/j s2228.htm

4/25/2005

i~-~~~~:

\Vorlci h':olloJl1ic Forum's Infomlal Gathering of World Economic Leaders

Page J of 3

growth. And markets have taken notice - Egyptian equities are up 100% in the last
year while the Egyptian pound has appreciated by more than 5 percent against the
dollar and the euro in the last month.

In Morocco, the government's commitment to the privatization of state-owned
enterprises, its efforts to increase the transparency of government decision-making,
and the liberalization of its trade policy are all visible indicators of a realization that
the private sector - not the government - must be the main engine of economic
growth. The U.S.-Morocco Free Trade Agreement and Morocco's eligibility for
funding from the Millennium Challenge Account are two tangible indicators of our
support for Morocco's reform-oriented policies.

In West Bank and Gaza, we have seen remarkable progress in the
government's financial accountability. Under the leadership of Finance Minister
Fayaad, the transparency of the budget process has improved dramatically, through
measures such a direct deposit system under which funds are disbursed directly to
employees. Minister Fayaad has also brought the petroleum monopoly under the
Finance Ministry's direct control. With the democratic election of President Abbas
and continued urgency for peace in the region, the United States supports further
economic measures to reduce poverty and unemployment.
In Pakistan, where just 5 years ago the country was on the brink of default,
the country now successfully taps international capital markets. The country's
success has been a direct result of the government's economic policies, leading to
its fastest growth rate in almost 10 years (6.4%). Pakistan has liberalized its trade
regime substantially, reducing tariffs and removing most nontariff barriers. It has
also privatized and restructured its banking sector significantly: 80% of banking
assets are now In the private sector (up from 34% in 1999, and just 8% in 1990)
and non-performing loans have fallen to 13.8% (down from 23% in 2001).

In Bahrain, a Free Trade Agreement was signed with the United States in
September 2004, where the government agreed to 100% duty free trade of
consumer and industrial goods and a phase-out of tariffs on remaining
products. The agreement is just one example of strong U.S. support for Bahrain's
continued progress on trade liberalization and economic reform.
In Jordan, Finance Minister Abu Hammour has made great strides in
Implementing fiscal policies - reducing expenditures, increasing revenues - that
have brought down the ratio of public debt to GDP by nearly 8 percentage points in
2004, and progress has been made in structural reforms, including in privatizing the
management of the Aqaba container port.

A little over a week ago, I had the privilege of witnessing President Bush's swearing
in ceremony. In hiS inaugural address, he stressed one unifying theme: freedom. In
these remarks I have stressed the importance of economic freedom through
economic reform. Last month in Rabat at the first Forum for the Future meeting,
Secretary Colin Powell emphasized that "Political freedom and economic freedom
go hand in hand." These links are clearly visible in the Broader Middle East and
North Africa. As President Bush said, "Our goal ... is to help others find their own
voice, attain their own freedom, and make their own way." We look forward to
supporting and working with the people of region on their priorities for economic
growth, job creation and poverty reduction, while recognizing that only through local
ownership can the people's aspirations for economic opportunity and sustained
growth be realized.

http·.··www.treaS.go\./pressrefi.ases/js2228.htm

4/25/2005

is-.2229·

Stjltl~lll~nt

or Trc~~sury Secretary John W. Snow on January Employment Report

Page I of 1

PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
February 4, 2005
js-2229
Statement of Treasury Secretary John W. Snow on January Employment
Report
As the economy continues to grow, we continue to see a steady pick up of new
jobs. Today's report again demonstrated the strength of our economic momentum
with the addition of 146,000 jobs in January. With upward revisions, a total of 2.7
million jobs have been created in 20 straight months. At 5.2 percent the
unemployment rate remains below the average of the past three decades.
This administration is committed to ensuring the continuing strength of the economy
and steady pace of job creation. President Bush has set forth a bold economic
agenda for America to strengthen Social Security, reform the tax code, curb
abusive lawsuits, and exercise the fiscal discipline necessary to cut the deficit in
half in five years. By facing these economic challenges, we will stay on track to
continue growing the economy, creating jobs and meeting the needs of America's
workers and families.

-30-

http:/..www.treas.gov/press/rele~ses/js2229.htm

4/25/2005

JS-22JO: Statement by Joho B. Taylor, Under Secretary for International Affairs, after the...

Page I of 3

PR ESS.RGQM;.

FROM THE OFFICE OF PUBLIC AFFAIRS

February 5, 2005
JS-2230
Statement by John B. Taylor, Under Secretary for International Affairs, after
the Meeting of G7 Finance Ministers and Central Bank Governors, London,
UK

I was pleased to join Chancellor Brown and the G-7 Finance Ministers at Lancaster
House today. I was honored to represent the U.S. Treasury in place of Secretary
Snow, who sent his regards to the group and is recovering from a bad chest cold.
The U.S came to this meeting to emphasize first and foremost the need to
strengthen economic growth. This is of paramount importance for the benefit of our
own economies and the world as a whole - and indeed,
achieving stronger growth was the centerpiece of our discussions.
The world economy is strongly positioned. Although growth has moderated
somewhat, the global economy is expected to sustain a broad-based expansion
going forward.
The United States continues to lead the way. The addition of 2.7 million jobs since
May of 2003 and a solid year-over-year growth rate of 4.4 percent show the
strength of our nation's economy. Our unemployment rate is down to 5.2 percent lower thanthe average rate of the 1970s, 1980s and 1990s. After-tax income is up
by nearly 12 percent since the
end of 2000, and household wealth is at an all-time high. Inflation and interest rates
remain low.
These are significant achievements - for which we can thank, in large part, sound
monetary policy and President Bush's well-timed tax cuts. Yet the United States
faces considerable economic challenges, with short-term and long-term implications
for our economy and beyond. Now is the time to confront these challenges.
Our budget deficit is unwelcome, although it is understandable, given what our
economy and our country have been through in recent history. President Bush is
committed to dealing with this deficit - both by
controlling spending and by implementing policies that encourage continued
economic growth. We remain on track to cut the deficit in half by 2009. And we are
also focusing on the longer-term fiscal situation including Social Security and other
federal programs.
Confronting the U. S. current account deficit is a shared responsibility. We are
doing our part by tackling the fiscal deficit and working to raise saving in the United
States. But our actions cannot stand alone. Strong growth in the U.S. economy
makes it imperative that our trading partners, too, adopt
policies that accelerate growth. Although growth in Europe and Japan has
strengthened, it needs to be more vibrant. Among other things, this means taking
concrete steps to implement structural reforms and supply-side policies to increase
flexibility and boost productivity growth and employment - as laid out in the G-7
Agenda for Growth last year.
On the subject of growth, I want to note how pleased I was to join the G-7 Finance
Ministers in meeting this morning with our counterparts from key emerging market
countries - Brazil, China, India and South Africa. These are rapidly emerging
countries, which represent an increasing share of the global economy and will play
an ever larger role over time. Their views
enriched our own discussions, and I look forward to continued consultations going
forward.
Addressing global imbalances also means increasing flexibility in exchange rates.
As you know, we met again today with our Chinese counterparts. The G-7 has

http://www.treas.gov/prcss/rcJcolses/js2230.htm

4/25/2005

JS-2130: Statement by Jol111 B. Taylor, Under Secretary for International Affairs, after the...

Page:2 of 3

indicated for some time, both separately and collectively, our support for greater
flexibility in the Chinese exchange rate. The Chinese continue to emphasize their
commitment to move to a flexible exchange rate, and we have seen steps that are
consistent with a move in this direction. Sustained, non-inflationary growth in China
is important for maintaining strong global growth, and a more flexible and marketbased renminbi exchange rate would help the Chinese achieve this goal.
Energy plays an important role in the outlook for the world economy. Market
transparency and data integrity are fundamental to the smooth operation of
markets, and important progress is being made in
improving data provision to oil markets.
A vibrant world economy also depends on free trade. Today, we called for urgent
conclusion of the Doha Development Round. Allowing international competition in
the financial sector is particularly important for developing countries to be able to
respond efficiently to the new trade opportunities afforded by such an agreement.
Research shows that greater foreign direct
investment in the financial services sector, coupled with strengthened regulation
and supervision, helps spur financial sector development and efficiency - and helps
promote economic growth. We are urging all
countries to submit ambitious offers on financial services by the deadline for such
offers this spring.
We all have great sympathy for the people affected by the tsunami disaster. For
our part, the President has committed an initial $350 million in U.S. government
assistance for relief and reconstruction, excluding the significant support provided
by the U.S. military in the region, and U.S. private donations are estimated to
exceed $725 million. The United States has also agreed with the G-7 that, for
affected countries that request it, we would exceptionally defer debt payments up to
the end 2005 (consistent
with national laws), without payment of interest during this period, and to promote
this in the Paris Club. We have been consulting with potentially
interested countries to make sure they understand that funds for debt relief could
reduce funds available for reconstruction. We will work with each of the affected
countries to determine the mix of direct assistance (both financial and technical)
and debt forbearance that best responds to that country's needs and priorities
Turning more broadly to development, Gordon Brown has rightly highlighted the
importance of tackling the challenges of global poverty. This was a key focus of our
discussions today. The United States is deeply committed to helping the poorest
countries. And we have acted accordingly - for instance, increasing our
development assistance by 90 percent between 2000 and 2004, well beyond the
commitment we made in Monterrey.
Assistance has doubled to thirty-two sub-Saharan African countries since 2000.
More importantly, we are being more selective in deploying our assistance funds,
through initiatives like the Millennium Challenge Account, and we are leveraging our
official assistance by catalyzing other financial flows, reducing trade barriers, and
encouraging debt relief.
For some time now, the United States has strongly stated our belief that more must
be done to prevent the build-up of unsustainable debts in poor countries. Increased
reliance on grants, as we have achieved in several MOB replenishments, is a
crucial component of any long-term solution. But we can do more to put these
countries on a path to the future.
There are a number of proposals about how to proceed on debt. The United States
favors action to provide up to 100 percent relief of MOB soft loans to the poorest
debt-vulnerable countries. Also, we believe that all bilateral creditors should follow
the United States in providing 100 percent debt relief under the Enhanced HIPC
Initiative. This action, coupled with
grants going forward, will put these poor countries on a sustainable path. On the
IMF side, it will be important to think carefully about how to ensure that the IMF
engages productively in poor countries. This is an area that requires further
consideration. We look forward to working together to achieve consensus on an
approach that resolves ongoing debt sustainability concerns and puts an end to the
lend-and-forgive approach to financing development.
On a related note, significant progress has been achieved in the G-7's work on
remittances. Each ofthe G-7 economies has launched bilateral work with one or
more key remittance partners. And significant multilateral efforts, together with
major sender and recipient economies and multilateral organizations, are underway
as well. These are important steps toward our shared goal of improving the

http://'.Vww.treas.gov/presslrclc~~')es/j s2230.htm

4/25/2005

JS-2no: ~tl\tement hv John B. Taylor, Under Secretary for International Affairs, after the... Page 3 or 3
environment for private sector provision of remittance services - and enhancing the
development impact of remittance
flows.
Modern, transparent and effective international financial institutions are vital to
achieving our development goals and promoting growth and stability
in the world economy as a whole. Reform of these institutions remains a key
priority.
In the IMF, we are very supportive of the Managing Director's efforts to prioritize the
IMF's work within the context of zero real growth in the budget. The United States
continues to believe that a non-borrowing program in the IMF would be a valuable
tool - creating an option for members that do not need an IMF loan to get the
benefits of close coordination with the IMF. We hope to see progress in
implementing
such a "Policy Monitoring Arrangement" soon.
Due to strong U.S. leadership, the multilateral development banks (MOBs) will
significantly expand the depth and breadth of information provided on the results
they achieve. We continue to press our fellow MOB shareholders to support
additional transparency and accountability measures that reflect best practices in
corporate governance. In the EBRD, I also believe that it is time to start thinking
about when to step aside and allow the private sector to take over. The new EU
member states have made
remarkable progress over the past 15 years in becoming vibrant market economies
and pluralistic, multiparty democracies. The EBRD was vital in assisting this
transition and, in doing so, has successfully fulfilled its mandate in these countries.
By ceasing new operations in the new EU member states within two to three years,
the EBRD would strengthen its focus on the poorest countries in the region - where
much work remains.
Since 9/11, we have made great strides in combating the financing of terrorism and
anti-money laundering. Working with the international financial institutions, FATF
and other international organizations, we have
been pushing for strong AMLlCFT standards and global compliance with those
standards, vital pillars in this fight. We now need to continue to tighten the noose
further. This means, first, that we want to promote further global compliance and
implementation with the FATF Recommendations and second, that we should be
looking to improve the effectiveness of our financial sanctions regimes and to apply
such financial sanctions broadly to the financial underpinnings of all crime. Under
the UK's leadership this year, we are determined to pursue these and other issues
through collaborative action going forward.
Thank you.

http://y.ww.treas.gov/press/relcav~s/j s2230.htm

4/25/2005

S-2n I: Undcr ~ccrctllry Taylor's Remarks on Combating Terrorist Financing at th...

Page I

or 2

FROM THE OFFICE OF PUBLIC AFFAIRS
February 5, 2005
JS-2231
Under Secretary Taylor's Remarks on Combating Terrorist Financing
at the G-? Meeting of Finance Ministers and Central Bank Governors
- Or. John Taylor, Treasury's Under Secretary for International Affairs, discussed
our efforts in the financial war on terror during dinner with the G-7 Finance Ministers
and Central Bank Governors on February 4th
"As Secretary Snow has said, hatred fuels terrorism, but money makes their lethal
schemes achievable. By breaking the financial backbone of terrorist groups and
insurgents, we can encumber and thwart their short term ambitions while rupturing
and dismantling their long-term agendas. Choking off funds that aid terrorist efforts
can lead to the ultimate ruin of terrorist organizations. A major focus of our efforts
moving forward should be the collective use of our financial tools to protect the
international financial system from abuse by terrorists or criminals, without
disrupting legitimate flows of capital.
"Anti-money laundering and counter-terrorist financing standards are vital pillars in
our fight against terrorist financing, and therefore require global compliance. The
G-7 has been at the forefront of these efforts, implementing necessary standards at
home, while working with our coalition partners abroad to do the same.
"While we recognize the battle is not over and much work lies ahead, we also know
we can build on our past successes to further tighten the financial noose around al
Qaida, Hamas and other like-minded terrorist groups. Our efforts have brought to
fruition the freezing of millions of dollars worldwide in terrorist-related assets. More
importantly, we have closed down channels and sources of funding that were being
relied upon to bankroll terrorist agendas.
"In addition, our collective work with the International Financial Institutions (IFls),
the Financial Action Task Force (FATF) and with other organizations plays a central
role in our progress in this common fight. We look forward to continuing this
productive and collaborative effort.
"As last year's G-7 chair, the United States would especially like to thank the United
Kingdom for aggressively carrying the torch forward and putting together the outline
of a well-structured thematic Draft Action Plan that builds on our past work.
"The Action Plan echoes the themes of the UK Presidency: engagement and
effectiveness. Clearly, to improve engagement, we will need to promote global
compliance with the FATF 40 Recommendations and the nine Special
Recommendations on terrorist financing. To improve the effectiveness of our
efforts, we need to ensure that we are aggressively implementing our financial
sanctions regimes to ensnare terrorists and applying them broadly to the financial
underpinnings of all crime. We should focus in particular not just on banks, but also
on non-bank financial services, charities and other high risk sectors.
"We should continue to use financial sanctions that are targeted or pinpointed to
specific institutions or entities, and refine the methods we use to identify and isolate
terrorist support networks under relevant UN obligations (UNSCR 1267 and 1373).
"The G7 should refine and develop what has become the tool of choice
internationally in dealing with terrorist financing: aggressive targeting mechanisms
and the implementation of targeted financial sanctions.

lttr:l/www.treas.gov/press/relca:.;~s/js2231.htm

4/25/2005

JS-2n I: Under Seeretnry Taylor's Remarks on Combating Terrorist Financing at th...

Page:2 of:2

"In moving forward, I also believe we should use the full range of financial tools
available to us collectively to identify and isolate corrupt foreign financial institutions
that are facilitating illicit financial activity.
"Indeed, the U.S. Treasury Department has already used its authority under Section
311 of the USA PATRIOT Act to identify and cut off from the U.S financial sector
several foreign financial institutions that we found to be of primary money
laundering concern and therefore a threat to our financial system.
"Though we have found this tool to be highly effective, it would clearly be most
effective if employed multilaterally.
"We have seen impressive successes in our collective efforts to target and halt
terrorist financing, and we have learned much about the mechanisms that provide
the channels for illicit international activity.
"The United States believes we should apply these lessons and deploy the full
array of financial tools at our disposal to attack the financial underpinnings of all
illicit activity, including organized crime, kleptocracy, narcotics trafficking and the
proliferation of weapons of mass destruction.
"The stakes are high, and we need to demand of ourselves and of the financial
leaders around the world continued creative thinking and effectiveness in these
efforts. Terrorists and their sympathizers have proved to be crafty and unrelenting
in their efforts to bankroll hatred - we must always stay one step ahead of their
antics. Our challenge is difficult, but our resolution is steadfast," said Taylor.

http://www.treas.gov/press/releasc<;/js2231.htm

4/25/2005

Page I

is-.!23:· Tn~il."my Relcast:s Blue Book

or 1

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

February 7,2005
js-2232
Treasury Releases Blue Book

The Treasury Department today announced the release of the General
Explanations of the Administration's Fiscal Year 2006 Revenue Proposals, also
known as the "Blue Book."
The Blue Book summarizes the revenue proposals in the President's Fiscal Year
2006 Budget.
###

REPORTS

•

The "2005 Blue Book" General Explanations of the Administration's Fiscal
Year 2006 Revenue Proposals

http://vww.treas.gov/presslrcleaxs/js2232.htm

4/2512005

is-2233: Proposed Tn~il"lIry Budget for FY 2006

Page I

or 1

FROM THE OFFICE OF PUBLIC AFFAIRS
Febfuary 7, 2005
Js-2233

Proposed Treasury Budget for FY 2006
The President's proposed budget for the Department of Treasury in fiscal year 2006
funds the Department's ongoing commitment to promoting economic opportunity
and ownership, to waging the financial war on terrorism and to striving for a more
effective and efficient federal government.
"The President's budget for Treasury reflects the Department's top priorities, such
as ensuring America's economic strength and fighting the financial war on terror,
while also demonstrating the fiscal responsibility necessary to reduce the deficit,"
said Treasury Secretary John W. Snow.
The overall Treasury budget for FY 2006 is $11.648 billion, a 3.8 percent increase
over the current appropriations for FY 2005.
The budget requests $10679 billion for the Internal Revenue Service, which
includes an additional $500 million for IRS enforcement activities, representing a
7.8 percent increase in enforcement funding over FY 2005. The increase will
provide additional resources to examine more tax returns, collect past due taxes
and investigate cases of tax evasion.
Treasury's budget reiterates the President's steadfast commitment to combating
terrorist financing and safeguarding the U.S. financial system by providing over
$118 million to support the financial war on terror and fight financial crime.
A complete summary of Treasury's FY 2006 budget request can be viewed at
www.treas.gov/offices/managemenUbudgetl.

http://',vww.treas.gov/presslrelc,n;cs/j s2233 .htm

4/25/2005

JS-2~3-+'

MFnlA ADVISORY,br>Treasury to Hold Background Technical Briefing on ...

Page I

or I

FROM THE OFFICE OF PUBLIC AFFAIRS
February 7,2005
JS-2234
MEDIA ADVISORY
Treasury to Hold Background Technical Briefing on Blue book
WASHINGTON, DC - The Treasury Department today announced the release of
the General Explanations of the Administration's Fiscal Year 2006 Revenue
Proposals, also known as the "Blue Book." Treasury Officials will host a technical
briefing on background for the press on the Blue Book at 2:00 PM today.
WHAT:
Technical Briefing on the FY 2006 Blue Book
WHEN:
2:00 PM today
WHERE:
U.S. Treasury Department
Room 4121
COVERAGE:
Pen and Pad Only. The briefing will be on background.
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.

http://vww.treas.gov/press/rclea~-:,cs/js2234.htm

4/25/2005

FROM THE OFFICE OF PUBLIC AFFAIRS
February 7, 2005
2005-2-7 -17 -35-38-16071
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $81,228 million as of the end of that week, compared to $85,425 million as of the end of the prior week.

I. Official U.S. Reserve Assets (in US millions)
Januarll 28, 2005

Februarv 4, 2005

85,425

81,228

TOTAL
1. Foreign Currency Reserves

a. Securities

Euro

Yen

TOTAL

Euro

Yen

TOTAL

11,932

15,205

27,137

11,841

15,169

27,010

Of which, issuer headquartered in the US.

b. Total deposits with:

b.i. Other central banks and BIS

11,702

3,056

14,758

11,611

3,049

14,660

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.

19,139

15,206

13,345

13,307

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
February 4, 2005

Januarll 28, 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

III. Contingent Short-Term Net Drains on Foreign Currency Assets
February 4, 2005

January 28, 2005
Euro
1. Contingent liabilities in foreign currency

Yen

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.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.
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.

S-2235: Secretary John W. Snow Opening Statement Hearing on the President's FY 2006 Budget House ... Page 1 of 3

FROM THE OFFICE OF PUBLIC AFFAIRS
February 8, 2005
JS-2235

Secretary John W. Snow Opening Statement Hearing on the President's FY
2006 Budget House Ways and Means Committee
Good morning and thank you Chairman Thomas and Ranking Member Rangel for
having me here today to discuss the President's budget. I think you'll find that it
exhibits a dedication to fiscal discipline, transparency, and economic growth.
By focusing on priorities and looking for savings in every agency, across the board,
the President's administration has come up with a budget that we believe is fair
while also holding the government accountable. As the President announced in his
State of the Union Address last week, this budget adheres to the principle of
"Taxpayer dollars must be spent wisely, or not at all."
It holds the growth of discretionary spending to just 2.1 percent, below the expected
rate of inflation. Non- security discretionary spending in this budget falls by nearly
one percent, the tightest such restraint proposed since the Reagan administration.
This administration appreciates that cutting taxes and exercising fiscal discipline
must go hand in hand. We appreciate that this is the people's money with which we
are dealing, and that we work for the taxpayers.
That is why we are committed to making the President's pro-growth tax cuts
permanent and building on our strengthened economic fundamentals as we submit
to you a budget that will increase the efficacy of our government programs without
over-spending the taxpayers' money.
Over the weekend, the finance ministers of the G7 met - the U.S. was represented
by Treasury Undersecretary for International Affairs John Taylor - and they
discussed the importance of promoting and achieving economic growth in our
countries, as well as keeping our respective financial houses in order. These two
issues are inextricably linked.
JS-2235
The way that we, as the executives of the federal government, manage the
taxpayers' money sends a message to the people of America as well as to our
trading partners and investors around the globe. When we control our spending, we
are showing our citizens and the world that fiscal discipline is a priority on par with
our policies that promote economic growth.
I'll talk more about fiscal discipline in a moment, but I'd like to start with a look at
what we have recently achieved through pro-growth economic policies.
Well-timed tax cuts, combined with sound monetary policy set by the Federal
Reserve Board, have resulted in very good economic growth and, most importantly,
continual job creation. The economy has created over 2.7 million jobs since May of
2003. And while job growth can never be fast enough for those looking for work, the
steady pace of job creation has been an unmistakable sign of an economy that has
recovered from very tough times, and is now expanding.

http://y.ww.treas.gov/press/relcav~s/i sL235 .htm

7/5/2005

S-2235: Secretary John W. Snow Opening Statement Hearing on the President's FY 2006 Budget House ... Page 2 of 3

Whenever I speak with my counterparts in the G7, I am reminded that the American
economy is the envy of the world. Our recovery and growth, our successful
dedication to entrepreneurship - all these things are admired, and increasingly
emulated, by our G7 partners.
Is it any wonder that they want to learn the secret to our economic resiliency? A
quick look at the facts reveals much to be envied: GOP growth for 2004 was 4.4
percent. Our economy has posted steady job gains for twenty straight months. The
unemployment rate is down to 5.2 percent - lower than the average rate of the
1970s, 1980s and 1990s. Real after-tax income is up by over eleven percent since
the end of 2000 and household wealth is at an all-time high. Inflation, interest rates,
and mortgage rates remain at low levels. Homeownership rates are at record highs.
Tax cuts can be hard on budgets and deficits in the short term, but if the tax cuts
are geared toward improving incentives there are long-term benefits as well as
short-term ones, and this fact has been well illustrated by these outstanding
economic results.
I point to this record because it is so important that we continue on a pro-growth
path. Continued economic growth is needed, and will be needed, to continue to
improve our standard of living and until every worker in America who is still looking
for a job can find one.
For example, we've got to make the President's growth-enhancing tax cuts
permanent - and that is included in this budget. The President's Panel on Tax
Reform was also created with economic growth in mind. It is a group of some of the
best minds in our country, and they'll be looking critically at the entire existing code
and coming up with proposals that would make it fairer, less complex, and more
pro-growth.
While the Panel is working on that historic task, our efforts to grow the American
economy will continue in many other areas - I am particularly interested in
legislation that will reduce the burden of frivolous lawsuits on our economy - and
this budget is part of the Administration's overall pro-growth policy agenda.
As I already mentioned, economic growth is good for our country for the jobs it
creates and the prosperity it spreads. But it is also, importantly, part of a winning
strategy on deficit reduction - one of the top priorities of this budget - because
economic growth increases Treasury receipts.
Treasury receipts are rising - in the second half of calendar 2004, individual income
tax revenue is up 10.5 percent versus the same period in 2003 - and will continue
to rise, as long as we have economic growth. That must be accompanied, as I
emphasized earlier, by strict fiscal discipline. That is why the President's budget
proposes real savings. I know it will have its critics as a result, but its frugality is
essential.
Let me be very clear on this: we have deficits and they are unwelcome. But we are
not under-taxed and higher taxes will not be the solution to reducing deficits. Fiscal
discipline, combined with economic growth, is the correct path.
Using this approach, we are making headway on deficit reduction, and we're on
track to halve the deficit by 2009. The deficit is also forecast to fall to 3.0 percent of
GOP in 2006 and to 1.5 percent by 2009, well below the 40-year historical average
of 2.3 percent of GOP.
The 2004 deficit came in at 3.6 percent of GOP - nearly a full percentage point
lower than had been projected. And the 2005 deficit is projected to show another
decline.
While we are pleased with this progress, we recognize that more needs to be done.
We need to make the tough choices on spending and stand steadfast in our

http://y.ww.treas.gov/press/relcav~s/i s2235 .htm

7/5/2005

S-2235: Secretary John \Y. Snow Opening Statement Hearing on the President's FY 2006 Budget House ... Page 3 of 3

commitment to continuing economic growth in order to see that deficit whittled
down.
We also need to look at our long-term deficit situation. I spoke earlier about
transparency, specifically the honesty of this budget, which deals openly with the
needs of the times in which we live, from the war on terror to the need for
continuing growth.
In the interest of honesty and transparency, I encourage all of us to follow the
politically courageous leadership of our President by looking at, and dealing with,
the $10.4 trillion deficit facing our children and grandchildren in the form of an
unsustainable Social Security program.
The program is an important institution, a sacred trust, and it worked well for the
times in which it was designed. It is, however, doomed by our country's
demographics and in need of wise and effective reform.
The arithmetic is simple. As people live longer and have had fewer children, the
ratio of workers paying into the system and retirees taking benefits out has
dwindled dramatically. We had 16 workers paying into a system for every one
beneficiary in 1950, and today we have just three workers for every beneficiary.
That ratio will drop to two-to-one by the time today's young workers retire.
We all must agree that this demographic reality exists, that this problem exists.
Social Security is secure for today's retirees and for those nearing retirement, it will
not change for those people who are 55 and over ... but it is offering empty
promises to future generations. When today's young workers begin to retire in
2042, the system will be exhausted and bankrupt.
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, here on Capitol Hill. I echo
the President's State of the Union Address in saying that we must join together to
strengthen and save Social Security.
We can, and should, do this without increasing payroll taxes. The level of increases
that would be necessary, if we maintain the status quo, would have a terrible impact
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.
Saving Social Security is an undertaking of historic proportions. We have hard work
ahead of us as we strive for consensus in the name of younger generations.
We also have hard work ahead of us when it comes to strengthening the
fundamentals of our economy: deficit reduction. good fiscal policy, energy policy,
lawsuit abuse reform, and encouraging savings.
I appreciate that this Administration has an ambitious agenda ... but it is a good one,
worth the work it will take to move forward, together, on it.
Let's start by passing this responsible, pro-growth budget.
Thank you for having me here today; I'm pleased to take your questions now.

http://y.ww.treas.gov/press/relcav~s/i s223 5 .htm

7/5/2005

Js-nJ(,: SCCldalY Juhn '/1/. Snow Opening Statement Revenue Proposals in the ...

Page 1 of 3

FROM THE OFFICE OF PUBLIC AFFAIRS
February 8, 2005
JS-2236
Secretary John W. Snow
Opening Statement
Revenue Proposals in the President's FY 2006 Budget
Senate Finance Committee
February 8, 2005
Good afternoon and thank you Chairman Grassley and Ranking Member Baucus
for having me here today to discuss the President's budget. I think you'll find that it
exhibits a dedication to fiscal discipline, transparency, and economic growth.
By focusing on priorities and looking for savings in every agency, across the board,
the President's administration has come up with a budget that we believe is fair
while also holding the government accountable. As the President announced in his
State of the Union Address last week, this budget adheres to the principle of
"Taxpayer dollars must be spent wisely, or not at all."
It holds the growth of discretionary spending to just 2.1 percent, below the expected
rate of inflation. Non-security discretionary spending in this budget falls by nearly
one percent, the tightest such restraint proposed since the Reagan administration.
This administration appreciates that cutting taxes and exercising fiscal discipline
must go hand in hand. We appreciate that this is the people's money with which we
are dealing, and that we work for the taxpayers.
That is why we are committed to making the President's pro-growth tax cuts
permanent and building on our strengthened economic fundamentals as we submit
to you a budget that will increase the efficacy of our government programs without
over-spending the taxpayers' money.
Over the weekend, the finance ministers of the G7 met - the U.S. was represented
by Treasury Undersecretary for International Affairs John Taylor - and they
discussed the importance of promoting and achieving economic growth in our
countries, as well as keeping our respective financial houses in order. These two
issues are inextricably linked.
The way that we, as the executives of the federal government, manage the
taxpayers' money sends a message to the people of America as well as to our
trading partners and investors around the globe. When we control our spending, we
are showing our citizens and the world that fiscal discipline is a priority on par with
our policies that promote economic growth.
I'll talk more about fiscal discipline in a moment, but I'd like to start with a look at
what we have recently achieved through pro-growth economic policies.
Well-timed tax cuts, combined with sound monetary policy set by the Federal
Reserve Board, have resulted in very good economic growth and, most importantly,
continual job creation. The economy has created over 2.7 million jobs since May of
2003. And while job growth can never be fast enough for those looking for work, the
steady pace of job creation has been an unmistakable sign of an economy that has
recovered from very tough times, and is now expanding.
Whenever I speak with my counterparts in the G7, I am reminded that the American
economy is the envy of the world. Our recovery and growth, our successful
dedication to entrepreneurship - all these things are admired, and increasingly

http://v. ww. treas.gov/pressire \ec.ses/js2236.htrn

4/25/2005

JS-2230: ~ccrctary John \V. Snow Opening Statement Revenue Proposals in the ...

Page.2 of 3

emulated, by our G7 partners.
Is it any wonder that they want to learn the secret to our economic reSiliency? A
quick look at the facts reveals much to be envied: GOP growth for 2004 was 4.4
percent. Our economy has posted steady job gains for twenty straight months. The
unemployment rate is down to 5.2 percent - lower than the average rate of the
1970s, 1980s and 1990s. Real after-tax income is up by over eleven percent since
the end of 2000 and household wealth is at an all-time high. Inflation, interest rates,
and mortgage rates remain at low levels. Homeownership rates are at record highs.
Tax cuts can be hard on budgets and deficits in the short term, but if the tax cuts
are geared toward improving incentives there are long-term benefits as well as
short-term ones, and this fact has been well illustrated by these outstanding
economic results.
I point to this record because it is so important that we continue on a pro-growth
path. Continued economic growth is needed, and will be needed, to continue to
improve our standard of living and until every worker in America who is still looking
for a job can find one.
For example, we've got to make the President's growth-enhancing tax cuts
permanent - and that is included in this budget. The President's Panel on Tax
Reform was also created with economic growth in mind. It is a group of some of the
best minds in our country, and they'll be looking critically at the entire existing code
and coming up with proposals that would make it fairer, less complex, and more
pro-growth.
While the Panel is working on that historic task, our efforts to grow the American
economy will continue in many other areas - I am particularly interested in
legislation that will reduce the burden of frivolous lawsuits on our economy - and
this budget is part of the Administration's overall pro-growth policy agenda.
As I already mentioned, economic growth is good for our country for the jobs it
creates and the prosperity it spreads. But it is also, importantly, part of a winning
strategy on deficit reduction - one of the top priorities of this budget - because
economic growth increases Treasury receipts.
Treasury receipts are riSing - in the second half of calendar 2004, individual income
tax revenue is up 10.5 percent versus the same period in 2003 - and will continue
to rise, as long as we have economic growth. That must be accompanied, as I
emphasized earlier, by strict fiscal discipline. That is why the President's budget
proposes real savings. I know it will have its critics as a result, but its frugality is
essential.
Let me be very clear on this we have deficits and they are unwelcome. But we are
not under-taxed and higher taxes will not be the solution to reducing deficits. Fiscal
discipline, combined with economic growth, is the correct path.
Using this approach, we are making headway on deficit reduction, and we're on
track to halve the deficit by 2009. The deficit is also forecast to fall to 3.0 percent of
GOPln 2006 and to 1.5 percent by 2009, well below the 40-year historical average
of 2.3 percent of GOP.
The 2004 deficit came in at 3.6 percent of GOP - nearly a full percentage point
lower than had been proJected. And the 2005 deficit is projected to show another
decline.
While we are pleased with this progress, we recognize that more needs to be done.
We need to make the tough choices on spending and stand steadfast in our
commitment to continuing economic growth in order to see that deficit whittled
down.
We also need to look at our long-term deficit situation. I spoke earlier about
transparency, specifically the honesty of this budget, which deals openly with the
needs of the times in which we live, from the war on terror to the need for
continuing growth.

http://www.treas.gov/press/reIeZtscs/js2236.htm

4/25/2005

JS-22J(,: Seudary John W. Snow Opening Statement Revenue Proposals in the ...

Pagc 3 of 3

In the interest of honesty and transparency, I encourage all of us to follow the
politically courageous leadership of our President by looking at, and dealing with,
the $10.4 trillion deficit facing our children and grandchildren in the form of an
unsustainable Social Security program.
The program is an important institution, a sacred trust, and it worked well for the
times in which it was designed. It is, however, doomed by our country's
demographics and in need of wise and effective reform.
The arithmetic is simple. As people live longer and have had fewer children, the
ratio of workers paying into the system and retirees taking benefits out has
dwindled dramatically. We had 16 workers paying into a system for everyone
beneficiary in 1950, and today we have just three workers for every beneficiary.
That ratio will drop to two-to-one by the time today's young workers retire.
We all must agree that this demographic reality exists, that this problem exists.
Social Security is secure for today's retirees and for those nearing retirement, it will
not change for those people who are 55 and over ... but it is offering empty
promises to future generations When today's young workers begin to retire in
2042, the system will be exhausted and bankrupt.
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, here on Capitol Hill. I echo
the President's State of the Union Address in saying that we must join together to
strengthen and save Social Security.
We can, and should, do this without increasing payroll taxes. The level of increases
that would be necessary, if we maintain the status quo, would have a terrible impact
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.
Saving Social Security is an undertaking of historic proportions. We have hard work
ahead of us as we strive for consensus in the name of younger generations.
We also have hard work ahead of us when it comes to strengthening the
fundamentals of our economy: deficit reduction, good fiscal policy, energy policy,
lawsuit abuse reform, and encouraging savings.
I appreciate that this Administration has an ambitious agenda .. but it is a good one,
worth the work it will take to move forward, together, on it.
Let's start by passing this responsible, pro-growth budget.
Thank you for having me here today; I'm pleased to take your questions now.

http://www.treas.gov/press/rcle.r.ics/js2236.htm

4/25/2005

JS-:~~31:

Secretlry John \\'. Snow Opening Statement Social Security: Defining t. .. Page; 1 u14

. PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
February 9, 2005
JS-2237
Secretary John W. Snow
Opening Statement
Social Security: Defining the Problem
House Budget Committee
February 9, 2005
Good afternoon and thank you Chairman Nussle and Ranking Member Spratt for
having me here today to discuss the President's budget. I think you'll find that it
exhibits a dedication to fiscal discipline, transparency, and economic growth.
By focusing on priorities and looking for savings in every agency, across the board,
the President's administration has come up with a budget that we believe is fair
while also holding the government accountable. As the President announced in his
State of the Union Address last week. this budget adheres to the principle of
"Taxpayer dollars must be spent wisely, or not at all."
It holds the growth of discretionary spending to just 2.1 percent, below the expected
rate of inflation. Non-security discretionary spending in this budget falls by nearly
one percent, the tightest such restraint proposed since the Reagan administration.
This administration appreciates that cutting taxes and exercising fiscal discipline
must go hand in hand. We appreciate that this is the people's money with which we
are dealing, and that we work for the taxpayers.
That is why we are committed to making the President's pro-growth tax cuts
permanent and building on our strengthened economic fundamentals as we submit
to you a budget that will increase the efficacy of our government programs without
over-spending the taxpayers' money.
Over the weekend, the finance ministers of the G7 met - the U.S. was represented
by Treasury Undersecretary for International Affairs John Taylor - and they
discussed the importance of promoting and achieving economic growth in our
countries, as well as keeping our respective financial houses in order. These two
issues are inextricably linked.
The way that we, as the executives of the federal government, manage the
taxpayers' money sends a message to the people of America as well as to our
trading partners and investors around the globe. When we control our spending, we
are showing our citizens and the world that fiscal discipline is a priority on par with
our policies that promote economic growth.
I'll talk more about fiscal discipline in a moment, but I'd like to start with a look at
what we have recently achieved through pro-growth economic policies.
Well-timed tax cuts, combined with sound monetary policy set by the Federal
Reserve Board, have resulted in very good economic growth and, most importantly,
continual job creation. The economy has created over 2.7 million jobs since May of
2003. And while job growth can never be fast enough for those looking for work, the
steady pace of job creation has been an unmistakable sign of an economy that has
recovered from very tough times, and is now expanding.

http://y.ww.treas.gov/press/relcav~s/is223 7, htm

4/25/2005

JS-2237: Secretary John W. Snow Opening Statement Social Security: Defining t... Page 2 of 4

http://y.ww.treas.gov/press/relcav~s/is223 7,htm

4/25/2005

JS-:2n7: Secretary John W. Snow Opening Statement Social Security: Defining t... Page 3 of 4

commitment to continuing economic growth in order to see that deficit whittled
down.
We also need to look at our long-term deficit situation. I spoke earlier about
transparency, specifically the honesty of this budget, which deals openly with the
needs of the times in which we live, from the war on terror to the need for
continuing growth.
In the interest of honesty and transparency, I encourage all of us to follow the
politically courageous leadership of our President by looking at, and dealing with,
the $10.4 trillion deficit faCing our children and grandchildren in the form of an
unsustainable Social Security program.
The program is an important institution, a sacred trust, and it worked well for the
times in which it was designed. It is, however, doomed by our country's
demographics and in need of wise and effective reform.
The arithmetic is simple. As people live longer and have had fewer children, the
ratio of workers paying into the system and retirees taking benefits out has
dwindled dramatically. We had 16 workers paying into a system for every one
beneficiary in 1950, and today we have just three workers for every beneficiary.
That ratio will drop to two-to-one by the time today's young workers retire.
We all must agree that this demographic reality exists, that this problem exists.
Social Security is secure for today's retirees and for those nearing retirement, it will
not change for those people who are 55 and over ... but it is offering empty
promises to future generations. When today's young workers begin to retire in
2042, the system will be exhausted and bankrupt.
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, here on Capitol Hill. I echo
the President's State of the Union Address in saying that we must join together to
strengthen and save Social Security.
We can, and should, do this without increasing payroll taxes. The level of increases
that would be necessary, if we maintain the status quo, would have a terrible impact
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.
Saving Social Security is an undertaking of historic proportions. We have hard work
ahead of us as we strive for consensus in the name of younger generations.
We also have hard work ahead of us when it comes to strengthening the
fundamentals of our economy: deficit reduction, good fiscal policy, energy policy,
lawsuit abuse reform, and encouraging savings.
I appreciate that this Administration has an ambitious agenda ... but it is a good one,
worth the work it will take to move forward, together, on it.
Let's start by passing this responsible, pro-growth budget.
Thank you for having me here today; I'm pleased to take your questions now.

http://y.ww.treas.gov/press/relcav~s/is223 7. htm

4/25/2005

Js-nj~:

Statement ot Donald V. Hammond Fiscal Assistant Secretary, U.S. Departm ... Page 1 of-J.

FROM THE OFFICE OF PUBLIC AFFAIRS
February 9, 2005
JS-2238
Statement of Donald V. Hammond
Fiscal Assistant Secretary, U.S. Department of the Treasury
Before the House Committee on Government Reform
Financial Report of the United States Government Improves
Government Accountability
Mr. Chairman and Members of the Subcommittee, it is my privilege and pleasure to
represent the Treasury Department today to discuss the state of reporting on the
finances of the federal government. Your continued interest in this important
subject is appreciated. The Financial Report of the United States Government,
incorporating the consolidated government-wide financial statements, is designed
to report on the financial condition of the Federal government using the accrual
basis of accounting employed and understood worldwide for financial reporting.
The report for fiscal year 2004 was the eighth time that Treasury has prepared and
issued this report pursuant to the requirements of the Government Management
Reform Act of 1994. We have learned a lot over these past eight years and, while
not always apparent, considerable progress has been made towards producing a
timely, accurate and useful financial report. Perhaps even more importantly, the
efforts to provide effective financial reporting have led to significant improvements
government-wide in the underlying financial management practices and processes.
We are pleased this year to have issued the fiscal year 2004 Financial Report on
December 15 meeting the objective the Administration set out three years ago.
This is two and a half months after year end and a full three and one half months
before the statutory due date of March 31. Much of the credit goes to the agencies
whose data is the backbone of the report. Almost all the agencies met their
November 15 deadline for the issuance of audited financial reports and every
agency met Treasury's November 18 deadline for data input into our new report
preparation system. At Treasury, we have been planning for this date and in
particular the Treasury bureau, the Financial Management Service (FMS), worked
extraordinarily hard to make this a reality.
This was a significant accomplishment considering that we also concurrently
launched the first part of a new consolidation process which was designed to
ensure that the agencies' financial statements are consistently included in the
government-wide Financial Report. Further development work to complete the
system is scheduled for 2005, which should make preparation of the report more
efficient and allow us to resolve some longstanding audit findings.
Importance of the Report
The Financial Report has been an important addition to federal financial reporting.
Prepared in accordance with accrual accounting standards established by generally
accepted accounting principles (GAAP), the report presents a picture of
government-wide finances that complements the traditional information in the
budget and helps to assess the long-term impact of the government's policy
decisions. The timely availability of this additional information can more fully inform
the budget process.
The standardized reporting framework promotes comparability and consistency in
reporting across years, among agencies and increasingly among countries using
accounting conventions generally common to financial reporting. The report goes

http://'vww.treas.gov/presslrelea~es/js2238.htm

4/25/2005

JS-22jx: Statement of Donald V. Hammond Fiscal Assistant Secretary, U.S. Departm ... Page 2 01'-1-

beyond simple reporting of results as it displays the effects of all significant assets,
liabilities, stewardship responsibilities and other commitments and responsibilities.
For example, the considerable financial implications of the government's social
insurance programs (principally Social Security and Medicare) are reported in the
stewardship accounting for these programs and discussed in Management's
Discussion and Analysis. These future program responsibilities do not fit neatly into
current accounting classifications. While the appropriate accounting treatment in
the future for these social insurance programs is a current topic of discussion at the
Federal Accounting Standards Advisory Board (FASAB), the existing standard
provides for comprehensive disclosure.

Major Improvements to the Financial Report
We think this year's Financial Report shows significant improvement from the first
one we prepared for fiscal year 1997. Many enhancements have been made over
the last eight years. Additional information has been added and the presentation
improved over the years which has increased the usefulness of the report to the
reader. The report is presented showing both current and prior years. This
comparative presentation provides additional context to the reader as one can see
the change in an account from year to year. The Statement of Net Cost is
presented showing cost by agency instead of by budget function. This provides a
critical link to the presentation of the budget. It also makes it easier for us to ensure
that the report is consistent with agencies' financial statements from which it is built
and also gives agencies a feeling of ownership in the report.
We worked with the FASAB to add two new basic financial statements, 1.) a
Reconciliation of Net Operating Cost and the Unified Budget Deficit and 2.) a
Statement of Changes in Cash Balance from Unified Budget and Other Activities.
The reconciliation statement ties our accrual results to the more widely recognized
budget results and the cash statement reconciles the budget results to the change
in cash during the year. We have made other additions to the report as required by
FASAB, such as additional reporting on social insurance and the presentation of the
Department of Defense's military equipment on the balance sheet.
Less visible but no less important, the discipline and rigor associated with the
production of regular financial statements have resulted in improvements in basic
financial operating activities. For example, the report that identifies differences
between the agencies' and Treasury's records for fund balance with Treasury were
reduced by 54 percent in FY 2004 alone. For fiscal year 1999, I testified that
agencies were out of balance by $401.3 million for differences greater than five
months old. Today, for fiscal year 2004, those same differences are $178.1 million
using a more aggressive three month aging standard. In another area, eight years
ago the details of the problems with intragovernmental transactions were more
unknown than known. We can now break out intragovernmental differences by
functional categories so key areas that need attention can be identified and
addressed. Finally, the synchronization of budget and proprietary figures was
greatly improved when FACTS II became operational in the last quarter of fiscal
year 1999. The Statements of Budgetary Resources in agencies' financial
statements are also an important link between the budget and proprietary areas.
All of these improvements have helped us hone in on those areas that need further
attention and will be the focus of our activities this year.

Challenges
In order to pass audit scrutiny, we must address three major areas:
•
•
•

Serious management control issues at 000
The government's inability to properly eliminate transactions between
agencies
Deficiencies in the report preparation process

000 is making progress but much work remains. They are such a significant portion
of the total financial picture that it is extremely unlikely that improvement in the audit
opinion will occur without significant improvement in 000 reporting.

httn:1h'Jww. treas.gov /press/releas'~s/i s223 8.htm

4/25/2005

JS-223~:

Statement of LJonald V. Hammond Fiscai Assistant Secretary, U.S. Departm ... Page 3 of ~

Two new initiatives were included in the 2004 report process that were designed to
reduce the out of balance conditions that exist between agency transactions with
other agencies. First we required Significantly greater detail in the agency
submissions so that we are better able to analyze the data. Second, we required
agency auditors to review the out of balance conditions between the audited
agencies and their trading partners in the hopes that greater auditor involvement
would encourage agency management to accurately record and correct these
balances. While it is too early to assess these initiatives, preliminary results are
very encouraging.
The new report preparation system is a work in progress. We met our first phase
objective for agencies to be able to fully utilize the data collection portion of the
system to submit their financial statement data, but we still used a series of off-line
processes to produce the final report. We plan to complete the consolidating
portion of the system in 2005, which will aid us in demonstrating that the data used
is consistent with the agencies' financial statements and greatly streamline the
preparation process. That being said, a comprehensive draft of the Financial
Report was produced in less than two weeks.
Progress in Addressing GAO Recommendations
GAO's audit enhances the report's credibility and highlights areas for improvement.
The existing weaknesses in federal financial management have prevented GAO
from being able to fully audit the report resulting in the issuance of a disclaimer of
opinion. The preparation and audit of the past eight reports have revealed many
deficiencies and areas for attention. This has resulted in improvements in the
quality of the underlying financial information and the financial reporting systems
and processes. It has also led to a better understanding of the government's
financial operations. Through this rigorous and continuous process, we will improve
our financial management environment and achieve more credibility in our financial
reporting. Once we have achieved this level of credibility, we will have created the
solid foundation for a better public understanding of the government's finances.
The new process we implemented for the FY 2004 reporting cycle used the agency
financial statements to produce the Financial Report. Agencies use the
Government-wide Financial Reports System (GFRS) to reclassify their financial
statement line items to the corresponding line items required for the governmentwide consolidated statements and provide additional information. While further
enhancements to GFRS are needed, Treasury has laid the foundation for ensuring
that the government-wide consolidated statements contain the same information as
the agency financial statements. As our edits of agency data improve, we believe
this aspect of the problem can be resolved in future years.
FASAB requires some disclosures that are not currently included in the
government-wide financial report. For the fiscal 2004 reporting cycle, FMS asked
agencies for data in the new report preparation system that relate to these
particular FASAB-required disclosures. We are in the process of analyzing the
2004 footnote disclosure data submitted by the agencies to determine where the
information is material to the financial statements or for evidence that the disclosure
is unnecessary due to immateriality. FASAB has also launched a project to
determine which FASAB-required disclosures would not be necessary in a
government-wide financial report. We are working closely with FASAB staff on this
effort.
We continue to make progress on the problem of imbalances in intragovernmental
transactions and are devoting increased attention to help agencies fully reconcile
these differences. As I testified in July before the Senate Committee on
Governmental Affairs, FMS has added a new tool to help agencies properly identify
and record these intragovernmental transactions. The Intragovernmental Reporting
and Analysis System (IRAS) is instrumental in classifying inter-agency activity and
balances. It identifies different ways agencies describe the same transaction (one
agency records an expense while the other capitalizes it). Additionally, IRAS
provides information for agencies to help correct reporting errors, and assists them
in reconciling major differences. IRAS offers a database solution for tracking
quarterly accounting errors and timing differences and a systematic documentation

httn:!Iv:ww. treas. gOY Ipress/reieaS'es/j s223 8.htm

4/25/2005

Js-~nx:

Statemcnt of Donald V. Hammond Fiscal Assistant Secretary, U.S. Departm ... Page 4 01'4

of the different accounting methods used by agencies. Treasury and OMB now
require agencies to report and reconcile intragovernmental activity quarterly instead
of just at the end of the year. These more frequent reconciliations have already led
to significant reductions in differences in agency reporting.

Other Improvements
Supporting the acceleration efforts has been our internal efforts to accelerate our
reporting of monthly agency data to agency financial managers. The Monthly
Treasury Statement, the monthly public source of budgetary results, has been
accelerated in issuance from the seventeenth workday to the eighth workday
facilitating agency efforts to verify and use the data in their reports.
As I have mentioned in the past, we continue with our plans to improve the routine
outlay and receipt process. Presently we employ a two step process for these
budgetary transactions. The first step relates to the transactions that record the
collection of funds or the disbursement of funds. The second step takes those
banking transactions and classifies them according to the appropriations authorized
by Congress. Obviously if these two steps could be combined savings would
result. In this case the savings would be significant. Estimates are that several
thousand financial management staff members across government are involved in
this classification process. On the outlay side the classification is known when the
disbursement is requested. To have to go back later and classify these
transactions is extremely inefficient. The sooner we can eliminate this step the
sooner savings and process efficiencies can occur. We have a pilot scheduled for
this coming fall. If that goes as planned we will be implementing this new feature in
the coming years to the benefit of every single agency across government.

Conclusion
We continue to make substantial progress on reaching our objective of effective
financial reporting and sound financial management. Through the efforts to date,
numerous issues have been identified, corrective actions instituted and processes
changed. Serious challenges remain before we reach our objective but we
understand our tasks and our commitment to resolving them is firm. As I have
previously stated, improved financial reporting leads to the ultimate benefit of
effective financial management. As the stewards of taxpayer funds, our
responsibility is to meet the highest standards of financial management.
In conclusion, we have come a long way, our upcoming challenges are significant
but manageable, and I am confident that we will continue to see real progress.
Thank you, Mr. Chairman. This concludes my formal remarks.

bttn:!/vww. treas. gOY /press/releascsli s223 8.htm

4/25/2005

JS-2139: The Honorable John W. Snow Prepared Remarks to the Florida Bankers As...

Page 1 of 4

-FlR EftS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
February 9, 2005
JS-2239
The Honorable John W. Snow
Prepared Remarks to the Florida Bankers Association
February 9, 2005
Washington, DC
Thank you so much for having me here today; I appreciate the tireless efforts and
partnership of Alex Sanchez and all of the Florida Bankers. I hope you're having a
terrific meeting and spending plenty of time on the Hill with your Congressional
Representatives.
I'm spending a good amount of time up there, myself, this week. The President
delivered his budget to the Congress on Monday, and I'm proud to represent him
and talk about his budget in committee hearings in both the House and the Senate.
Senators and Congressmen have wanted to talk to me as much about Social
Security as about the budget. I encouraged both House and Senate Members to
follow the President's political courage and leadership when it comes to saving
Social Security for future generations. Our children's retirement security is more
important that partisan politics, and confronting this problem before it becomes a
crisis is a true test of leadership. President Bush came to WaShington to solve
problems, not pass them on to future presidents and future generations.
I reminded Members of Congress that Social security will not be changed for those
55 or older (born before 1950). Today, more than 45 million Americans receive
social security benefits and millions more are nearing retirement. For the more than
45 million Americans who are currently receiving Social Security benefits, and those
nearing retirement, benefits are secure and will not change in any way, period.
I believe we'll make real progress on Social Security once everyone agrees that the
demographic future of the system makes it unsustainable. Simply put, there are
fewer workers to support our retirees. People are living longer and having fewer
children. As a result we have seen a dramatic change in the number of workers
supporting each retiree's benefits. We had 16 workers paying into a system for
every one beneficiary in 1950, and today we have just three workers for every
beneficiary. That ratio will drop to two-to-one by the time today's young workers
retire.
When today's young workers begin to retire in 2042, the system will be exhausted
and bankrupt. Today's 30-year-old can expect a 27 percent benefit cut from the
current system when he or she reaches retirement age. And, without action, these
benefit cuts will only get worse. We must make social security better for younger
workers.
Social Security reform will be hard work, but something this important must not be
put off for another day.
Budgets are hard work, too, and they should be. After all, decisions about how to
spend taxpayer dollars should not be taken lightly. I think the President summed up
his budget approach very well when he said that taxpayer dollars ought to be spent
wisely, or not at all.

http://www.treas.goy/press/rcleel.eslis2239.htm

4/25/2005

JS-2239: The Honorable John W. Snow Prepared Remarks to the Florida Bankers As...

Page:2 01'-+

Part of the context of the Fiscal Year 2006 budget is the path of today's economy. I
was pleased to report to lawmakers yesterday and this morning that our economy is
very strong. very healthy.
Well-timed tax cuts, combined with sound monetary policy set by the Federal
Reserve Board, have resulted in very good economic growth and, most importantly,
continual job creation. The economy has created over 2.7 million jobs since May of
2003. And while job growth can never be fast enough for those looking for work, the
steady pace of job creation has been an unmistakable sign of an economy that has
recovered from very tough times, and is now expanding.
The evidence abounds: GOP growth for 2004 was 4.4 percent. The unemployment
rate is down to 5.2 percent - lower than the average rate of the 1970s, 1980s and
1990s. Real after-tax income per person is up by over eleven percent since the end
of 2000 and household wealth is at an all-time high. Inflation, interest rates, and
mortgage rates remain at low levels. Homeownership rates are at record highs.
The people here in this room should be very proud of those numbers. Because you
are very much a part of our country's economic recovery and strength. Whether it's
home mortgages or small-business start-up loans, you are providing the capital that
enables terrific, job-creating economic growth.
You've done it with an eye toward economic progress, but also with heart. I
especially want to commend you, in fact, for helping your communities and your
entire state through one of the most devastating hurricane seasons on record.
I spoke to a group of your leadership back in October and said this at the time, but I
don't want to miss the opportunity to deliver a specific message to the larger group:
Thanks to all of you who made funds available early for last September's Social
Security direct-deposit payments. Hurricane Frances was approaching, and
honoring those direct deposits early was the definition of being a good neighbor.
You came to the aid of your customers in their time of need, and it was a display of
instinctive compassion that showcased the very human side of the banking
industry.
In today's world you. as bankers, are taking care of your customers in a new way.
In addition to providing essential financial services, you also work with law
enforcement and intelligence services every day in the war against terrorism.
While hatred fuels the terrorist agenda, money makes it possible. That's why the
work you do, and the information you share with authorities, is a critical element in
winning the war on terror. With every battle that we win, every terrorist or
organization that we designate, we tighten the noose on terrorist financial networks.
I deeply appreciate the work you do in this area. I know that many of you here today
are concerned about developments related to the Bank Secrecy Act, and I'd like to
talk about that because it's important we work together on this.
Compliance with the Bank Secrecy Act is vital; we take it seriously, and information
reported by your institutions under this Act is critical to the national security of our
country and to our efforts to protect our financial system from the abuses of money
laundering and other financial crime.
We hear your concerns about the need for consistent enforcement. I want you to
know that I have asked Under Secretary Stuart Levey, Assistant Secretary Zarate
and Director Fox of the Financial Crimes Enforcement Network to fully engage the
bank supervisory agencies and the Department of Justice to ensure that the
examination and enforcement processes under the Bank Secrecy Act are fair,
consistent, and achieving the ultimate policy goals of the statute.
We have also heard and read your concerns about the ambiguities surrounding
money service businesses. I am asking Director Fox to convene a meeting here in
Washington to begin to address issues relating to the banking of money service

http://y.ww.treas.gov/press/releav~s/i s2239 .htm

4/25/2005

JS-2239: The Honorable John W. Snow Prepared Remarks to the Florida Bankers As...

Page 301'4

businesses. These businesses are key components of a healthy financial sector,
and it is very important that they have access to banking services. The purpose of
this meeting will be to help develop specific regulatory guidance that will assist your
institutions in understanding this industry, its operations, the risks posed and the
obligations your industry has relating to this industry under the Bank Secrecy Act.
Again, I want to thank you for the efforts you and your institutions have made in
complying with the Bank Secrecy Act. We are aware of the efforts you are making
and the monies you are spending to ensure compliance. The financial sectorparticularly depository institutions - has led the private sector in assisting in the war
against terrorism, and it is clear that you appreciate the fact that you are on the
front lines. On behalf of the President, I want to thank you for your efforts, and I
want you to know that we appreciate your good corporate citizenship here in
Washington.
Before I take your questions, I want to take a moment to encourage you, if you
aren't already, to offer a new product to your customers. It's something that I think
has huge market potential, and is of particular interest to your small-business
customers.
I'm talking about Health Savings Accounts, HSAs. Last year's Medicare prescription
drug bill created HSAs, an innovative new program to empower consumers to make
better health care choices. HSAs are really super-charged IRAs that put patients
back in charge of their health care. You own it, you control it, you can leave it to
your heirs.
It's a new option for health coverage that is good news for individuals and
employers who are struggling with their health-care costs.
One of the most common complaints we hear from consumers is that they can't find
a local bank that offers these accounts. So I am confident that the market is there
for you, that consumers are anxious for you to add this to your product line. It is
also possible that demand for HSAs might take off very soon in Florida. Governor
Jeb Bush recently sent a proposal to the state legislature that would create an HSA
option for state government employees.
And there is good news for banks when it comes to offering this new product: first,
any bank is automatically allowed to offer HSAs to your customers as either a trust
or a custodial account. Second, the reporting on these accounts is minimal. You
only need to report on them once a year - to the customer and the IRS - one form
to report contributions to the account and another form to report the amount that
has been taken out of the account.
Best of all: you won't need any new forms. Treasury has model forms that you can
use, or you can adapt the forms you use for IRAs for HSAs.
HSAs are a critical step toward increasing the availability and affordability of health
insurance for all Americans. They are also helping to put individuals in charge of
their own health care ... and that's something that is good news both for the
American family and for the American economy as a whole.
As you know, the President supports this type individual control and ownership in
many areas. He wants to see as many Americans as possible own their own
homes, their own businesses if they want, their own health care and their own
retirement savings.
I'm proud to be working for the President on these goals, and I'm looking forward to
working with all of you as we protect America from terror and continue on a path of
economic growth.
Thank you again; have a great meeting.

http://www.treas.gov/press/relcases/js2239.htm

4/25/2005

JS-22ll'O: Press Statemcnt on Visit to Iraq to Discuss Progress on Monetary and Financial... Pagc 1 or 1

FROM THE OFFICE OF PUBLIC AFFAIRS
February 8. 2005
JS-2240

"Press Statement on Visit to Iraq to Discuss Progress on Monetary and
Financial Issues"
John B. Taylor
Under Secretary for International Affairs
United States Treasury
Baghdad, Iraq
February 8, 2005
The purpose of my visit to Iraq has been to discuss economic and financial issues
of interest to the United States and Iraq. I have had very successful meetings with
the Deputy Prime Minister, the Minister of Finance, and the Central Bank
Governor. I would like to thank the Minister of Finance for hosting a wonderful
lunch at his residence. His hospitality is a testament to the strong friendship and
cooperation that has developed between the Finance Ministry of Iraq and the U.S.
Treasury.
My visit to Iraq comes just nine days after the historic and successful elections for
the National Assembly, and I note and can see that confidence and optimism from
the elections has also spread to the economic sphere. Indeed, there is a great deal
to be optimistic about.
The progress made is especially remarkable when compared to the conditions
during my visit here in June 2003. Then the old Saddam dinar was in circulation,
the central bank could not operate independently and did not have any reserves,
and the country suffered under a huge debt burden.
In contrast, today in Iraq we see the necessary foundations for a strong and vibrant
economy are being established. Notable successes over the past year include: the
successfully launching of a new currency, an 80 percent reduction on Iraq's
sovereign debt, and the establishment of an independent central bank law.
One of the topics for discussion today was the newly opened income-earning
account that the Central Bank of Iraq established at the Federal Reserve Bank of
New York. This account will enable the Central Bank of Iraq to increase its
earnings by about $100 million per year. This income can be used by the Central
Bank to improve its infrastructure and enhance the services provided to the
financial sector and the Iraqi people. Much work remains to be done on the
development of the banking sector, but the people of Iraq are right to be optimistic
for their future following the election, for the necessary economic and political
foundations are taking root to ensure Iraq's prosperity.

http://www.treas.gov/press/relcases/js2240.htm

4/25/2005

JS-2241: Juan Zarate, Assistant Secretary for Terrorist Financing & Financial Crimes <br...

Page 1 of 3

FROM THE OFFICE OF PUBLIC AFFAIRS

February 9, 2005
JS-2241
Juan Zarate, Assistant Secretary for Terrorist FinanCing & Financial Crimes
Prepared Remarks to the Florida Bankers Association

Thank you for inviting me to speak today and for the opportunity to follow Secretary
Snow. The Florida Bankers Association is an important partner with us on a series
of critical issues - especially on the matters related to money laundering and
terrorist financing.
We are living in a time of serious paradigmatic shifts and find ourselves now in the
middle of the convulsions from the evolution of our increased responsibilities. After
the 9/11 attacks, we collectively realized that we needed to rethink how we
protected ourselves - by moving to proactive, preventative policies. This shift
included the need for greater domestic and international accountability - including
financial accountability.
In this period, then, you, as the private sector are seen and expected to be on the
front lines. As Secretary Snow remarked, application and enforcement of the Bank
Secrecy Act is a critical part of that responsibility. Though the transition to a higher
level of due diligence and practices may sometimes prove turbulent, its purpose to better protect us and our financial system from the taint of terrorist financing,
money laundering, and financial crime - is an essential one.
At the Treasury, we certainly understand our role in ensuring that we are avoiding
unnecessary burdens on the financial community, and this is a key element in our
decision-making. We consistently strive to find a balance between government
oversight and the efficient and effective operations of financial institutions. This is
precisely why the Secretary has directed us to ensure that the Bank Secrecy Act is
not only being enforced aggressively, but also that we are doing so fairly and
judiciously.
The enforcement of the Bank Secrecy Act is an important component of ensuring
that our financial system is not corrupted by the movement of tainted capital.
Certainly, we know that the private sector is doing its best to adapt to the
adjustments of expansion and deepening of the Bank Secrecy Act and the antimoney laundering laws and expectations.
The enforcement actions that we have seen over the past few months, however,
have not simply been lapses resulting from this new environment. Instead, we have
seen basic failures to apply the basic standards of anti-money laundering systems.
This was certainly the case in Riggs, where the lax or non-existent anti-money
laundering systems and practices led to a record fine of $25 million. With UBS, we
saw a straightforward decision to ignore its obligations to honor Office of Foreign
Asset Control (OFAC) related regulations and restrictions - resulting in a $100
million fine and action by Swiss authorities.
We are in a time now, where non-existent programs and lack of basic diligence or
willful blindness are no longer acceptable. That is why we have worked very hard,
through FinCEN, to ensure that the regulatory community and the Treasury are
working together on ensuring consistent examinations and enforcement. This is
also why the Secretary has called upon us to work with the Department of Justice
on these matters as well. Diligence in FinCEN and OFAC compliance matters must

http://www.treas.goY/press/relcases/is2241.htm

4/25/2005

JS-22-l I: Juan Zarate, Assistant Secretary for Terrorist Financing & Financial Crimes <br...

Page 2 of 3

be taken seriously. This relates not just to good practices, but also to issues of
national security.
In this new environment, we, as the government, have responsibilities as well.
Specific PA TRIOT Act provisions have given us new tools to help fulfill our
obligations to the private sector. Whereas some mandate increased information
sharing between the Treasury Department, the law enforcement and intelligence
communities, and financial institutions, others give us authorities to help protect the
financial system from rogue financial institutions and jurisdictions of concern.
Let me say from the outset that the information provided to us by the financial
community - pursuant to the Bank Secrecy Act - is extremely valuable. We use it
every day around the country. It helps those of us in the government to find leads,
develop cases, understand trends, inform our regulations and educate the
regulators and the public. That's why proper filing of SARs - without defensive
filing - is an important issue for us and one which we frequently address. FinCEN's
SAR Activity Reviews - which are now published periodically - give a clear sense
of the valuable information we see in what your institutions and others produce.
And we now have more tools to share information. With Section 314 of the
PATRIOT Act, we are mandated to share information with and within the financial
sector; that is, both vertically - between the government and the industry - and
horizontally - providing a safe harbor that allows industry members to share with
each other. Treasury has implemented this section by creating a "pointer" system
for law enforcement. The system gives the appropriate authorities, in the right
circumstances, the ability to work with FinCEN to transmit the names of persons of
interest to the financial sector to determine whether those institutions possess any
relevant transaction or account information. The system has been successful, and
law enforcement has advised that it has been a valuable tool. You have seen the
statistics we publish about the number of cases that have been helped using this
new tool.
Given the importance of this tool, FinCEN has just recently announced the
establishment of a secure web-based 314a communications system. This is an
important tool that will allow us to share more information - more quickly and freely
- to allow you to make better risk-based decisions.
We are also now in a position to use new authorities under the authorities of
Section 311 of the PATRIOT Act - not simply to protect the U.S. financial system,
but to notify the financial community of the concerns we have regarding money
laundering risks. It is important to remember that the movement of money in the
21 st century knows no borders, and that terrorist financing and money laundering
has global reach. Financial transparency worldwide is required if we are to be
effective in combating these scourges.
Section 311, which we have now used on eight occasions, allows us to protect our
financial system from illicit funds emanating from jurisdictions that do not retain
such standards. Section 311 provides the authority to prevent jurisdictions and
foreign financial institutions found to be of "primary money laundering concern" from
doing business with the United States. Importantly, it also sounds an alarm with
banks and governments worldwide, alerting them to designated parties and their
illicit activities.
In May 2004, the Treasury Department designated the Commercial Bank of Syria
(CBS) under Section 311. Information available to the United States showed that
terrorists and their sympathizers had funneled money through CBS. The bank also
acted as a conduit for the laundering of proceeds generated from the illicit sale of
Iraqi oil. Specifically more than $1 billion was illegally diverted by Saddam
Hussein's regime from the U.N.'s Oil for Food (OFF) program, and some of these
proceeds flowed through accounts at CBS.
CBS will either take effective steps to address our concerns, or we will cut it off from
our financial system. Actions of this type, used judiciously, will help cause
jurisdictions and institutions to adopt real reforms that impose an acceptable degree

http://www.treas.gov/press/relcases/is2241.htm

4/25/2005

JS-22.f 1: Juan Zarate, Assistant Secretary for Terrorist Financing & Financial Crimes <br...

Page 3 of 3

of financial transparency, and will help protect the integrity of our financial system in
the meantime.
It is essential that we establish an embedded ethos of information sharing between
financial institutions and government authorities, and directly between individual
financial institutions. With this in mind, Treasury relies heavily on the Bank Secrecy
Act Advisory Group (BSAAG) as a forum in which to discuss controversial issues
and emerging threats. BSAAG is comprised of high-level representatives from
financial institutions, federal law enforcement agencies, regulatory authorities, and
others from the private and public sectors. Through the BSAAG and other
regulatory and educational seminars and programs, Treasury maintains a close
relationship with U.S. financial institutions to ensure a smooth exchange of
information related to money laundering and terrorist financing. We will continue to
use this forum and opportunities such as this to talk about concerns the financial
community has and steps we can take together to address emerging threats to all
of us.
We are also improving our information sharing and collaboration internationally in
the establishment of the "Buddy Bank" initiative. This program's goal is to create a
culture of anti-money laundering compliance internationally in the private sector through private sector mentoring. We are in the process of developing such
projects in Latin American and Africa, so as to ensure that the private sector around
the world is fully capable to deal with and engage in the anti-money laundering
campaign. We have strong partners within the private sector who are exploring the
role they can play internationally.
All of this represents the evolution of the post-9/11 environment - where the public
and private sectors have to work together more closely and share responsibility for
the issues of money laundering and terrorist financing. In this new environment,
you and your colleagues in the financial community are the guardians of the
financial system. Your role of witnessing and monitoring the entry and movement
of capital around the world comes with great responsibility. Your role and ours has
evolved, and we must work together to fulfill our new roles.
I thank you for your help in meeting the important challenges we face and for the
opportunity to speak with you.

http://wWW .treas.gov Ipress/re Icases/is224 Lhtm

4/25/2005

JS-2242: Secretary John W. Snow Opening Statement Hearing Regarding Pres ... Page 1 01'4

- - ~ :.-..-=:::-~::~=--.:p,~ Ers~fRO()M

FROM THE OFFICE OF PUBLIC AFFAIRS
February 10, 2005
JS-2242

Secretary John W. Snow
Opening Statement
Hearing Regarding President's FY '06 budget Request
Senate Budget Committee
February 10, 2005
Good afternoon and thank you Chairman Gregg and Ranking Member Conrad for
having me here today to discuss the President's budget. I think you'll find that it
exhibits a dedication to fiscal discipline, transparency, and economic growth.
By focusing on priorities and looking for savings in every agency, across the board,
the President's administration has come up with a budget that we believe is fair
while also holding the government accountable. As the President announced in his
State of the Union Address last week, this budget adheres to the principle of
"Taxpayer dollars must be spent wisely, or not at all."
It holds the growth of discretionary spending to just 2.1 percent, below the expected
rate of inflation. Non-security discretionary spending in this budget falls by nearly
one percent, the tightest such restraint proposed since the Reagan administration.
This administration appreciates that cutting taxes and exercising fiscal discipline
must go hand in hand. We appreciate that this is the people's money with which we
are dealing, and that we work for the taxpayers.
That is why we are committed to making the President's pro-growth tax cuts
permanent and building on our strengthened economic fundamentals as we submit
to you a budget that will increase the efficacy of our government programs without
over-spending the taxpayers' money.
Over the weekend, the finance ministers of the G7 met - the U.S. was represented
by Treasury Undersecretary for International Affairs John Taylor - and they
discussed the importance of promoting and achieving economic growth in our
countries, as well as keeping our respective financial houses in order. These two
issues are inextricably linked.
The way that we, as the executives of the federal government, manage the
taxpayers' money sends a message to the people of America as well as to our
trading partners and investors around the globe. When we control our spending, we
are showing our citizens and the world that fiscal discipline is a priority on par with
our policies that promote economic growth.
I'll talk more about fiscal discipline in a moment, but I'd like to start with a look at
what we have recently achieved through pro-growth economic policies.
Well-timed tax cuts, combined with sound monetary policy set by the Federal
Reserve Board, have resulted in very good economic growth and, most importantly,
continual job creation. The economy has created over 2.7 million jobs since May of
2003. And while job growth can never be fast enough for those looking for work, the
steady pace of job creation has been an unmistakable sign of an economy that has
recovered from very tough times, and is now expanding.

http://www.treas.goY/press/relcases/is2242.htm

4/25/2005

JS-~~..j.2:

Secretary John W. Snow Opening Statement Hearing Regarding Pres... Page 2 01'':+

Whenever I speak with my counterparts in the G7, I am reminded that the American
economy is the envy of the world. Our recovery and growth, our successful
dedication to entrepreneurship - all these things are admired, and increasingly
emulated, by our G7 partners.
Is it any wonder that they want to learn the secret to our economic resiliency? A
quick look at the facts reveals much to be envied: GOP growth for 2004 was 4.4
percent. Our economy has posted steady job gains for twenty straight months. The
unemployment rate is down to 5.2 percent - lower than the average rate of the
1970s, 1980s and 1990s. Real after-tax income is up by over eleven percent since
the end of 2000 and household wealth is at an all-time high. Inflation, interest rates,
and mortgage rates remain at low levels. Homeownership rates are at record highs.
Tax cuts can be hard on budgets and deficits in the short term, but if the tax cuts
are geared toward improving incentives there are long-term benefits as well as
short-term ones, and this fact has been well illustrated by these outstanding
economic results.
I point to this record because it is so important that we continue on a pro-growth
path. Continued economic growth is needed, and will be needed, to continue to
improve our standard of living and until every worker in America who is still looking
for a job can find one.
For example, we've got to make the President's growth-enhancing tax cuts
permanent - and that is included in this budget. The President's Panel on Tax
Reform was also created with economic growth in mind. It is a group of some of the
best minds in our country, and they'll be looking critically at the entire existing code
and coming up with proposals that would make it fairer, less complex, and more
pro-growth.
While the Panel is working on that historic task, our efforts to grow the American
economy will continue in many other areas - I am particularly interested in
legislation that will reduce the burden of frivolous lawsuits on our economy - and
this budget is part of the Administration's overall pro-growth policy agenda.
As I already mentioned, economic growth is good for our country for the jobs it
creates and the prosperity it spreads. But it is also, importantly, part of a winning
strategy on deficit reduction - one of the top priorities of this budget - because
economic growth increases Treasury receipts.
Treasury receipts are rising - in the second half of calendar 2004, individual income
tax revenue is up 10.5 percent versus the same period in 2003 - and will continue
to rise, as long as we have economic growth. That must be accompanied, as I
emphasized earlier, by strict fiscal discipline. That is why the President's budget
proposes real savings. I know it will have its critics as a result, but its frugality is
essential.
Let me be very clear on this: we have deficits and they are unwelcome. But we are
not under-taxed and higher taxes will not be the solution to reducing deficits. Fiscal
discipline, combined with economic growth, is the correct path.
Using this approach, we are making headway on deficit reduction, and we're on
track to halve the deficit by 2009. The deficit is also forecast to fall to 3.0 percent of
GOP in 2006 and to 1.5 percent by 2009, well below the 40-year historical average
of 2.3 percent of GOP.
The 2004 deficit came in at 3.6 percent of GOP - nearly a full percentage point
lower than had been projected. And the 2005 deficit is prOjected to show another
decline.
While we are pleased with this progress, we recognize that more needs to be done.
We need to make the tough choices on spending and stand steadfast in our

http://y.ww.treas.gov/press/relcav~s/i s2242.htm

4125/2005

JS-2242: Secretary John W. Snow Opening Statement Hearing Regarding Pres ... Page 3 01'4

commitment to continuing economic growth in order to see that deficit whittled
down.
We also need to look at our long-term deficit situation. I spoke earlier about
transparency, specifically the honesty of this budget, which deals openly with the
needs of the times in which we live, from the war on terror to the need for
continuing growth.
In the interest of honesty and transparency, I encourage all of us to follow the
politically courageous leadership of our President by looking at, and dealing with,
the $10.4 trillion deficit facing our children and grandchildren in the form of an
unsustainable Social Security program.
The program is an important institution, a sacred trust, and it worked well for the
times in which it was designed. It is, however, doomed by our country's
demographics and in need of wise and effective reform.
The arithmetic is simple. As people live longer and have had fewer children, the
ratio of workers paying into the system and retirees taking benefits out has
dwindled dramatically. We had 16 workers paying into a system for every one
beneficiary in 1950, and today we have just three workers for every beneficiary.
That ratio will drop to two-to-one by the time today's young workers retire.
We all must agree that this demographic reality exists, that this problem exists.
Social Security is secure for today's retirees and for those nearing retirement, it will
not change for those people who are 55 and over ... but it is offering empty
promises to future generations. When today's young workers begin to retire in
2042, the system will be exhausted and bankrupt.
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, here on Capitol Hill. I echo
the President's State of the Union Address in saying that we must join together to
strengthen and save Social Security.
We can, and should, do this without increasing payroll taxes. The level of increases
that would be necessary, if we maintain the status quo, would have a terrible impact
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.
Saving Social Security is an undertaking of historic proportions. We have hard work
ahead of us as we strive for consensus in the name of younger generations.
We also have hard work ahead of us when it comes to strengthening the
fundamentals of our economy: deficit reduction, good fiscal policy, energy policy,
lawsuit abuse reform, and encouraging savings.
I appreciate that this Administration has an ambitious agenda ... but it is a good one,
worth the work it will take to move forward, together, on it.
Let's start by passing this responsible, pro-growth budget.
Thank you for having me here today; I'm pleased to take your questions now.

http://y.ww.treas.gov/press/releav~s/is2242. htm

4/2512005

.IS-224J: Treasury and IRS Issue Guidance on Net Operating Loss Carrybacks

Page I of I

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

February 10, 2005
JS-2243
Treasury and IRS Issue Guidance on Net Operating Loss Carrybacks
-- Today, the Treasury Department and IRS issued a notice that provides guidance
on carrybacks of net operating losses that arise in taxable years ending prior to
October 22, 1998.
In general, a taxpayer must first carry a net operating loss back to each of the three
taxable years preceding the taxable year of the loss. However, certain portions of a
net operating loss may be eligible to be carried back to each of the ten taxable
years preceding the taxable year of the loss.
The notice will help taxpayers determine whether a loss may be eligible for the tenyear net operating loss carryback period in light of recent court decisions. The
notice provides questions and answers that address what losses may be eligible
and illustrative examples of the types of losses that qualify for the ten-year
carryback period.
REPORTS
•

A copy of the notice

http://www.treas.gov/nrcss/relc(l:)\.\S/is2243.htm

4/25/2005

Part III - Administrative, Procedural, and Miscellaneous

Specified Liability Losses

Notice 2005-20
PURPOSE
This notice addresses several questions of statutory interpretation arising under

§ 172(f)(1 )(8) of the Internal Revenue Code prior to its amendment by § 3004(a) of the
Tax and Trade Relief Extension Act of 1998 (former § 172(f)(1 )(8)). The amendment to
former § 172(f)(1 )(8) is effective for net operating losses (NOLs) arising in taxable years
ending after October 21, 1998.
8ACKGROUND
The Statute
Section 172(b)(1 )(C) provides that the portion of any NOL that qualifies as a
specified liability loss may be carried back to each of the 10 taxable years preceding the
taxable year of the loss. For NOLs arising in taxable years ending prior to October 22,
1998, former § 172(f)(1 )(8) treats as a specified liability loss the portion of the NOL
generated by:
(8) [a]ny amount [other than product liability expenses and certain
expenses related thereto] allowable as a deduction under [chapter 1 of the
Internal Revenue Code] with respect to a liability which arises under a
Federal or State law or out of any tort of the taxpayer if(i) in the case of a liability arising out of a Federal or State law, the
act (or failure to act) giving rise to such liability occurs at least 3 years
before the beginning of the taxable year, or
(ii) in the case of a liability arising out of a tort, such liability arises

out of a series of actions (or failures to act) over an extended period of
time a substantial portion of which occurs at least 3 years before the
beginning of the taxable year.
For this purpose, a liability is not taken into account unless the taxpayer used an accrual
method of accounting throughout the period or periods during which the acts or failures
to act giving rise to the liability occurred.
The Sealy Decisions
In Sealy Corp. v. Commissioner, 107 T. C. 177 (1996), aft'd, 171 F.3d 655 (9th
Cir. 1999), the Tax Court held that the portion of NOls generated by deductions for the
following liabilities did not result in former § 172(f)(1 )(8) specified liability losses:
(1) professional fees incurred to comply with current reporting, filing, and
disclosure requirements imposed by the Securities and Exchange Act of 1934;
(2) professional fees incurred to comply with current ERISA reporting
requirements; and
(3) professional fees incurred in connection with an income tax audit by the
Service for a prior taxable year.
The Tax Court gave three reasons for its conclusion that these liabilities did not
arise under a federal or state law within the meaning of former § 172(f)( 1)(8). First, the
federal laws cited by the taxpayers did not establish their liability to pay the amounts at
issue. Instead, the taxpayers' liabilities did not arise until the services were contracted
for and received and the taxpayers' choice of the means of compliance, rather than the
cited provisions, determined the nature and amount of their costs. Sealy at 184.
Second, Congress intended former §172(f)(1 )(8) to apply only to liabilities for which a
deduction is deferred because of the economic performance requirement of § 461 (h).

The economic performance requirement did not delay the taxpayers' accrual of the
deductions at issue. Sealy at 185-86. Third, invoking the statutory construction rule of
ejusdem generis, the court concluded that Congress intended the 1O-year carryback to
apply to a relatively narrow class of liabilities similar to other liabilities referred to in
former § 172(f). Sealy at 186.
In affirming the Tax Court's judgment, the Ninth Circuit stated that the acts giving
rise to the liabilities at issue in Sealy were contractual acts by which Sealy engaged
lawyers or accountants and did not occur at least 3 years before the beginning of the
taxable year of the related deductions as required by former
§ 172(f)( 1)(8 )(i).
The Host Marriot and Intermet Decisions
In Host Marriott Corp. v. United States, 113 F. Supp. 2d 790 (D. Md. 2000), aft'd,
267 F.3d 363 (4th Cir. 2001), the district court concluded that interest liabilities on
federal tax deficiencies arise under federal law within the meaning of former
§172(f)(1 )(8). The court pointed out that § 6601 (a) imposes interest on due but unpaid
federal taxes. The court noted that, in contrast to the situation in Sealy, the interest
liabilities were set by federal law, not by the taxpayer's choice.
In Intermet Corp. v. Commissioner, 117 T.C. 133 (2001), the Tax Court cited
Host Marriot and concluded that liabilities for state tax deficiencies, interest on state tax
deficiencies, and interest on a federal income tax deficiency arise under federal or state
law within the meaning of former § 172(f)(1 )(8). In distinguishing Sealy, the Tax Court
only referred to the first reason (i.e., federal law did not establish the liability to pay the
amounts at issue) that it gave in Sealy for concluding that the professional fee liabilities

at issue in that case did not arise under federal or state law.
In addition, in both Host Marriot and Intermet, the courts concluded that the filing
of an erroneous tax return, resulting in the initial failure to timely pay the entire amount
of tax due, constitutes the act giving rise to the entire compound interest liability on
unpaid tax.
The Major Paint Decision
In Major Paint Co. v. United States, 334 F.3d 1042 (Fed. Cir. 2003), aff'g
Standard Brands Liquidating Creditor Trust v. United States, 53 Fed. CI. 25 (2002), the
Federal Circuit held that liabilities for capitalized legal, accounting, and other
professional fees and expenses incurred pursuant to a reorganization bankruptcy under
Chapter 11 of Title 11 of the United States Code did not arise under federal law for
purposes of former § 172(f)(1 )(B). The fees included those incurred by the taxpayer on
its own behalf as well as fees incurred on behalf of the unsecured creditors' committee
but required to be paid from the bankruptcy estate. The taxpayer capitalized a portion of
the fees incurred as a result of the reorganization bankruptcy and later deducted the
capitalized fees upon a subsequent voluntary liquidating bankruptcy.
The Bankruptcy Code requires the appointment of an unsecured creditors'
committee and allows the committee, with court approval, to employ various
professionals to perform services for the committee. The Bankruptcy Code also
requires the bankruptcy court to approve the employment of the professionals, the
terms of their employment, and the amounts paid to them. In Major Paint, a local court
rule required the bankrupt taxpayer to employ counsel.
The Federal Circuit analyzed the opinions in Sealy, Host Marriot, and Intermet,

from which it concluded two principles could be derived. First, "'arising out of a federal
law' means more than just that the liability is incurred with respect to an obligation under
a federal law." 334 F.3d at 1046. Second, "the nature and amount of the liability must
be traceable to a specific law and cannot be the result of choices made by the taxpayer
or others." Id. As in Sealy, the statutory provisions did not establish a liability to pay the
amounts at issue. Rather, the decisions of the taxpayer and the creditors' committee,
subject to final approval by the bankruptcy judge, as to the means of compliance
determined the nature and amount of the costs. The court concluded that the
connection between the Bankruptcy Code and the liabilities for the fees was "too
attenuated to meet the level of 'arise under' necessary to qualify as a specified liability
loss." Id. at 1047.
QUESTIONS AND ANSWERS
The ''Arises Under a Federal or State Law" Requirement

Q-1. What tests must a liability satisfy to arise under federal or state law within the
meaning of former § 172(f)(1 )(B)?
A-1. To arise under federal or state law the liability must be directly imposed by federal
or state law and must not be the result of decisions made by the taxpayer or others.
See Sealy and Major Paint.

Q-2. Maya tort liability satisfy the requirements of former § 172(f)(1 )(B)(i)?
A-2. Yes. A tort liability may be directly imposed under either federal or state law. If
the act or failure to act giving rise to the tort liability occurs at least 3 years before the
beginning of the taxable year of the liability's deduction, the requirements of former

§ 172(f)(1 )(B)(i) are satisfied.

Multiple Act Torts
0-3. What is a tort liability that arises out of a series of actions (or failures to act) over
an extended period of time?
A-3. A tort liability that arises out of a series of actions (or failures to act) over an
extended period of time within the meaning of former § 172(f)(1 )(8)(ii) is a liability that
arises only from multiple acts or failures to act over an extended period of time. An
example is a tort liability for causing someone to develop a disease because of
repeated exposures to chemicals or other toxic substances. This liability would be a tort
liability within the meaning of former § 172(f)(1 )(8)(ii) if a substantial portion of the
exposures occur at least 3 years before the beginning of the taxable year of the
liability's deduction.
On the other hand, what may appear to be a tort liability involving multiple acts,
such as a tort liability arising from a continuing trespass, is actually a number of
separate liabilities, each arising from separate acts or failures to act resulting in
separate causes of action. The Internal Revenue Service will not treat this type of
liability as a multiple act or failure to act liability that satisfies the requirements of former

§ 172(f)(1 )(8)(ii). Instead, to generate a specified liability loss, the separate liabilities
must independently satisfy the 3-year act or failure to act requirement of former §
172(f)(1 )(8)(i).
The

'~ct

or Failure to Act" Requirement

0-4. Which act in the chain of causation leading to the creation of a liability constitutes
"the act or failure to act" giving rise to that liability within the meaning of former

§ 172(f)(1 )(8)(i)?

A-4. The act or failure to act resulting in the establishment of a legal liability constitutes
the act or failure to act within the meaning of former § 172(f)(1 )(8)(i). For example, in
the case of a trespass, the act of trespassing constitutes the relevant act for purposes of
former § 172(f)(1 )(8)(i), not the judgment of a court.
In the case of interest on unpaid federal or state taxes, the Service continues to
believe that a taxpayer's use of the government's money over discrete periods, such as
days, months or portions of a month, is an essential element that creates the liability.
Therefore, the Service believes that the courts in Host Marriott and Intermet incorrectly
concluded that the initial failure to pay the taxes when due constituted the act or failure
to act giving rise to any interest that economically accrued during the taxable year such
interest was deductible and the 3-year period prior to the beginning of that taxable year.
Consequently, the Service will continue to assert that interest that economically accrues
on a liability for unpaid taxes in the taxable year such interest is deductible and the 3year period prior to the beginning of that taxable year does not satisfy the 3-year act or
failure to act requirement of former § 172(f)(1 )(8)(i).
The "With Respect To" Requirement

0-5. For purposes of former § 172(f)(1 )(8), does a deduction allowable "with respect to"
a liability include other items, such as legal and professional fees to contest the liability
or court costs incurred to litigate the liability?
A-5. A deduction allowable with respect to a liability includes only a deduction for the
liability itself. Therefore, legal fees, court costs, and similar items do not generate a
former § 172(f)(1 )(8) specified liability loss even if the liabilities are incurred in
determining the amount of a liability that does satisfy the requirements of former

§ 172(f)(1)(8).
In Sealy, the Tax Court and Ninth Circuit held that deductions for accounting and
legal fees incurred in connection with a federal income tax audit did not generate a
specified liability loss under former § 172(f)(1 )(8). Federal law directly imposed only the
federal income tax liability and did not impose the taxpayer's liability for the accounting
and legal fees. The taxpayer's liabilities for the accounting and legal fees arose as a
result of decisions made by the taxpayer, and such liabilities were incurred when the
services were contracted for and performed. Implicit in the Tax Court's holding is the
conclusion that the deduction for the legal and professional fees was not, within the
meaning of § 172(f)(1 )(8), allowable "with respect to" the federal tax liability that was the
subject of the audit.
Depreciation Deductions

0-6. For purposes of § 172(f)(1 )(8), are depreciation deductions allowable with respect
to the liability giving rise to the depreciable basis of a depreciable asset?
A-6. Depreciation deductions are not allowable with respect to the liability giving rise to
the depreciable basis of a depreciable asset. Depreciation deductions may be
allowable with respect to liabilities satisfied through the use of the depreciable asset.
Liabilities arising under federal or state law may be treated as part of the cost
basis of property if the liabilities are properly chargeable to a capital account. For
example, § 164(a) requires sales taxes imposed on the purchase of equipment used in
a taxpayer's trade or business to be capitalized into the cost basis of the equipment. If
an NOL is incurred for a taxable year and the sales tax liability was incurred at least 3
years before the beginning of that taxable year, some taxpayers have asserted that any

portion of the NOL generated by depreciation deductions for the portion of the
property's depreciable basis attributable to the capitalized sales tax constitutes a former

§ 172(f)(1 )(8) specified liability loss irrespective of how the property is used. Likewise,
taxpayers may be required to place certain equipment into service to comply with
requirements of federal or state law, for example, clean water standards. Some of
these taxpayers have asserted that if the equipment was acquired by the taxpayer at
least 3 years prior to the beginning of the taxable year, the portion of any NOL
generated for the taxable year by depreciation deductions attributable to the equipment
qualifies as a former § 172(f)(1 )(8) specified liability loss. The Service disagrees with
both of these assertions.
Section 167(a) allows a depreciation deduction only for property that is either
used in a trade or business or held for the production of income. Whether a
depreciation deduction is allowable "with respect to" a liability depends upon the
property's actual use. For example, if a taxpayer uses equipment to satisfy an
environmental cleanup liability imposed by federal law, the portion of the equipment's
depreciation allocable to satisfying the environmental cleanup liability is allowable with
respect to the environmental cleanup liability. If the environmental cleanup liability
arose as a result of a chemical spill that occurred at least 3 years before the beginning
of the taxable year and the environmental cleanup liability is otherwise deductible, the
depreciation deductions may generate a specified liability loss. However, if a taxpayer
uses equipment to satisfy environmental cleanup liabilities that arise during the same
taxable year the depreciation deductions are allowable, for example, by preventing the
discharge of pollutants resulting from manufacturing activities during the current taxable

year, the act giving rise to the taxpayer's environmental cleanup liability will not satisfy
the 3-year act or failure to act requirement of former § 172(f)(1 )(B)(i), irrespective of
when the taxpayer placed the cleanup equipment in service.
DRAFTING INFORMATION
The principal author of this notice is Forest Boone of the Office of Associate
Chief Counsel (Income Tax and Accounting). For further information regarding this
notice contact Mr. Boone at 202-622-4960 (not a toll-free call).

JS-2244: lax Panel Announces Witness List for First Meeting and Launches Offici...

Page 1 of 2

FROM THE OFFICE OF PUBLIC AFFAIRS
February 10, 2005
JS-2244

Tax Panel Announces Witness List for First Meeting
and Launches Official Website
WASHINGTON, DC - Senators Connie Mack and John Breaux, Chairman and
Vice -Chairman of the President's Advisory Panel on Federal Tax Reform, today
announced the witness list for the Panel's first meeting and the launch of the
Panel's official website, Taxreformpanel.gov.
The witnesses are Fred T. Goldberg, Louis Kaplow, William G. Gale, and Stephen
J. Entin. Biographical information for each witness is attached.
Secretary of the Treasury John Snow will also appear before the panel.
"The President has tasked our Panel with developing reforms to make the tax code
simpler, fairer and more growth oriented. I look forward to the opportunity to hear
from Secretary Snow as well as this distinguished group of experts as we begin the
process of examining the problem and formulating solutions," Senator Mack stated.
"The current tax system is an unfair burden on Americans," added Senator Breaux.
"When it takes the average taxpayer 11 hours to fill out the short tax form,
something is wrong. This is a unique opportunity to work in a bipartisan effort and
find ways to make the tax system serve Americans better."
The witnesses will provide the Panel with an historical overview of our current tax
system and an understanding of how it evolved and where it is today. The Panel
also will hear background about tax systems. In particular, the witnesses will
explain the difference between a tax on income and a tax on consumption, how
the different bases impact the overall functioning of the tax system, and the
advantages and disadvantages of each one in terms of simplicity, fairness and
economic growth.
The meeting will be held on Wednesday, February 16,2005 at 10:00 AM in the
Ronald Reagan Building & International Trade Center Amphitheater, Concourse
Level, 1300 Pennsylvania Avenue NW, Washington, DC.
Also, the Panel today announced the launch of Taxreformpanel.gov, the Panel's
official website. Taxreformpanel.gov will provide full information about the Panel's
activities including meeting information and materials, public announcements and
press releases.

Biographical Information for Witnesses Scheduled to Participate in the First
Meeting of The President's Advisory Panel on Federal Tax Reform February
16,2005
Fred T. Goldberg, Jr. is currently a Partner at Skadden, Arps, Slate, Meagher &
Flom, LLP in Washington, DC. He first joined Skadden, Arps in 1986, following two
years as Chief Counsel of the Internal Revenue Service. Previously, Mr. Goldberg
served as Commissioner of the IRS and Assistant Secretary of the Treasury for Tax
Policy. Mr. Goldberg received his B.A. and his J.D. from Yale University.

http://www.treas.gov/press/releases/js2244.htm

4/25/2005

JS-2244: I'ax Panel Announces Witness List for First Meeting and Launches Offici...

Page 2 of 2

Louis Kaplow is currently the Finn M.W. Caspersen and Household International
Professor of Law and Economics at Harvard Law School. Dr. Kaplow received his
BA from Northwestern University, his JD. from Harvard Law School and his MA
and Ph .0. in Economics from Harvard University.
William G. Gale is the Arjay and Frances Fearing Miller Chair at The Brookings
Institution and the Co-director of the Urban-Brookings Tax Policy Center. From
1991-1992, Dr. Gale served as Senior Staff Economist at the President's Council of
Economic Advisers. Previously, Dr. Gale was Assistant Professor of Economics at
the University of California, Los Angeles. Dr. Gale received his BA from Duke
University and his PhD. from Stanford University.
Stephen J. Entin is currently President and Executive Director at the Institute for
Research on the Economics of Taxation. Mr. Entin is a former Deputy Assistant
Secretary for Economic Policy at the Department of the Treasury. Prior to joining
Treasury, Mr. Entin was a staff economist with the Joint Economic Committee of the
Congress. Mr. Entin is a graduate of Dartmouth College and received his graduate
training in economics at the University of Chicago, majoring in macroeconomics,
monetary policy, and international economics.

http://www.treas.gov/press/relcases/js2244.htm

4/25/2005

JS-224S. The Goycmancci!ll\cstment Nexus: Measuring Results for Better Perfonnance< ... Page I uf 2

FROM THE OFFICE OF PUBLIC AFFAIRS
February 5, 2005
JS-2245
The Governance/Investment Nexus: Measuring Results for Better
Performance
John B. Taylor
Under Secretary for International Affairs
United States Treasury
Good Governance for Development (GfD) in the Arab Countries:
An Arab Regional Initiative in Partnership with OECD and UNDP
Dead Sea, Jordan
February 6, 2005
I would like to thank His Majesty King Abdullah II for hosting this forum and for his
leadership on this important initiative of Good Governance for Development in the
Arab Countries. I am honored to lead the United States delegation to this event,
attended by Heads of State from Arab countries and distinguished ministers from
the region and OECD countries. President Bush sends a personal message of
support for this initiative and for the Arab leaders who are championing the fight
against corruption and implementing public governance reforms; these measures
form the backbone of economic development. The United States - like international
organizations such as the OECD and the UNDP - is committed to facilitating these
initiatives with the ultimate goal of improving peoples' lives in the region.

Governance and Economic Growth - Why Governance Matters.
Governance is an appropriate and essential topic in any discussion on development
because of its links to economic growth. Studies by World Bank show the
connection between good governance and higher per capita incomes. IMF
research shows that adoption of key transparency measures reduces sovereign
spreads by 7-17%, indicating that investors see good governance as reducing risk.
At Treasury, we are always hearing the complaints from all kinds of investors about
poor governance in countries all over the world. They are frustrated because they
want to invest, but are driven away by what they perceive as rampant corruption or
excessive bureaucracy. "Why don't these governments understand that public
governance influences investment decisions, and that investment brings jobs and
growth?" they say. Domestic investment is hampered by poor governance for
similar reasons. Discouraging the local entrepreneurs of the region limits the
expansion of the private sector, and thus severely limits the scope for economic
growth.
Apart from investment, good governance increases the effectiveness of aid and
promotes better use of domestic resources. A strong policy environment supported
by accountable public institutions helps assure that funds are not wasted or
misused and so delivers more economic growth for every aid dollar, as
transparency will help assure that funds are not wasted or misused. In the same
way, good governance assures more efficient use of domestic public resources.
Public productivity supports private productivity, which drives growth.
The commitments all the regional countries have made through this initiative, along
with complementary commitments found in the UN Convention Against Corruption,
provide a useful path for the region and a model for all nations as they seek to
move forward in this area.

Results Measurement to Promote Good Governance
I urge you to integrate measurable indicators of progress into the work of this

http://www.treas.goY/press/relcases/js2245.htm

4/25/2005

JS-214S: The Governance/Invcstment Nexus: Measuring Results for Better Performance<... Pagc:2 or:2
initiative. Not only will using measurable indicators and insisting on measurable
results make this initiative more effective, it is a way to promote good governance
more generally. An environment where public servants are working toward specific
and publicly disseminated targets will lead to better governance Quite simply, what
gets measured gets done.
Many have argued that governance does not lend itself to measurement. We
struggled with this too in developing a more effective way to provide aid under the
President's Millennium Challenge Account. However, after much consultation
within our government and with international institutions, academics and NGOs, we
chose six indicators under the "ruling justly" set of evaluation criteria against which
countries' performance are measured. These indicators are publicly available.
Also, in our role in the multilateral development banks, we have worked to ensure
that the weight of governance remains high in the calculation of performance-based
allocations. Developing indicators and setting targets may be difficult, but the
benefits of doing so far outweigh any frustrations.
US proud to participate in GfD conference
It is very encouraging to see this initiative get underway, for not only does it address
an essential element of development as I mentioned earlier, but it is being driven by
the countries of the region themselves. It is home-grown. Only when the push to
reform comes from within does reform have a chance of succeeding. The United
States is proud to support such efforts. We are an eager participant in this
conference and in its sister initiative, the MENA-OECD investment program.
Indeed, through the G8/BMENA initiative, the United States is working with its G8
and regional partners to develop an investment task force that will complement and
support the work already underway. In this way the G8 will be lending its support to
this important work. Similarly, we hope to increase the scope for synergies and
collaboration between the G8/BMENA initiative and the governance dimension of
this initiative.
Conclusion
Once again, I would like to thank His Majesty King Abdullah II for hosting this
launching conference. I anticipate that this process will be a productive one, with
many positive outcomes. I urge that the momentum for reform created by this
conference be sustained so that it results in meaningful and lasting change. I look
forward to seeing the progress and synergies that can result from the joint efforts of
the region with its partners in the OEeD, UNDP and G8.

http://www.treas.gov/press/relcases/js2245.htm

4/25/2005

JS-224(,: Slatement of (j ! i'l11allce Ministers and Central Bank Governors, London, 4... Page I of 2

FROM THE OFFICE OF PUBLIC AFFAIRS
February 4, 2005
JS-2246
Statement of G7 Finance Ministers and Central Bank Governors, London,
4-5 February 2005
G7 Finance Ministers and Central Bank Governors met in London. We are
conscious of our responsibility to respond positively to the challenges and
opportunities of the global economy. Recognizing the need for greater and wider
partnerships, we held an informal meeting with key global economies and continued
our productive dialogue with the Chinese authorities.
Since our meeting in October the economic cycle has matured and global growth
moderated, but is expected to remain robust for 2005. Risks are balanced, though
global imbalances remain. Inflationary pressures remain subdued. We recognize
that each of our countries must play its part to support long-term sustainable global
growth: key priorities are that the United States has committed to fiscal
consolidation; Europe and Japan to further structural reform. We agreed on the
importance to global growth of an ambitious result at the Hong Kong WTO
ministerial with a view to concluding the Doha Development Round, including
financial services. We committed to provide support to build the infrastructure and
capacity to enable developing countries to benefit from trade opportunities and
called on the IFls to playa major role in this.
We discussed medium-term energy issues and the risks of current oil prices.
Market transparency and data integrity is key to the smooth operation of markets.
We welcomed concrete actions in improving data provision to oil markets and
encouraged further work, including on oil reserves data, by relevant international
organizations. The Extractive Industries Transparency Initiative can increase fiscal
transparency and help improve the use to which oil revenues are put. We call on
international institutions to work with oil producing countries to ensure a climate
conducive to investment. We recognized the importance of raising medium-term
energy supply, of energy efficiency, and of the importance of technology and
innovation in ensuring energy security.
We reaffirmed that exchange rates should reflect economic fundamentals. Excess
volatility and disorderly movements in exchange rates are undesirable for economic
growth.
We continue to monitor eXChange markets closely and cooperate as appropriate. In
this context, we emphasize that more flexibility in exchange rates is desirable for
major countries or economic areas that lack such flexibility to promote smooth and
widespread adjustments in the international financial system, ased on market
mechanisms.
Flexible economies with efficient labor markets are key to sustained economic
success. In an increasingly integrated global economy, bringing more people into
the labor market would raise living standards and play an important part in
increasing the sustainability of public finances, as populations age. We reviewed
our experience in this area and are committed to taking further reforms.
We reiterated our condolences and sympathies to all those directly affected by the
tsunami disaster. We reviewed the substantial response to these tragic events and
discussed reconstruction needs on the basis of the preliminary assessment by the
IMF and World Bank. For affected countries that request it, we agreed
exceptionally to defer debt payments up to the end of 2005 (consistent with national
laws), without payment of interest during this period, and to promote this in the
Paris Club. We will review at our next meeting the need for further assistance
based on the full needs assessment.

http://W\\fw. treas.gov/pr e~~/rcl cu:,(~s/j s2246.htrn

4/25/2005

JS-~:.A(,.

Statement of G7 F1I1ance Ministers and Central Bank Governors, London, 4 ... Page:2 01':2
We discussed the challenges of meeting the Millennium Development Goals and
the opportunities in the coming year and have published our conclusions
separately.
We also agreed to meet our counterparts from the Broader Middle East and North
Africa region at the time of our next meeting.
The IFls must adapt to meet the challenges of the modern global economy. We
undertook to support World Bank and IMF management in their strategic reviews of
their institutions. We look forward to discussing this topic further at the Spring
Meetings.

http://www.treas.gov/pres:-.//LlcJ~·~s/js2246.htm

4/25/2005

JS-:2:247: G7 Finance Ministers Conclusions on Development

Page 1 uf':2

FROM THE OFFICE OF PUBLIC AFFAIRS
February 4, 2005
JS-2247

G7 Finance Ministers Conclusions on Development
1. We reaffirm our commitment to help developing countries achieve the Millennium
Development Goals by 2015 1 . We will make particular efforts in Africa, which on
current rates of progress will not meet any of the Millennium Development Goals by
2015. This report sets out the steps we plan to take.
2. At the International Conference on Financing for Development in Monterrey on
21-22 March 2002, the international community agreed on a partnership for
development, in which developing countries are primarily responsible for their own
economic and social development, supported by the international community. The
range of international support agreed at Monterrey included action on: a more open
world trade system; increased aid effectiveness; absorption capacity; increased
levels of aid; and debt relief.
3. In order to make progress on social and economic development, we believe it is
essential that developing countries put in place the policies for sustainable
development. Sound, accountable and transparent institutions and policies are the
basis for sustained economic growth and poverty reduction. Increasing fiscal
transparency is essential and a priority for developing countries is to tackle
corruption, which is a significant barrier to growth, private sector development,
investment and poverty reduction. A number of other measures, such as
establishing a credible legal framework, need to be taken to reduce or eliminate
impediments to private investment, both domestic and foreign.
4. It is crucial that the international community improves the effectiveness of aid. In
particular bilateral and multilateral donors need to: harmonise their operational
procedures; align aid behind country-owned priorities; and provide for measurable
results. Donors must also: focus their aid on poverty reduction; enhance efforts to
untie aid, based on DAC principles; and deliver aid in a more predictable way. We
look forward to agreement on practical steps to improve aid effectiveness at the
Paris OECD DAC High Level Forum in March.
5. Progress on the Doha Development Agenda is critical to global economic growth
and poverty reduction. We must ensure that the Doha Round delivers substantial
benefits to developing countries.
We encourage both developed and developing countries to play an active role in
the negotiations to ensure that an ambitious outcome is achieved. We recognise
that developing countries face particular problems and need the flexibility to
sequence reforms to their trade policies. We call on the IFls to develop proposals
for additional assistance to countries, consistent with debt sustainability, to ease
adjustment in these economies, based on a systematic analysis of transition costs
and consistent with country-owned development strategies, so they can increase
their capacity to take advantage of more open markets.
6. HIV/AIDS and malaria undermine growth in developing economies and progress
towards the Millennium Development Goals. In addition to treatment, care, and the
development of health systems, research on vaccines must be accelerated. We
reaffirm our commitment to the Global HIV Vaccine Enterprise, and will consider
how to increase public research. We will also explore the use of advance purchase
commitments to drive private sector investment.
1 As Endorsed by Heads of State and Government in the UN General Assembly on
September 8, 2000.

http://www .treas.gov Ipress/re lcases/j s224 7 .htrn

4/25/2005

JS-:2247: G7

Fill{IlILT

Ministers Conclusions on Development

Page :2 01':2

7. The Enhanced HIPC Initiative has to date significantly reduced the debt of 27
countries, and we reaffirm our commitment to the full implementation and financing
of the Initiative. Moreover, individual G7 countries have gone further, providing up
to 100 per cent relief on bilateral debt. However, we recognise that more still needs
to be done. We are agreed on a case-by-case analysis of HIPC countries, based on
our willingness to provide as much as 100 per cent multilateral debt relief. We also
ask the IMF and the World Bank to look at the issue of debt sustainability in other
low-income countries. To finance the relief of debts owed to the IMF and to enable
the Fund to continue to playa role in the poorest countries, the Managing Director
has stated that he will bring forward proposals at the Spring Meetings, covering the
Fund's gold and other resources and in an orderly way. We look forward to his
proposals. For the relief of debts owed to the World Bank and African Development
Bank we will work with their management and shareholders to bring forward
proposals for agreement at the Spring Meetings to achieve this without reducing the
resources available to the poorest countries through these institutions. We also call
on non-Paris Club creditors to provide at least their share of HIPC debt relief, and
we ask the IMF to report on progress at the Spring Meetings.
8. In addition to debt relief, we recognised at Monterrey that a substantial increase
in aDA and other resources will be required to assist developing countries to
achieve the internationally agreed development goals and objectives, including
those contained in the Millennium Declaration. We acknowledged the efforts of all
donors whose aDA contributions exceed, reach or are increasing towards the
Monterrey targets. We emphasise the importance of an ambitious replenishment of
IDA 14.
9. As we prepare for decisions at the G8 Summit in Gleneagles we agree a work
programme on: the IFF and its pilot, the IFF for immunisation; some of the revenue
proposals from the Landau Report brought forward by France and Germany which
could also refinance the IFF; the Millennium Challenge Account; and other financing
measures; so that decisions can be made on the constitution of and participation in
a financing package to achieve the Millennium Development Goals.

http://www.treas.gov/press/relcases/js2247.htm

4/25/2005

JS-224H: Statement on the Meeting of G7 Finance Ministers and Central Bank Governors...

Page I

or I

FROM THE OFFICE OF PUBLIC AFFAIRS
February 4, 2005
JS-2248

Statement on the Meeting of G7 Finance Ministers and Central Bank
Governors
with Chinese counterparts, London, 5 February 2004
The Finance Ministers and Central Bank Governors of the G7 countries met
informally with China's Finance Minister and Central Bank Governor to continue the
productive dialogue begun in WaShington in October 2004. They enjoyed an open
and helpful exchange of views on a wide range of economic issues of mutual
interest in a candid way. Among other things, they exchanged views on fiscal and
monetary policies in G7 economies, the Asian economic outlook, and exchange
rate flexibility. It was agreed that this meeting was an effective means of increasing
shared understanding of the challenges and opportunities of an increasingly
integrated global economy.

http://www.treas.gov/press/relcases/js2248.htm

4/25/2005

js-2249: lreasury Pnwides Guidance On Abusive "SILO" Arrangements

"~.

- - - ._- - -;~RESS

Page 1 of 1

Reo M·

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

February 11, 2005
js-2249
Treasury Provides Guidance On Abusive "SILO" Arrangements
The Treasury Department and the Internal Revenue Service today issued guidance
that designates "sale-in/lease-out" or "SILO" arrangements as abusive tax
avoidance transactions.
SILO arrangements are designed to exploit the tax law by shifting tax benefits from
a tax-indifferent party that cannot use them to a taxpayer that can. Taxpayers
entering into SILO arrangements cannot claim tax benefits as the purported owners
of property subject to the lease because they do not acquire tax ownership of the
property.
In the American Jobs Creation Act of 2004, Congress enacted limitations on the
deductibility of losses from future SILO transactions. The Notice informs taxpayers
that the IRS will challenge the purported tax benefits claimed by taxpayers entering
into earlier SILO transactions on a number of grounds. It further states that SILOs
are considered "listed transactions." Taxpayers who enter into SILOs and who are
required to file tax returns must disclose their participation to the IRS. In addition,
promoters of listed transactions must keep lists of investors and, in certain cases,
register those transactions with the IRS.
A copy of the notice is attached.
###

REPORTS
•

Notice 2005-13

http://www.treas.gov/press/releases/js2249.htm

4/25/2005

Part III - Administrative, Procedural, and Miscellaneous

Tax-Exempt Leasing Involving Defeasance

Notice 2005-13
The Internal Revenue Service and the Treasury Department are aware of types
of transactions, described below, in which a taxpayer enters into a purported saleleaseback arrangement with a tax-indifferent person in which substantially all of the taxindifferent person's payment obligations are economically defeased and the taxpayer's
risk of loss from a decline, and opportunity for profit from an increase, in the value of the
leased property are limited. This notice alerts taxpayers and their representatives that
these transactions are tax avoidance transactions and identifies these transactions, and
substantially similar transactions, as listed transactions for purposes of § 1.6011-4(b)(2)
of the Income Tax Regulations and §§ 6111 and 6112 of the Internal Revenue Code.
This notice also alerts parties involved with these transactions of certain responsibilities
that may arise from their involvement with these transactions.
FACTS

X is a U.S. taxpayer. FP is a tax-indifferent person that owns and uses certain
property. 1 BK1, BK2, BK3, and BK4 are banks. None of these parties is related to any
other party, unless otherwise indicated.
Situation 1

2
On the closing date of January 1, 2003 ("Closing Date"), X and FP enter into a
purported sale-leaseback transaction under which FP sells the property to X, and X
immediately leases the property back to FP under a lease ("Lease"). The purchase and
sale agreement and the Lease are nominally separate legal documents. Both
agreements, however, are executed pursuant to a comprehensive participation
agreement, which provides that the parties' rights and obligations under any of the
agreements are not enforceable before the execution of all transaction documents.
The Lease requires FP to make rental payments over the term of the Lease
("Lease Term"). As described below, the Lease also provides that under certain
conditions, X has the option ("Service Contract Option") to require FP to identify a party
("Service Recipient") willing to enter into a contract with X to receive services provided
using the leased property ("Service Contract") that commences immediately after the
expiration of the Lease Term. The Service Recipient must meet certain financial
qualifications, including credit rating and net capital requirements, and provide
defeasance or other credit support to satisfy certain of its obligations under the Service
Contract. If FP cannot locate a qualified third party to enter into the Service Contract,
FP or an affiliate of FP must enter into the Service Contract. The aggregate of the
Lease Term plus the term of the Service Contract ("Service Contract Term") is less than
80 percent of the assumed remaining useful life of the property.
On the Closing Date, the property has a fair market value of $1 05x and X makes
a single payment of $105x to FP. To fund the $105x payment, X provides $15x in

In some instances, FP meets the definition of a tax-exempt entity under section
168(h)(2). In other instances, FP does not meet that definition but possesses attributes,
such as net operating losses, that render FP tax indifferent.
1

3
equity and borrows $81x from BK1 and $9x from BK2. Both loans are nonrecourse and
provide for payments during the Lease Term. Accrued but unpaid interest is capitalized
as additional principal. As of the Closing Date, the documents reflect that the sum of
the outstanding principal on the loans at any given time will be less than the projected
fair market value of the property at that time. The amount and timing of the debt service
payments closely match the amount and timing of the Lease payments due during the
Lease Term.
FP intends to utilize only a small portion of the proceeds of the purported saleleaseback for operational expenses or to finance or refinance the acquisition of new
assets. Upon receiving the $1 05x purchase price payment, FP sets aside substantially
all of the $1 05x to satisfy its lease obligations. FP deposits $81 x with BK3 and $9x with
BK4. BK3 may be an affiliate of BK1, and BK4 may be an affiliate of BK2. The deposits
with BK3 and BK4 earn interest sufficient to fund FP's rent obligations as described
below. BK3 pays annual amounts equal to 90 percent of FP's annual rent obligation
under the Lease (that is, amounts sufficient to satisfy X's debt service obligation to
BK1). Although FP directs BK3 to pay those amounts to BK1, the parties treat these
amounts as having been paid from BK3 to FP, then from FP to X as rental payments,
and finally from X to BK1 as debt service payments. In addition, FP pledges the deposit
with BK3 to X as security for FP's obligations under the Lease, while X, in turn, pledges
its interest in FP's pledge to BK1 as security for X's obligations under the loan from
BK1. Similarly, BK4 pays annual amounts equal to 10 percent of FP's rent obligation
under the Lease (that is, amounts sufficient to satisfy X's debt service obligation to
BK2). Although FP directs BK4 to pay these amounts to BK2, the parties treat these

4
amounts as having been paid from BK4 to FP, then from FP to X as rental payments,
and finally from X to BK2 as debt service payments. Although FP's deposit with BK4 is
not pledged, the parties expect that the amounts deposited with BK4 will remain
available to pay the remaining 10 percent of FP's annual rent obligation under the
Lease. FP may incur economic costs, such as an early withdrawal penalty, in
accessing the BK4 deposit.
FP is not legally released from its rent obligations. X's exposure to the risk that
FP will not make the rent payments, however, is substantially limited by the
arrangements with BK3 and BK4. In the case of the loan from BK1, X's economic risk is
remote due to the deposit arrangement with BK3. In the case of the loan from BK2, X's
economic risk is substantially reduced through the deposit arrangement with BK4. X's
obligation to make debt service payments on the loans from BK1 and BK2 is completely
offset by X's right to receive Lease rentals from FP. As a result, neither bank bears a
significant risk of nonpayment. 2
FP has an option ("Purchase Option") to purchase the property from X on the last
day of the Lease Term ("Exercise Date"). Exercise of the Purchase Option allows FP to
repurchase the property for a fixed exercise price ("Exercise Price") that, on the Closing
Date, exceeds the projected fair market value of the property on the Exercise Date. The
Purchase Option price is sufficient to repay X's entire loan balances and X's initial

The arrangement by which FP sets aside the funds necessary to meet its obligations
under the Lease may take a variety of forms other than a deposit arrangement involving
BK3 and BK4. These arrangements include a loan by FP to X, BK1 or BK2; a letter of
credit collateralized with cash or cash equivalents; a payment undertaking agreement;
prepaid rent (regardless of whether X finances a portion of the purchase price by
borrowing from BK1 or BK2); a sinking fund arrangement; a guaranteed investment
contract; or financial guaranty insurance.
2

5
equity investment plus provide X with a predetermined after-tax rate of return on its
equity investment.
At the inception of the transaction, X requires FP to invest $9x of the $1 05x
payment in highly rated debt securities ("Equity Collateral"), and to pledge the Equity
Collateral to X to satisfy a portion of FP's obligations under the lease. 3 Although the
Equity Collateral is pledged to X, it is not among the items of collateral pledged to BK1
or BK2 in support of the nonrecourse loans to X. The Equity Collateral upon maturity,
when combined with the balance of the deposits made with BK3 and BK4 and the
interest on those deposits, fully funds the amount due if FP exercises the Purchase
Option. This arrangement ensures that FP is able to make the payment under the
Purchase Option without an independent source of funds. Having economically
defeased both its rental obligations under the Lease and its payment obligations under
the Purchase Option, FP keeps the remaining $6x, subject to its obligation to pay the
Termination Value (described below) upon the happening of certain events specified
under the Lease.
If FP does not exercise the Purchase Option, X may elect to (1) take back the
property, or (2) exercise the Service Contract Option and compel FP either to (a)
identify a qualified Service Recipient, or (b) enter (or compel an affiliate of FP to enter)
into the Service Contract as the Service Recipient for the Service Contract Term. If X
exercises the Service Contract Option, the Service Recipient must pay X predetermined

The arrangement by which the return of X's equity investment plus a predetermined
after-tax return on such investment is provided may take a variety of forms other than
an investment by FP in highly rated debt securities. For example, FP may be required
to obtain a payment undertaking agreement from an entity having a specified minimum
credit rating.
3

6
minimum capacity payments sufficient to provide X with a minimum after-tax rate of
return on its equity investment. The Service Recipient also must reimburse X for X's
operating and maintenance costs for providing the services.
As a practical matter, the Purchase Option and the Service Contract Option collar
X's exposure to changes in the value of the property. If the value of the property is at
least equal to the Purchase Option Exercise Price, FP likely will exercise the Purchase
Option. Likewise, FP likely will exercise the Purchase Option if FP concludes that the
costs of the Service Contract Option exceed the costs of the Purchase Option.
Moreover, FP may exercise the Purchase Option even if the fair market value of the
property is less than the Purchase Option Exercise Price because the Purchase Option
is fully funded, and the excess of the Exercise Price over the projected value may not
fully reflect the costs to FP of modifying, interrupting, or relocating its operations. If the
Purchase Option is exercised, X will recover its equity investment plus a predetermined
after-tax rate of return. Conversely, if the Purchase Option is not exercised, X may
compel FP to locate a Service Recipient to enter into the Service Contract in return for
payments sufficient to provide X with a minimum after-tax rate of return on its equity
investment, regardless of the value of the property.
Throughout the Lease Term, X has several remedies in the event of a default by
FP, including a right to (1) take possession of the property or (2) cause FP to pay X
specified damages ("Termination Value"). Likewise, throughout the Service Contract
Term , X has similar remedies in the event of a default by the Service Recipient. On the
Closing Date, the amount of the Termination Value is slightly greater than the purchase
price of the property. The Termination Value fluctuates over the Lease Term and

7
Service Contract Term, but at all times is sufficient to repay X's entire loan balances and
X's initial equity investment plus a predetermined after-tax rate of return. The BK3
deposit, the BK4 deposit and the Equity Collateral are available to satisfy the
Termination Value during the Lease Term. If the sum of the deposits plus the Equity
Collateral is less than the Termination Value, X may require FP to maintain a letter of
credit. During the Service Contract Term, the Service Recipient will be required to
provide defeasance or other credit support that would be available to satisfy the
Termination Value. As a result, X in almost all events will recover its investment plus a
pre-tax rate of return.
For tax purposes, X claims deductions for interest on the loans and for
depreciation on the property. X does not include the optional Service Contract Term in
the lease term for purposes of calculating the property's recovery period under §§
168(g)(3)(A) and 168(i)(3). X includes in gross income the rents received on the Lease.
If the Purchase Option is exercised, X also includes the Exercise Price in calculating its
gain or loss realized on disposition of the property.
The form of the sale from FP to X may be a head lease for a term in excess of
the assumed remaining useful life of the property and an option for X to purchase the
property for a nominal amount at the conclusion of the head lease term. In some
variations of this transaction, the participation agreement provides that if X refinances
the nonrecourse loans, FP has a right to participate in the savings attributable to the
reduced financing costs by allowing FP to renegotiate certain terms of the transaction,
including the Lease rents and the Purchase Option price.
Situation 2

8
The facts are the same as in Situation 1 except for the following.
The Lease does not provide a Service Contract Option. In lieu of the Purchase
Option described in Situation 1, FP has an option ("Early Termination Option") to
purchase the property from X on the date ("ETO Exercise Date") that is 30 months
before the end of the Lease Term. Exercise of the Early Termination Option allows FP
to terminate the Lease and repurchase the property for a fixed exercise price ("ETO
Exercise Price") that on the Closing Date, exceeds the projected fair market value of the
property on the ETO Exercise Date. The Early Termination Option price is sufficient to
repay X's entire loan balances and X's initial equity investment plus a predetermined
after-tax rate of return on its equity investment. The balance of the Equity Collateral
combined with the balance of the deposits made with BK3 and BK4 and the interest on
those deposits fully fund the amount due under the Early Termination Option.
If FP does not exercise the Early Termination Option, FP is required to obtain
residual value insurance for the benefit of X, pay rents for the remaining Lease Term,
and return the property to X at the end of the Lease Term ("Return Option"). The
residual value insurance must be issued by a third party having a specified minimum
credit rating and must provide that if the actual residual value of the property is less than
a fixed amount ("Residual Value Insurance Amount") at the end of the Lease Term, the
insurer will pay X the shortfall. On the Closing Date, the Residual Value Insurance
Amount is less than the projected fair market value of the property at the end of the
Lease Term. If FP does not maintain the residual value insurance coverage for the
entire Lease Term remaining after the ETO Exercise Date, FP will default and be
obligated to pay X the Termination Value. If FP does not exercise the Early Termination

9
Option, the rents for the remaining Lease Term plus the Residual Value Insurance
Amount are sufficient to provide X with a minimum after-tax rate of return on the
property, regardless of the value of the property. As a practical matter, the Early
Termination Option and the Return Option collar X's exposure to changes in the value
of the property. At the end of the Lease Term, FP also may have the option to purchase
the property for the greater of its fair market value or the Residual Value Insurance
Amount.
For tax purposes, X claims deductions for interest on the loans and for
depreciation on the property. X treats a portion of the property as qualified
technological equipment within the meaning of § 168(i)(2). X depreciates that portion of
the property over five years under § 168(g)(3)(C). X treats a portion of the property as
software. X depreciates that portion of the property over 36 months under

§ 167(f)(1 )(A).
X includes in gross income the rents received on the Lease. If the Early
Termination Option is exercised, X also includes the ETa Exercise Price in calculating
its gain or loss realized on disposition of the property.
In some variations of this transaction, if the Early Termination Option is not
exercised, the Lease rents payable to X may increase for the portion of the Lease Term
remaining after the ETa Exercise Date.
ANALYSIS

The substance of a transaction, not its form, governs its tax treatment. Gregory
v. Helvering, 293 U.S. 465 (1935). In Frank Lyon Co. v. United States, 435 U.S. 561,
573 (1978), the Supreme Court stated that U[i]n applying the doctrine of substance over

10
form, the Court has looked to the objective economic realities of a transaction rather
than to the particular form the parties employed." The Court evaluated the substance of
the particular transaction in Frank Lyon to determine that it should be treated as a saleleaseback rather than a financing arrangement. The Supreme Court described the
transaction in Frank Lyon as "a genuine multiple-party transaction with economic
substance which is compelled or encouraged by business or regulatory realities, is
imbued with tax-independent considerations, and is not shaped solely by tax-avoidance
features that have meaningless labels attached." Frank Lyon, 435 U.S. at 584. The
Court subsequently relied on its approach in Frank Lyon to recharacterize a sale and
repurchase of federal securities as a loan, finding that the economic realities of the
transaction did not support the form chosen by the taxpayer. Nebraska Oep't of
Revenue v. Loewenstein, 513 U.S. 123 (1994).
A sale-leaseback will not be respected unless the owner/lessor acquires and
retains "significant and genuine attributes" of a traditional owner, including "the benefits
and burdens of ownership." Coleman v. Commissioner, 16 F.3d 821,826 (yth Cir. 1994)
(citing Frank Lyon, 435 U.S. at 582-84). Considering the totality of the facts and
circumstances in the transactions described in Situations 1 and 2, X does not acquire
the benefits and burdens of ownership and consequently cannot claim tax benefits as
the owner of the property. The transactions described above are, in substance,
fundamentally different from the sale-leaseback transaction respected by the Court in
Frank Lyon.
First, in Frank Lyon, the sales proceeds were used to construct the lessee's new
headquarters. In contrast, in the transactions described above, substantially all of the

11
$105x sales proceeds are immediately set aside by FP to satisfy its obligations under
the Lease and to fund FP's exercise of the Purchase Option or the Early Termination
Option. As a condition to engaging in the transactions, FP economically defeases
substantially all of its rent payment obligations and the amounts due under the
Purchase Option or the Early Termination Option by establishing and pledging the
deposit with BK3 and the Equity Collateral. Moreover, even though FP may not pledge
the deposit with BK4, FP fully funds its remaining rent obligations with the BK4 deposit
and may have limited rights to access the funds held in that deposit. Consequently, the
only capital retained by FP is the remaining $6x portion of the sales proceeds that
represents FP's fee for engaging in the transaction.
Second, in Frank Lyon, the taxpayer bore the risk of the lessee's nonpayment of
rent, which could have forced the taxpayer to default on its recourse debt. The Court
concluded that the taxpayer exposed its business well-being to a real and substantial
risk of nonpayment and that the long-term debt affected its financial position. Frank
Lyon, 435 U.S. at 577. In contrast, in the transactions described above, economic
defeasance renders the risk to X of FP's failure to pay rent remote. Moreover, because
of the economic defeasance, X's right to receive the Equity Collateral upon the exercise
of the Purchase Option, and FP's obligation with respect to the Termination Value, a
failure by FP to satisfy its lease obligations does not leave X at risk for repaying the loan
balances or forfeiting its equity investment.
Third, in Frank Lyon, the taxpayer's return was dependent on the property's
value and the taxpayer's equity investment was at risk if the property declined in value.
The economic burden of any decline in the value of the property is integral to the

12
determination of tax ownership. See,~, Swift Dodge v. Commissioner, 692 F.2d 651
th

(9 Cir. 1982). In the transactions described above, X bears insufficient risk of a decline
in the value of the property to be treated as its owner for tax purposes. In Situation 1,
regardless of a decline in the value of the property, X can recover its entire investment,
repay both loans, and obtain a minimum after-tax rate of return on its equity investment
by exercising the Service Contract Option. Similarly, in Situation 2, a decline in the
value of the property will not prevent X from recovering its entire investment, repaying
both loans and obtaining a minimum after-tax rate of return on its equity investment
through the rents for the remaining Lease Term plus the Residual Value Insurance
Amount under the Return Option. The failure of FP to satisfy its obligations under the
Service Contract Option in Situation 1 or the Return Option in Situation 2 results in
default and obligates FP to pay X the Termination Value. In both Situation 1 and
Situation 2, the BK3 and BK4 deposits and Equity Collateral are available to fund FP's
obligations upon termination of the Lease. Thus, in both situations, X has substantially
limited its risk of loss regardless of the value of the property upon termination of the
Lease.
Fourth, the combination of FP's Purchase Option and X's Service Contract
Option in Situation 1, and FP's Early Termination Option and continued rent and
residual value insurance obligations under the Return Option in Situation 2, significantly
increase the likelihood that FP will exercise its Purchase Option in Situation 1 and its
Early Termination Option in Situation 2 even if the fair market value of the property is
less than the Purchase Option Exercise Price or ETO Exercise Price, respectively,
because both options are fully funded and the excess of the exercise price over the

13
leased property's fair market value may not fully reflect the costs to FP of modifying,
interrupting, or relocating its operations. See Kwiat v. Commissioner, T.C. Memo. 1992433 (ostensible lessor did not possess the benefits and burdens of ownership because
reciprocal put and call options limited the risk of economic depreciation and the benefit
of possible appreciation); see also Aderholt Specialty Co. v. Commissioner, T.C. Memo.
1985-491; Rev. Rul. 72-543, 1972-2 C.B. 87. In contrast, in Frank Lyon, the lessee's
decision regarding the exercise of its purchase option was not constrained by a lessor's
right to exercise a reciprocal option similar to the Service Contract Option or the Return
Option described in Situations 1 and 2, respectively. Similarly, X's opportunity to
recognize a return through refinancing the BK1 and BK2 loans is also limited in those
cases in which FP has a right to participate in any savings attributable to reduced
financing costs, such as through renegotiation of the Lease rents and the Purchase
Option price. See Hilton v. Commissioner, 74 T.C. 305 (1980), aff'd, 671 F.2d 316 (9

Cir. 1982) (arrangement whereby lessor and lessee shared the savings from any
refinancing of lessor's nonrecourse debt was a factor supporting holding to disregard
form of sale-leaseback transaction).
In the transactions described above, X does not have a meaningful interest in the
risks and rewards of the property. Thus, X does not acquire the benefits and burdens of
ownership of the property and does not become the owner of the property for U.S.
federal income tax purposes. In substance, the transactions described above are
merely a transfer of tax benefits to X, coupled with X's investment of the Equity
Collateral for a predetermined after-tax rate of return.
Furthermore, in appropriate cases, the Service may challenge the purported tax

14
benefits from these transactions on additional grounds, including (1) that the substance
over form doctrine requires recharacterization of the arrangement as a financing
arrangement, or (2) that the loans from BK1 and BK2, in substance, do not involve the
use or forbearance of money, do not constitute valid indebtedness for tax purposes, and
that any interest nominally paid or accrued on the loans is not deductible. Cf. Rev. Rul.
2002-69, 2002-2 C.B. 760 (disregarded offsetting obligations in a L1LO arrangement
gave the taxpayer, at most, a future interest in the property).
The American Jobs Creation Act of 2004, P.L. 108-357, 118 Stat. 1418 (the
"Act"), was enacted on October 22, 2004. Section 847 of the Act amended §§ 167 and
168 to provide that service contracts that follow a lease must be included in the lease
term and to modify the recovery period for qualified technological equipment and
computer software subject to a lease with a tax-exempt entity. Section 848 of the Act
added new § 470, which suspends losses for certain leases of property to tax-exempt
entities. See H. R. Rep. No. 755, 108th Cong., 2d Sess., at 660,662-663 (2004).
These amendments generally are effective for leases entered into after March 12,

Transactions that are the same as, or substantially similar to, the transactions
described in this notice are identified as "listed transactions" for purposes of § 1.60114(b )(2) and §§ 6111 and 6112 effective February 11, 2005, the date this notice is
released to the public. Independent of their classification as "listed transactions,"
transactions that are the same as, or substantially similar to, the transactions described

Leases or purported leases of Qualified Transportation Property described in section
849(b) of the Act are not identified as listed transactions subject to the terms of this
notice.

15
in this notice may already be subject to the requirements of § 6011, § 6111, or § 6112,
or the regulations thereunder. Persons required to disclose these transactions under

§ 1.6011-4 who fail to do so may be subject to the penalty under § 6707A. 5 Persons
required to disclose or register these transactions under § 6111 who have failed to do
so may be subject to the penalty under § 6707(a). Persons required to maintain lists of
investors under § 6112 who have failed to do so (or who fail to provide such lists when
requested by the Service) may be subject to the penalty under § 6708(a). In addition,
the Service may impose penalties on parties involved in these transactions or
substantially similar transactions, including accuracy-related penalties under § 6662 or §
6662A.
The Service and the Treasury Department recognize that some taxpayers may
have filed tax returns taking the position that they were entitled to the purported tax
benefits of the types of transactions described in this notice. These taxpayers should
consult with a tax advisor to ensure that their transactions are disclosed properly and to
take appropriate corrective action.

DRAFTING INFORMATION
For further information regarding this notice, contact John Aramburu on (202)
622-4960 (not a toll-free call).

Section 6707A applies to returns and statements due after October 22,2004. See
Notice 2005-11, 2005-7 I.R.B. 493.

JS-2250: Thc U.S. Commitmcnt to Uruguay and Latin America John B. Taylor U ... Page 1 of 2

FROM THE OFFICE OF PUBLIC AFFAIRS
February 14, 2005
JS-2250
The U.S. Commitment to Uruguay and Latin America
John B. Taylor
Under Secretary of Treasury for International Affairs
Remarks at Embassy of Uruguay on Receipt of the "Medal of the Oriental
Republic of Uruguay"
Washington, DC
February 14, 2005
Thank you very much for inviting me here today and for this honor. I am pleased to
have had the opportunity to work with Ambassador Fernandez-Faingold, Minister
Alfie, and other members of the Uruguayan government to help Uruguay through
the difficult period in 2002. President Batlle and his economic team deserve high
marks for their achievements in putting Uruguay back on the path of growth.
A core aspect of the Bush Administration's economic strategy for Latin America and
the rest of the world is to provide strong support to countries that are pursuing
sound economic policies. Our strategy is based on our firm belief that without
sound policies on the part of the country itself, international assistance cannot yield
successful results. We have applied this philosophy in our work to prevent and
contain financial crises and to bolster economic growth in the region.
Another early focus of the Bush Administration was to deal with financial contagion
and define clearly when a response from the international policy community is
appropriate and desirable. We emphasized early on that contagion was not
automatic, and that policy responses had to take this into account. This is
important because reacting to false alarms about contagion can lead to support of
countries that are not following strong and sustainable policies. At the same time, it
is important to recognize instances where countries are pursuing strong policies but
are hit by external shocks beyond their control that damage their economies.
Uruguay is an excellent example of how these two elements--(1) supporting
countries that are implementing good economic policies and (2) dealing
appropriately with contagion--came together.
Uruguay had a solid record of market-oriented economic policies when the crisis in
Argentina caused a bank run in the Uruguayan banking system. I was in close
contact with Uruguayan government and IMF officials during the first half of 2002,
as they tracked the decline in deposits and formulated a response to it. The first
step was for Uruguay to draw on its existing IMF program. Then, a new IMF
program was launched in March and augmented in June, with the aim of building
reserves in the financial system and bolstering public confidence that the
government's finances were being put on more sustainable footing.
It became by the early summer that these measures were not enough to stop the
run. More needed to be done to stabilize the situation and prevent a breakdown in
the payments system that would compound the damage to Uruguay's economy.
We assembled a team at the Treasury covering all aspects of the situation,
covering fiscal and debt, monetary, banking, legal, IMF, and MOB-related issues.
We began a series of intensive meetings with Uruguayan and IMF officials to
develop a strategy for confronting the bank run decisively.

http://www .treas.gov /press/re Icases/j S;225Qhtm

4/25/2005

JS-2250: Thc U.S. Commitmcnt to Uruguay and Latin America lohn B. Taylor U ... Page 2 of 2

The key challenge was this: because Uruguay's banking system was dominated by
dollar deposits, the central bank did not have the ability to print money to satisfy the
demand for withdrawals. Depositors saw that the central bank's foreign reserves-even with the earlier IMF loans--totaled less than the amount of dollar deposits in
the system. Therefore, depositors were rushing to get their money out before the
system ran out of dollars. In our discussions with the Uruguayan team and the IMF,
we agreed that the only way to convince people to keep their money in the banks
was to back deposits dollar-for-dollar. Backing all deposits in the system was not
viable because of the amount of funds that Uruguay would have to borrow would
have been too large. Working line-by-line through the various categories of
deposits, we worked with the Uruguay and the IMF to develop a plan to fully back
dollar checking and savings deposits while reprogramming dollar time deposits.
To financing the deposit guarantee plan, we reached agreement on a package that
mobilized additional funds from the IMF, World Bank, and Inter-American
Development Bank. In addition to reprogramming time deposits, the Uruguayan
government would take strong measures to suspend the operations of four private
domestic banks. The U.S. Treasury provided a short-term, $1.5 billion ESF loan to
the government of Uruguay to provide a bridge to the disbursement of funds from
the international financial institutions.
Events have shown that the package and bridge loan were a success in both the
short and in the longer term. Our bet to support Uruguay's future has paid off. The
rapid provision of financial support bolstered confidence and enabled Uruguay to
reopen the banks without a resumption of the bank run. The bridge loan from the
U.S. Treasury was repaid in just four days.
The Uruguayan government followed through on its commitments to keep economic
policies on track. With stability returning, the government successfully executed a
debt exchange in May 2003 to put the country's debt on a sustainable path. It put
in place fiscal policies aimed at bringing down debt levels. Through expenditure
restraint and strengthened tax administration, the government increased the
primary balance from a deficit of 1.2 percent of GOP in 2001 to a surplus of 3.6
percent of GOP in 2004. As the government proceeded with financial sector
reforms and confidence improved, resident bank deposits of the non-financial
private sector recovered to about 80 percent of their pre-crisis level and growth of
bank credit to the private sector (excluding NPL write-offs) turned positive in 2004.
Let's look at the results of these good policies and our support. In 2002 the
economy contracted by 11 percent, inflation surged to 26 percent, and
unemployment rose to 18 percent. By last year, Uruguay's economy grew a
projected 12 percent, inflation was reduced to close to 7% percent, and
unemployment fell to roughly 12 percent.
We very much look forward to working with the incoming Vazquez administration to
build upon these achievements, both in Uruguay and in the region as a whole.
Thanks to better policies in many countries, the region is currently enjoying the
fastest rate of economic growth in a quarter century. Our shared challenge is to
sustain that momentum by putting in place microeconomic policies that encourage
Latin American entrepreneurs to risk their capital at home.
Our assistance to Uruguay is just one example of President Bush's continuing
commitment to the region--a commitment reflected in areas as diverse as our
support for countries confronting financial crises, to the Free Trade Area of the
Americas (FT AA), to the Millennium Challenge Account (MCA) for our
Hemisphere's poorest countries, to the initiatives launched at last year's Summit of
the Americas to reduce the cost of remittances and increase the availability of bank
credit to small businesses. Through working together in these and other areas, we
can lay the foundation for a future with more prosperity and less poverty for all
people in our hemisphere.
Thank you again for this honor.

http://wWW .treas.gov Ipress/re Icases/j s22.S..Q.b1m

4/25/2005

Page 1 or J

JS-.2.2) I - Treasury International Capital Data for December

FROM THE OFFICE OF PUBLIC AFFAIRS
We recommend printing this release usmg tile PDF file below.
To view or print the PDF content on tillS page. download the free Adobe® Acrobat® Reader®.

February 15, 2005
JS-2251

Treasury International Capital Data for December
Treasury International Capital (TIC) data for December are released today and posted on the US Treasury web site
date, which will report on data for January, is scheduled for March 15, 2005.

Long-Term Domestic Securities
Gross purchases of domestic securities by foreigners were $1,317.0 billion in December, exceeding gross sales of de
$1,234.1 billion during the same month.
Foreign purchases of domestic securities reached $82.9 billion on a net basis in December, relative to $100.7 billion (
flows reached $72.6 billion in December. Net private purchases of Treasury Bonds and Notes decreased to $1.4 billie
Net private purchases of Government Agency Bonds were $25.6 billion, up from $24.3 billion the previous month. Ne
rose to $39.1 billion from $23.7 billion the previous month. Net private purchases of Equities fell to $6.5 billion from $'
Official net purchases of US. securities were $10.3 billion in December, relative to $27.9 billion in November. Official
Notes of $7.0 billion accounted for the bulk of official inflows in December, down from $21.0 billion the previous montl

Long-Term Foreign Securities
Gross purchases of foreign securities owned by U.S. residents were $259.8 billion in December, relative to gross salE
$281.4 billion during the same month.
Gross sales of foreign securities to U.S. residents exceeded purchases by $21.6 billion, highlighting net foreign sales
$6.2 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 $61.3 billion in Dec
November. Net foreign purchases of long-term securities were $821.8 billion in 2004 as compared to $683.6 billion dl
The full data set, including adjustments for repayments of principal on asset-backed securities, as well as historical
htl;J '

N'J~J'.',

trr-;;J:l

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 Residents
(Billions of dollars, not seasonally adjusted)
2002
1 Gross Purchases of Domestic Securities
2 Gross Sales of Domestic Securities
3 Domestic Securities Purchased, net (line 1 less line 2) 11
4

5
6
7
8

(JO\/'jIC,.

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

http://www.treas.gov/press/releases/js2251.htm

2003

2004

Sep-04

13,022.9
12,475.4
547.6

14,374.7
13,6288
745.9

15,393.5
14,477.7
915.8

1,2577
1,192.0
65.7

508.3
112.8
166.6
176.7
52.2

602.8
160.5
140.9
263.3
38.2

679.6
153.6
212.2
289.4
24.4

51.4
5.8
6.2
42.3
-2.9

4/2512005

JS-~~':;

I - Treasury Tnternatlonal Capital Data for December
9
10
11
12
13

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

14 Gross Purchases of Foreign Securities
15 Gross Sales of Foreign Securities
16 Foreign Securities Purchased, net (line 14 less line 15) /3
17
18

Foreign Bonds Purchased, net
Foreign Equities Purchased, net

19 Net Long-Term Flows (line 3 plus line 16)
/1
Net foreign purchases of U.S. securities (+)
/2
Includes International and Regional Organizations
/3
Net U.S. acquisitions of foreign securities (-)
Source:US. Department of the Treasury

Pa}!,c ~

or ~

39.3
7.1
28.6
5.6
-2.0

143.1
113.5
24.3
5.6
-0.3

236.2
203.1
20.3
11.4
1.4

14.3
10.9
2.2
1.2
00

2,640.0
2,613.0
27.0

2,891.0
2,953.4
-62.3

3,177.7
3,271.7
-94.0

242.4
247.0
-4.6

28.5
-1.5

20.1
-82.4

-2.3
-91.7

-0.8
-3.7

574.6

683.6

821.8

61.2

REPORTS

•

(PDF) Foreigners Transactions in Long-Term Securities with US ReSidents (Billions of dollars. not seasonal I

p:llw~'W.treas.gov/press/relea~es/js2251.htm

4/2)/200)

,"'I

DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
February 15, 2005
EMBARGOED UNTIL 9:00 AM

Contact:

Tony Fratto
202-622-2910

Treasury International Capital Data for December
Treasury International Capital (TIC) data for December are released today and posted on the
U.S. Treasury web site (www.treas.gov/tic). The next release date, which will report on data for
January, is scheduled for March 15,2005.
Long-Term Domestic Securities
Gross purchases of domestic securities by foreigners were $1,317.0 billion in December,
exceeding gross sales of domestic securities by foreigners of $1 ,234.1 billion during the same
month.
Foreign purchases of domestic securities reached $82.9 billion on a net basis in December,
relative to $100.7 billion during the previous month. Private net flows reached $72.6 billion in
December. Net private purchases of Treasury Bonds and Notes decreased to $1.4 billion from
$11.8 billion the preceding month. Net private purchases of Government Agency Bonds were
$25.6 billion, up from $24.3 billion the previous month. Net private purchases of Corporate
Bonds rose to $39.1 billion from $23.7 billion the previous month. Net private purchases of
Equities fell to $6.5 billion from $13.0 billion.
Official net purchases of U.S. securities were $10.3 billion in December, relative to $27.9 billion
in November. Official net purchases of Treasury Bonds and Notes of$7.0 billion accounted for
the bulk of official inflows in December, down from $21.0 billion the previous month.
Long-Term Foreign Securities
Gross purchases of foreign securities owned by U.S. residents were $259.8 billion in December,
relative to gross sales of foreign securities to U.S. residents of$281.4 billion during the same
month.

Gross sales of foreign securities to U.S. residents exceeded purchases by $21.6 billion,
highlighting net foreign sales of $15.4 billion in Foreign Equities and $6.2 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 $61.3 billion in December compared with $89.3 billion in November. Net foreign
purchases oflong-term securities were $82l.8 billion in 2004 as compared to $683.6 billion
during 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)
2002

2004

Se -04

Oct-04

Nov-04

Dec-04

Gross Purchases of Domestic Securities
13,022.9 14,374.7 15,393.5
12,475.4 13,628.8 14,477.7
2 Gross Sales of Domestic Securities
547.6
745.9
915.8
3 Domestic Securities Purchased, net (line I less line 2) /1

1,257.7
1,192.0
65.7

1,204.5
1,139.9
64.6

1,411.5
1,310.8
100.7

1,317.0
1,234.1
82.9

2003

4
5
6
7
8

Private, net /2
Treasury Bonds & Notes, net
Gov'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

679.6
153.6
212.2
289.4
24.4

51.4
5.8
6.2
42.3
-2.9

49.7
5.2
22.9
18.1
3.6

72.8
11.8
24.3
23.7
13.0

72.6
1.4
25.6
39.1
6.5

9
10
II
12
13

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

39.3
7.1
28.6
5.6
-2.0

143.1
113.5
24.3
5.6
-0.3

236.2
203.1
20.3
11.4
1.4

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

10.3
7.0
1.0
1.7
0.6

2,640.0
2,613.0
27.0

2,891.0
2,953.4
-62.3

3,177.7
3,271.7
-94.0

242.4
247.0
-4.6

253.8
271.5
-17.7

268.7
280.0
-11.4

259.8
281.4
-21.6

28.5
-1.5

20.1
-82.4

-2.3
-91.7

-0.8
-3.7

-5.1
-12.7

-2.9
-8.5

-6.2
-15.4

574.6

683.6

821.8

61.2

46.9

89.3

61.3

14
15
16
17
18
19
/1
/2
/3

Gross Purchases of Foreign Securities
Gross Sales of Foreign Securities
Foreign Securities Purchased, net (line 14 less line 15) /
Foreign Bonds Purchased, net
Foreign Equities Purchased, net

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

FROM THE OFFICE OF PUBLIC AFFAIRS

February 15, 2005
2005-2-15-10-36-52-28712
U.S. International Reserve Position

The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $80,602 million as of the end of that week, compared to $81,228 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

Februarll 4, 2005

FebruarY 11, 2005

81,228

80,602

Euro

Yen

TOTAL

Euro

Yen

TOTAL

11,841

15,169

27,010

11,797

14,875

26,672

Of which, issuer headquartered in the U. S.

b. Total deposits with:
11,611

b.i. Other central banks and BIS

14,660

3,049

11,559

2,990

14,549

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

b.ii. Of which, banks located abroad

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

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

15,206

15,113

13,307

13,225

11,045

11,042

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
Februarll 4, 2005
Euro

1. Foreign currency loans and securities

Yen

Februar1l11, 2005

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
February 4, 2005
Euro

Yen

February 11, 2005

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 institutions
Headquartered in the U. S.
3.c. With banks and other financial institutions
Headquartered outside the U. S.

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

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

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

Notes:

1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week 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 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-2252: Treasury Takes Action to Stem Funding to the Iraqi Insurgency

Page 1 of 2

FROM THE OFFICE OF PUBLIC AFFAIRS
February 15, 2005
JS-2252
Treasury Takes Action to Stem Funding
to the Iraqi Insurgency
The U.S. Department of the Treasury again took action today against an individual
whose efforts were helping to finance the Iraqi insurgency, as well as al Qaida.
"Today's designation of al-Fadhli is another important step in breaking the financial
ties the al-Zarqawi Network depends on to perpetrate acts of horror and violence
against people of all faiths and nationalities," said Treasury Secretary John W.
Snow.
Muhsin al-Fadhli was designated under Executive Order 13224 for providing
financial and material support to the al-Zarqawi Network and al Qaida. The U.S. is
submitting al-Fadhli 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.
Today's action follows on the heels of last month's designation by the Treasury of
Sulayman Khalid Darwish. Among other activities, Darwish recruited, trained and
dispatched terrorist operatives to help carry out the agendas of both the al-Zarqawi
Network and al Qaida.
Muhsin al-Fadhli is considered an al Qaida leader in the Gulf countries. Information
available to the U.S. Government indicates that al-Fadhli fought alongside the
Taliban and al Qaida in Afghanistan where he served as a bodyguard and secondin-command for an al Qaida leader. He also fought against Russian forces in
Chechnya, where he trained in the use of firearms, antiaircraft guns and
explosives. Information available to the U.S. Government shows that in early
September, 2001, al-Fadhli possibly received forewarning that U.S. interests would
be struck.
Muhsin al-Fadhli's support for terrorism extends to Iraq where he is believed to be
providing support to fighters against U.S. and multinational forces and is considered
a major facilitator connected to the brutal terrorist, Abu Musab al-Zarqawi. In an
effort to solidify the support of key financial backers sponsoring attacks, al-Fadhli
requested that tapes be made showing evidence of successful attacks in Iraq.
Furthermore, Muhsin al-Fadhli was also involved in several attacks in October,
2002. First, he raised money in Kuwait which was used to finance an attack on the
French ship MV LIMBURG on October 6, 2002 which killed one, injured four crew
members and released 50,000 barrels of crude oil along 45 miles of coastline.
Muhammad al-Hamati [AKA Abu 'Asim al-Makki]. an al- Qaida operative and a
Specially Designated Global Terrorist, had called al-Fadhli in the wake of the attack
on the MV LIMBURG, informing him that the first operation on the French oil tanker
had been completed.
AI-Fadhli was also suspected of having a connection to an attack against U.S.
Marines on the Kuwaiti Faylaka Island on October 8,2002 during which one U.S.
Marine was killed.

http://www.treas.gov/press/relcases/js2252.htm

4/25/2005

JS-2252: Treasury Takes Action to Stem Funding to the Iraqi Insurgency

Page 2 01'2

In February, 2003, a Kuwaiti court convicted four suspects, including al-Fadhli, of
providing funding for terrorist activities and undergoing military training in
Afghanistan for purposes of terrorism. The Kuwaiti court handed down five-year jail
sentences to the suspects who had been arrested on October 30, 2002 and
November 16, 2002 on suspicion of involvement in planning or supporting plans to
conduct terrorist operations in the wake of the October, 2002 attacks on the French
ship, MV LIMBURG, and against U.S. Marines on Faylaka Island.
Zarqawi was named a Specially Designated Global Terrorist 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 and a Specially Designated Global Terrorist on October 15, 2004.
Identifying Information
MUHSIN AL-FADHLI
AKAs: Muhsin Fadhil ·Ayyid al Fadhli
Muhsin Fadil Ayid Ashur al Fadhli
Abu Majid Samiyah
Abu Samia
DOB: April 24, 1981
Passport#: Kuwaiti 106261543
Address: Block Four, Street 13, House #179
Kuwait city
AI-Riqqa area
Kuwait
Muhsin al-Fadhli 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. AI-Fadhli 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.
Blocking actions are critical to combating the finanCing of terrorism. When an
action is put into place, any assets existing in the formal financial system at the time
of the order are to be frozen. Blocking actions serve additional functions as well,
acting as a deterrent for non-designated parties who might otherwise be willing to
finance terrorist activity; exposing terrorist financing "money trails" that may
generate leads to previously unknown terrorist cells and financiers, disrupting
terrorist financing networks by encouraging designated terrorist supporters to
disassociate themselves from terrorist activity and renounce their affiliation with
terrorist groups; terminating terrorist cash flows by shutting down the pipelines used
to move terrorist-related assets; forcing terrorists to use alternative, more costly and
higher-risk means of financing their activities; and engendering international
cooperation and compliance with obligations under UN Security Council
Resolutions.
Since September 11, 2001, the United States has designated 398 individuals and
entities as terrorists, their financiers or facilitators, as well as worked with the
international community to freeze over $147 million worldwide in terrorist-related
assets.

http://wWW .treas.gov Ipress/re Icases/j S2252~htm

4/25/2005

JS-2253: MeJia AJ"isory Tax Panel to Hold First Meeting

Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
February 15, 2005
JS-2253
Media Advisory
Tax Panel to Hold First Meeting
Washington- The President's Advisory Panel on Federal Tax Reform will hold its
first meeting tomorrow at 10:00 AM at the Ronald Reagan Building. No advance
registration is required, but you must show valid press identification upon arrival.
WHAT:
Meeting of the President's Advisory Panel on Federal Tax Reform
WHEN:
10:00 AM -- Wednesday, February 16, 2005
WHERE: The Ronald Reagan Building & International Trade Center
Amphitheater, Concourse Level
1300 Pennsylvania Avenue NW
Washington, DC
PRE-SET: Press may begin arriving at 8:30 AM to pre-set equipment. Members of
the press should arrive no later than 9:45 AM.
NOTE: Satellite parking is very limited. If a satellite truck will be necessary, please
contact us as soon as possible.
Contact: Taylor Griffin Director of Public Affairs at (202)-622-2960

http://www .treas.gov Ipress/re Icases/j s2253~htm

4/25/2005

JS-22S-+: Statement of Deputy Assistant Secretary for Financial Education Dan Iann...

Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
February 15, 2005
JS-2254
Statement of Deputy Assistant Secretary for Financial
Education Dan lannicola, Jr.
on the Financial and Economic Literacy Caucus
Today's formation of the Financial and Economic Literacy Caucus is an important
step in the federal effort to promote personal economic security through financial
education. I commend Representatives Judy Biggert and Ruben Hinojosa for their
efforts to provide Americans with the education resources they need to achieve
their financial goals. I look forward to partnering with the caucus to advance
Treasury's commitment to ensuring that Americans learn more about their finances
and, in so doing, live better lives.

http://www.treas.gov/press/re]cases!js2254 h1m

4/2512005

JS-2255: The Honorable John W. Snow Prepared Remarks President's Adviso...

Page 1 of 2

FROM THE OFFICE OF PUBLIC AFFAIRS
February 16, 2005
JS-2255

The Honorable John W. Snow
Prepared Remarks
President's Advisory Panel on Tax Reform
February 16, 2005
Good morning; thank you all for being here. Thanks especially to the witnesses who
are offering their expert insight and advice today, and to the Tax Reform Panel
members who are giving so generously of their time and intellect to this historic
undertaking. I am deeply appreciative of your efforts, and I believe the American
people, and the American economy, will benefit greatly from your work.
I also want to commend Senators Mack and Breaux for their leadership on this
Panel. These gentlemen are terrific patriots and dedicated public servants; I thank
you both for taking the helm.
This country has a wonderfully dynamic, resilient and powerful economy. It is an
economy that is ever-changing to keep up with developments in technology,
international trade and world events. Unfortunately, our tax code has not kept up
with the changing times.
While America remains known for its economic flexibility and dynamism, our tax
code has grown larger, bulkier, more burdensome and lethargic with every passing
year.
The tax code is dreadfully murky in its complexity, but its size is clear and easy to
see. More than a million words long, the Internal Revenue Code and regulations
has more than doubled in terms of page-length over the past twenty years and
today's "short" income tax form takes more than 11 hours to prepare - about the
same as the "long form" did a decade ago.
The code is so filled with loopholes, exceptions and lengthy explanations that
individuals and businesses spend more than six billion hours every year on
paperwork and other tax headaches.
Imagine what this great country could do if we could get a few billion hours back.
And that's why we're here today. To talk about how we can take those billions of
hours away from the tax code nightmare and give them back to the terrific
productivity and creativity of the American people.
The President has asked that this bipartisan Panel work together to come up with
some options. He has asked that you be guided by the goals of increased fairness,
simplicity and ease of understanding, and economic growth and job creation. The
President has also asserted that a new code should carryon the good traditions of
recognizing the importance of homeownership and charity in our society.
I look forward to reviewing your proposals - which the President has asked to be
budget-neutral - later on this year. Tax reform is a key priority for the President,
and for the American people. I wish you well with this historic endeavor.
Thank you, and have a great meeting.

http://www.treas.gov/press/relcases/js2255.htm

4/25/2005

JS-2256: Testimony of Juan Carlos Zarate, Assistant Secretary Terrorist Finan...

:.. .-.

~,.

Page 1 of l)

. -' . _.. .
"

•."PR
ES=S~ROO~M·f~~
' --_. .. _. .

FROM THE OFFICE OF PUBLIC AFFAIRS
February 16, 2005
JS-2256
Testimony of
Juan Carlos Zarate, Assistant Secretary
Terrorist Financing and Financial Crimes
U.S. Department of the Treasury
Before the House Financial Services Committee
Subcommittee on Oversight and Investigations
Chairman Kelly, Ranking Member Gutierrez, and distinguished members of the
Subcommittee, thank you for this opportunity to appear before you today and
discuss the abuses by terrorists of non-traditional means of financing and the U.S.
government's efforts to combat them. This is an important and complex issue, and
I applaud the Subcommittee for its continued focus on the changing face of terrorist
financing. The Treasury Department particularly appreciates the leadership you
have provided, Madam Chair, on this and related issues.
Since September 11 th, we have concentrated our attention on financially isolating
those who support terrorism while building systems and capacities in the
international financial system to heighten the risk and cost associated with moving
tainted capital. Through an unprecedented global effort to shut down flows of
money to AI Qaida and like-minded terrorist groups, it is now harder, costlier and
riskier for terrorists to raise funds for their attacks. Terrorist assets and conduits of
funding have been frozen, shut down or otherwise neutralized. Key facilitators have
been captured or killed; otherwise sympathetic donors have been deterred or
isolated, and through training and technical assistance we have increased the
capacity of our global partners to combat terrorist financing.
In addition to concentrating on the formal mechanisms used by terrorists and
criminals to hide sources and eventual uses of money, we have known and
addressed the various informal ways that terrorist groups around the world raise
and move money. We have applied a consistent approach to dealing with the
relevant systemic risks attendant to different sectors of the international financial
system - both formal and informal - in order to bring greater transparency and
accountability to financial transactions globally.
To this end, we have supported and encouraged the worldwide expansion of the
regulatory oversight to previously unregulated sectors, garnered more information
from the newly regulated communities, and applied enforcement pressure where
needed to help ensure compliance. In many respects, these efforts have shone the
light of day on previously unseen or untended corners of the financial world.
Throughout this period, there has been a growing realization internationally that
securing the financial system and all vulnerable sectors - in addition to targeting the
sources of terrorist support - is an essential element of our fight against terrorism
and financial crimes. We must continue to build upon this strategy and systemic
platform to reduce the risks associated with the movement of money in the less
formal sectors of the international financial system.
AI Qaida and like-minded terrorist groups and their supporters will constantly search
for the weak links in the preventative systems that are put in place in the United
States and around the world. Thus, we are challenged to innovate ways of
securing the international financial system and disrupting the financing that fuels
terror, without doing damage to the workings of the free markets. This challenge

http://www.treas.gov/press/relcases/js2256.htm

4/25/2005

JS-2256: Testimony o1 Ju<ln Carlos Zarate, Assistant Secretary Terrorist Finan...

Page 2 ofY

extends to the less formal and previously unregulated sectors of the international
economy.

THE EVOLVING THREAT
In the world of counter-terrorism, we are constantly facing new challenges and
evolving threats. In this realm, we know that terrorist groups of all stripes use a
variety of mechanisms to raise and move money.
AI Qaida has used charities and deep-pocket donors to raise and move money.
Hamas holds fundraising events, where like-minded individuals are invited to
contribute funds ultimately meant for terrorist activities. The terrorist cell that
launched the devastating attacks on Madrid's train system raised money through
drug dealing. In the United Kingdom, terrorists engage in bank robberies to acquire
ready cash. Colombia's notorious FARC, ELN, and AUC narco-terrorists maintain
drug cartels and kidnapping operations in order to support their terrorist operations.
Still others, like Hezbollah, ETA, and Jemaah Islamiyah, employ front companies
and phony businesses to funnel cash or extortion taxes meant to subsidize their
terrorist networks.
These are just some examples that pOint to the real challenges that we face. Now
more than ever, it is clear that terrorist financing is not a monolithic force - but part
and parcel of a nexus comprised of adept financial criminals, corruptible financial
institutions, and complex ideological and financial networks. The terrorist financing
threat is evolving. Terrorist financiers are constantly adjusting to international
efforts to obstruct them and consistently depend on new and innovative ways to
bankroll the terrorist infrastructure.
U.S. and multinational victories against AI Qaida have had a scattering effect,
meaning that some of our terrorist enemies have dispersed into new and
incongruous clusters.
As AI Qaida balkanizes, the organizations and those localized cells that are aligned
with it are relying on additional and differentiated sources of financing to survive
and proliferate. These sources, we have found, include the corruption or abuse of
the charitable sector and various forms of financial crime. The means of moving
money across borders also varies - to include the use of cash couriers and
hawaladars.

INFORMAL AND ALTERNATIVE FINANCIAL SYSTEMS VULNERABLE TO USE
BY TERRORISTS AND CRIMINALS
In the larger campaign against terrorist financing, the U.S. government has focused
not simply on the formal financial systems used to raise and move money but on
the alternative mechanisms relied upon by terrorist groups around the world to help
support their activities. In a sense, as the U.S. government and its partners - in the
public and private sectors -- have made it more difficult for terrorist financiers and
money launderers to use banks, terrorist groups have begun to rely even more so
upon less formal methods to move money.
One of the alternatives terrorists have employed to move money is frequently
termed as alternative remittance systems (ARS) -- also known as informal value
transfer systems (IVTS), parallel banking, or underground banking. In a sense,
referring to these alternative systems as "non-traditional" is somewhat misplaced.
It is more precise to think of these as systems outside of any regulated financial
system at all. In fact, many of the so-called "non-traditional" systems we are
talking about today are quite traditional within the cultures and norms of daily
business in various corners of the world.
There are a variety of non-traditional "systems." Some of them, such as hawala
and the Black Market Peso Exchange, are well-known to this Subcommittee.
Others, such as trafficking in precious gems and the laundering of diamonds are
gaining increased recognition. These diverse systems, however, do have

http://wWW .treas.gov Ipress/re Icases/j s2256..htrn

4/25/2005

JS-2256: Testimony of Juan Carlos Zarate, Assistant Secretary Terrorist Finan...

Page 301'<)

commonalities. Virtually all of them may use trade to transfer value or provide
counter valuation in order to "balance the books." In addition, we have found that
these networks operate and depend on trust. Unfortunately, this high degree of
trust, often based on long-standing ethnic, family, clan or tribal ties, obstructs those
trying to understand and investigate these networks and design effective policies
and countermeasures to terrorist and criminal abuse.
Our approach with these sectors has been to bring them into the light of the
regulatory world - through laws and outreach - and to enforce, with the help of the
appropriate agencies, including the federal regulatory agencies and the Department
of Justice and the Department of Homeland Security, those laws and regulations
accordingly to ensure a culture of compliance with recordkeeping, due diligence,
and broad anti-money laundering controls. Increased transparency and
accountability, concomitantly, enhances our ability to target corrupted actors within
these systems.

Charities
Perhaps the most important non-traditional method used by terrorist organizations
to raise and move funds and otherwise support terrorist activity is through the
corruption and abuse of charities. Numerous instances have come to light in which
mechanisms of charitable giving have been used to provide a cover for the
financing of terror. In certain cases the charity itself was a mere sham that existed
simply to funnel money to terrorists. However, often the abuse of charity has
occurred without the knowledge of donors, or even of members of the management
and staff of the charity itself. Besides direct financial support, some charities also
provide cover and logistical support for the movement of terrorist operatives, and
others facilitate terrorist recruitment by disseminating terrorist agendas or
ideologies.
Curtailing such corruption and abuse is a critical element of our general national
and international strategy to combat terrorist financing, as underscored in the 2002
and 2003 National Money Laundering Strategies, numerous USG counter-terrorism
strategies, and various international resolutions and standards. Efforts across the
U.S. government have produced considerable results in the form of targeted actions
to identify, disrupt and dismantle terrorist financing through charitable
organizations. The U.S. has designated five U.S.-based charities, including thirtyfive additional international charities for terrorist financing activity; prosecuted the
leader of a U.S.-based charity for fraud and racketeering based on terrorist
financing activity; indicted the charity and its leadership on terrorist financing-related
charges; and investigated dozens if not hundreds of additional charities suspected
of terrorist financing activity. Many of these investigations are ongoing.
These successful targeted actions are the product of sustained interagency
coordination and collaboration. We are also engaging in coordinated efforts to
improve our systemic oversight, investigation, outreach and international
capabilities. At the federal level, oversight and transparency of the charitable sector
is a primary concern of the Tax Exempt and Government Entities Operating
Division (TEGE) of the Internal Revenue Service (IRS). TEGE examines and
recognizes charities that qualify for tax exempt status, based on information
submitted by charities in their application forms and annual returns. The civil
examiners in TEGE have a unique familiarity with the charitable sector and the
reporting, record keeping and disclosure obligations of the sector under the federal
income tax laws.
This experience is critical to the criminal investigative efforts of the Criminal
Investigative Division (CID) of the IRS. The IRS has established a number of
mechanisms to ensure that TEGE and CID appropriately communicate and work
together on potential cases involving terrorist financing. For example, TEGE has
recently revised the application form for tax-exempt status for charities (Form 1023)
to include more relevant investigative information for criminal investigators in
terrorist financing and criminal cases. TEGE has also established a Screening
Center to process leads from all sources, including state and local officials, on
potentially abusive charities.

http://www.treas.gov/press/releases/js2256.htm

4/25/2005

JS-2256: Testimony ol Juan Carlos Zarate, Assistant Secretary Terrorist Finan...

Page -+ of ')

Finally, TEGE has created a Media Relations Screening Office to identify and
examine public reports on abuses within the charitable sector.
Experience gained during the past two years has also identified areas where CID
can have a greater impact addressing terrorism related financial issues without
duplicating the efforts of any other law enforcement agency. CID has created a
Lead Development Center (LDC) to pilot a counter-terrorism project focusing on
charitable abuse by using advanced analytical technology, along with subject
matter experts, to support ongoing investigations and proactively identify potential
patterns and perpetrators. The LDC is comprised of a staff of CID Special Agents,
investigative analysts, and representatives from TEGE, who research investigative
leads and field office inquiries concerning terrorism investigations. The LDC
integrates its work within the larger U.S. law enforcement community, largely
through CID representatives on Joint Terrorism Task Forces (JTTFs) led by the
FBI. The target information packages developed by the LDC are sent to the JTTF
or IRS field office that requested the analysis and to such other law enforcement
entities as may be appropriate and consistent with the statutory limitations on
disclosure.
The LDC also serves as a central point to de-conflict related investigations among
multiple IRS field offices, and is developing distinctive analytical capabilities to
include link analysis, data matching, and pro-active data modeling. Using data from
tax-exempt organizations and other tax-related information that is protected by strict
disclosure laws, the LDC can analyze information not available to or captured by
other law enforcement agencies. By combining that data with public source
information and data gathered by other criminal investigations, the LDC can
perform a complete analysis of all financial data pertinent to specific targets and
restrict its dissemination as required by the tax disclosure laws and the rules of
grand jury secrecy. This research, technology, and intuitive modeling, coupled with
CI's financial expertise, will help maximize the impact of CI resources against
sophisticated terrorist organizations.
Internationally, we are working with our counterparts in Finance Ministries around
the world to promote better oversight, investigation and protection of charities from
terrorist abuse. Through the Financial Action Task Force (FATF), we have issued a
Best Practices Paper to FATF Special Recommendation VIII (SR VIII), describing
steps that charities and governments can take to attack and protect against terrorist
abuse. We have also launched an internal review process through the FATF's
Working Group on Terrorist Financing to improve member countries' understanding
of their charitable sectors and to identify existing strengths and weaknesses in
combating terrorist abuse of charities. We are globalizing this process by extending
this exercise to the FATF-style regional bodies. Based on the conclusions drawn
from this exercise, we are now working with our counterparts in the FATF to
develop further interpretive guidance to SR VIII, which will strengthen the
capabilities and commitments of member states in combating terrorist abuse of the
charitable sector. We are also continuing to work with the interagency community
to deliver bilateral assistance to countries to improve their oversight and
investigation capabilities with respect to the charitable sector.
In addition to these oversight, investigative, international, and information-sharing
efforts, the Treasury Department is engaged in sustained outreach with the
charitable sector to develop protective measures against potential terrorist and
criminal abuse of the sector. In April 2004, the Treasury Department hosted an
Initial Outreach Event with representatives from across the charitable sector to
discuss Treasury's Anti-Terrorist Financing Guidelines: Voluntary Best Practices
for U.S.-Based Charities and related issues of terrorist finanCing in the charitable
sector. Based on this meeting, the Treasury Department is continuing to work with
the sector to refine these guidelines and develop better feedback for the sector on
terrorist financing issues. The Treasury Department is also working with private
sector watchdog groups in the charitable sector to promote awareness of terrorist
financing issues and to expand this oversight mechanism to vulnerable donor and
charitable communities. Finally, Treasury is also working with other U.S. agencies
and the charitable sector to examine ways of promoting charitable assistance
abroad by reducing the threat of terrorist abuse. We will continue to work with the
interagency community and the charitable sector to ensure that our resources,
authorities and relationships are fully applied to attack and protect against terrorist

http://www.treas.gov/press/relcases/js2256.htm

4/25/2005

JS-2256: Testimony of<BR~>JuJn Carlos Zarate, Assistant Secretary Terrorist Finan...

Page 501'0

abuse.

Hawalas
Hawala is a "non-traditional" value transfer system, which does not rely on the
physical movement of money in order to transfer value across borders between
trusted hawaladars (or brokers). Instead, transactions are conducted between
trusted networks or brokers in a manner that allows the fluid delivery of cash or
valued goods to remote parts of the world, which are often not yet accessed by the
banking system. These transactions tend to be recorded by hawaladars with some
diligence for business record keeping purposes, and settlements of the debts owed
are often conducted via trade transfers or bank transactions.
Although overwhelmingly used for legitimate purposes such as the remittance of
immigrant wages, hawala networks have also been utilized by those who finance
terrorism, and their previously unregulated and informal status around the world
made this sector particularly vulnerable to abuse. Treasury is confronting the
potential misuse of this hawala system at multiple levels.
Internationally, we have worked with international counterparts to expand the
regulation of hawaladars overseas. Within the Financial Action Task Force, we
worked in October 2001, to ensure that the international community would begin to
address terrorists' abuse of alternative remittance systems. We helped establish
and have driven the implementation of the FATF's Special Recommendation (SR)
VI. SR VI states that each country should ensure that individuals and entities that
provide money transmission services are licensed or registered and otherwise
subjected to the international standards on combating money laundering and
terrorist financing, represented by the FATF 40 Recommendations and Nine
Special Recommendations. This important step effectively globalized the
international effort to extend government oversight to alternative remittance
systems.
This effort has been taken on in other international fora. In May 2002, the Central
Bank of the United Arab Emirates hosted the first international conference on
hawala to discuss their characteristics and to coalesce an international approach to
dealing with this unregulated sector. The resulting Abu Dhabi Declaration on
hawala called for countries to put in place effective but not overly restrictive
regulations on the practice of hawala. As a result, the United Arab Emirates and
other countries like Pakistan have established regulatory systems - including
licenSing and registration program -- for the large hawala community. Progress in
the UAE and other countries towards bringing the hawala system into the light of
government supervision and oversight was further discussed and internationalized
at 2nd Hawala Conference in Abu Dhabi last year and will continue this April at the
3rd Annual Abu Dhabi Conference on hawala.
Domestically, we have instituted federal regulations to cover the registration of
money service businesses, to include hawalas in the United States. As part of the
process of registration, we have engaged in a public outreach campaign to make
the registration requirements known (especially in ethnic communities), and the law
enforcement community has taken appropriate steps to target and prosecute
unregistered money service businesses. The process of bringing into the regulated
community a previously unaddressed sector of the financial system is still
underway, and a major challenge for us remains the identification and registration
of the hawala sector in the United States.

Black Market Peso Exchange (BMPE)
The BMPE - which is a trade-based system of moving value -- is another alternative
value transfer system, used primarily in South America and the Caribbean. This
system is often associated most closely with the financing and laundering of
proceeds for narcotraffickers in Colombia. BMPEs have become popular transit
points for drug lords to launder their money from U.S. dollars to Colombian pesos.
This trade-based innovation has now been relied upon for a generation. Drug

http://www.treas.gov/press/relcases/js2256.htm

4125/2005

JS-2256: Testimony ol<BR:->Juan Carlos Zarate, Assistant Secretary Terrorist Finan...

Page 6 ofl)

money laundering used to be conducted simply through large deposits of cash into
US banks that were then wire-transferred to Colombian institutions. But as U.S.
and international authorities cracked down, the drug traffickers were forced to
innovate and turned to peso brokers to subvert new controls meant to stop them.
Corrupt peso exchanges would sell the drug cartels' U.S. dollars to Colombian
businesses, who would then buy American goods. Once the American goods were
resold, this time for Colombian pesos, the companies could pay the broker back.
After taking a healthy commission for his work, the peso broker could then return
the pesos to the drug cartels themselves.
This is a cycle of dangerous money laundering that U.S. and international
authorities have been fighting since the 1990's, through investigations, led by the
Department of Homeland Security's Immigration and Customs Enforcement (ICE),
prosecutions, and effective money freezes. There have been numerous studies of
this system, and its longevity is a testament to its efficiency and usefulness to those
attempting to evade a host of laws and taxes.
The efforts to ferret out the illicit transactions among legitimate trade in the region
are now enhanced by greater due diligence on currency exchange houses and
suspicious trade transactions - as well as by heightened standards in the region
related to money laundering and terrorist financing.
Cash Couriers

Another terrorist financing threat exists in the movement of bulk cash across
borders, and particularly, the use of illicit cash couriers. As our efforts choke off
terrorists' ability to abuse the formal financial sector and informal value transfer
systems, AI Qaida and other terrorist groups have increasingly resorted to cash
couriers to move their funds across borders in advance of terrorist objectives and
operations.
Treasury and the interagency community, particularly ICE, have worked with our
international partners to identify and attack the illicit use of cash couriers and the
smuggling of bulk cash. On October 22, 2004, FATF issued Special
Recommendation IX (SR IX), under which member countries should ensure that
they have measures in place to detect the physical cross-border transportation of
currency and bearer negotiable instruments. SR IX also, among other things,
provides that countries should have competent authorities in place to stop or
restrain currency and bearer negotiable instrument movements suspected of being
related to terrorist financing or money laundering. Moreover, countries must
maintain appropriate sanctions to deal with individuals that make false declarations
or disclosures regarding the movement of bulk cash or bearer negotiable
instruments. To further assist countries in developing and implementing effective
measures to identify and intercept illicit cash couriers and bulk cash smuggling, we
have worked through the FATF to issue an Interpretive Note and Best Practices
Paper to SR IX. This guidance will assist our efforts to enhance global capability to
attack terrorist financing or illicit finance through cash couriers or bulk cash
smuggling.
Precious Commodities

Several reports have underscored the vulnerability of the precious commodities
sector as a possible means of terrorist financing. The illicit diamond trade provides
an instructive illustration of how terrorists could abuse the precious commodities
industry to fund their efforts. The diamond industry describes the movement or flow
of diamonds from the point of origin to the point of final use as a "pipeline."
Unfortunately, the legitimate diamond processing steps of mining, trading, cutting,
polishing, and retailing can be abused by corrupt regimes and criminal
organizations to place, layer, and integrate illicit diamonds. To combat these risks,
we must improve the oversight and transparency of the diamond and precious
commodity industries through the development of effective international standards
and domestic regulation, and we must identify and disrupt illicit actors within the
system through targeted actions.

http://www.treas.gov/press/relcases/js2256.htm

4/25/2005

JS-22S6: Testimony o1<BR">Juan Carlos Zarate, Assistant Secretary Terrorist Finan...

Page 7 01'<)

The U.S. government and the international community have worked together with
industry to establish international standards that address the particular concerns
regarding "conflict" diamonds used to finance wars and other criminal or violent
activity. The resultant Kimberley Process is an excellent example of industry,
government, and NGO partnership that has helped focus attention and regulatory
countermeasures on conflict diamonds.
The Kimberley Process defines guidelines in an effort to document the movement
of rough stones through the diamond pipeline and to limit trade to countries
participating in the Kimberly Process. The Kimberley Process requires that each
shipment of rough diamonds being exported and crossing an international border
be transported in a tamper-resistant container and accompanied by a government
validated Kimberley Process Certificate, which is uniquely numbered and includes
the description of the shipment's contents.
The latest Kimberley Process plenary meeting that took place in Canada in October
2004 noted significant progress in the implementation of the Kimberley Process
Certification scheme. Kimberley Process Participants now encompass the
overwhelming majority of the producers and traders in rough diamonds. Although
the Kimberley Process has made notable progress in counteracting the trade in
conflict diamonds, the procedures were not designed specifically to combat
diamond laundering or other financial crimes associated with diamonds. For
example, the trade in rough diamonds and the mixing of parcels before being
imported into a country for finishing and sale is a recognized vulnerability. There
are reports that in some locations that Kimberley certificates can be purchased on
the black market. Moreover, the trade in polished stones is not subject to the
Kimberley Process.
The Treasury Department is responding to identified gaps in the prevention of
financial crimes related to precious commodities, particularly concerns of potential
terrorist financing, through sustained industry outreach and the development of
effective regulation. In March 2004, William Fox, the Director of Treasury's
Financial Crimes Enforcement Network (FinCEN), addressed the 3rd Annual
Meeting of the World Diamond Council, in Dubai. Director Fox and other Treasury
officials have subsequently been engaged with industry representatives in other
forums. This continuous dialogue has informed Treasury's ongoing development of
a rule extending anti-money laundering obligations to dealers in precious
commodities, including diamonds.
FinCEN published a notice of proposed rulemaking in the Federal Register on
February 23, 2003. The proposed rule set forth minimum anti-money laundering
programmatic requirements applicable to dealers in precious metals, stones, or
jewels to prevent money laundering or terrorist financing. This includes formal riskbased policies and procedures, with internal controls, reasonably designed to
prevent the dealer from being used to facilitate money laundering or the financing of
terrorist activities. Dealers are also encouraged to adopt procedures for voluntarily
filing Suspicious Activity Reports with FinCEN and for reporting suspected terrorist
activities to FinCEN. FinCEN will be issuing a final rule shortly.
In addition to these outreach and oversight measures, Treasury is also working with
the interagency community to identify and shut down illicit financiers who have
penetrated the diamond and precious commodity industries in support of criminal
activities. Under Executive Order 13348, the Department is pursuing economic
sanctions against members of the former Charles Taylor regime and a number of its
supporters who financed criminal and terrorist activity though engagement in the
diamond and timber industries, including a key Taylor supporter - the Russianbased arms trafficker Viktor Bout.
Arguably the largest private arms dealer in the world today, Bout uses his fleet of
Soviet-era cargo aircraft to supply guns and bullets by the ton, as well as advanced
equipment such as attack helicopters to anyone willing to pay his price. In Liberia
and elsewhere, Bout's organization has reportedly accepted payment in diamonds
which can be easily and profitably unloaded in the Middle East or Europe.
All of these efforts - using a variety of tools available to us -- form part of a

http://www.treas.gov/press/relcases/js2256.htm

4/25/2005

JS-2256: Testimony of Juan Carlos Zarate, Assistant Secretary Terrorist Finan...

Page (-) oft)

comprehensive strategy to deal with the vulnerabilities associated with the precious
commodities market.

Trade-Related Links
We are determined to combat terrorist financing, regardless of the tactics our
enemies choose to employ. As noted above, our varied efforts directed against the
abuse of less formal systems and sectors are targeted in several different areas.
Treasury recognizes that, similar to other fronts in the war against terrorist
financing, there is no single solution or countermeasure. We must use all tools
available to bring these sectors into the mainstream while ferreting out those bad
actors and transactions that are abusing the systems that millions around the world
rely upon for their well being. We have done this under the expansion of the Bank
Secrecy Act - as laid out in the USA PATRIOT Act - and with our international
engagement, which has led to better systems, capacity, and expectations of
financial transparency and accountability.
In all of this, we must recognize that our terrorist enemies and their supporters are
not inert but can adapt to the weapons we deploy against them.
With this in mind, we are looking to other financial systems and sectors around the
world that could be used not only to skirt financial regulations but also to facilitate
criminal activity and possibly terrorism. As I indicated earlier, we have helped usher
the concept of financial transparency for the movement of currency and other
financial products. Yet we have found that the "non-traditional" methods of
transferring value we are concerned with are not adequately captured or monitored
by "front door" financial reporting requirements and regulations. It may now be time
to address creatively the "back door" of these systems - meaning the misuse of
trade, which virtually all of the alternative remittance systems share in common.
Our experiences demonstrate that an effective way to analyze and investigate
suspect trade-based activity is to have systems in place that can monitor specific
imports and exports to and from given countries. There is growing worldwide
recognition of entrenched patterns of trade fraud. For example, the Kimberley
Process was created - in part - due to findings that massive quantities of conflict
diamonds from non-diamond producing West African countries were being exported
to Belgium. The former U.S. Customs Service (now known as ICE) has used the
same technique of examining trade anomalies to combat the Colombia black
market peso exchange, to examine suspect gold shipments from non-gold
producing countries in the Caribbean, and to take enforcement action against the
illegal transshipment of textiles.
We will continue to work with our colleagues from throughout the U.S. government,
and particularly ICE, to detect trade anomalies that point us to fraudulent value
transfers, money laundering, terrorist financing, and other financial crimes.
CONCLUSION
As the war against terrorism moves beyond the initial phases, we must continue to
match the adaptations of terrorist financiers, money launderers, and other financial
criminals with our own enhanced powers and steadfast resolve. Every day it
becomes more apparent that following dirty money and attacking its illicit sources is
an essential part of winning the financial war on terrorism. If we scatter the
terrorists, deny them cash, and smother their attempts to funnel their ill-gotten gains
through the international financial system, we can make their lives all the more
miserable, and their despicable efforts all the more powerless.
Madam Chairman, we appreciate the Subcommittee's continued support as we
endeavor to further enhance our varied efforts to combat all types of terrorist
financing. We look forward to continuing our work with you on these issues, and I
am happy to answer your questions.

http://www.treas.gov/press/re]cases!js22.56 htm

4/2512005

JS-2257: Opening Statement by Senator Connie Mack Chairman, President's Advisor... Page 1 of 1

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

February 16, 2005
JS-2257
Opening Statement by Senator Connie Mack
Chairman, President's Advisory Panel on Federal Tax Reform
First Meeting February 16, 2005
Introduction
Today's meeting marks the beginning of the Panel's important work to explore ways
to reform the Federal tax code. I believe that it is a good sign that we are holding
our first meeting to discuss reform in the building that bears the name of Ronald
Reagan, who initiated the last bipartisan effort to reform the tax code twenty years
ago. As we will hear today, a lot has changed since then. This panel will take a
fresh look at the existing tax code and will formulate options for making the tax
system simple, fair, and
productive. I am privileged to serve as the Panel's chairman and would like to thank
Vice-Chairman Breaux and the rest of the Panel for agreeing to help tackle this
challenging task.
REPORTS

•

Statement by Senator Connie Mack

http://www.treas.gov/press/relcases/js2257.htm

4/25/2005

President's Advisory Panel on

Federal Tax Reform
TI\XREFORMPI\NEL.GOV

FOR IMMEDIATE RELEASE
February 16, 2005

Contact: Jeff Kupfer
202-622-0064

OPENING STATEMENT BY SENATOR CONNIE MACK
Chairman, President's Advisory Panel on Federal Tax Reform
First Meeting -- February 16, 2005
Introduction
Today's meeting marks the beginning of the Panel's important work to explore ways to
reform the Federal tax code. I believe that it is a good sign that we are holding our first
meeting to discuss reform in the building that bears the name of Ronald Reagan, who
initiated the last bipartisan effort to reform the tax code twenty years ago. As we will
hear today, a lot has changed since then. This panel will take a fresh look at the
existing tax code and will formulate options for making the tax system simple, fair, and
productive. I am privileged to serve as the Panel's chairman and would like to thank
Vice-Chairman Breaux and the rest of the Panel for agreeing to help tackle this
challenging task.
We have an ambitious agenda today. First, I will provide some background about what
the Panel hopes to accomplish and how we intend to accomplish it. In addition, we will
be hearing brief comments from the members of the Panel.
I am very honored that Treasury Secretary John Snow is here as we begin this
important work. In addition to Secretary Snow, we will hear from four distinguished
witnesses. Our first witness will help us put our current tax system in context and
provide us a better understanding of how we got to where we are today. Our second
witness will provide needed background about tax system design and valuable insights
into how to think about choosing a base for taxation. He will explain the difference
between a tax on income and a tax on consumption. Finally, our last two witnesses will
describe how the choice of an income tax base or a consumption tax base impacts the
overall function of the tax system and the advantages and disadvantages of each
system in terms of simplicity, fairness and economic growth.
**MORE**

-1-

Our Mission
The President has stated clearly that tax reform is a key priority and formed this Panel
to advise the Secretary of the Treasury on options to reform the tax code. We have
been directed to provide the Secretary our findings by July 31. To accomplish this task,
we intend to do our work in two stages. First, we will take a comprehensive look at the
existing tax system. Our objective is to make sure that we have a full understanding of
the current problems in the tax code - specifically its complexity, its impact on economic
growth, and its perceived unfairness.
After we have defined the problems that need to be addressed, we will turn to a
consideration of options for reform. These options may include making modifications to
improve current law, overhauling the existing system, or replacing the current structure
and starting over. As part of our effort, we will study the major reform proposals that
have been offered in the past, as well as any new ideas.
As we move forward, we intend to hold a number of public meetings like this one. We
will announce the dates and locations of those hearings soon. We anticipate holding
those meetings in Washington, D.C., and in other parts of the country.
It is vitally important to all of us that the public know what we are doing and have a
chance to provide input. We have established a website - www.taxreformpanel.govthat provides information about our activities. We will also use that website to receive and post - public comments.
We welcome input throughout the process. At the same time, we will also be requesting
comments on specific topics. In connection with the first stage of our work - defining the
problems in the tax code - we are making our first specific request. We ask that
interested parties submit comments to the Panel about:

Headaches that taxpayers - both individuals and businesses - face
because of the existing system. By headaches, we mean
unnecessary complexity and burdens.

Aspects of the tax system that you believe are unfair.

Specific examples of how the tax code distorts important business
or personal decisions.

Goals that the Panel should try to achieve as we evaluate the
existing tax system and recommend options for reform. At this
point, we are not looking for specific proposals.

**MORE**

-2-

There will be additional requests for comments. For example, when we move to the
second stage of the process and begin considering options for reform, we will make
specific requests for suggestions, alternatives, and proposals for improving the tax
system.
Why Reform is Necessary

There is nearly universal agreement that we must reform the tax system. The tax code
is a complex and cluttered mess that discourages economic growth and vitality. Our tax
laws penalize hard work, discourage savings and investment, and hinder the
competitiveness of American businesses abroad.
Compliance with the tax code is complicated and burdensome. It is also a waste of our
resources. Nobody likes paying taxes. But instead of making it as easy as possible,
the tax code is an obstacle for those who pay their fair share. It is estimated that
individuals and businesses spend at least 6 billion hours each year just to file their
taxes.
More than half of Americans use a paid preparer to file their taxes. In fact, costs
incurred by individuals in connection with their taxes exceed $100 billion. These
numbers are staggering. Americans should not have to hire an expert to help them
calculate their taxes. The problems of complexity are not limited to individual taxpayers,
however. In fact, the compliance burden on businesses - both large and small - is
enormous and adds another $20 to $25 billion to the total cost of compliance.
One particular problem that cannot be ignored is the rapidly growing reach of the
Alternative Minimum Tax. The AMT imposes a second tax system that is separate, but
parallel, to the regular income tax system and requires that taxpayers compute their
taxes twice. The AMT was enacted in the 1960s to target a small group of high-income
taxpayers who were avoiding paying all income taxes. Since then, changes to the AMT
and inflation have caused it to apply to large numbers of middle-class taxpayers by
denying families benefits that are available under the regular tax system. The number of
Americans who will be confronted by the AMT will grow from 3.8 million this year to 51
million taxpayers by 2015.
Conclusion

Americans are demanding a better tax system. It should be simple, transparent and
easy to understand. It should be stable and predictable - in order to permit informed
planning and decision making. It should encourage economic growth. And it should
minimize the costs of compliance and intrusion into the lives of taxpayers. We look
forward to completing this important task - and to presenting options that will ensure a
better tax system for ourselves and for future generations.

####

-3-

JS-2258: Opening Statement by Senator John Breaux Vice-Chairman, President's A...

Page 1 of 1

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

February 16, 2005
JS-2258
Opening Statement by Senator John Breaux
Vice-Chairman, President's Advisory Panel on Federal Tax Reform
February 16, 2005
Thank you. I look forward to working closely with Chairman Mack on this worthwhile
task to find ways to reform and simplify our tax system. Someone once said that tax
simplification is complicated stuff. I agree, but I believe that we have an excellent
opportunity to meet this challenge. To accomplish any significant change, it is vital
that it be done on a bipartisan basis. I am pleased that the President assembled
this panel to begin the process of working together to reform our tax system.
REPORTS

http://www.treas.gov/press/relcases/js2258.htm

4/25/2005

Llo~

President's Advisory Panel on

Federal Tax Reform
TAXREFORMPI\NEL.GOV

FOR IMMEDIATE RELEASE
February 16, 2005

Contact: Jeff Kupfer
202-622-0064

OPENING STATEMENT BY SENATOR JOHN BREAUX
Vice-Chairman, President's Advisory Panel on Federal Tax Reform
First Meeting -- February 16, 2005
Thank you. I look forward to working closely with Chairman Mack on this worthwhile
task to find ways to reform and simplify our tax system. Someone once said that tax
simplification is complicated stuff. I agree, but I believe that we have an excellent
opportunity to meet this challenge. To accomplish any significant change, it is vital that
it be done on a bipartisan basis. I am pleased that the President assembled this panel
to begin the process of working together to reform our tax system.
The ever increasing complexity of our tax laws imposes an unnecessary burden on
Americans. In 1940, it took only two pages to explain how to fill out a form 1040.
Today, the 1040-EZ, or short form, is accompanied by 36 pages of instructions. For
more than 80 million taxpayers who filed the long form for 2003 - with its 70 lines, 30
commonly used schedules and more than 130 pages of instructions - the task was
even more overwhelming. It's time to think seriously about whether the tax code needs
to be so complicated.
This complexity has real consequences. By the time we started the last major reform
effort in the 1980s, the vast majority of the public had come to believe that their

neighbors were avoiding paying their fair share. It is my view that we again find
ourselves in that situation. Some have even said that we are "moving toward a crisis of
compliance with the income tax." Simplifying the tax code will make it easier for
taxpayers to comply with the tax laws, and will restore confidence in the tax system.
We therefore must take action soon before our system of voluntary compliance is
undermined.
But reform is not just about the possibility of eliminating mountains of paperwork - it's
also about global competition. From the vantage point of today's global marketplace,
our tax rules are outdated. It is a problem that grows worse with each passing year as
the world's economies become more closely interrelated. Now is the time to take a
critical look at whether our tax code is an obstacle to U.S. businesses - both here at
home and abroad.

**MORE**

- 1-

Over the next six months, we will have a real discussion about what kind of tax system
we want in this country. This dialogue will involve many voices. We will hear from
academic experts, business leaders and taxpayers who are doing their best to comply
with our tax laws. We must first study the problems in the current tax code and then
explore available options to create a system that is that is simpler, fairer and more
productive. I am honored to serve with the other panel members and look forward to
finding ways to improve the lives of Americans.
####

-2-

JS-2259: Fad Shed.;br->The President's Advisory Panel on Federal Tax Reform Holds Fi... Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on tillS page. clown/oad the free Ali(l/li/" ArIO/IHt(r') Reacir,,'r.

February 16, 2005
JS-2259

Fact Sheet
The President's Advisory Panel on Federal Tax Reform Holds First Meeting
OVERVIEW:
The President's Advisory Panel on Federal Tax Reform held its first meeting in
Washington, DC, today. President Bush established the Panel to make
recommendations on ways to create a simpler, fairer, and more pro-growth tax
system. The panel is led by former Senators Connie Mack and John Breaux, and
consists of a distinguished group of experts and experienced people from both
parties.

REPORTS
•

Fact Sheet The Presldpnt's AVlsory Panel on Federal Tax Reform Holds
First Meeting

http://www.treas.gov/press/relcases/js2259.htm

4/25/2005

President's Advisory Panel on

Federal TQJ( Reform
TAXREFORMPANEL.GOV

February 16,2005

FACT SHEET
The President's Advisory Panel on Federal Tax Reform Holds First Meeting
OVERVIEW:
The President's Advisory Panel on Federal Tax Reform held its first meeting in Washington, DC,
today. President Bush established the Panel to make recommendations on ways to create a
simpler, fairer, and more pro-growth tax system. The panel is led by former Senators Connie
Mack and John Breaux, and consists of a distinguished group of experts and experienced people
from both parties.
America has a growing, dynamic, and changing economy - but our tax code has not kept up with
the times. The current tax code is a maze of special interest loopholes and complex provisions
that cause America's taxpayers to spend more than six billion hours every year on paperwork and
other headaches. President Bush believes that America's taxpayers deserve better. The tax
panel is part of President Bush's pledge to lead a bipartisan effort to reform and simplify the tax
code.
The time that people spend complying with an overly complex tax code is a waste of resources
that has been growing over time.
•
•
•
•
•
•

The Internal Revenue Code contains more than a million words.
The number of pages in the Internal Revenue Code and regulations has more than
doubled over the past twenty years.
In 1940, it took only two pages of instructions to fill out the Form 1040; today, the 1040 EZ or "short form" is accompanied by 36 pages of instructions.
Today's "short" income tax form takes more than 11 hours to prepare - about the same
as the "long form" did a decade ago.
It takes 12 pages of instructions to calculate the Earned Income Tax Credit - a basic
element of income-support for the working poor.
By 2010, more than one in five taxpayers will be forced to calculate their income taxes
twice - once for the regular income tax and once for the Alternative Minimum Tax - and
then pay the greater amount. The number of affected people will continue to grow over
time.

**MORE**

President Bush's Action to Promote Tax Reform
•
•

•

President Bush announced that he is making tax reform a key priority of his second term.
On January 7, 2005, the President began this effort by creating, by Executive Order, a
bipartisan panel to advise the Treasury Secretary on options to fundamentally reform the
tax code to make it simpler, fairer, and more growth oriented.
The President's goals are to make the tax code simpler and to increase long-run
economic growth and job creation. Taxes should be applied fairly, and reform should
recognize the importance of homeownership and charity in our American society.

Background: The President's Advisory Panel on Federal Tax Reform
The panel will hold public meetings and seek input from individuals, businesses, and
associations and organizations. It will also seek input from Members of Congress.
At today's first meeting, the panel heard from Treasury Secretary John Snow and from other
witnesses. The witnesses described the history of the federal income tax and described the
differences between income and consumption taxes.
The panel will hold a series of public meetings during the next few months. The next meeting
will take place on March 3, 2005 in Washington DC.
•

The Panel will examine the exitsing system and then formulate options for reform, which
will be presented to the Secretary of the Treasury by July 31, 2005. This advice will
inform the Secretary in his efforts to make recommendations to the President.
####

JS-226U: MEDIA ADVISORY~BR>Secretary Snow To Visit Wall Street This Week to ...

Page 1 of 2

FROM THE OFFICE OF PUBLIC AFFAIRS
February 16, 2005
JS-2260

MEDIA ADVISORY
Secretary Snow To Visit Wall Street This Week to Discuss Security
Treasury Secretary John W. Snow this week will meet with financial sector leaders
about the need to strengthen and preserve the U.S. Social Security system. He will
travel to New York City on Thursday and Friday, February 17-18.
"The Social Security program was one of the great moral successes of the 20th
century," said Secretary Snow. "While Social Security is sound for today's seniors
and for those nearing retirement, it needs to be fixed for younger workers - our
children and grandchildren."
The government has made promises it cannot afford to pay for with the current payas-you-go system. In 1950, there were 16 workers to support everyone beneficiary
of Social Security. Today, there are only 3.3 workers supporting every Social
Security beneficiary. In 2008 - just three short years from now - baby boomers will
begin to retire. And over the next few decades, people will be living longer and
benefits are scheduled to increase dramatically. By the time today's youngest
workers turn 65, there will only be 2 workers supporting each beneficiary. Under
the current system, today's 30-year-old worker will face a 27% benefit cut when he
or she reaches normal retirement age.
During his visit, the Secretary will discuss President Bush's pledge to work with
Congress to find the most effective combination of reforms.
"As we fix Social Security, we must make it a better deal for our younger workers by
allowing them to put part of their payroll taxes in voluntary personal retirement
accounts," Secretary Snow said. "The money would go into a conservative mix of
bond and stock funds that would have the opportunity to earn a higher rate of return
than anything the current system could provide. That savings would provide a nest
egg to supplement that worker's traditional Social Security check, or to pass on to
his or her children."
At the conclusion of his trip to New York, Secretary Snow will tour a trading floor
and then conduct a press availability to discuss the need to fix the Social Security
system as well as his meetings on Wall Street.
The following event is open to media with official media credentials:

Friday, February 18
Tour of Lehman Brothers' trading floor
Lehman Brothers
745 7th Avenue (between 49th & 50th)
New York, NY
11 :00 am EST
** Media must RSVP to Kerri Cohen, 212-526-4092
** Media must arrive by 10:45 am in main lobby
** Press availability will occur immediately following the tour

http://www.treas.gov/press/relcases/js2260.htm

4/25/2005

JS-2261: Statement of Harold Damelin Before the United States Senate Comm ... Page 1 of 2

FROM THE OFFICE OF PUBLIC AFFAIRS
February 17, 2005
JS-2261
Statement of Harold Damelin
Before the United States Senate
Committee on Finance
Chairman Grassley, Senator Baucus, and Members of the Committee on Finance,
thank you for the opportunity to appear before you today and provide testimony. I
am honored to be the President's nominee to serve as the Inspector General of the
Department of the Treasury. This is the second time President Bush has
nominated me to serve in the United States Government. Since the Senate
confirmed my previous nomination, I have served as Inspector General of the Small
Business Administration for nearly two years.
If you will permit me, I would like to take a moment to introduce the members of my
family. My wife, Harriet, is here with me today. We are also blessed with two
children, Scott and Rachel, their respective spouses, Fara and Rob, and three
beautiful grandchildren, Leah, Rebecca and Max.
By way of background, I was born and raised in the Boston, Massachusetts area,
and attended Boston College, where I majored in accounting, and Boston College
Law School. Shortly after graduating from law school and completing my Army
officers basic training course at Fort Gordon in Georgia, I moved with my family to
the Washington, D.C. area where I have worked in a number of different positions
over the past 32 years, 18 of which were devoted to government service. Out of
law school, I was recruited into the honors program at the Chief Counsel's Office of
the Internal Revenue Service where I worked for approximately one year. For the
next 13 years of my career, I served as a federal criminal prosecutor, both with the
Criminal Division of the United States Department of Justice, where I worked in the
Public Integrity and Fraud Sections, and as an Assistant United States Attorney in
the United States Attorney's Office for the District of Columbia, where I served as
Deputy Chief of the Grand Jury Section. During my tenure as a federal prosecutor,
I handled numerous investigations and prosecutions, many of which were complex
and sensitive.
After leaving the United States Attorney's office in 1986, I spent the next nine years
in private practice as a partner in two different law firms. I specialized in whitecollar criminal defense, representing corporations and individuals in a wide variety
of complex criminal and administrative proceedings. In addition, I counseled clients
with respect to the formation and implementation of compliance programs.
In 1995, I had the honor and privilege of being asked by Senator William Roth of
Delaware to serve as Staff Director and Chief Counsel for the United States Senate
Permanent Subcommittee on Investigations. I accepted the position and for the
next two years, I assembled and directed a professional staff responsible for
conducting a number of investigations and holding a series of public hearings on a
variety of issues, including healthcare and procurement fraud.
Following my work with the Senate Permanent Subcommittee, Senator Fred
Thompson of Tennessee asked me to serve as a Senior Counsel to the Senate's
Special Investigation Committee, which examined allegations of illegal and
improper activities surrounding the 1996 federal election campaigns. While serving
in this position, I was responsible for overseeing major portions of the Committee's
investigation, participating in its public hearings, and preparing the Committee's

http://www.treas.goy/press/relcases/js2261 htm

4/25/2005

JS-2261: Statement of Harold Damelin Before the United States Senate Comm... Page 2 of 2

final report.
Upon completion of my work for the Special Investigation Committee, I returned
once again to private practice for almost five years, where I continued to specialize
in white collar criminal defense work until I was nominated by the President, and
confirmed by the Senate in March of 2003, to serve as the Inspector General of the
Small Business Administration.
I believe the knowledge and experience I have gained over these past two years as
the Inspector General of the Small Business Administration has further prepared
me for new challenges I will surely face at the Department of the Treasury, if
confirmed. At the Small Business Administration I have led a staff of about 100
people located throughout the country. During this time I have become familiar,
and dealt directly with, the many issues faced by an Inspector General on a daily
basis, and I believe that I have handled my duties and responsibilities in a highly
professional and competent manner. I have also been pro-active. For example, I
developed an organized effort within my office to identify and prosecute those
individuals who fraudulently obtained SBA disaster loans in connection with the
9/11 tragedy.
I understand that the responsibilities of the position to which I have been nominated
are great. Based on the significant issues facing the Department of the Treasury, it
is clear to me that assuming the leadership role of Inspector General will be a
challenging assignment. With my diverse experience, I feel well prepared to
assume the position. If confirmed, I welcome the challenges I will be facing and
pledge to you that I will work hard every day to carry out my responsibilities.
Mr. Chairman, thank you again for allowing me to appear here today, and I would
be happy to answer any questions that you and other members of the Committee
may have.

http://www.treas.goY/press/relcases/js2261.htm

4/25/2005

JS-226:2: Deputy Assistant Secrdary Iannicola Teaches Personal Finance Skills to W... Page I of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
February 17, 2005
JS-2262
Deputy Assistant Secretary lannicola Teaches Personal Finance
Skills to Washington D.C. High Schools Students at
Howard D. Woodson Senior High School Academy of Finance
Treasury's Deputy Assistant Secretary for Financial Education Dan lannicola today
taught personal finance skills on budgeting and managing credit wisely to thirty
eleventh and twelfth grade students at Howard D. Woodson Senior High School
Academy of Finance in Washington, D.C. During the lesson, lannicola explained
how the credit reporting system works and how to avoid common credit pitfalls.
"Since young people frequently receive credit card solicitations, we need to make
sure they are armed with the financial knowledge to make responsible choices
before they make mistakes that could impact their credit reports for years to come,"
said lannicola. "Today the students and I talked about how borrowing could have
either a positive or a negative effect on one's life, depending on how it is used."
The Howard D. Woodson Senior High School is organized through several
academies, and offers its students an environment where they can explore various
career paths. Today's financial education lesson with Mr. lannicola was
coordinated through the National Academy Foundation's Academy of Finance. The
Academy of Finance prepares students for post-secondary education and careers
through academic learning and hands-on work experiences. Students are exposed
to broad career opportunities in the financial services industry.
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/financialeducation

http://www.treas.gov/press/relcases/js2262.htm

4/25/2005

JS-2263: Treasury Provides Guidance on Termination of Section 936 Elections

Page 1 of 1

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

February 18, 2005
JS-2263
Treasury Provides Guidance on Termination
of Section 936 Elections

WASHINGTON, DC -- Today the Treasury Department announced guidance on
certain tax consequences of the termination of sections 936 and 30A. These
sections, which provide for special tax treatment of certain domestic corporations
with business activities in possessions of the United States, do not apply to taxable
years beginning after December 31, 2005.
In response to the impending termination of these sections, corporations that have
been subject to this special tax treatment have begun to restructure their business
arrangements. The notice issued today provides guidance on tax issues that are
likely to arise for these corporations.

REPORTS
•

A copyof the guidance

http://www.treas.gov/press/relcases/js2263.htm

4/25/2005

Part III - Administrative, Procedural, and Miscellaneous

Guidance Related to Section 936 Termination

Notice 2005-21

This notice provides guidance to U.S. corporations allowed a credit under section
936 or 30A of the Internal Revenue Code (section 936 corporations) with regard to the
termination of sections 936 and 30A. Specifically, this notice discusses certain issues
that are likely to arise depending on the manner in which the business of a section 936
corporation continues to be conducted after this termination.

BACKGROUND
Subject to certain limitations, special tax credits are available under section 936
(possession tax credit) or section 30A (Puerto Rico Economic Activity Credit) for taxable
income of a domestic corporation derived from the active conduct of a trade or business
in a possession of the United States, provided that an election is made under sections
936(a) and (e). The tax credits provided by sections 936 and 30A will not be allowed for
taxable years beginning after December 31,2005. See sections 9360) and 30A(h).
The Treasury Department and the Internal Revenue Service (Service) anticipate that
certain issues are likely to arise in connection with the termination of sections 936 and

30A (including election revocations in advance of such termination) and accordingly
provide guidance with respect to these issues in this notice. The Treasury Department
and the Service intend that these issues be resolved by applying existing provisions of
the Internal Revenue Code and the Treasury regulations. This notice provides
explanations and cross-references as appropriate to certain applicable statutory and
regulatory provisions. Other issues not discussed in this notice may also arise,
depending on a specific taxpayer's facts and circumstances.
Whether certain issues are likely to arise will depend on the manner in which a
section 936 corporation's business continues to be conducted following the termination
of sections 936 and 30A. Three possible situations and the issues that are likely to
arise in each are discussed in Sections I through III below.
Regardless of how a section 936 corporation's business is conducted following
the termination of sections 936 and 30A, in the case of a section 936 corporation that
does not affirmatively revoke its election to be treated as a section 936 corporation and
has not otherwise allowed the election to terminate (for example, by not claiming the
possession tax credit on Form 5735 ("Possessions Corporation Tax Credit (Under
Sections 936 and 30A),,)), the election will terminate by operation of law for the taxable
years of such corporation beginning after December 31, 2005. No new filing
requirements (for example, a requirement to file a special form) will apply to such a
corporation.

SECTION I. THE SECTION 936 CORPORATION CONTINUES ITS ACTIVITIES AS A

DOMESTIC CORPORATION.
One possible situation upon the termination of sections 936 and 30A (or earlier
election revocation) is for the former section 936 corporation to continue its activities as
a domestic corporation.
A.

Membership in consolidated group

For taxable years following the last taxable year in which it was entitled to the
credit under section 936 or 30A, a former section 936 corporation that continues its
activities as a domestic corporation may be required to be included in an affiliated group
of corporations filing a consolidated income tax return. Section 1504(b)(4) provides that
section 936 corporations are not "includible corporations" that may join in a consolidated
return group. If the section 936 corporation would have been includible in a
consolidated return group were it not for section 1504(b)(4), the termination of sections
936 and 30A will automatically cause the corporation to be included in the consolidated
return group for the first taxable year it is not a section 936 corporation. No election
needs to be filed, and no approval from the Service needs to be obtained, to include the
former section 936 corporation in the consolidated return group. If the section 936
corporation and its parent corporation do not have the same annual accounting period,
the inclusion of the former section 936 corporation in the consolidated return group will
result in a short taxable year for the former section 936 corporation. See Rev. Proc.
2002-37,2002-1 C.B. 1030, and Rev. Proc. 2002-39, 2002-1 C.B. 1046, for guidance
on changes to annual accounting periods.
When the former section 936 corporation becomes an includible corporation, the

parent corporation is the agent for the group for many elections and other matters
related to the tax liability of the former section 936 corporation and the other
consolidated return group members. See § 1.1502-77 of the Income Tax Regulations.
If the former section 936 corporation becomes includible in a consolidated return
group, the carryover of specific tax attributes of the corporation will be governed by
applicable consolidated return provisions. The special rules governing prior losses and
earnings are discussed below.
B.

Former section 936 corporation with loss history

Each taxable year that the corporation was a section 936 corporation is a
separate return limitation year (SRLY) in relation to the consolidated return group. See

§ 1.1502-1 (f). Therefore, the rules of § 1.1502-21 (c) will limit the extent to which net
operating loss (NOL) carryovers of the former section 936 corporation arising (or treated
as arising) in its SRLYs are included in the consolidated NOL deductions for the years
the corporation is included in the consolidated return group. In general, § 1.150221 (c)(1) provides that NOLs from SRLYs included in the group's consolidated NOL
deduction may not exceed the aggregate consolidated taxable income for all
consolidated taxable years of the group determined by reference to only the member's
items of income, gain, deduction, and loss, as explained in the regulation. Under

§ 1.1502-15, built-in losses of the former section 936 corporation arising (or treated as
arising) in its SRLYs may, in some cases, be limited by the SRLY limitation described
above as if the built-in loss were a hypothetical NOL carryover or net capital loss
carryover arising in a SRLY. SRLY limitations also apply to net capital losses (see

§ 1.1502-22(c)), net section 1231 losses (see § 1.1502-23), general business credits
(see § 1.1502-3(d)), and minimum tax credits (see § 1.1502-55).
If a former section 936 corporation (whether or not includible in a consolidated
return group) continues its activities as a domestic corporation, section 382 will not
apply to limit the carryover of NOLs or built-in losses in the absence of an "ownership
change" (as defined in section 382(g)). The termination of sections 936 and 30A or the
revocation of a section 936 election alone will not constitute an ownership change for
that purpose.
If the section 936 corporation is an unaffiliated dual resident corporation or an
unaffiliated domestic owner that has filed an agreement described in § 1.1503-2(g)(2)
with respect to dual consolidated losses, becoming a member of a consolidated group
may cause the dual consolidated losses to be recaptured pursuant to § 1.15032(g)(2)(iii)(A).
C.

Accumulated earnings of section 936 corporation

When a former section 936 corporation becomes a member of a consolidated
return group, the treatment of the earnings and profits (E&P) of the former section 936
corporation will be determined by the rules provided in § 1.1502-33. When the former
section 936 corporation joins the consolidated group, any undistributed E&P earned
before it was a member of the consolidated return group carry over to the corporation's
first taxable year in the group, and E&P earned after it becomes a member of the group
will tier up to higher-tier corporations in the group under § 1.1502-33(b). When a former
section 936 corporation becomes an includible corporation in a consolidated return

group and distributes a dividend to its parent corporation attributable to E&P
accumulated while the distributing corporation was a section 936 corporation, such a
dividend will not result in an adjusted current earnings (ACE) adjustment under section
56(g)(4)(C) for alternative minimum tax (AMT) purposes. For regular tax purposes,
such a dividend is not included in the parent corporation's gross income under

§ 1.1502-13(f)(2)(ii), and there is no change to the parent corporation's E&P as a result
of such a distribution.

SECTION II. THE SECTION 936 CORPORATION LIQUIDATES INTO ITS DOMESTIC
PARENT CORPORATION.
Another possible situation upon the termination of sections 936 and 30A (or
earlier election revocation) is for the section 936 corporation to be completely liquidated
into its domestic parent corporation.

Recognition of gain or loss upon liquidation distributions

Section 332(a) provides, subject to the requirements in section 332(b), that no
gain or loss is recognized on receipt by a corporation of property distributed in complete
liquidation of another corporation. Section 337(a) provides that no gain or loss is
recognized to the liquidating corporation on the distribution of any property to the 80percent distributee (that is, the corporation that meets the 80-percent stock ownership
requirements in section 332(b)) in a complete liquidation to which section 332 applies.
If the section 936 corporation has one corporate shareholder that satisfies the
requirements of an 80-percent distributee, sections 332(a) and 337(a) allow the

corporation to be liquidated into its parent corporation without recognition of gain or loss
by either the liquidating section 936 corporation or its parent corporation. But see
section 337(c) (denying section 337 nonrecognition, but not section 332 nonrecognition,
if the liquidating corporation is owned by two or more members of a consolidated group
that together meet the 80-percent ownership requirements by reason of the aggregate
stock ownership rule of § 1.1502-34).
Section 901 (g)(1) provides a special rule for taxes paid or accrued to foreign
countries or possessions of the United States with respect to distributions that are
attributable to periods during which the distributing corporation was a "possessions
corporation." For this purpose, the term "possessions corporation" includes section 936
corporations. See section 901 (g)(2). Under this special rule, to the extent the
distribution is received in connection with a liquidation with respect to which gain or loss
is not recognized, such taxes shall not be treated as taxes paid to a foreign country or
U.S. possession. As a result, no foreign tax credit or deduction shall be allowed with
respect to any amount so paid or accrued.
If the section 936 corporation is an unaffiliated dual resident corporation or an
unaffiliated domestic owner that has filed an agreement described in § 1.1503-2(g)(2)
with respect to dual consolidated losses, the liquidation of such corporation may cause
the dual consolidated losses to be recaptured pursuant to § 1.1503-2(g)(2)(iii)(A).

Succession to section 381 (c) items of the liquidated section 936

corporation
In the case of the acquisition of assets of a corporation by another corporation in

a distribution to such other corporation to which section 332 applies, section 381
provides that the acquiring corporation shall succeed to and take into account, as of the
close of the day of the distribution and subject to certain conditions and limitations, the
items described in section 381 (c). Section 381 (c) enumerates more than twenty
separate items, which include (but are not limited to) NOL carryovers, E&P, capital loss
carryovers, and methods of accounting. When a section 936 corporation is liquidated
into its parent corporation under section 332, section 381 requires that the parent
corporation determine and take into account the items specified in section 381 (c).
Section 381 (c)(1) provides rules regulating the carryover of an NOL of a
liquidating corporation to its parent corporation's first taxable year ending after the date
of the liquidation. In particular, section 381 (c)(1 )(8) limits the deductibility of the NOL
carryover for that taxable year of the parent to the proportion of the parent's taxable
income that the number of days in the taxable year after the liquidation bears to the total
number of days in the year. Also, section 381 (b)(3) provides that the parent corporation
may not carry back an NOL or a net capital loss for a taxable year ending after the date
of the liquidation to a taxable year of the liquidated corporation.
If the parent corporation is a member of a consolidated return group, NOLs, builtin losses, and other tax attributes to which the parent corporation of a liquidated section
936 corporation succeeds are subject to the SRL Y rules. The SRL Y limitation applies to
a carryover of NOLs from the subsidiary under § 1.1502-21, to built-in losses on assets
distributed by the subsidiary under § 1.1502-15, and to certain other carryovers. All of
the items of income, gain, deduction, and loss of the parent (that is, not solely the items

attributable to the assets distributed by the subsidiary) are included for purposes of
determining the SRL Y limitation for the parent's taxable years after a section 332
liquidation. See § 1.1502-15(d), Example 1, part (iv) (applying a similar rule when
assets are contributed to a corporation in a section 351 transaction).
The ACE adjustment under section 56(g)(4)(C) does not apply to a liquidation of
a section 936 corporation into its parent corporation because, under section 331(b), a
distribution in liquidation is not treated as a dividend.

SECTION III. THE SECTION 936 CORPORATION REINCORPORATES AS A
FOREIGN CORPORATION.
A third possible situation upon the termination of sections 936 and 30A (or earlier
election revocation) is for the section 936 corporation (or former section 936
corporation) to reincorporate as a foreign corporation. For these purposes, a foreign
corporation includes a corporation formed under the laws of a possession of the United
States. See section 7701 (a)(5).
A.

Section 367 consequences of a section 368(a)(1 )(F) reorganization

A common form of reincorporation is effected through "a mere change in identity,
form, or place of organization of one corporation, however effected," as described in
section 368(a)(1 )(F) (an "F reorganization"). Section 1.367(a)-1 T(f) provides that, in
every F reorganization where the transferor corporation is a domestic corporation and
the acquiring corporation is a foreign corporation, there is considered to exist: (1) a
transfer of assets by the transferor corporation to the acquiring corporation under

section 361 (a) in exchange for stock of the acquiring corporation and the assumption by
the acquiring corporation of the transferor corporation's liabilities; (2) a distribution of the
stock of the acquiring corporation by the transferor corporation to the shareholders of
the transferor corporation; and (3) an exchange by the transferor corporation's
shareholders of the stock of the transferor corporation for stock of the acquiring
corporation under section 354(a).
Section 367(a) provides that, if in connection with any exchange described in
section 361 (a) a U.S. person transfers property to a foreign corporation, such foreign
corporation shall not, for purposes of determining the extent to which gain will be
recognized on such transfer, be considered a corporation. The transferee's loss of
corporate status for U.S. tax purposes denies the transferor the benefit of
nonrecognition treatment with respect to gain under section 361 (a). A domestic
corporation subject to gain recognition under section 367(a) recognizes gain on the
transfer of its assets to a foreign corporation in a transaction described in section 361 (a)
as if the property had been disposed of in a taxable exchange with the transferee
corporation. See § 1.367(a)-1T(b)(4). Section 367(a)(2) and (3), and the regulations
thereunder, provide special exceptions to the rule of gain recognition provided in section
367(a)(1) when a U.S. person transfers certain types of property to a foreign
corporation, including a limited exception for property transferred to a foreign
corporation for use by such foreign corporation in the active conduct of a trade or
business outside the United States. This exception, however, does not apply to certain
kinds of property, such as section 1221 (a) inventory property or accounts receivable.
10

These special exceptions also do not apply in certain cases where the transferor
corporation is widely held. See section 367(a)(5).
Section 367 generally will apply to transfers of property by a section 936
corporation to a foreign corporation without regard to whether the section 936 election is
in effect at the time of the transfer. However, if the transfer is made while the section
936 election is in effect, the taxpayer may receive a possession tax credit with respect
to income recognized on the transfer, to the extent such income is from sources outside
the United States. See sections 936(a)(1 )(A)(ii) and 30A(a)(1 )(8).
8.

Effect of termination of section 936 on the use and transfer of intangibles

Section 367(d) provides that, if a U.S. person transfers any intangible property
(within the meaning of section 936(h)(3)(8)) to a foreign corporation in an exchange
described in section 351 or 361, the U.S. person transferring such property shall be
treated as having sold such intangible property in exchange for a series of annual
payments over the useful life of such property which are contingent upon the
productivity, use, or disposition of such property and which are commensurate with the
income attributable to such property. These deemed payments are treated as ordinary
income to the transferor.
Section 367(d) does not apply to the transfer of foreign goodwill or going concern
value. Section 1.367(d)-1T(b). For this purpose, § 1.367(a)-1T(d)(5)(iii) defines "foreign
goodwill or going concern value" as "the residual value of a business operation
conducted outside the United States after all other tangible and intangible assets have
been identified and valued." The transfer of a section 936 corporation's business to a
11

foreign corporation typically will not involve the transfer of significant goodwill of the
section 936 corporation to the foreign corporation, but it may in certain cases. Goodwill
associated with a section 936 corporation's business operations in a possession, to the
extent it exists, mayor may not be considered "foreign goodwill" under § 1.367(a)1T(d)(5)(iii), depending on the facts and circumstances.
Section 936 contains special rules regarding intangibles that may affect the
application of section 367(d) to transfers of intangibles by a section 936 corporation or
former section 936 corporation.
Section 936(h) provides that the intangible property income of a section 936
corporation - that is, the gross income of a section 936 corporation attributable to any
intangible property (other than intangible property that has been licensed to the section
936 corporation since prior to 1948) - shall be included on a pro rata basis in the gross
income of the shareholders of the section 936 corporation as income from sources
within the United States. Under section 936(h)(5), however, the shareholders of a
section 936 corporation are not required to recognize such intangible property income if
an eligible section 936 corporation elects one of two alternative methods of computation
of taxable income: (1) the cost sharing method of section 936(h)(5)(C)(i) ("section 936
CSM"); or (2) the profit split method of section 936(h)(5)(C)(ii) ("section 936 profit split
method"). Under the section 936 CSM, the electing section 936 corporation pays a
"cost sharing payment" (as defined in section 936(h)(5)(C)(i)(I)) and is treated as an
owner (solely for purposes of earning a return thereon) of certain intangible property
related to the section 936 corporation's economic activities in the possession. Under

the section 936 profit split method, the electing section 936 corporation's taxable
income is equal to 50 percent of the section 936(h)(5)(C)(ii)(lI) "combined taxable
income" of the affiliated group from covered sales of products produced or services
rendered, in whole or in part, by the section 936 corporation in a possession.
Following the termination of sections 936 and 30A, the section 936 CSM and the
section 936 profit split method will no longer apply and the income of a former section
936 corporation (or a successor entity), including income from intangibles, will be
required to be determined under generally applicable federal income tax principles.
Thus, for example, the arm's length amount charged in a controlled transfer of an
intangible to a former section 936 corporation must be determined under one of the four
methods listed in § 1.482-4(a), applied in accordance with all of the provisions of

§ 1.482-1, and must be commensurate with the income attributable to the intangible. In
this regard, it is important to note that Congress intended for cost sharing under section
936(h)(5)(C)(i) to remain separate and distinct from cost sharing arrangements under
section 482. See section 936(h)(5)(C)(i)(l) (providing that amounts paid under cost
sharing agreements with related persons are not considered in the determination of
section 936 CSM payments). A section 936 corporation does not obtain an interest in
intangibles in exchange for payments it makes pursuant to an election of the section
936 CSM, but rather, it obtains a temporary limited entitlement to manufacturing
intangible income. See section 936(h)(5)(C)(i)(II). That is, the statutorily determined
section 936 CSM payment entitles the section 936 corporation to manufacturing
intangible income only in the taxable year for which the payment is made. A section
13

936 corporation or a former section 936 corporation will accordingly not possess any
interest in any intangible property as a result of payments made pursuant to an election
of the section 936 CSM.
To the extent that a section 936 corporation (or a former section 936 corporation)
does own intangible property ("possession-owned intangibles"), and transfers such
property to a foreign corporation, certain of the section 367 consequences may depend
on whether the section 936 election is in effect at the time of the property transfer.
Under section 936(h)(6), when a section 936 corporation transfers possession-owned
intangibles to a related foreign corporation, the shareholders of the section 936
corporation are generally required by section 936(h)(1) to include in gross income, on a
pro rata basis, the annual payments provided for by section 367(d) as U.S. source
ordinary income. In contrast, if a section 936 election is not in effect at the time of the
transfer (for example, following the termination of sections 936 and 30A), the transferor
of possession-owned intangibles (that is, a former section 936 corporation or a
successor corporation) to a foreign corporation will itself be treated as having sold such
possession-owned intangibles in exchange for the annual payments provided for by
section 367(d), with the source of such payments generally determined by the
applicable source rule in section 861(a)(4) or 862(a)(4), pursuant to section 865(d).
C.
corporation

Subsequent dividends from earnings accumulated by the section 936

In a transfer connected with an F reorganization to which section 361 applies,
section 381 provides that the acquiring corporation shall succeed to and take into
14

account, as of the close of the day of the distribution and subject to certain conditions
and limitations, the items described in section 381 (c), which include E&P. See section
381 (c )(2). Section 243( e) provides that any dividend from a foreign corporation from
E&P accumulated by a domestic corporation during a period with respect to which the
domestic corporation was subject to taxation shall be entitled to a ORO as if it were
distributed by a domestic corporation which is subject to taxation for purposes of
applying section 243(a). Notwithstanding that section 936 provides for a credit against
taxes imposed on a corporation making a section 936 election, section 936 corporations
are domestic corporations subject to tax and thus meet the requirements of sections
243(a) and (e). Section 243(a) provides a 1DO-percent dividends received deduction

(ORO) for qualifying dividends. Section 243(b) provides that a qualifying dividend
includes any dividend received by a corporation if the corporation is a member of the
same affiliated group as the distributing corporation and the distributing corporation has
a section 936 election in effect. For this purpose, the exclusion of a section 936
corporation from the affiliated group under section 1504(b)(4) does not apply. See
section 243(b )(2)(A).
Section 1.243-3(b) provides that a foreign corporation shall, for purposes of
section 243(e), maintain separate accounts for E&P to which it succeeds that were
accumulated by a domestic corporation and for other accumulated E&P of the foreign
corporation. Under § 1.316-2, every distribution made by a corporation is considered to
be made first out of any current year E&P and then out of E&P accumulated in prior
taxable years. With respect to the accumulated E&P of the foreign corporation, § 1.24315

3(c) provides that dividends paid by the foreign corporation shall be treated as having
been paid out of the most recently accumulated E&P of such foreign corporation
(regardless of whether such E&P was accumulated by a predecessor domestic
corporation or by the foreign corporation itself). To the extent that a dividend is paid out
of E&P accumulated by the foreign corporation and by a predecessor domestic
corporation for taxable years ending on the same day (so that neither is more recently
accumulated), then the portion of such dividend considered paid out of each account
shall be the same proportion of the total dividend as the amount of E&P in that account
bears to the sum of the E&P in all such accounts. Thus, for example, if a section 936
corporation is reincorporated as a newly formed foreign corporation, and the foreign
corporation subsequently makes distributions to its U.S. parent, the distributions will be
treated as first coming from current E&P, then from accumulated E&P with the latest
E&P accumulated being treated as distributed first. Subject to section 245, dividends
from earnings accumulated by the foreign corporation itself generally will not be entitled
to the ORO. However, dividends from E&P accumulated while the predecessor
corporation was a section 936 corporation will be entitled to the ORO.
Section 901 (g)(1) provides in relevant part that no credit or deduction is allowed
for any tax that is paid or accrued to any foreign country or possession of the United
States with respect to any distribution from a corporation to the extent such distribution
is attributable to periods during which such corporation is a section 936 corporation and
a ORO is allowable with respect to such distribution. As a result, no foreign tax credit or
deduction is allowed with respect to any foreign or possession tax imposed on dividend
16

distributions by a foreign corporation from earnings accumulated by a predecessor
section 936 corporation.

Alternative minimum tax

In determining ACE adjustments for AMT purposes, section 56(g)(4)(C)(i)
generally provides that a deduction shall not be allowed for any item if such item would
not be deductible for any taxable year for purposes of computing E&P. However,
section 56(g)(4)(C)(ii) provides an exception for any deduction allowable under section
243 for any dividend that is a "1 OO-percent dividend" (that is, a dividend with respect to
which a 100-percent ORO is allowable), or that is received from a section 243(c)(2) "20percent owned corporation," but only to the extent such dividend is attributable to
income of the paying corporation that is subject to tax (determined after the application
of sections 936 and 30A). Thus, to determine the effect on ACE of a distribution from a
foreign corporation that has succeeded to the E&P of a section 936 corporation, the
recipient of the distribution must determine: (1) the extent to which the section 243 ORO
would be allowed with respect to the distribution by the foreign corporation; and (2) the
extent to which the E&P comprising such distribution were accumulated in taxable years
for which the election under section 936 (or section 30A) was in effect and were subject
to tax in such taxable years.
For purposes of determining the alternative minimum foreign tax credit, section
56(g)(4)(C)(iii)(I) provides, subject to the limitation in section 56(g)(4)(C)(iii)(II), that 75
percent of any withholding or income taxes paid to a possession of the United States
shall be treated as a tax paid to a foreign country by the corporation receiving the
17

dividend. Taxes paid to a U.S. possession by a section 936 corporation shall be treated
as a withholding tax paid with respect to any dividend distributed by such corporation to
the extent such taxes would be treated as paid by the corporation receiving the dividend
under rules similar to the rules of section 902. Section 56(g)(4)(C)(iii)(III). Section
56(g)(4)(C)(iii)(IV) provides that, in determining the alternative minimum foreign tax
credit, section 904(d) shall be applied as if dividends from a section 936 corporation
were a separate category of income referred to in a subparagraph of section 904(d)(1).
To the extent a dividend distributed by a foreign corporation comprises E&P
accumulated in taxable years for which an election under section 936 (or section 30A)
was in effect (and to which the foreign corporation has succeeded), the recipient of the
dividend will determine the alternative minimum foreign tax credit with respect to such
part of the dividend pursuant to the rules provided in section 56(g)(4 )(C)(iii).

Recapture of dual consolidated losses

If the section 936 corporation is an unaffiliated dual resident corporation or an
unaffiliated domestic owner that has filed an agreement described in § 1.1503-2(g)(2)
with respect to dual consolidated losses, an outbound asset reorganization may cause
the dual consolidated losses to be recaptured pursuant to § 1.1503-2(g)(2)(iii)(A).
Depending on the facts and circumstances, recapture issues in addition to those
associated with dual consolidated losses may also arise. See sections 367(a)(3)(C) and
904(f)(3).
F.

Reporting requirements

Depending on the facts and circumstances, certain reporting requirements may
18

apply with respect to the former section 936 corporation. For example, section 60388
may require the transfer of tangible and intangible property to be reported on Form 926
("Return by a U.S. Transferor of Property to a Foreign Corporation"). See § 1.60388-1.
Form 5471 ("Information Return of U.S. Persons With Respect to Certain Foreign
Corporations") and its schedules (for example, Schedule 0 ("Organization or
Reorganization of Foreign Corporation, and Acquisitions and Dispositions of its Stock"))
may also be required to be filed. See generally sections 6038 and 6046.
G.

Subpart F consequences to U.S. shareholders

Depending on the facts and circumstances, a section 936 corporation
reincorporated as a foreign corporation may be a controlled foreign corporation (CFC)
(as defined in section 957(a)) subject to the provisions of subpart F (sections 951
through 964). Section 951 (a) requires that a United States shareholder (as defined in
section 951 (b)) of a CFC include in its gross income for the taxable year its pro rata
share of certain items of the CFC's income ("subpart F income").
Certain taxpayers may choose to continue to conduct business in a possession
through a branch of a CFC organized or created elsewhere. Such a branch may
constitute a manufacturing branch for purposes of the regulations under section
954(d)(2). Under certain facts and circumstances, income derived by a CFC with a
manufacturing branch located outside the country under the laws of which the CFC is
organized may constitute foreign base company sales income, a form of subpart F
income that the United States shareholder must include in income. See § 1.954-3(b)(4),
Example (2).
19

DRAFTING INFORMATION
The principal author of this notice is Edward R. Barret of the Office of Associate
Chief Counsel (International). However, other personnel from the Service and the
Treasury Department participated in its development. For further information regarding
this notice contact Thomas A. Vidano or Edward R. Barret at (202) 435-5265 (not a tollfree call).

JS-2264:

Ta.'..

Panel Seeks PublIc Comment

Page I of I

FROM THE OFFICE OF PUBLIC AFFAIRS
February 18, 2005
JS-2264

Tax Panel Seeks Public Comment
- Senator Connie Mack, Chairman of the President's Advisory Panel on Federal
Tax Reform, announced at the Panel's first meeting, February 16, 2005 that the
Panel is seeking public comments on the following issues:
1.
2.
3.
4.

Headaches, unnecessary complexity, and burdens that taxpayers - both
individuals and businesses - face because of the existing system.
Aspects of the tax system that are unfair.
Specific examples of how the tax code distorts important business or
personal decisions.
Goals that the Panel should try to achieve as it evaluates the existing tax
system and recommends options for reform.

At this point, the Panel is not asking for specific proposals.

Information on how to submit comments as well as details on the required format
for comments are available at http://www.taxreformpanel.gov/contactl. Comments
submitted in connection with this first request must be received by the Panel no
later than 5:00 p.m. on March 18, 2005. All comments submitted will be made
available to the public.

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 are available on the Panel's website at www.taxreformpanel.gov,

http://ww v •. treas.goy/press/releasc<.;./js2264.htm

4/25/2005

JS-2265: Rcmad\s ut'Trcasury Assistant Secretary Mark J. Warshawsky on Social Securit... Page I

or ~

,,:;

fii> 0ji;; ;:ifi/ ·;.~~·~:;~I.

-piR E~l~hJt~~,;.,'- .

FROM THE OFFICE OF PUBLIC AFFAIRS
February 18, 2005
JS-2265

Remarks of Treasury Assistant Secretary Mark J. Warshawsky on Social
Security
at the Securities Industry Association Savings & Retirement Symposium Fort
Lauderdale, Florida
In his State of the Union address the President said, "One of America's most
important institutions - a symbol of the trust between generations - is also in need of
wise and effective reform_"
He was of course referring to Social Security.
The President's willingness to fix Social Security shows his political courage_ Our
children's retirement security is more important than partisan politics and 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_

At the outset, let me reiterate what the President has said to those in or near
retirement: Social Security will not be changed for those 55 or older_ Today, more
than 45 million Americans receive Social Security benefits and millions more are
nearing retirement. For these Americans, Social Security benefits are secure and
will not change in any way_ This is only fair.
The inevitable demographics confronting Social Security mean that we have fewer
workers to support our retirees_ People are living longer and having fewer children_
As a result we have seen a dramatic change in the number of workers supporting
each retiree's benefits_
When today's young workers begin to retire in 2042, the system will be exhausted
and bankrupt. Today's 30-year-olds can expect a 27 percent benefit cut from the
current system when they reach retirement age_ And without action, these benefit
cuts will only get worse_ The President believes we should fix Social Security once
and for all. And, in doing so, we should make Social Security a better deal for our
children and grandchildren_
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_ One important component of reform is the introduction of
personal retirement accounts (PRAs)_ PRAs provide individual control, ownership,
and are an effective vehicle for pre-funding more of our Social Security benefits_
PRAs also offer individuals the opportunity to build a nest-egg that the government
cannot take away_ They allow individuals to partake in the benefits of investing in
the financial markets. Individual control and ownership means that people would be
free to pass any unused portion of accounts to their heirs_
Today I'll briefly discuss the Administration's proposals for how PRAs will be
phased in, how they interact with the traditional Social Security benefits, and then
I'll discuss the administrative structure, the investment choices, and the distribution
options in more detail.
Let me make two critical points up front. First, the system needs to be reformed to
make it permanently sustainable. The President is committed to doing this while

http://wwv-.treas.gov/press/releasc~/is2265.htm

4/25/2005

JS-2265: Remarks of Ireasury Assistant Secretary Mark 1. Warshawsky on Social Securit... Page:2 01'.:1maintaining the progressivity of the system. The second critical point is that
personal retirement accounts will be voluntary. At any time a worker can "opt in" by
making a one-time election to put a portion of his or her payroll taxes into a
personal retirement account. A worker who chooses not to opt in will receive
traditional Social Security benefits, reformed to be permanently sustainable.
To ease the transition to a personal retirement account system, participation will be
pllased in according to the age of the worker. In the first year of implementation,
2009, workers currently between the age of 40 and 54 (born between 1950 and
1965) would have the option of establishing personal retirement accounts. In the
second year, 2010, workers currently between the age of 26 and 54 (born between
1950 and 1978) would be given the option and by the end of the third year, 2011, all
workers born in 1950 or later who want to participate in personal retirement
accounts would be able to do so.
Even after the initial implementation, personal retirement accounts will start
gradually. Although all participants will eventually be allowed to contribute 4
percentage points of their payroll taxes to a personal account, the annual
contributions to personal retirement accounts initially would be capped at $1,000
per year. The cap would rise gradually over time, growing $100 per year, plus
growth in average wages. Starting with the full 4 percentage point PRA contribution
ensures that low-income workers can get appreciable gains from the accounts. If
we started out with a lower percentage contribution, the potential dollar gains for
low-income workers would be much more limited.
There has been a great deal of discussion about how PRAs will interact with the
traditional Social Security benefit. The PRA structure that the President has
proposed is a "carve out" or "offset" PRA. An offset PRA simply means that
workers who choose to contribute payroll taxes to a PRA will have their defined
Social Security benefit adjusted by an actuarially fair amount. The government
borrowing rate is the appropriate and fair offset rate or assumed rate of return.
As proposed by the President, PRAs are designed to hold down administrative
costs, encourage careful and cautious investing, and provide a reliable income for
the full length of retirement.
Centralized administration and limited choice will hold down administrative costs.
The PRA administration and investment options will be modeled on the Thrift
Savings Plan (TSP). TSP is a voluntary retirement savings plan offered to federal
employees, including members of Congress. TSP offers comparable benefits and
features to those available to private sector employees in 401 (k) retirement plans.
The Social Security Administration's actuaries project that the ongoing
administrative costs for a TSP-style personal account structure would be roughly 30
basis points or 0.3 percentage points.
The PRAs will limit the risk of investments with low-risk, low-cost options like the
broad index funds available to federal employees in TSP. Similarly to TSP, the
index funds could include, for instance, a government securities fund; an
investment-grade corporate bond index fund; a small-cap stock index fund; a largecap stock index fund; and an international stock index fund. In addition to these
TSP-type funds, workers could choose a Treasury Inflation-Protected Securities
fund.
Workers will also be able to choose a "life cycle portfolio" that would automatically
adjust the level of risk of the investments as the worker aged. As the individual
neared retirement age, the life cycle fund automatically and gradually shifts the
allocation of investment funds so that it is weighted more heavily toward bonds.
The President's plan includes a mechanism that will protect near-retirees from
sudden market swings on the eve of retirement. PRA balances would be
automatically invested in the "life cycle portfolio" when a worker reaches age 47,
unless the worker and his or her spouse specifically opted out by signing a waiver
form stating they are aware of the risks involved.
Because these are specifically designed as retirement accounts, PRAs would not
be accessible prior to retirement. Workers who choose personal retirement
accounts would not be allowed to make withdrawals from, take loans from, or
borrow against their accounts prior to retirement.

http://ww.·.. treas.goy/press/rcleascs!j.s2265.htm

4/25/2005

JS-226j. Rcmcub ol'Trcasury Assistant Secretary Mark J. Warshawsky on Social Securit ... Page

ol'...J.

The distribution options for PRAs will include restrictions on withdrawals to
discourage outliving ones assets. Procedures would be established to govern how
account balances would be withdrawn at retirement. This would involve some
combination of inflation indexed annuities to ensure a stream of monthly income
over the worker's life expectancy, phased withdrawals indexed to life expectancy,
and lump sum withdrawals. Individuals would not be permitted to withdraw funds
from their personal retirement accounts as lump sums if doing so would result in
their moving below the poverty line. Account balances in excess of the povertyprotection threshold requirement could be withdrawn as a lump sum for any
purpose or left in the account to accumulate investment earnings.
Some have raised concerns about the public borrowing that might be needed to
help finance PRA contributions. Such an increase in public borrowing is often
referred to as a "transition cost." but I want to argue here that the term is a
misnomer; the increased public borrowing does not represent an increase in the
cost of paying retirement benefits and hence is not a cost in the sense that people
would normally believe. PRAs increase public debt in the short term, but ultimately
leave public debt unchanged when factoring in the outlay reductions deriving from
the reduction in defined benefits. Because long-term public debt is unchanged, the
policy is neutral with respect to the long-term cost of paying retirement benefits.
But is it a concern that the policy would increase public debt in the short term? The
answer is no, at least not with respect to the size and type of accounts that the
President has put forward. In the short term, the private sector has effectively
swapped a promise of future defined benefits for explicit public debt of equal value.
At all times, private sector wealth is unchanged, and the government's total
liabilities are unchanged. It follows that the so-called transition costs of introducing
PRAs are not added costs. I think financial markets understand that any transition
debt is but a small fraction of what Social Security currently owes, and will respond
favorably to a reform plan that responsibly addresses Social Security's long-term
financial imbalance.

SINGLE EMPLOYER DEFINED-BENEFIT PENSION REFORM
I would also like to talk today about the Administration's proposal to reform the
single-employer defined benefit pension system. The current defined benefit
pension rules do not ensure that pension plans are adequately funded.
Underfunded plan terminations are 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, and ultimately
potentially threaten taxpayers. 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.

Today I want to focus on two important, but less frequently discussed aspects of
the proposed reforms: the treatment of lump sums and the reforms that affect
defined contribution plans.
Our lump-sum proposal would replace the use of 30-year Treasury rates for
purposes of determining lump sum settlements under qualified plans with a yield
curve approach Current law use of the 30-year Treasury rate to determine the
minimum lump sum amount often inflates the lump sums in comparison with the
value of the annuity that the employee would otherwise receive. Under our
proposal, lump sum settlements would be calculated using the same interest rates
that are used in discounting pension liabilities: interest rates that are drawn from a
zero-coupon corporate bond yield curve based on the interest rates for high quality
corporate bonds. This reform will include a transition period, so that employees
who are expecting to retire in the near future are not subject to an abrupt change in
the amount of their lump sums as a result of changes in law. The new baSis would
not apply to distributions in 2005 and 2006 and would be phased in for distributions
in 2007 and 2008, with full implementation beginning only in 2009.
We also want to make improvements to defined contribution retirement plans.
Congress successfully passed two proposals originally set forth in the President's

http://www.treas.gov/press/relcases/js2265.htm

4/25/2005

JS-2265. RemillKs ol'Trcasury Assistant Secretary Mark J. Warshawsky on Social Securit... Page..+ oj'''+
Retirement Security Plan with the enactment of the Sarbanes-Oxley Act of 2002.
The Sarbanes-Oxley Act (1) guarantees that workers will now receive notice 30
days prior to a pension plan blackout period and (2) prohibits corporate officers
from selling their own company stock during blackout periods.
The other components of the President's reform plan are to:
•

Improve choice by allowing participants to diversify their investments by
selling their company stock after three years. The use of employer stock
allows companies to be more generous with their matching contributions.
Workers, however, should also have the right to choose how they want to
invest their retirement savings. The President's plan would ensure that
workers could sell company stock and diversify into other investment
options after three years of participation in the plan.
• Enhance information by requiring quarterly benefit statements to be sent to
participants. A meaningful ability to change investments also depends on
workers receiving timely information about their 401 (k) accounts. The
President's plan would require companies to provide workers with quarterly
benefit statements with information about their accounts including the value
of their assets, their rights to diversify, and the importance of maintaining a
diversified portfolio.
• Increase confidence by providing participants with increased access to
professional investment advice. Current ERISA law raises barriers against
employers and investment firms providing individual investment advice to
workers. The President's plan would increase workers' access to
professional investment advice. By relying on expert advisers who assume
full fiduciary responsibility for their counsel and disclose relationships and
fees associated with investment alternatives, American workers will have
the information to make better retirement decisions.

In summary, I expect the coming months to be a busy and productive time at the
Treasury Department. As I have discussed today, fixing Social Security is a critical
and urgent issue. We must make the system permanently sustainable and I believe
personal accounts are an integral part of the solution. The defined benefit pension
system provides retirement income for 44 million Americans; therefore adopting
reforms that improve plan funding and ensure the long-term solvency of the system
and the PBGC are critical. Putting annuity and lump sum distributions on an even
footing is an important aspect of these reforms. Similarly, we encourage Congress
to pass the President's Plan for Retirement Security which will improve the
diversification, information, and confidence of defined contribution pension
partiCipants.

http://www.treas.gov/press/relcases/js2265.htm

4/25/2005

JS-226b. The HUllurahlc John W. Snow Statement on Social Security Refom1 ...

Page I of':2

PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
February 18, 2005
JS-2266
The Honorable John W. Snow
Statement on Social Security Reform
New York, NY
February 18, 2005
Good morning. It's great to be here in New York, and I especially appreciate the
opportunities I've had this week to talk with financial leaders about the long-range
fiscal health of the nation's Social Security system, and the implications of both
reform and of inaction.
New York's financial community is acutely aware of the problems that the program
faces. They understand what an enormous impact Social Security can have on our
economy overall, and they are interested in seeing the system successfully
reformed in a way that protects beneficiaries as well as our economy - for the near
term as well as for long term.
The financial leaders I met with share the President's concern that Social Security
needs to be fixed. They know that if those of us in the government don't pursue and
enact meaningful changes now, the Social Security system will eventually need to
be propped up with massive tax increases, which will send terrible shockwaves
through our economy.
The American economy is the most dynamic and resilient in the world, but we
cannot take that for granted, and this is something uniquely understood by financial
leaders who watch and participate in our markets every day. They understand, as
our President understands, that we must plan for the future and deal with looming
financial threats when we see them. Wall Street is familiar with this way of thinking,
which is why they share the President's interest in saving and strengthening the
Social Security system. To ignore the problem, I think they agree, is to deny reality.
These leaders live in the real world and make hard choices every day. The same
can be said for our President. His leadership on Social Security reform displays his
great courage as well as his dedication to doing what is right for the American
people, for generations to come. Tackling the problems of Social Security is simply
more important than partisan politics, and the President won't ignore this problem or
leave it as an ugly inheritance for future presidents and future generations
I've been pleased to be able to discuss the President's vision on Social Security in
more detail during my meetings here in New York this week. I've emphasized, for
example, that Social Security reform will not impact those who those born before
1950 - their Social Security checks will not change. Of course, people 55 and older
will have an interest in the issue - but more because they care about the financial
future of their children and grandchildren and want them to have a Social Security
benefit they can count on when they retire.
We've had terrific discussions here in New York about the possible structure of
personal accounts, and how younger workers would be able to learn about their
financial choices, build a nest egg and benefit from sound long-term investment in
the free market system without disrupting the system of benefits for their parents
and other generations of retired beneficiaries.
Some of the most compelling conversations I've had this week, with some great
financial minds here in New York, were about the irrefutable facts, the undeniable
fact that the Social Security system is on an unsustainable path. We've looked at
the demographics, at the arithmetic, and it cannot be denied: Just 13 years from

http://www.treas.gov/press/relcases/js2266.htm

4/25/2005

JS-226(J. Tilt: Honorable John W. Snow Statement on Social Security Reforrn ...

Page:2 or:2

now - around 2018 - the system will begin paying out more than it takes in. People
are living longer and having fewer children, so there are fewer workers to support
retirees. We had 16 workers paying into a system for everyone beneficiary in 1950,
and today we only have about three workers for every beneficiary. That ratio will
drop to two-to-one by the time today's young workers retire.
And when those young workers retire, in 2042, the system will be exhausted,
bankrupt. Today's 30-year-old can expect a 27% benefit cut from the current
system when he/she reaches retirement age. Without action, our children and
grandchildren will be faced with huge benefit cuts or massive tax increases.
Social Security has been patched up in the past. We've raised taxes to take us
through a few more generations of retirees. But the patches don't last because our
demographics are working increasingly against us. We need lasting, meaningful
reform. Part of lasting reform ought to be the option, for younger workers, to build a
nest egg and I'm excited to be talking with the financial community about how to
make that opportunity a reality in a fiscally responsible way that will not unsettle our
financial markets. The President believes that a gradual approach to the
establishment of personal retirement accounts - phaSing in account participation
and slowly phasing up the amount of allowable contributions - is the way to achieve
those goals.
It's been a pleasure to spend this time with the terrific financial minds and the good
American hearts here in New York this week. This issue is important to all
Americans, and it's important that we continue to work together to strengthen Social
Security for our children and grandchildren.
Thank you.

http://www.treas.goY/press/relcases/js2266.htm

4/25/2005

js-2267:

DqJllly Assistant Secretary Iannicola Delivers Keynote Address at the National ...

Page I

or I

FROM THE OFFICE OF PUBLIC AFFAIRS
February 18, 2005
js-2267

Deputy Assistant Secretary lannicola Delivers Keynote Address at the
National Black Caucus of States Institute Financial Literacy Symposium
Deputy Assistant Secretary for Financial Education Dan lannicola, Jr. today
delivered a keynote address at the National Black Caucus of States Institute's first
National Symposium on Financial Literacy. lannicola was presented with the
Institute's Pillar of Excellence Award, which is awarded to individuals and
organizations who have built a foundation for improving financial literacy throughout
the country and in African American communities.
lannicola highlighted the importance and timeliness of the Institute's efforts in
working to provide state legislators with relevant data about current financial
education levels in African American communities. He also congratulated the group
for holding its first symposium on financial literacy and on announcing its new
initiative, "Saving Black America, One Account at a Time."
lannicola talked to the group about poverty and wealth and how financial education
can change lives for the better. "Financial knowledge can be a strong force for
personal empowerment. By saving, by investing and by learning more about his or
her own finances, everyone can find a place in an ownership society. The
campaign launched today will spread this important message across America."
The National Black Caucus of States Institute (NBCSI) is non-profit organization.
The Organization's primary mission is to develop, conduct and promote educational
research and training programs designed to enhance the effectiveness of its
members as they consider legislation and issues of public policy impacting African
American constituents. The NBCSI formed a Financial Literacy Task Force to work
with financial and educational institutions, the financial services industry,
community, civic and faith-based organizations and policymakers. The Task
Force's focus is on identifying solutions to existing barriers to self-sufficiency and
wealth-building in the African American community.
The National Symposium on Financial Literacy is a one-day meeting to present and
discuss major issues, legislation, developments, partnerships and next steps for
improving access, programs and policies regarding financial literacy in the African
American community.
The Department of the Treasury is a leader in promoting financial education.
Treasury established the Office of Financial Education in May of 2002. The Office
works to promote access to the financial education tools that can help all Americans
make wiser choices in all areas of personal financial management, with a special
emphasis on saving, credit management, home ownership and retirement
planning. The Office also coordinates the efforts of the Financial Literacy and
Education Commission, a group chaired by the Secretary of Treasury and
composed of representatives from 20 federal departments, agencies and
commissions, which works to improve financial literacy and education for people
throughout the United States. For more information about the Office of Financial
Education visit: www.treas,gov/financialeducation.

-30-

http://wwv •. treas.gov/press/rclease:-..I.is2267.htm

4/25/2005

js-226R: OF AC Issues l'Iarilication on Payments for Agricultural and Medical Ship ...

Pagclof2

PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
February 22, 2005
js-2268
OFAC Issues Clarification on Payments
for Agricultural and Medical Shipments to Cuba
The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC)
today clarified that under the Cuban Assets Control Regulations the terminology
"payment of cash in advance" with regard to Commerce-licensed shipments to
Cuba means payment of cash prior to shipment of goods.
This payment policy conforms to the common understanding of the term in
international trade finance. In addition, it balances OFAC's responsibility to
administer effective sanctions against Cuba while ensuring the island can continue
to receive food shipments, medicine and medical supplies from U.S. exporters.
The Trade Sanctions Reform and Export Enhancement Act of 2000 (TSRA)
provides that agricultural products, medicines and medical supplies may be
exported to Cuba as long as they are paid for through a letter of credit from a third
country financial institution that may be confirmed or advised by a U.S. financial
institution or by payment of cash in advance. Cash in advance of shipment is a
widely held interpretation of the terminology, notably by other agencies in the U.S.
Government.
Some US financial institutions began requesting that OFAC clarify whether
payments of cash in advance permits the shipment of goods to Cuba prior to receipt
of the payment by U.S. exporters.
To mitigate the immediate impact on the transfer of these payments, OFAC
adopted an interim policy to issue specific licenses to exporters whose transactions
occurred while guidance was pending. OFAC created the specific licensing policy to
ensure the Cuban people did not see a disruption in agricultural and medical
shipments to the island and to avoid any unnecessary disruption of U.S. business.
The Treasury Department engaged in discussions within the Administration and
received input from Congress and industry officials before issuing this guidance. It
was determined that payments made to U.S. exporters before shipment effectively
met the goals of the TSRA and the US. Cuba sanctions program.
The final rule on the payment policy was submitted to the Federal Register today
and becomes effective immediately. The language in the final rule provides a 30
day window for exporters to continue to engage in transactions under financing
terms resembling cash against documents, but requires payment for such
transactions to be completed within the 30-day period. The exporter will still need a
Commerce Department license. The purpose of this 30-day window is to provide a
transition period.
The United States imposed sanctions against Cuba in 1963, in response to hostile
actions by the Cuban government. Cuba is listed as a state sponsor of terrorism by
the U.S. Department of State, and Cuban dictator Fidel Castro continues to oppress
the Cuban people under his totalitarian regime.
Economic sanctions against rogue nations - including denying them access to the
U.S. financial system and hard currency - can prompt real and positive change by
pressuring regimes to change behavior or policies.
The Bush Administration is committed to helping the freedom-starved people of

http://ww.... treas.gov/press/retcascs./js2268.htm

4/25/2005

js-2268: OFAC Issues l'Iani"lcatioll on Payments for Agricultural and Medical Ship...

Page:2 01':2

Cuba live lives free from Castro's oppression and tyranny. OFAC is steadfast in
effectively administering the Cuba sanctions program to hasten freedom to the
Cuban people.
-30-

http://wwv.treas.gov/press/releases!js2268.htm

4/25/2005

J8-2269: Secretary Snow V isits Florida This Week to Discuss Strengthening Social Secur... Page I

or 1

FROM THE OFFICE OF PUBLIC AFFAIRS
February 22, 2005
JS-2269

Secretary Snow Visits Florida This Week to Discuss Strengthening Social
Security
U.S. Treasury Secretary John W. Snow will travel to Tampa and Jacksonville,
Florida on Thursday, February 24 and Friday, February 25 to meet with local
business leaders and discuss the President's efforts to strengthen and preserve the
U.S. Social Security system.
"President Bush has discussed the importance of Social Security and the need to
fix the Social Security system for future generations of Americans," said Secretary
Snow. "The President has assured Americans that he will not change the Social
Security system in any way for those born before 1950.
"Social Security is sound for today's seniors and for those nearing retirement, but it
needs to be fixed for younger workers - our children and grandchildren. To keep
the promise of Social Security alive for our children and grandchildren, we need to
fix Social Security now once and for all."
The following events are open to credentialed media with photo identification:

Thursday, February 24
Remarks to Tampa Chamber of Commerce
9:15 am EDT
Tampa Chamber of Commerce
615 Channelside Drive, Suite 108,
Tampa, FL
** Media must arrive by 8:30 am EDT
** A brief media availability will be held immediate following the event

Friday, February 25
Remarks to Jacksonville Chamber of Commerce
9:30 am EDT
Fidelity National Financial
601 Riverside Ave,
Jacksonville, FL
** Media must arrive by 8:45 am EDT
** A brief media availability will be held immediate following the event

-30-

http://wwwtrcn3.gov/preD~;/relea~e<;/js2269.htm

4/25/2005

JS-2270: Treasury Secretary John Snow Remarks: IDA-14 Replenishment Meeting

Page I

or 2

PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
February 22, 2005
JS-2270
Treasury Secretary John Snow
Remarks: IDA-14 Replenishment Meeting
I would like to begin by welcoming this distinguished group of donors, borrowers,
and World Bank representatives to the United States and the U.S. Treasury
Department. We are very pleased to have the opportunity to host the finallDA-14
replenishment meeting.
This is an important day in a crucial year of development.
We all know that development is by nature a multi-faceted undertaking.
Consequently, success will not depend simply on more aid alone, but also on
increased trade, private capital flows, remittances, and importantly, sound
institutions and policies in developing countries.
Recent experience shows that important progress is being made. Economic growth
in developing countries has been the broadest and deepest in decades. But,
clearly many challenges remain, particularly in sub-Saharan Africa.
The donor community gathered here is demonstrating its ongoing commitment to
this important effort and specifically to IDA as a key provider of development
assistance to poor countries. We expect this strong commitment to continue for the
foreseeable future.
The U.S. views IDA as one of the most effective deliverers of assistance -- one that
is consistently on the cutting-edge of development best practices.
I recognize that IDA often has a broad role in poor countries - one that extends
beyond purely delivering financial assistance to other issues such as coordinating
donors and performing research - which provide additional benefits to poor
countries and other aid agencies alike. An important example is that IDA's
performance allocation system was very influential in shaping how our Millennium
Challenge Account functions.
As you are all too aware, our funding decisions are determined by our Congress
and ultimately by the taxpayers. As a result, it is crucial that these institutions
convincingly demonstrate that scarce resources are being put to the most effective
use possible.
Recognizing this reality, I am greatly encouraged by the direction taken by IDA in
recent years as well as the new reforms outlined in the preliminary IDA-14
Agreement.
I would like to briefly highlight a few key issues that we believe are critical to the
international community's cause.
I am pleased that the IDA - as well as the African Fund - replenishment
agreements represent a crucial step toward ending the lend-and-forgive cycle which has been terribly disruptive and debilitating in many countries. The Bush
Administration is very committed to addressing the ongoing debt problem in poor
countries and is continuing to have thoughtful discussions about how to move this
important issue even further.
The fact that 47 countries (out of 62 eligible) will receive grants is both heartening

http://www.trea5.g0v/pr~ss/rI..J.~~1~t~s/js2270.htm

4/22/2005

JS-2270: Treasury Secrdary John Snow Remarks: IDA-l4 Replenishment Meeting

Page :2 or:2

and distressing. It is heartening because these countries will stop digging and start
crawling out of the hole of unsustainable debt that has constrained economic
growth and poverty reduction for far too long. And it is distressing because so
many countries are currently at risk of debt distress and highly vulnerable to
economic shocks.
That said, we should be proud of the leadership that we've shown in taking a big
step forward in putting countries on a sustainable path.
Any effective organization -- whether it's a fortune 500 company, a local NGO or a
central government -- must measure performance if it is to figure out what works
and what doesn't. Simply put - what gets measured, gets done. Without this
measurement and analytical diagnosis, it's impossible to replicate successes, make
mid-term corrections, or phase out unproductive programs.
President Bush has stressed measurable results in all U.S. government programs,
most noticeably in education. For this reason, I am very encouraged that donors
have agreed to significantly expand the IDA results measurement framework
beyond the groundbreaking work performed to date.
I am pleased to see focus on greater use of performance indicators connected to
timelines and periodic assessments of project/program performance, and I am
encouraged that World Bank Management will seek to ensure that staff incentives
properly track the new measurement framework. This is an important part of
creating a results-based institution from top to bottom.
These efforts and others outlined in the IDA-14 Agreement will undoubtedly
improve the effectiveness and accountability of IDA's development assistance including preventing the misuse of World Bank resources.
Transparency is another important component of fostering effective and
accountable institutions. Letting the light of day shine on the internal workings of
international organizations is an absolute must. Openness facilitates deeper
dialogue about best practices and greater accountability to shareholders and
stakeholders. On the other hand, opaqueness and shadows breed uncertainty,
corruption, and inefficiency.
Therefore, I'm pleased to see that the IDA-14 Agreement will outline an ambitious
action plan for the World Bank Board to pursue - such as publishing project
assessments and evaluating the World Bank's internal controls. I hope that all of
you sitting around this table will do your part in bringing these important reforms to
fruition.
The IDA emerging from this replenishment negotiation will be strengthened not just
in terms of financial capacity, but also in terms of delivering effective assistance on
the ground. Clearly, recipient countries will be better off.
I will be testifying before Congress in a few weeks and am anxious to inform them
about this impressive outcome. An outcome for which those of you sitting in this
room are broadly responsible.
Again, welcome all of you to the United States and to the Treasury Department.
wish you the best of luck in concluding this important and ground breaking
replenishment of IDA.

-END-

http://wwwtrea6.gov/pr~~~/releascs/js2270.htm

4/22/2005

JS-2271: I a\. Panel Announces Mectll1gs

Page I ()j I

PRESS RO'OM

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download Ihe free Adobe(r() Acro/JoICr) Reade"").

February 23, 2005
JS-2271

Tax Panel Announces Meetings
WASHINGTON, DC- Senators Connie Mack and John Breaux, Chairman and Vice
-Chairman of tile President's Advisory Panel on Federal Tax Reform, today
announced the Panel's next three meetings
On March 3, 2005 the Panel will meet in Washington, DC, at George Washington
University's Jack Morton AuditOrium. At thiS meeting, the Panel Will hear additional
perspectives on tax reform, as well as a description of the problems presented by
compleXity in the tax system On March 8, 2005 the Panel will meet in Tampa,
FlOrida, to discuss how the tax system affects businesses and entrepreneurs. On
March 16, 2005 the panel will travel to Chicago, Illinois, where the meeting will
focus on how the tax code Influences important taxpayer decisions. Further details
for each of these meetings, including the list of Witnesses, will be provided in later
releases.
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.

REPORTS
•
•

3rd and 4tr1 Meeting Notice
2nd Meeting Notice

http://www.treas.gov/prcs£/rl..k:Jst~s/js2271.htm

4/25/2005

Federal Register/Vol. 70, No. 3S/Wednesday, February 23, 200S/Notices
DEPARTMENT OF TRANSPORTATION
Surface Transportation Board
[STB Finance Docket No. 34624]

R.J. Corman Railroad Companyl
Central Kentucky Lines, LLCAcquisition and Operation
Exemption-Line of R.J. Corman
Railroad Property, LLC

RJ, Corman Railroad Company/
Central Kentucky Lines. LLC (RjCC).1 a
Class III rail carrier. has filed a verified
notice of exemption under 49 CFR
1150.41 to acquire by sublease from its
corporate affiliate R.J. Corman Railroad
Property. LLC (Railroad Property) and
operate a line of railroad in Louisville.
KY, known as the Water Street Lead.
extending from the southeast edge of the
Mellwood Avenue crossing of the Water
Street Lead at or near milepost OTR 4.74
(also known as milepost OOT 1.8) on
CSX Transportation. Inc.'s (CSXT)
Louisville Terminal Subdivision to the
end of track north of River Road. a total
distance of approximately 2.4 miles.
along with associated industry leads
and switch tracks.2 The Water Street
Lead is owned by CSXT and will be
leased by Railroad Property. RJCC will
also acquire by aSSignment from
Railroad Property incidental overhead
trackage rights on a CSXT line between
Louisville and Anchorage, KY, on
CSXT's LCL Subdivision between the
Water Street Lead and milepost 12.49 at
HK Tower in Anchorage. a distance of
approximately 10.75 miles (the
Anchorage Trackage Rights). to allow
connection with other RJCC operations
at the latter location. 3
This transaction is related to STB
Finance Docket No. 34625. R.], Corman
Railroad Property. LLC-Lease
Exemption-Line of CSX
Transportation, Inc., wherein Railroad
Property seeks to lease the Water Street
Lead and acquire the Anchorage
Trackage Rights from CSXT.
RJCC certifies that its projected
revenues as a result of this transaction
will not result in RjCC becoming a Class
II or Class I rail carrier. But, because
RJCC's projected annual revenues will
RJCC is controlled by Richard J. Corman. who
also controls eight other Class III rail carriers in the
eastern United States.
2 According to RJCC. an agreement has been
reached with Railroad Property providing for
RJCC's sublease and operation of the Water Street
Lead immediately upon Railroad Property's lease of
the Water Street Lead from CSXT. The agreement
also provides for the assignment of the Anchorage
Trackage Rights from Railroad Property to RJCC.
3 Railroad Property also will assign to RjCC its
operating rights over CSXT between the Water
Street Lead and CSXT's Osborne Yard in Louisville
for purposes of effectuating interchange.
I

exceed $5 million. RjCC certified to the
Board on December 7,2004. that. prior
to that date. it sent the required notice
of the transaction to the national offices
of all labor unions representing
employees on the affected lines and
posted a copy of the notice at the
workplace of the employees on the
affected lines. See 49 CFR 1150.42(e).
RJCC stated that it intended to
consummate the transaction on
February 5. 2005. and commence
operations on February 7.2005.
If the notice contains false or
misleading information, the exemption
is void ab initio. Petitions to revoke the
exemption under 49 USC. 10502(d)
may be filed at any time. The filing of
a petition to revoke will not
automatically stay the transaction.
An original and 10 copies of all
pleadings, referring to STB Finance
Docket No. 34624. must be filed with
the Surface Transportation Board, 1925
K Street, NW., Washington. DC 204230001. In addition. one copy of each
pleading must be served on Ronald A.
Lane, 29 North Wacker Drive, Suite 920.
Chicago, IL 60606-2832.
Board decisions and notices are
available on our Web site at http://
www.stb.dot.gov.
Decided: February 15, 2005.
By the Board. David M. Konschnik.
Director. Office of Proceedings.
Vernon A. Williams,
Secretary.
[FR Doc. 05-3429 Filed 2-22-05; 8:45 am]
BILLING CODE

491~1-P

DEPARTMENT OF THE TREASURY
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 two public
meetings of the President's Advisory
Panel on Federal Tax Reform.
DATES: The meetings will be held on
Tuesday, March 8, 2005. in the Tampa,
Florida area, and on Wednesday, March
16.2005, in the Chicago, Illinois area.
Both meetings will begin at 9:30 a.m.
ADDRESSES: Due to exceptional
circumstances concerning scheduling,
this Notice is being published at this
time; however. the venues have not
been identified to date. Venue
information will be posted on the
Panel's Web site at http://
www. taxreformpanel.gov as soon as it is
available.

8875

FOR FURTHER INFORMATION CONTACT: The
Panel staff at (202) 927 -2T AX (9272829) (not a toll-free call) or e-mail
info@taxreformpanel.gov (please do not
send comments to this box). Additional
information is available at http://

www.taxreformpanel.gov.
SUPPLEMENTARY INFORMATION:
Purpose: The March 8 meeting is the
third meeting of the AdviSOry Panel,
and will focus on how our tax system
affects business and entrepreneurship.
The March 16 meeting is the fourth
meeting of the Advisory Panel and will
focus on examining the impact of tax
incentives on taxpayers' decisions.
Comments: Interested parties are
invited to attend these meetings;
however, no public comments will be
heard at these meetings. Any written
comments with respect to these
meetings may be mailed to The
President's Advisory Panel on Federal
Tax Reform, 1440 New York Avenue,
NW., Suite 2100, Washington, DC
20220. On February 16,2005, the Panel
requested written comments in response
to four specific questions about the
Federal tax system. For additional
information regarding this request for
comments, please see http://
www.taxreformpanel.govlcontact. 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. NW., Room 1621.
Washington. DC 20024. The Reading
Room is open to the public from 9 a.m.
to 4 p.m., Monday through Friday
except holidays. The public entrance to
the Reading Room is on Pennsylvania
Avenue between 10th and 12th 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 http://

www.taxreformpane1.gov.
Dated: February 18. 2005.
Mark S. Kaizen,
Designated Federal Officer.
[FR Doc. 05-3571 Filed 2-22-05; 8:45 am]
BILLING CODE 4810-25-P

DEPARTMENT OF THE TREASURY
Internal Revenue Service
[REG-154000-04]

Proposed Collection; Comment
Request for Regulation Project;
Withdrawal
AGENCY: Internal Revenue Service (IRS).

7998

Federal Register / Vol. 70, No. 31/ Wednesday, February 16, 2005/ Notices

DEPARTMENT OF TRANSPORTATION
National Highway Traffic Safety
Administration
Reports, Forms and Record Keeping
Requirements; Agency Information
Collection Activity Under OMB Review

National Highway Traffic
Safety Administration.
ACTION: Notice.
AGENCY:

In compliance with the
Paperwork Reduction Act of 1995 (44
U.S.C. 3501 et seq.), this notice
announces that the Information
Collection Request (ICR) abstracted
below has been forwarded to the Office
of Management and Budget (OMB) for
review and comment. The ICR describes
the nature of the information collections
and their expected burden. The Federal
Register Notice with a 60-day comment
period was published on November 2,
2004 [69 FR 63568).
DATES: Comments must be submitted on
or before March 18, 2005.
ADDRESSES: Send comments, within 30
days, to the Office of Information and
Regulatory Affairs, Office of
Management and Budget, 725 17th
Street, NW., Washington, DC 20503,
Attention NHTSA Desk Officer.
SUMMARY:

Estimated Total Annual Burden:
2,247,014.
Comments Are Invited On: Whether
the proposed collection of information
is necessary for the proper performance
of the functions of the Department,
including whether the information will
have practical utility; the accuracy of
the Department's estimate of the burden
of the proposed information collection;
ways to enhance the quality, utility and
clarity of the information to be
collected; and ways to minimize the
burden of the collection of information
on respondents, including the use of
automated collection techniques or
other forms of information technology.
A Comment to OMB is most effective
if OMB receives it within 30 days of
publication.
Issued in Washington, DC. on February 10,
2005.

Richard C. Morse,
Director. Office of Odometer Fraud
Investigation.
[FR Doc. 05-2944 Filed 2-15-05; 8:45 am]
BILLING CODe 491o--S9-P

Dated: February 14, 2005.

DEPARTMENT OF THE TREASURY
Public Meeting of the President's
Advisory Panel on Federal Tax Reform

FOR FURTHER INFORMATION CONTACT:

AGENCY:

Richard Morse, National Highway
Traffic Safety Administration, Office of
Odometer Fraud Investigation (NVS230),202-366-4761. 400 Seventh Street,
SW., Room 6130, Washington, DC
20590.

ACTION:

SUPPLEMENTARY INFORMATION:

National Highway Traffic Safety
Administration

Title: 49 CFR Part 580 Odometer
Disclosure Statement.
OMB Number: 2127-0047.
Type of Request: Extension of a
currently approved collection.
Abstract: The Federal Odometer Law,
49 U.S.C. chapter 327, and
implementing regulations, 49 CFR part
580 require each transferor of a motor
vehicle to provide the transferee with a
written disclosure of the vehicle's
mileage. This disclosure is to be made
on the vehicle's titie, or in the case of
a vehicle that has never been titled, on
a separate form. If the title is lost or is
held by a lien holder, and where
permitted by state law, the disclosure
can be made on a state-issued, secure
power of attorney.
Affected Public: Households,
Business, other for-profit, and not-forprofit institutions, Federal Government,
and State, local, or tribal Government.

this meeting. The public will be invited
to submit comments regarding specific
issues of tax reform at later dates. Any
written comments with respect to this
meeting may be mailed to the
President's Advisory Panel on Federal
Tax Reform, 1440 New York Avenue,
NW., Suite 2100, Washington, DC
20220. 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, NW., Room 1621,
Washington, DC 20024. The Reading
Room is open to the public from 9 a.m.
to 4 p.m., Monday through Friday
except holidays. The public entrance to
the reading room is on Pennsylvania
Avenue between 10th and 12th 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 http://
www.taxreformpanel.gov.

Department of the Treasury.
Notice of meeting.

This notice advises all
interested persons of a public meeting of
the President's Advisory Panel on
Federal Tax Reform.
DATES: The meeting will be held on
Thursday, March 3, 2005, at 9:30 a.m.
ADDRESSES: The meeting will be held at
the Jack Morton Auditorium, Media and
Public Affairs Building, The George
Washington University, 805 21st Street,
NW., Washington, DC 20052. Seating
will be available to the public on a firstcome, first-served basis.
FOR FURTHER INFORMATION CONTACT: The
Panel staff at (202) 927-2TAX (9272829) (not a toll-free call) or e-mail
info@taxreformpanel.gov (please do not
send comments to this box; a comment
box will be available shortly).
Additional information is available at
http://www. taxreformpanel.gov.
SUMMARY:

SUPPLEMENTARY INFORMATION:

Purpose: This is the second meeting
of the Advisory Panel. The meeting will
be focused on understanding problems
presented by the tax system, including
its complexity and the impact of
complexity on overall compliance.
Comments: Interested parties are
invited to attend the meeting; however,
no public comments will be heard at

Mark S. Kaizen,
Designated Federal Officer.
[FR Doc. 05-3086 Filed 2-15-05; 8:45 am]
BILLING CODe 481O--25-P

DEPARTMENT OF THE TREASURY
Internal Revenue Service
Open Meeting of the Area 1 Taxpayer
Advocacy Panel (Including the States
of New York, Connecticut,
Massachusetts, Rhode Island, New
Hampshire, Vermont and Maine)
AGENCY: Internal Revenue Service (IRS)
Treasury.
ACTION: Notice.

An open meeting of the Area
1 Taxpayer Advocacy Panel will be
conducted (via teleconference). The
Taxpayer Advocacy Panel is soliciting
public comments, ideas and suggestions
on improving customer service at the
Internal Revenue Service.
DATES: The meeting will be held
Wednesday, March 2, 2005.
SUMMARY:

FOR FURTHER INFORMATION CONTACT:

Marisa Knispel at 1-888-912-1227 (tollfree), or 718-488-3557 (non toll-free).
SUPPLEMENTARY INFORMATION: An open
meeting of the Area 1 Taxpayer
Advocacy Panel will be held
Wednesday, March 2, 2005 from 3 p.m.
ET to 4 p.m. ET via a telephone
conference call. Individual comments
will be limited to 5 minutes. If you
would like to have the TAP consider a

FROM THE OFFICE OF PUBLIC AFFAIRS
February 23, 2005
2005-2-23-14-32-46-6928
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $81,164 million as of the end of that week, compared to $80,602 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
Februar~

TOTAL

1. Foreign Currency Reserves

a. Securities

Februa~

11, 2005

80,602

18, 2005

81,164

Euro

Yen

TOTAL

Euro

Yen

TOTAL

11,797

14,875

26,672

11,970

14,883

26,853

Of which, issuer headquartered in the U.S.

b. Total deposits with:
b.i. Other central banks and BIS

11,559

2,990

14,549

11,753

2,991

14,744

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

b.ii. Of which, banks located abroad

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

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

15,113

15,213

13,225

13,312

11,042

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
Februar~

Euro
1. Foreign currency loans and securities

Februar~

11, 2005

Yen

TOTAL

Euro

18, 2005

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

III. Contingent Short-Term Net Drains on Foreign Currency Assets
February 11, 2005
Euro
1. Contingent liabilities in foreign currency

Yen

February 18, 2005

TOTAL

Euro

Yen

TOTAL

o
o

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-2272: Tax Panel Stan Announced

Page I of I

FROM THE OFFICE OF PUBLIC AFFAIRS
February 23, 2005
JS-2272

Tax Panel Staff Announced
WASHINGTON, DC - Jeffrey Kupfer, executive director of the President's Advisory
Panel on Federal Tax Reform, today announced three new members of the Tax
Panel staff. Jon Ackerman is serving as senior counsel, Rosanne Altshuler is
serving as senior economist and Tara Bradshaw will join the Tax Panel staff as
communications director later this month.
Jon Ackerman joined the Tax Panel staff as senior counsel on February 9, 2005.
He is currently on leave from the Department of the Treasury's Office of Tax Policy.
Prior to joining the Department of the Treasury, he was an attorney with McKee
Nelson LLP. Jon is a certified public accountant and practiced with a global
accounting firm before attending law school. He is an adjunct professor of law at
the Georgetown University Law Center and has held a number of positions in the
American Bar Association Section of Taxation. Jon received a Bachelor of
Business Administration from the University of Arizona, a Master of Taxation from
the University of Denver, and a law degree from the University of Chicago.
Rosanne Altshuler joined the Tax Panel staff as senior economist on February 14,
2005. She is currently on leave from Rutgers University where she is an associate
professor of economics. Before joining the Tax Panel, she was acting as a special
advisor to the Joint Committee on Taxation. Altshuler has published numerous
articles on the economics of taxation in scholarly journals and books. Her work has
also appeared in Tax Notes and Tax Notes International. She has served on the
Board of Directors of the National Tax Association and has edited the National Tax
Journal since 2001. Rosanne received her B.A. from Tufts University in 1982 and
her Ph.D. in Economics from the University of Pennsylvania in 1988.
Tara Bradshaw will join the Tax Panel staff as communications director on February
28, 2005. She most recently served as an associate director 'in the Americas Public
Relations Group at Ernst & Young LLC, where she managed public relations for the
National Tax Practice. From 2001 to 2004, she served as a spokeswoman for U.S.
Department of the Treasury regarding tax policy, tax reform, IRS, the
Administration's budget, and economic issues. She was the press secretary for the
Senate Finance Committee (Chairman William V. Roth, Jr. R-DE) from 1999 to
2001. She holds a Masters in Mass Communication and Journalism and a BA in
English from the University of South Carolina.
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 are available on the Panel's website at www.taxreformpanel.gov.

http://wwwtrea:•. goy/press/r~km.es/js2272.htm

4/22/2005

JS-2273: The Honorable John W. Snow Prepared Remarks: The Tampa Chamber of... Page I of J

PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
February 24, 2005
JS-2273
The Honorable John W. Snow
Prepared Remarks: The Tampa Chamber of
Commerce Board of Governors
Tampa, FL
February 24, 2005
Thank you; it's great to be in Tampa. Yours is a beautiful and vibrant city, and one
that I always enjoy visiting.
A special group of folks with an historic task will be here in Tampa in less than two
weeks. On March 8th the President's Advisory Panel on Federal Tax Reform will
holding a meeting here on business and entrepreneurship - something that is
clearly of interest to this group!
The Tax Reform Panel is made up of a group of great Americans; brilliant folks who
are giving generously of their time and intellect to the historic undertaking of
reforming our cumbersome tax code into something that is more fair, simple and
pro-growth. I am deeply appreciative of their efforts, and I believe the American
people, and the American economy, will benefit greatly from their work.
Speaking of important work, I want to commend the Tampa Chamber for its work to
make this city a success, including the terrific contributions that your member
companies make, individually and collectively, to the Tampa area economy. Being
an entrepreneur and running a business, no matter how small, is what makes the
American economy tick - both locally and nationally.
Businesses like yours create jobs. That's why the President's tax cuts were
designed with small business in mind ... and the results have been very good. The
economy - again, made up of businesses like yours - has created over 2.7 million
jobs since May of 2003. And while Job growth can never be fast enough for those
looking for work, the steady pace of job creation has been an unmistakable sign of
an economy that has recovered from very tough times, and is now expanding.
Evidence of our economic health abounds: GOP growth for 2004 was 4.4 percent.
The unemployment rate is down to 5.2 percent - lower than the average rate of the
1970s, 1980s and 1990s. Real after-tax income per person is up by over eleven
percent since the end of 2000 and household wealth is at an all-time high. Inflation,
interest rates, and mortgage rates remain at low levels. Homeownership rates are
at record highs.
Our economy is dynamic and resilient - the envy of the world. But of course we still
face economic challenges as a country. We need to keep taxes low and stay on this
path of economic growth and job creation. We also need to continue looking down
the field and make sure that our economy is not disrupted by things that we can
avoid - things that we can fix, today.
Obviously I'm talking about Social Security. The system, as you know, is
unsustainable. It's in trouble. The President has sounded the call for meaningful
reform, and his leadership on the issue is both politically brave and inspiring. The
American people and their representatives in government all know that Social
Security needs to be fixed; but it took a brave leader to say, okay, this is the year
we're going to do it.
Keep in mind that the system is working fine for now, and most of you in this room
will never be personally impacted by Social Security's impending economic

http://wwwtreu3.gov/press/r~lt:<1St~s/js2273.htm

4/22/2005

JS-2273: The Honorable John W. Snow Prepared Remarks: The Tampa Chamber of...

Page 2 of' 3

shortfalls. You will not be impacted by any change in or reform to the system,
because the President has pledged that if you were born before 1950 - if you're 55
or older today - the system will not change for you; you will receive your full
anticipated benefits, period.
No, those of us of a certain age aren't the ones who need to worry. It's our children
and their children who will be left out by the current system. They are the ones
President Bush is worried about. They are the ones for whom Congress needs to
act, and soon.
Without reform, younger generations will face massive tax increases and/or benefit
cuts. It's a simple matter of demographics and arithmetic. With Americans living
longer and having fewer children, the system simply can't operate the way it was
intended. In 1950 there were 16 workers to support every beneficiary of Social
Security - a very comfortable ratio of those paying in versus those drawing benefits.
But today there are only 3.3 workers supporting every beneficiary. By the time
today's youngest workers turn 65, there will only be two workers supporting each
retiree.
The numbers simply don't work. As a result, today's 30-year-old can expect a 27
percent benefit cut from the current system when he or she reaches retirement age.
The problem actually becomes more expensive with each passing year. And as it
is, we are looking at $10.4 trillion in unfunded liabilities. If we do not act to fix the
system, the only solutions available for younger generations will be dramatically
higher taxes, massive new borrowing or sudden and severe cuts in benefits or other
government programs.
Dramatically higher taxes are ruinous for an economy - even one as resilient and
strong as ours. No one understands this concept better than the people here today.
You know that lower taxes help your business, and higher taxes hurt it - and as I
said before, you are the linchpin of our economy. The President knows that an
increase in the payroll tax rate hurts businesses like yours, and all the jobs you
create, and he won't do that.
He also won't leave this problem to future generations and future presidents.
What he'd like to see for future generations is an ability to save some of those
payroll taxes, to build a nest egg that belongs to the worker, not to the government.
A nest egg that would have a real return on investment, far better than the rapidlyweakening promise of Social Security benefits.
With voluntary personal accounts, younger workers would be able to learn about
their financial choices, build a nest egg and benefit from sound long-term
investment in the free market system without disrupting the system of benefits for
their parents and other generations of retired beneficiaries.
Social Security reform that doesn't raise payroll tax rates, that protects benefits for
today's seniors, and that improves the system dramatically for your children and
grandchildren can be achieved. We can choose to leave a reformed, healthy
system to our heirs rather than a looming financial crisis.
Many of you in this room may want to pass your business on to your children or
grandchildren. I know you'll want your business to be in top shape, financially, when
that time comes.
Let's make sure we do the same with Social Security. If we act now, we can make
sure that Social Security, and our economy, are on sound financial footing for our
children and grandchildren.
Thanks so much for having me here today.

-30-

http://www.tr~as.gov/rn~ss/releases/js2273.htm

4/22/2005

JS-2274: The Honorable John W. Snow Prepared Remarks: The Jacksonville Cham...

Page I of:2

FROM THE OFFICE OF PUBLIC AFFAIRS
February 25, 2005
JS-2274
The Honorable John W. Snow
Prepared Remarks: The Jacksonville Chamber of Commerce
Jacksonville, FL
February 25, 2005
Thank you so much for having me here today. Jacksonville is always a great city to
visit, and I appreciate the work that this group does to make it a good place to live
and do business.
Both individually and collectively, the members of the Jacksonville Chamber make
terrific contributions to the Jacksonville area economy, and I commend you all for
that. Being an entrepreneur and running a business, no matter how small, is what
makes the American economy tick - both locally and nationally. I appreciate that,
and President Bush appreciates that.
We know that businesses like yours create jobs. That's why the President's tax cuts
were designed with small business in mind ... and the results have been very good.
The economy - again, made up of businesses like yours - has created over 2.7
million jobs since May of 2003. And while job growth can never be fast enough for
those looking for work, the steady pace of job creation has been an unmistakable
sign of an economy that has recovered from very tough times, and is now
expanding.
Evidence of our economic health abounds: GOP growth for 2004 was 4.4 percent.
The unemployment rate is down to 5.2 percent - lower than the average rate of the
1970s, 1980s and 1990s. Real after-tax income per person is up by over eleven
percent since the end of 2000 and household wealth is at an all-time high. Inflation,
interest rates, and mortgage rates remain at low levels. Homeownership rates are
at record highs.
Our economy is dynamic and resilient - the envy of the world. But of course we still
face economic challenges as a country. We need to keep taxes low and stay on this
path of economic growth and job creation. We also need to continue looking down
the field and make sure that our economy is not disrupted by things that we can
avoid - things that we can fix, today.
Obviously I'm talking about Social Security. The system, as you know, is
unsustainable. It's in trouble. The President has sounded the call for meaningful
reform, and his leadership on the issue is both politically brave and inspiring. The
American people and their representatives in government all know that Social
Security needs to be fixed; but it took a brave leader to say, okay, this is the year
we're going to do it.
Keep in mind that the system is working fine for now, and most of you in this room
will never be personally impacted by Social Security's impending economic
shortfalls. You will not be impacted by any change in or reform to the system,
because the President has pledged that if you were born before 1950 - if you're 55
or older today - the system will not change for you; you will receive your full
anticipated benefits, period.
No, those of us of a certain age aren't the ones who need to worry. It's our children
and their children who will be left out by the current system. They are the ones
President Bush is worried about. They are the ones for whom Congress needs to
act, and soon.

http://www.tr~as.gov!prcss.jrelcascs/js2274.htm

4/22/2005

JS-227-l: The Honorable John W. Snow Prepared Remarks: The Jacksonville Cham...

Page.2 oj I

Without reform, younger generations will face massive tax increases and/or benefit
cuts. It's a simple matter of demographics and arithmetic. With Americans living
longer and having fewer children, the system simply can't operate the way it was
intended. In 1950 there were 16 workers to support every beneficiary of Social
Security - a very comfortable ratio of those paying in versus those drawing benefits.
But today there are only 3.3 workers supporting every beneficiary. By the time
today's youngest workers turn 65, there will only be two workers supporting each
retiree.
The numbers simply don't work. As a result, today's 30-year-old can expect a 27
percent benefit cut from the current system when he or she reaches retirement age.
The problem actually becomes more expensive with each passing year. And as it
is, we are looking at $10.4 trillion in unfunded liabilities. If we do not act to fix the
system, the only solutions available for younger generations will be dramatically
higher taxes, massive new borrowing or sudden and severe cuts in benefits or other
government programs.
Dramatically higher taxes are ruinous for an economy - even one as resilient and
strong as ours. No one understands this concept better than the people here today.
You know that lower taxes help your business, and higher taxes hurt it - and as I
said before, you are the linchpin of our economy. The President knows that an
increase in the payroll tax rate hurts businesses like yours, and all the jobs you
create, and he won't do that.
He also won't leave this problem to future generations and future presidents.
What he'd like to see for future generations is an ability to save some of those
payroll taxes, to build a nest egg that belongs to the worker, not to the government.
A nest egg that would have a real return on investment. far better than the rapidlyweakening promise of Social Security benefits.
With voluntary personal accounts, younger workers would be able to learn about
their financial choices, build a nest egg and benefit from sound long-term
investment in the free market system without disrupting the system of benefits for
their parents and other generations of retired beneficiaries.
Social Security reform that doesn't raise payroll tax rates, that protects benefits for
today's seniors, and that improves the system dramatically for your children and
grandchildren can be achieved. We can choose to leave a reformed, healthy
system to our heirs rather than a looming financial crisis.
Many of you in this room may want to pass your business on to your children or
grandchildren. I know you'll want your business to be in top shape, financially, when
that time comes.
Let's make sure we do the same with Social Security. If we act now, we can make
sure that Social Security, and our economy, are on sound financial footing for our
children and grandchildren.
Thanks so much for having me here today.

htto:llwww.tr~as.gov/pn:.ss/rdeases/js2274.htm

4/22/2005

JS-2275: Statement of Treasury Secretary John W. Snow on Fourth Quarter GOP G... Page I uf I

FROM THE OFFICE OF PUBLIC AFFAIRS
February 25, 2005
JS-2275

Statement of Treasury Secretary John W. Snow
on Fourth Quarter GDP Growth
Today's announcement that fourth quarter real gross domestic product grew at a
3.8 percent rate rather than the 3.1 percent rate originally reported illustrates that
America's economy has been moving in the right direction and Americans are
seeing results. I was particularly pleased to see that business investment was
revised up to a growth rate of 14 percent. Recent economic data for the first
quarter, including the steep drop in new claims for unemployment insurance and
robust growth in business spending on capital goods, show that this momentum is
continuing into 2005.
President Bush is committed to keeping the economy on the path of healthy growth
by making the tax cuts permanent, reducing the burden of frivolous lawsuits, and
strengthening social security. The President's leadership on economic policy is
clearly moving the economy in the right direction.

.http://www. tren5.gov/press!r~le<l,>p.s/j s227 5 .htrn

4/22/2005

JS-2276: Deputy Assistant Secretary Iannicola Addresses National Meeting of Gras... Page I

or I

FROM THE OFFICE OF PUBLIC AFFAIRS
February 24, 2005
JS-2276
Deputy Assistant Secretary lannicola
Addresses National Meeting of Grass
Roots Financial Educators in Baltimore
Treasury's Deputy Assistant Secretary for Financial Education Dan lannicola today
delivered remarks about Treasury's financial education initiatives and the progress
of the Financial Literacy and Education Commission at the Assets for
Independence Program Grantee Meeting in Baltimore, Maryland. lannicola spoke to
representatives of non-profit groups, state and local government agencies,
community action agencies and faith-groups on ways to strengthen and expand
financial education in their communities.
lannicola praised the organizations present for the impact they have on the grass
roots level. "There is no substitute for the type of on-the-ground presence these
organizations have in their communities. By knowing their clients by name and by
need, these groups are able to spread financial knowledge on the local leveL"
The Assets for Independence Program is a federal grant program that enables
community-based non-profits and state, local and tribal government agencies to
implement ways of giving low-income families assistance. Assets for Independence
is administered by the Office of Community Services within the U.S. Department of
Health and Human Services. The program supports projects that help low-income
families move up the economic ladder by providing financial literacy education,
access to individual development accounts, as well as other strategies. Individual
development accounts help participants save earned income in special purpose
matched savings accounts.
The Department of the Treasury is a leader in promoting financial education.
Treasury established the Office of Financial Education in May of 2002. The Office
works to promote access to the financial education tools that can help all Americans
make wiser choices in all areas of personal financial management, with a special
emphasis on saving, credit management, home ownership and retirement
planning. The Office also coordinates the efforts of the Financial Literacy and
Education Commission, a group chaired by the Secretary of Treasury and
composed of representatives from 20 federal departments, agencies and
commissions, which works to improve financial literacy and education for people
throughout the United States. For more information about the Office of Financial
Education visit: www.treas.gov/financialeducation.

http://www.tr~as.gov/pfi:s../releases/js2276.htm

4/22/2005

JS-2277: The lIonorabk John W. Snow Credit Union National Association (CUNA... Page 1 Or.f

FROM THE OFFICE OF PUBLIC AFFAIRS
February 28, 2005
JS-2277
The Honorable John W. Snow
Credit Union National Association (CUNA)
Government Affairs Conference
Washington, DC
February 28, 2005
Thank you so much for having me here today.
This is the third year that I've been able to come to this fine conference, and it's
always a pleasure to work with your group.
I meet and work with financial leaders every day, but you are special. Credit Unions
have great heart, showcased in your terrific motto of "not for charity, not for profit,
but for service."
You do good work. Loans to small business, home mortgages, financial education
and fighting the financial war on terror ... each one of these efforts is critical to our
country's economic health and strength, and I applaud you for doing good while you
do business.
I believe I told you last year that this administration understands the basic economic
principle that you get less of anything you tax ... and we don't want less of what you
do. Well, that principle, and that position, remains true today.
We don't want less small-business lending. We don't want fewer home mortgages.
We want to continue to have a strong relationship with a group of financial
institutions that are dedicated to their communities, who want to see their
customers educated and financially literate.
And we want to continue working with you as we cut off the flow of blood money to
the terrorists who seek to do our country harm. Because while hatred fuels the
terrorist agenda, cash makes it possible. America's credit unions have shown
tremendous resolve in this fight, and I want to personally thank you for your efforts.
The financial community has shown great resolved since September 11 th, and our
work together has been productive. Since September 11, 2001, the United States
has designated 398 individuals and entities as terrorists, their financiers or
facilitators, as well as worked with the international community to freeze over $147
million worldwide in terrorist-related assets.
Most recently, the Treasury again took action against Muhsin al-Fadhli, whose
efforts were helping to finance the Iraqi insurgency, as well as al Qaida. That action
followed on the heels of last month's designation by the Treasury of Sulayman
Khalid Darwish. Darwish was helping support Zarqawi, who has launched violent
acts against our troops, coalition partners and the Iraqi people
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.
As you know, the financial war on terror is ongoing and it is not easy. But since we
must continue to be vigilant, Treasury is always looking for ways to provide you with
more and better information about our regulations, for example those out of
FinCEN. So let's keep up the dialogue ... let us know when we're confusing you, or

http://www.tr~aS.80v/pn~ss/rcleascs/js2277.htm

4/22/2005

JS-2277: The Honorabk John W. Snow Credit Union National Association (CUNA ... Page:2 of..+
when we can do better - because the better our regulations are understood by you,
the more successful our critical enforcement efforts will be.
Our country must be safe in order to be prosperous and create jobs. I emphasized
loans for small-business start-ups and expansions because that leads to job
creation, which is the ultimate goal of a strong economy.
Credit unions have been there for entrepreneurs when they needed you most. You
understand their needs, and our President does, too. When small business needed
tax relief to grow and create new jobs, President Bush responded with reduced
marginal rates, an increase in expensing and a whack at the death tax. Sure
enough, job creation started to pick up. Since May of 2003, the economy has
created 2.7 million jobs. The steady pace of job creation has been an unmistakable
sign of an economy that has recovered from very tough times, and is now
expanding.
The first time I spoke to this group, you may remember, our economy was
struggling. But look at the U.S. economy today. GOP growth for 2004 was 4.4
percent. The unemployment rate is down to 5.2 percent - lower than the average
rate of the 1970s, 1980s and 1990s. Real after-tax income per person is up by over
eleven percent since the end of 2000 and household wealth is at an all-time high.
Inflation, interest rates, and mortgage rates remain at low levels. Homeownership
rates are at record highs.
Our economic recovery was swift and strong and you were part of it. More
Americans have jobs today thanks to the recovery, and you should take great pride
in this fact.
Our economic challenges are not over, of course; we still have plenty of work to do.
Historic work has begun on reforming our federal tax code - something that I
believe will stimulate and strengthen our economy over the long term. The
President's Advisory Panel on Tax Reform is holding meetings, gathering
information and examining the current code as they work toward developing
recommendations for a new code that would be simpler, more fair and encourage
economic growth.
The work on tax reform is exciting, and I believe this administration will make
history on fundamental tax reform this year. In the mean time, we need to keep
taxes low and government spending in check in order to reduce our budget deficits.
That's why President Bush submitted a very lean, very responsible budget to
Congress this month.
We also need to address our long-term financial deficits. As you know, the
President has made reforming the nation's Social Security system a top priority of
his second term. Taking on this challenge has been a profound act of political
leadership and moral courage. I'm proud to work with him as we talk with the
Congress and with taxpayers all over the country about the serious problems facing
the Social Security system.
Congress should follow the President's political courage and leadership when it
comes to saving Social Security for future generations. Because our children's
retirement security is more important that partisan politics.
It is important to keep in mind that Social Security will not be changed for those 55
or older (anyone born before 1950). For the more than 45 million Americans who
are currently receiving Social Security benefits, and those nearing retirement,
benefits are secure and will not change in any way, period.
I believe we'll make real progress on Social Security once everyone agrees that the
demographic future of the system makes it unsustainable. Simply put, there are
fewer workers to support our retirees. People are living longer and having fewer
children. As a result we have seen a dramatic change in the number of workers
supporting each retiree's benefits. We had 16 workers paying into a system for
every one beneficiary in 1950, and today we have just three workers for every
beneficiary. That ratio will drop to two-to-one by the time today's young workers
retire.

http://www.tn~~ .. l:jov/prcss/relcascs/js2277.htrn

4/22/2005

JS-2277: The Honorable John W. Snow Credit Union National Association (CUNA... Page 3 of-J.
Just three years from now, in 2008, the first baby boomers will begin to retire. In
2018, 13 years from now, the government will begin to payout more in Social
Security benefits than it collects in payroll taxes. By 2042, when younger workers
begin to retire, the system will be bankrupt. Under the current system, today's 30year-old worker will face a 27 percent benefit cut when he or she reaches normal
retirement age.
We must make Social Security better for younger workers.
If we do not act to fix the system, the only solutions available for younger
generations will be dramatically higher taxes, massive new borrowing or sudden
and severe cuts in benefits or other government programs.
Dramatically higher taxes are ruinous for an economy - even one as resilient and
strong as ours.
What the President would rather see for future generations is an ability to save
some of their payroll taxes, to build a nest egg that belongs to the worker, not to the
government. A nest egg that would have a real return on investment, far better than
the rapidly-weakening promise of Social Security benefits.
With voluntary personal accounts, younger workers would be able to learn about
their financial choices, build a nest egg and benefit from sound long-term
investment in the free market system without disrupting the system of benefits for
their parents and other generations of retired beneficiaries.
Social Security reform that doesn't raise payroll tax rates, that protects benefits for
today's seniors, and that improves the system dramatically for your children and
grandchildren can be achieved. We can choose to leave a reformed, healthy
system to our heirs rather than a looming financial crisis.
Social Security reform will be hard work, but something this important must not be
put off for another day.
Before I leave, I do want to take a moment to encourage you, if you aren't already,
to offer a new product to your customers. It's something that I think has huge
market potential, and is of particular interest to your small-business customers.
I'm talking about Health Savings Accounts, HSAs. Last year's Medicare prescription
drug bill created HSAs, an innovative new program to empower consumers to make
better health care choices. HSAs are really super-charged IRAs that put patients
back in charge of their health care. You own it, you control it, you can leave it to
your heirs.
It's a new option for health coverage that is good news for individuals and
employers who are struggling with their health-care costs.
One of the most common complaints we hear from consumers is that they can't find
a local bank that offers these accounts. So I am confident that the market is there
for you, that consumers are anxious for you to add this to your product line. It is
also possible that demand for HSAs might take off very soon in Florida. Governor
Jeb Bush recently sent a proposal to the state legislature that would create an HSA
option for state government employees.
And there is good news for credit unions when it comes to offering this new product:
first, any bank or credit union is automatically allowed to offer HSAs to your
customers as either a trust or a custodial account. Second, the reporting on these
accounts is minimal.
You only need to report on them once a year - to the customer and the IRS - one
form to report contributions to the account and another form to report the amount
that has been taken out of the account.
Best of all: you won't need any new forms Treasury has model forms that you can
use, or you can adapt the forms you use for IRAs for HSAs.

http://www.trl:.a~.gov/pressJreleases/js2277.htm

4/22/2005

18-2277: The Honorable John W. Snow Credit Union National Association (CUNA ... Page ~ ()f~
HSAs are a critical step toward increasing the availability and affordability of health
insurance for all Americans. They are also helping to put individuals in charge of
their own health care ... and that's something that is good news both for the
American family and for the American economy as a whole.
As you know, the President supports this type individual control and ownership in
many areas. He wants to see as many Americans as possible own their own
homes, their own businesses if they want, their own health care and their own
retirement savings.
As credit union operators, you are also dedicated to individual ownership and
savings, so I know the concept is not a new one to you.
You understand as well as anyone in the financial community the benefits that
come from financial ownership and independence. It's one of the reasons you've
been such a great partner in the effort to increase financial literacy in this country.
You are closer to your customers than a lot of financial institutions are. You
therefore have an opportunity to contribute in a unique way to financial literacy and
ownership.
In terms of financial literacy, I think we have a tremendous opportunity to start fresh
with a new generation ... to ensure that tomorrow's young adults understand how
important it is to save, and how to protect themselves from identity theft, in the
same way that they understand the basics of physical health or road safety.
There is a tremendous interest on the part of students to learn the financial facts of
life: how to manage credit wisely, how to save and invest, how important it is to
save for retirement at the beginning of a career, not at the end.
You and your staff are uniquely positioned to reach out to these groups and others
in need of financial education to help bring them into the financial mainstream,
where they can safely build up their assets, invest and save for their futures and
their children's futures.
As with so many other things, we accomplish the most when we work together.
Whether it's fighting terrorists, or teaching teenagers about financial responsibility,
or helping entrepreneurs pursue their American Dreams.
I'm glad to work with the nation's credit unions on all these efforts.
I thank you for the work you do, and the chance to speak to you today.
Have a great conference.

http://www.tr~aS.80v Iprcss/releases/j s2277 .htrn

4/22/2005

JS-2278: Treasury and IRS Issue Guidance on Life Insurance and Annuity Insurance and ...

Page I

or I

PRESS ROOM

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

February 28. 2005
JS-2278
Treasury and IRS Issue Guidance on Life Insurance and Annuity Insurance
and Annuity Insurance and Annuity Insurance and Annuity Contracts
WASHINGTON, DC-- Today, the Treasury Department and the Internal Revenue
Service finalized a regulation that would limit the use of life insurance and annuity
contracts as a way to avoid current taxation of investment earnings. The regulation,
together with other guidance previously issued, will prevent taxpayers from turning
otherwise taxable investments in hedge funds and other entities into tax-deferred or
tax-free investments by purchasing the investments through a life insurance or
annuity contract.
Life insurance and annuity contracts receive favorable tax treatment in recognition
of the importance of protecting loved ones against the potentially devastating
financial consequences of death or the risk of exhausting savings while in
retirement. The regulation finalized today, together with other guidance previously
issued, provides guidance that will help taxpayers purchasing a life insurance or
annuity contract to be secure in the knowledge that the contract complies with the
tax laws. This regulation is part of the effort to modernize the rules for these
contracts in recognition of the developments that have occurred in the financial
markets in recent years.
The regulation finalized today was originally proposed in 2003. In response to
comments from the public, the transition period for existing contracts that are
affected by the regulation is four calendar quarters, which is two calendar quarters
longer than the period originally proposed. The preamble to the regulation also
acknowledges valuable input from commentators that may serve as the basis for
additional guidance in the future.

REPORTS
•

A copy of the regulations

http://www.tr~as.8ov/rress/rcleases/js2278.htm

4/2212005

[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9185]
RIN 1545-8877
Diversification Requirements for Variable Annuity, Endowment, and Life Insurance
Contracts
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final regulations removing provisions of the Income
Tax Regulations that apply a look-through rule to assets of a nonregistered partnership for
purposes of satisfying the diversification requirements of section 817(h) of the Internal
Revenue Code.
DATES: Effective Date: These regulations are effective as of March 1,2005. However,
arrangements in existence on March 1, 2005, will be considered to be adequately
diversified if: (i) those arrangements were adequately diversified within the meaning of
section 817(h) prior to March 1,2005, and (ii) by December 31,2005, the arrangements
are brought into compliance with the final regulations.
Applicability Date: For dates of applicability, see § 1.817-5(i).

FOR FURTHER INFORMATION CONTACT: James Polfer, (202) 622-3970 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:

Background
Under section 817(h), a variable contract based on a segregated asset account is
not treated as an annuity, endowment, or life insurance contract unless the segregated
asset account is adequately diversified. For purposes of testing diversification, section
817(h)(4) and § 1.817-5(f) of the regulations provide a look-through rule for assets held
through certain investment companies, partnerships, or trusts. Section 1.817-5(f)(2)(i)
provides that look-through treatment is available with respect to any investment company,
partnership, or trust only if all the beneficial interests in the investment company,
partnership, or trust are held by one or more segregated asset accounts of one or more
insurance companies, and public access to such investment company, partnership, or trust
is available exclusively (except as otherwise permitted by section 1.817-5(f)(3)) through the
purchase of a variable contract. Under § 1.817-5(f)(2)(ii), the look-through rule applies to a
partnership interest that is not registered under a Federal or state law regulating the
offering or sale of securities. Unlike § 1.817-5(f)(2)(i), satisfaction of the nonregistered
partnership look-through rule of § 1.817-5(f)(2)(ii) is not explicitly conditioned on limiting the
ownership of interests in the partnership to certain specified holders.

3
On July 30,2003, the Treasury Department and the IRS published a notice of
proposed rulemaking (REG-163974-02) under section 817 in the Federal Register (68
FR 44689). The proposed regulations would remove the rule that applies specifically to
nonregistered partnerships for purposes of testing diversification. The proposed
regulations also would remove an example that illustrates that rule.
The application of § 1.817-5(f)(2)(i) to interests in nonregistered partnerships will be
unchanged by the removal of § 1.817-5(f)(2)(i i). Thus, look-through treatment will be
available for interests in a nonregistered partnership if all the beneficial interests in the
partnership are held by one or more segregated asset accounts of one or more insurance
companies and public access to the partnership is available exclusively (except as
otherwise permitted by §1.817-5(f)(3)) through the purchase of a variable contract.
Written comments were received in response to the notice of proposed rulemaking.
A public hearing on the notice of proposed rulemaking was held on April 1, 2004. After
consideration of all the comments and the hearing testimony, the proposed regulations are
adopted as amended by this Treasury decision.

4
Explanation and Summary of Comments and Public Hearing
In addition to requesting comments on the clarity of the proposed rule and how the
rule could be made easier to understand, the Treasury Department and the IRS specifically
requested comments on: (1) whether revocation of §1.817-5(f)(2)(ii) necessitates other
changes to the look-through rules of § 1.817-5(f) , in particular whether the list of holders
permitted by §1.817-5(f)(3) should be amended or expanded, and whether a non-pro-rata
distribution of the investment returns of a segregated asset account should be permitted to
take account of certain bonus payments to investment managers commonly referred to as
incentive payments, (2) whether § 1.817-5 should be updated to take account of changes to
variable contracts since the final regulations were published in 1986, and (3) whether
regulations are needed to address when a holder of a variable contract will be treated as
the owner of assets held in a segregated asset account and, therefore, required to include
earnings on those assets in income.
1. Comments on the Proposed Regulations
Two comments on the proposed regulation concerned the definition of "security" in
§1.817-5(h)(6). Under §1.817-5(b)(1 )(ii)(A), all securities of the same issuer are treated as
one investment for the purposes of satisfying the diversification requirements. Section
1.817-5(h)(6) provides that the term security includes "a cash item and any partnership
interest registered under a Federal or State law regulating the offering or sale of
securities," but does not include" any other partnership interest." The commentators stated
that the definition of "security" that applies to § 1.817-5 should be amended to include an

5
interest in a non-registered partnership. The Treasury Department and the IRS agree tha~
in light of the revocation offormer §1.817-5(f)(2)(ii), the definition of security should be
modified to remove the distinction between registered and nonregistered partnership
interests. The final regulations reflect this change.
A number of commentators also suggested that the regulation should be clarified by
adding to or otherwise revising the examples contained in §1.817-5(g). In response to
these comments, the final regulations revise §1.817-5(g) Example1 to remove the
reference to partnership P as a publicly registered partnership. The Treasury Department
and the IRS believe tha~ with this change, the examples contained in §1.817-5(g)
adequately explain the application of §1.817-5 to partnership interests. Any questions
concerning the application of § 1.817-5 to more specific factual scenarios may be
addressed by the letter ruling process or by subsequent published guidance.
Two commentators urged that existing arrangements either should be
grandfathered in some fashion or should be given additional time to be brought into
compliance with the final regulations. The notice of proposed rulemaking provided that
arrangements in existence on the effective date of the revocation of § 1.817-5(f)(2)(ii) will
be considered to be adequately diversified if: (i) those arrangements were adequately
diversified within the meaning of section 817(h) prior to the revocation of §1.817-5(f)(2)(ii),
and (ii) by the end of the last day of the second calendar quarter ending after the effective
date of the regulation, the arrangements are brought into compliance with the final
regulations. The Treasury Department and the IRS do not believe it is appropriate to

6
grandfather existing arrangements indefinitely. In response to these comments, however,
the transition period for existing arrangements to be brought into compliance with the
regulations is two calendar quarters longer than the period provided in the proposed
regulations.
Finally, one commentator questioned the authority of the Treasury Department and
the IRS to enact this final regulation because "the only substantive impetus for the
regulation is a general statement in the legislative history." Congress enacted the
diversification requirements of section 817(h) to "discourage the use of tax-preferred
variable annuity and variable life insurance primarily as investment vehicles," H.R. Conf.
Rep. No. 98-861, at 1055 (1984), and granted the Secretary broad regulatory authority to
develop rules to carry out this intent. The Treasury Department and the IRS have
determined that this final regulation and the rest of the regulations contained in § 1.817-5
were prescribed within the delegation of authority provided by Congress.
2. Comments on § 1.817-5 More Generally
Many comments concerned the list of permitted investors under § 1.817-5(f)(3).
Notwithstanding the limitations on public access to an investment company, partnership, or
trust that is subject to look-through treatment under §1.817-5(f), § 1.817-5(f)(3) permits lookthrough treatment if the beneficial interests of the investment company, partnership, or trust
are held by certain other "permitted investors," including the general account of a life
insurance company (if certain requirements are met), the manager or a corporation related
to the manager (if certain requirements are met), or the trustee of a qualified plan.

7
Commentators suggested that the list of permitted investors be expanded to include, for
example, qualified tuition programs described in section 529; segregated asset accounts
of foreign insurance companies; foreign pension plans; persons or entities related to the
manager of an investment company, partnership, or trust in a manner specified in section
707(b); certain investment professionals operating as service providers; or persons who
receive interests in a partnership as a result of inadvertent transfers, such as by bankruptcy
or death of the permitted investor. The sole speaker at the public hearing on the notice of
proposed rulemaking testified that the list of investors permitted by § 1.817-5(f)(3) should
be expanded to include "floor specialists" as that term is defined in section 1236(d)(2).
Other comments suggested guidance on non-pro-rata manager compensation. In
order for the manager (or a corporation related in a manner specified in section 267(b) to
the manager) of an investment company, partnership, or trust, to be a permitted investor
under §1.817 -5(f)(3)(ii), (1) its interest must be held in connection with the creation or
management of the investment company, partnership, or trust; (2) the return on such
interest must be computed in the same manner as the return on an interest held by a
segregated asset account is computed (determined without regard to expenses
attributable to variable contracts); and (3) there must be no intent to sell such interest to the
public. A number of commentators stated that the requirement that the return on a
manager's interest be computed in the same manner as the return on a segregated asset
account's interest -- essentially a pro-rata distribution requirement -- is inconsistent with
prevailing market practices concerning manager bonuses, discourages the creation of

8
insurance dedicated funds, and is not necessary to prevent abuse of the look-through rules
contained in §1.817-5(f).
Some comments stated there is a need to clarify the consequences to a variable
contract and variable contract holder when the contract's segregated asset account
contains an asset in which beneficial interests are held by investors (such as qualified
plans) that qualified as permitted investors in § 1.817-5(f)(2) or (3) at the time of initial
investment, but subsequently lose their status. Similarly, one commentator urged that if an
insurance company has a reasonable basis to believe that an investment company,
partnership, or trust satisfies the requirements of § 1.817-5(f)(2), a variable contract of that
insurance company should be permitted to look-through that entity for purposes of testing a
segregated asset account on which that contract is based, even if the investment company,
partnership, or trust has investors not described in §1.817-5(f)(2) or (3). The commentator
suggested that this standard would be consistent with the standard of determination often
used in the Federal securities laws.
Other comments included a request for clarification of the treatment of fund-of-funds
and master-feeder arrangements for purposes of testing diversification; the desirability of
an updated correction procedure for failure to satisfy the diversification requirements of
section 817(h) and §1.817-5; guidance concerning the use of independent investment
advisors; and extension of the special diversification rules for United States Treasury
securities under section 817(h)(3) and § 1.817-5(b)(3) to variable annuity contracts. (The
latter comment presumably would require a change to section 817(h)(3), as well as to the

regulations. )
Although the comments on §1.817-5 generally are not adopted in this Treasury
decision, the Treasury Department and IRS will consider these comments in the event of
future published guidance. For example, Rev. Rul. 2005-7 (2005-6 I.R.B.) (see §601.601
(d)(2)(ii)(Q) of this chapter) provides guidance on the application of the diversification lookthrough rule to tiered investment companies.
3. Comments on Investor Control
Finally, some comments concerned the need for additional guidance addressing
circumstances under which the holder of a variable contract will be treated as the owner of
assets held by a segregated asset account by virtue of the control the contract holder has
over those assets. Under Rev. Rul. 81-225,1981-2 C.B. 12 (see §601.601 (d)(2)(ii)(Q) of
this chapter), the owner of a variable annuity contract funded by publicly available mutual
fund shares is treated as the owner of those shares. Rev. Rul. 2003-92, 2003-33 I.R.B.
350 (see §601.601 (d)(2)(ii)(Q) of this chapter), clarified and amplified Rev. Rul. 81-225 by
applying the same rule to variable life insurance contracts, and by treating as publicly
available a nonregistered partnership, interests in which are sold only to qualified
purchasers that are accredited investors or to no more than one hundred accredited
investors. See also Rev. Rul. 2003-91,2003-33 I.R.B. 347; Rev. Rul. 82-54, 1982-1 C.B.
11; Rev. Rul. 80-274,1980-2 C.B. 27; Rev. Rul. 77-85,1977-1 C.B. 12.; Christoffersen v.
U.S., 749 F.2d 513 (8th Cir. 1984), rev'g 578 F. Supp. 398 (N.D. Iowa 1984). See
§601.601 (d)(2)(ii)(Q) of this chapter.

10
One commentator urged that Rev. Rul. 2003-92 should not be applied retroactively

to treat certain investors as the "general public" as that term is used in Rev. Rul. 81-225.
Specifically, the commentator requested relief for investments in real estate partnerships,
interests in which are held directly by (1) organizations described in section 501 (c)(3), and
(2) such partnerships' investment managers, if those managers are not described in
§ 1.817-5(f)(3 )(ii) because of bonus payment arrangements. The commentator believed
such relief is warranted because of uncertainty concerning the meaning of "general public"
as that term is used in Rev. Rul. 81-225. Several other commentators suggested that
regulations under section 817 should clarify that the permitted investors under
§1.817-5(f)(3) do not constitute the "general" public as that term is used in Rev. Rul.
2003-92 and Rev. Rul. 81-225. According to these commentators, it would be anomalous
for ownership by a permitted investor under § 1.817-5(f)(3) to result in a variable contract
holder being treated as the owner of an investment company, partnership, or trust, when the
look-through rule itself appears to endorse ownership by that same investor for purposes of
testing diversification. Still another commentator noted that when determining whether a
contract holder is treated as the owner of segregated account assets, communications
between investment advisors or officers and variable contract holders should be permitted
if the communications are consistent with Federal securities and commodities laws.
One commentator suggested that the preamble to this Treasury decision should
confirm the intended scope of Rev. Proc. 99-44, 1999-2 C.B. 598. Under Rev. Proc. 9944, a contract is treated as an annuity contract described in sections 403(a), 403(b), or

11
408(b), notwithstanding that contract premiums are invested at the direction of the contract
holder in publicly available securities, so long as certain requirements are met. Those
requirements include a limitation that no additional Federal tax liability would have been
incurred if the employer of the contract holder had instead paid amounts into a custodial
account in an arrangement that satisfied the requi rements of section 403(b )(7)(A) or no
additional Federal tax liability would have been incurred if the consideration for the contract
had instead been held as part of a trust that would satisfy the requirements of section
408(a), as applicable. The commentator urged that the preamble to this Treasury decision
clarify that the "no additional Federal tax liability" limitation was intended to apply only to tax
on unrelated business income. Finally, one commentator noted that, given the inherent
factual nature of the determination whether a contract holder is treated as the owner of
segregated account assets, the issue is better addressed by letter ruling or revenue ruling,
rather than by regulations.
Although the comments on investor control are not adopted in this Treasury
decision, they are responsive to the request for comments in the July 30,2003, notice of
proposed rulemaking and will receive careful attention in the event of further guidance on
investor control.

12
Act (5 U.S.C. chapter 5) does not apply to these regulations, and because the regulations

do not impose a collection of information on small entities, the Regulatory Flexibility Act (5
u.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Internal Revenue
Code, the notice of proposed rulemaking preceding these regulations was submitted to the
Small Business Administration for comment on its impact on small business.

Drafting Information
The principal author of these regulations is James Polfer, Office of the Associate
Chief Counsel (Financial Institutions and Products), Office of Chief Counsel, Internal
Revenue Service. However, personnel from other offices of the Treasury Department and
the IRS participated in their development.

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

Adoption of Amendment to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAX
Paragraph 1. The authority citation for part 1 continues to read in part as
follows:
Authority: 26 U.S.C. 7805

***

Section 1.817-5 also issued under 26 U.S.C. 817(h).

***

Par. 2. Section 1.817-5 is amended as follows:

13
1. Paragraphs (f)(2)(ii) and (g) Example 3 are removed.
2. Paragraph (f)(2)(iii) is redesignated as paragraph (f)(2)(ii).
3. The first sentence of paragraph (g) Example 1 is revised.
4. Paragraph (g) Example 4 is redesignated as paragraph (g) Example 3.
5. Paragraph (h)(6) is revised.
6. New paragraph (i)(2)(v) is added.
The revisions read as follows:

§ 1.817-5 Diversification requirements for variable annuity, endowment. and life insurance
contracts.
*****
(g) * * *
Example 1 . (i) The assets underlying variable contracts issued by a life insurance
company consist of two groups of assets: (a) a diversified portfolio of debt securities and
(b) interests in P, a partnership. * * *

(h) * * *
(6) Security. The term security shall include a cash item and any partnership
interest, whether or not registered under a Federal or State law regulating the offering or
sale of securities. The term shall not include any interest in real property, or any interest in
a commodity.
*****
(i) * * *

(2) * * *
(v) A segregated asset account in existence before March 1,2005, will be
considered to be adequately diversified if.(A) As of March 1, 2005, the account was adequately diversified within the meaning
of section 817(h) and this regulation as in effect prior to that date; and
(8) 8y December 31,2005, the account is adequately diversified within the meaning
of section 817(h) and this regulation.

/s/ Mark E. Matthews
Deputy Commissioner for Services and Enforcement

Approved: February 15, 2005

/s/ Eric Solomon
Acting Deputy Assistant Secretary of the Treasury

FROM THE OFFICE OF PUBLIC AFFAIRS
February 28, 2005
2005-2-28-15-43-6-10558

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 $79,780 million as of the end of that week, compared to $81,164 million as of the end of the prior week.

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

TOTAL
1. Foreign Currency Reserves

a. Securities

18, 2005

Februarv 25, 2005

81,164

79,780

Euro

Yen

TOTAL

Euro

Yen

TOTAL

11,970

14,883

26,853

12,080

14,951

27,031

Of which, issuer headquartered in the U. S.

b. Total deposits with:

b.i. Other central banks and BIS

11,753

2,991

14,744

11,866

3,005

14,871

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

b.ii. Of which, banks located abroad

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

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

15,213

15,288

13,312

11,549

11,042

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
Februar~

Euro
1. Foreign currency loans and securities

Februar~

18, 2005

Yen

TOTAL

Euro

25, 2005

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

III. Contingent Short-Term Net Drains on Foreign Currency Assets
February 18, 2005
Euro
1. Contingent liabilities in foreign currency

Yen

February 25, 2005

TOTAL

Euro

Yen

TOTAL

o
o

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-2279: Secretary SlHm Visits Arkansas and Louisiana This Week to Discuss Strengthe...

Page

or J

FROM THE OFFICE OF PUBLIC AFFAIRS
February 28, 2005
JS-2279
Secretary Snow Visits Arkansas and Louisiana This Week to Discuss
Strengthening Social Security
U.S. Treasury Secretary John W. Snow will travel to Fayetteville, Arkansas on
Thursday, March 3 and New Orleans, Louisiana on Friday, March 4 to meet with
local business leaders and discuss the President's efforts to strengthen and
preserve the U.S. Social Security system."President Bush has discussed the
importance of Social Security and the need to fix the Social Security system for
future generations of Americans," said Secretary Snow. "The President has
assured Americans that he will not change the Social Security system in any way
for those born before 1950.
"Social Security is sound for today's seniors and for those nearing retirement, but it
needs to be fixed for younger workers - our children and grandchildren. To keep
the promise of Social Security alive for our children and grandChildren, we need to
fix Social Security now once and for all."
The following events are open to credentialed media with photo identification:
Thursday, March 3
Remarks to Sam M. Walton College of Business, University of Arkansas
10:00 a.m. CST
Reynolds Center for Enterprise Development
Corner of Fairview & Buchanan Streets
Fayetteville, AR
** Media must arrive by 9: 15 am CST
** A brief media availability will be held immediate following the event
Friday, March 4
Remarks to New Orleans' Metro Chamber Alliance
9:30 am CST
New Orleans Metropolitan Convention and Visitors Bureau
2020 St. Charles Ave,
New Orleans, LA
** Media must arrive by 8:45 am CST
** A brief media availability will be held immediate following the event
- 30 -

http://www.tn~aSBov/prcss/rckases/js2279.htm

4/22/2005

JS-22~O: Tax Panel Announces Witness List for Second Meeting on Thursday

Page I or:2

FROM THE OFFICE OF PUBLIC AFFAIRS
March 1, 2005
JS-2280
Tax Panel Announces Witness List
for Second Meeting on Thursday
WASHINGTON, DC- Senators Connie Mack and John Breaux, Chairman and Vice
-Chairman of the President's Advisory Panel on Federal Tax Reform, today
announced the witness list for the Panel's second meeting, on Thursday, March 3,
2005. The witnesses will provide the panel additional perspectives on tax reform, as
well as a description of the problems presented by complexity in the tax
system. Biographical information for each witness is attached.
WITNESS LIST
The Honorable Alan Greenspan
Chairman of the Board of Governors of the Federal Reserve System
The Honorable James A, Baker, III
Former Secretary of State and Former Secretary of the Treasury
Panel I: View from the Internal Revenue Service
Testimony of the Honorable Mark W. Everson. Commissioner, Internal Revenue
Service
Panel II: The Impact of Complexity on Taxpayers
Testimony of Nina E. Olson, National Taxpayer Advocate
Testimony of Joel B. Slemrod, Paul W. McCracken Collegiate Professor of
Business Administration and the Director, Office of Tax Policy Research at the
University of Michigan Ross School of Business
Panel III: The Alternative Minimum Tax
Testimony of Leonard Burman, Senior Fellow at the Urban Institute and co-director
of the Urban-Brookings Tax Policy Center
Testimony of Claudia Hill, EA, MBA, Owner and Principal, Tax Mam, Inc.,
Cupertino, CA
The meeting will be held on Thursday, March 3, 2005, at 9:30 AM in the Jack
Morton Auditorium, Media and Public Affairs Building, The George Washington
University, 805 21 st Street, NW, Washington, DC, 20052
Biographical Information for Witnesses Scheduled to Participate in the
Second Meeting of The President's Advisory Panel on Federal Tax Reform
March 3, 2005
Alan Greenspan is Chairman of the Board of Governors of the Federal Reserve
System and Chairman of the Federal Open Market Committee. He served
President Ronald Reagan as Chairman of the National Commission on Social
Security Reform and as a member of the President's Economic Policy Advisory
Board Under President Gerald Ford, he was the Chairman of the President's
Council of Economic Advisers. He has been a member of Time Magazine's Board
of Economists, senior advisor to the Brookings Panel on Economic Activity, and a
consultant to the Congressional Budget Office. He received a B.S., MA, and PhD.
in economics from New York University.

http://www.trcas.gov/prc33/releaf.~c/is:2280.htm

4/25/2005

1S-2280: Tax Pancl AnnoLlllccs Witness List for Second Meeting on Thursday

Page 2 or.2

James A. Baker, III, is honorary chairman of the Baker Institute for Public Policy at
Rice University. Mr. Baker was the White House Chief of Staff under President
Ronald Reagan from 1981 to 1985. He served as the 67th Secretary of the
Treasury from 1985 to 1988 under President Reagan. As Treasury Secretary,
Baker was also chairman of the President's Economic Policy Council. He served
as the 61 st Secretary of State from January 1989 through August 1992 under
President George Bush. Mr. Baker is presently a senior partner in the law firm of
Baker Botts and a senior counselor to The Carlyle Group.
Mark Everson is the Commissioner of Internal Revenue. Mr. Everson also served
as Deputy Director for management and controller of the office of Federal Financial
Management for the Office of Management and Budget. He also chaired the
President's Management Council. During the Reagan administration, he held
several positions at the U.S. Information Agency and the Department of Justice. He
received his BA in history from Yale University and M.S. in accounting from the
New York University Business School.
Nina Olson is the National Taxpayer Advocate. She is the founder and former
executive director of the Community Tax Law ProJect, the first independent lowincome taxpayer clinic in the United States. She served as the chair of the ABA
Section of Taxation Low-Income Taxpayers Committee as well as the Pro Se/Pro
Bono Task Force of the ABA Tax Section's Court Procedure Committee. In
addition, Nina has served as chair of the Virginia State Bar's Special Committee on
Access to Legal Services. She has been an adjunct professor at Virginia
Commonwealth University, the College of William and Mary School of Law, and the
University of Richmond School of Law. She received her B.A. from Bryn Mawr
College, her J.D. from North Carolina Central University School of Law, and L.L.M.
in taxation from Georgetown University law Center.
Joel Slemrod is the Paul W. McCracken Collegiate Professor of Business
Economics and Public Policy and the Director of the Office of Tax Policy Research
of the Stephen M. Ross School of Business at the University of Michigan. He is coauthor with Jon BakiJa of Taxing Ourselves. A Citizen's Guide to the Debate over
Taxes, the third edition of which was published in 2004. Professor Slemrod was
editor of the National Tax Journal, the leading academic journal devoted to the
theory and practice of taxation, from 1992 to 1998. Previously, Professor Slemrod
served as the senior staff economist for tax policy at the President's Council of
Economic Advisers from 1984-85 and a National Fellow at the Hoover Institution
from 1983-84. Professor Slemrod received an A.B. from Princeton University and a
PhD. in economics from Harvard University.
Leonard Burman is co-director of the Tax Policy Center, Senior Fellow at the
Urban Institute, and Visiting Professor at the Georgetown University Public Policy
Institute. Professor Burman served as Deputy Assistant Secretary of the Treasury
for Tax Analysis from 1998 to 2000, and as Senior Analyst at the Congressional
Budget Office from 1988 to 1997. He is the author of a book, The Labyrinth of
Capital Gains Tax Policy: A Guide for the Perplexed, and numerous articles,
studies, and reports. He is also a commentator for Marketplace. His recent
research has examined the individual alternative minimum tax, the estate tax, the
changing role of taxation in social policy, and tax incentives for savings, retirement,
and health insurance. He holds a PhD. from the University of Minnesota and a
B.A. from Wesleyan University.
Claudia Hill is a nationally recognized tax professional and frequent lecturer on
taxation of individuals and representation before the Internal Revenue Service. For
over 30 years, Ms. Hill has been owner and principal of Tax Mam, Inc, one of the
25 largest tax preparation firms in Silicon Valley, California, where she prepares
hundreds of returns every year. She is Editor in Chief of the CCH, Inc., "Journal of
Tax Practice & Procedure," and a Contributing Author of Practitioner's Publishing
Company's "Guide to Dealing with the IRS." Ms. Hill is an Enrolled Agent, an
Accredited Tax Advisor, and holds an M.BA

http://wwwtrc1l3.goy/pressirelea6el./js2280.htm

4/25/2005

js-2282: Testimony of Assistant Secretary of Treasury Mark 1. Warshawsky before t...

Page 1 of 1

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

March 1, 2005
js-2282
Testimony of Assistant Secretary of Treasury
Mark J. Warshawsky before the United States
Senate Committee on Finance
Good afternoon Chairman Grassley, Ranking Member Baucus, and members of the
Committee. I appreciate the opportunity to discuss the Administration's proposal to
reform and strengthen the single employer defined benefit pension system. In my
testimony, I will focus on the proposal's funding rules, in particular, the calculation
of the funding targets.
•

Testimony of Assistant Secretary of Treasury Mark J. Warshawsky before
the United States Senate Committee on Finance (Full Version)

http://www.treaD.goy/prc~:.-;/rt..lt~;lses/js2282.htm

4/25/2005

Testimony of Assistant Secretary of Treasury Mark J. Warshawsky
before the United States Senate Committee on Finance
Good afternoon Chainnan Grassley, Ranking Member Baucus, and members of
the Committee. I appreciate the opportunity to discuss the Administration's proposal to
reforn1 and strengthen the single employer defined benefit pension system. In my
testimony, I will focus on the proposal's funding rules, in particular, the calculation of the
funding targets.
The single employer defined benefit pension system is in serious financial
trouble. Many plans are badly underfunded, jeopardizing the pensions of millions of
American workers. The insurance system protecting these workers in the event that their
own pension plans fail has a substantial deficit. Such a deficit means that although the
PBGC has sufficient cash to make payments in the near-tenn, without corrective action,
ultimately the insurance system will simply not have adequate resources to pay all the
benefits that it owes to the one million workers and retirees currently owed benefits who
were participants of failed plans and to the beneficiaries of plans that fail in the future.
The Administration believes that current problems in the system are not transitory
nor can they be dismissed as simply the result of restructuring in a few industries. The
cause of the financial problems is the regulatory structure of the defined benefit system
itself. Correcting these problems and securing the retirement benefits of workers and
retirees requires that the system be restructured. Minor tinkering with existing rules will
not be sufficient. If we want to retain defined benefit plans as a viable option for
employers and employees, fundamental changes must be made to the system to make it
financially sound.
A defined benefit pension plan is a trusteed arrangement under which an
employer makes a financial commitment to provide a reliable stream of pension
payments to employees in exchange for their service to the finn. One cannot expect that
such obligations will be honored consistently if they are allowed to remain chronically
underfunded as they are under current law. The incentives for financially sound plan
funding must be improved or we will continue to see pension plans tenninating with
massive amounts of unfunded benefits. These unfunded benefits are costly both to
participants because many lose benefits and also to other pension sponsors because, they
are likely bear the higher costs that such underfunding imposes on the insurance system
through even higher premiums.
The goal of the Administration's proposed defined benefit pension refonn is to
enhance retirement security. The refonns are designed to ensure that plans have
sufficient funds to meet accurately and meaningfully measured accrued obligations to
participants. The current defined benefit pension funding rules - which focus on
micromanaging annual cash flows to the pension fund -- are in need of a complete
overhaul. The current rules are needlessly complex and fail to ensure that many pension
plans remain prudently funded. The current rules:

•
•
•
•
•
•
•
•

Measure plan assets and liabilities inaccurately.
Fail to ensure adequate plan funding.
Fail to allow sufficient contributions by plans in good economic times, making
minimum required contributions rise sharply in bad economic times.
Permit excessive risk of loss to workers.
Are burdensome and unnecessarily opaque and complex.
Do not provide participants or investors with timely, meaningful information on
funding levels.
Do not generate sufficient premium revenues to sustain the PBGC.
Create a moral hazard by permitting financially troubled companies with
underfunded plans to make benefit promises they cannot keep.

The President's solution to these issues is to fundamentally reform the rules
governing pension plan funding, disclosure and PBGC premiums, based on the following
three simple principles:
•
•
•

Funding rules should ensure pension promises are kept by improving incentives to
fund plans adequately.
Workers, investors and pension regulators should be fully aware of pension plan
funding status.
Premiums should reflect a plan's risk and ensure the pension insurance system's
financial solvency.

Such changes will increase the likelihood that workers and retirees actually
receive the benefits that they have earned and as a result will moderate future insurance
costs that will be borne by sound plan sponsors. Today I am going to discuss how the
Administration's initiative improves incentives for adequate plan funding. We have
proposed a fundamental reform of the treatment of defined benefit pension plans, one that
we believe will change plan sponsor behavior, ultimately result in better funded and
better managed defined benefit pension plans, and secure benefits for workers and
retirees.
The Administration proposal is designed both to simplify funding rules and to
enhance pension plan participants' retirement security. The federal government has an
interest in defining and enforcing minimum prudent funding levels, but many other
funding, investment, and plan design decisions are best left to plan sponsors. Under this
proposal, pension plans would be required to fund towards an economically meaningful
funding target - a measure of the currently accrued pension obligations. Plans that fall
below the minimum funding target would be required to fund-up to the target within a
reasonable period of time. Plans that fall significantly below the minimum acceptable
funding level would also be subject to benefit restrictions.
Some key features of the proposed funding rules:

•

Funding based on meaning/itl and accurate measures of liabilities and assets. The
proposal provides funding targets that are based on meaningful, timely, and accurate
(using the yield curve for discounting is a central component of this proposal)
measures of liabilities that retlect the financial health of the employer.

•

Accrued benefitsfilnded. Sponsors that fall below minimum funding levels will be
required to fund up within a reasonable period of time. The proposal requires a 7year amortization period for annual increases in funding shortfalls. There will be
restrictions on the extension of new benefit promises by employers whose plans'
funded status falls below acceptable levels. Benefit restrictions will limit liability
growth as a plan becomes progressively underfunded relative to its funding target.

•

Plan sponsors able tofilnd plans during good times. Many believe that the inability
of plan sponsors to build sufficiently large funding surpluses during good financial
times under current rules has contributed to the current underfunding in the pension
system. The proposal addresses this problem directly by creating two funding
cushions that, when added to the appropriate funding target, would determine the
upper funding limit for tax deductible contributions. And every plan will be allowed
to fund to a level of funding corresponding to the total cost of closing out the plan.
Under our proposal, allowing plan sponsors the opportunity to prefund and therefore
limit contribution volatility is a critical element.

Some argue that the best way to enhance retirement security is to create the
appearance of well funded pension plans through the use of asset and liability smoothing
and increased amortization periods for actuarial losses. In addition, plan sponsors have
frequently voiced their dislike of volatile and unpredictable minimum contributions.
Our view is there are significant risks associated with masking the underlying
financial and economic reality of underfunded pension plans. Failure to recognize risk
because of the use of smoothing mechanisms results in transfers of risk among parties, in
particular from plan sponsors to plan participants and the PBGC. One need only look at
the losses incurred by many steel and airline plan participants and PBGC's net position to
see this is so.
Moreover, the Administration recognizes that the current minimum funding rules
-- particularly the deficit reduction contribution mechanism and the limits on tax
deductibility of contributions -- have contributed to funding volatility. Our proposal is
designed to remedy these issues; for example, we increase the deductible contribution
limit. We feel this additional ability to fund during good times, combined with other
provisions of the proposal; for example, increasing the amortization period to seven years
compared to a period as short as four years under the current law deficit reduction
contribution mechanism, together with the existing freedom of plans have to choose
pension fund investments, will give plans the tools they need in order to smooth
contributions over the business cycle. Plans may choose to limit volatility by choosing
an asset allocation strategy or conservative funding level so that financial market changes
will not result in large increases in minimum contributions. These are appropriate

methods for dealing with risk; it is inappropriate to limit contribution volatility by
transferring risk to participants and the PBGC.
Meaningful and Accurate Measures ofAssets and Liabilities
We propose measuring liabilities on an accrual basis using a single standard
liability measurement concept that does not distort the measures by smoothing values
over time. Within the single method, liability is measured using assumptions that are
appropriate for a financially healthy plan sponsor (investment grade credit rated), and
alternatively using assumptions that are appropriate for a less healthy plan sponsor
(below investment grade) that is more likely to find itself in a position of default on
pension obligations in the short to medium term.
On-going liability is defined as the present value on the valuation date of all
benefits that the sponsor is obligated to pay. Salary projections would not be used in
determining the level of accrued benefits. Expected benefit payments would be
discounted using the corporate bond spot yield curve that will be published by the
Treasury Department based on market bond rates. Retirement assumptions will be
developed using reasonable methodologies, based on the plan's or other relevant recent
historical experience. Finally, unlike the current liability measure under current law,
plans would be required to recognize expected lump sum payments in computing their
liabilities.
The at-risk liability measure estimates the liabilities that would accrue as a plan
heads towards termination because of deteriorating financial health of the plan sponsor.
At-risk liability would include accrued benefits for an ongoing plan, plus increases in
costs that occur when a plan terminates. These costs include acceleration in early
retirement, increase in lump sum elections when available and the administrative costs
associated with terminating the plan.
The following table provides a summary overview of the critical differences
between the ongoing and at-risk liability assumptions.
Ongoing Liability

At-Risk Liability

Discount Rate
Mortality Assumptions
Retirement Assumptions

-------------- Yield Curve --------------------------- Set by Law -------------Developed using relevant
Acceleration in retirement rates - individuals retire at
recent historical experience.
the earliest early retirement opportunity.

Lump Sum Payments

Developed using relevant
recent historical experience.

Acceleration in lump-sum election.

Transaction Costs

Not included

Included. Calculated by formula.

Under our proposal, assets will be valued based on market values on the valuation
date for determining minimum required and maximum allowable contributions. No
smoothed actuarial values of assets will be used as they mask the true financial status of
the pension plan.
One aspect of our liability measurement approach that has received a fair amount
of attention is the use of the yield curve to discount pension plan liabilities. Accuracy
requires that the discount rates used in calculating the present value of a plan's benefit
obligations satisfy two criteria: they must reflect the timing of the future payments, and
they should be based on current market-determined interest rates for similar obligations.
The Administration proposes to replace the current law method with a schedule of rates
drawn from a spot yield curve of high grade (AA) corporate bonds averaged over 90
business days. Discounting future benefit cash flows using the rates from the spot yield
curve is the most accurate way to measure a plan's liability because, by matching the
maturity of the discount rate with the timing of the obligation, it properly computes
today's cost of meeting that obligation. Use ofa yield curve is a prudent and common
practice; yield curves are regularly used in valuing other financial instruments including
mortgages, certificates of deposit, etc.
The Treasury Department has developed a corporate bond yield curve that is
appropriate for this purpose. Our methodology allows spot yield curves to be estimated
directly from data on corporate AA bonds. The process incorporates statistically
unbiased adjustments for bonds with embedded call options, and allows for statistically
unbiased projections of yields beyond a 30-year maturity. We recently published a white
paper detailing our methodology (Creating a Corporate Bond Spot Yield Curve for
Pension Discounting Department of The Treasury, Office of Economic Policy, White
Paper, February 7, 2005) that is available on the Treasury Department web site.
Our budget proposal to reform the calculation of lump-sum benefits also uses the
yield curve for calculating the minimum lump sums. We propose to replace the use of a
30-year Treasury rates for purposes of determining lump sum settlements under qualified
plans. Using the yield curve to compute lumps sums and the funding required for an
annuity eliminates any distortions that would bias the participant's payout decision.
Under our proposal, lump sum settlements would be calculated using the same interest
rates that are used in discounting pension liabilities: interest rates that are drawn from a
zero-coupon corporate bond yield curve based on the interest rates for high quality
corporate bonds. This reform includes a transition period, so that employees who are
expecting to retire in the near future are not subject to an abrupt change in the amount of
their lump sums as a result of changes in law. The new basis would not apply to
distributions in 2005 and 2006 and would be phased in for distributions in 2007 and
2008, with full implementation beginning only in 2009. ill

to discount the plans aggregate expected pension payments in each year to participants.
The plan administrator has calculated these future pension payments based on the plan's
formula for benefits that participants have earned up to the valuation date. As this
example shows, once the actuary has determined the plan's annual cash benefit payments
summed over all participants in a manner similar to what is done under current law,
discounting those payments using the yield curve is quite simple.
Our hypothetical plan consists of three individuals, the 64-year-old Mr. Brown,
the 59-year-old Ms. Scarlet, and the 54-year-old Mr. Green. Each of the three retires at
age 65 and receives the same pension benefit payment each year until death at age 80.
The benefit Mr. Brown has earned to date is higher than Ms. Scarlet's (it is assumed that
he has been working longer under the plan) whose expected benefit is in tum larger than
Mr. Green's. Mr. Brown's annual benefit under the plan is $12,000, Ms. Scarlet's is
$9,000 and Mr. Green's is $6,000.
Chart 1 shows the AA corporate bond yield curve that would be used to discount
these benefit payments. The yield curve has interest rates for years 0 to 80. For our
stylized example we will only need to use points for the years 1 through 26 because we
assume that no participant will draw benefits before year 1 and all payments will be made
by year 26. The example applies the yield curve to payments made each year.

Chart 1
Spot Yield Curve
CoqlorateAA Douds
~O DoilY Average 12.110/2004
8.0%
7.0%

1),0%
5.0%
4.0%
3.0%

2.0%

Maturity, Years

1.0%
0.0%

Chart 2 shows the benefit payments that each participant is expected to receive in the
future. Chart 3 shows expected total payments that will be made by the plan each year in
the future; this is simply the sum of payments to the three individual participants. The
total benefit line takes an upward step each time a participant retires and a downward step
each time a participant's benefit ends.
Chart 2
Serlellt Payment:,; 101 ,]

Slrn~le

3 P,nllclpodnt Plan

1-30,000

.'"

~25.IXlO

~
1:

'!20,000

..~

~15,IUO

;

:10,000

Hi,mo

:.0
I

-S

/
r.

to II I:> I:l U 15 16 17 to 19 ?-O :> I :>:> :>:I ,.., :>!'i :>6 '17 ?B :>9
futUft.t

PI.. " yt...... ~

Chart 3
lotdll-uture tlelle,.t Paymell's
:I.J

m·: f 8.:- ",.:fit "; ::t~1 n" ef"lt ~ 'ur 8 ~I)\,,,,,r,

Sc."3'rIEt. -=arl.j C'r E'er,

$30,000

$25,000

$20,000

$15,000

$10,000

'I:

c:
§

.,
".
.:
c:

\
\
\

H,OOO

$0 t-~~~~--~~~~~~~~~~~~--~~~-,~~~
1 2 ) 4 !i r. 18 91011121J1·1151fo17181!)]O?1nn2·1252foH2829
Future Plan Years

How do we apply the yield curve to discounting these benefit payments?
Let's take years 5, 14 and 20. In year 5, the plan expects to pay $12,000 in
benefits, all to Mr. Brown. The discount rate for that year drawn from the yield curve is
4.03 percent. To compute the present value of the $12,000, the $12,000 is divided by
1.218 (one plus the interest rate expressed in decimal form, 1.0403, raised to the 5th
power), which equals $9,849.
For plan year 14 the expected benefit payments are $27,000 ($12,000 to Mr.
Brown, $9,000 to Ms. Scarlet and $6,000 to Mr. Green) and the yield curve interest rate
is 5.51 percent. To compute the present value, the $27,000 is divided by 2.119 (1.0546
taken to the 14th power) yielding $12,742. For year 20, the plan expects to pay $15,000
($9,000 to Ms. Scarlet and $6,000 to Mr. Green) and the discount rate from the yield
curve is 5.96 percent. Dividing $15,000 by 3.183 gives a present value of $4,713. Note
that even though there are three participants in the plan, once their benefit payments
during any period are added together only one interest rate is needed to compute the
present value for that period. Separate interest rates are not used for every individual
participant in the plan.
In order to compute the plan's target liability the plan needs to perform
computations like the one above for each payment period from 1 through 27 and sum
them together. The liability for this hypothetical plan is $238,994. In this example, only
26 interest rates are used, one for each year that benefit payments are made. Even if our
hypothetical plan had thousands of participants, but payments were made for only 26
years in the future, only 26 interest rates would be needed to compute the plan's liability.
This is, of course, a simplified example. The plan actuary needs to make a
number of computations and use his or her professional judgment to determine the plan's
future benefit payments each year: the actuary must estimate the probability that a
participant will retire at a particular time in the future and must model the probable
pattern of payments that will be made for that participant until the participant's death.
These computations, already required by current law, are complex, but once the actuary
has determined the annual cash benefit payments, discounting those payments using the
yield curve is quite simple and can easily be done using a basic spreadsheet program.
As noted above, if Mr. Brown elected to take a lump sum payment rather than an
annuity, the minimum value of that lump sum would also be computed using the yield
curve. We have assumed that Mr. Brown will begin receiving his annual benefit of
$12,000 next year and will receive the same benefit for 16 years. In order to compute the
value of those future payments as a lump sum we would simply discount each period's
cash flows using interest rates drawn from the yield curve to find the present value of the
benefit in each future period. Then we sum those present values together to yield the
minimum lump sum value. In year one, for example, the interest rate drawn from the
yield curve is 2.59 percent. If the first $12,000 payment is made one year in the future its
present value would be $11,697. The present value of the payment made in year 5 would
be computed using the year 5 point on the yield curve that is 4.03 percent. Its present

Distinction by Credit Rating
Under the Administration's proposal, the appropriately measured accrued
liabilities serve as the plan funding targets. The target funding level for minimum
required contributions will vary depending on the financial health of the plan sponsor.
Plans sponsored by financially healthy firms (investment grade rated) will use 100
percent of ongoing liability as their funding target. Less healthy plan sponsors (below
investment grade rated) will use 100 percent of at-risk liability as their funding target. ill
The goal of pension funding rules is to minimize benefit losses to plan
participants. When pension plans default on their obligations, the PBOC is required to
make benefit payments to plan participants subject to the guarantee limits. Ultimately, if
plan defaults are too numerous, the insurance system will collapse and taxpayers may be
called upon to fund the pension promises. Pension plans sponsored by firms with poor
credit ratings pose the greatest risk of such defaults. Therefore, it is only natural that
pension plans with sponsors that fall into this readily observable high risk category
should have more stringent funding standards. The at-risk liability measure is an
appropriate funding target for below investment grade companies because the target
reflects the plan liabilities that would accrue as a plan heads towards termination.
The table below shows the average cumulative default rate of corporate bond
issuers as computed by Moody's Investor's Service (January 2005). This table indicates
that, over time, below investment grade firms have a substantially higher likelihood of
default than investment grade firms. The table indicates that 14.81 percent ofBa rated
firms Gust below investment grade) experience a default within 7 years, whereas only
3.12 percent of Baa rated firms Gust above investment grade) experience a default within
the same period.

Average Cumulative Default Rate by Credit Rating, 1970-2004
Selected Data
Years
1
3
5
7
10
15
20

Aaa
0.00
0.00
0.12
0.30
0.63
l.22
l.54

Aa
0.00
0.03
0.20
0.37
0.61
l.38
2.44

Moody's Credit Rating
A
Baa
Ba
0.02 0.19
l.22
0.22 0.98
5.79
0.50 2.08
10.72
0.85 3.12
14.81
l.48 4.89
20.11
2.74 8.73
29.67
4.87 12.05 37.07

B
5.81
19.51
30.48
39.45
48.64
57.72
59.11

Caa-C
22.43
46.71
59.72
68.06
76.77
78.53
78.53

Source: Moodys Investor Services, Global Credit Research, Default and Recovery Rates
of Corporate Bond Issuers, 1920-2004, January 2005.
The following chart shows that firms generally have a below investment grade
credit rating for several years prior to their plan default on pension obligations triggering
a claim on the PBGC. This shows 27 largest claims to PBGC for which the series of
S&P ratings were available. This suggests that while defaults are certainly not easily
predictable (many other plans with below investment grade credit ratings did not default),
these are clear warning signs that any responsible regulatory system should take into
account. Differentiating funding targets based on credit ratings is appropriate and the
investment grade/below investment grade distinction is the most useable and accurate
breakpoint.

Chart 4
Debt Ratings for 27 Large PBGC Claims

o Below Investment Grade

o Investment Grade

G
'(''',If'!l ProOI 10 D,lte 01 PI,\I\ I.,IIIIII1JIlor,

Source: PBGC
Accrued Benefits Funded
Under the proposal, sponsors that fall below minimum funding levels would be
required to fund up towards their appropriate target in a timely manner. If the market
value of plan assets is less than the funding target for the year, the minimum required
contribution for the year would be equal to the sum of the applicable normal cost for the
year and the amortization payments for the shortfall. Amortization payments would be
required in amounts that amortize the funding shortfall over a 7-year period. The initial
amortization base is established as of the valuation date for the first plan year and is equal
to the excess, if any, of the funding target over the market value of assets as of the
valuation date. The shortfall is amortized in 7 annual level payments. For each
subsequent plan year, if the sum of the market value of assets and the present value of
future amortization payments is less than the funding target, that shortfall is amortized
over the following 7 years. If the sum of the market value of assets and the present value
of future amortization payments exceeds the funding target, no new amortization base
would be established for that year and the total amortization payments for the next year
would be the same as in the prior year. When, on a valuation date, the market value of
the plan's assets equals or exceeds the funding target, then the amortization charges
would cease and all existing amortization bases would be eliminated. W

It is critical to note that while our proposal does away with "credit balances" as
currently construed, it does not reduce the incentives to contribute above the minimum.
It does, however, prevent underfunded plans from using credit balances for funding
holidays. Because credit balances currently are not marked to market and can be used by
underfunded plan sponsors, they have resulted in plans having lengthy funding holidays,
while at the same time becoming increasingly underfunded. Just marking credit balances
to market is not sufficient to solve the problem if underfunded plan are still able to take
funding holidays. In the Administration proposal, the focus of the reformed funding rules
on stocks of assets and accrued liabilities means that pre-funding pays off in a reduction
in future required minimum payments. Under a reformed set of funding rules, prefunding adds to a plan's stock of assets, thereby reducing any current shortfalls or the
likelihood of potential future shortfalls relative to appropriately and accurately measured
liabilities.

An Example of Funding Rules
Using another example we can demonstrate how minimum contributions would
be determined under the funding proposal. Liabilities for the plan are computed over a
five-year period using the cash flows and the yield curve depicted in the graphs above.
(For simplicity, it is assumed that the yield curve interest rates remain constant over the
five-year period.) We then begin with an arbitrarily chosen level of plan underfunding to
demonstrate how the amortizations of plan deficits would work. For this example, we
simplify and assume that the interest rate charged for amortization of shortfalls is zero.
That means that a shortfall increase payment amortized over 7 years is merely the
increase divided by 7. The normal cost is also assumed to be zero to simplify the
exposition.
In year one, the plan is underfunded by $18,994. That means that the plan must
contribute a minimum of $2,713, which is the amortization payment for $18,994 over a
seven year term -- in year one and for the next six years -- unless the plan becomes fully
funded before year seven.
In year two, the plan's funding deficit is $8,000 as a result of increases in both the
value of assets and liabilities. Since this new shortfall is less than the value of future
contributions (we assume that the plan will make future contributions so their present
value effectively becomes an asset) the increase in the shortfall is zero. Under the
amortization rules no new payment is required; because the plan is still underfunded,
however, a second payment of $2,713 must be made. The amortization rule is designed
to encourage plans to fund up quickly in order to protect participants' pensions. For that
reason, the amortization payment of $2,713 is not reduced even though the plan's funded
status has improved.
In year 3, the funding shortfall increases to $18,367 because the value of assets
has fallen. Because this is $4,800 more than the value of the remaining amortization
payments, a new payment of $686 is added to the existing payment of $2,713 meaning
that total contributions are $3,399 in year 3.

In year 4, because of an increase in asset values, the plans deficit falls to $9,283.
This is less than $14,968, the value of the remaining shortfall payments from year 1 and
year 3 so there is no new payment and the required contribution remains $3,399.
In year 5, asset values rise again and the plan is now fully funded. Because the
plan no longer has a funding deficit, no minimum contribution is required and all past
amortization payments are cancelled.
Table 2
Minimum Funding Example
Year

Assets
Liabilities

$220,000
$238,994

$242,000
$250,000

$225,060
$243,427

$236,313
$245,596

$250,492
$247,656

Shortfall

$18,994

$8,000

$18,367

$9,283

$16,281

$13,567
$0

$10,854
$0
4,114

$8,140
$0
3,429
$0

$16,281

$13,567

$14,968

$11,569

$18,994

$4,800

Year 1 Shortfall Increase
Year 2 Shortfall Increase
Year 3Shortfall Increase
Year 4 Shortfall Increase
Year 5 Shortfall Increase

$2,713

$2,713
$0

$2,713
$0
$686

$2,713
$0
$686
$0

$0
$0
$0
$0

Total Minimum Contribution

$2,713

Value of Remaining Year 1 Pmts.
Value of Remaining Year 2 Pmts.
Value of Remaining Year 3 Pmts.
Value of Remaining Year 4 Pmts.
Value of All Remaining Payments

Shortfall Increase
Minimum Contribution for:

$2,713

$3,399

Plan sponsors able to fund plans during good times
The Administration proposed reforms provide real and meaningful incentives for
plans to adequately fund their accrued pension obligations. The importance of these
mechanisms that I have described is not simply to force plans to fund-up quickly and
reduce the rate at which new obligations accrue. Their importance is also that rational,
forward looking managers will respond to these reforms by taking steps to ensure that
plans remain well funded on an ongoing basis. The Administration plan matches new
responsibilities, to more fully fund pension obligations, with new opportunities - an
enhanced ability to pre-fund obligations on a tax preferred basis.
Pension sponsors believe that their inability, under current rules, to build
sufficiently large funding surpluses during good financial times has contributed
significantly to current underfunding in the pension system. The proposal addresses this
problem directly by creating two funding cushions that, when added to the appropriate
funding target, would determine the upper funding limit for tax deductible contributions.
Every plan will be allowed to fund to at least at-risk Liability.
The first cushion is designed to allow firms to build a sufficient surplus so that
plans do not become underfunded solely as a result of asset and liability values
fluctuations that occur over a business cycle. Plan sponsors would also be able to build a
second funding cushion that allows them to pre-fund for salary or benefit increases.

Conclusion
Defined benefit plans are a vital source of retirement income for millions of
Americans. The Administration is committed to ensuring that these plans remain a viable
retirement option for those firms that wish to offer them to their employees. The long run
viability of the system, however, depends on ensuring that it is financially sound. The
Administration's proposal is designed to put the system on secure financial footing in
order to safeguard the benefits that plan participants have earned and will earn in the

future. We are committed to working with Congress to ensure that effective defined
benefit pension reforms that protect worker's pensions are enacted into law.
It has been my pleasure to provide this detailed discussion of some of the critical
elements of the proposal. My colleagues and I are available and look forward to
discussing the proposal and the motivations for the proposal and answering any
additional questions you may have.

W This is a different yield curve phase-in schedule than proposed for the use of the yield curve in
discounting pension liabilities for minimum funding purposes.
l1J The proposal includes a detailed description of the transition rules that govern the phase in of the higher
funding target when a plan changes status from ongoing to at-risk. See the Treasury Blue Book for more
information at http://www.trcas.gov/officcs/tax-policy/library/bluebk05.pdf.

[3]

This description draws on the description in the Treasury Blue Book.

1S-2283: Tampa Small Busincss Will Host Tax Rclc.mll Panel's <BR:.>Third Hcaring 011 ...

FROM THE OFFICE OF PUBLIC AFFAIRS
March 2, 2005
JS-2283

Tampa Small Business Will Host Tax Reform Panel's
Third Hearing on March 8th
The President's Advisory Panel on Federal Tax Reform today announced that
SAGO Networks, a small technology business in Tampa, Florida, will host the
Panel's third hearing. The hearing will be held on Tuesday, March 8, 2005 at 9:30
a.m. at 4465 W. Gandy Boulevard, Tampa, Florida, 33611.
Former Senators Connie Mack and John Breaux serve as the Chairman and Vice Chairman of the President's Advisory Panel on Federal Tax Reform.
The Panel's third hearing will focus how the tax system affects businesses and
entrepreneurs. The witness list for this hearing will be provided at a later date.
About SAGO Networks:
Sago Networks is a technology services company that provides solutions for all of
its customers' bandwidth and custom telecommunications needs. From its
headquarters in the Tampa Bay area and satellite offices in Miami and Dallas, Sago
has implemented multiple rapidly deployable, high-speed wireless networks and
maintains one of the largest bandwidth datacenters in the country.
www.sagonetworks.com
About the Tax Reform Panel:
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.

http://wWv.·.trCtl:i ..Il;ov!press!r.eleaseslis2283.htm

Page I of I

J5-2284: Treasury and IRS Issue Regulations on SlIbsiJiary Stock Losses

Page I of I

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free At/oiler,:; Aun/Jill: :'" ROdtie,{"I,

March 2, 2005
JS-2284
Treasury and IRS Issue Regulations
on Subsidiary Stock Losses

WASHINGTON, DC-- Today the Treasury Department and the IRS released final
regulations disallowing certain losses recognized on sales of stock of a member of
a consolidated group. The final regulations are similar to temporary regulations that
were issued in March, 2002, after the Federal Circuit's decision in Rite Aid Corp. v,
United States. 255 F,3d 1357 (Fed. Cir, 2001).
Additionally, the Treasury Department and the IRS intend to publish within the near
term proposed regulations with an alternative approach to the problem addressed
by these regulations.

REPORTS
• The text of the regulation

http://W)l ...Y;tiCIl3.gov/prcss/rclc~... es/js2284.htm

4/2511005

[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TO 9187]
RIN 1545-BA52
Loss Limitation Rules
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
SUMMARY: This document contains final regulations under sections 337(d) and 1502 of
the Internal Revenue Code (Code). These regulations disallow certain losses recognized
on sales of subsidiary stock by members of a consolidated group. These regulations apply
to corporations filing consolidated returns, both during and after the period of affiliation,
and also affect purchasers of the stock of members of a consolidated group.
DATES: Effective Date: These regulations are effective April 4, 2005.
Applicability Date: For dates of applicability, see §§1.337(d)-2(g), 1.1502-20(i),
and 1.1S02-32(b).
FOR FURTHER INFORMATION CONTACT: Theresa Abell (202) 622-7700 or Martin
Huck (202) 622-7750 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act

The collection of information contained in these final regulations has been reviewed

and approved by the Office of Management and Budget in accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number 1545-1774.
The collection of information in these final regulations is in §§1.337(d)-2(c), 1.150220(i), and 1.1502-32(b)(4). The information is required to allow the taxpayer to make
certain elections to determine the amount of allowable loss under §1.337(d)-2, §1.1502-20
as currently in effect, or under §1.1502-20 modified so that the amount of allowable loss
determined pursuant to §1.1502-20(c)(1) is computed by taking into account only the
amounts computed under §1.1502-20(c)(1 )(i) and (ii); to allow the taxpayer to reapportion
a section 382 limitation in certain cases; to allow the taxpayer to waive certain loss
carryovers; to allow acquiring groups to reduce the amount of certain loss carryovers
deemed to expire; and to ensure that loss is not disallowed and basis is not reduced under
§1.337(d}-2 to the extent the taxpayer establishes that the loss or basis is not attributable
to the recognition of built-in gain on the disposition of an asset. The collection of
information is required to obtain a benefit. The likely respondents are corporations that file
consolidated income tax returns.
The estimated burden is as follows:
Estimated total annual reporting andlor recordkeeping burden: 36,720 hours.
Estimated average annual burden per respondent: 2 hours.
Estimated number of respondents: 18,360.
Estimated annual frequency of responses: once.
Comments concerning the accuracy of this burden estimate and suggestions for

reducing this burden should be directed to the Office of Management and Budget, Attn:
Desk Officer for the Department of 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.
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 the collection of information must be retained as long
as their contents may become material in the administration of any Internal Revenue law.
Generally, tax returns and tax return information are confidential, as required by 26 U.S.C.
6103.

Background
On March 7, 2002, the IRS and Treasury Department issued a Treasury decision
that included temporary regulations and cross-referencing proposed regulations (TO 8984,
67 FR 11034; REG-1 02740-02) implementing the repeal of the General Utilities doctrine in
the consolidated return context pursuant to the mandate of section 337(d). Those
regulations included §§1.337(d)-2T, 1.1502-20T(i), and 1.1502-32T(b)(4)(v).
For dispositions and deconsolidations of subsidiary stock before March 7, 2002,
and dispOSitions and deconsolidations of subsidiary stock on or after March 7, 2002, that
were effected pursuant to a binding written contract entered into before such date that was
in continuous effect until the disposition or deconsolidation, §1.1502-20T(i) permits

consolidated groups to elect to calculate allowable loss on the sale of subsidiary stock, or
the basis reduction required on the deconsolidation of subsidiary stock, by applying

§1.1502-20 in its entirety, § 1.1502-20 without regard to the duplicated loss factor of the
loss disallowance formula, or §1.337(d)-2T. Section 1.337(d)-2T disallows certain losses
recognized on sales of subsidiary stock by members of a consolidated group and, under
certain circumstances, requires the basis of subsidiary stock to be reduced to its value
immediately before a deconsolidation of the stock. For dispositions and deconsolidations
on or after March 7, 2002, unless the disposition or deconsolidation was effected pursuant
to a binding written contract entered into before March 7, 2002, that was in continuous
effect until the disposition or deconsolidation, groups must apply §1.337(d)-2T to calculate
allowable loss on the sale of subsidiary stock or the basis reduction required on the
deconsolidation of subsidiary stock.
The Treasury decision also included a number of correlative provisions, in both
§§1.1502-20T and 1.1502-32T, designed to address certain issues that could arise if a
group elected to apply §1.1502-20 without regard to the duplicated loss factor of the loss
disallowance formula, or §1.337(d)-2T. Technical changes to §§1.337(d)-2T, 1.1502-20T,
and 1.1502-32T were made by Treasury decisions 8998 (67 FR 37998), 9057 (68 FR
24351),9118 (69 FR 12799), and 9155 (69 FR 51175).
On August 25,2004, the IRS issued Notice 2004-58 (2004-39I.R.B. 520)
describing the basis disconformity method and announcing that the IRS will accept that
method as a method for determining whether subsidiary stock loss is disallowed and

subsidiary stock basis is reduced under §1.337(d)-2T. Contemporaneous with the
issuance of the Notice, the IRS and Treasury Department published temporary and crossreferencing proposed regulations (TD 9154, 69 FR 52419; REG-135898-04) extending the
time for making an election under §1.1502-20T(i) and permitting taxpayers to amend or
revoke prior elections made under §1.1502-20T(i).
In response to the promulgation of §1.337(d)-2T and the issuance of Notice 200458, the IRS and Treasury Department have received a number of comments on the
regulations, the basis disconformity method, and, more generally, on the manner in which
the repeal of the General Utilities doctrine should be implemented in the consolidated
group context. The IRS and Treasury Department have studied and are continuing to study
those comments. In that regard, the IRS and Treasury Department intend to publish within
the near term proposed regulations with an alternative approach to this problem. Until
those proposed regulations are published as final or temporary regulations, whether
certain losses recognized on sales of subsidiary stock are disallowed and whether basis of
subsidiary stock must be reduced immediately before a deconsolidation of the stock will
continue to be determined under the rules of §1.337(d)-2T. Accordingly, this Treasury
decision adopts the rules of §1.337(d)-2T (as in effect on March 2, 2005) as final regulation
§1.337(d)-2 without substantive change. The IRS will accept the basis disconformity
method as a method for determining whether subsidiary stock loss is disallowed and
subsidiary stock basis is reduced under that final regulation.

In addition, to permit taxpayers to make the election to apply §1.1502-20 without
regard to the duplicated loss factor of the loss disallowance rule, or the rule of §1.337(d)-2,
as provided in this Treasury Decision, this Treasury decision also adopts the rules of
§1.1502-20T and the correlative rules of §1.1502-32T (as in effect on March 2, 2005) as
final regulations without substantive change.

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 is hereby certified that these regulations will not have a Significant economic
impact on a substantial number of small entities. This certification is based on the fact that
these regulations will primarily affect affiliated groups of corporations that have elected to
file consolidated returns, which tend to be larger businesses. Therefore, a Regulatory
Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the Code, these regulations will be submitted to the Chief
Counsel for Advocacy of the Small Business Administration for comment on their impact
on small business.

Drafting Information
The prinCipal authors of these regulations are Theresa Abell and Martin Huck of the
Office of Associate Chief Counsel (Corporate). However, other personnel from the IRS
and Treasury Department participated in their development.
List of Subjects

26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and record keeping reqUirements.

Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602 are amended as follows:
PART 1-INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by removing the entry for
§1.337(d)-2T and adding an entry in numerical order to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.337(d)-2 also issued under 26 U.S.C. 337(d}. * * *
Par. 2. Section 1.337(d)-2 is revised to read as follows:
§1.337(d)-2 Loss limitation rules.
(a) Loss disallowance-( 1) General rule. No deduction is allowed for any loss
recognized by a member of a consolidated group with respect to the disposition of stock of
a subsidiary.
(2) Definitions. For purposes of this section:
(i) The definitions in §1.1502-1 apply.
(ii) Disposition means any event in which gain or loss is recognized, in whole or in
part.

(3) Coordination with loss deferral and other disallowance rules. For purposes of
this section, the rules of §1.1502-20(a)(3) apply, with appropriate adjustments to reflect
differences between the approach of this section and that of §1.1502-20.
(4) Netting. Paragraph (a)(1) of this section does not apply to loss with respect to
the disposition of stock of a subsidiary, to the extent that, as a consequence of the same
plan or arrangement, gain is taken into account by members with respect to stock of the
same subsidiary having the same material terms. If the gain to which this paragraph
applies is less than the amount of the loss with respect to the disposition of the subsidiary's
stock, the gain is applied to offset loss with respect to each share disposed of as a
consequence of the same plan or arrangement in proportion to the amount of the loss
deduction that would have been disallowed under paragraph (a)(1) of this section with
respect to such share before the application of this paragraph (a){4). If the same item of
gain could be taken into account more than once in limiting the application of paragraphs
(a}(1) and (b}(1) ofthis section, the item is taken into account only once.
(b) Basis reduction on deconsolidation-(1) General rule. If the basis of a member
of a consolidated group in a share of stock of a subsidiary exceeds its value immediately
before a deconsolidation of the share, the basis of the share is reduced at that time to an
amount equal to its value. If both a disposition and a deconsolidation occur with respect to
a share in the same transaction, paragraph (a) of this section applies and, to the extent
necessary to effectuate the purposes ofthis section, this paragraph (b) applies following
the application of paragraph (a) of this section.

(2) Deconsolidation. Deconsolidation means any event that causes a share of
stock of a subsidiary that remains outstanding to be no longer owned by a member of any
consolidated group of which the subsidiary is also a member.
(3) Value. Value means fair market value.
(4) Netting. Paragraph (b)(1) of this section does not apply to reduce the basis of
stock of a subsidiary, to the extent that, as a consequence of the same plan or
arrangement, gain is taken into account by members with respect to stock of the same
subsidiary having the same material terms. If the gain to which this paragraph applies is
less than the amount of basis reduction with respect to shares of the subsidiary's stock, the
gain is applied to offset basis reduction with respect to each share deconsolidated as a
consequence of the same plan or arrangement in proportion to the amount of the reduction
that would have been required under paragraph (b)( 1) of this section with respect to such
share before the application ofthis paragraph (b)(4).
(c) Allowable loss--(1) Application. This paragraph (c) applies with respect to stock
of a subsidiary only if a separate statement entitled §1.337(d)-2(c) statement is included
with the return in accordance with paragraph (c)(3) of this section.
(2) General rule. Loss is not disallowed under paragraph (a)(1) of this section and
basis is not reduced under paragraph (b)( 1) of this section to the extent the taxpayer
establishes that the loss or basis is not attributable to the recognition of built-in gain, net of
directly related expenses, on the disposition of an asset (including stock and securities).
Loss or basis may be attributable to the recognition of built-in gain on the disposition of an

asset by a prior group. For purposes of this section, gain recognized on the disposition of
an asset is built-in gain to the extent attributable, directly or indirectly, in whole or in part, to
any excess of value over basis that is reflected, before the disposition of the asset, in the
basis ofthe share, directly or indirectly, in whole or in part, after applying section 1503(e)
and other applicable provisions of the Internal Revenue Code and regulations. Federal
income taxes may be directly related to built-in gain recognized on the disposition of an
asset only to the extent of the excess (if any) of the group's income tax liability actually
imposed under Subtitle A of the Internal Revenue Code for the taxable year of the
disposition of the asset over the group's income tax liability for the taxable year
redetermined by not taking into account the built-in gain recognized on the disposition of
the asset. For this purpose, the group's income tax liability actually imposed and its
redetermined income tax liability are determined without taking into account the foreign tax

credit under section 27(a} of the Internal Revenue Code.
(3) Contents of statement and time of filing. The statement required under
paragraph (c){1) of this section must be included with or as part of the taxpayer's return for
the year of the disposition or deconsolidation and must contain-(i) The name and employer identification number (E.I.N.) of the subsidiary; and
(ii) The amount of the loss not disallowed under paragraph (a)(1) of this section by

reason of this paragraph (c) and the amount of basis not reduced under paragraph (b)(1) of
this section by reason of this paragraph (c).

(4) Example. The principles of paragraphs (a), (b), and (c) ofthis section are
illustrated by the examples in §§1.337(d}-1(a)(5) and 1.1502-20(a)(5) (other than
Examples 3,~,

and~)

and (b), with appropriate adjustments to reflect differences between

the approach of this section and that of §1.1502-20, and by the following example. For
purposes ofthe examples in this section, unless otherwise stated, the group files
consolidated returns on a calendar year basis, the facts set forth the only corporate activity,
and all sales and purchases are with unrelated buyers or sellers. The basis of each asset
is the same for determining earnings and profits adjustments and taxable income. Tax
liability and its effect on basis, value, and earnings and profits are disregarded. Investment
adjustment system means the rules of §1.1502-32. The example reads as follows:
Example. Loss offsetting built-in gain in a prior group. (i) P buys all the stock of T for
$50 in Year 1, and T becomes a member of the P group. T has 2 assets. Asset 1 has a
basis of $50 and a value of $0. and asset 2 has a basis of $0 and a value of $50. T sells
asset 2 during Year 3 for $50 and recognizes a $50 gain. Under the investment adjustment
system, P'S basis in the T stock increased to $100 as a result of the recognition of gain. In
Year 5, all of the stock of P is acquired by the P1 group, and the former members of the P
group become members of the P1 group. T then sells asset 1 for $0, and recognizes a
$50 loss. Under the investment adjustment system, P'S basis in the T stock decreases to
$50 as a result of the loss. T's assets decline in value from $50 to $40. P then sells all the
stock of T for $40 and recognizes a $10 loss.
(ii) pIS basis in the T stock reflects both T's unrecognized gain and unrecognized
loss with respect to its assets. The gain T recognizes on the disposition of asset 2 is builtin gain with respect to both the P and P1 groups for purposes of paragraph (c)(2) of this
section. In addition, the loss T recognizes on the disposition of asset 1 is built-in loss with
respect to the P and P1 groups for purposes of paragraph (c)(2) of this section. T's
recognition of the built-in loss while a member of the P1 group offsets the effect on T's
stock basis of T's recognition of the built-in gain while a member of the P group. Thus, P's
$10 loss on the sale ofthe T stock is not attributable to the recognition of built-in gain, and
the loss is therefore not disallowed under paragraph (c)(2) of this section.

(iii) The result would be the same if, instead of having a $SO built-in loss in asset 1
when it becomes a member of the P group, T has a $50 net operating loss carryover and
the carryover is used by the P group.
(d) Successors. For purposes of this section, the rules and examples of

§1.1S02-20(d) apply, with appropriate adjustments to reflect differences between the
approach of this section and that of §1.1502-20.
(e) Anti-avoidance rules. For purposes of this section, the rules and examples of
§1.1S02-20{e) apply, with appropriate adjustments to reflect differences between the
approach of this section and that of §1.1502-20.
(f) Investment adjustments. For purposes of this section, the rules and examples of
§1.1S02-20{f) apply, with appropriate adjustments to reflect differences between the
approach of this section and that of §1.1S02-20.

(9) Effective dates. This section applies with respect to dispositions and
deconsolidations on or after March 3, 200S. In addition, this section applies to
dispositions and deconsolidations for which an election is made under §1.1502-20(i)(2) to
determine allowable loss under this section. If loss is recognized because stock of a
subsidiary became worthless, the disposition with respect to the stock is treated as
occurring on the date the stock became worthless. For dispositions and deconsolidations
after March 6, 2002 and before March 3, 2005, see §1.337(d)-2T as contained in the 26
CFR part 1 in effect on March 2, 200S.

§1.337(d)-2T [Removed]
Par. 3. Section 1.337(d)-2T is removed.

Par. 4. In § 1.1502-20, paragraph (i) is revised to read as follows:

§1.1502-20 Disposition or deconsolidation of subsidiary stock.
*****

(i) Limitations on the applicability of §1.1502-20-( 1) Dispositions and
deconsolidations on or after March 7, 2002. Except to the extent specifically incorporated
in §1.337(d)-2, paragraphs (a) and (b) of this section do not apply to a disposition or
deconsolidation of stock of a subsidiary on or after March 7. 2002, unless the disposition
or deconsolidation was effected pursuant to a binding written contract entered into before
March 7, 2002, that was in continuous effect until the disposition or deconsolidation.
(2) Dispositions and deconsolidations prior to March 7,2002. In the case of a
dispOSition or deconsolidation of stock of a subsidiary by a member before March 7, 2002.
or a disposition or deconsolidation on or after March 7, 2002, that was effected pursuant to
a binding written contract entered into before March 7, 2002, that was in continuous effect
until the disposition or deconsolidation, a consolidated group may determine the amount of
the member's allowable loss or basis reduction by applying this section in its entirety, or, in
lieu thereof, subject to the conditions set forth in this paragraph (i), by making an
irrevocable election to apply the provisions of either-(i) This section, except that in applying paragraph (c)(1) of this section, the amount
of loss disallowed under paragraph (a)(1) of this section and the amount of basis reduction
under paragraph (b)(1) of this section with respect to a share of stock will not exceed the
sum ofthe amounts described in paragraphs (c)(1 )(i) and (ii) of this section; or

(ii) Section 1.337(d)-2.

(3) Operating rules-(i) Reattribution of losses in the case of an election to
detennine allowable loss by applying the provisions described in paragraph (i)(2)(i) of this
section. If a consolidated group elects to determine allowable loss by applying the
provisions described in paragraph (i)(2)(i) of this section, an election described in
paragraph (g) of this section to reattribute losses will be respected only if the requirements
of paragraph (g) of this section, induding the requirement that the election be filed with the
group's income tax return for the year of the disposition, have been or are satisfied. For
example, if a consolidated group did not file a valid election described in paragraph (g) of
this section with its return for the year of the disposition, this section does not authorize the
group that disposed of the stock to make such an election with its return for the year in
which it elects to determine its allowable stock loss under the provisions described in
paragraph (i)(2)(i) of this section. If a consolidated group that made a vafid election
described in paragraph (g) of this section with respect to the disposition of stock elects to
determine allowable loss by applying the provisions described in paragraph (i){2)(i) of this
section, the erection described in paragraph (g) of this section may not be revoked, and the
amount of loss treated as reattributed as of the time of the disposition pursuant to the
election described in paragraph (g) of this section is the amount of loss originally
reattributed, reduced to the extent that it exceeds the greater of~~
(A) The amount of stock loss disallowed after applying the provisions described in
paragraph (i){2}(i) of this section; and

(8) The amount of reattributed losses that the group that disposed of the stock
absorbed in years for which the assessment of a deficiency is prevented by any law or rule
of law as of the date the election to apply the provisions described in paragraph (i)(2)(i) of
this section is filed and at all times thereafter.
(ii) Reattribution of losses in the case of an election to determine allowable loss by

applying the provisions described in paragraph (i)(2)(ii) of this section. If a consolidated
group elects to determine allowable loss by applying the provisions described in
paragraph (i)(2)(ii) of this section, the consolidated group may not make an election
described in paragraph (g) of this section to reattribute any losses. If the consolidated
group made an election described in paragraph (g) of this section with respect to the
disposition of subsidiary stock, the amount of loss treated as reattributed pursuant to such
election will be the greater of(A) Zero; and
(8) The amount of reattributed losses that the group that disposed of the stock
absorbed in years for which the assessment of a deficiency is prevented by any law or rule
of law as of the date the election to apply the provisions described in paragraph (i)(2)(ii) of
this section is filed and at all times thereafter.
(iii) Apportionment of section 382 limitation in the case of a reduction of reattributed
losses-(A) Losses subject to a separate section 382 limitation. If, as a result of the
application of paragraph (i)(3)(i) or (ii) and paragraph (i}(3)(vii) of this section, pre-change
separate attributes that were subject to a separate section 382 limitation are treated as

losses of a subsidiary and the common parent previously elected to apportion all or a part
of such limitation to itself under §1.1502-96(d), the common parent may reduce the amount
of such limitation apportioned to itself.
(8) Losses subject to a subgroup section 382 limitation. If, as a result of the
application of paragraph (i){3)(i) or (ii) and paragraph (i)(3)(vii) of this section, pre-change
subgroup attributes that were subject to a subgroup section 382 limitation are treated as
losses of a subsidiary and the common parent previously elected to apportion all or a part
of such limitation to itself under §1.1502-96(d), the common parent may reduce the amount
of such limitation apportioned to itself. In addition, if such subsidiary has ceased to be a
member of the loss subgroup to which the pre-change subgroup attributes relate, the
common parent may increase the total amount of such limitation apportioned to such
subsidiary (or loss subgroup that includes such subsidiary) under §1.1502-95(c) by an
amount not in excess of the amount by which such limitation that is apportioned to the
common parent is reduced pursuant to the previous sentence.
(C) Losses subject to a consolidated section 382 limitation. If, as a result of the
application of paragraph (i)(3)(i) or (ii) and paragraph (i)(3)(vii) of this section, pre-change
consolidated attributes (or pre-change subgroup attributes) that were subject to a
consolidated section 382 limitation (or subgroup section 382 limitation where the common
parent was a member of the loss subgroup) are treated as losses of a subsidiary, and the
subsidiary has ceased to be a member ofthe loss group (or loss subgroup), the common
parent may increase the amount of such limitation that is apportioned to such subsidiary (or

loss subgroup that includes such subsidiary) under §1.1S02-95{c). The amount of each
element of such limitation that can be apportioned to a subsidiary (or loss subgroup that
includes such subsidiary) pursuant to this paragraph (i)(3)(iii)(C), however, cannot exceed.
the product of (x) the element and (y) a fraction the numerator of which is the amount of prechange consolidated attributes (or subgroup attributes) subject to that limitation that are
treated as losses of the subsidiary (or loss subgroup) as a result of the application of
paragraph (i)(3)(i) or (ii) and paragraph (i)(3)(vii) of this section and the denominator of
which is the total amount of pre-change attributes subject to that limitation determined as of
the close of the taxable year in which the subsidiary ceases to be a member of the group
(or loss subgroup).
(D) Operating rules-(1) Limitations on apportionment. In making any adjustment to
an apportionment of a subgroup section 382 limitation or a consolidated section 382
limitation pursuant to paragraph (i)(3)(iii)(6) or (e) of this section, the common parent must
take into account the extent, if any, to which such limitation has previously been
apportioned to another subsidiary or loss subgroup prior to the date the election to apply
the provisions described in paragraph (i)(2)(i) or (ii) of this section is filed.
~) Manner and

effect of adjustment to previous apportionment of limitation to

common parent. Any reduction in a previous apportionment of a separate section 382
limitation or a subgroup section 382 limitation to the common parent made pursuant to
paragraph (i)(3)(iii)(A) or (8) of this section is treated as effective when the previous
apportionment was effective. Any such adjustment must be made in a manner consistent

with the principles of §1.1502-95(c). For example, to the extent the apportionment of a
separate section 382 limitation or a subgroup section 382 limitation to a common parent is
reduced pursuant to paragraph (i)(3)(iii)(A) or (8) of this section, the amount of such
limitation available to the subsidiary or loss subgroup, as applicable, is increased.

@) Manner and effect of adjustment to apportionment of limitation to departing
subsidiary or loss subgroup. Any increase in an amount of a subgroup section 382
limitation or a consolidated section 382 limitation apportioned to a departing subsidiary (or
loss subgroup that includes such subsidiary) made pursuant to paragraph (i)(3)(iii)(8) or
(C) of this section is treated as effective for taxable years ending after the date the
subsidiary ceases to be a member of the group or loss subgroup. Any such adjustment
may be made regardless of whether the common parent previously elected to apportion all
or a part of such limitation to such subsidiary (or loss subgroup that includes such
subsidiary) under §1.1502-95(c) or 1.1502-95A(c), but must be made in a manner
consistent with the principles of §1.1502-95(c). For example, to the extent the
apportionment of an element of a subgroup section 382 limitation or a consolidated
section 382 limitation to a departing subsidiary is increased pursuant to paragraph
(i)(3)(iii)(B) or (C) of this section, the amount of such element of such limitation that is
available to the loss subgroup or loss group is reduced consistent with §1.1502-95(c)(3).
(1) Prohibition against other adjustments. This paragraph (i)(3)(iii) does not
authorize the common parent to adjust the apportionment of any separate section 382
limitation, subgroup section 382 limitation, or consolidated section 382 limitation that it

previously apportioned to a subsidiary, to a loss subgroup, or to itself under §1.1502-95(c),
1.1502-95A(c), or 1.1502-96(d), other than as provided in paragraphs (i)(3}(iii)(A), (B), and

(C) of this section.
(E) Time and manner of making apportionment adjustment. An adjustment to the
apportionment of any separate section 382 limitation, subgroup section 382 limitation, or
consolidated section 382 limitation pursuant to paragraph (i)(3)(iii)(A), (8), or (C) of this
section must be made as part of the group's election to apply the provisions of paragraph
(i)(2)(i) or (ii) of this section, as described in paragraph (i)(4) of this section.
(iv) Notification of reduction of reattributed losses and adjustment of apportionment
of section 382 limitation. If the application of paragraph (i)(3)(i) or (ii) of this section results
in a reduction of the losses treated as reattributed pursuant to an election described in
paragraph (g) of this section, then, prior to the date that the group files its income tax return
for the taxable year that includes August 26, 2004, the common parent must send the
notification required by this paragraph to the subsidiary, at the subsidiary's last known
address. In addition, if the acquirer of the subsidiary stock was a member of a
consolidated group at the time of the disposition, the common parent must send a copy of
such notification to the person that was the common parent of the acquirer's group at the
time of the acquisition, at its last known address. The notification is to be in the form of a
statement entitled Recomputation of Losses Reattributed Pursuant to the Election
Described in §1.1502-20(g), that is signed by the common parent and that indudes the
following information-

(A) The name and employer identification number (E.I.N.) of the subsidiary;
(8) The original and the recomputed amount of losses treated as reattributed
pursuant to the election described in paragraph {g} of this section; and
(C) If the apportionment of a separate section 382 limitation, a subgroup section
382 limitation, or a consolidated section 382 limitation is adjusted pursuant to paragraph
(i)(3)(iii)(A), (8), or (C) of this section, the original and the adjusted apportionment of such
limitation.
(v) Items taken into account in open years-(A) General rule. An election under
paragraph (i)(2) of this section affects a taxpayer's items of income, gain, deduction, or
loss only to the extent that the election gives rise, directly or indirectly to items or amounts
I

that would properly be taken into account in a year for which an assessment of deficiency
or a refund of overpayment, as the case may be, is not prevented by any law or rule of law.
Under this paragraph, if the election increases the loss allowed with respect to a
dispOSition of subsidiary stock, but the year of the disposition (or the year to which such
loss would have been carried back or carried forward) is a year for which a refund of
overpayment is prevented by law, to the extent that the absorption of such excess loss in
such year would have affected the tax treatment of another item (e.g., another loss that was
absorbed in such year) that has an effect in a year for which a refund of overpayment is not
prevented by any Jawor rule of law, the election will affect the treatment of such other item.
Therefore, if the absorption of the excess loss in the year of the disposition (which is a year
for which a refund of overpayment is prevented by law) would have prevented the

absorption of another loss (the second loss) in such year and such loss would have been
carried to and used in a year for which a refund of overpayment is not prevented by any law
or rule of law (the other year), the election makes the second loss available for use in the
other year.
(B) Special rule. If a member's basis in stock of a subsidiary was reduced pursuant
to §1.1502-32 because a loss with respect to stock of a lower -tier subsidiary was treated
as disallowed under this section, then, to the extent such disallowed loss is allowed as a
result of an election under paragraph (i) of this section but would have been properly
absorbed or expired in a year for which a refund of overpayment is prevented by law or rule
of law, the member's basis in the subsidiary stock may be increased for purposes of
determining the group's or the shareholder-member's Federal income tax liability in all
years for which a refund of overpayment is not prevented by law or rule of law.
(vi) Conforming amendments for items previously taken into account in open years.
To the extent that, on any Federal income tax return, the common parent absorbed losses
that were reattributed pursuant to an election described in paragraph (g) of this section and
the amount of losses so absorbed is in excess of the amount of losses that are treated as
reattributed after application of paragraph (i)(3)(i) or (ii) of this section, or that may be
taken into account after any adjustment to an apportionment of a separate section 382
limitation, a subgroup section 382 limitation, or a consolidated section 382 limitation
pursuant to paragraph (i}(3)(iii) of this section, such returns must be amended to the
greatest extent possible to reflect the reduction in the amount of losses treated as

reattributed and any adjustment to the apportionment of such limitation.
(vii) Availability of losses to subsidiary. To the extent that any losses of a subsidiary
are reattributed to the common parent pursuant to an election described in paragraph (g)
of this section, such reattribution is binding on the subsidiary and any group of which the
subsidiary is or becomes a member. Therefore, if the subsidiary ceases to be a member
of the group, any reattributed losses are not thereafter available to the subsidiary and may
not be utilized by the subsidiary or any other group of which such subsidiary is or becomes
a member. To the extent that the application of paragraph (i)(3)(i) or (ii) of this section
results in a reduction in the amount of losses treated as reattributed to the common parent
pursuant to an election described in paragraph (g) of this section, however, losses in the
amount of such reduction are available to the subsidiary and may be utilized by the
subsidiary or any group of which such subsidiary is a member, subject to applicable
limitations (e.g., section 382).
(viii) Apportionment of section 382 limitation in the case of an amendment of an
election made pursuant to §1.1502-32(b)(4)--(A) In general. If, in connection with a
disposition or deconsolidation of subsidiary stock, the subsidiary the stock of which was
disposed of or deconsolidated became a member of another consolidated group (the
acquiring group), and, pursuant to §1.1502-32(b)(4)(vii), the acquiring group amends an
election made pursuant to §1.1502-32(b)(4) to treat all or a portion of the loss carryovers of
such subsidiary (or a lower-tier corporation of such subsidiary) as expiring for all Federal
income tax purposes, then the common parent may reapportion a separate, subgroup, or

consolidated section 382 limitation with respect to such subsidiary or lower-tier corporation
in a manner consistent with the principles of paragraphs (i)(3)(iii)(A) through (0) of this
section. Any reapportionment of a section 382 limitation made pursuant to the previous
sentence shall have the effects described in paragraphs (i)(3)(iii)(0)(li) and (iii) of this
section. For purposes of this section, a lower-tier corporation is a corporation that was a
member of the group of which the subsidiary was a member immediately before becoming
a member of the acquiring group and that became a member of the acquiring group as a
result of the subsidiary becoming a member of the acquiring group.
(8) Time and manner of adjustment of apportionment of section 382 limitation. The
common parent must include a statement entitled Adjustment of Apportionment of Section
382 Limitation in Connection with Amendment of Election under §1.1502-32(b)(4) with or
as part of any timely filed (including any extensions) original return for a taxable year that
includes any date on or before August 26, 2004, or with or as part of an amended return
filed before the date the original return for the taxable year that includes August 26, 2004, is
due (with regard to extensions). The statement must set forth the name and E.I.N. of the
subsidiary and both the original and the adjusted apportionment of a separate section 382
limitation, a subgroup section 382 limitation, and a consolidated section 382 limitation, as
applicable. The requirements of this paragraph (i)(3)(viii)(8) will be treated as satisfied if
the information required by this paragraph (i)(3)(viii)(8) is included in the statement
required by paragraph (i)(4) of this section rather than in a separate statement.
(4) Time and manner of making the election. An election to determine allowable

loss or basis reduction by applying the provisions described in paragraph (i)(2)(i) or (ii) of
this section is made by including the statement required by this paragraph with or as part of
any timely filed (including any extensions) original return for a taxable year that includes any
date on or before August 26, 2004, or with or as part of an amended return filed before the
date the original return for the taxable year that includes August 26, 2004, is due (including
any extensions). Filing a statement in accordance with the provisions of this paragraph
satisfies the requirement to file a "statement of allowed loss" otherwise imposed under
paragraph (c)(3) of this section or §1.337(d)-2(c)(3). The statement required by this
paragraph satisfies the requirement that a statement be filed in order to claim allowable
loss or basis reduction by applying the provisions described in paragraph (i)(2)(i) or (ii).
The statement filed under this paragraph shall be entitled Allowed Loss under Section
[Specify Section under Which Allowed Loss Is Determined] Pursuant to Section 1.150220(i) and must include the following information-(i) The name and E.I.N. of the subsidiary and of the member(s) that disposed of the
subsidiary stock;
(ii) In the case of an election to determine allowable loss or basis reduction by
applying the provisions described in paragraph (i)(2)(i) of this section, a statement that the
taxpayer elects to determine allowable loss or basis reduction by applying such provisions;
(iii) In the case of an election to determine allowable loss or basis reduction by
applying the provisions described in paragraph (i)(2)(ii) of this section, a statement that the
taxpayer elects to determine allowable loss or basis reduction by applying such provisions;

(iv) If an election described in paragraph (g) of this section was made with respect
to the disposition of the stock of the subsidiary, the amount of losses originally treated as
reattributed pursuant to such election and the amount of losses treated as reattributed
pursuant to paragraph (i)(3)(i) or (ii) of this section;
(v) If an apportionment of a separate section 382 limitation, a subgroup section 382
limitation, or a consolidated section 382 limitation is adjusted pursuant to paragraph
(i)(3)(iii)(A), (8), or (C) of this section, the original and redetermined apportionment of such
limitation; and
(vi) Ifthe application of paragraph (i)(3)(i) or (ii) of this section results in a reduction

of the amount of losses treated as reattributed pursuant to an election described in
paragraph (g) of this section. a statement that the notification described in paragraph
(i)(3)(iv) of this section was sent to the subsidiary and, if the acquirer was a member of a
consolidated group at the time of the stock sale, to the person that was the common parent
of such group at such time, as required by paragraph (i)(3)(iv) of this section.
(5) Revocation or amendment of prior elections--(i) In general. Notwithstanding
anything to the contrary in this paragraph (i), if a consolidated group made an election
under §1.1502-20T(i) to apply the provisions described in §1.1502-20T(i)(2)(i) or (ii), the
consolidated group may revoke or amend that election as provided in this paragraph (i)(5).

(ii) Time and manner of revoking or amending an election. An election to apply the
prOVisions described in §1.1502-20T(i)(2)(i) or (ii) is revoked or amended by including the
statement required by paragraph (i)(5)(iii) of this section with or as part of any timely filed

(including any extensions) original return for a taxable year that includes any date on or
before August 26, 2004, or with or as part of an amended return filed before the date the
original return for the taxable year that includes August 26,2004, is due (including any
extensions ).
(iii) Required statement--(A) Revocation. To revoke an election to apply the
provisions described in § 1.1502-20T(i)(2)(i) or (ii), the consolidated group must file a
statement entitled Revocation of Election Under Section 1.1502-20T(j). The statement
must include the name and E.I.N. of the subsidiary and ofthe member(s) that disposed of
the subsidiary stock.
(8) Amendment. To amend an election to apply the provisions described in

§1.1502-20T(i)(2)(i) or (ii), the consolidated group must file a statement entitled
Amendment of Election Under Section 1.1502-20T(i). The statement must include the
following information-(1J The name and E.I.N. of the subsidiary and of the member(s) that disposed of the
subsidiary stock; and
(g) The provision the taxpayer elects to apply to determine allowable loss or basis

reduction (described in paragraph (i)(2)(i) or (ii) of this section).
(iv) Special rule. If a consolidated group revokes an election made under §1.150220T(;), an election described in paragraph (g) of this section to reattribute losses will not be
respected, even if such election was filed with the group's return for the year of the
disposition.

(6) Effective date. This paragraph (i) is applicable on and after March 3, 2005.
(7) Cross references. See §1.1502-32(b)(4)(v) for a special rule for filing a waiver
of loss carryovers.

§1.1502-20T(i) [Removed]
Par. 5. In §1.1502-20T, paragraph (i) is removed.
Par.6. Section 1.1502-32 is amended by revising paragraphs (b)(4)(v) and
(b)(4)(vii) to read as follows:

§1.1502-32 Investment adjustments.
*****

(b) * * *
(4) * * *
(v) Special rule for loss carryovers of a subsidiary acquired in a transaction for
which an election under §1.1502-20(i)(2) is made-(A) Expired losses. Notwithstanding
paragraph (b)(4)(iv) of this section, unless a group otherwise chooses, to the extent that S's
loss carryovers are increased by reason of an election under §1.1502-20(i)(2) and such
loss carryovers expire or would have been properly used to offset income in a taxable year
for which the refund of an overpayment is prevented by any law or rule of law as of the date
the group files its original return for the taxable year in which S receives the notification
described in §1.1S02-20(i)(3)(iv) and at all times thereafter, the group will be deemed to
have made an election under paragraph (b )(4) of this section to treat all of such loss
carryovers as expiring for all Federal income tax purposes immediately before S became

a member of the consolidated group. A group may choose not to apply the rule of the
previous sentence to all of such loss carryovers of S by taking a position on an original or
amended tax return for each relevant taxable year that is consistent with having made such
choice.
(8) Available losses. Notwithstanding paragraph (b)(4)(iv) of this section, to the

extent that S's loss carryovers are increased by reason of an election under §1.150220(i)(2) and such loss carryovers have not expired and would not have been properly used
to offset income in a taxable year for which the refund of an overpayment is prevented by
any law or rule of law as of the date the group files its original return for the taxable year in
which S receives the notification described in §1.1502-20(i)(3)(iv) and at all times
thereafter, the group may make an election under paragraph (b }(4) of this section to treat
all or a portion of such loss carryovers as expiring for all Federal income tax purposes
immediately before S became a member of the consolidated group. Such election must

be filed with the group's original return for the taxable year in which S receives the
notification described in §1.1502-20(i)(3)(iv).
(C) Effective dates. Paragraph (b)(4)(v) of this section is applicable on and after

March 3, 2005. For prior periods, see §1.1502-32T(b)(4)(v) as contained in the 26 CFR
part 1 in effect on March 2, 2005.
(vi) * * *
(vii) Special rules for amending waiver of loss carryovers from separate return
limitation year-(A) Waivers that increased allowable loss or reduced basis reduction

required. If, in connection with the acquisition of S, the group made an election pursuant to
paragraph (b)(4) of this section to treat all or any portion of S's loss carryovers as expiring,
and the prior group elected to determine the amount of the allowable loss or the basis
reduction required with respect to the stock of S or a higher-tier corporation of S by
applying the provisions described in § 1.1502-20(i)(2)(i) or (ii), then the group may reduce
the amount of any loss carryover deemed to expire (or increase the amount of any loss
carryover deemed not to expire) as a result of the election made pursuant to paragraph
(b)(4) of this section. The aggregate amount of loss carryovers that may be treated as not
expiring as a result of amendments made pursuant to this paragraph (b)(4)(vii)(A) with
respect to S and any higher-and lower-tier corporation of S may not exceed the amount
described in § 1.1502-20(c)(1 )(iii) with respect to the acquired stock (computed without
regard to the effect of the group's election or elections pursuant to paragraph (b )(4) of this
section, but with regard to the effect of the prior group's election pursuant to §1.1S02-20(g),
if any, prior to the application of §1.1502-20(i)(3)). For purposes of determining the
aggregate amount of loss carryovers that may be treated as not expiring as a result of
amendments made pursuant to this paragraph (b)(4)(vii)(A) with respect to S and any
higher- and lower-tier corporation of S, the group may rely on a written notification provided
by the prior group. Nothing in this paragraph shall be construed as permitting a group to
increase the amount of any loss carryover deemed to expire (or reduce the amount of any
loss carryover deemed not to expire) as a result of the election made pursuant to
paragraph (b)(4) of this section.

(8) Inadvertent waivers of loss carryovers previously subject to an election
described in §1.1502-20(g). If. in connection with the acquisition of S. the group made an
election pursuant to paragraph (b)(4) of this section to waive loss carryovers of S by
identifying the amount of each loss carryover deemed not to expire, the prior group elected
to determine the amount of the allowable loss or the basis reduction required with respect
to the stock of S or a higher-lier corporation of S by applying the provisions described in
§1.1502-20(i)(2)(i) or (ii), and the amount of S's loss carryovers treated as reattributed to
the prior group pursuant to the election described in §1.1502-20(g) is reduced pursuant to

§1.1502-20(i)(3), then the group may amend its election made pursuant to paragraph
(b)(4) of this section to provide that aI/ or a portion of the loss carryovers of S that are
treated as loss carryovers of S as a result of the prior group's election to apply the
provisions described in § 1.1502-20(i)(2)(i) ar (ii) are deemed nat to expire. This
paragraph (b)(4)(vii)(B), however, does not permit a group to reduce the amount of any
loss carryover deemed not to expire as a result of the election made pursuant to paragraph

(b)(4) of this section.
(C) Time and manner of amending an electian under § 1.1502-32(b)(4 ). The
amendment of an election made pursuant to paragraph (b X4) of this section must be made
in a statement entitled Amendment of Election to Treat Loss Carryover as Expiring Under
§1.1502-32(b)(4) Pursuant to §1.1502-32(b)(4){vii). The statement must be filed with or as
part of any timely filed (including extensions) original return for the taxable year that
includes August 26, 2004, or with ar as part of an amended return filed before the date the

original return for the taxable year that includes August 26,2004, is due (with regard to
extensions). A separate statement shall be filed for each election made pursuant to
paragraph (b)(4) of this section that is being amended pursuant to this paragraph
(b){4)(vii). For purposes of making this statement, the group may rely on the statements
set forth in a written notification provided by the prior group. The statement filed under this
paragraph must include the following(1) The name and employer identification number (E.I.N.) of S;
~)

In the case of an amendment made pursuant to paragraph (b)(4)(vii)(A), a

statement that the group has received a written notification from the prior group confirming
that the group's prior election or elections pursuant to paragraph (b)(4) of this section had
the effect of either increasing the prior group's allowable loss on the disposition of
subsidiary stock or reducing the prior group's amount of basis reduction required;
@) The amount of each loss carryover of S deemed to expire (or the amount of loss
carryover deemed not to expire) as set forth in the election made pursuant to paragraph
(b)(4) of this section;
(!) The amended amount of each loss carryover of S deemed to expire (or the

amended amount of loss carryover deemed not to expire): and
~)

In the case of an amendment made pursuant to paragraph (b)(4)(vii)(A) of this

section, a statement that the aggregate amount of loss carryovers of S and any higher- and
lower-tier corporation of S that will be treated as not expiring as a result of amendments
made pursuant to paragraph (b)(4)(vii)(A) of this section will not exceed the amount

described in §1.1502-20(c)(1 )(iii) with respect to the acquired stock (computed without
regard to the effect of the group's election or elections pursuant to paragraph (b)(4) of this
section, but with regard to the effect of the prior group's election pursuant to §1.1502-20(g),

if any, prior to the application of §1.1502-20(i)(3».
(0) Items taken into account in open years. An amendment to an election made

pursuant to paragraph (b)(4) of this section affects the group's items of income, gain,
deduction, or loss only to the extent that the amendment gives rise, directly or indirectly, to
items or amounts that would properly be taken into account in a year for which an
assessment of deficiency or a refund for overpayment, as the case may be, is not
prevented by any law or rule of law. Under this paragraph, if the year to which a loss
previously deemed to expire as a result of an election made pursuant to paragraph (b)(4)
of this section is deemed not to expire as a result of an election made pursuant to this
paragraph would have been carried back or carried forward is a year for which a refund of
overpayment is prevented by law, then to the extent that the absorption of such loss in such
year would have affected the tax treatment of another item (e.g., another loss that was
absorbed in such year) that has an effect in a year for which a refund of overpayment is not
prevented by any law or rule of Jaw, the amendment to the election made pursuant to
paragraph (b)(4) of this section will affect the treatment of such other item. Therefore, if the
absorption of such loss (the first loss) in a year for which a refund of overpayment is
prevented by law would have prevented the absorption of another loss (the second loss) in
such year and such second loss would have been carried to and used in a year for which a

refund of overpayment is not prevented by any law or rule of law (the other year), the
amendment of the election makes the second loss available for use in the other year.

(E) Higher-and lower-tier corporations of S. A higher-tier corporation of S is a
corporation that was a member of the prior group and, as a result of such higher-tier
corporation becoming a member of the group; S became a member of the group. A lowertier corporation of S is a corporation that was a member of the prior group and became a
member of the group as a result of S becoming a member of the group.
(F) Effective date. This paragraph (b)(4)(vii) is applicable on and after March 3,
200S. For prior periods, see §1.1S02-32T(b)(4)(vii) as contained in the 26 CFR part 1 in
effect on March 2, 200S.
* ** * *

Par. 7. In §1.1S02-32T, paragraphs (b)(4)(v) and (b)(4 )(vii) are revised to read as
follows:
§1.1502-32T Investment adjustments (temporary).

**** *
(b) * * *

(4) * * *
(v) For further guidance see §1.1502-32(b)(4}(v).
(vi) * * *
(vii) For further guidance see §1.1S02-32(b )(4 )(vii).
* ** * *

Par. 8. The fol/owing sections in the table below are amended by revising
u§1.337(d)-2T" to u§1.337(d)-2," each time it appears in the paragraph:
Section

Remove

Add

§1.267(f)-1 (k)

§1.337(d)-2T

§1.337(d)-2

§1.5974{g)(2)(v)

§1.337(d)-2T

§1.337(d)-2

§1.1502-11(b){3){ii)(c)

§1.337(d)-2T

§1.337(d)-2

§1.1502-12(r)

§1.337(d)-2T

§1.337(d)-2

§1.1502-15(b )(2)(iii)

§1.337(d)-2T

§1.337(d)-2

§1.1502-35T(b)(6)(ii)

§1.337(d)-2T

§1.337(d)-2

§1.1502-35T(c)(9)

§1.337(d)-2T

§1.337{d)-2

§1.1502-91 (h )(2)

§1.337(d)-2T

§1.337(d)-2

602-0MB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION
ACT
Par. 9. The authority citation for part 602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 10.ln §602.101, paragraph (b) is amended by removing the entry for
§1.337(d)-2T and adding entries to the table in numerical order to read, in part, as follows:

§602.101 OMS Control numbers.
*****

(b) * **

CFR part or section where

CurrentOMB

identified and described

control No.

*"**"

1.337(d)-2 ...................................................................................... 1545-1160
1545-1774
***"'*

1.1502-20 ...................................................................................... 1545-1160
1545-1218
1545-1774
***"'*

1.1502-32 ............... .............. .................... .............. ............. .......... 1545-1344
1545-1774
*'****

Deputy Commissioner for Services and Enforcement.

Mark E. Matthews

Approved: February 18, 2005

Acting Deputy Assistant Secretary of the Treasury.
Eric Solomon
35

JS-228S: TestimollY of Assistant Secretary ollrcasury Mark J. warsnawsKY <,l:W,...-'lJl:IOIl:...

'15"

•

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, down'oad the free Ada/wil<- AcmIK,I") Rca{/c(f,,).

March 2, 2005
JS-2285

Testimony of Assistant Secretary of Treasury Mark J. Warshawsky
before the United States House Education and the Workforce Committ99
Good afternoon Chairman Boehner, Ranking Member Miller, and members of the
Committee. I appreciate the opportunity to participate in this hearing to discuss the
Administration's proposal to reform and strengthen the single employer defined
benefit pension system. In my testimony, I will focus on the proposal's funding
rules, in particular, the calculation of the funding targets

LINKS

• Testimony of Assistant Secretary of Treasury Mark J. Warshawsky before
the United States House Education and the Workforce Committee (Full
Version)

http://>:rT9w.ileas.!wv/oress/rekases/js2285.htm

4/25/200:

Good afternoon Chainnan Boehner, Ranking Member Miller, and members of the
Committee. I appreciate the opportunity to participate in this rearing to discuss the
Administration's proposal to refonn and strengthen the single employer defined benefit
pension system. In my testimony, I will focus on the proposal's funding rules, in
particular, the calculation of the funding targets.
The single employer defined benefit pension system is in serious financial trouble.
Many plans are badly underfunded, jeopardizing the pensions of millions of American
workers. The insurance system protecting these workers in the event that their own
pension plans fail has a substantial deficit. Such a deficit means that although the PBGC
has sufficient cash to make payments in the near-tenn, without corrective action,
ultimately the insurance system will simply not have adequate resources to pay all the
benefits that it owes to the one million workers and retirees currently owed benefits who
were participants of failed plans and to the beneficiaries of plans that fail in the future.
The Administration believes that current problems in the system are not transitory
nor can they be dismissed as simply the result of restructuring in a few industries. The
cause of the financial problems is the regulatory structure of the defined benefit system
itself. Correcting these problems and securing the retirement benefits of workers and
retirees requires that the system be restructured. Minor tinkering with existing rules will
not be sufficient. If we want to retain defined benefit plans as a viable option for
employers and employees, fundamental changes must be made to the system to make it
financially sound.
A defined benefit pension plan is a trusteed arrangement under which an
employer makes a financial commitment to provide a reliable stream of pension
payments to employees in exchange for their service to the firm. One cannot expect that
such obligations will be honored consistently if they are allowed to remain chronically
underfunded as they are under current law.
JS-2285

The incentives for financially sound plan funding must be improved or we will
continue to see pension plans tenninating with massive amounts of unfunded benefits.
These unfunded benefits are costly both to participants because many lose benefits and
also to other pension sponsors because, they are likely bear the higher costs that such
underfunding imposes on the insurance sy.;tem through even higher premiums.
The goal of the Administration's proposed defined benefit pension refonn is to
enhance retirement security. The refonns are designed to ensure that plans have
sufficient funds to meet accurately and meaningfully measured accrued obligations to
participants. The current defined benefit pension funding rules - which focus on
micromanaging annual cash flows to the pension fund -- are in need of a complete
overhaul. The current rules are needlessly complex and fail to ensure that many pension
plans remain prudently funded. The current rules:
•

Measure plan assets and liabilities inaccurately.

• Fail to ensure adequate plan funding.
• FaiJ to allow sufficient contributions by plans in good economic times, making
minimum required contributions rise sharply in bad economic times.
• Pennit excessive risk of loss to workers.
• Are burdensome and unnecessarily opaque and complex.
• Do not provide participants or investors with timely, meaningful infonnation on
funding levels.
• Do not generate sufficient premium revenues to sustain the PBGC.
• Create a moral hazard by permitting financially troubled companies with underfunded
plans to make benefit promises they cannot keep.
The President's solution to these issues is to fundamentally reform the rules
governing pension plan funding, disclosure and PBGC premiums, based on the following
three simple principles:
•

Funding rules should ensure pension promises are kept by improving incentives to
fund plans adequately.
• Workers, investors and pension regulators should be fully aware of pension plan
funding status.
• Premiums should reflect a plan's risk and ensure the pension insurance system's
financial solvency.
Such changes will increase the likelihood that workers and retirees actually
receive the benefits that they have earned and as a result will moderate future insurance
costs that will be borne by sound plan sponsors. Today I am going to discuss how the
Administration's initiative improves incentives for adequate plan funding. We have
proposed a fundamental refonn of the treatment of defined benefit pension plans, one that
we believe will change plan sponsor behavior, ultimately result in better funded and
better managed defined benefit pension plans, and secure benefits for workers and
retirees.
The Administration proposal is designed both to simplify funding rules and to
enhance pension plan participants' retirement security. The federal g>vemment has an
interest in defining and enforcing minimum prudent funding levels, but many other
funding, investment, and plan design decisions are best left to plan sponsors. Under this
proposal, pension plans would be required to fund towards an economical1y meaningful
funding target - a measure of the currently accrued pension obligations. Plans that fall
below the minimum funding target would be required to fund-up to the ~t within a
reasonable period oftime. Plans that faU significantly below the minimum acceptable
funding level would also be subject to benefit restrictions.
Some key features of the proposed funding rules:
• Funding based an meaningful and accurate measures of liabilities and assets. The
proposal provides funding targets that are based on meaningful, timely, and accurate

(using the yield curve for discounting is a central component of this proposal)
measures of liabilities that reflect the financial health of the employer.

• Accrued benefits funded. Sponsors that fall below minimum funding levels will be
required to fund up within a reasonable period of time. The proposal requires a 7year amortization period for annual increases in funding shortfalls. There will be
restrictions on the extension of new benefit promises byemployers whose plans'
funded status falls below acceptable levels. Benefit restrictions will limit liability
growth as a plan becomes progressively underfunded relative to its funding target.
•

Plan sponsors able to fund plans during good times. Many believe that the inability
of plan sponsors to build sufficiently large funding surpluses during good financial
times under current rules has contributed to the current underfunding in the pension
system. The proposal addresses this problem directly by creating two funding
cushions that, when added to the appropriate funding target, would determine the
upper funding limit for tax deductible contributions. And every plan will be allowed
to fund to a level of funding corresponding to the total cost of closing out the plan
Under our proposa~ allowing plan sponsors the opportunity to prefund and therefore
limit contribution volatility is a critical element.

Some argue that the best way to enhance retirement security is to create the
appearance of well funded pension plans through the use ofasset and liability smoothing
and increased amortization periods for actuarial losses. In addition, plan sponsors have
frequently voiced their dislike of volatile and unpredictable minimum contributions.
Our view is there are significant risks associated with masking the underlying
financial and economic reality of underfunded pension plans. Failure to recognize risk
because of the use of smoothing mechanisms results in transfers of risk among parties, in
particular from plan sponsors to plan participants and the PBGC. One need only look at
the losses incurred by many steel and airline plan participants and PBGC 's net position to
see this is so.
Moreover, the Administration recognizes that the current minimum funding rules
-- particularly the deficit reduction contribution mechanism and the limits on tax
deductibility of contributions -- have contributed to funding volatility. Our proposal is
designed to remedy these issues; for example, we increase the deductible contribution
limit. We feel this additional ability to fund during good times, combined with other
provisions of the proposal; for example, increasing the amortization period to seven years
compared to a period as short as four years under the current law deficit reduction
contribution mechanism, together with the existing freedom of plans have to choose
pension fund investments, will give plans the tools they need in order to smooth
contributions over the business cycle. Plans may choose to limit volatility by choosing
an asset allocation strategy or conservative funding level so that financial market changes
will not result in large increases in minimum contributions. These are appropriate
methods for dealing with risk; it is inappropriate to limit contribution volatility by
transferring risk to participants and the PBGC.

Meaningful and Accurate Measures of Assets and Liabilities

We propose measuring liabilities on an accrual basis using a single standard
liability measurement concept that does not distort the measures by smoothing values
over time. Within the single method, liability is measured using assumptions that are
appropriate for a financially healthy plan sponsor (investment grade credit rated), and
alternatively using assumptions that are appropriate for a less healthy plan sponsor
(below investment grade) that is more likely to find itself in a position of default on
pension obligations in the short to medium term.
On-going liability is defined as the present value on the valuation date of all
benefits that the sponsor is obligated to pay. Salary projections would not be used in
determining the level of accrued benefits. Expected benefit payments would be
discounted using the corporate bond spot yield curve that will be published by the
Treasury Department based on market bond rates. Retirement assumptions will be
developed using reasonable methodologies, based on the plan's or other relevant recent
historical experience. Finally, unlike the current liability measure under current law,
plans would be required to recognize expected lump sum payments in computing their
liabilities.
The at-risk liability measure estimates the liabilities that would accrue as a plan
heads towards termination because of deteriorating financial health of the plan sponsor.
At-risk liability would include accrued benefits for an ongoing plan, plus increases in
costs that occur when a plan terminates. These costs include acceleration in early
retirement, increase in lump sum elections when available and the administrative costs
associated with terminating the plan.

The following table provides a summary overview of the critical differences
between the ongoing and at-risk liability assumptions.
Ongoing Liability

At-Risk Liability

Discount Rate
Mortality Assumptions
Retirement Assumptions

-------------- Yield Curve -------------------------.- Set by Law ----------- --Acceleration in retirement rates - individuals retire at
Developed using relevant
the earliest early retirement opportunity.
recent historical experience.

Lump Sum Payments

Developed using relevant
recent historical experience.

Acceleration in lump-sum election.

Transaction Costs

Not included

Included. Calculated by formula.

Under our proposal, assets will be valued based on market values on the valuation
date for determining minimum required and maximum allowable cortributions. No

smoothed actuarial values of assets will be used as they mask the true financial status of
the pension plan.
One aspect of our liability measurement approach that has received a fair amount
of attention is the use of the yield curve to discount pension plan liabilities. Accuracy
requires that the discount rates used in calculating the present value of a plan's benefit
obligations satisfy two criteria: they must reflect the timing of the future payments, and
they should be based on current market-determined interest rates for similar obligations.
The Administration proposes to replace the current law method with a schedule of rates
drawn from a spot yield curve of high grade (AA) corporate bonds averaged over 90
business days. Discounting future benefit cash flows using the rates from the spot yield
curve is the most accurate way to measure a plan's liability because, by matching the
maturity of the discount rate with the timing of the obligation, it properly computes
today's cost of meeting that obHgation. Use of a yield curve E a prudent and common
practice; yield curves are regularly used in valuing other financial instruments including
mortgages, certificates of deposit, etc.
The Treasury Department has developed a corporate bond yield curve that is
appropriate for this purpose. Our methodology allows spot yield curves to be estimated
directly from data on corporate AA bonds. The process incorporates statistically
unbiased adjustments for bonds with embedded call options, and allows for statistically
unbiased projections of yields beyond a 30-year maturity. We recently published a white
paper detailing our methodology (Creating a Corporate Bond Spot Yield Curve for
Pension Discounting Department 0 f The Treasury, Office 0 f Economic Policy, White
Paper, February 7, 2005) that is available on the Treasury Department web site.
Our budget proposal to reform the calculation of lump-sum benefits also uses the
yield curve for calculating the minimum lump sums. We propose to replace the use of a
30-year Treasury rates for purposes of detennining lump sum settlements under qualified
plans. Using the yield curve to compute lumps sums and the funding required for an
annuity eliminates any distortions that would bias the participant's payout decision
Under our proposal, lump sum settlements would be calculated using the same interest
rates that are used in discounting pension liabilities: interest rates that are drawn from a
zero-coupon corporate bond yield curve based on the interest rates for high quality
corporate bonds. This reform includes a transition period, so that employees who are
expecting to retire in the near future are not subject to an abrupt change in the amount of
their Jump sums as a result of changes in law. The new basis would not apply to
distributions in 2005 and 2006 and would be phased in for distributions in 2007 and
2008, with full implementation beginning only in 2009.'

This is a different yield curve phase-in schedule than proposed for the use of the yield curve in

discounting pension liabilities for minimum funding purposes.

to discount the plans aggregate expected pension payments in each year to participants.
The plan administrator has calculated these future pension payments based on the plan's
fonnula for benefits that participants have earned up to the valuation date. As this
example shows, once the actuary has detennined the plan's annual cash benefit payments
summed over all participal1s in a manner similar to what is done under current law,
discounting those payments using the yield curve is quite simple.
Our hypothetical plan consists of three individuals, the 64-year-old Mr. Brown,
the 59-year-old Ms. Scarlet, and the 54-year-old Mr. Green. Each of the three retires at
age 65 and receives the same pension benefit payment each year until death at age 80.
The benefit Mr. Brown has earned to date is higher than Ms. Scarlet's (it is assumed that
he has been working longer under the plan) whose expected benefit is in tum larger than
Mr. Green's. Mr. Brown's annual benefit under the plan is $12,000, Ms. Scarlet's is
$9,000 and Mr. Green's is $6,000.
Chart 1 shows the AA corporate bond yield curve that would be used to discount
these benefit payments. The yield curve has interest rates for years 0 to 80. For our
stylized example we will only need to use points for the years 1 through 26 because we
assume that no participant will draw benefits before year I and all payments will be made
by year 26. The example applies the yield curve to payments made each year.

Chart I
Spot Yield Curve
Corporate AA Bonds
90 Day Average 1213012004
8.0%
7.0%
6.00/.
5.0%
4.0%
3.0%
2.0%

Maturity, Years

1.0%
0.0%
0

l......Mr Brown's Benefit Payments - - - Ms. Scarlet's Benefit Pa~ments ~Mr. Green"s Benefit payment~

$25.000

$20,000

I
I

$15,000

$10,000

$5,000

1 2 3 4

5 6 7 8 9 1011 121314151617181920212223242526272829
Future Plan Years

Chart 3
Total Future Benefit Payments
Sum of Benefit Payments for Brown, Scarlet, and Green

$30,000

~GI

$25,000

$20,000

$15,000

A-

\
\

$10,000

$5,000
..... Total Future Benefit Payments

1 2 3 4 5 6 7891011121314151617181920212223242526272829
Future Plan Years

How do we apply the yield curve to discounting these benefit payments?
Let's take years 5, 14 and 20. In year 5, the plan expects to pay $12,000 in
benefits, all to Mr. Brown. The discount rate for that year drawn from the yield curve is
4.03 percert. To compute the present value of the $12,000, the $12,000 is divided by
1.218 (one plus the interest rate expressed in decimal fonn, 1.0403, raised to the 5th
power), which equals $9,849.
For plan year 14 the expected benefit payments are $27,000 ($12,000 to Mr.
Brown, $9,000 to Ms. Scarlet and $6,000 to Mr. Green) and the yield curve interest rate
is 5.51 percent. To compute the present value, the $27,000 is divided by 2.119 (1.0546
taken to the 14th power) yielding $12,742. For year 20, the plan expects to pay $15,000
($9,000 to Ms. Scarlet and $6,000 to Mr. Green) and the discount rate from the yield
curve is 5.96 percent. Dividing $15,000 by 3.183 gives a present value of$4,713. Note
that even though there are three participants in the plan, once their benefit payments
during any period are added together only one interest rate is needed to compute the
present value for that period. Separate interest rates are not used for every individual
participant in the plan.
In order to compute the plan's target liability the plan needs to perform
computations like the one above for each payment period from 1 through 27 and sum
them together. The liability for this hypothetical plan is $238,994. In this example, only
26 interest rates are used, one for each year that benefit payments are made. Even if our
hypothetical plan had thousands of participants, but payments were made for only 26
years in the future, only 26 interest rates would be needed to compute the plan's liability.
This is, of course, a simplified example. The plan actuary needs to make a
number of computations and use his or her professional judgment to determine the plan's
future benefit payments each year: the actuary must estimate the probability that a
participant will retire at a particular time in the future and must model the probable
pattern of payments that will be made for that participant until the participant's death
These computations, already required by current law, are complex, but once the actuary
has determined the annual cash benefit payments, discounting those payments using the
yield curve is quite simple and can easily be done using a basic spreadsheet program.
As noted above, if Mr. Brown elected to take a lump sum payment rather than an
annuity, the minimum value of that lump sum would also be computed using the yield
curve. We have assumed that Mr. Brown will begin receiving his annual benefit of
$12,000 next year and will receive the same benefit for 16 years. In order to compute the
value of those future payments as a lump sum we would simply discount each period's
cash flows using interest rates drawn from the yield curve to find the present value of the
benefit in each future period. Then we sum those present values together to yield the
minimum lump sum value. In year one, for example, the interest rate drawn from the
yield curve is 2.59 percent. If the first $12,000 payment is made one year in the future its
present value would be $11,697. The present value ofthe payment made in year 5 would
be computed using the year 5 point on the yield curve that is 4.03 percent.

Its present value would be $9,849. In year 12, the interest rate used to compute
the present value is 5.29 percent and therefore the present value of the benefit payment is
$6,465. In total, Mr. Brown's hypothetical lump sum would be valued at $131,035.

Distinction by Credit Rating
Under the Administration's proposal, the appropriately measured accrued
liabilities serve as the plan funding targets. The target funding level for minimum
required contribution; will vary depending on the financial health of the plan sponsor.
Plans sponsored by financially healthy firms (investment grade rated) will use 100
percent of ongoing liability as their funding target. Less healthy plan sponsors (below
investment grade rated) will use 100 percent of at-risk liability as the ir funding target. 2
The goal of pension funding rules is to minimize benefit losses to plan
participants. When pension plans default on their obligations, the PBGC is required to
make benefit payments to plan participants subject to the guarantee limits. Ultimately, if
plan defaults are too numerous, the insurance system will collapse and taxpayers may be
called upon to fund the pension promises. Pension plans sponsored by firms with poor
credit ratings pose the greatest risk of such defaults. Therefore, it is only natural that
pension plans with sponsors that fall into this readily observable high risk category
should have more stringent funding standards. The at-risk liability measure is an
appropriate funding target for below investment grade companies because the target
reflects the plan liabilities that would accrue as a plan heads towards termination
The table below shows the average cumulative default rate of corporate bond
issuers as computed by Moody's Investor's Service (January 2005). This table indicates
that, over time, below investment grade firms have a substantially higher likelihood of
default than investment grade finns. The table indicates that 14.81 percent of Ba rated
finns (just below investment grade) experience a default within 7 years, whereas only
3.12 percent of Baa rated firms Uust above investment grade) experience a default within
the same period.

2 The proposal includes a detailed description of the transition rules that govern the phase in of the higher
funding target when a plan changes status from ongoing to at-risk. See the Treasury Blue Book for more
infonnation at http://www.treas.gov(offices/tax-policy/library/bluebk05.pdf.

Average Cumulative Default Rate by Credit Rating, 1970-2004
Selected Data
Years
1
3
5
7
10
15
20

Aaa
0.00
0.00
0.12
0.30
0.63
1.22
1.54

Aa
0.00
0.03
0.20
0.37
0.61
1.38
2.44

Moody's Credit Rating
A
Baa
Ba
0.02 0.19
1.22
0.22 0.98
5.79
0.50 2.08
10.72
14.81
0.85 3.12
1.48 4.89
20.11
2.74 8.73
29.67
4.87 12.05 37.07

B
5.81
19.51
30.48
39.45
48.64
57.72
59.11

Caa-C
22.43
46.71
59.72
68.06
76.77
78.53
78.53

Source: Moodys Investor Services, Global Credit Research, Default and Recovery Rates
of Corporate Bond Issuers, 1920-2004, January 2005.
The following chart shows that firms generally have a below investment grade
credit rating for several years prior to their plan default on pension obligations triggering
a claim on the PBGC. This shows 27 largest claims to PBGC for which tre series of
S&P ratings were available. This suggests that while defaults are certainly not easily
predictable (many other plans with below investment grade credit ratings did not default),
these are clear warning signs that any responsible regulatory system should take into
account. Differentiating funding targets based on credit ratings is appropriate and the
investment gradelbelow investment grade distinction is the most useable and accurate
breakpoint.

Chart 4
Debt Ratings for 27 Large PBGC Claims

CBelow Investment Grade

[Jlnvestment Grade

PERCEN T OF( ..A L! S
1~,:

......- .-- ...- ......- ......- .....- rI--

I--

......- .....-

8~·:

50%

7
6
5
4
Yo:arl Prior 10 Dille of Plan T-erlnil1~lioll

Source: PBGC
Accrued Benefits Funded

Under the proposal, sponsors that fall below minimum funding levels would be
required to fund up towards their appropriate target in a timely manner. If the market
value of plan assets is less than the funding target for the year, the minimum required
contribution for the year would be equal to the sum of the applicable normal cost for the
year and the amortization payments for the shortfall. Amortization payments would be
required in amounts that amortize the funding shortfall over a 7-year period. The initial
amortization base is established as of the valuation date for the first plan year and is equal
to the excess, if any, of the funding target over the market value of assets as of the
valuation date. The shortfall is amortized in 7 annual level payments. For each
subsequent plan year, if the sum of the market value of assets and the present value of
future amortization payments is less than the funding target, that shortfall is armrtized
over the following 7 years. If the sum of the market value of assets and the present value
of future amortization payments exceeds the funding target, no new amortization base
would be established for that year and the total amortization payments for the next year
would be the same as in the prior year. When, on a valuation date, the market value of
the plan's assets equals or exceeds the funding target, then the amortization charges
would cease and all existing amortization bases would be eliminated. 3

It is critical to note that while our proposal does away with "credit balances" as
currently construed. it does not reduce the incentives to contribute above the minimum.
It does, however, prevent underfunded plans from using credit balances for funding
holidays. Because credit balances currently are not marked to market and can be used by
underfunded plan sponsors, they have resulted in plans having lengthy funding holidays,
while at the same time becoming increasingly underfunded. Just marking credit balances
to market is not sufficient to solve the problem if underfunded plan are still able to take
funding holidays. In the Administration proposal, the focus of the refonned funding rules
on stocks of assets and accrued liabilities means that pre-funding pays off in a reduction
in future required minimum payments. Under a refonned set of funding rules, prefunding adds to a plan's stock of assets, thereby reducing any current shortfalls or the
likelihood of potential future shortfalls relative to appropriately and accurately measured
liabilities.

An Example ofFunding Rules
Using another example we can demonstrate how minimum contributions would
be detennined under the funding proposal. Liabilities for the plan are computed over a
five-year period using the cash flows and the yield curve depicted in the graphs above.
(For simplicity, it is assumed that the yield curve interest rates remain constant over the
five-year period.) We then begin with an arbitrarily chosen level of plan underfunding to
demonstrate how the amortizations of plan deficits would work. For this example, we
simplify and assume that the interest rate charged for amortization of shortfalls is zero.
That means that a shortfall increase payment amortized over 7 years is merely the
increase divided by 7. The nonnal cost is also assumed to be zero to simplify the
exposition.
In year one, the plan is underfunded by $18,994. That means that the plan must
contribute a minimum 0[$2,713, which is the amortization payment for $18,994 over a
seven year tenn -- in year one and for the next six years -- unless the plan becomes fully
funded before year seven.
In year two, the plan's funding deficit is $8,000 as a result of increases in both the
value of assets and liabilities. Since this new shortfall is less than the value of future
contributions (we assume that the plan will make future contributions so their present
value effectively becomes an asset) the increase in the shortfall is zero. Under the
amortization rules no new payment is required; because the plan is still underfunded,
however, a second payment of$2,713 must be made. The amortization rule is designed
to encourage plans to fund up quickly in order to protect participants' pensions. For that
reason, the amortization payment of$2,713 is not reduced even though the plan's funded
status has improved.

J This

description draws on the description in the Treasury Blue Book.

In year 3, the funding shortfall increases to $18,367 because the value of assets
has fallen. Because this is $4,800 more than the value of the remaining amortization
payments, a new payment of $686 is added to the existing payment of $2,713 meaning
that total contributions are $3,399 in year 3.
In year 4, because of an increase in asset values, the plans deficit falls to $9,283.
This is less than $14,968, the value of the remaining shortfall payments from year I and
year 3 so there is no new payment and the required contribution remains $3,399.
In year 5, asset values rise again and the plan is now fully funded. Because the
plan no longer has a funding deficit, no minimum contribution is required and all past
amortization payments are cancelled.
Table 2
Minimum Funding Example

Year
Assets
Liabilities
Sbortfall

Shortfall Increase

$220,000 $242,000 5225,060 $236,313 5250,492
$238,994 5250,000 5243,427 $245,596 5247,656
SI8,994
S8,OOO $18,367
59,283
50
$16,281

Value of Remaining Year 1 Pmts.
Value of Remaining Year 2 Pmts.
Value of Remaining Year 3 Pmts.
Value of Remaining Year 4 Pmts.
Value of All Remaining Payments

$13,567

$10,854

4,114

$8,140
$0
3,429
$0

$16,281

$13,567

$14,968

$11,569

518,994

$4,800

$2,713

$2,713
$0

$2,713

$686

$686
$0

Minimum Contribution for:
Year 1 Shortfall Increase
Year 2 Shortfall Increase
Year 3ShortfaJl Increase
Year 4 Shortfall Increase
Year 5 Shortfall Increase
Total Minimum Contribution

$2,713

52,713

$3,399

$0
$0

Benefit Restrictions
Finally, we have proposed benefit restrictions that will limit liability growth as a
plan becomes progressively underfunded relative to its funding target. It is important to
arrest the growth of liabilities when plans are becoming dangerously underfunded in
order to ensure that plan participant will collect benefits that they accrue. Under current
law, sponsors of underfunded plans can continue to provide for additional accruals and,
in many situations even make benefit improvements. Plan sponsors in financial trouble
have an incentive to promise generous pension benefits, rather tl:nn increase current
wages, and employees may go along because of the PBGC guarantee. This increases the
likely losses faced by participants and large claims to the PBGC. To guard against this
type of moral hazard, if a company's plan is poorly funded, tre growth in the plan's
liabilities should be limited unless and until the company funds them, especially if the
company is in a weak financial position.
Plan sponsors able to fund plans during good times
The Administration proposed reforms provide real and meaningful incentives for
plans to adequately fund their accrued pension obligations. The importance of these
mechanisms that I have described is not simply to force plans to fund-up quickly and
reduce the rate at which new obligations accrue. Their importance is also that rational,
forward looking managers will respond to these reforms by taking steps to ensure that
plam remain well funded on an ongoing basis. The Administration plan matche s new
responsibilities, to more fully fund pension obligations, with new opportunities - an
enhanced ability to pre- fund obligations on a tax preferred basis.
Pension sponsors believe that their inability, under current rules, to build
sufficiently large funding surpluses during good financial times has contributed
significantly to current underfunding in the pension system. The proposal addresses this
problem directly by creating two funding cushions that, when added to the appropriate
funding target, would determine the upper funding limit for tax deductible contributions.
Every plan will be allowed to fund to at least at-risk Liability.
The first cushion is designed to allow firms to build a sufficient surplus so that
plans do not become underfunded solely as a result of asset and liability values
fluctuations that occur over a business cycle. Plan sponsors would also be able to build a
second funding cushion that allows them to pre-fund for salary or benefit increases.
Conclusion
Defined benefit plans are a vital source of retirement income for millions of
Americans. The Administration is committed to ensuring that these plans remain a viable
retirement option for those firms that wish to offer them to their employees. The bng run
viability of the system, however, depends on ensuring that it is financially sound.

The Administration' s proposal is designed to put the system on secure financial
footing in order to safeguard the benefits that plan participants have earned and will earn
in the future. We are committed to working with Congress to ensure that effective
defined benefit pension refonus that protect worker's pensions are enacted into law.
It has been my pleasure to provide this detailed discussion of some of the critical
elements of the proposal. My colleagues and I are available and look forward to
discussing the proposal and the motivations for the proposal and answering any
additional questions you may have.

-30-

S.2287: FACT SHEET: 60 Stops in 60 Days Strengthening Social Security for Future Generations

."o :~"':.-';~o~-i:'

.,'0

'.0

. . . • . -.-

,;:~.: ....

...
....

- ".:"

00"

.r. '.':'

-."

.::"

Page 1 of I

II'. . "

.."': .'"

"o~-=
".::"';':

...";.: :',

·f

w-~

.~,

}r.-"'"

.f;

PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free AdolJe(j<) Acrobat® Reac/er®.

March 2, 2005
JS-22B7
FACT SHEET: 60 Stops in 60 Days Strengthening
Social Security for Future Generations
Treasury Secretary John Snow today launched the "60 Stops in 60 Days" tour in
which Administration officials - from President Bush to Cabinet members and policy
experts - will crisscross the nation to take the President's message of
strengthening Social Security to the American people. The blitz is the next stage in
the Administration's long term effort to talk about the need for a permanent fix to
save Social Security for future generations.
REPORTS
• FACT SHEET: 60 Stops in 60 Days Strengthening Social Security for Future
Generations(Full Version)

11to:J/www.treas.l!ov/nress/releases/t!)Z237.htm

7/512005

•

SOCIAL SECURITY INFORMATION CENTER
U.S. Department of the Treasury - 202·622·5850
Wednesday, March 2, 2005

FACT SHEET: 60 Stops in 60 Days
Strengthening Social Security for Future Generations

Treasury Secretary John Snow today launched the "60 Stops in 60 Days" tour in which Administration officials from President Bush to Cabinet members and policy experts - will crisscross the nation to take the President's
message of strengthening Social Security to the American people. The blitz is the next stage in the
Administration's long term effort to talk about the need for a permanent fix to save Social Security for future
generations.
The President has made it clear that Social Security will remain the same for those born before 1950, but that
the system must be made better for younger workers.
"The 60-day barnstorming effort underscores our commitment to an open dialogue about the serious problems
facing the system,· Secretary Snow said. 'We look forward to continuing the education process with Americans
of all ages in communities across the nation. Every place I travel, I meet people who understand that the current
system won't be there for their children and grandchildren. They understand that action needs to be taken now
to strengthen Social Security."
From March 3- May 1, 2005, Administration officials will travel throughout the country as part of a coordinated
60·day tour of at least 60 stops to discuss the President's vision to strengthen and save Social Security with the
American people. Officials will meet with groups of our youngest workers and our oldest retirees.
In the next 7 days:
• President Bush travels to New Jersey and Indiana for conversations on Social Security with residents of
Westfield, NJ and Notre Dame, IN. (3/4)
• Secretary Snow delivers remarks on Social Security at Walton Business School in Fayetteville, AR (313)
and to the New Orleans' Metro Chamber Alliance in New Orleans, LA. (3/4)
• Jim lockhart, Deputy Commissioner of the Social Security Administration, travels to Michigan for five
Social Security Town Hall meetings with Rep. Pete Hoekstra. (3/4·3/5)
• Keith Hennessey, Deputy Director of the National Economic Council, heads to Westminster, MD for a
Social Security Town Hall with Rep. Roscoe Bartlett. (317)
• Secretary Snow delivers remarks to the American Banker Association and the American Insurance
Association in Washington. DC. (3/8·3/9)
• On our still growing list of events, Administration officials already have trips planned to dozens of events
in nearly 30 states.
"Real progress is being made. In the State of the Union, the President said that his objective was to engage
Americans in a national debate, a broad national dialog to get people talking about this issue," said Secretary
Snow. "We've seen a clear shift in the course of the last month or so from the question: 'Is there a problem?' to
the question: 'How do we fix it?' People are talking about it; families are talking about it; Congress is talking
about it. For the next 60 days at countless stops from coast to coast - the whole Administration will be talking
about it."
###

S-2288: Treasury and IRS IsslIe Proposed rules for<BR -Roth Contrihutions to 40 I(k) PL.. Page I of I

FROM THE OFFICE OF PUBLIC AFFAIRS

To view or print the PDF content on this page. download the free I'II/,AJ!)·".' A(./(I/J,,'~') Ri'. ,If,!!',.

March 2. 2005
JS-2288

Treasury and IRS Issue Proposed rules for
Roth Contributions to 401(k) Plans
WASHINGTON. DC -- The Department of Treasury and IRS today announced
proposed regulations regarding designated Roth contributions to 401 (k) plans.
Roth contributions. which were created in the Economic Growth and Tax Relief
Reconciliation Act of 2001 (EGTRRA). will allow for employees to designate all or a
portion of their 401 (k) employee deferrals on an after-tax basis. Most distributions
of the amount contributed as well as any earnings on those contributions will be taxfree.
Although Roth contributions are not effective until taxable years beginning after
December 31. 2005. many plan sponsors are interested in amending their plans
and establishing procedures for administering these accounts. Releasing these
proposed rules at this time will enable Treasury and the IRS to finalize the rules in
time for plan sponsors to implement this valuable retirement savings opportunity
beginning in 2006
Similar rules will apply to Roth contributions available under 403(b) plans
sponsored by tax exempt organizations and public schools.

REPORTS
•

The text of the proposed regulations

http://www.trcas.l!ov/oressir@leases/js2288.htm

4!25.:2()05

10062

Proposed Rules

Federal Register

Vol. 70, No. 40
Wednesday, March
This section of the FEDERAL REGISTER
contains noHces 10 Ihe public 01 the proposed
issuance of rules and regulations. The
purpose of these notices is to give interested
persons an opportunity to participate in the
rule making prior 10 the adoption of the final
rules.

DEPARTMENT OF THE TREASURY
Internal Revenue Service

26 CFR Part 1
[REG-122847-G4]
RIN 1545-B040

Qualified Amended Returns
AGENCY: Internal Revenue Service (IRS),
Treasury.
AClION: Notice of proposed rulemaking
by cross-reference to temporary
regulations.
SUMMARY: In the Rules and Regulations
section of this issue of the Federal
Register, the IRS is issuing temporary
regulations relating to the definition of
qualified amended returns. The text of
those regulations also serves as the text
of these proposed regulations.
DATES: Written or electronically
generated comments and requests for a
public hearing must be received by May
31,2005.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG-122847-04), Room
5203, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand
delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG-122847-04),
Courier's Desk. Internal Revenue
Service, 1111 Constitution Avenue,
NW., Washington, DC. Alternatively,
taxpayers may submit comments
electronically via the IRS Internet site at
http://www.irs.gov/regs or via the
Federal eRulemaking Portal at http;//
www.regulations.gov (indicate IRS and
REG-122847-04).
FOR FURTHER INFORMATION CONTACT:

Concerning the proposed regulations,
Nancy M. Galib, (202) 622-4940;
concerning submissions of comments
and requests for a public hearing, Sonya
Cruse of the Regulations Unit at (202)
622-4693 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:

Background
Temporary regulations in the Rules
and Regulations section of this issue of
the Federal Register amend the Income
Tax Regulations (26 CFR part 1)
regarding rules relating to qualified
amended returns. The text of the
temporary regulations also serves 88 the
text of these proposed regulations. The
preamble to the temporary regulations
explains the regulations.

2. 2005

List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
rocordkeeping requirements.
Proposed Amendments to the

Regulations
Accordingly. 26 CFR part 1 is
proposed to be amended as follows:
PART 1-INCOME TAXES

Paragraph 1. The authority citation
for part 1 continues to read in part as
Special Analyses
follows:
It has been determined that this notice
Authority: 26 U.S.C. 7605" " •
of proposed rulemaking is not a
Par. 2. In § 1.6664-1, paragraph (b)(3)
significant regulatory action as defined
is added to read as follows:
in Executive Order 12866. Therefore, a
regulatory assessment is not required. It § 1.6664-1 Accuracy-related and fraud
penalties; deftnltlons and special rules.
also has been determined that section
553(b) of the Administrative Procedure
*
*
*
Act (5 U.S.C. chapter 5) does not apply
[The text of proposed § 1.6664-1(b)(3)
to these regulations, and. because these is the same as the text of § 1.6664regulations do not impose a collection
IT(b)(3) published elsewhere in this
of information on small entities, the
issue of the Federal Register].
Par. 3. In § 1.6664-2, paragraph (c) is
Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to
revised to read as follows:
section 7805(t) of the Internal Revenue
§ 1.6664-2 Underpayment.
Code, this notice of proposed
*
*
* *
rule making will be submitted to the
IThe text of proposed § 1.6664-2(c) is
Chief Counsel for Advocacy of the Small
the same as the text of § 1.6664-2T(c)
Business Administration for comment
published elsewhere in this issue of the
on their impact.
Federal RegisterJ.
Comments and Requests for a Public
*
*
*
*
"
Hearing
Before these proposed regulations are
adopted as final regulations,
consideration will be given to any
written (a signed original and 8 copies)
and electronic comments that are
submitted timely to the IRS. The IRS
and Treasury specifically request
comments on the clarity of the proposed
regulations and how they can be made
easier to understand. All comments will
be available for public inspection and
copying. A public hearing will be
sch.eduled if requested in writing by any
person that timely submits comments. If
a public hearing is scheduled, notice of
the date, time, and place for the public
hearing will be published in the Federal
Register.
Drafting Information
The principal author of these
regulations is Nancy M. Galib of the
Office of Associate Chief Counsel,
Procedure and Administration
(Administrative Provisicms and Judicial
Practice Division).

Mark K. Matthews,

Deputy Commissioner for Services and
Enforcement.
[FR Doc. 05-3945 Filed 3-1-05; 8:45 amI
BILLING CODE 483C1-1l1-P

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-152354-04]
RIN 1545-SE05

Designated Roth Contributions to
Cash or Deferred Arrangements Under
Section 401(k)
AGENCY: Internal Revenue Service (IRS).
Treasury.
ACTION: Notice of proposed rulemaking.

This document contains
proposed amendments to the
regulations under section 401(k) and (m)
of the Internal Revenue Code. These
SUMMARY:

Federal Register/Vol. 70, No. 40 I Wednesday, March 2, 2005/Proposed Rules
The accuracy of the estimated burden
associated with the proposed collection
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 collection 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 collection of information in this
proposed regulation is in 26 CFR
1.401(kHU1(1)&(2). This information is
required to comply with the separate
accounting and recordkeeping
requirements of section 402A. This
information will be used the IRS and
employers maintaining section 401(k)
plans to insure compliance with the
requirements of section 402A. The
collection of information is required to
obtain a benefit. The likely
recordkeepers are state or local
governments. business or other forprofit institutions, nonprofit
institutions, and small businesses or
FOR FURTHER INFORMATION CONTACT:
organizations.
Concerning the regulations, R. Lisa
Estimated total annual recordkeeping
Mojiri-Azad or Cathy A. Vohs, 202-622- burden: 157,500 hours.
6060; concerning submissions and
Estimated average annual burden
requests for a public hearing, contact
hours per recordkeeper: 1 hour.
Treena Garrett, 202-622-7180 (not tollEstimated number of respondents
free numbers).
recordkeepers: 157.500.
An agency may not conduct or
SUPPLEMENTARY INFORMATION:
sponsor, and a person is not required to
Paperwork Reduction Act
respond to, a collection of information
unless it displays a valid control
The collection of information
number
assigned by the Office of
contained in this notice of proposed
Management and Budget.
ruiemaking has been submitted to the
Books or records relating to a
Office of Management and Budget for
collection
of information must be
review in accordance with the
retained as long as their contents may
Paperwork Reduction Act of 1995 (44
become material in the administration
U.S.C. 3507(d)). Comments on the
collection of information should be sent of any internal revenue law. Generally,
tax returns and tax return information
to the Office of Management and
are confidential, as required by 26
Budget, Attn: Desk Officer for the
U.S.C. 6103.
Department of the Treasury. Office of
Information and Regulatory Affairs,
Background
Washington, DC 20503, with copies to
This document contains proposed
the Internal Revenue Service, Attn: IRS amendments to the lncome Tax
Reports Clearance Officer,
Regulations (26 CFR Part 1) under
SE:W:CAR:MP:T:T:SP: Washington, DC section 401(k) and (m) of the Internal
20224. Comments on the collection of
information should be received by May Revenue Code of 1986 (Code). The
amendments would provide guidance
2,2005. Comments are specifically
on designated Roth contributions under
requested concerning:
section 402A of the Code, added by
. Whether the proposed collection of
section 617[a) of the Economic Growth
Information is necessary for the proper
and Tax Relief Reconciliation Act of
performance of the functions of the
2001 (Public Law 107-16, 115 Stat. 38)
Intemal Revenue Service, including
(EGTRRAJ.
Whether the information will have
Section 401(k) provides that a profitpractical utility;
sharing, stock bonus, pre-ERISA money
proposed regulations would provide
guidance concerning the requirements
for designated Roth contributions to
qualified cash or deferred arrangements
under section 401(k). These proposed
regulations would affect section 401(k)
plans that provide for ~~signated. ~oth
contributions and parllclpants eligIble
toroake elective contributions under
these plans.
DATES: Written or electronic comments
and requests for a public hearing must
be received by May 31, 2005.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG-152354-04), room
5203. Internal Revenue Service. POB
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be handdelivered Monday through Friday
between the hoUls of a B.m. and 4 p.m.
to CC:PA:LPD:PR (REG-152354-04),
Courier's Desk, Internal Revenue
Service, 1111 Constitution Avenue,
NW., Washington. DC. Alternatively,
taxpayers may submit comments
electronically via the IRS Internet site at
http://www.irs.gov/regs or the Federal
eRulemaking Portal at http://
www.regu[ations.gov (indicate IRS and
REG-152354-04).

10063

purchase or rural cooperative plan will
not fail to qualify under section 401(a)
merely because it contains a cash or
deferred arrangement. Contributions
made at the election of an employee
under a qualified cash or deferred
arrangement are known as elective
contributions. Generally, such elective
contributions are not includible in
income at the time contributed and are
sometimes referred to as pre-tax elective
contributions.
Under section 402A, beginning in
2006, a plan may permit an employee
who makes elective contributions under
a qualified cash or deferred arrangement
to designate some or all of those
contributions as Roth contributions.
Although designated Roth contributions
are elective contributions under a
qualified cash or deferred arrangement,
unlike pre-tax elective contributions,
they are currently includible in gross
income. However, a qualified
distribution of designated Roth
contributions is excludable from gross
income.
On December 29, 2004, final
regulations under section 401(k) were
issued (69 FR 78144). Those regulations
apply to plan years beginning on or after
January 1, 2006. Under those final
regulations, § 1.401(kJ-l(f) was reserved
for special rules for deSignated Roth
contributions. These proposed
regulations would amend those final
regulations to fill in that reserved
paragraph and provide additional rules
applicable to deSignated Roth
contributions.
Explanation of Provisions

Rules Relating to Designated Roth
Contributions
The proposed regulations provide
special rules relating to designated Roth
contributions under a section 401(k)
plan. The proposed regulations would
amend § 1.401(k)-1(f) to provide a
definition of deSignated Roth
contributions and special rules with
respect to such contributions. Under
these proposed regulations, designated
Roth contributions are defined as
elective contribUtions under a qualified
cash or deferred arrangement that are:
(1) Designated irrevocably by the
employee at the time of the cash or
deferred election as designated Roth
contributions; (2) treated by the
employer as includible in the
employee's income at the time the
employee would have received the
contribution amounts in cash if the
employee had not made the cash or
deferred election (e.g., by treating the
contributions as wages subject to
applicable withholding requirements):

10064

Federal Register/Vol. 70, No. 40/Wednesday, March 2, 200S/Proposed Rules

and [3) maintained by the plan in a
separate account. The proposed
regulations provide that contributions
may only be treated as designated Roth
contributions to the extent permitted
under the plan.
The proposed regulations provide
that, under the separate accounting
requirement. contrioutians and
withdrawals of designated Roth
contributions must be credited and
debited to a designated Roth
contribution account maintained for the
employee who made the designation
and the plan must maintain a record of
the employee's investment in the
contract (i.e., designated Roth
contributions that have not been
distributed) with respect to the
employee's designated Roth
contribution account. In addition, gains,
losses. and other credits or charges must
be separately allocated on a reasonable
and consistent basis to the deSignated
Roth contribution account and other
accounts under the plan. However.
forfeitures may not be allocated to the
designated Roth contribution account.
The separate accounting requirement
applies at the time the designated Roth
contribution is contributed to the plan
and must continue to apply until the
designated Roth contribution account is
completely distributed.

Other Rules
A designated Roth contribution must
satisfy the requirements applicable to
elective contributions made under a
qualified cash or deferred arrangement.
Thus, designated Roth contributions are
subject to the nonforfeitability and
distribution restrictions applicable to
elective contributions and are taken into
account under the ADP test of section
401(kJ in the same manner as pre-tax
elective contributions. Similarly,
designated Roth contributions are
subject to the rules of section
401(a)(9)(AJ and (B) in the same manner
as pre-tax elective contributions.
Section 1.401(k)-2 ofthe final section
401(k) regulations contains correction
methods that a plan may use if it fails
to satisfy the ADP test for a year. The
proposed regulations would amend the
rules relating to these correction
methods to permit an HCE with elective
contributions for a year that includes
both pre-tax elective contributions and
designated Roth contributions to elect
whether excess contributions are to be
attributed to pre-tax elective
contributions or designated Roth
contributions.
The proposed regulati~ns provide that
a distribution of excess contributions is
not includible in income to the extent
it represents a distribution of designated

Roth contributions. However, the
income allocable to a corrective
distribution of excess contributions that
are designated Roth contributions is
includible in gross income in the same
manner as income allocable to a
corrective distribution of excess
contributions that are pre-tax elective
contrioutions, The proposed regulations
also provide a similar rule under the
correction methods that a plan may use
if it fails to satisfy the ACP test in
§ 1.401(m}-2.

Additional Required Plan Terms
In addition to the rules relating to
section 401(k} and (m) discussed above,
there are other aspects of designated
Roth contributions that must be
reflected in plan terms and are not
addressed in these proposed
regulations. For example. while a plan
is permitted to allow an employee to
elect the character of a distribution (i.e.,
whether the distribution will be made
from the designated Roth contribution
account or other accounts), the extent to
which a plan so permits must be set
forth in the terms of the plan. In
addition. the plan must provide that, for
purposes of section 401(a)(31),
designated Roth contributions may be
rolled over only to another plan
maintaining a designated Roth
contribution account or to a Roth IRA.

Certain Issues Not Addressed
These proposed regulations do not
provide gUidance with respect to the
taxation of the distribution of
designated Roth contributions. For
example. the proposed regulations do
not provide guidance with respect to the
recovery of an employee's investment in
the contract associated with his or her
designated Roth contributions. The IRS
and Treasury request comments on the
issues on which guidance is needed
with respect to the taxation of such
distributions. Comments are also
requested on any other issues arising
under section 402A on which guidance
is needed.
Effective Date
Section 402A is effective for taxable
years beginning after December 31,
2005. These regulations are proposed to
apply to plan years beginning on or after
January 1. 2006.

have a significant economic impact on
a substantial number of small entities.
This certification is based on the fact
that most small entities that maintain a
section 401(k) plan use a third party
provider to administer the plan.
Therefore, an analysis under the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. Pursuant to
section 7805(f) of the Code, this notice
of proposed rulemaking will be
submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on its
impact on small business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regUlations.
consideration will be given to any
written (a signed original and 8 copies)
or electronic comments that are
submitted timely to the IRS. The IRS
and Treasury request comments on the
clarity of the proposed rules and how
they can be made easier to understand.
All comments will be available for
public inspection and copying. A public
hearing will be scheduled if requested
in writing by any person that timely
submits written comments. If a public
hearing is scheduled, notice of the date,
time, and place for the public hearing
will be published in the Federal
Register.
Drafting Information
The principal authors of these
proposed regulations are R. Lisa MojiriAzad and Cathy A. Vohs afthe Office
of the Division CounsellAssociate Chief
Counsel (Tax Exempt and Government
Entities). However. other personnel
from the IRS and Treasury participated
in the development of these regulations.
Proposed Amendments to the
ReguJations
Accordingly, 26 CFR part 1 is
proposed to be amended as follows:

PART 1-INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read, in part, as
follows:
Authority: 26 U.S.C. 7B05 * • •

Par. 2. Section 1.401(k)-O is amended
by:
SpeCial Analyses
1. The entry for § 1.401(kJ-1(f1 is
It has been determined that this notice
amended by removing "[Reserved]" and
of proposed rulemaking is not a
adding entries for § 1.401(k)-1(f)(1),(2)
significant regulatory action as defined
and (3).
in Executive Order 12866. Therefore, a
2. Adding an entry for § 1.401(k)regulatory assessment is not requi.red. It
is hereby certified that the c?llectl~n of 2(b)(2)(vi)(C).
The additions read as follows:
information in these regulations wIll not

10065

Federal Register/Vol. 70, No. 40/Wednesday, March 2, 2005/Proposed Rules
Roth contribution account and other
accounts und~r the plan. However,
forfeitures may not be allocated to the
§ 1.401(k)-1 CertaIn cash or deferred
designated Roth contribution account.
amangements.
The separate accounting requirement
applies at the time the designated Roth
(f)" * *
contribution is contributed to the plan
(1) In general.
and. must continue to apply until the
(2) Separate accounting required.
deSIgnated Roth contribution account is
(3) Designated Roth contributions
completely distributed.
must satiSfy rules applicable to elective
(3) Designated Roth contributions
contributions.
must satisfy rules applicable to elective
..
contributions. A designated Roth
contribution must satisfy the
§1.401(k)-2 ADP test.
requirements applicable to elective
*
contributions made under a qualified
(h)' * *
cash or deferred arrangement. Thus, for
(2) * * •
example, a designated Roth contribution
(vi)" ....
must satisfy the requirements of
(el Corrective distributions
paragraphs (c) and (d) ofthis section
attributable to designated Roth
and is treated as an employer
contributions.
contribution for purposes of sections
Par. 3. Section 1.401(k)-1(f) is revised 401(a), 401(k), 402. 404, 409, 411. 412.
as follows;
415,416 and 417. In addition, the
deSignated Roth contributions are
§1.401(k)-1 Certain cash or deferred
treated as elective contrlbutions for
arrangements.
purposes of the ADP test. Similarly. the
•
designated Roth contribution account is
(f) Special rules for designated Roth
subject to the rules of section
contributions-(1) In general. The term
401 (a)(9)(A) and (B) in the same manner
deSignated Roth contribution means an as an account that contains pre-tax
elective contribution under a qualified
elective contributions.
cash or deferred arrangement that, to the *
*
*
*
extent permitted under the plan, isPar. 4. Section 1.401(k)-2 is amended
(i) Designated irrevocably by the
as follows:
employee at the time of the cash or
1. A new sentence is added after tho
deferred election as a designated Roth
second sentence in paragraph (b)(l)(ii).
contribution;
2. The last sentence in paragraph
(ii) Treated by the employer as
(b)(2)(vi)(B) is amended by removing the
includible in the employee's income at
period and adding a clause at the end.
the time the employee would have
3. Paragraph (b)(2)(vi)(C) is added.
received the amount in cash if the
The additions read as follows:
employee had not made the cash or
§ 1.401 (k)-2 ADP test.
deferred election (e.g., by treating the
.. * * *
contributions as wages subject to
(h)" .. •
applicable withholding requirements);
(1)" .. ..
and
(iiJ" * • Similarly, a plan may
(iii) Maintained by the plan in a
permit
an HCE with elective
separate account (in accordance with
contributions for a year that includes
paragraph (t)(2) of this section).
both pre-tax elective contributions and
(2) Separate accounting required.
deSignated Roth contributions to elect
Under the separate accounting
whether the excess contributions are to
requirement of this paragraph (f)(2).
be
attributed to pre-tax elective
contributions and withdrawals of
contributions or designated Roth
designated Roth contributions must be
contributions." .. *
credited and debited to a designated
Roth contribution account maintained
(2)" ....
for the employee who made the
(vi)" • *
deSignation and the plan must maintain
(B) * .. *, except to the extent
a record of the employee's investment in
provided in paragraph (b)(2j(vi)(C) of
the contract (i.e., designated Roth
this section.
contributions that have not been
(el Corrective distributions
distributed) with respect to the
attributable to desi&nated Roth
employee's designated Roth
contribution account. In addition, gains, contributions. Notwithstanding
losses, and other credits or charges must paragraphs (b)(z){vi)(A) and (B) ofthis
be separately allocated on a reasonable section, a distribution of excess
contributions is not includible in gross
and consistent basis to the designated

§ 1.401(k)-O Table of contents.

income to the extent it represents a
distribution of designated Roth
contributions. However. the income
allocable to a corrective distribution of
excess contributions that are designated
Roth contributions is included in gross
income in accordance with paragraph
(b)(2)(vi)(A) or (B) of this section (i.e., in
the same manner as income allocable to
a corrective distribution of excess
contributions that are pre-tax elective
contributions).
*
Par. 5. Section 1.401(k)-6 is amended
as follows:
1. A new definition is added after the
definition of Current year testing
method.
2. A new definition is added after the
definition of Pre·ERISA money purchase
pension plan.
The additions read as follows:
§ 1.401 (k)-6 Definitions.
*
*
*

Desi&nated Roth contributions.
Designated Roth contributions means
designated Roth contributions as
defined in § 1.401(k)-1(f)(1).

Pre·tax elective contributions. Pre-tax
elective contributions means elective
contributions under a qualified cash or
deferred arrangement that are not
designated Roth contributions.

Par. 6. Section 1.401(m)-O is
amended by adding an entry for
§ 1.401(m)-2(b)(2)(vi)(C) to read as
follows:
§ 1.401(m}-O Table of contents.
*

§ 1.401 (ml-:-2 ACP test.

(b)" • •
(1)" • •

(vi)" * *
(C) Corrective distributions
attributable to designated Roth
contributions.
.. ..
*
Par. 7. Section 1.401(m)-2 is revised
as follows:
1. The last sentence in paragraph
(b)(2)(vi)(B) is amended by removing the
period and adding a clause.
2. Paragraph (b](2)(vi)(Cj is added.
The additions read as follows:

§ 1.401 (m)-2 ACP test.

(h) * " •

(2) * * •
(vi) * .. *

(B)" • "or as provided in paragraph
(b)(2)(vi)(C) of this section.
(C) Corrective distributions
attributable to deSignated Roth

10066

Federal Register/Vol. 70, No. 40/Wednesday, March 2, 2005/Proposed Rules

contributions. Notwithstanding
paragraphs (b)(2)(vi)(A) and (B) of this
section, a distribution of excess
aggregate contributions is not includible
in gross income to the extent it
represents a distribution of designated
Roth contributions. However, the
income allocable to a corrective
distribution of excess aggregate
contributions that are designated Roth
contributions is taxed in accordance
with paragraph (b)(2)(vi)(A) or (B) of
this section (i.e., in the same manner as
income allocable to a corrective
distribution of excess aggregate
contributions that are not designated
Roth contributions).

Par, 8. Section 1.401(m)-5 is
amended by adding a new definition
after the definition of Current yeor
testing method to read as follows:
The addition reads as follows:
§1.401(mj-5 Definitions.

*
Designated Roth contributions.
Designated Roth contributions means
designated Roth contributions as
defined in § 1.401(k)-1(t)(1).
*
*
Mark E. Matthews,
Deputy Commissioner for Services and
Enforcemellt.
IFRDoc. 05-4020 Filed 3-1--05; 8:45 ami
BlWNG CODE 483H1-P

DEPARTMENT OF TRANSPORTATION
National Hlghwav Traffic Safety
Administration

49 CFR Part 541
[Docket No. NHTSA 2oo5-20278J
RlN 2127-AJ53

Preliminary Theft Data; Motor Vehicle

Theft Prevention Standard

MY 2002 vehicles (2.49 thefts per
thousand vehicles).
Publication of these data fulfills
NHTSA's statutory obligation to
periodically obtain accurate and timely
theft data, and publish the information
for review and comment.
DATES: Comments must be submitted on
or before May 2, 2005.
ADDRESSES: You may submit comments
(identified by DOT Docket No. NHTSA2005-20278 and or RIN number 2127AJ53) by any oftha following methods:
• Web site: http://dms.dot.gov.
Follow the instructions for submitting
comments on the DOT electronic docket
site.
• Fax: 1-202-493-2251.
• Mail: Docket Management Facility;
U.S. Department of Transportation, 400
Seventh Street, SW., Nassif Building,
Room PL-401, Washington, DC 20590001.
• Hand Delivery: Room PL-401 on
the plaza level of the Nassif Building,
40() Seventh Street, SW., Washington,
DC, between 9 a.m. and 5 p.m., Monday
through Friday, except Federal
Holidays.
• Federal eRulemaking Portal: Go to
http://www.reguiations.gov. Follow the
online instructions for submitting
comments.
Instructions: All submissions must
include the agency name and docket
number or Regulatory Identification
Numher (RIN) for this rulemaking. For
detailed instructions on submitting
comments and additional information
on the rulemaking process, see the
Public Participation heading of the
Supplementary Information section of
this document. Note that all comments
received will be posted without change
to http://dms.dot.govincluding any
personal information provided. Please
see the Privacy Act heading under
Regulatory Notices.
Docket: For access to the docket to
read background documents or
comments received, go to http://
dms.dot.gov at any time or to Room PL401 on the plaza level of the Nassif
Building, 400 Seventh Street, SW ..
Wasbington, DC, between 9 a.m. and 5
p.m., Monday through Friday, except

National Highway Traffic
Safety Administration (NHTSA),
Department of Transportation.
ACTION: Publication of preliminary theft
data: request for comments.

Federal Holidays.

SUMMARY: This

FOR FURTHER INFORMATION CONTACT:

AGENCY:

document requests
comments on data about passenger
motor vehicle thefts that occurred in
calendar year (CY) 2003 including theft
rates for eXisting passenger motor
vehicle lines manufactured in model
year (MY) 2003. The preliminary theft
data indicate that the vehicle theft rate
foreY/MY 2003 vehicles (1.84 thefts
per thousand vehicles) decreased by
26.1 percent from the theft rate for CYI

Ms.
Deborah Mazyck, Office of International
Policy, Fuel Economy and Consumer
Programs, NHTSA, 400 Seventh Street,
SW., Washington, DC 20590. Ms.
Mazyck's telephone number is (202)
366-0846. Her fax number is (202) 4932290.
SUPPLEMENTARY INFORMATION: NHTSA
administers a program for reducing
motor vehicle theft. The central feature

of this program is the Federal Motor
Vehicle Theft Prevention Standard, 49
CFR part 541. The standard specifies
performance requirements for inscribing
or affixing vehicle identification
numbers (VINs) onto certain major
original equipment and replacement
parts of high-theft lines of passenger
motor vehicles.
The agency is required by 49 U.S.C.
33104(h)(4) to periodically obtain, from
the most reliable source, accurate and
timely theft data, and publish the data
for review and comment. To fulfill the
§ 33104(b)(4) mandate, this document
reports the preliminary theft data for CY
2003 the most recent calendar year for
which data are available .
In calculating the 2003 theft rates,
NHTSA followed the same procedures it
used in calculating the MY 2002 theft
rates. (For 2002 theft data calculations,
see 69 FR 53354, September 1, 2004). As
in all previous reports, NHTSA's data
were based on information provided to
the agency by the National Crime
Information Center (NCIC) of the
Federal Bureau of Investigation. The
NCIC is a governmental system that
receives vehicle theft information from
nearly 23,000 criminal justice agenCies
and other law enfoIGement authorities
throughout the United States. The NCIC
data also include reported thefts of selfinsured and uninsured vehicles, not all
of which are reported to other data
sources. The 2003 theft rate for each
vehicle line was calculated by dividing
the number of reported thefts of MY
2003 vehicles ofthat line stolen during
calendar year 2()03, by the total number
of vehicles in that line manufactured for
MY 2003, as reported by manufacturers
to the Environmental Protection
Agency.
The preliminary 2003 theft data show
a decrease in the vehicle theft rate when
compared to the theft rate eX}lerienced
in CYIMY 2002. The preliminary theft
rate for MY 2()03 passenger vehicles
stolen in calendar year 2003 decreased
to 1.84 thefts per thousand vehicles
produced, a decrease of26.1 percent
from the rate of2.49 thefts per thousand
vehicles experienced by MY 2002
vehicles in CY 2002. For MY 2003
vehicles, out of a total of 217 vehicle
lines, 21 lines had a theft rate higher
than 3.5826 per thousand vehicles, the
established median theft rate for MYs
1990/1991 (See 59 FR 12400, March 16,
1994). Of the 21 vehicle lines with a
theft rate higher than 3.5826, 18 are
passenger car lines. 2 are multipurpose
passenger vehicle lines, and one is a
light-duty truck line.
In Table 1, NHTSA has tentatively
ranked each of the MY 2003 vehicle
lines in descending order of theft rate.

;-2289: Updated Tax Policy Fact Sheds /\ \'ailable

Page I of I

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page. download the free At/oil .... · Auu/J"I" R",IIi1j'.

March 2. 2005
JS-2289

Updated Tax Policy Fact Sheets Available
WASHINGTON, DC - The Treasury Department today posted updates to three fact

sheets on tax policy to the Treasury web site. These fact sheets provide valuable
information about lax policy issues.
REPORTS
•
•

•

How Have the President's T;1)( Cuts EnCOllr<lgcd Inveslrlcnt?
Who Pays ttH~ 1\,10st Indiviclual Income Taxes?
Tile Toll of Two TClxes: Tile Regular Income Tax and the AMT

http://www.trcas.gov/press/relea~iPs!js22g<).htm

4/25/2005

DEPARTMENT OF THE TREASURY
Office of Public Affairs
March 2, 2005

FACT SHEET:
How Have the President's Tax Cuts Encouraged Investment?

President Bush's tax cuts have reduced the marginal effective tax rate (METR) on new investment, which
is measured as the share of an investment's economic income needed to cover taxes over its lifetime.
Lower METRs encourage additional investment, capital accumulation, and, in the long-tenn, higher living
standards.
As shown in the table below, reductions in personal income tax rates (including the tax rates on dividends
and capital gains) enacted in 2001 and 2003 have reduced the METR in the corporate sector by 15.5
percent and in the overall economy by 17.4 percent.
The temporary bonus depreciation provision enacted in 2001 and expanded in 2003 to 50% provided a
potent short-tenn investment stimulus. Before expiring at the end of 2004, this provision lowered by onehalf or more the METR on qualifying investment.
Effect of President's tax cuts on the marginal effective tax rate on new investment
CO!Eorate

Business Sector
Noncor~orate

Total

Owner-Occupied
Housing

Economywide

Without Tax Cuts

33.0%

20.6%

28.0%

-2.7%

17.2%

With Tax Cuts 11

27.9%

17.5%

23.6%

-2.0%

14.2%

-15.7
%

+25.9
%

%Reduction

-15.5%

-15.0%

-17.4%

11 Includes the effects of lower regular tax rates and lower tax rates on dividends and capital gains income, but not the
temporary 50 percent bonus depreciation provision.
Source: U.S. Department of the Treasury, Office of Tax Analysis

Leveling the Playing Field
Taxing income from alternative investments at a more uniform METR - "leveling the playing field" promotes efficient allocation of resources within the economy by allowing market fundamentals, rather
than taxes, to guide financing and investment decisions.
By lowering the tax rate on dividends and capital gains. the 2003 Tax Act increased tax uniformity by
substantially reducing the METR on income from corporate equity financed investment, relative to other
sources of capital income, such as debt and noncorporate income.

DEPARTMENT OF THE TREASURY
Office of Public Affairs
March 2, 2005

FACT SHEET:
Who Pays the Most Individual Income Taxes?

The individual income tax is highly progressive - a small group of higher-income
taxpayers pay most of the individual income taxes each year.
•

In 2002 the latest year of available data, the top 5 percent of taxpayers paid more than
one-half (53.8 percent) of all individual income taxes, but reported roughly one-third
(30.6 percent) of income.

•

The top 1 percent of taxpayers paid 33.7 percent of all individual income taxes in
2002. This group of taxpayers has paid more than 30 percent of individual income
taxes since 1995. Moreover, since 1990 this group's tax share has grown/aster than
their income share.

•

Taxpayers who rank in the top 50 percent of taxpayers by income pay virtually all
individual income taxes. In all years since 1990, taxpayers in this group have paid
over 94 percent of all individual income taxes. In 2000, 2001, and 2002, this group
paid over 96 percent of the total.

The President's tax cuts have shifted a larger share of the individual income taxes paid to
higher income taxpayers. In 2005, when most of the tax cut provisions are fully in effect
(e.g., lower tax rates, the $1,000 child credit, marriage penalty reliet), the projected tax
share for lower-income taxpayers will/all, while the tax share for higher-income taxpayers
will rise.
•

The share oftaxes paid by the bottom 50 percent oftaxpayers will fall from 4.1
percent to 3.6 percent.

•

The share oftaxes paid by the top 1 percent of taxpayers will rise from 32.3 percent to
33.7 percent.

•

The average tax rate for the bottom 50 percent of taxpayers falls by 27 percent as
compared to a 13 percent decline for taxpayers in the top 1 percent.

Share of Individual Income Taxes and Income, 1990-2002
Share of Individual Income Taxes

DEPARTMENT OF THE TREASURY
Office ofPublic Affairs
March 2, 2005

fACT SHEET:
The Toll of Two Taxes: The Regular Income Tax and the AMT
The alternative minimum tax (AMT) is a second
income tax system that runs parallel to the regular
individual income tax. First enacted in the late
1960's, the AMT was intended to target a small group
of high-income individuals - who had managed to
avoid all taxes - to ensure they paid a minimum
amount of tax. Changes since the AMI's original
enactment mean that today it reaches into the ranks of
the middle class, potentially denying them the benefit
of many of the deductions, credits. and lower tax rates
available under the regular income tax system. Ihe
AMI also significantly increases the complexity of
tax filing for taxpayers subject to the AMI and for
millions of additional taxpayers who must complete
AMI forms to determine they are not subject to the
AMI.
Left unchanged, the AMI will affect increasing
numbers of taxpayers. As can be seen in the graph to
the right, assuming the 200 I and 2003 tax cuts are
made permanent, the number of taxpayers with
increased taxes due to the AMI will increase from
3.8 million in 2005 to 20.5 million in 2006 and to
51.3 million in 2015.
The cost of addressing the AMI will also grow
rapidly. Assuming the 2001 and 2003 tax cuts are
extended, in 2006 the AMI will increase the amount
of tax individuals pay by $33.9B, rising to $210B in
2014.
The graph shows that by 2013 less revenue would be
lost from repealing the regular income tax than from
repealing the AMI.

Number of Individual AMT Taxpayers
(assumes EGTRRA and JGTRRA sunsets are repealed)
Million. 01 AMTT•• payers
GO -,

2004

2005

21101

2007

2008

z009

2010

2011

2012

2013

2014

2015

Cost of Repealing Regular IncDme Tax vs. Cost of Repealing the AMT
(assumes EGTRRA and JGlRRA sunsels are repealell,
Billions of DDllars
250

150

//
100

-----

----------r,-ll-/
•

_-.-~~,-

/---

----

---

--.---~---------- _ _ _ _ _
Cost of Repealing Ihe AMT

-~--~~--

+---1

2006

20G7

20(18

2009

2010

2011

FlacalYear

2012

2013

2014

2015

JS-2290: Treasury Designates Four Companies Tied to J~lmtlical1 Kingpin

P<lgc I of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF contenl on this page. download /he free 1I(101)I!I'9 Acro/)D/ ...:} Re<ldet<~~

March 3. 2005
JS-2290

Treasury DeSignates Four Companies Tied to Jamaican Kingpin
The U.S. Department of the Treasury today identified four companies associated
with Jamaican national. Leebert Ramcharan. who was named by President Bush as
a drug kingpin on June 1. 2004. The companies were added to the Treasury's
Office of Foreign Assets Control's (OFAC) list of persons deSignated pursuant to
the Foreign Narcotics Kingpin Designation Act (Kingp;n Act).
"Today's action is against four key holding companies helping to prop up the
financial networl< of Jamaican kingpin Leebert Ramcharan." said OFAC Director
Robert Werner. "The Treasury is committed to exposing the companies controlled
by drug kingpins in Jamaica and around the world."
Jamaica is a leading transit country for South American cocaine. The companies
deSignated today are tile Caribbean Beach Park. Caribbean Showplace Ltd.
Ramcharan Brothers Ltd and Ramcharan Ltd. TOOay's action prohibits all financial
and commercial transactions between the designated entities and any U.S. person
and freezes any assets found in the United States.
"This action is the result of close coordination between OFAC and the Drug
Enforcement Administration,U Werner noted.
Today's action brings the total number of Tier I and Tier 1\ Kingpins under the
Kingpin Act to 164: 48 drug kingpins worldwide, 34 companies 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 narcotics traffickers on a worldwide basis. The Kingpin
Act was modeled after Executive Order 12978 which applies economic sanctions
against narcotics traffickers centered in Colombia. and which is also administered
byOFAC.

A list of the companies and their addresses can be found here:
http://www.lreas.gov/offices/enforcementtofac/aclions/20050303.shtml
REPORTS
• A diagram of the companies named by OFAC today

http://wwwtrcn3.~oy/pre88/rel~~~s!js2290.htm

4115/2005

Department of the Treasury
Office of Foreign Assets Control

LEEBERT RAMCHARAN nER II ENTI liES
March 2005

All companies shown on this chart are Jamaican.

Foreign Narcotics Kingpin DeSignation Act

Tier I Kingpin
(June 1, 2004)

____ Leebert RAMCHARAN
____
I DOB: 28 DEC 1959 \
~
Passport: A2016602 (Jamaica)

Owner &. Majority Shareholder

-------CARIBBEAN BEACH PARK
1137 Sugar Mill Road
Montego Bay, Jamaica

iif;"T·:;'~·"

b ~.

.............. I

~~ .!..;,...~

I~""':

'l~I'IIJr..'.

.....
. .
,".. _- ."'.,l\,.;'-

. -:.:

Managing Director a. Shareholder

RAMCHARAN BROTHERS lTD
Rosehall Main Road
Rosehall, Jamaica

Owner 8r. Majority Shareholder

Managing Director &; Shareholder

RAMCHARAN LTD
Rosehall Main Road
Rosehall, Jamaica

~
CARIBBEAN SHOWPLACE LTD
Troplgala Night Club
Montego Bay, Jamaica

~-2291:

Treasury Secretary John W. Snow Prcparcd

Rcmarks:~BR>Sam

M. Walto... Page I on

FROM THE OFFICE OF PUBLIC AFFAIRS
March 3, 2005
JS-2291
Treasury Secretary John W. Snow
Prepared Remarks:
Sam M. Walton College of Business
University of Arkansas

March 3, 2005
Thank you so much for having me here today. It's terrific to be in Arkansas, and I'm
honored to visit your fine school.
A lot of you are around my son's age, and I'm reminded of a conversation I had with
him a year or SO ago. He was home from college and I asked him if he and his
friends ever talked about Social Security. It's an awfully important issue, and I'd
hoped that my son and his friends had talked about it.
He said they didn'!. I asked whether they knew how important it was and he said
"Dad, we don't talk about it because we know it won't be there for us:
And of course we know that this belief is fairly typical among your generation.
While I believe there is good reason for optimism on this day, I do want to give your
generation credit for being informed, for appreciating how serious the demographic
challenge is when it comes to the future of Social Security. You know that people
are living longer and having fewer children and that a pay-as-you-go system won't
work with those kinds of numbers.
Without reform, your generation, and generations that come after you, will face
massive tax increases and for benefit cuts because the system simply can't operate
the way it was intended. In 1950 a ticket to an NFL playoff game was less than $2,
and there were 16 workers to support every beneficiary of Social Security - a very
comfortable ratio of those paying in versus those drawing benefits.
But we live in a very different world today. There are only 3.3 workers supporting
every beneficiary. By the lime today's youngest workers - that's some, if not many
of you in this room today - turn 65, there will only be two workers supporting each
retiree.
The numbers simply don't work. As a result, today's 30-year-old can expect a 27
percent benefit cut from the current system when he or she reaches retirement age.
These numbers don1 impact people who are 55 or older - those already retired or
near retirement. They impact you, and you are terribly aware of that fac!.
However, as I said, there is also reason for great optimism on this day. The terrific
news on Social Security is that the President's leadership on the issue is creating
movement. Progress, real progress, is being made.
When the President took this issue to the country in his State of the Union address,
he said his objective was to engender a broad national dialogue to get people
talking about the subject.
He wanted Americans to talk about Social Security, and a national conversation has
begun as a direct result.

http://www.treas.gov/presslreleases/js2291.htm

4/2512005

JS-2291: Treasury Secretary John W. SI1()w Prepared Rcmarks: Sam M. Walto... Page 2 of 3
Over lunch counters, over dinner tables, and breakfast tables all over America ...
the topic is Social Security reform. It's the front page story in virtually every
newspaper. It's on the evening news. And it's there because of the President of the
United States. It's there because of the courage that he's had to directly confront
and deal with what so many in political life call the "third raiL" It's there because the
President refuses to leave this serious problem to future generations and future
presidents.
The American people respect leaders who call a spade a spade. The President
touched the -third rail" without fear, and now we're moving forward. Neighbors and
co-workers are talking about it; families are talking about it; Congress is talking
about it.
We've seen a clear shift in the course of the last month or so from the question: "Is
there a problem?" to the question: "How do we fix it?"
This broad national dialogue has enabled us to look closely and honestly at the
Social Security system - both its problems and the reforms that could save it. We
can now talk about the fact that the problem actually becomes more expensive with
each passing year. And as it is, we are looking at $10.4 trillion in unfunded
liabilities.
Every day, more and more people realize how important it is to act, that if we do not
act to fix the system. the only solutions available for younger generations will be
dramatically higher taxes, massive new borrowing or sudden and severe cuts in
benefits or other government programs.
And I can tell you unequivocally that dramatically higher taxes are ruinous for an
economy - even one as resilient and strong as ours. The President knows that an
increase in the payroll tax rate hurts workers and job-creating small businesses,
and he won't do that. He won't let your generation suffer because his generation
was too afraid of the "third rail" to act.
What he'd like to see, instead, for you and for future generations is an ability to
save some of your payroll taxes, to build a nest egg that belongs to you, not to the
government. A nest egg that would have a real return on investment, far better than
the rapidly-weakening promise of Social Security benefits.
Albert Einstein believed, and the President and I agree, that compound interest is
one of the most powerful forces in the universe.
With voluntary personal accounts, you would have the chance to learn about your
financial chOices, build a nest egg and benefit from sound long-term investment in
the free market system without disrupting the system of benefits for your parents
and other generations of retired beneficiaries.
For the life of me, I can't imagine why anybody would argue against you having the
ability to invest and build a better retirement for your future. It costs the Social
Security system nothing to do so, it will cost your parents and grandparents nothing,
it gives you a better retirement, and it helps our country create a larger pool of
savings. And as the president has said the retirement security of our young people
is too important for partisan politics. Why wouldn't we do this? I have not heard one
good reason not to and I can't figure out why anybody would oppose it.
Social Security reform that doesn't raise payroll tax rates, that protects benefits for
today's seniors, and that improves the system dramatically for your generation can
be achieved.
A reformed, healthy system can be in your future instead of the empty promises
that my son spoke of. An opportunity to build a retirement nest egg of your very own
can be achieved, and a looming financial crisis can be mitigated.
You are witnessing an exciting moment in. Amer~n hi~tory. wh~re a P~esident:s
courageous leadership has inspired a national diSCUSSion and, I m confident. Will
lead to historic good results. I encourage you to be involved, whether it's talking
about the issue with your classmates over dinner or writing a letter to your Members
of Congrass.

http://www.trc21s.Jl:ov/presslr81~~l.lp·Yjs2291.htm

4/25/2005

JS-229\ : Treasury Secretary John W. Snow<13R>Pn:pareu Rcmarks: Sam M. Walto... Page 3 01'3
Thank you so much for having me here today; I'd be happy to take your questions
now.

http://wwwtrcas.gov/f)fC33/reieases/js2291.htm

4/2512005

JS-2292: Remarks

or Acting Assistant Secretary for Financial Institutions Greg Zerz...

Page I of 3

FROM THE OFFICE OF PUBLIC AFFAIRS

March 3, 2005
JS-2292
Remarks of
Acting Assistant Secretary for Financial Institutions Greg Zerzan
before the Networks Financial Institute's Regulatory
Reform Summit
Washington, D.C.

Thank you for inviting me to participate in the Networks Financial Institute's (NFl's)
Second Annual Regulatory Reform Summit. The NFl Summit is an important forum
for dialogue about the many issues facing the financial services industry in the 21st
century.
Today, I would like to focus my remarks on the Terrorism Risk Insurance Act, also
known as "TRIA." The Act plays a role in a key priority for the Administration -winning the war on terror. This war is being waged on many fronts and in many
ways. The attacks of September 11 were designed to strike at America's core
strengths, one of which is our economy. And while our intelligence, military,
homeland security, and local communities deal with offensive and defensive
strategies, we must continue to strengthen our systems in order to withstand and
minimize any disruptions to our businesses, markets, and economy, should another
attack occur.
In the aftermath of September 11, the important role that insurance plays in our
economy became very clear.
Before September 11,2001, losses from terrorism were generally covered in
commercial property and casualty insurance policies. A general exception to this
was coverage for losses resulting from nuclear, biological, and chemical (commonly
referred to as "NBC") reaction, release, and/or contamination, however caused.
Most policies were written so as to cover all risks of loss unless specifically
excluded from the policy. Generally, underwriters did not perceive terrorism foreign or domestic - as a significant risk despite the occurrences of the 1993
attack on the World Trade Center and the 1995 bombing of the federal building in
Oklahoma City, nor did they perceive the extent of losses that could occur from a
single event. Accordingly, terrorism was not separately priced. Like so many others,
the insurance industry simply had not anticipated a catastrophic terrorist attack in
the United States.
After September 11, the market significantly changed. As a result of the losses
stemming from the attacks, reinsurers by and large stopped offering reinsurance
coverage for property/casualty terrorism risks, or offered it at costs that were
generally considered prohibitive. Not being able to reinsure the terrorism risks
covered in their direct policies to consumers, property and casualty insurers
responded by writing specific terrorism exclusions in their policies where allowed by
state regulators, thereby leaving many U.S. businesses exposed and uninsured.
The insurers withdrawal led to a slow down in construction projects, increased
business costs for the insurance that was available, and generally impeded
businesses' ability to finance new job-creating economic activity in the midst of the
economic downturn caused in part by the September 11 attacks.
In addition, because the laws in some states required insurers to cover terrorism
losses, those insurers who had not collected premiums for the risk or could not
obtain reinsurance suddenly faced the possibility of insolvency in the event of
another large terrorism-related loss.
The market also faced the consequences that usually result anytime a catastrophe
occurs. be 11 terro%1l1. IlUrricanes, or otherwise -- the suspension of renewals until

http://www.trcn3.?;ov/pr666/rel~~sp.sJjs2292.htm

4/25/2005

JS-2292: Remarks of Acting Assistant Secretary j()r Financial Institutions Greg Zerz... Page 2 of 3
risks and underwriting practices can be reassessed; and increasing premiums for
all property and casualty coverage as insurers try to replenish their diminished
surpluses.
It was against this backdrop that Congress and President Bush acted by passing
the Terrorism Risk Insurance Act.

TRIA Designed to Address Market Disruptions.
To address market disruptions and ensure the continued widespread availability
and affordability of commercial property and casualty terrorism coverage, TRIA
nullified the existing terrorism exclusions being used by insurers. In return, TRIA
established a temporary federal program of shared public and private compensation
for insured commercial property and casualty losses resulting from acts of
terrorism.
TRIA in effect placed the federal government in the commercial property and
casualty terrorism risk reinsurance business for three years (through December 31,
2005). TRIA provides a federal "back stop" for terrorism reinsurance at no up-front
cost. covering up to an annual aggregate limit of $100 billion, SUbject to individual
insurer and industry-wide retentions. It also requires direct insurers to offer (or
"make available") terrorism coverage to policyholders on the same terms and
conditions (but not price) applicable to the other insured losses covered by the
policy. Thus, if a policy covered nuclear, biological or chemical losses due to nonterrorism causes, it would also have to cover such losses if caused by terrorism.
TRIA does not require insurance companies to pay premiums but provides authority
for Treasury to recoup its federal payments via surcharges on policyholders.
Certain recoupment is mandatory, based on insurance marketplace aggregate
annual retention amounts specified in the law. In other circumstances, TRIA
authorizes discretionary recoupment, ensuring that in the event the program is
utilized, there is a mechanism to allow for the potential recovery of the taxpayers'
contributions.
It is also worth noting that TRIA preserved state insurance regulation and consumer
protections.
Litigation Management

TRIA also contains important provisions relating to the management of litigation
arising from a certified act of terrorism. The law creates an exclusive federal cause
of action for property damage, personal injury, or death caused by an attack. This
sole and exclusive federal cause of action, pre·empts all other actions under state
law. This little-talked about part of TRIA is actually one of its most Significant
aspects; by turning all potential claims into a single federal cause of action, as well
as consolidating cases in the federal courts. the Act creates a model for judicial
economy and the principle of putting victims' well being ahead of administrative or
legal costs, such as unreasonable attorneys' fees. Additionally, under TRIA's
litigation management provisions, punitive damages will not be shared by the
federal government. These provisions offer a guide on how potential claims in a
wide variety of different contexts can be resolved in a just and economical manner.
Treasury Accomplishments.

Promptly after TRIA was signed into law, Treasury issued a number of interim
guidance notices to assist the insurance industry in complying with the immediatelyeffective requirements of the Act. The interim guidance notices were directly
followed by the issuance of formal regulations to implement TRIA. Treasury also
created and staffed a separate Terrorism Risk Insurance Program office. Treasury
has since:
• finalized all of the regulations necessary for the submission and payment of
potential claimS under TRIA;
..
.
• contracted a claims management contractor and an auditor to assist With
the processing and verification of potential claims; and .
• established a Web-based claims faCility for the submiSSIon and payment of
claims.

hUp:/lwww.trCtl3.gov/press/releases./js2292.htl11

.t/25!2005

JS-2292: Remarks of Acting Assistant Secretary t()r Financiallnstitutiol1s Greg Zcrz... Page 3 of 3
What Happens Next?

By most indications TRIA has been successful in achieving the fundamental goal of
enhancing the availability and affordability of commercial property and casualty
terrorism risk insurance, particularly for economic development purposes.
Now that we are entering the final months of the program created under TRIA, it is
logical to ask what happens next. The law directs that Treasury conduct a study
assessing the effectiveness of the program and the likely capacity of the industry to
offer insurance for terrorism risk after the program ends, as well as the availability
and affordability of such insurance for various policyholders.
Treasury has sent out surveys to help us obtain the information needed to complete
our study. The last survey wave was sent out just recently. Under the law, Treasury
is required to report our results to Congress by June 30. Our goal is to have the
study ready al the earliest date practicable, while ensuring that we have given the
necessary rigor and scrutiny that this important matter deserves.
There is no question that very serious policy questions are raised by TRIA's
expiration. As a general matter, there is wiclespread consensus across the federal
government favoring the efficiency of markets. At the same time. it should be
acknowledged that insurance markets are not entirely free -- a host of state
regulations, varying from one jurisdiction to the next. place a variety of controls and
responsibilities on insurers. In the terror context. the variety of state regulation must
be contrasted with the potentially nationwide distribution of risk. the exact
concentrations of which are difficult to fully determine.
No matter how these questions are ultimately answered, there should be no doubt
that TRIA has played a useful role in stabilizing markets and providing for the
management of the threat of terrorism related loss. Because of the importance of
this element of the war on terror, insurers and insureds alike should know that this
Administration is fully considering all of the possible options in order to make sure
that this front is properly covered.
It has been a pleasure speaking with you today, and I thank you for allowing me to

touch upon this important topiC.

http://www.treus.gov!preii/relea-;es/js2292.htm

4/2SIZOOS

js-2293: Deputy Assistant Secretary lallllicoia Addresses hnancial <:-BR>b.!ucation Lead...

Page I or I

FROM THE OFFICE OF PUBLIC AFFAIRS
March 3, 2005
js-2293

Deputy Assistant Secretary lannicola Addresses Financial
Education Leaders at the 2005 National Summit on
Economic and Financial Literacy
Deputy Assistant Secretary for Financial Education Dan lannicola, Jr. addressed
business leaders, educators and policy makers at the 2005 National Summit on
Economic and Financial Literacy at the National Press Club in Washington, D.C.
today. The summit's theme this year, Education for an Ownership Society,
underscored the importance of economic and financial literacy for all Americans
and the benefits it can bring to people's lives. The summit was hosted by the
National Council on Economic Education
lannicola highlighted the launch of the Financial Literacy and Education
Commission's federal financial education web Site, r)ttp Ilwww.rnyrnoney.gov, and
toll-free hotline, 1-888-mymoney. This one-stop shop for free federal financial
education resources gives consumers an easy way to get Information on a variety
of personal finance topics.
lannicola praised the organizations participating In today's Summit for their work in
improving financial education across the country, particularly in schools. "The
National Council on Economic Education is an important partner in our work at
Treasury to bring economic literacy to thiS nation's young people," said lannicola.
"Through their national network of educators and financial education supporters,
the NCEE is working hard to find a home for financial education in every classroom
in America. Today, we salute their progress:'
The NCEE is a non-profit organization that promotes economic literacy for students
and their teachers. NCEE's mission is to help students develop the real-life skills
they need to succeed, including honing saving and investing skills to become
effective participants in a global economy.
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 !reels gDv/flilancialcclucallon.

http://www.tr~aslgov!prc:;:;/n~I.:ascs!js22LJ3.htm

4/25<2005

1S-2294: Treasury Secretary John W. Snow Prepared Remarks to: New Orleans' Me ... Page I of 3

FROM THE OFFICE OF PUBLIC AFFAIRS
March 4, 2005
JS-2294
Treasury Secretary John W. Snow
Prepared Remarks to: New Orleans' Metro Chamber Alliance
New Orleans, LA
March 4, 2005

Thank you so much for having me here today. It's a pleasure to be here in this
vibrant city.
A special group of folks with an historic task will be here in New Orleans in a few
weeks. On March 23 rcl , the President's Advisory Panel on Federal Tax Reform will
holding a meeting here. They'll be exploring perceptions about the fairness of the
tax code and focusing on how our tax system affects families.
The Tax Reform Panel is made up of a group of great Americans; smart, thoughtful
individuals who are giving generously of their time and intellect to the historic
undertaking of reforming our cumbersome tax code into something that is more fair,
simple and pro-growth. I am deeply appreciative of their efforts, and I believe the
American people, and the American economy, will benefit greatly from their work.
So I'm glad they'll be holding a meeting in New Orleans. It is a great American cityfull of enterprise and industry, art and music. I appreciate how much the people in
this room have contributed to making this city a terrific place to live, and to visit, as
well as how much you contribute to the local, state and national economies.
Being an entrepreneur and running a business, no matter how small, is what makes
the American economy tick - both locally and nationally. I appreciate that. and
President Bush appreciates that.
We know that businesses like yours create jobs. That's why the President's tax cuts
were designed with small bUSiness in mind. And those tax cuts worked. Today's
announcement that 262,000 new jobs have been created is good news for America
and the growth of our economy. More than just a statistic, this number means that
262,000 Americans who have been looking for a job found one.
Evidence of our economic health abounds: In addition to continued job growth,
we've also seen new jobless claims decline and productivity continue to expand.
GDP growth for 2004 was 4.4 percent. The unemployment rate is down to 5.2
percent - lower than the average rate of the 1970s, 19805 and 19905. Inflation,
interest rates. and mortgage rates remain at low levels. Homeownership rates are
at record highs.
Our economy is dynamic and resilient - the envy of the world. But of course we still
face economic challenges as a country. We need to keep taxes low and stay on this
path of economic growth and job creation. We also need to continue looking down
the field and make sure that our economy is not disrupted by things that we can
avoid - things that we can fix, today.
I'm talking about Social Security ... the fact that we have an opportunity to save a
system that is, unfortunately. unsustainable in its current form. We have a chance,
this year, to save Social Security for the sake of our children and grandchildren.
The terrific news today is that people are talking about the issue. The President's
leadership has drawn critical attention to the problem and is creating movement.
Progress, real proqress. is being made.

http://www.tretlj.gov/pre6B/r~1p-al;e~(js2294.htm

4!25/2005

JS-2294: Trcasury Sccrdary John W. Snow Prepan:d Rcmarks to: New Orlcans' \1c ... Page 2 ofJ
When the President took this issue to the country in his State of the Union Address
he said his objective was to engender a Droad national dialogue to get people
'
talking about this issue.
He wanted Americans to talk aDout Social Security, and a national conversation has
begun as a direct result.
Over lunch counters, over Dreakfast and dinner tables allover America ... the topic
is Social Security reform. It's the front page story in virtually every newspaper. It's
on the evening news. And it's there because of the President of the United States.
It's there because of the courage that he's had to directly confront and deal with
what so many in political life call the "third rail."
The American people respect leaders who call a spade a spade. The President
touched the "third rail" without fear, and now we're moving forward. Neighbors and
co-workers are talking about it; families are talking about it; Congress is talking
about it.
We've seen a clear shift in the course of the last month or so from the question: "Is
there a problem?" to the question: "How do we fix it?"
I imagine that you are talking about it with your spouse and family members, your
business partners, customers and employees. Those conversations are critical, and
I hope our meeting here today can help make them even more lively, more
productive.
First, I need to let those of you know that if you are 55 or older - raise your hand if
you're 55 or older - your Social Security benefits are solid. They will not change.
You don't need to change your retirement plan or strategy because of Social
Security reform, period.
But now I'll ask: how many of you have children or grandchildren? Raise your
hands. It's those children and grandchildren, those young workers and future
workers, who we need to be worried about. They are the ones for whom we need to
fix this system.
This might be hard to explain to some of your relatives or neighbors, especially if
they are retired or near retirement and are worried about their benefits. The threat
to Social Security in the near future makes more sense when you look at the simple
arithmetic. Social Security has enough money now because for decades we have
had more than enough workers paying into the system, supporting the retirees
drawing benefits.
In 1950, there were 16 workers to support every beneficiary of Social Security - a
very comfortable ratio of those paying in versus those drawing benefits. Today
there are only 3.3 workers supporting every beneficiary. By the time today's
youngest workers - many of you have children in that age group - turn 65, there
will only be two workers supporting each retiree.
Just three years from now, in 2008, the first baby boomers will begin to retire. In
2018, 13 years from now, the government will begin to payout more in Social
Security benefits than it collects in payroll taxes. By 2042, when younger workers
begin to retire, the system will be bankrupt. Under the current system, today's 30year-old worker will face a 27 percent benefit cut when he or she reaches normal
retirement age.
We must make Social Security better for those younger workers.
If we do not act to fix the system, the only solutions available for younger
generations will be dramatically higher taxes, massive new borrowing or sudden
and severe cuts in benefits or other government programs.
And I don't think I need to tell you that dramatically higher taxes are ruinous for an
economy - even one as resilient and strong as ours. Y.ou kn~w this because you
see what taxes do to your business. When taxes are higher, It slows you dow~.
When they are lower, it frees you up to do what you do best: grow and create Jobs.

http://wW\l•• tr-eo.fl.gov/press/releases/js2294.htm

4/2512005

J8-2294: Treasury Secretary John W. Snow Prcparcd Remarks to: New Orleans' Me... Page 3 of 3
The President knows that an increase in the payroll tax rate hurts workers and jobcreating small businesses like yours, and he won't do that. He also won't leave the
problem for future generations and future presidents to deal with.
What he'd like to see, instead, for future generations is an ability to save some of
their payroll taxes, to build a nest egg that belongs to them, not to the government.
Something they could pass on to their heirs. A nest egg that would have a real
return on investment, far better than the rapidly-weakening promise of Social
Security benefits.
Albert Einstein believed, and the President and I agree, that compound interest is
one of the most powerful forces in the universe.
With voluntary personal accounts, younger workers would have the chance to learn
about their financial choices, build a nest egg and benefit from sound long-term
investment in the free market system without disrupting the system of benefits for
today's retired beneficiaries.
For the life of me, I can't imagine why anybody would argue against young workers
having the ability to invest and build a better retirement for their future. It costs the
Social Security system nothing to do so, it will cost current and near-retirees
nothing, it gives our children and grandchildren a better retirement, and it helps our
country create a larger pool of savings. And as the president has said the
retirement security of our young people is too important for partisan politics. Why
wouldn't we do this? I have not heard one good reason not to and I can't figure out
why anybody would oppose it.
Social Security reform that doesn't raise payroll tax rates, that protects benefits for
today's seniors, and that improves the system dramatically for our children and
grandchildren can be achieved.
We are part of an exciting moment in American history, where a President's
courageous leadership has inspired a national discussion and, I'm confident, will
lead to historic good results. I encourage you to be involved, whether ii's talking
about the issue with your colleagues, with your children, or writing a letter to your
Members of Congress.
Many of you in this room may want to pass your business on to your children or
grandchildren. I know you'll want your business to be in top shape, finanCially, when
that time comes.
Let's make sure we do the same with Social Security. If we act now, we can make
sure that Social Security, and our economy, are on sound financial footing for our
children and grandchildren.
Thanks so much for having me here today.

http://www.tRas.gov/pr~iilrck.ascs/js2294.htm

4/2512005

JS-229S: Remarks by Tony Fratto, Treasury Department spokesman on the HOllse S... Page I of I

FROM THE OFFICE OF PUBLIC AFFAIRS
March 4, 2005
JS-2295
Remarks by Tony Fratto, Treasury Department spokesman
on the House Subcommittee on Foreign Operations
decision regarding the
US-Turkey Financial Agreement:
The proposal in the House Subcommittee on Foreign Operations and
Appropriations is an indication that Turkey's economy has improved significantly
over the past few years.
The US-Turkey Financial Agreement has helped to reassure financial markets and
maintain economic stability in Turkey.
Turkish authorities have been able to implement nessary fiscal and monetary
reforms. These reforms - combined with the EU's decision to begin negotiations
with Turkey on EU accession - have lead to strong growth and have increased
financial stability.
Growth has averaged over 5% in the last three years, and inflation is at its lowest
level in thirty years (9.3% at end-2004).
As Chairman Kolbe noted said, the committee's recommendation reflects Turkey's
greatly improved economic and financial situation.

http://w~r.treafq~oY/preS6/releases!js2295.htl1l

4/25i2005

JS-2296: Statement of Treasury Secretary John W. Snow on February Employment Report

Page I of I

FROM THE OFFICE OF PUBLIC AFFAIRS
March 4, 2005
JS-2296
Statement of Treasury Secretary John W. Snow on February Employment
Report

Today's announcement that 262,000 new jobs have been created is good news for
America and the growth of our economy. More than just a statistic, this number
means that 262,000 Americans looking for a job, have now found a job.
In addition to continued job growth, we've also seen new jobless claims decline and
productivity continue to expand. President Bush is committed to keeping the
economy on the path of healthy growth by making the tax cuts permanent, reducing
the burden of frivolous lawsuits, and strengthening social security. The President's
leadership on economic policy is clearly moving the economy in the right direction.

http://www.treas.gov/press/rdeascsijs2296.htm

4125!2005

FROM THE OFFICE OF PUBLIC AFFAIRS

March 7, 2005
2005-3-7-13-25-13-16053
U.S. International Reserve Position

The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $80,079 million as of the end of that week, compared to $79,780 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
February 25, 2005

March 4, 2005

79,780

80,079

TOTAL

1. Foreign Currency Reserves

a. Securities

Euro

Ven

TOTAL

Euro

Yen

TOTAL

12,080

14,951

27,031

12,143

15,058

27,201

Of which, issuer headquartered in the U. S.

b. Total deposits with:
b.i. Other central banks and BIS

11,866

3,005

14,871

3,027

11,914

14,941

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

bjL Of which, banks located abroad

bJii. Banks headquartered outside the U.s.

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

15,288

15,241

3. Special Drawing Rights (SDRs) 2

11,549

11,654

4. Gold Stock 3

11,042

2. IMF Reserve Position

5. Other Reserve Assets

II. Predetermined Short-Term Drains on Foreign Currency Assets
March 4, 2005

February 25, 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

III. Contingent Short-Term Net Drains on Foreign Currency Assets
February 25, 2005
Euro
1. Contingent liabilities in foreign currency

Yen

March 4, 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
3.8. With otf1er 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.B. 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.
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/doliar 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-2297: MEDIA ADVISORY: Secretary Snow to Visit l'\cw Mexico and Texas This We...

Page I of I

FROM THE OFFICE OF PUBLIC AFFAIRS
March 8, 2005
js-2297
MEDIA ADVISORY: Secretary Snow to Visit New Mexico and Texas This Week
to Discuss Strengthening and Preserving Social Security

U.S. Treasury Secretary John W. Snow will travel to Albuquerque, New Mexico on
Thursday, March 10 and San Antonio, Texas on Friday, March 11to discuss the
President's efforts to strengthen and preserve the U.S. Social Security system.
"The President is committed to saving Social Security," said Secretary
Snow. "Social Security is sound for today's retirees. but the system must be fixed to
keep the promise of Social Security for our children and grandchildren.
"Social Security faces real problems that must be addressed today and President
Bush is committed to fixing Social Security and signing legislation this year,"
Secretary Snow continued. "Make no mistake, voluntary personal retirement
accounts are an important part of comprehensive reform."
The following events are open to credentialed media with photo identification:
Thursday, March 10

Roundtable with Local Business Leaders
10:00 a.m. MST
Greater Albuquerque Chamber of Commerce
115 Gold Avenue SW
Suite 201
Willard Board Room
Albuquerque, NM
•• Media must arrive by 9:30 am MST
.** A brief media availability will be held immediate following the event
Friday, March 11

Remarks to Independent Community Bankers of America National Convention
9:30am CST

San Antonio Marriott River Center Hotel
Grand Ballroom, Third Floor
101 Bowie St
San Antonio TX
•• Media must arrive by 9:00 am CST
•• A brief media availability will be held immediate following the event
-30-

http://wwwtr~as.gov/press/relcascs/js2297.htm

4!25!2005

js-2298: Treasury Secretary John W. Snow <hr> Prepared Remarks: <hI"> Press ContCren... Page 1 of 2

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Arf()ile(') AU(I/)al',:; R(-id(/!"f:,.

March 8, 2005
is-2298
Treasury Secretary John W. Snow
Prepared Remarks:
Press Conference on the SAVE Initiative

Senator Thomas, Congressman Johnson, it's an honor and a pleasure to be here
with both of you to talk about the ways in which we can make it easier for
Americans to save for the future.
Government has a tendency to make things overly complicated in spite of the best
of intentions. As a result, Americans have any number of savings and retirement
investment account options to choose from, but their variety and complexity make
them confusing in a way that is actually a disincentive for savings.
From 401 (k)s and SIMPLE 401 (k)s to IRAs and Roth IRAs, 403(b)s to 457s and so
on ... savings vehicles have become an intimidating kind of alphabet soup.
Americans don't need to - and shouldn't - live in an environment where they need a
financial advisor to partiCipate in tax-preferred savings. There is a way for
government to encourage and reward savings that is much easier to understand,
and opens the door to a financially secure future much wider.
The three types of savings accounts we are talking about today have the potential
to push that door open, wider than it's ever been.
By simplifying the tax incentives and penalties and dividing the accounts logically by
their funding and use, LSAs, RSAs and ERSAs will make savings more
approachable and more manageable for all Americans, and this is an extremely
important goal.
Combined with already-allowable Health Savings Accounts, these new savings
accounts would create a commonsense approach that Americans could use to save
and plan for future expenses, both expected and unexpected.
HSAs are already helping Americans take charge of their own health-care because
individuals own the accounts and are empowered to playa greater role in their
health care decisions. Rather than a third-party insurer being involved for routine,
lower-cost medical care, HSAs are giving patients choice and control over their own
health care decisions while also allowing them to save for future, unanticipated
health care needs, or, if unused, to pass on to their heirs.
RSAs would improve and simplify savings opportunities by conSOlidating the
various existing, often confusing, IRA options. Contributions of up to $5,000 per
year in each would accumulate lax-free and distributions after age 58 would be taxfree as well. Everyone would be eligible to save in an LSA for any purpose,
regardless of their income. Nothing is more simple than this. And, like HSAs, with
both LSAs and RSAs, you own the account, you make decisions about the account,
and you can pass it on to your heirs.
While RSAs conSOlidate and simplify individual retirement savings options, ERSAs
do the same for retirement savings plans offered by employers to employees. This
is the world of 401 (k)s, thrifts, 403(b)s, etc. Again, this is a chance for at-work
savings to be more accessible and simpler, and I am particularly excited about the

http://wwwtr~as.gov/prcssJrdeases/js2298.htl11

4/25/2005

js-2298: Treasury Secret.uy John W. Snow <hI'> Prepared Remarkli: <br.·~ Press Conferen... Page 2 of 1
increased ease they would offer to small-business owners.
Since small businesses employ more than half of all private-sector workers, it is
very important that we make establishment and management of employersponsored retirement savings as straightforward and effortless as possible. Small
employers often cannot hire accountants or Human Resources staff, so making
setting up plans simpler should make providing retirement savings options available
to their employees much easier.
The President has said that saving is the path to independence for Americans in all
phases of life, and we must encourage more Americans to take that path. He has
backed up those words with specific proposals and support for legislative plans like
the SAVE Initiative. The high priority of creating these savings plans is also
reflected by their inclusion in the President's FY 2006 budget.
As you all know, the President and his administration are also actively touching the
"third rail of politics" by supporting meaningful, lasting reform of our nation's Social
Security system. Here, too, we see the President's passionate beliefthat personal
savings and ownership is the path to independence. It's why he advocates the
creation of personal savings accounts as part of overall Social Security reform.
The President and I believe that enabling younger workers to build a nest egg is an
important, integral part of any change to Social Security, because the future of the
system must be different for younger generations. Our country's demographics
make the current pay-as-you-go system unsustainable. period.
Giving young workers having the ability to invest and build a better retirement for
their future costs the Social Security system nothing to do so, will cost current and
near-retirees nothing, gives our children and grandchildren a better retirement. and
helps our country create a larger pool of savings. And as the president has said, the
retirement security of our young people is too important for partisan politics. Why
wouldn't we do this? I have not heard one good reason not to and I can't figure out
why anybody would oppose it.
Similarly, I cannot imagine why anyone would oppose the commonsense, Simpler
approach of LSAs. RSAs and ERSAs. This initiative has the full support of the
President, and I look forward to the day when all Americans can save more, and
save more simply.
Thank you.
A fact sheet on the President's savings proposals is attached.

REPORTS

• Fact Sheet on the President's SClvings Proposals

http://www.treas.gov/pre5i!relp.ases/is2298.htm

4/25J200S

DEPARTMENT OF THE TREASURY
Office ofPublic Affairs
March 8, 2005

FACT SHEET:
President Bush's Savings Proposals
"Americans can help secure their own future by saving. Government must support policies that promote and
protect saving. And saving ;s the path to independence for Americans in all phases of life, and we must
encourage more Americans to take that path."
-President George W. Bush

OVERVIEW
Today, Treasury Secretary John Snow joined Senator Craig Thomas and Representative Sam
Johnson to announce the Save Initiative, an effort sponsored by Senator Thomas in the Senate
and Rep. Johnson in the House to pass legislation enacting three of the President's key savings
proposals, Retirement Savings Accounts (RSAs), Lifetime Savings Accounts (LSAs), and
Employer Retirement Savings Accounts (ERSAs).
These initiatives will give more hardworking Americans the opportunity to save so they can enrich
their lives and strengthen their retirement security. These proposals make saving simple for
everyone and for every purpose. No longer will individuals have to worry about the confusing
alphabet soup of six different savings accounts. No longer will people have to worry about the
endless maze of confusing rules. These simple accounts will have one powerful goal -- making
saving for everyday life and retirement security easier and more attractive.

Lifetime Savings Accounts

Lifetime Savings Accounts (LSAs) can be used for any type of savings, including
education, a new home, healthcare needs, or even seed money to start a small business.
> An LSA will allow an individual, regardless of age or income, to contribute $5,000 a year
(which would be indexed for inflation) and make penalty free withdrawals at any time and
for any purpose.
,. like Roth IRAs, contributions will not be deductible, but earnings and distributions
would be tax-free.
> Unlike IRAs, when people take money out of their LSA, they will not be required to
overcome a maze of papelWork requiring them to document qualified expenses, financial
institutions will not need to explain complicated rules to participants, and the government
will not need to verify the qualifying expenses.
LSA's are good for average Americans because:

Giving people the ability to access their money at anytime for any purpose will encourage
more people to save.
LSAs take away the hassle factor. The combination of universal eligibility and
unrestricted tax-free distributions makes saving simple and makes it more likely that
average Americans, especially those with less financial sophistication or lower income,
will participate.

Retirement Savings Accounts
~

Retirement Savings Accounts (RSAs) allow individuals to contribute up to $5,000 per
year (indexed for inflation) in savings for retirement regardless of their income.
~ RSAs can be used only for retirement saving.
) RSAs will improve and simplify savings opportunities by consolidating traditionallRAs,
nondeductible IRAs and Roth IRAs, each of which has a confusing and different set of
rules regarding eligibility and tax treatment, into one simple, streamlined account with
rules similar to current law Roth IRAs.
~ Like current law Roth IRAs, contributions will not be deductible, but earnings would
accumulate tax free and distributions after age 58 (or death or disability) would be
tax free.
) Existing Roth IRAs would be unaffected (except that they would be renamed RSAs).
Existing traditional and nondeductible IRAs could be converted into RSAs; those not
converted to RSAs could not accept any new contributions (other than rollover
contributions); no one would be required to convert.
RSAs are good for average Americans because:
) Simplifying the complex eligibility rules and repeal of the income limits will encourage
more Americans to save for retirement.
) RSAs make saving for retirement simple and easy. Individuals would not be required to
make minimum distributions from the accounts during their lifetime, simplifying financial
planning during their retirement years.
~ RSAs would insure that money set aside for retirement is used for retirement. Current
IRAs allow for withdrawals for many non-retirement purposes. Each withdrawal from an
IRA potentially reduces retirement funds.
) No longer would savers have to worry about complex rules allowing withdrawals from
IRAs for certain qualified expenses. LSAs would allow people to save for expenses such
as health care or education while RSAs would go exclusively towards retirement savings.

Employer Retirement Savings Accounts
)

There are currently a bewildering array of tax-preferred, employer-based retirement
savings accounts with similar goals but different rules regulating eligibility, contribution
limits, tax treatment, and withdrawal restrictions.
) The proposal would consolidate 401 (k), thrift, 403(b), and governmental 457 plans as
well as SARSEPs and SIMPLE 'RAs into a single account, Employer Retirement Savings
Accounts (ERSAs), which could be sponsored by any employer.
» The overwhelming complexity of current rules imposes substantial burdens on employers
and workers and discourages employers from offering plans to workers.
~ ERSAs would follow a greatly simplified version of the existing rules for 401 (k) plans.
ERSAs are good for workers because:
) More Americans would have access to these plans.
) Because of the complexity and compliance costs of current employer sponsored
retirement plans, many firms, especially small businesses, do not offer employer
sponsored savings opportunities for retirement.
» By simplifying and consolidating these plans into one account, ERSAs, compliance costs
and complexity would be reduced encouraging more employers - especially small
businesses - to offer employer sponsored retirement plans.

JS-2299: Testimony of Assistant Secretary of Treasury Mark J. Warshawsky before the U... Page I of I

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free

AtiO/J(-;fi') AGroilnl i,; ROillh)I";).

March 8, 2005
JS-2299
Testimony of Assistant Secretary of Treasury Mark J. Warshawsky before the
United States House Ways and Means Committee

REPORTS
• (PDF) Testimony of Assistant Secretary of Treasury Mark J. Warshawsky
before the United States House Ways and Means Committee

http://www.treas.gov/prc~s!relea...es/js2299.htm

4i25!2()05

DEP ARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
Embargoed Until 3 p.m. EST
March 8, 2005

CONTACT:

Mary Diamond
(202) 622-2960

Testimony of Assistant Secretary of Treasury Mark J. Warshawsky
before the United States House Ways and Means Committee
Good afternoon Chairman Camp, Ranking Member McNulty, and members of the
Subcommittee. I appreciate the opportunity to participate in this hearing to discuss the
Administration's proposal to reform and strengthen the single employer defined benefit
pension system. In my testimony, I will focus on the proposal's funding rules, in
particular, the calculation of the funding targets.
The single employer defined benefit pension system is in serious financial trouble.
Many plans are badly underfunded, jeopardizing the pensions of millions of American
workers. The insurance system protecting these workers in the event that their own
pension plans fail has a substantial deficit. Such a deficit means that although the PBGC
has sufficient cash to make payments in the near-term, without corrective action,
ultimately the insurance system will simply not have adequate resources to pay all the
benefits that it owes to the one million workers and retirees currently owed benefits who
were participants of failed plans and to the beneficiaries of plans that fail in the future.
The Administration believes that current problems in the system are not transitory
nor can they be dismissed as simply the result ofrestructuring in a few industries. The
cause of the financial problems is the regulatory structure of the defined benefit system
itself. Correcting these problems and securing the retirement benefits of workers and
retirees requires that the system be restructured. Minor tinkering with existing rules will
not be sufficient. If we want to retain defined benefit plans as a viable option for
employers and employees, fundamental changes must be made to the system to make it
financially sound.

A defined benefit pension plan is a trusteed arrangement under which an
employer makes a financial commitment to provide a reliable stream of pension
payments to employees in exchange for their service to the finn. One cannot expect that
such obligations wilJ be honored consistently ifthey are allowed to remain chronically
underfunded as they are under current law. The incentives for financially sound plan
funding must be improved or we will continue to see pension plans terminating with
massive amounts of unfunded benefits. These unfunded benefits are costly both to
participants because many lose benefits and also to other pension sponsors because, they
are likely bear the higher costs that such underfunding imposes on the insurance system
through even higher premiums.
The goal of the Administration's proposed defined benefit pension reform is to
enhance retirement security. The reforms are designed to ensure that plans have
sufficient funds to meet accurately and meaningfully measured accrued obligations to
participants. The current defined benefit pension funding rules - which focus on
micromanaging annual cash flows to the pension fund -- are in need of a complete
overhaul. The current rules are needlessly complex and fail to ensure that many pension
plans remain prudently funded. The current rules:
• Measure plan assets and liabilities inaccurately.
, Fail to ensure adequate plan funding.
• Fail to allow sufficient contributions by plans in good economic times, making
minimum required contributions rise sharply in bad economic times.
• Pennit excessive risk of loss to workers.
• Are burdensome and unnecessarily opaque and complex.
• Do not provide participants or investors with timely, meaningful information on
funding levels.
• Do not generate sufficient premium revenues to sustain the PBGC.
• Create a moral hazard by pennitting financially troubled companies with underfunded
plans to make benefit promises they cannot keep.
The President's solution to these issues is to fundamentally rcfonn the rules
governing pension plan funding, disclosure and PBGC premiums, based on the following
three simple principles:
• Funding rules should ensure pension promises are kept by improving incentives to
fund plans adequately.
• Workers, investors and pension regulators should be fully aware of pension plan
funding status.
• Premiums should reflect a plan's risk and ensure the pension insurance system's
fmancial solvency.
Such changes will increase the likelihood that workers and retirees actually
receive the benefits that they have earned and as a result will moderate future insurance
costs that will be borne by sound plan sponsors. Today I am going to discuss how the
Administration's initiative improves incentives for adequate plan funding. We have
2

proposed a fundamental reform of the treatment of defined benefit pension plans, one that
we believe will change plan sponsor behavior, ultimately result in better funded and
better managed defined benefit pension plans, and secure benefits for workers and
retirees.
The Administration proposal is designed both to simplify funding rules and to
enhance pension plan participants' retirement security. The federal government has an
interest in defining and enforcing minimum prudent funding levels, but many other
funding, investment, and plan design decisions are best left to plan sponsors. Under this
proposal, pension plans would be required to fund towards an economically meaningful
funding target - a measure of the currently accrued pension obligations. Plans that fall
below the minimum funding target would be required to fund-up to the target within a
reasonable period of time. Plans that fall significantly below the minimum acceptable
funding level would also be subject to benefit restrictions.
Some key features of the proposed funding rules:

•

Funding based on meaningful and accurate measures of liabilities and assets. The
proposal provides funding targets that are based on meaningful, timely, and accurate
(using the yield curve for discounting is a central component ofthis proposal)
measures ofliabilities that reflect the financial health of the employer.

• Accrued benefits funded. Sponsors that fall below minimum funding levels will be
required to fund up within a reasonable period oftime. The proposal requires a 7year amortization period for annual increases in funding shortfalls. There will be
restrictions on the extension of new benefit promises by employers whose plans'
funded status falls below acceptable levels. Benefit restrictions will limit liability
growth as a plan becomes progressively underfunded relative to its funding target.
•

Plan sponsors able to fund plans during good times. Many believe that the inability
of plan sponsors to build sufficiently large funding surpluses during good financial
times under current rules has contributed to the current underfunding in the pension
system. The proposal addresses this problem directly by creating two funding
cushions that, when added to the appropriate funding target, would determine the
upper funding limit for tax deductible contributions. And every plan will be allowed
to fund to a level of funding corresponding to the total cost of closing out the plan.
Under our proposal, allowing plan sponsors the opportunity to prefund and therefore
limit contribution volatility is a critical element.

particular from plan sponsors to plan participants and the PBGC. One need only look at
the losses incurred by many steel and airline plan participants and PBGes net position to
see this is so.
Moreover, the Administration recognizes that the current minimum funding rules
-- particularly the deficit reduction contribution mechanism and the limits on tax
deductibility of contributions -- have contributed to funding volatility. Our proposal is
designed to remedy these issues; for example, we increase the deductible contribution
limit. We feel this additional ability to fund during good times, combined with other
provisions of the proposal; for example, increasing the amortization period to seven years
compared to a period as short as four years under the current law deficit reduction
contribution mechanism, together with the existing freedom of plans have to choose
pension fund investments, will give plans the tools they need in order to smooth
contributions over the business cycle. Plans may choose to limit volatility by choosing
an asset allocation strategy or conservative funding level so that financial market changes
will not result in large increases in minimum contributions. These are appropriate
methods for dealing with risk; it is inappropriate to limit contribution volatility by
transferring risk to participants and the PBGC.

Meaningful and Accurate Measures ofAssets and Liabilities
We propose measuring liabilities on an accrual basis using a single standard
liability measurement concept that does not distort the measures by smoothing values
over time. Within the single method, liability is measured using assumptions that are
appropriate for a financially healthy plan sponsor (investment grade credit rated), and
alternatively using assumptions that are appropriate for a less healthy plan sponsor
(below investment grade) that is more likely to find itself in a position of default on
pension obligations in the short to medium term.
On-going liability is defined as the present value on the valuation date of all
benefits that the sponsor is obligated to pay. Salary projections would not be used in
detennining the level of accrued benefits. Expected benefit payments would be
discounted using the corporate bond spot yield curve that will be published by the
Treasury Department based on market bond rates. Retirement assumptions will be
developed using reasonable methodologies, based on the plan's or other relevant recent
historical experience. Finally, unlike the current liability measure under current law,
plans would be required to recognize expected lump sum payments in computing their
liabilities.
The at-risk liability measure estimates the liabilities that would accrue as a plan
heads towards termination because of deteriorating financial health of the plan sponsor.
At~risk liability would include accrued benefits for an ongoing plan, plus increases in
costs that occur when a plan terminates. These costs include acceleration in early
retirement, increase in lump sum elections when available and the administrative costs
associated with terminating the plan.

The following table provides a summary overview of the critical differences
between the ongoing and at-risk liability assumptions.
At-Risk Liabilit

Discount Rate
Mortality Assumptions
Retirement Assumptions

-------------- Yield Curve -------------------------- Set by Law -------------Developed using relevant
Acceleration in retirement rates - individuals retire at
recent historical experience.
the earliest early retirement opportunity.

Lump Sum Payments

Developed using relevant
recent historical experience.

Acceleration in lump-sum election.

Transaction Costs

Not included

Included. Calculated by formula.

Under our proposal, assets will be valued based on market values on the valuation
date for determining minimum required and maximum allowable contributions. No
smoothed actuarial values of assets will be used as they mask the true financial status of
the pension plan.
One aspect of our liability measurement approach that has received a fair amount
of attention is the use of the yield curve to discount pension plan liabilities. Accuracy
requires that the discount rates used in calculating the present value of a plan's benefit
obligations satisfy two criteria: they must reflect the timing ofthe future payments, and
they should be based on current market-determined interest rates for similar obligations.
The Administration proposes to replace the current law method with a schedule of rates
drawn from a spot yield curve of high grade (AA) corporate bonds averaged over 90
business days. Discounting future benefit cash flows using the rates from the spot yield
curve is the most accurate way to measure a plan's liability because, by matching the
maturity ofthe discount rate with the timing of the obligation, it properly computes
today's cost of meeting that obligation. Use ofa yield curve is a prudent and common
practice; yield curves are regularly used in valuing other financial instruments including
mortgages, certificates of deposit, etc.
The Treasury Department has developed a corporate bond yield curve that is
appropriate for this purpose. Our methodology allows spot yield curves to be estimated
directly from data on corporate AA bonds. The process incorporates statistically
unbiased adjustments for bonds with embedded ca1l options, and allows for statistically
unbiased projections of yields beyond a 30-year maturity. We recently published a white
paper detailing our methodology (Creating a Corporate Bond Spot Yield Curve for
Pension Discounting Department of The Treasury, Office of Economic Policy, White
Paper, February 7, 2005) that is available on the Treasury Department web site.
Our budget proposal to reform the calculation of lump-sum benefits also uses the
yield curve for calculating the minimum lump sums. We propose to replace the use ofa
3D-year Treasury rates for purposes of determining lump sum settlements under qualified
plans. Using the yield curve to compute lumps sums and the funding required for an
annuity eliminates any distortions that would bias the participant's payout decision.
5

Under our proposal, lump sum settlements would be calculated using the same interest
rates that are used in discounting pension liabilities: interest rates that are drawn from a
zero-coupon corporate bond yield curve based on the interest rates for high quality
corporate bonds. This reform includes a transition period, so ~hat employees who are
expecting to retire in the near future are not subject to an abrupt change in the amount of
their lump sums as a result of changes in law. The new basis would not apply to
distributions in 2005 and 2006 and would be phased in for distributions in 2007 and
2008, with full implementation beginning only in 2009. I

An Example of Discounting Liabilities Using the Yield Curve
Today, I'll provide an example (economists call this a stylized example) of how
the yield curve would be used in discounting pension obligations. The yield curve is used
to discount the plans aggregate expected pension payments in each year to participants.
The plan administrator has calculated these future pension payments based on the plan's
formula for benefits that participants have earned up to the valuation date. As this
example shows, once the actuary has determined the plan's annual cash benefit payments
summed over all participants in a manner similar to what is done under current law,
discounting those payments using the yield curve is quite simple.
Our hypothetical plan consists of three individuals, the 64-year-old Mr. Brown,
the 59-year-old Ms. Scarlet, and the 54-year-old Mr. Green. Each of the three retires at
age 65 and receives the same pension benefit payment each year until death at age 80.
The benefit Mr. Brown has earned to date is higher than Ms. Scarlet's (it is assumed that
he has been working longer under the plan) whose expected benefit is in tum larger than
Mr. Green's. Mr. Brown's annual benefit under the plan is $12,000, Ms. Scarlet's is
$9,000 and Mr. Green's is $6,000.
Chart I shows the AA corporate bond yield curve that would be used to discount
these benefit payments. The yield curve has interest rates for years 0 to 80. For our
stylized example we will only need to use points for the years I through 26 because we
assume that no participant will draw benefits before year I and all payments will be made
by year 26. The example applies the yield curve to payments made each year.

I This is a different yield curve phase-in schedule than proposed for the use of the yield curve in
discounting pension liabilities for minimum funding purposes.

Chart 1
Spot Yield Curve
Corporate AA Bonds
90 Day Average 1213012004
B.O%

7.0% i
8.0%
5.0%
4.0%
3.0%
2.0%

Maturity, Years

1.0%
0.0%
0

i
I
i

530,000 , . - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ,
_ M r Brown's Benefil Payments ...... Ms. Scarlet's Benefit Payments - M r . Green's BenafU Payments.

$25,'00
$20,000
$15,000

~~~~~~~~~~

$10,000

i··,. .
$O~~~~~~~~~------------~~~~--~--~~~~

1 2

3 4

5 6

7 8 9 1011 12131415161718192021 2223242526272829

Future Plan Years

Chart 3
Total Future Benefit Payments
Sum of Benefit Payments for Brown, SGarlet, and Green

$30.000

$25.000

$20,000

$15,000

$10,000

+-4~-+-"

$5,000
$0

-+-Total Future Benefit Payments

I
1 2 3 4 5 6 7 8 9 101112131415161718192021 2223242526272829
Future Plan Years

How do we apply the yield curve to discounting these benefit payments?
Let's take years 5, 14 and 20. In year 5, the plan expects to pay $12,000 in
benefits, all to Mr. Brown. The discount rate for that year drawn from the yield curve is
4.03 percent. To compute the present value of the $12,000, the $12,000 is divided by
1.218 (one plus the interest rate expressed in decimal form, 1.0403, raised to the 5th
power), which equals $9,849.
For plan year 14 the expected benefit payments are $27,000 ($12,000 to Mr.
Brown, $9,000 to Ms. Scarlet and $6,000 to Mr. Green) and the yield curve interest rate
is 5.51 percent. To compute the present value, the $27 ,000 is divided by 2.119 (1.0546
taken to the 14th power) yielding $12,742. For year 20, the plan expects to pay $15,000
($9,000 to Ms. Scarlet and $6,000 to Mr. Green) and the discount rate from the yield
curve is 5.96 percent. Dividing $15,000 by 3.183 gives a present value of$4,713. Note
that even though there are three participants in the plan, once their benefit payments
during any period are added together only one interest rate is needed to compute the
present value for that period. Separate interest rates are not used for every individual
participant in the plan.
In order to compute the plan's target liability the plan needs to perform
computations like the one above for each payment period from I through 27 and sum
them together. The liability for this hypothetical plan is $238,994. In this example, only
26 interest rates are used, one for each year that benefit payments are made. Even if our
hypothetical plan had thousands of participants, but payments were made for only 26
years in the future, only 26 interest rates would be needed to compute the plan's liability.
This is, of course, a simplified example. The plan actuary needs to make a
number of computations and use his or her professional judgment to determine the plan's
future benefit payments each year: the actuary must estimate the probability that a
participant will retire at a particular time in the future and must model the probable
pattern of payments that will be made for that participant until the participant's death.
These computations, already required by current law, are complex, but once the actuary
has determined the annual cash benefit payments, discounting those payments using the
yield curve is quite simple and can easily be done using a basic spreadsheet program.
As noted above, ifMr. Brown elected to take a lump sum payment rather than an
annuity, the minimum value of that lump sum would also be computed using the yield
curve. We have assumed that Mr. Brown will begin receiving his annual benefit of
$12,000 next year and will receive the same benefit for 16 years. In order to compute the
value of those future payments as a lump sum we would simply discount each period's
cash flows using interest rates drawn from the yield curve to find the present value of the
benefit in each future period. Then we sum those present values together to yield the
minimum lump sum value. In year one, for example, the interest rate drawn from the
yield curve is 2.59 percent. If the first $12,000 payment is made one year in the future its
present value would be $11,697. The present value of the payment made in year 5 would
be computed using the year 5 point on the yield curve that is 4.03 percent. Its present

value would be $9,849. In year 12, the interest rate used to compute the present value is
5.29 percent and therefore the present value of the benefit payment is $6,465. In total,
Mr. Brown's hypothetica11ump sum would·be valued at $131,035.
Distinction by Credit Rating
Under the Administration's proposal, the appropriately measured accrued
liabilities serve as the plan funding targets. The target funding level for minimum
required contributions will vary depending on the financial health of the plan sponsor.
Plans sponsored by financially healthy finns (investment grade rated) will use 100
percent of ongoing liability as their funding target. Less healthy plan sponsors (below
investment grade rated) will use 100 percent of at-risk liability as their funding target.:2
The goal of pension funding rules is to minimize benefit losses to plan
participants. When pension plans default on their obligations, the PBGe is required to
make benefit payments to plan participants subject to the guarantee limits. Ultimately, jf
plan defaults are too numerous, the insurance system will collapse and taxpayers may be
called upon to fund the pension promises. Pension plans sponsored by finns with poor
credit ratings pose the greatest risk of such defaults. Therefore, it is only natural that
pension plans with sponsors that fall into this readily observable high risk category
should have more stringent funding standards. The at-risk liability measure is an
appropriate funding target for below investment grade companies because the target
reflects the plan liabilities that would accrue as a plan heads towards termination.
The table below shows the average cumulative default rate of corporate bond
issuers as computed by Moody's Investor's Service (January 2005). This table indicates
that, over time, below investment grade firms have a substantially higher likelihood of
default than investment grade finns. The table indicates that 14.81 percent ofBa rated
fmns (just below investment grade) experience a default within 7 years, whereas only
3.12 percent of Baa rated firms (just above investment grade) experience a default within
the same period.

2 The proposal includes a detailed description of the transition rules that govern the phase in of the higher
funding target when a plan changes status ftom ongoing to at-risk. See the Treasury Blue Book for more
information at http://www.treas.gov/officesltax-policylIibrary/bluebk05.pdf.

Average Cumulative Default Rate by Credit Rating, 1970·2004
Selected Data
Years
1
3
5
7
10

15
20

Aaa
0.00
0.00
0.12

Aa
0.00
0.03
0.20

OJO

OJ7

0.63
1.22
1.54

0.61
1.38
2.44

Moody's Credit Rating
A
Baa
Ba
0.02 0.19
1.22
0.22 0.98
5.79
0.50 2.08 10.72
0.85 3.12 14.81
1.48 4.89 20.11
2.74 8.73 29.67
4.87 12.05 37.07

I!
5.81
19.51
30.48
39.45
48.64
57.72
59.11

Caa-C
22.43
46.71
59.72
68.06
76.77
78.53
78.53

Source: Moodys Investor Services, Global Credit Research, Default and Recovery Rates
of Corporate Bond Issuers, 1920-2004, January 2005.
The following chart shows that firms generally have a below investment grade
credit rating for several years prior to their plan default on pension obligations triggering
a claim on the PBGe. This shows 27 largest claims to PBGC for which the series of
S&P ratings were available. This suggests that while defaults are certainly not easily
predictable (many other plans with below investment grade credit ratings did not default),
these are clear warning signs that any responsible regulatory system should take into
account. Differentiating funding targets based on credit ratings is appropriate and the
investment gradelbelow investment grade distinction is the most useable and accurate
breakpoint.

Chart 4
Debt Ratings for 27 Large PBGC Claims

[] Below Investment Grade
10(I~.:

[]Inve$tment Grade

r---

.....-

r--

r---

.....-

I--

t--

I--

t--

.....-

r---

60~,:

50~·:

Years Prior 10

D~te

e,' Plan Terl11in.ltio)11

Source: PBGe
Accrued Benefits Funded
Under the proposal, sponsors that fall below minimum funding levels would be
required to fund up towards their appropriate target in a timely manner. Ifthe market
value of plan assets is less than the funding target for the year, the minimum required
contribution for the year would be equal to the sum of the applicable normal cost for the
year and the amortization payments for the shortfall. Amortization payments would be
required in amounts that amortize the funding shortfall over a 7-year period. The initial
amortization base is established as of the valuation date for the first plan year and is equal
to the excess, if any, of the funding target over the market value of assets as of the
valuation date. The shortfall is amortized in 7 annual level payments. For each
subsequent plan year, ifthe sum of the market value of assets and the present value of
future amortization payments is less than the funding target, that shortfall is amortized
over the following 7 years. If the sum of the market value of assets and the present value
of future amortization payments exceeds the funding target. no new amortization base
would be established for that year and the total amortization payments for the next year
would be the same as in the prior year. When, on a valuation date, the market value of
the plan's assets equals or exceeds the funding target, then the amortization charges
3
would cease and all existing amortization bases would be eliminated.

Using another example we can demonstrate how minimum contributions would
be determined under the funding proposal. Liabilities for the plan are computed over a
five-year period using the cash flows and the yield curve depicted in the graphs above.
(For simplicity, it is assumed that the yield curve interest rates remain constant over the
five-year period.) We then begin with an arbitrarily chosen level of plan underfunding to
demonstrate how the amortizations of plan deficits would work. For this example, we
simplity and assume that the interest rate charged for amortization of shortfalls is zero.
That means that a shortfall increase payment amortized over 7 years is merely the
increase divided by 7. The normal cost is also assumed to be zero to simplify the
exposition.
In year one, the plan is underfunded by $18,994. That means that the plan must
contribute a minimum of$2,713, which is the amortization payment for $18,994 over a
seven year term -- in year one and for the next six years -- unless the plan becomes fully
funded before year seven.
In year two, the plan's funding deficit is $8,000 as a result of increases in both the
value of assets and liabilities. Since this new shortfall is less than the value of future
contributions (we assume that the plan will make future contributions so their present
value effectively becomes an asset) the increase in the shortfall is zero. Under the
amortization rules no new payment is required; because the plan is still underfunded,
however, a second payment of$2,713 must be made. The amortization rule is designed
to encourage plans to fund up quickly in order to protect participants' pensions. For that
reason, the amortization payment of $2,713 is not reduced even though the plan's funded
status has improved.

3 This

description draws on the description in the Treasury Blue Book.

In year 3, the funding shortfall increases to $18,367 because the value of assets
has fallen. Because this is $4,800 more than the value of the remaining amortization
payments, a new payment of $686 is added to the existing payment of $2,713 meaning
that total contributions are $3,399 in year 3.
In year 4, because of an increase in asset values, the plans deficit falls to $9,283.
This is less than $14,968, the value of the remaining shortfall payments from year 1 and
year 3 so there is no new payment and the required contribution remains $3,399.
[n year 5, asset values rise again and the plan is now fully funded. Because the
plan no longer has a funding deficit, no minimum contribution is required and all past
amortization payments are cancelled.
Table 2
Minimum Funding Example
Year
Assets
Liabilities
Shortfall

$220,000
$238,994
$18,994

$242,000
$250,000
$8,000

$225,060
$243,427
$18,367

$236,313
$245,596
$9,283

$250,492
$247,656
$0

$16,281

$13,567
$0

$10,854
$0
4,114

$8,140
$0
3,429

Value of Remaining Year 1 Pmts.
Value of Remaining Year 2 Pmts.
Value of Remaining Year 3 Pmts.
Value of Remaining Year 4 Pmts.
Value of All Remaining Payments

Shortfall Increase

$0
$0

$16,281

$13,567

$14,968

$11,569

$18,994

$4,800

$2,713

$2,713
$0
$686

$2,713

$0
$0
$0
$0
$0

Minimum Contribution for:
Year 1 Shortfall Increase
Year 2 Shortfall Increase
Year 3Shortfall Increase
Year 4 Shortfall Increase
Year 5 Shortfall Increase
Total Minimum Contribution

$0
$686

$2,713

$3,399

Plan sponsors able to fund plans during good times
The Administration proposed reforms provide real and meaningful incentives for
plans to adequately fund their accrued pension obligations. The importance of these
mechanisms that I have described is not simply to force plans to fund-up quickly and
reduce the rate at which new obligations accrue. Their importance is also that rational,
forward looking managers will respond to these reforms by taking steps to ensure that
plans remain well funded on an ongoing basis. The Administration plan matches new
responsibilities, to more fully fund pension obligations, with new opportunities - an
enhanced ability to pre-fund obligations on a tax preferred basis.
Pension sponsors believe that their inability, under current rules, to build
sufficiently large funding swpluses during good financial times has contributed
significantly to current underfunding in the pension system. The proposal addresses this
problem directly by creating two funding cushions that, when added to the appropriate
funding target, would determine the upper funding limit for tax deductible contributions.
Every plan will be allowed to fund to at least at-risk Liability.
The first cushion is designed to allow finns to bund a sufficient surplus so that
plans do not become underfunded solely as a result of asset and liability values
fluctuations that occur over a business cycle. Plan sponsors would also be able to build a
second funding cushion that allows them to pre-fund for salary or benefit increases.

-30-

S~2300: The Honomble John W. Snow Prcpan:d Rl!nmrks to the American Bankers... P<lgc I of 3

FROM THE OFFICE OF PUBLIC AFFAIRS
March 9, 2005
JS-2300
The Honorable John W. Snow
Prepared Remarks to the American Bankers Association
March 9, 2005
Washington, DC

Thank you so much for having me here today; I hope you're having a terrific
meeting and are spending plenty of time on the Hill with your Congressional
Representatives. They need to hear from you! You're a very important part of the
free-market system that makes this great American economy so strong, and your
perspective on financial policy issues is invaluable.
No one appreciates the role you play in the American economy, and our way of life,
more than Don Ogilvie. I know he'll be leaving the ABA this spring, after 20 years of
service as your CEO.
Don, you've had a distinguished career in both the publiC and private sectors,
you've helped ABA become one of the leading associations in Washington, DC,
and I wish you all the best in your future endeavors.
Don is leaving this group on a high note in many ways. Over the past two years,
American bankers have been part of a phenomenal economic recovery and are
helping to finance terrific economic growth.
Well-timed tax cuts, combined with sound monetary policy set by the Federal
Reserve Board, have resulted in very good economic growth and, most importantly,
continual job creation. The economy has created over three million jobs since May
of 2003. And while job growtfl can never be fast enough for those looking for work,
the steady pace of job creation has been an unmistakable sign of an economy that
has recovered from very tough times, and is now expanding.
The evidence abounds: In addition to continued job growth, we've also seen new
jobless claims decline and productivity continue to expand. GDP growth for 2004
was 4.4 percent. The unemployment rate is down to 5.4 percent - lower than the
average rate of the 1970s, 1980s and 1990s. Inflation, interest rates, and mortgage
rates remain at low levels. Homeownership rates are at record highs.
The people here in this room should be very proud of those numbers. Because you
are very much a part of our country's economic recovery and strength. Whether it's
home mortgages or small-business start-up loans, you are providing the capital that
enables terrific, job-creating economic growth.
So I encourage you to keep up the good work at home. Here in Washington, DC
lawmakers need to work on keeping the path clear and solid for an economic future
that is as good, or better, than the present. To do that, we've got to keep taxes low.
We've got to keep the homeland secure - that's something you're helping with and
I'll talk more about that later. And we've got to save Social Security.
Social Security is sound for today's retirees, but the system must be fixed to keep
the promise of Social Security for our children and grandchildren, period.
The President has courageously touched the ''third rail of politics' and successfully
engendered a national dialogue on this monumental issue. His leadership has been
inspirational.

http://www.treIl9.gov/presslreleasesljs2300.htm

4/25i2005

JS-2300: The Honorable John W. Snow Prcpareu Remarks to the American Bankers... Page 2 of 3
Today. the conversation on Social Security is taking place everywhere you go.
every place you look. Over lunch counters, over breakfast and dinner tables all over
America ... the topiC is Social Security reform. It's the front page story in virtually
every newspaper. It's on the evening news. And it's there because of the President
of the United States. It's there because of the courage that he's had to directly
confront and deal with that "third rail."
We're really advancing on this issue, and ideas are coming forward. Neighbors and
co-workers are talking about it; families are talking about it; Congress is talking
about it.
We've seen a clear shift in the course of the last month or so from the question: "Is
there a problem?" to the question: "How do we fix it?"
The President has encouraged this dialogue because he wants lots of ideas on the
table; our children's future is too important for partisan politics, and an open
discussion with lots of ideas is a much better way to accomplish this goal.
President Bush has established some basic principles. He wants to preserve
benefits for current and near-retirees while saving and strengthening the system for
future generations. Specifically, Social Security will not be changed for those 55 or
older (born before 1950). For the more than 45 million Americans who are currently
receiving Social Security benefits, and those nearing retirement, benefits are secure
and will not change in any way, period.
For future generations of retirees, the President believes an awful lot of hope lies in
personal accounts - something that would allow younger workers to build a nest
egg that they own and control, something the government could never take away
from them. and that would tap into the great force of compound interest.
Einstein believed, and the President and I agree, that compound interest is one of
the most powerful forces in the universe. II's why a personal account nest egg
would have a real return on investment that is far better than the rapidly-weakening
promise of Social Security benefits.
Finally, and very importantly, the President has said he won't raise the payroll tax
rate. Payroll taxes have been raised by Congress time and time again since Social
Security was established - and it has failed make Social Security solvent. RaiSing
the payroll tax will harm our economy, hurt job growth and fail to achieve the
Presidenfs goal to create a permanent fix for Social Security. Even the most
resilient economy can be devastated by dramatic tax increases.
I know that this audience understands and appreciates what I'm saying here today.
You understand the value of ownership, and how sound investments and savings
lead to a financially independent future.
You've seen your customers improve their financial futures through the investment
and savings products you offer.
Perhaps you are even offering your customers Health Savings Accounts (HSAs)and if you aren't yet. I hope you consider it. It's something that I think has huge
market potential, and is of particular interest to your small-business customers.
HSAs are really super-charged IRAs that put patients back in charge of their health
care. They own it, they control it, they can leave it to their heirs.
It's a new option for health coverage that is good news for individuals and
employers who are struggling with their health-care costs.
One of the most common complaints we hear from consumers is that they can't find
a local bank that offers these accounts. So I am confident that the market is there
for you and that consumers are anxious for you to add this to your product line.
HSAs are a critical step toward increasing the availability and afford ability of health
insurance for all Americans. They are also helping to put individuals in charge of
their own health care ... and that's something that is good news both for the

http://wwwtr~as.gov/press/releases/js2300.htm

4/25!2005

JS-2300: The Honorable John W. Snow Prcparcd Rcmarks to the Amcricnn Bunkers... Pagc 3 of 3
American family and for the American economy as a whole.
The American economy also does well when our citizens feel a sense of safety and
stability. In short: we must be secure in order to be prosperous.
And thars why, in teday's world you, as bankers, are taking care of your customers
in a new way. In addition to providing essential financial services, you also work
with law enforcement and intelligence services every day in the war against
terrorism.
While hatred fuels the terrorist agenda, money makes it possible. That's why the
work you do, and the information you share with authorities, is a critical element in
winning the war on terror. With every battle that we win, every terrorist or
organization that we deSignate, we tighten the noose on terrorist financial networks.
I deeply appreciate the work you do in this area. I know that many of you here today
are concerned about developments related to the Bank Secrecy Act, and I'd like to
talk about that because it's important we work together on this.
Compliance with the Bank Secrecy Act is vital; we take it seriously, and information
reported by your institutions under this Act is critical to the national security of our
country and to our efforts to protect our financial system from the abuses of money
laundering and other financial crime. Your due diligence with respect to suspicious
activity makes you the gatekeepers for entry into the financial system.
We hear your concerns about the need for consistent enforcement. I want you to
know that I have asked Under Secretary Stuart Levey, Assistant Secretary Zarate
and Director Fox of the Financial Crimes Enforcement Network to fully engage the
bank supervisory agencies and the Department of Justice to ensure that the
examination and enforcement processes under the Bank Secrecy Act are fair,
consistent, and achieving the ultimate policy goals of the statute.
We have also heard and read your concerns about the ambiguities surrounding
money service businesses. Upon my request, FinCEN convened a meeting here in
Washington to begin to address issues relating to the banking of money service
businesses. These businesses are key components of a healthy financial sector.
and it is very important that they have access to banking services. This meeting
was to help develop specific regulatory guidance that will assist your institutions in
understanding this industry, its operations, the risks posed and the obligations your
industry has relating to this industry under the Bank Secrecy Act.
Again, I want to thank you for the efforts you and your institutions have made in
complying with the Bank Secrecy Act. We are aware of the efforts you are making
and the monies you are spending to ensure compliance. The financial sectorparticulaJ1y depOSitory institutions - has led the private sector in assisting in the war
against terrorism, and it is clear that you appreciate the fact that you are on the
front lines. On behalf of the President, I want to thank you for your efforts, and I
want you to know that we appreCiate your good corporate citizenship here in
Washington.
I believe that the best days lie ahead for this country ... because we are resolved to
make it so. From the war on terror to the salvation of Social Security, these are
historic times that we will look back on as triumphant. I'm proud to be working for
the President on each of these goals, and I'm looking forward to working with all of
you as we protect America from terror and continue on a path of economic growth.
Thank you again; have a great meeting.

http://www.treas.gov/pressirele.-.1.\es/js2300.htm

4i25/2005

JS-230 1: Treasury and IRS Isslle Regulations <:BR>oll Insolvent Reorganizations

Page 1 of I

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free /1(/0/)''-'' /len o/lil/'" Ri:,J(/i'I""

March 9,2005
JS-2301
Treasury and IRS Issue Regulations
on Insolvent Reorganizations
Today the Treasury Department and the Internal Revenue Service issued proposed
regulations regarding the circumstances in which an insolvent corporation may
engage in a tax-free reorganization. The proposed regulations generally provide
that a transaction can qualify as a tax-free asset reorganization only if the target
corporation transfers property with net value to the acquiring corporation. The
proposed regulations also provide similar rules for tax-free stock reorganizations,
tax-free liquidations, and tax-free incorporations.

REPORTS
•

The text of the regulations

http://wwwtr-:as.gov!prt>5;s!relcascs/js2301.htm

4/25/2005

[4830-0 I-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service

26 CFR Part 1
[REG-1633 14-03]
RIN 1545-BC88
Transactions Involving the Transfer of No Net Value
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains proposed regulations providing guidance
regarding corporate formations, reorganizations, and liquidations of insolvent
corporations. These regulations provide rules requiring the exchange (or, in the case of
section 332, a distribution) of net value for the nonrecognition rules of subchapter C to
apply to the transaction. The regulations also provide guidance on determining when and
to what extent creditors of a corporation will be treated as proprietors of the corporation
in determining whether continuity of interest is preserved in a potential reorganization.
Finally, the regulations provide guidance on whether a distribution in cancellation or
redemption of less than all of the shares one corporation owns in another corporation
satisfies the requirements of section 332. The proposed regulations affect corporations
and their shareholders.
DATES: Written and electronic comments and requests for a public hearing must be
received by (INSERT DATE 90 DAYS AFTER PUBLICATION OF THIS
DOCUMENT IN THE FEDERAL REGISTER.]

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-1633 14-03), room 5203,
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington DC 20044.
Submissions may be hand delivered Monday through Friday between the hours of 8 a.m.
to 4 p.m. to CC:PA:LPD:PR (REG-163314-03), 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(IRS and REG-l 633 14-03).
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations on
the reorganization provisions and regarding issues raised by the proposed regulations
with respect to provisions other than those related to corporate liquidations and
subchapter K, Jean Brenner, (202) 622-7790; concerning the proposed regulations on
corporate liquidations, Sean McKeever, (202) 622-7750; concerning the application of
the principles of the proposed regulations to transfers of property to partnerships under
subchapter K, Jeanne Sullivan or Michael Goldman, (202) 622-3070; concerning
submissions of comments and/or requests for a public hearing, Treena Garrett, (202) 6227180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
General Background

The IRS and the Treasury Department believe that there is a need to provide a
comprehensive set of rules addressing the application of the nonrecognition rules of
subchapter C of the Internal Revenue Code (Code) to transactions involving insolvent
corporations and to other transactions that raise similar issues. The proposed regulations
provide three sets of rules, the principal one of which is that the nonrecognition rules of

subchapter C do not apply unless there is an exchange (or, in the case of section 332, a
distribution) of net value (the "net value requirement"). The proposed regulations also
provide guidance on the circumstances in which (and the extent to which) creditors of a
corporation will be treated as proprietors of the corporation in determining whether
continuity of interest is preserved in a potential reorganization. The proposed regulations
further provide guidance on whether a distribution in cancellation or redemption of less
than all of the shares one corporation owns in another corporation satisfies the
requirements of section 332. Each of these rules is discussed separately in this preamble.
Explanation of Provisions

Exchange of Net Value Requirement
Background
In subchapter C, each of the rules described below that provides for the general
nonrecognition of gain or loss refers to a distribution in cancellation or redemption of
stock or an exchange for stock. Section 332 provides, in part, that "[n]o gain or loss shall
be recognized on the receipt by a corporation of property distributed in complete
liquidation of another corporation ... only if ... the distribution is by such other
corporation in complete cancellation or redemption of all its stock." Section 351
provides, in part, that "[n]o gain or loss shall be recognized ifproperty is transferred to a
corporation by one or more persons solely in exchange for stock in such corporation."
Section 354 provides, in part, that "[n]o gain or loss shall be recognized if stock or
securities in a corporation a party to a reorganization are ... exchanged solely for stock
or securities ... in another corporation a party to the reorganization." Finally, section
361 provides that "[n]o gain or loss shall be recognized to a corporation if such

corporation is a party to a reorganization and exchanges property ... solely for stock or
securities in another corporation a party to the reorganization."
The authorities interpreting section 332 have consistently concluded that the
language of the statute referring to a distribution in complete cancellation or redemption
of stock requires a distribution of net value. Section 1.332-2(b) provides that section 332
applies only if a parent receives at least partial payment for the stock that it owns in the
liquidating corporation. Such payment could not occur unless there were a distribution of
net value. The courts have focused in numerous cases on the effect of liabilities on the
distribution requirement of section 332. In H. G. Hill Stores. Inc. v. Commissioner, 44
B.T.A. 1182 (1941), a subsidiary liquidated and distributed its assets and liabilities to its
parent in cancellation of its indebtedness to its parent. The court interpreted the phrase
"in complete cancellation or redemption of all its stock" as requiring that a distribution be
made to the parent in its capacity as a stockholder in order for section 112(b)(6) (the
predecessor of section 332) to apply and, thus, held that section 112(b)(6)·did not apply
because the parent corporation received payment in its capacity as a creditor and not in its
capacity as a stockholder. See also Rev. Ruls. 2003-125 (2003-521.R.B. 1243), 70-489
(1970-2 c.B. 53), and 59-296 (1959-2 C.B. 87).
Rev. Rul. 59~296 holds that the principles relevant to liquidations under section
332 also apply to reorganizations under section 368. However, other authorities are not
consistent with the approach afRev. Rul. 59-296. Most notably, in Norman Scott. Inc. v.
Commissioner, 48 T.C. 598 (1967), the Tax Court held that a transaction involving an
insolvent target corporation qualified as a reorganization under section 368(a)(1)(A).
The IRS and the Treasury Department have decided to resolve the uncertainties

by generally adopting a net value requirement for each of the described nonrecognition
rules in subchapter C. The net value requirement generally requires that there be an
exchange of property for stock, or in the case of section 332, a distribution of property in
cancellation or redemption of stock. The IRS and the Treasury Department believe that
the net value requirement is the appropriate unifying standard because it is more
consistent with the statutory framework of subchapter C, case law, and published
guidance than any other approach considered. In addition, the IRS and the Treasury
Department believe that the net value requirement is the appropriate standard because
transactions that fail the requirement, that is, transfers of property in exchange for the
assumption of liabilities or in satisfaction of liabilities, resemble sales and should not
receive nonrecognition treatment.
The IRS and the Treasury Department considered several other approaches to
unify and rationalize the nonrecognition rules of subchapter C as they applied to
transactions involving insolvent corporations. The IRS and the Treasury Department
considered whether there should be special rules for potential nonrecognition transactions
between members of a consolidated group. Such rules might disregard the various
exchange requirements in the statute because of the single entity principles generally
applicable to corporations joining in the filing of a consolidated return. This approach
was rejected because there is no consolidated return policy that compels a different set of
rules for potential nonrecognition transactions between members of a consolidated group.

ef. §1. 1502-35T(t)(I); Notice 94-49 (1994-1 c.B. 358). The current intercompany
transaction rules (in particular those regarding successors in § 1.1502-13(j)) could be
modified to extend deferral of gain and loss to additional situations as long as the assets

remained in the consolidated group pending later acceleration events that befall the assets
or successor entities. However, no such rules are being proposed because the case for
treating the transferor and transferee members as a single entity seems weakest when the
group's equity investment in the transferor has been eliminated.
The IRS and the Treasury Department also considered whether satisfying the
words of the relevant statutory provisions that describe the relationship of the parties to a
transaction should be sufficient for applying the nonrecognition rules to a transaction
between the parties. This approach would essentially take the position that the words of
distribution or exchange in the statute do not state a separate requirement but merely
describe the most common form of the transaction to which the provision is intended to
apply. For example, under this approach, it would be sufficient for a transaction to
qualify as a distribution in complete liquidation under section 332 if the corporation to
which assets are transferred owned stock meeting the requirements of section 1504(a)(2)
at the time of the transfer. Also, under this approach, it would be sufficient for a
transaction to qualify as a transfer under section 351 if a transferor of assets were in
control (as defined in section 368(c» of the corporation to which assets are transferred
immediately after the transaction. However, this approach would require distinguishing,
when the structure of the statute does not, between parts of a statute that impose
requirements and other parts that do not.
Explanation of rules
Net Value Requirement

For potential liquidations under section 332, the net value requirement is effected
by the partial payment rule in § 1.332-2(b) of the current regulations. The proposed

regulations make no modifications to this rule, except, as discussed below, for
transactions in which the recipient corporation owns shares of multiple classes of stock in
the dissolving corporation. The proposed regulations also make minor changes to other
sections of the regulations under section 332 to conform those regulations to changes in
the statute.
For potential transactions under section 351, the proposed regulations add § 1.351l(a)(I)(iii)(A), which requires a surrender of net value and, in paragraph (a)(1)(iii)(B), a
receipt of net value. This rule is similar to that for potential asset reorganizations,
discussed below. The proposed regulations make minor changes to other sections of the
regulations under section 351 to conform those regulations to changes in the statute.
For potential reorganizations under section 368, the proposed regulations modify
§1.368-1 (b)( 1) to add the requirement that there be an exchange of net value. Section

1.368-1(f) of the proposed regulations sets forth the rules for determining whether there is
an exchange of net value. These rules require, in paragraph (f)(2)(i) for potential asset
reorganizations and paragraph (f)(3)(i) for potential stock reorganizations, a surrender of
net value and, in paragraph (f)(2)(ii) for potential asset reorganizations and paragraph
(f)(3)(ii) for potential stock reorganizations, a receipt of net value. In a potential asset
reorganization (one in which the target corporation would not recognize gain or loss
under section 361), the target corporation surrenders net value if the fair market value of
the property transferred by it to the acquiring corporation exceeds the sum of the amount
of liabilities of the target corporation that are assumed by the acquiring corporation and
the amount of any money and the fair market value of any property (other than stock
permitted to be received under section 36J{a) without the recognition of gain) received

by the target corporation. This rule ensures that a target corporation transfers property in
exchange for stock. The IRS and the Treasury Department believe that the proposed rule
better identifies whether a target corporation transfers property in exchange for stock than
a rule that looks to the issuance or failure to issue stock because, when the parties are
related, the issuance or failure to issue stock might be meaningless.
In a potential stock reorganization (one which would be described in section
368(a)( I)(B) or section 368(a)( I )(A) by reason of section 368(a)(2)(E», the rules are
modified to reflect the fact that the target corporation remains in existence. A potential
reorganization under section 368(a)(l )(A) by reason of section 368(a)(2)(E) must satisfy
the asset reorganization test for the merger of the controlled corporation into the target
corporation (for which test the controlled corporation is treated as the target corporation)
and the stock reorganization test for the acquisition of the target corporation.
In a potential asset reorganization, the target corporation receives net value if the
fair market value of the assets of the issuing corporation exceeds the amount of its
liabilities immediately after the exchange. This rule ensures that the target corporation
receives stock (or is deemed to receive stock under the "meaningless gesture" doctrine)
having value. This rule is necessary because the IRS and the Treasury Department
believe that the receipt of worthless stock in exchange for assets cannot be part of an
exchange for stock.
Scope of Net Value Requirement

The proposed regulations provide in § 1.368-1(b)(1) that the net value requirement
does not apply to reorganizations under section 368(a)(l)(E) and 368(a)(1)(F). The IRS
and the Treasury Department recently issued final regulations (T.D. 9182, 70 FR 9219

(Feb. 25, 2005» stating that a continuity of business enterprise and a continuity of
interest are not required for a transaction to qualify as a reorganization under section
368(a)(l)(E) or (F) because applying the requirements in those contexts is not necessary
to protect the policies underlying the reorganization provisions. Because the purpose
underlying the net value requirement is the same as that underlying the continuity of
interest requirement, the IRS and the Treasury Department have similarly concluded that
applying the net value requirement to transactions under section 368(a)(1)(E) or (F) is not
necessary to protect the policies underlying the reorganization provisions.
The proposed regulations also provide in §1.368-1(b)(l) and §1.368-1(f)(4) that
the net value requirement does not apply to a limited class of transactions that qualify as
reorganizations under section 368(a)(1)(D). That class of transactions are the
transactions exemplified by James Armour, Inc. v. Commissioner, 43 T.C. 295 (1964),
and Rev. Rul. 70-240 (1970-1 C.B. 81). The IRS and the Treasury Department
acknowledge that the conclusions of the described authorities are inconsistent with the
principles of the net value requirement. Nevertheless, the IRS and the Treasury
Department currently desire to preserve the conclusions of these authorities while they
more broadly study issues relating to acquisitive reorganizations under section
368(a)(I)(D), including the continuing vitality of various liquidation-reincorporation
authorities after the enactment of the Tax Reform Act of 1986, Public Law 99-514 (100
Stat. 2085 (1986». Consistent with the described authorities, the exception is limited to
acquisitive reorganizations of solvent target corporations. The proposed regulations
provide no specific guidance (other than in an example incorporating the facts of Rev.
Rul. 70-240 (1980-1 C.B. 81», other than with regard to the application of the net value

requirement, on when a transaction will qualify as a reorganization under section
368(a)(I)(0). In this regard, compare Armour with Warsaw Photographic Associates,
Inc. v. Commissioner, 84 T.C. 21 (1985).
Definition of Liabilities
In applying the proposed regulations, taxpayers must determine the amount of
liabilities of the target corporation that are assumed by the acquiring corporation.
Although the proposed regulations do not define the term liability, the IRS and the
Treasury Department intend that the term be interpreted broadly. Thus, for purposes of
the proposed regulations, a liability should include any obligation of a taxpayer, whether
the obligation is debt for federal income tax purposes or whether the obligation is taken
into account for the purpose of any other Code section. Generally, an obligation is
something that reduces the net worth of the obligor. The IRS and the Treasury
Department have proposed adopting a similar definition of liability for purposes of
implementing section 358(h) in subchapter K. See Prop. Reg. §1.752-I(a)(I)(ii) and
Prop. Reg. §1.752-7(b)(2)(ii) (REG-106736-00, 68 FR 37434 (June 24, 2003), 2003-28

I.R.B. 46).
Amount of Liabilities
The proposed regulations provide no specific guidance on determining the amount
ofa liability. The IRS and the Treasury Department are currently considering various
approaches to determining the amount of a liability. One approach would be to treat the
amount of a liability represented by a debt instrument as its adjusted issue price
determined under sections 1271 through 1275 of the Code (the OlD rules) (perhaps with
exceptions for certain contingent payment debt instruments) while treating the amount of

other liabilities as the value of such liabilities. Another approach would be to treat the
amount of all liabilities as the value of such liabilities. Other approaches could borrow in
whole or in part from other authorities such as those relevant to the determination of
insolvency under section 108(d)(3). One method for valuing liabilities is to detennine the
amount of cash that a willing assignor would pay to a willing assignee to assume the
liability in an arm's-length transaction. Cf. Prop. Reg. §1.752-7(b)(2)(ii).
In the course of developing these regulations, the IRS and the Treasury
Department considered special issues related to the assumption of nonrecourse liabilities
in the context ofa transaction to which section 332, 351, or 368 might apply. The IRS
and the Treasury Department are considering a rule similar to the one in Rev. Rul. 92-53
(1992-2 C.B. 48) that would disregard the amount by which a nonrecourse liability
exceeds the fair market value of the property securing the liability when determining the
amount of liabilities that are assumed. For example, under such a rule, if an individual
transfers an apartment building with a fair market value of$175x subject to a
nonrecourse obligation of $190x and an adjacent lot of land with a fair market value of
$IOx to a corporation, the transferor will have surrendered net value because the fair
market value of the assets transferred ($175x + $ lOx) exceeds the amount of the
liabilities assumed ($190x - $15x, the amount of the excess nonrecourse indebtedness).
Any rule disregarding excess nonrecourse indebtedness would be limited to the
application of the net value requirement and would have no relevance for other federal
income tax purposes, such as the determination of the amount realized under section
100 I. Comments are requested regarding the treatment of nonrecourse indebtedness and

the effect of such treatment when both property subject to the nonrecourse indebtedness
and other property are transferred.
Assumption of Liabilities
In general, the IRS and the Treasury Department believe that the principles of
section 357(d) should be applied to determine whether a liability is assumed when more
than one person might bear responsibility for the liability. Comments are requested
regarding whether and to what extent the principles of section 357{d) should be
incorporated into the regulations.
The IRS and the Treasury Department believe that transfers of assets in
satisfaction of liabilities should be treated the same as transfers of assets in exchange for
the assumption of liabilities. Accordingly, in determining whether there is a surrender of
net value, the proposed regulations treat any obligation of the target corporation for
which the acquiring corporation is the obligee as a liability assumed by the acquiring
corporation.
In Connection With
The proposed regulations take into account not only liabilities assumed in the
exchange, but also liabilities assumed "in connection with" the exchange. The proposed
regulations include this rule so that the timing of an acquiring corporation's assumption
of a target corporation's liability (or a creditor's discharge of a target corporation's
indebtedness), whether before an exchange, in the exchange, or after the exchange, will
have the same effect in determining whether there is a surrender of net value in the
exchange. The proposed regulations also take into account, in determining whether there
is a surrender of net value, money and other nonstock consideration received by the target

corporation in connection with the exchange.
The IRS and the Treasury Department intend that the substance-over-fonn doctrine
and other nonstatutory doctrines be used in addition to the "in connection with" rule in
detennining whether the purposes and requirements of the net value requirement are
satisfied. Cf. Rev. Rul. 68-602 (1968-2 C.B. 135) (holding that a parent corporation's
cancellation of a wholly-owned subsidiary's indebtedness to it that is an integral part of a
liquidation is transitory and, therefore, disregarded).
Section 368(a)(1 )(C)
The proposed regulations remove the statement in §1.368-2(d)(l) that the
assumption of liabilities may so alter the character of a transaction as to place the
transaction outside the purposes and assumptions of the reorganization provisions.
Because the proposed regulations provide more specific guidance regarding when the
assumption of liabilities will prevent a transaction from qualifying as a reorganization
under section 368(a)(l)(C), the IRS and the Treasury Department believe the statement is
unnecessary.
Section 721
The IRS and the Treasury Department recognize that the principles in the
proposed rules under section 351 may be applied by analogy to other Code sections that
are somewhat parallel in scope and effect, such as section 721, dealing with the
contribution of property to a partnership in exchange for a partnership interest. The IRS
and the Treasury Department request comments on whether rules similar to the rules of
the proposed regulations should be proposed in the context of subchapter K and the

considerations that might justify distinguishing the relevant provisions in subchapter K
from those provisions that are the subject of these proposed regulations.

Continuity of Interest
Background
The Code provides general nonrecognition treatment for reorganizations
described in section 368. A transaction must comply with both the statutory requirements
of the reorganization provisions and various nonstatutory requirements, including the
continuity of interest requirement, to qualify as a reorganization. See § 1.368-1 (b). The
purpose of the continuity of interest requirement is to ensure that reorganizations are
limited to readjustments of continuing interests in property under modified corporate
form and to prevent transactions that resemble sales from qualifying for nonrecognition
of gain or loss available to corporate reorganizations. See §§ 1.368-1 (b), 1.368-1 (e)( 1).
Continuity of interest requires that a substantial part of the value of the proprietary
interests in the target corporation be preserved in the reorganization. See §1.368-1(e)(I);
see also LeTulle v. Scofield, 308 U.S. 415 (1940); Helvering v. Minnesota Tea Co., 296
U.S. 378 (1935); Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U.S. 462 (1933);
Cortland Specialty Co. v. Commissioner, 60 F.2d 937 (2d Cir. 1932), cert. denied, 288
U.S. 599 (1933).
Generally, it is the shareholders who hold the proprietary interests in a
corporation. However, when a corporation is in bankruptcy, the corporation's stock may
be worthless and eliminated in the restructuring. In this case, when the corporation
engages in a potential reorganization, its creditors may receive acquiring corporation
stock in exchange for their claims and its shareholders may receive nothing. Thus,

without special rules, most potential reorganizations of corporations in bankruptcy would
fail the continuity of interest requirement. The Supreme Court addressed this problem in
Helvering v. Alabama Asphaltic Limestone Co., 315 U.S. 179 (1942), in which it held
that, for practical purposes, the old continuity of interest in the shareholders shifted to the
creditors not later than the time "when the creditors took steps to enforce their demands
against the insolvent debtor. In this case, that was the date of the institution of
bankruptcy proceedings. From that time on, they had effective command over the
property." See also Palm Springs Holding Corp. v. Commissioner, 315 U.S. 185 (1942)
(holding that the legal procedure employed by the creditors to obtain effective command
over a corporation's property was not material when the corporation was insolvent).
Notwithstanding Palm Springs, it is not clear when creditors of an insolvent corporation
not in a title 11 or similar case may be considered proprietors for purposes of satisfying
the continuity of interest requirement.
In Atlas Oil & Refining Corp. v. Commissioner, 36 T.C. 675 (1961), the court
held that only creditors who in fact receive stock in the acquiring corporation, by relation
back, can be deemed to have been equity owners at the time of the transfer. The court
stated that the fact that a more senior class of creditors may have had "effective
command" over the assets in the case will not make them proprietors if they do not in fact
exercise their right to receive stock in the acquiring corporation.
In the Bankruptcy Tax Act of 1980, Public Law 96-589 (94 Stat. 3389 (1980»,
Congress added section 368(a)(1)(G), providing for a new type of reorganization
applicable to corporations in title II or similar cases. In the legislative history to that
statute, Congress stated its expectation that the courts and the Treasury Department

would determine whether the continuity of interest requirement is satisfied in a potential
reorganization under section 368(a)(1 )(G) by treating as proprietors the most senior class
of creditors who received stock, together with all interests equal and junior to them,
including shareholders. See S. Rep. No. 1035, 96th Cong., 2d Sess. 36-37 (1980). This
formulation is similar to the relation back analysis that the Tax Court used in Atlas Oil.
Explanation of provisions
The proposed regulations add new §1.368-1 (e)( 6), which describes the
circumstances in which creditors of a corporation generally, and which creditors in
particular, will be treated as holding a proprietary interest in a target corporation
immediately before a potential reorganization. In general, the proposed rules adopt the
standard for reorganizations under section 368(a)(I)(G) recommended in the Senate
Finance Committee Report to the Bankruptcy Tax. Act of 1980. The proposed regulations
also provide that creditors of an insolvent target corporation not in a title 11 or similar
case may be treated as holding a proprietary interest in the corporation even though they
take no steps to obtain effective command over the corporation's property, other than
their agreement to receive stock in the potential reorganization. The proposed
regulations, at §1.368-I(e)(6)(ii), provide specific guidance on how to quantify the
proprietary interest of the target corporation so that taxpayers may determine whether a
substantial part of the value of the proprietary interests in the target corporation is
preserved in the potential reorganization. Because a creditor of a corporation may hold
claims in more than one class, the proposed regulations generally refer to claims of a
particular class of creditors rather than to creditors in a particular class.

The proposed regulations treat claims of the most senior class of creditors to
receive a proprietary interest in the issuing corporation and claims of all equal classes of
creditors (together, the senior claims) differently from the claims of classes of creditors
junior to the senior claims (the junior claims). The proposed regulations treat senior
claims as representing, in part, a creditor claim against the corporation, and, in part, a
proprietary interest in the corporation. This rule mitigates the adverse effect on
continuity of interest of senior creditors seeking payment primarily in nonstock
consideration while still taking some payment in shares of stock of the acquiring
corporation. The determination of what part of a senior claim is a proprietary interest in
the target corporation is made by calculating the average treatment for all senior claims.
Thus, the proposed regulations, at §1.368-1(e)(2)(ii)(B), provide that the value ofa
proprietary interest in the target corporation represented by a senior claim is determined
by multiplying the fair market value of the creditor's claim by a fraction, the numerator
of which is the fair market value of the proprietary interests in the issuing corporation
that are received in the aggregate in exchange for the senior claims, and the denominator
of which is the sum of the amount of money and the fair market value of all other
consideration (including the proprietary interests in the issuing corporation) received in
the aggregate in exchange for such claims. The effect of this rule is that there is 100
percent continuity of interest if each senior claim is satisfied with the same ratio of stock
to nonstock consideration and no junior claim is satisfied with non stock consideration.
The proposed regulations, at §1.368-1(e)(6)(ii)(A), provide that the entire amount
of a junior claim represents a proprietary interest in the target corporation immediately
before the potential reorganization. Thus, the value of the proprietary interest represented

by that claim is the fair market value of the claim (which value is generally determined
by reference to the amount of money and the fair market value of the consideration
received in exchange therefor).
The rules in the proposed regulations are intended to work in conjunction with the
current continuity of interest rules. Accordingly, the proposed regulations modify
§1.368-1 (e)(1)(ii), relating to the effect on continuity of interest of distributions or

redemptions before a potential reorganization, and §1.368-1 (e)(2), relating to the effect
on continuity of interest of acquisitions of proprietary interests by persons related to the
issuing corporation, to ensure that the purpose of these rules is effected when creditors'
claims represent the proprietary interests in the target corporation.
Section 332
Background

Section 332 requires that a subsidiary'S liquidating distribution to its parent
corporation be in complete cancellation or redemption of all its stock. In Spaulding
Bakeries. Inc. v. Commissioner, 252 F.2d 693 (2d Cir. 1958), aff'g 27 T.C. 684 (1957),
the Second Circuit concluded that for a distribution to be made in cancellation or
redemption of "all the stock," payment must be made on each class of stock. See also H.
K. Porter Co. v. Commissioner, 87 T.C. 689 (1986).
Explanation of provisions
The current regulations provide that section 332 applies only to those cases in
which the recipient corporation receives at least partial payment for the stock that it owns
in the liquidating corporation. The proposed regulations clarify that section 332 applies
only to those cases in which the recipient corporation receives at least partial payment for

each class of stock that it owns in the liquidating corporation, an interpretation consistent
with the Second Circuit's holding in Spaulding Bakeries and the Tax Court's holding in
H. K. Porter. The IRS and the Treasury Department have adopted this approach because
they believe that it is appropriate for a taxpayer to recognize loss when it fails to receive a
distribution on a class of stock in liquidation of its subsidiary. The recipient corporation
would recognize such a loss if the distribution qualified as a reorganization.
The proposed regulations also confirm that when the liquidation fails to qualify
under section 332 because the recipient corporation did not receive at least partial
payment for each class of stock but did receive at least partial payment for at least one
class of stock, the transaction may qualify as a corporate reorganization under section
368.
Proposed Effective Date
These proposed regulations will apply to transactions that occur after the date they
are published as final regulations in the Federal Register.
Special Analyses
It has been determined that this notice of proposed rulemaking is not a significant

regulatory action as defined in Executive Order 12866. Therefore, a regulatory
assessment is not required. It has also been determined that section 553(b) of the
Administrative Procedures Act (5 U.S.C. chapter 5) does not apply to these proposed
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 Internal Revenue Code, this notice of proposed

rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.
Comments and Requests for Public Hearing
Before these proposed regulations are adopted as final regulations, consideration
will be given to any written comments (a signed original and 8 copies) or comments
transmitted via Internet that are submitted timely to the IRS. The IRS and the Treasury
Department request comments on the clarity of the proposed rules and how they can be
made easier to understand. All comments will be available for public inspection and
copying. A public hearing will be scheduled if requested in writing by any person that
timely submits written comments. Ifa public hearing is scheduled, notice of the date,
time, and place for the public hearing will be published in the Federal Register.
Drafting Information
The principal authors of these proposed regulations are Jean Brenner and Sean
McKeever ofthe Office of Associate Chief Counsel (Corporate). However, other
personnel from the IRS and the 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 1 - - INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by revising the entry for
"Section 1.351-1" to read, in part, as follows:
Authority: 26 U.S.C. 7805

***

Section 1.351-1 also issued under 26 U.S.c. 351.

***

Par. 2. Section 1.332-2 is amended by:
1. Revising the first sentence of paragraph (a).
2. Revising paragraph (b).
3. Revising the heading of the Example in paragraph (e).
4. Adding Example 2 to paragraph (e).
The revisions and addition read as follows:
§ 1.332-2 Requirements for nonrecognition of gain or loss.

(a) The nonrecognition of gain or loss is limited to the receipt of property by a
corporation that is the actual owner of stock (in the liquidating corporation) meeting the
requirements of section 1504(a)(2).

***

(b) Section 332 applies only when the recipient corporation receives at least
partial payment for each class of stock that it owns in the liquidating corporation. If
section 332 does not apply, see section 165(g) regarding the allowance oflosses for
worthless securities for a class of stock for which no payment is received. Further, if
section 332 does not apply and the recipient corporation receives partial payment for at
least one class of stock that it owns in the liquidating corporation, see section 368(a)( 1)
regarding potential qualification of the distribution as a reorganization. If section 332
does not apply and the distribution does not quality as a reorganization, see section 331
for those classes of stock for which partial payment is received.

*****
(e) * * *

Example I.

***

Example 2. P Corporation owns all of the outstanding preferred and common
stock ofQ Corporation. The preferred stock is not stock described in section 1504(a)(4).
The fair market value of Q Corporation's assets exceeds the amount of its liabilities but
does not exceed the liquidation preference on the Q Corporation's preferred stock. Q
Corporation liquidates and distributes all of its assets to P Corporation. P Corporation
receives partial payment for its Q Corporation preferred stock but receives nothing for its
Q Corporation common stock. The receipt by P Corporation of the properties of Q
Corporation is not a distribution received by P Corporation in complete liquidation of Q
Corporation within the meaning of section 332. Thus, under section 165(g), P
Corporation is entitled to a worthless security deduction for its Q Corporation common
stock. The transaction may qualify as a reorganization under section 368(a)(1)(C). If the
transaction does not qualify as a reorganization, P Corporation will recognize gain or loss
on its Q Corporation preferred stock under section 331.
Par. 3. Section 1.351-1 is amended by:
1. Revising the first sentence of paragraph (a)(l) introductory text.
2. Adding a sentence after the last sentence in paragraph (a)(l) introductory text
and revising the phrase "For the purposes ofthis section" at the end of paragraph (a)(l)
introductory text.
3. Revising paragraphs (a)(l)(i) and (a)(l)(ii).
4. Removing the concluding text immediately following paragraph (a)(I)(ii).
5. Adding paragraphs (a)(I)(iii) and (a)(I)(iv).
6. Adding Example 4 at the end of paragraph (a)(2).
7. Revising paragraph (b)(l).
The revisions, removal, and additions read as follows:
§ 1.351-1

Transfer to corporation controlled by transferor.

(a)(l) Section 351(a) provides, in general, for the nonrecognition of gain or loss
upon the transfer by one or more persons of property to a corporation solely in exchange
for stock of such corporation if, immediately after the exchange, such person or persons
are in control of the corporation to which the property was transferred.

* * * For

purposes of this section, stock rights and stock warrants are not included in the term
stock. In addition, for purposes of this section -(i) Stock will not be treated as issued for property if it is issued for services
rendered or to be rendered to or for the benefit of the issuing corporation;
(ii) Stock will not be treated as issued for property if it is issued for property

which is of relatively small value in comparison to the value of the stock already owned
(or to be received for services) by the person who transferred such property and the
pr~mary purpose

of the transfer is to qualify under this section the exchanges of property

by other persons transferring property; and
(iii) Stock will not be treated as issued for property if either -(A) The fair market value of the transferred property does not exceed the
,sum of the amount of liabilities of the transferor that are assumed by the
transferee in connection with the transfer and the amount of any money and the
fair market value of any other property (other than stock permitted to be received
under section 351 (a) without the recognition of gain) received by the transferor in
connection with the transfer. For this purpose, any obligation of the transferor for
which the transferee is the obligee that is extinguished for federal income tax
purposes in connection with the transfer is treated as a liability assumed by the
transferee; or

(B) The fair market value of the assets of the transferee does not exceed the
amount of its liabilities immediately after the transfer;
(iv) Paragraph (a)(1)(iii) of this section applies to transfers occurring after the date
these proposed regulations are published as final regulations in the Federal Register.

(2) '" • '"

**"'''' *
Example 4. A, an individual, transfers an apartment building with a fair market
value of $17Sx to Corporation X. The building is subject to a nonrecourse obligation of
$190x and no other asset is subject to that liability. A receives 10 shares of Corporation
X stock in the exchange. Immediately after the exchange, Corporation X is solvent and
A owns 100% of its outstanding stock. Under paragraph (a)(l)(iii) of this section, the 10
shares of Corporation X stock received by A will not be treated as issued for property
because the fair market value of the apartment building does not exceed the amount of
A's liabilities assumed by Corporation X. Therefore, section 351 does not apply to the
exchange.

. ..

'" '"

(b)( 1) When property is transferred to a corporation by two or more persons in
exchange for stock, as described in paragraph (a) of this section, and the stock received is
received in disproportion to the transferor's prior interest in such property, the entire
transaction will be given tax effect in accordance with its true nature, and the transaction
may be treated as if the stock had first been received in proportion and then some of such
stock had been used to make gifts (section 2501 et seq.), to pay compensation (sections
61 (a){l ) and 83(a», or to satisfy obligations of the transferor of any kind.

**"'.'"
Par. 4. Section 1.368-1 is amended by:
1. Removing the last sentence of paragraph (a).
2. Redesignating paragraph (b) as paragraph (b)(I).
3. Removing the third sentence of paragraph (b)(l) and adding two sentences in
its place.
4. Removing the seventh sentence of paragraph (b)(1).
5. Adding paragraph (b)(2).

6. Adding a sentence after the fifth sentence of paragraph (e)(l)(i).
7. Adding a sentence at the end of paragraph (e)( 1)(ii).
8. Revising the text of paragraph (e)(2).
9. Redesignating paragraphs (e)(6) and (e)(7) as paragraphs (e)(7) and (e)(8),
respectively, and adding a new paragraph (e)(6).
10. Adding Example 10 to the end of paragraph (e)(7).
11. Adding a sentence at the end of paragraph (e)(8).
12. Adding paragraph (t).
The additions and revisions read as follows:
§ 1.368-1

Purpose and scope of exception to reorganization exchanges.

*****
(b)( 1) * * * Requisite to a reorganization under the Internal Revenue Code are a
continuity of business enterprise through the issuing corporation under the modified
corporate form as described in paragraph (d) of this section, a continuity of interest as
described in paragraph (e) of this section (except as provided in section 368(a)(l)(D»,
and an exchange of net value as described in paragraph (t) of this section.
Notwithstanding the requirements of this paragraph (b)(I), an exchange of net value is
not required for a transaction to qualify as a reorganization under section 368(a)(l)(E) or
(F) and, to the extent provided in paragraph (t)(4), for a transaction to qualify as a
reorganization under section 368(a)(1)(D).

***

(2) Effective dates. The third and fourth sentences of paragraph (b)(l) of this
section apply to transactions occurring after the date these proposed regulations are
published as final regulations in the Federal Register. The fifth and sixth sentences

apply to transactions occurring after January 28, 1998, except that they do not apply to
any transaction occurring pursuant to a written agreement which is binding on January
28, 1998, and at all times thereafter.

*****
(e)

***

(1)

***

(i) * * * See paragraph (e)(6) of this section for rules related to when a creditor's
claim against a target corporation is a proprietary interest in the corporation.

***

(ii) * * * A proprietary interest in the target corporation is not preserved to the
extent that creditors (or former creditors) of the target corporation that own a proprietary
interest in the corporation under paragraph (e)(6) of this section (or would be so treated if
they had received the consideration in the potential reorganization) receive payment for
the claim prior to the potential reorganization.
(2) * * * A proprietary interest in the target corporation is not preserved if, in
connection with a potential reorganization, a person related (as defined in paragraph
(e)(3) of this section) to the issuing corporation acquires either a proprietary interest in
the target corporation or stock of the issuing corporation that was furnished in exchange
for a proprietary interest in the target corporation for consideration other than stock of the
issuing corporation. The preceding sentence does not apply to the extent those persons
who were the direct or indirect owners of the target corporation prior to the potential
reorganization maintain a direct or indirect proprietary interest in the issuing corporation.

*****

(6) Creditors' claims as proprietary interests--(i) In general. A creditor's claim
against a target corporation may be a proprietary interest in the target corporation if the
. target corporation is in a title 11 or similar case (as defined in section 368(a)(3» or the
amount of the target corporation's liabilities exceeds the fair market value of its assets
immediately prior to the potential reorganization. In such cases, if any creditor receives a
proprietary interest in the issuing corporation in exchange for its claim, every claim of
that class of creditors and every claim of all equal and junior classes of creditors (in
addition to the claims of shareholders) is a proprietary interest in the target corporation
immediately prior to the potential reorganization.
(ii) Value of proprietary interest--(A) In general. Generally, if a creditor's claim
is a proprietary interest in the target corporation, the value of the proprietary interest is
the fair market value of the creditor's claim.
(B) Claims of creditors of most senior classes. For a claim of the most senior
class of creditors receiving a proprietary interest in the issuing corporation and a claim of
any equal class of creditors, the value of the proprietary interest in the target corporation
represented by the claim is determined by multiplying the fair market value of the claim
by a fraction, the numerator of which is the fair market value of the proprietary interests
in the issuing corporation that are received in the aggregate in exchange for the claims of
those classes of creditors, and the denominator of which is the sum of the amount of
money and the fair market value of all other consideration (including the proprietary
interests in the issuing corporation) received in the aggregate in exchange for such
claims.

(iii) Bifurcated claims. If a creditor's claim is bifurcated into a secured claim and
an unsecured claim pursuant to an order in a title II or similar case (as defined in section
368(a)(3» or pursuant to an agreement between the creditor and the debtor, the
bifurcation of the claim and the allocation of consideration to each of the resulting claims
will be respected in applying the rules of this paragraph (e)(6).
(iv) Effect of treating creditors as proprietors. The treatment ofa creditor's claim
as a proprietary interest in the target corporation shall not preclude treating shares of the
target corporation as proprietary interests in the target corporation.
(7) .........

...............
Example 10. Creditors treated as owning a proprietary interest. T has assets with
a fair market value of $150x and liabilities of $200x. T has two classes of creditors, the
senior creditors with claims of $50x, and the junior creditors with claims of $150x. T
transfers all of its assets to P in exchange for $95x and shares of P stock with a fair
market value of $55x. The T senior creditors receive in the aggregate $40x and P stock
with a fair market value of $1 Ox in exchange for their claims. Each T senior creditor
receives stock and non stock consideration in the same proportion. The T junior creditors
receive $55x and Pstock with a fair market value of $45x in exchange for their claims.
The T shareholders receive no consideration in exchange for their T stock. Under
paragraph (e)(6) of this section, because the amount ofT's liabilities exceeds the fair
market value of its assets immediately prior to the potential reorganization, the claims of
the creditors ofT may be proprietary interests in T. Because the senior creditors receive
proprietary interests in P in the transaction in exchange for their claims, their claims and
the claims of the junior creditors and the T shareholders are treated as proprietary
interests in T immediately prior to the transaction. Under paragraph (e)(6)(ii) ofthis
section, the value of the senior creditors' proprietary interests in Tis $10x, the value of
the proprietary interests in P that they received in exchange for their claims. In addition,
the value of the junior creditors' proprietary interests in T immediately prior to the
transaction is $lOOx, the value of their claims. Because P is treated as acquiring 50
percent of the value of the proprietary interests in T in exchange for P stock
($55x1$llOx), a substantial part of the value ofthe proprietary interests in T is preserved.
Therefore, the continuity of interest requirement is satisfied.
(8) ......... The sixth sentence of paragraph (e)(I)(i) of this section, the last sentence
of paragraph (e)(l)(ii) of this section, paragraph (e)(2) ofthis section, paragraph (e)(6) of

this section, and Example 10 of paragraph (e)(7) of this section apply to transactions
occurring after the date these proposed regulations are published as final regulations in
the Federal Register.
(f) Exchanges of net value--( I) General rule. An exchange of net value requires

that there be both a surrender of net value and a receipt of net value. Whether there is a
surrender of net value is determined by reference to the assets and liabilities of the target
corporation. Whether there is a receipt of net value is determined by reference to the
assets and liabilities of the issuing corporation (as defined in paragraph (b) of this
section). The purpose of the exchange of net value requirement is to prevent transactions
that resemble sales (including transfers of assets in satisfaction of liabilities) from
qualifying for nonrecognition of gain or loss available to corporate reorganizations.
(2) Asset transactions. There is an exchange of net value in a potential
reorganization to which section 361 would apply only if-(i) Surrender of net value. The fair market value of the property transferred by the
target corporation to the acquiring corporation exceeds the sum of the amount of
liabilities of the target corporation that are assumed by the acquiring corporation in
connection with the exchange and the amount of any money and the fair market value of
any other property (other than stock permitted to be received under section 361(a)
without the recognition of gain) received by the target corporation in connection with the
exchange. For this purpose, any obligation of the target corporation for which the
acquiring corporation is the obligee that is extinguished for federal income tax purposes
in connection with the exchange is treated as a liability assumed by the acquiring
corporation; and

(ii) Receipt of net value. The fair market value of the assets ofthe issuing

corporation exceeds the amount of its liabilities immediately after the exchange.
(3) Stock transactions. There is an exchange of net value in a potential
reorganization under section 368(a)( 1)(B) or section 368(a)(1 )(A) by reason of section
368(a)(2)(E) only if -(i) Surrender of net value. The fair market value of the assets of the target
corporation exceeds the sum of the amount of the liabilities of the target corporation
immediately prior to the exchange and the amount of any money and the fair market
value of any other property (other than stock permitted to be received under section 354
without the recognition of gain and nonqualified preferred stock within the meaning of
section 35 1(g» received by the shareholders of the target corporation in connection with
the exchange. For this purpose, assets of the target corporation that are not held
immediately after the exchange and liabilities of the target corporation that are
extinguished for federal income tax purposes in the exchange other than ones, if any, to
the corporation into which the target corporation merges in the case of a potential
reorganization under section 368(a)(I)(A) by reason of section 368(a)(2)(E) are
disregarded; and
(ii) Receipt of net value. The fair market value of the assets of the issuing
corporation exceeds the amount of its liabilities immediately after the exchange.
(4) Exception. The requirement that there be an exchange of net value does not
apply to a transaction that would otherwise qualify as a reorganization under section
368(a)(1)(D) by reason of section 354 or so much of section 356 as relates to section 354,
provided that the fair market value of the property transferred to the acquiring

corporation by the target corporation exceeds the amount of liabilities of the target
corporation immediately before the exchange (including any liabilities cancelled,
extinguished, or assumed in connection with the exchange), and the fair market value of
the assets of the acquiring corporation equals or exceeds the amount of its liabilities
immediately after the exchange.
(5) Examples. For purposes of the examples in this paragraph (t)(S), each ofP, S,
and T is a corporation; all corporations have only one class of stock outstanding; A, B, C,
and D are individuals; and the transaction is not otherwise subject to recharacterization.
Except as otherwise provided, no person is related to any other person and the fair market
value of the assets of each corporation exceeds the amount of its liabilities immediately
prior to the transaction described in the example. The following examples illustrate the
application of this paragraph (t).
Example I. T has assets with a fair market value of $SOx and liabilities of $7Sx,
all of which are owed to A. T transfers all of its assets to S in exchange for S stock with
a fair market value of $SOx. T distributes the S stock to A in exchange for the T debt
owed to A. T dissolves. T's shareholders receive nothing in exchange for their T stock.
Under paragraph (f)(2)(i) of this section, T surrenders net value because the fair market
value of the property transferred by T ($SOx) exceeds the sum of the amount of liabilities
that are assumed by S in connection with the exchange ($Ox) and the amount of any
money and the fair market value of any other property (other than stock permitted to be
received under section 361 (a) without the recognition of gain) received by T in
connection with the exchange ($Ox). In addition, under paragraph (t)(2)(ii) of this
section, T receives net value because the fair market value of the assets of S exceeds the
amount of its liabilities immediately after the exchange. Therefore, under paragraph (f)
of this section, there is an exchange of net value.
Example 2. P owns all of the stock of both Sand T. T has assets with a fair
market value of$100x and liabilities of$160x, all of which are owed to P. T transfers all
of its assets to S in exchange for S stock with a fair market value of $1 OOx. T distributes
the S stock to P in exchange for the T debt owed to P. T dissolves. P receives nothing in
exchange for its T stock. Under paragraph (t)(2)(i) of this section, T surrenders net value
because the fair market value ofthe property transferred by T ($100x) exceeds the sum of
the amount ofliabilities ofT assumed by S in connection with the exchange (SOx) and the
amount of any money and the fair market value of any other property (other than stock

permitted to be received under section 361(a) without the recognition of gain) received
by T in connection with the exchange ($Ox). In addition, under paragraph (t)(2)(ii) of
this section, T receives net value because the fair market value of the assets of S exceeds
the amount of its liabilities immediately after the exchange. Therefore, under paragraph
(t) ofthis section, there is an exchange of net value. The result would be the same ifno S
stock were issued.
Example 3. The facts are the same as in Example 2, except that 1's debt is owed
to B. T transfers all of its assets to S in exchange for the assumption ofT's liabilities. T
dissolves. The obligation to B is outstanding immediately after the transfer. P receives
nothing in exchange for its T stock. Under paragraph (t)(2)(i) of this section, T does not
surrender net value because the fair market value of the property transferred by T ($100x)
does not exceed the sum of the amount of liabilities of T assumed by S in connection
with the exchange ($160x). Therefore, under paragraph (t) of this section, there is no
exchange of net value. The result would be the same if S stock were issued.
Example 4. The facts are the same as in Example 3, except that S first assumes
the T debt owed to B and subsequently T transfers all of its assets to S in exchange for S
stock with a fair market value of $1 OOx. If S' s assumption of the T debt is made in
connection with the subsequent transfer ofT assets to S, under paragraph (t)(2)(i) of this
section, T does not surrender net value because the fair market value of the property
transferred by T ($ 1OOx) does not exceed the sum of the amount of liabilities ofT
assumed by S in connection with the exchange ($160x). Therefore, under paragraph (t)
of this section, there is no exchange of net value.
Example 5. P owns 70% of the stock of T. A owns the remaining 30% of the
stock of T. T has assets with a fair market value of $1 OOx and liabilities of $160x, all of
which are owed to P. T merges into P. A receives nothing in exchange for its T stock.
Under (t)(2)(i) of this section, even though T's obligation to P is extinguished in the
transaction, it is treated as a liability assumed by P. Thus, under paragraph (t)(2)(i) of
this section, T does not surrender net value because the fair market value of the property
transferred by T ($100x) does not exceed the sum of the amount ofliabilities ofT
assumed by P in connection with the exchange ($160x). Therefore, under paragraph (t)
of this section, there is no exchange of net value.
Example 6. A owns all of the stock of S. S has assets with a fair market value of
$200x and liabilities of$500x, all of which are owed to T. The S debt has a fair market
value of $200x. In addition to the S debt, T has other assets that have a fair market value
of $700x. T has no liabilities. T transfers all of its assets to S in exchange for S stock
with a fair market value of $900x. T distributes the S stock to its shareholders in
exchange for their T stock. T dissolves. S cancels all of its stock held by its shareholders
immediately prior to the exchange. Under paragraph (t)(2)(i) of this section, T surrenders
net value because the fair market value of the property transferred by T ($900x) exceeds
the sum of the amount of liabilities of T assumed by S in connection with the exchange
($Ox) and the amount of any money and the fair market value of any other property (other
than stock permitted to be received under section 361(a) without the recognition of gain)

received by T in connection with the exchange ($Ox). In addition, under paragraph
(f)(2)(ii) of this section, T receives net value because the fair market value of the assets of
S ($900x) exceeds the amount of the liabilities of S ($Ox) immediately after the
exchange. Therefore, under paragraph (f) of this section, there is an exchange of net
value.
Example 7. P owns all of the stock of S. T has assets with a fair market value of
$300x and liabilities of $650x, $SOOX of which are owed to P and $ISOx of which are
owed to A. T merges into S. In the merger, P stock is issued to A in satisfaction of the
debt owed to A by T. Also in the merger, P contributes to the capital ofT the debt Pis
owed. Assume the merger would qualify as a reorganization under section 368(a)(l)(A)
by reason of section 368(a)(2)(0) ifthe exchange of net value requirement in paragraph
(f)(l) of this section did not apply. Whether there is a surrender of net value is
determined by reference to the actual merger of T into S. Thus, T surrenders net value
because the fair market value of the property transferred by T ($300x) exceeds the sum of
the amount ofliabilities ofT assumed by S in connection with the exchange (SOx) and the
amount of any money and the fair market value of any other property (other than stock
permitted to be received under section 361(a) without the recognition of gain) received
by T in connection with the exchange ($Ox). Whether there is a receipt of net value is
determined by reference to the issuing corporation, in this case, P. T receives net value
because the fair market value of the assets of P exceeds the amount of the liabilities of P
immediately after the exchange. Therefore, under paragraph (f) of this section, there is
an exchange of net value.
Example 8. P owns all of the stock of both Sand T. T transfers all of its assets to
S in exchange for $34x, the assets' fair market value. Following this transfer, T pays its
debts of $2x and dissolves, distributing the remaining $32x to P. Assume the transaction
would qualify as a reorganization under section 368(a)(1)(0) by reason of section 354 or
so much of section 356 as relates to section 354 if the net value requirement in paragraph
(f)(l) of this section did not apply. Under paragraph (f)(2) ofthis section, there is no
exchange of net value because the fair market value of the property transferred by T
($34x) does not exceed the amount of money received by T in connection with the
exchange ($34x). However, under paragraph (f)(4) of this section, because the
transaction would otherwise qualify as a reorganization under section 368(a)(1)(0) and
the other requirements of paragraph (f)(4) of this section are satisfied, the exchange of net
value requirement does not apply. Accordingly, the transaction qualifies as a
reorganization under section 368(a)(I)(0).
Example 9. A and B own all of the stock of T. T has assets with a fair market
value of$SOOx and liabilities of$900x, all of which are owed to C and D, security
holders ofT. P acquires all ofthe stock and securities ofT in exchange for P voting
stock. In the transaction, A and B receive nothing in exchange for their stock ofT. C
and D exchange all of their securities ofT for stock ofP. Under paragraph (f)(3)(i) of
this section, there is a surrender of net value because the fair market value of the assets of
T held immediately prior to the exchange that are held immediately after the exchange
($500x) exceeds the sum of the amount of liabilities ofT immediately prior to the

exchange ($Ox, disregarding the liabilities of $900x extinguished in the exchange) and
the amount of any money and the fair market value of any other property (other than
stock permitted to be received under section 354 without the recognition of gain and
nonqualified preferred stock within the meaning of section 351 (g» received by the
shareholders ofT ($Ox). In addition, under paragraph (f)(3)(ii) of this section, there is a
receipt of net value because the fair market value of the assets of P exceeds the amount of
the liabilities ofP immediately after the exchange. Therefore, under paragraph (f) of this
section, there is an exchange of net value.
Example 10. A and B own all of the stock ofP, and C and D own all ofthe stock
ofT. P has assets with a fair market value of$400x and liabilities of$500x, and T has
assets with a fair market value of $1 OOOx and liabilities of $600x. P acquires all of the
stock ofT. C and D exchange all of their T stock, with a fair market value of$400x, for
P stock with a fair market value of $3 OOx' immediately after the transaction. P cancels all
ofthe stock held by A and B immediately prior to the exchange. Under paragraph
(f)(3)(i) of this section, there is a surrender of net value because the fair market value of
the assets ofT held immediately prior to the exchange that are held immediately after the
exchange ($lOOOx) exceeds the amount ofliabilities ofT ($600x) immediately prior to
the exchange and the amount of any money and the fair market value of any other
property (other than stock permitted to be received under section 354 without the
recognition of gain and nonqualified preferred stoc~ within the meaning of section
351 (g» received by the shareholders ofT ($Ox). In addition, under paragraph (f)(3)(ii) of
this section, there is a receipt of net value because the fair market value of the assets of P
($800x), which includes the fair market value of the stock ofT, exceeds the amount of its
liabilities ($500x) immediately after the exchange. Therefore, under paragraph (f) of this
section, there is an exchange of net value. To the extent that C and D surrender T stock
with a value in excess of the value of the P stock they receive, the tax consequences of
the surrender of the additional stock are determined based on the facts and circumstances.
(6) Effective date. This paragraph (f) applies to transactions occurring after the
date these proposed regulations are published as final regulations in the Federal
Register.
Par. 5. Section 1.368-2 is amended by revising paragraph (d)(l) to read as
follows:
§1.368-2 Definition of terms.

*****
(d)

***

(1)( i) One corporation must acquire substantially all the properties of another
corporation solely in exchange for all or part of its own voting stock, or solely in
exchange for all or a part of the voting stock of a corporation which is in control of the
acquiring corporation. For example, Corporation P owns all the stock of Corporation A.
All the properties of Corporation Ware transferred to Corporation A either solely in
exchange for voting stock of Corporation P or solely in exchange for less than 80 percent
of the voting stock of Corporation A. Either of such transactions constitutes a
reorganization under section 368(a)(1)(C). However, if the properties of Corporation W
are acquired in exchange for voting stock of both Corporation P and Corporation A, the
transaction will not constitute a reorganization under section 368(a)(I)(C). In
determining whether the exchange meets the requirement of "solely for voting stock," the
assumption by the acquiring corporation of liabilities of the transferor corporation, or the
fact that property acquired from the transferor corporation is subject to a liability, shall be
disregarded. Section 368(a)( 1)(C) does not prevent consideration of the effect of an
assumption of liabilities on the general character of the transaction but merely provides
that the requirement that the exchange be solely for voting stock is satisfied if the only
additional consideration is an assumption of liabilities.

(ii) Paragraph (d)(l)(i) of this section applies to transactions occurring after the
date these proposed regulations are published as final regulations in the Federal

'" '" '" '" '"

Deputy Commissioner for Services and
Enforcement.

JS-2302: Treasury Secretary John W. Snow Preparcu Remarks: Greater Albuqucrquc... Page I of 3

FROM THE OFFICE OF PUBLIC AFFAIRS
March 10,2005
JS-2302
Treasury Secretary John W. Snow
Prepared Remarks: Greater Albuquerque Chamber of Commerce
Albuquerque, NM
Thank you so much for having me here today. II's a pleasure to be here in this
terrific city.
Albuquerque is full of culture and heritage as well as being a fast-paced business
environment. I appreciate how much the people in this room have contributed to
making this city an awfully nice place to live, and to visit, as well as how much you
contribute to your local, state and national economies.
Being an entrepreneur and running a business, no matter how small, is what makes
the American economy tick - both locally and nationally. I appreciate that, and
President Bush appreciates that.
We know that businesses like yours create jobs. That's why the President's tax cuts
were designed with small bUSiness in mind. And those tax cuts worked. Three
million new jobs have been created since the tax cuts were enacted.
Evidence of our economic health abounds: In addition to continued job growth,
we've also seen new jobless claims decline and productivity continue to expand.
GOP growth for 2004 was 4.4 percent. The unemployment rate is down to 5.4
percent - lower than the average rate of the 1970s, 1980s and 1990s. Inflation,
interest rates, and mortgage rates remain at low levels. Homeownership rates are
at record highs.
Our economy is dynamic and resilient - the envy of the world. But of course we still
face economic challenges as a country. We need to keep taxes low and stay on this
path of economic growth and job creation. We also need to continue looking down
the field and make sure that our economy is not disrupted by things that we can
avoid - things that we can fix, today.
I'm talking about Social Security ... the fact that we have an opportunity to save a
system that is, unfortunately, unsustainable in its current form. We have a chance,
this year, to save Social Security for the sake of our children and grandchildren.
The terrific news today is that people are talking about the issue. The Presidenfs
leadership has drawn critical attention to the problem and is creating movement.
Progress, real progress, is being made.
When the President took this issue to the country in his State of the Union Address,
he said his objective was to engender a broad national dialogue to get people
talking about this issue.
He wanted Americans to talk about Social Security, and a national conversation has
begun as a direct result.
Over lunch counters. over breakfast and dinner tables all over America ... the topic
is Social Security reform. It's the front page story in virtually ellery newspaper. It's
on the evening news. And it's there because of the President of the United States.
It's there because of the courage that he's had to directly confront and deal with
what so many in political life call the "third rail."

http://wwwtr6IlS.Aov/pres.s.lreleases/is2302.htm

4125/2005

JS-2302: Trc,lslIry Secretary John W. Snow Pn:parcd Remarks: Greater Albuquerque ... Page 2 of)
The Amencan people respect leaders who call a spade a spade. The President
touched the "third rail" without fear, and now we're moving forward. Neighbors and
co-workers are talking about it; families are talking about it; Congress is talking
about it.
We've seen a clear shift in the course of the last month or so from the question: "Is
there a problem?" to the question: "How do we fix it?"
I imagine that you are talking about it with your spouse and family members, your
business partners, customers and employees. Those conversations are critical, and
I hope our meeting here today can help make them even more lively, more
productive.
First. I need to let those of you know that if you are 55 or older - raise your hand if
you're 55 or older - your Social Security benefits are solid. They will not change.
You don't need to change your retirement plan or strategy because of Social
Security reform, period.
But now I'll ask: how many of you have Children or grandchildren? Raise your
hands. It's those children and grandchildren, those young workers and future
workers, who we need to be worried about. They are the ones for whom we need to
fix this system.
This might be hard to explain to some of your relatives or neighbors, especially if
they are retired or near retirement and are worried about their benefits. The threat
to Social Security in the near future makes more sense when you look at the simple
arithmetic. Social Security has enough money now because for decades we have
had more than enough work.ers paying into the system, supporting the retirees
drawing benefits.
In 1950, there were 16 workers to support every beneficiary of Social Security - a
very comfortable ratio of those paying in versus those drawing benefits. Today
there are only 3.3 worKers supporting every beneficiary. By the time today's
youngest workers - many of you have children in that age group - turn 65. there
will only be two workers supporting each retiree.
Just three years from now, in 2008, the first baby boomers will begin to retire. In
2018,13 years from now, the government will begin to payout more in Social
Security benefits than it collects in payroll taxes. By 2042, when younger workers
begin to retire, the system will be bankrupt. Under the current system, today's 30year-Old worker will face a 27 percent benefit cut when he or she reaches normal
retirement age.
We must make Social Security better for those younger workers.
If we do not act to fix the system, the only answers available for younger
generations will be dramatically higher taxes, massive new borrowing or sudden
and severe cuts in benefits or other government programs.
And I don't think I need to tell you that dramatically higher taxes are ruinous for an
economy - even one as resilient and strong as ours. You know this because you
see what taxes do to your business. When taxes are higher, it slows you down.
When they are lower, it frees you up to do what you do best: grow and create jobs.
Furthermore, raising payroll taxes is not a permanent fix. They have been raised
some 20 times since Social Security was established - and it has failed make
Social Security solvent.
The President k.nows all of this. He knows that an increase in the payroll tax rate
doesn't fix the system and it hurts workers and job-creating small businesses like
yours. That's why he won't raise the payroll tax rate, period. He also won't leave the
problem for future generations and future presidents to deal with.
What he'd like to see, instead, for future generations is an ability to save some of
their payroll taxes, to build a nest egg that belongs to them, not to the government.
Something they could pass on to their heirs. A nest egg that would have a real
retLlrll on investment, lar better than the rapidly-weakening promise of Social

http://~.tr:as,gov/press/releases/js2302.htm

4/2512()OS

JS-2302: Treasury Secretary John W. Snow Prcpan.:d Remarks: Greater Albuquerque... Page 3 of 3
Security benefits.
Albert Einstein believed, and the President and I agree, that compound interest is
one of the most powerful forces in the universe.
With voluntary personal accounts, younger workers would have the chance to learn
about their financial choices, build a nest egg and benefit from sound long-term
investment in the free market system without disrupting the system of benefits for
today's retired beneficiaries.
For the life of me, I can't imagine why anybody would argue against young workers
having the ability to invest and build a better retirement for their future. It costs the
Social Security system nothing to do so, it will cost current and near-retirees
nothing, it gives our children and grandchildren a better retirement, and it helps our
country create a larger pool of savings. And as the president has said the
retirement security of our young people is too important for partisan politics. Why
wouldn't we do this? I have not heard one good reason not to and I can't figure out
why anybody would oppose it.
Additionally, as former Democratic Congressmen Tim Penny and Charlie Stenholm
wrote in an op-ed this week, "opposing personal accounts is not a substitute for
offering a positive solution for dealing with the challenges that face Social Security."
They went on to say, astutely, that they "believe that if Social Security were being
created from scratch today, Americans would want to include a way to help
everyone build up a nest egg." The President and I couldn't agree more.
Social Security reform that doesn't raise payroll tax rates, that protects benefits for
today's seniors, and that improves the system dramatically for our children and
grandchildren can be achieved.
We are part of an exciting moment in American history, where a President's
courageous leadership has inspired a national discussion and, I'm confident, will
lead to historic good results. I encourage you to be involved, whether it's talking
about the issue with your colleagues, with your children, or writing a letter to your
Members of Congress.
Many of you in this room may want to pass your business on to your children or
grandchildren. I know you'll want your business to be in top shape, financially, when
that time comes.
Let's make sure we do the same with Social Security. If we act now, we can make
sure that Social Security. and our economy, are on sound financial footing for our
children and grandchildren.
Thanks so much for having me here today.

http://www.tr~a6.g()v/press/reJea.ies/js2302.htm

4/25/2005

JS-2303: Statement from Secretary Snow h)\Iowing a Conversation on Social Security<B... Page I of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
March 10, 2005
JS-2303
Statement from Secretary Snow Following a Conversation on Social Security
Greater Albuquerque Chamber of Commerce
Albuquerque, NM

"II was a pleasure to talk with business leaders here in Albuquerque this morning
about reforming Social Security in a way that is fair to all generations.
The national dialogue on Social Security is terrific; it's the topic at lunch counters
and kitchen tables, college dining halls and office water coolers all over the country.
And as ideas begin to come fOfWard, it's important to remember that reform of the
Social Security system must be lasting, permanent, not just a temporary ·band-aid.'
It takes courage to do more than patch up a system that affects every citizen's life.
But irs what Americans expect of their leaders; they expect elected officials like the
President and the Congress to really solve problems, not just tinker with them.
That's why the President has said that Social Security must be put on solid financial
ground permanently, for the long haul. He believes that it would be an injustice to
the American people if Washington, DC simply put a band-aid on the problem.
Because then the whole country would be back at the starting line in a few years.
So if someone promises you a 75-year fix, I encourage you to read the fine print. In
1983 we were promised a ''75-year fix" - but 2 years later, the system was headed
out of balance again.
I know that all of you born before 1950 know that nothing changes for you. You
aren't going to be scared by ads, or misled by politicians. You know better than
anyone how important it is to have a secure retirement, and you also want what's
best for your kids and your grandkids ... which is why we welcome your ideas on
this issue.
Your generation has an awfully important opportunity. You can be the ones to usher
in a new generation of shareholders in the American Dream. Your children and
grandchildren have an opportunity you didn't have - an opportunity to own their
retirement, a nest egg they could pass on to their heirs.
The creation of voluntary personal accounts is the element that makes the
President's vision so different from a band-aid approach. They would change our
children's financial prospects and give Social Security a future that won't need
constant patching-up."

http://wwvv.treas.gov!pres.<i/releasesljs2303.htm

4f25i2005

JS-2304: Deputy Assistant Secretary Immieola Recognizes Busincss Community Inv... Page I of I

FROM THE OFFICE OF PUBLIC AFFAIRS
March 9, 2005
JS-2304

Deputy Assistant Secretary lannleola Recognizes
Business Community Involvement in Youth Financial
Education Efforts
Treasury's Deputy Assistant Secretary for Financial Education Dan /annico/a, Jr.
today addressed business and education leaders at a board meeting of the Junior
Achievement National Capital Area Office. lannicola commended the businesses
represented at the meeting for their support of finanCial education for youth through
their work with Junior Achievement in the Washington D.C., metropolitan area.
Businesses at the meeting have contributed funds to Junior Achievement and have
sent their executives into classrooms to teach lessons on business, personal
finance, economics and free enterprise.
lannicola explained to the group that business leaders are uniquely positioned to
help both young people and their own organizations by increasing the financial
literacy of America's youth. He encouraged the executives to continue their efforts
and to spread the word among their private sector peers that there is still more to
do in the effort to bring financial education to all of our young people.
"Supporting financial education is not just a nice thing for companies to do, it is a
smart thing to do. Young people with an understanding of money and business will
be better consumers and better employees and this benefits the private sector,"
said lannicola. "The companies at today's meeting understand that financial
education for young people is an investment with a good return."
Junior Achievement of the National Capital Area educates children on America's
free enterprise system. Junior Achievement is a non-profit organization dedicated to
educating young people about business, economics and free enterprise. The
organization's programs span grades K-12, with curricula deSigned to teach
elementary students about their roles as individuals, workers and consumers. and
to prepare middle and high school students for key economic and workforce issues.
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 Uteracy and Education
Commission, a group chaired by the Secretary of Treasury and composed of
representatives from 20 federal departments, agencies and commissions, which
works to improve financial literacy and education for people throughout the United
States. For more information about the Office of Financial Education
visit: www.treas.gov/financialeducation.

http://www.trea6.g(}v/pres..~releases/js2304.hlm

4/25i2005

JS-230S: The Honorable John W. Snow Preparcd Rcmarks The Independent C.. Page I ofS

FROM THE OFFICE OF PUBLIC AFFAIRS
March 11, 2005
JS-2305

The Honorable John W. Snow
Prepared Remarks

The Independent Community Bankers of America National Convention
March 11, 2005
San Antonio, TX
Thank you so much for having me here today; I hope you're having a terrific
meeting. It's great to be in San Antonio.
I've come to you with a message from the President; let me read it to you before I
begin.
I send greetings to those celebrating the 75th anniversary of the Independent
Community Bankers of America.
Our nation's economy is strong and growing because of the entrepreneurial spirit of
our citizens. For more than seven decades, ICBA has supported community banks
across our country and worked to promote excellence within the banking industry.
America's community banks encourage local development, assist small businesses,
and help individuals achieve financial stability and success.

As you celebrate this milestone, you should take pride in your accomplishments. I
applaud ICBA members for helping our citizens plan for the future and make
informed decisions about their savings. Your efforts contribute to the prosperity of
our Nation.
Laura and I send our best wishes. Signed, George W. Bush.
It's an honor to have brought you that special message.
The very first thing I want to let you know about is that, once you get back home to
your home office and computers, there is a new website you should check aut:
www.strengthcningsocialsecurity.gov.This new site just 'went live' today and is full
of great information. It's designed to help Americans understand the serious
problems that the Social Security system faces, and will provide constant updates
on the efforts of the President and the administration to achieve meaningful, lasting,
bi-partisan reform. One feature, for example, will keep a log of the trips that the
President, Vice President, I and other cabinet members are taking to talk about
Social Security with Americans like you from coast to coast.
When it comes to budgets, income and outlays, sometimes it helps to see things
presented visually. That's one of the things this site provides. It shows how our
demographics are impacting the system and rendering it unsustainable. It lays aut
the Presidenfs principles for reform as well as supplying Site visitors with a history
of Social Security, from its creation.
I'll get into the topic of Social Security mare in a moment, but want to start today by
noting that, aver the past two years, America's independent community bankers
have been part of a phenomenal economic recovery and are helping to finance
terrific economic growth. You are on the front lines, working closely with your
customers to buy a new house or perhaps grow a small business. That's important
work that has helped our economy prosper and has therefore made a real
difference in people's lives.

http://www.treas.goy/prf"-..~s./re1eases/js2305.htm

4/2512005

JS·2305: Tht: Honorable John W. Snow Preparcd Rcmarks The Independent C... Page 2 of 5
Well-timed tax cuts, combined with sound monetary policy set by the Federal
Reserve Board, led to this very good economic growth and, most importantly,
continual job creation. The economy has created over three million jobs since May
of 2003. And while job growth can never be fast enough for those looking for work,
the steady pace of job creation has been an unmistakable sign of an economy that
has recovered from very tough times, and is now expanding.
The evidence abounds: In addition to continued job growth, we've also seen new
jobless claims decline and productivity continue to expand. GDP growth for 2004
was 4.4 percent. The unemployment rate is down to 5.4 percent - lower than the
average rate of the 19705, 1980s and 1990s. Inflation, interest rates, and mortgage
rates remain at low levels. Homeownership rates are at record highs.
The people here in this room should be very proud of those numbers. Because you
are very much a part of our country's economic recovery and strength. Whether it's
home equity lines of credit or small-business start-up loans, you are providing the
capital that enables terrific, job-creating economic growth.
So I encourage you to keep up the good work at home. In Washington, DC
lawmakers need to work on keeping the path clear and solid for an economic future
that is as good, or better, than the present. To do that, we've got to keep taxes low.
We've got to keep the homeland secure - that's something you're helping with and
I'll talk more about that later. And we've got to save Social Security.
Social Security is sound for today's retirees, but the system must be fixed to keep
the promise of Social Security for our children and grandchildren, period.
The good news, the great news, is that the national dialogue on Social Security is
terrific; it's the topic at lunch counters and kitchen tables, college dining halls and
office water coolers all over the country. And as ideas begin to come forward, it's
important to remember that reform of the Social Security system must be lasting,
permanent, not just a temporary ·band-aid.'
It takes courage to do more than patch up a system that affects every citizen's life.
But it's what Americans expect of their leaders; they expect elected officials like the
President and the Congress to really solve problems, not just tinker with them.
That's why the President has said that Social Security must be put on solid financial
ground permanently, for the long haul. He believes that it would be an injustice to
the American people if Washington, DC simply put a band-aid on the problem.
Because then the whole country would be back at the starting line in a few years.
So if someone promises you a 75-year fix, I encourage you to read the fine print. In
1983 we were promised a "75-year fix" - but 2 years later, the system was headed
out of balance again.
I know that all of you born before 1950 know that nothing changes for you. You

aren't going to be scared by ads, or misled by politicians. You know better than
anyone how important it is to have a secure retirement, and you also want what's
best for your kids and your grand kids ... which is why we welcome your ideas on
this issue.
The generations of current and near-retirees have an awfully important opportunity:
to be the ones to usher in a new generation of shareholders in the American
Dream. Our children and grandchildren have an opportunity we didn't have - an
opportunity to own their retirement, a nest egg they could pass on 10 their heirs.
The creation of voluntary personal accounts is the element that makes the
President's vision so different from a band-aid approach. They would change our
children's financial prospects and give Social Security a future that won't need
constant patching-up.
It's inspiring to imagine, and inspiring that we've seen a clear shift in the course of
the last month or so from the question: "Is there a problem?" to the question: "How
do we fix it?"
And that's ttle question Americans want to hear. It's why he encouraged this

http://www.trell~.gov/press/re1e.ases/js2305.htm

4125!2005

JS-2305: The Honorable John W. Snow Pn:parcd RCl11arks Thc Independent C... Page 3 of 5
dialogue; he wants lots of ideas on the tab/e. An open discussion with lots of ideas
- not partisan politics - is the best way to accomplish the goal of securing the
financial future of our children and grandchildren
President Bush has established some basic principles. He wants a permanent
solution, as I mentioned earlier, not a band-aid.
He wants to preserve benefits for current and near-retirees while saving and
strengthening the system for future generations. Specifically, Social Security will not
be changed for those 55 or older (born before 1950). For the more than 45 million
Americans who are currently receiving Social Security benefits, and those nearing
retirement, benefits are secure and will not change in any way, period.
The President has also said that he won't raise the payroll tax rate, Payroll taxes
have oeen raised some 20 times since Social Security was established - and it has
failed to make Social Security solvent. Raising the payroll tax will harm our
economy, hurt job growth and fail to achieve the President's goal to create a
permanent fix for Social Security. Even the most resilient economy can be
devastated by dramatic tax increases.
For future generations of retirees, the President believes an awful lot of hope lies in
personal accounts - something that would allow younger workers to build a nest
egg that they own and control, something the government could never take away
from them, and that would tap into the great force of compound interest something you, as bankers, understand very well,
Albert Einstein believed, and the President and I agree, that compound interest is
one of the most powerful forces in the universe, /t's why a personal account nest
egg would have a real return on investment that is far better than the rapidlyweakening promise of Social Security benefits.
For the life of me, I can't imagine why anybody would argue against young workers
having the ability to invest and build a better retirement for their future. It costs the
Social Security system nothing to do so, it will cost current and near-retirees
nothing, it gives our children and grandchildren a better retirement, and it helps our
country create a larger pool of savings. And as the President has said, the
retirement security of our young people is too important for partisan politics, Why
wouldn't we do this? I have not heard one good reason not to and I can't figure out
why anybody would oppose it.
Furthermore, as former Democratic Congressmen Tim Penny and Charlie Stenholm
wrote in an op-ed this week, "opposing personal accounts is not a substitute for
offering a positive solution for dealing with the challenges that face Social Security."
They went on to say, astutely, that they "believe that if Social Security were being
created from scratch today, Americans would want to include a way to help
everyone build up a nest egg." The President and I couldn't agree more.
I know that this audience understands and appreciates what I'm saying here today.
You understand the value of ownership, and how sound investments and savings
lead to a financially independent future.
You've seen your customers improve their financial futures through the investment
and savings products you offer.
Perhaps you are even offering your customers Health Savings Accounts (HSAs) and if you aren't yet, I hope you consider it. /t's something that I think has huge
market potential, and is of particular interest to your small-business customers.
HSAs are really super-charged IRAs that put patients back in charge of their health
care. They own it, they control it, they can leave it to their heirs.
It's a new option for health coverage that is good news for individuals and
employers who are struggling with their health-care costs.
One of the most common observations we hear from consumers is their desire to
find a local bank that offers these accounts, So I am confident that the market is
ttlere for you arH1 that consumers are anxious for you to add this to your product

http://ww\.. •. treos.gov/presslmleases/js2305.htm

4/25/2005

JS-2305: The Honorable John W. Snow Prepared Remarks The Independent c.. Page 4 of 5
line. This is a real opportunity for you.
~SAs are a critical step toward increasing the availability and affordability of health

Ins~rance for all Amencans. They are also helping to put individuals in charge of
their own health care ... and that's something that is good news both for the
American family and for the American economy as a whole.

The :~merican economy also does well when our citizens feel a sense of safety and
stability. In short: we must be secure in order to be prosperous.
And that's why, in today's world you, as bankers, are taking care of your customers
in a new way. In addition to providing essential finanCial services, you also work
with law enforcement and intelligence services every day in the war against
terrorism.
While hatred fuels the terrorist agenda, money makes it possible. That's why the
work you do, and the information you share with authorities, is a critical element in
winning the war on terror. With every battle that we win, every terrorist or
organization that we designate, we tighten the noose on terrorist financial networks.
While terrorist groups need enormous amounts of money to train, recruit, travel and
essentially exist, September 11 th and the train bombings in Madrid taught us that
relatively small amounts of money are needed to carry out actual terrorist attacks.
That's why it is so very important that we remain constantly vigilant, attacking
tainted sources of funding while also creating systems that help prevent blood
money from moving through our banks and financial system.
I deeply appreciate the work you do in this area. I know that many of you here today
are concerned about developments related to the Bank Secrecy Act, and I'd like to
talk about that because it's important we work together on this.
Compliance with the Bank Secrecy Act is vital; we take it seriously, and information
reported by your institutions under this Act is critical to the national security of our
country and to our efforts to protect our financial system from the abuses of money
laundering and other financial crime. Your due diligence with respect to suspicious
activity makes you the gatekeepers for entry into the financial system.
We hear your concerns about the need for consistent enforcement. I want you to
know that I have asked Under Secretary Stuart Levey, Assistant Secretary Zarate
and Director Fox of the Financial Crimes Enforcement Network to fully engage the
bank supervisory agencies and the Department of Justice to ensure that the
examination and enforcement processes under the Bank Secrecy Act are fair,
conSistent, and achieving the ultimate policy goals of the statute.
We have also heard and read your concerns about the ambiguities surrounding
money service businesses. Upon my request, FinCEN convened a meeting here in
Washington to begin to address issues relating to the banking of money service
businesses. These businesses are key components of a healthy financial sector,
and it is very important that they have access to banking services. This meeting
was to help develop specific regulatory guidance that will assist your institutions in
understanding this industry. its operations, the risks posed and the obligations your
industry has relating to this industry under the Bank Secrecy Act.
Again, I want to thank you for the efforts you and your institutions have made in
complying with the Bank Secrecy Act. We are aware of the efforts you are making
and the monies you are spending to ensure compliance. The financial sectorparticularly depository institutions - has led the private sector in assisting in the war
against terrorism, and it is dear that you appreciate the fact that you are on the
front lines. On behalf of the President, I want to thank you for your efforts, and I
want you to know that we appreciate your good corporate citizenship here in
Washington.
I believe that the best days lie ahead for this country ... because we are resolved to
make it so. From the war on terror to the salvation of Social Security to the spread
of democratic values across the globe, these are historic times that we will look
back on with the great sense that America saw what needed to be done and didn't
shrink fram the challenge. I'm proud to be working for the President on each of

http://w~\~ •. tr~a8.gov/press/releases/js2305.htl11

4/25/200~

JS-230S: The Honorable John W. Snow Prcparcd Rcmarks The Independent C.. Page 5 of 5
these goals, and I'm looking forward to working with all of you as we protect
America from terror and continue on a path of economic growth.
Thank you again; have a great meeting.

http://wwwtreas.gov/press/relcascsljs2305.htm

4!25i20()5

JS-2306: Treasury Department Launches Social Security <...::BR>Wcb Silc<13R>www.Stre...

Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
March 11. 2005
JS-2306
Treasury Department Launches Social Security
Web Site
www.StrengtheningSociaISecurity.gov

SAN ANTONIO - Treasury Secretary John Snow today announced the Department
of the Treasury is launching a new web site, StrenglhenlngSoclaISecurily.gov. The
site will provide up-to-date information on the problems facing Social Security and
the Administration's efforts to permanently fix the program through bipartisan
reform.
"As I have traveled across the country these past few months, I've met people at
every stop who are asking me Questions about Social Security. 'What can we do to
improve the system for future generations? Will Social Security be there for me
when I retire? Why is the program in trouble?'" said Snow. "We are launching this
web site to provide Americans with the latest information so these questions can be
answered. They will see where Social Security stands today and what can be done
to strengthen it for the future."
The web site, www.StrengtheningSociaISeclIrity.gov, provides access to a broad
array of information including speeches by the President and his Cabinet, press
releases, and fact sheets. The site tracks Administration officials' Social Security
events and will serve as the information center for the ongoing 60 Stops in 60 Days
tour.

http://wwv... tftmfi.gov/pres:.~re1eases/js2306.htm

4!25i200S

js-2307: The Honorable Mark Warshawsky Prepan:d Remarb<br.-/Thc National New ... Page 1 of 4

FROM THE OFFICE OF PUBLIC AFFAIRS

March 11, 2005
IS-2307
The Honorable Mark Warshawsky
Prepared Remarks
The National Newspaper Association
"The Urgency for Social Security Reform in the United States"
March 11, 2005
Washington, DC

Thank you for the kind introduction. In his State of the Union address the President
said, "One of America's most important institutions - a symbol of the trust between
generations - IS also in need of wise and effective reform."
He was of course referring to Social Security. As you are aware, President Bush
has made Social Security reform a major priority of his second term. Accordingly,
we in the Administration want to formulate a reform plan that modernizes the
program, is fair and puts Social Security on a sound and sustainable financial
footing.
Today I'll explain why it is so important that responsible Social Security reform
occur now, and why one element of a successful reform plan must be personal
retirement accounts that give individuals more control over their financial futures.
There is a great new web site that all Americans can use to learn more about what I
will be talking about tOday: StrellgtheillngSoclalSecuntygov.
I have been in the economics field for 25 years researching retirement security
policies and if you had told me at any point that the solvency and reform of Social
Security would be discussed around the kitchen table, the water cooler, or in the
news everyday, I never would have believed you. Now the fact that Social Security
cash flows will start going into the red in 2018 and the trust fund will be exhausted
by 2042 is on the minds of Americans. And they want a solution. The debate has
come much further than anyone could have imagined. Now we need ideas, more
rather than less, to produce real results.
It is imperative that Social Security be reformed now well in advance of the
exhaustion of the trust fund. Why? As I'll explain in this speech, delaying reform
only reduces the options for fairly distributing the benefits of Social Security across
generations. As reform is delayed fewer generations are able to participate in a
reformed entitlement system that will close Social Security's funding gap, and,
therefore, the more severe those reforms will need to be.

It is also imperative that PRAs be part of the Social Security solution. Why? PRAs
provide individual control, ownership, and offer individuals the opportunity to build a
nest-egg that the government cannot take away. They allow individuals to partake
in the benefits of investing in the financial markets. Individual control and
ownership means that people would be free to pass any unused portion of accounts
to their heirs. But most importantly, PRAs allow effective pre-funding of Social
Security benefits. I like to characterize PRAs as Individual "Iockboxes" for Social
Security surpluses. PRAs are effective because the government can never take
that money away.
THE SIZE OF SOCIAL SECURITY'S FINANCING SHORTFALL

According to the Social Security actuary's current projections, Social Security cash
surpluses (payroll and benefit taxes less benefit payments) that last year amounted
to 1.6 percent of taxable payroll will get ever smaller after the extraordinarily large
baby boom generalion begins to retire in 2008, and will ultimately turn to deficits

_ http://ww.. r.tHlas.gov/pn~ssJreleases/js2307.htm

4125!2()05

js-2307: The Honorable

~ark

Warshawsky,hr>Prcparcd Rcmarks Thc National

~cw...

Pagc 2 of4

beginning in 2018. Starting at that time, benefits payments will have to be at least
partially financed from general revenues that initially correspond to interest
payments earned by the Trust Fund and later by redemptions of Trust Fund
balances. Under current projections, the drawdown of trust fund securities will be
complete in 2042, at which time only about three-quarters of benefits will be
payable.
Of course, full benefits could continue to be paid after 2042 if the payroll tax rate,
now 12.4 percent, were to be increased. If, for example, the system were to
operate on a pay-as-you-go basis in every year beginning in 2042, current
projections indicate that the payroll tax rate would have to rise gradually, but
steadily, to more than 19% at the end of the current 75-year projection period.
Alternatively, Social Security which has a $3.7 trillion deficit calculated over 75
years could be made solvent over the next 75 years if the payroll tax rate were
immediately increased by 1.9 percentage points (to 14.3 percent), or if all current
and future benefits were reduced by 13 percent. In either case, a large Trust Fund
would accumulate that would be exactly dissipated at the end of the 75 year .
projection period. This type of reform would therefore not make the system
permanently solvent. With each passing year, the Trustees would report an ever
larger financial imbalance as the 7S-year scoring window is moved forward to
include years with ever larger gaps between expected system costs and income.
This last observation - that reforms that make the system appear solvent when
calculated over 75 years do not make the system permanently solvent - shows that
a 75 year horizon does not fully capture the financial status of the Social Serurity
program. In fact, no finit~ period will completely embody the financial status of the
program because people pay taxes in advance of receiving benefits: at any
arbitrary cutoff date, people will have accrued benefits that have not yet been paid.
For example, the current 75 year projections include nearly all of the 2010 birth
cohort's taxes but virtually none of their benefits. In order 10 get a complete picture
of Social Security's permanent financial problem, the time horizon for calculating
income and costs must be extended to the indefinite future. Such a calculation is
provided in the 2004 Trustees Report: it is estimated there that for the entire past
and future of the program, the present value of scheduled benefits exceeds the
present value of scheduled tax income by $10.4 trillion. This is the financing gap
that program reforms must ultimately close. To put this in perspective, eliminating
the permanent deficit could be accomplished with an immediate and permanent 3.5
percentage point increase in the payroll tax rate (to 15.9 percent), or with a 22
percent reduction in all current and future benefits. In both cases, there would be
massive near-term Trust Fund accumulations.
INTERGENERATIONAL EQUITY: WHY SOCIAL SECURITY MUST BE
REFORMED NOW
These results make clear that the Social Security system is not financially viable
and must be fixed. How to close the permanent financing gap raises difficult
questions over how the net benefits of Social Security should be shared across
generations. In this context, it is important 10 recognize that the large unfunded
obligations in the system are primarily the consequence of the past system
generosity to generations that are now either dead or retired. Of course. those
ear1y generations are beyond reform's reach, so the entitlement reforms needed to
close the financing gap must fall entirely on later generations.
Viewing Social Security from the perspective of how it affects generations and
individuals explains why it is imperative that Social Security be reformed now.
Delaying reform only reduces the options for fair1y distributing the benefits of Social
Security across generations. Most people agree that it would not be fair to alter
Social Security's promises to retirees and near retirees. The longer reform is
delayed, the fewer generations that are left to participate in a reformed entitlement
system so as to close Social Security's funding gap, and the more severe those
reforms will be.
To make this point more concretely, consider a policy of closing Social Security's
permanent financing gap by immediately increasing the payroll tax rate by 3.5
percentage points. If the tax increase were instead delayed until 2042 when the
trust fund is depleted, the requisite tax increase would be 6.5 percentage points.
Clearly, I do not advocate any of these policies. My pOint is that there is no doubt
that fairness to future generations requires that action be taken now.

http://www.tr~a8.80v/pr~ss/relcases/js2307.htm

4/25!2()05

js-2307: The Honorable Murk Warsha\Vsky<br~Prcpared Rcmarks<br...>The National New ... Pagc 3 of 4
FIXING THE SYSTEM

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 has issued guiding principles for reforming Social Security.
One very important principle is that the benefits of seniors at or near retirement
should be protected, and that payroll taxes should not be increased.
Another principle is that personal retirement accounts (PRAs) should be made
available for younger workers to build a nest egg for retirement that they own and
control, and which they can pass on to their children and grandchildren.
Additionally, we must pursue the goal of a permanently sustainable system,
eschewing halfway measures that would necessitate further reforms in the future.
Personal Retirement Accounts

I would like to focus on the advantages of PRAs. PRAs provide individual control.
ownership, and offer individuals the opportunity to partake in the benefits of
investing in private-sector markets. Individual control and ownership means that
people would be free to pass the value of accounts to their heirs (bequests).
Personal accounts will provide Americans who choose to participate with an
opportunity to share in the benefits of economic growth by participating in markets
through sound investments. Personal retirement accounts will be voluntary. At any
time a worker can "opt in" by making a one-time election to put a portion of his or
her payroll taxes into a personal retirement account. A worker who chooses not to
opt in will receive traditional Social Security benefits, reformed to be permanently
sustainable.
Perhaps most importantly. the retirement security of our current young and future
workers depends on PRAs. They allow individuals to save now to help fund their
retirement incomes. In principle. that could be done with reforms that save tax
revenues in the Social Security Trust Fund. But such "saving" would almost
certainly be undone by political pressures to increase government spending and
hence produce larger deficits outside of Social Security. The only way to truly save
for our retirement and give our children and grandchildren a fair deal is with
personal accounts. Personal accounts serve as private and therefore effective
"lock boxes·. When prefunding is done using a personal account. there is no
pressure to increase government spending, because this pre-funding belongs to
individuals and does not appear on the government balance sheet as budget
surpluses.
As proposed by the President. PRAs are designed to hold down administrative
costs, encourage careful and cautious investing, and provide a reliable income for
the full length of retirement.
Centralized administration and a trim menu of investment choices will hold down
administrative costs. The PRA administration and investment options will be
modeled on the federal Thrift Savings Plan (TSP), the voluntary retirement savings
plan offered to members of Congress and other federal employees. TSP offers
benefits and features comparable to those available to private sector employees in
401 (k) retiremen1 plans. The Social Security Administration's actuaries project that
the ongoing administrative costs for a TSP-style personal account structure would
be roughly 0.3 percentage points - that is $3 for every $1,000 invested.
PRA investors will have access to low-risk, low-cost broad index funds like those
currently available to TSP participants. Workers will also be able to choose a "life
cycle" fund. The asset composition of a life-cycle funds changes automatically to
adjust investment risk downward as the fund's owner ages. To protect nearretirees from sudden market swings on the eve of retirement, the President's plan
specifies that a life-cycle fund be the default fund for workers age 47 and older.
The worker can opt out of this default if the worker and his or her spouse sign a

http://www.tre.as.~ov/prcss/rcleases/js2307.htm

4/25!2()05

js-2307: The Honorable Mark Warshawsky Pn:parcd Rcmarks<hr>The National New ... Page 4 01'4
waiver form stating they are aware of the risks involved.
CONCLUSION

To conclude, let me say that I am encouraged that Social Security reform is finally
being earnestly debated, and that all parties are motivated to make Social Security
fair and permanently solvent. Today, my small contribution to this debate consists
of four major points:
• Social Security as currently designed cannot be sustained. We know with
absolute certainty that Social Security will ultimately be reformed. The only
question is when and how.
• Social Security reform is urgent. The longer reform is delayed, the more
unfair reform will be to future generations, and the more difficult it will be for
individuals to plan their financial futures.
• Social Security reform must make Social Security permanently solvent. Half
measures ensure that further reforms will be necessary, and amount to a
delay of reform that would be unfair to future generations.
• Making Social Security permanently solvent requires that retirement
incomes be pre-funded in PRAs rather than the Social Security Trust Fund.
Any attempt to pre-fund retirement incomes in the Trust Fund would be
undone by excessive government spending outside of Social Security.

LINKS

• Strengthening Social Security

http://www•treas. g9V/prf'.ss/re.lea.ses/j s23 07. h1m

4/25/2005

lS-2308: Report To The Committees On Appropriations on Clari fication Of Statutory Pro... Page I of 7

.
. "".

...

.-,'

'-. .

~l~ii~lf~~~~!~:~:;-i:-·
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Ado/lB(') AcrolJaWj R~'ilrlelf'!!.

March 11,2005
JS-2308
Report To The Committees On Appropriations on Clarification Of Statutory
Provisions Addressing Currency Manipulation
Introduction
This report was prepared pursuant to Section 221 of Title II of Division H of the
Consolidated Appropriations Act, 2005 (PubliC Law 108-447). This Section states
that: "Not later than 60 days after the enactment of this Act, the Secretary of the
Treasury shall submit to the Committees on Appropriations a report describing how
statutory provisions addressing currency manipulation by America's trading
partners contained in, and relating to, Title 22 U.S.C. 5304, 5305 and 286y can be
better clarified administratively to provide for improved and more predictable
evaluation, and to enable the problem of currency manipulation to be better
understood by the American people and the Congress."
Title 22 U.S.C. 5304 requires, inter alia, that the Secretary of the Treasury analyze
on an annual basis the exchange rate policies of foreign countries, in consultation
with the International Monetary Fund, and consider whether countries manipulate
the rate of exchange between their currency and the United States dollar for
purposes of preventing effective balance of payments adjustment or gaining unfair
competitive advantage in international trade. Section 5304 further requires that: "If
the Secretary considers that such manipulation is occurring with respect to
countries that (1) have material global current account surpluses; and (2) have
significant bilateral trade surpluses with the United States, the Secretary of the
Treasury shall take action to initiate negotiations with such foreign countries on an
expedited basis, in the International Monetary Fund or bilaterally, for the purpose of
ensuring that such countries regularly and promptly adjust the rate of exchange
between their currencies and the United States dollar to permit effective balance of
payment adjustments and to eliminate the unfair advantage."
Title 22 U.S.C. 5305 requires, inter alia, the Secretary of the Treasury to provide
reports on international economic policy, including exchange rate policy. Among
other matters, the reports are to contain the results of negotiations conducted
pursuant to Section 5304.
Title 22 U.S.C. 286y requires the Secretary of the Treasury, inter alia, to initiate
discussions with countries regarding economic dislocations which result from
structural exchange rate imbalances; and to instruct the United States Executive
Director of the International Monetary Fund to work for adoption of policies in the
Fund that promote conditions contributing to the stability of exchange rates and
avoid the manipulation of exchange rates between major currencies.
Summary
The assessment of whether an economy is manipulating the rate of exchange
between its currency and the U.S. dollar for the purposes of preventing effective
balance of payments adjustments or gaining unfair competitive advantage in
international trade is inherently difficult. The determination of exchange rates
reflects the interplay of macroeconomic and microeconomic forces throughout
every corner of the world. Assessments under Section 5304 require a
comprehensive review of significant international economic developments and an
evaluation of the factors that underlie those developments. In making such
assessments, Treasury is guided by the following considerations:
• Notwithstanding the inherent difficulties in rendering assessments, the
authorities of an economy could be said to manipulate the exchange rate if

http://www.treaD.gov/pn~s.s/rdcascs/js2308.htm

412512005

JS-2308: Report To The Committees On Appropriations OJl Clarification Of Statutory Pro... Page 2 of 7

•

they intention~lIy act to set the exchange rate at levels, or ranges, to
prevent effective balance of payments adjustments or gain unfair
competitive advantage in international trade such that for a protracted
period the exchange rate differs significantly from the rate that would have
prevailed in the absence of action by the authorities. However, such a
significant difference could also arise from the interplay of economic forces
or other factors.
Hence, in making assessments, a wide range of economic data and policies
must be reviewed. In this light, one must carefully review trading partners'
exchange rates, external balances, foreign exchange reserve accumulation,
macroeconomic trends. monetary and financial developments, stale of
institutional development, and financial and exchange restrictions.
Developments in anyone area do not typically provide sufficient grounds to
conclude that exchange rates are being manipulated in terms of Section
5304.
Although a broad range of economies in all regions of the world are
routinely examined, those countries with concurrently large bilateral
surpluses with the United States and large global current account surpluses
are reviewed more thoroughly.
Analysts also examine indicators that could be consistent with official action
to manipulate currencies for such purposes. Though potentially helpful,
these indicators are generally not dispositive in and of themselves. They
include, inter alia: (1) measures of undervaluation; (2) protracted large-scale
intervention in one direction; (3) rapid foreign exchange reserve
accumulation; (4) capital controls and payments restrictions; and (5) trade
and current account balances.
To enable the problem of currency manipulation to be better understood by
the American people and Congress, ·the Treasury must continue its ongoing
intensive monitoring of foreign economic policies and performance, provide
Congress and the public with continued timely reporting on intemational
economic developments, and maintain its close engagement with Congress.

Manipulation
There are many inherent difficulties in rendering assessments of when a currency is
being manipulated to prevent effective balance of payments adjustments or gain
unfair competitive advantage in international trade. However, the authorities of an
economy could be said to "manipulate- the exchange rate in terms of Section 5304
if they intentionally act to set the exchange rate at levels, or ranges, such that for a
protracted period the exchange rate differs significantly from the rate that would
have prevailed in the absence of action by the authorities. A significant difference
between a market rate and an underlying "equilibrium" rate could also arise from
the interplay of economic forces or other factors.

http://www.treas.gov/pres.~lrelcases/js2308.htm

4125/2005

JS-2308: RCp0l1 To The Committees On Appropriations Oil CI;'lrilicatiol1 Of Statutory Pro... Page 3 of7
emphasized that further work on exit strategies from managed exchange rate
regimes ~involving di~ 0f!ici~1 intervention or indirect intervention such as through
the bankIng system) IS a pnonty. Engagement with the IMF is continuing on many
levels so that the IMF undertakes a thorough, clear, and analytically rigorous
assessment of exchange rate issues in its surveillance. even when the country
authorities' views diverge with those of IMF staff.

Country Examinations
Although a broad range of economies In all regions of the world are routinely
examined, in light of the requirements of Section 5304, those countries with large
overall current account surpluses or large bilateral surpluses with the United States
are reviewed more thoroughly. The term "material global current account
surpluses," used in Section 5304, is taken to mean large current account surpluses,
measured as a percent of an economy's GOP. The term ·significant bilateral trade
surplus," used in Section 5304, is taken to mean a large bilateral trade surplus with
the United States, relative to the size of U.S. trade.
In measuring bilateral trade surpluses, the Treasury uses Bureau of Census
statistics on trade in goods. Foreign official statistics are typically used in the
examination of global current account balances, which includes global trade
balances. China's global trade surplus (a major component of the current account
surplus) as reported in aggregate by China's trading partners, however, differs
markedly from what is reported by Chinese official statistics. Treasury is
undertaking an investigation to see how this arises and what. if any, of the
difference can be reconciled.
The discrepancy between the estimate of China's trade surplus reported by
Chinese authorities and by China's trading partners has been investigated in a
number of studies.[2) One difficulty that arises is that much trade to and from China
travels via Hong Kong. Importing countries usually accurately determine the source
of their imports through certificates of origin. But exporters (both Chinese and
partner country exporters) often record the destination of their exports as Hong
Kong, even though the goods go on to other markets. This explains a significant
part of the discrepancy between Chinese and partner country trade estimates of
China's trade surplus, since a significant part of the trade between China and
partner countries is recorded as trade with Hong Kong. (It is worth noting that the
discrepancy between Chinese and partner country trade data is mirrored in partner
country data with Hong Kong. In 2003 Hong Kong reported a global trade deficit of
$8 billion, while partner country data showed a $121 billion surplus with Hong
Kong.)
Correction for exports reported to Hong Kong but destined elsewhere, and for the
addition of cost, insurance, and freight to exports substantially reduces, but ~s
not completely eliminate, the discrepancy between Chinese and partner country
trade data. Treasury considers both Chinese and partner country data in analyzing
the size of China's global current account surplus.
Analysis of Foreign Exchange Rate Policies

In making its assessments, Treasury undertakes a careful review of trading
partners' exchange rates, external balances, foreign exchange reserve
accumulation, macroeconomic trends, monetary and financial developments, state
of institutional development. and financial and exchange restrictions. Developments
in anyone area do not typically provide sufficient grounds to conclude that
exchange rates are being manipulated. A combination of factors can lead. and has
in the past led. Treasury to find that certain economies were manipulating their
currencies consistent with the terms of Section 5304. China. Taiwan. and South
Korea were each considered to be manipulating its currency in terms of Section
5304 during different periods in the years 1988 through 1994 (see Attachment II).
Many formal models, as well as a great deal of informal reasoning, have been used
over the years to attempt to explain exchange rate determination.(3] These efforts
have helped enhance understanding of exchange rate trends and issues. But no
approach or model has been fully able to describe observed market-determined
exchange rate behavior. The results of any analYSis of exchange rate behavior can
vary substantially depending on the approach used.
To assist in the identification of exchange rate manipulation. analysts examine
indicators that are consistent with official actions to manipulate currencies for the
purposes of preventing effective balance of payments adjustments or gaining unfair

http://www.tr~as.gov/pr(.J;;slrclcascs/js2308.htm

4/25/20()5

JS-2308: Report To The Committees On Appropriations UI1 Clarification Of Statutory Pro ... Page 4 01'7
competitive advantage In international trade. Though potentially helpful. these
indicators are generally not dispositive in and of themselves in determining that a
specific economy has manipulated its exchange rate under the terms of Section
~3~. In a~dition t~ stand~rd macroeconomic and microeconomic analysis, these
Indlca!ors Incl~de, .Inter ah~: (1 J measure~ of undervaluation: (2) protracted largescale intervention In one direction; (3) rapid foreign exchange reserve
accumulation; (4) capital controls and payments restrictions; and (5) trade and
current account balances. These indicators are described in detail below.
(1) Measures of Undervaluation
A large "undervaluation" of a market exchange rate may exist relative to an
"equilibrium exchange rate," calculated using a specific model. However,
calculating such an "equilibrium" exchange rate is quite difficult given that the given
methodological approach may not capture observed market behavior.
Further, even if a currency can be identified as -misaligned" in the sense that it
deviates substantially from its "equilibrium exchange rate,· as determined by a
specific model, that does not necessarily mean that "manipulation" is occurring. For
example, if a country initiated a contractionary fiscal policy and an expansionary
monetary policy, which temporarily lowered real interest rates, the model might be
incapable of predicting the amount by which the country's currency would
depreciate. In such circumstances, the "misalignment" might reflect problems with
the model describing market reaction to the fundamental macroeconomic policy
mix, but not "manipulation" of the exchange rate.
Similarly. if there were a large, unexpected surge in private capital outflows from a
country, driving down the exchange rate, the exchange rate could appear to be
"misaligned" due to inadequate modeling of market behavior. However. this would
not be attributable to developments in the current account, and it again would not
necessarily imply "manipulation."
(2) Protracted Large-Scale Intervention in One Direction

Protracted large-scale intervention in one direction also merits attention in any
consideration of "manipulation," insofar as such intervention could reflect an effort
by the authorities to maintain a given exchange rate level in the face of market
pressure for the purposes of Section 5304.
Intervention can be carried out for a number of purposes. IMF surveillance
procedures provide that: "A member should intervene In the exchange market if
necessary to counter disorderly conditions, which may be characterized inter alia by
disruptive short-term movements in the exchange value of its currency. Members
should take into account in their intervention pOlicies the interests of other
members, including those of the countries in whose currencies they Intervene."(4)
Evidence shows that the effectiveness of intervention in influencing exchange rate
behavior is, at best, short-lived. Intervention can, however, impact domestic
inflation. As a result, most countries ·sterilize" their intervention so that the impact
of intervention on the monetary base is offset. Although short-term sterilized
intervention may be effective in offsetting short-term foreign exchange market
shocks, there is little evidence that it has long-term effects on the exchange rate.
The ability of governments to marshal sufficient resources for effective intervention
is also often limited by the size of the foreign exchange market - for example,
according to the latest Bank for International Settlements survey (2004), average
daily tumover is $1.9 trillion in traditional foreign exchange markets (spot
transactions, outright forwards, and swaps) and $1.2 trillion in over-the-counter
currency and interest rate derivatives markets.

http://www.tren3.gov/press/releases/js2308.htm

4i2S/2005

JS-2308: Report To The Committees On Appropriations 011 ('Iari IiCaliol1 Of Statutory Pro... Page 5 of 7
reserves. Some countries - for example, countries with a heavy tourist season _
experience large seasonality in their balance of payments, which they might wish to
smooth to avoid significant swings in their exchange rate. Other countries may need
to buy foreign exchange in order to make payments on external debt or to counter
disorderly market conditions.
After the Asian financial crisis, many economists came to believe that emerging
markets and developing countries needed to raise their reserves in order to take
account of volatility in short-term capital flows. U.S. foreign exchange reserves tend
to be quite small, reflecting in large measure the dollar's predominant role as a
reserve currency in the international monetary system.

(4) Capital Controls and Payments Restrictions
Capital controls also warrant attention in making assessments regarding currency
manipulation. Capital controls can be applied to inflows (limiting upward pressure
on domestic currency) or outflows (limiting downward pressure on the domestic
currency). Some countries have used controls on inflows out of concern that large
short-term portfolio investment from major financial centers could suddenly reverse
- disrupting small domestic capital markets. If controls are placed on outflows,
lifting them could result in increased capital outflows that cause the domestic
currency to depreciate.
More broadly. capital controls prevent capital from flowing to its most productive
uses. They involve significant administrative costs, reduce the pressure on
countries to institute needed economic reforms, and can increase tile risk to tile
domestic economy in times of crisis (for example, by limiting sources of funding if
there is a shock to domestic credit markets).
Payments restrictions regulate the use of foreign currency to buy goods and
services and can be very distortionary. Residents of a country with such restrictions
may wish to buy certain foreign goods or services but may be denied the foreign
currency necessary to make the purchase even if they are willing to do the
transactions at the formal exchange rate. The General Obligations of IMF members
severely discourage restrictions on current international transactionsI5].

(5) Trade and Current Account Balances
Many analysts focus on the impact of exchange rates on trade flows, often
examining developments in bilateral trade balances and current account balances.
Bilateral balances, however, reflect unique patterns of demand or comparative
advantage and are therefore highly limited in their ability to explain exchange rate
movements. For example, it is quite understandable that the United States would
have a large bilateral deficit with a country that is a major oil exporter. At the same
time, in a multilateral trading system, a bilateral deficit with one country can be
offset by a bilateral surplus with another.
Current account positions reflect a country's balance on trade in goods and
services (normally the largest component). plus its balance on income and
transfers. Trade balances are heavily affected by cyclical forces - the growth of one
economy's income relative to that of its major trading partners. Indeed, a principal
cause of the widening of the U.S. current account deficit in recent years has been
the strong cyclical performance of the U.S. economy relative to many other major
industrial economies. Trade may also be affected by a number of factors that
influence costs and prices in one economy relative to its trading partners - for
example, eXChange rate movements, growth in productivity, and relative monetary
conditions. Given the large US current account deficit, it is natural that the
counterpart to the deficit is to be found in farge surpluses in other countries of tile
world.
The current account balance is, by accounting definition, equal to the gap between
saving and investment in a country.IS] Saving is equal to public and private saving
and is thus affected by fiscal policy and individual saving decisions. Investment is
determined by business decisions, which depend on productivity, interest rates, and
the relative attractiveness and risk-adjusted returns of economies.
A current account deficit must be financed from abroad, by foreigners acquiring
more assets in the deficit country than the deficit country is acquiring abroad.

http://wwwtreai.govJprcsslrclc~es/js2308.htm

4/25/2005

1S-2308: Repol1 To The Committees On Appropriations on Clari Ilcation Of Statutory Pro... Page 6 of 7
Alternatively slated, a current account deficit is mirrored in capital and financial
account inflows (including changes in foreign exchange reserves). Thus, exchange
rate determination is strongly affected by global capital flows. Strong inflows of
capital into the United States in recent years have been attracted by sound U.S.
economic performance, the attractiveness of the U.S. investment climate, and the
depth and liquidity of U.S. financial markets. When global tensions arjse, there can
also be "safe haven" demand for such currencies as the U,S. dollar.
As a share of GOP, current account balances vary widely (see table). The
globalization of financial markets has given investors greater freedom in placing
their assets and has supported greater dispersion of the size of current account
balances and net foreign asset positions.[7]
Different Exchange Rate Regimes
There is considerable diversity in the exchange rate regime choices of countries,
ranging from flexible exchange rate systems with little or no intervention to currency
unions and full dollarization. Until the early 19705, the international economy had
generally operated with pegged eXChange rates - as under the pre-WWII gold
standard and the post-WWII Bretton Woods system. Even after the collapse of the
Bretton Woods system, European economies continued to maintain relatively fixed
exchange rate arrangements among themselves, culminating in the creation of the
eura. The IMF Articles of Agreement (Article IV) provide that members have the
right to determine their own exchange rate arrangements.[8]

Many countries have continued to choose a form of pegged exchange rate regime,
particularly countries which are small and open; trade significantly with a country to
whom their currency is pegged; have limited financial sector development; lack a
significant capacity to implement an independent monetary policy and instead use
the exchange rate as a nominal anchor; or believe that exchange-rate based
stabilization is an attractive method to address high inflation. Strong exchange rate
pegs, such as currency board arrangements and outright dollarization, have also
been used by a number of countries in recent years. A country's macroeconomiC
policies should be consistent with whatever exchange rate regime is chosen.
Conclusion
The determination of foreign exchange rates is a complex process that involves
countless economic decisions. both at the national and global levels. Although there
are many plausible reasons that authorities might seek to influence an economy's
exchange rate, there is a legitimate concern that some countries might succeed in
manipulating an exchange rate to prevent effective balance of payments
adjustments or to achieve an unfair competitive advantage in international trade.
The assessment of whether an economy is manipulating the rate of exchange in
terms of Section 5304 requires a comprehensive review of significant international
economic developments to determine if a country is able to manipulate the rate of
exchange for those purposes and succeeds in creating an unfair competitive
advantage or preventing effective balance of payments adjustments.
Treasury has broadly used the approach outlined above since it began assessing
foreign exchange policy under Section 5304. Treasury has stated, in the past, that it
considered certain economies to be manipulating their exchange rates in terms of
that Section. It continues to carry out these assessments vigorously and will report
to Congress on any economy that it considers to be manipulating its exchange rate
in terms of Section 5304 and on the negotiations required with such an economy
under that Section. Treasury must continuously monitor country economic
developments and global financial markets in every corner of the world on a realtime basis to render its assessments.

[1] See "Surveillance over Exchange Rate Policies," Decision No. 5392-(77/63),
4/29/1977, as amended (also included as Attachment III).
[2] The discrepancy between estimates of China's global trade surplus based on
Chinese and partner country statistics was analyzed in the 301 petition submitted
by the Fair Currency alliance in April 2004. The global discrepancy is currently
being analyzed by Treasury, and also by John Schindler and Dustin Beckett at the
Federal Reserve ("How Big is China's Trade Surplus," unpublished draft, 2005).
Studies of the US-China bilateral trade balance have been conducted by Fung and
Lao (K.C Fung. Lawrence J. Lau, "New Estimates of the United States - China

http://www.treas.gov/press/re leases/js2308.htm

4/25/2005

JS-2308: Rcp0l1 To The Committees On Appropriations

011

C'lari ficatioll Of Statutory Pro... Page 7 of 7

Bildlerdl Trdue Ijalallces," InStitute tor International Studies, Stanford University,
April 1999) and by Voon and Kueh (J.P. Voon and Y.Y. Kueh, "Country of Origin,
China's Value-Added Exports, and Sino-U.S. Trade Balance Reconciliation," paper
presented to the Third Sino-American Relations Conference, Hong Kong,
November 15-16 1999).
[3] Examples include purchasing power parity, the monetary approach, and the
portfoliO balance approach, as well as numerous formal macroeconomic models.
[411MF, Surveillance over Exchange Rate Policies, April 29, 1977.
[51 Article VIII, Section 2(a) of the IMF Articles of Agreement states: "Subject to the
provisions of Article VII, Section 3(b) and Article XIV, Section 2, no member shall,
without the approval of the Fund, impose restrictions on the making of payments
and transfers for current international transactions." The IMF does not have
authority over the capital account.
[61 In the first half of 2004, the US current account deficit was $594 billion
(seasonally adjusted, on a national income accounts basis). This deficit equaled the
gap between $2,246 billion in investment and $1,652 billion in saving. That is, U.S.
domestic investment was $594 billion more than domestic saving with net foreign
investment making up the difference.
[7] See, for example, "Financial Globalization and Exchange Rates," Philip Lane
and Gian Maria Milesi-Ferrretti, IMF Working Paper, January 2005.
[8] See also "Exchange Rate Regimes in an Increasingly Integrated World
Economy;" Occasional Paper 193; Michael Mussa, Paul Masson, et aI.,
International Monetary Fund, 2000.
REPORTS
•

Clarification Currency Manipulation Report

http://www.treas.gov/press/releas~s!js2308.htm

4/25/2005

REPORT TO THE COMMITTEES ON APPROPRIATIONS ON
CLARIFICATION OF STATUTORY PROVISIONS
ADDRESSING CURRENCY MANIPULATION

Introduction
This report was prepared pursuant to Section 221 of Title II of Division H ofthe Consolidated
Appropriations Act, 2005 (Public Law 108-447). This Section states that: "Not later than 60
days after the enactment of this Act, the Secretary of the Treasury shall submit to the
Committees on Appropriations a report describing how statutory provisions addressing currency
manipulation by America's trading partners contained in, and relating to, Title 22 U.S.C. 5304,
5305 and 286y can be better clarified administratively to provide for improved and more
predictable evaluation, and to enable the problem of currency manipulation to be better
understood by the American people and the Congress."
Title 22 U.s.C. 5304 requires, inter alia, that the Secretary of the Treasury analyze on an annual
basis the exchange rate policies of foreign countries, in consultation with the International
Monetary Fund, and consider whether countries manipulate the rate of exchange between their
currency and the United States dollar for purposes of preventing effective balance of payments
adjustment or gaining unfair competitive advantage in international trade. Section 5304 further
requires that: "If the Secretary considers that such manipulation is occurring with respect to
countries that (1) have material global current account surpluses; and (2) have significant
bilateral trade surpluses with the United States, the Secretary of the Treasury shall take action to
initiate negotiations with such foreign countries on an expedited basis, in the International
Monetary Fund or bilaterally, for the purpose of ensuring that such countries regularly and
promptly adjust the rate of exchange between their currencies and the United States dollar to
permit effective balance of payment adjustments and to eliminate the unfair advantage."
Title 22 U.S.c. 5305 requires, inter alia, the Secretary of the Treasury to provide reports on
international economic policy, including exchange rate policy. Among other matters, the reports
are to contain the results of negotiations conducted pursuant to Section 5304.
Title 22 U.S.C. 286y requires the Secretary of the Treasury, inter alia, to initiate discussions with
countries regarding economic dislocations which result from structural exchange rate
imbalances; and to instruct the United States Executive Director of the International Monetary
Fund to work for adoption of policies in the Fund that promote conditions contributing to the
stability of exchange rates and avoid the manipulation of exchange rates between major
currencies.
Summary
The assessment of whether an economy is manipulating the rate of exchange between its
currency and the U.S. dollar for the purposes of preventing effective balance of payments
adjustments or gaining unfair competitive advantage in international trade is inherently difficult.
The determination of exchange rates reflects the interplay of macroeconomic and microeconomic
forces throughout every comer of the world. Assessments under Section 5304 require a

2
comprehensive review of significant international economic developments and an evaluation of
the factors that underlie those developments. In making such assessments, Treasury is guided by
the following considerations:
• Notwithstanding the inherent difficulties in rendering assessments, the authorities of an
economy could be said to manipulate the exchange rate ifthey intentionally act to set the
exchange rate at levels, or ranges, to prevent effective balance of payments adjustments or
gain unfair competitive advantage in international trade such that for a protracted period the
exchange rate differs significantly from the rate that would have prevailed in the absence of
action by the authorities. However, such a significant difference could also arise from the
interplay of economic forces or other factors.
• Hence, in making assessments, a wide range of economic data and policies must be
reviewed. In this light, one must carefully review trading partners' exchange rates, external
balances, foreign exchange reserve accumulation, macroeconomic trends, monetary and
financial developments, state of institutional development, and financial and exchange
restrictions. Developments in anyone area do not typically provide sufficient grounds to
conclude that exchange rates are being manipulated in terms of Section 5304.
• Although a broad range of economies in all regions of the world are routinely examined,
those countries with concurrently large bilateral surpluses with the United States and large
global current account surpluses are reviewed more thoroughly.
• Analysts also examine indicators that could be consistent with official action to manipulate
currencies for such purposes. Though potentially helpful, these indicators are generally not
dispositive in and of themselves. They include, inter alia: (1) measures of undervaluation;
(2) protracted large-scale intervention in one direction; (3) rapid foreign exchange reserve
accumulation; (4) capital controls and payments restrictions; and (5) trade and current
account balances.
• To enable the problem of currency manipulation to be better understood by the American
people and Congress, the Treasury must continue its ongoing intensive monitoring of foreign
economic policies and performance, provide Congress and the public with continued timely
reporting on international economic developments, and maintain its close engagement with
Congress.
Manipulation
There are many inherent difficulties in rendering assessments of when a currency is being
manipulated to prevent effective balance of payments adjustments or gain unfair competitive
advantage in international trade. However, the authorities of an economy could be said to
"manipulate" the exchange rate in terms of Section 5304 if they intentionally act to set the
exchange rate at levels, or ranges, such that for a protracted period the exchange rate differs
significantly from the rate that would have prevailed in the absence of action by the authorities.
A significant difference between a market rate and an underlying "equilibrium" rate could also
arise from the interplay of economic forces or other factors.

There are many reasons why the authorities might seek to influence the exchange rate. For
example, they may wish to counter disorderly market conditions; or use the exchange rate as an
anchor for monetary policy; or build up international reserves to reduce vulnerability to possible
currency crises. If an economy manipulates its exchange rate in order to prevent effective
balance of payments adjustments or achieve an unfair advantage in international trade, however,
this can be very harmful to other economies and the global financial system.
In order to render assessments on foreign economic and exchange rate policies, Treasury staff
monitors economic and financial developments in countries across the globe on a real-time basis.
The International Monetary Fund also conducts surveillance over members' exchange rate
policies as required by the Articles of Agreement. The IMF Executive Board adopted general
principles in 1977 that continue to provide guidance with respect to these obligations.! Treasury
consults regularly with the International Monetary Fund on what constitutes exchange rate
"manipulation" as discussed above, both in the context of the reports required under Section
5304 and on an ad hoc basis.
Further, the United States has urged the IMF to strengthen its surveillance of exchange rate
issues in its regular Article IV consultations. In particular, the IMF has been urged to make
candid discussions of exchange rate policy a routine exercise, particularly when a fixed peg is
involved. The United States has also emphasized that further work on exit strategies from
managed exchange rate regimes (involving direct official intervention or indirect intervention
such as through the banking system) is a priority. Engagement with the IMF is continuing on
many levels so that the IMF undertakes a thorough, clear, and analytically rigorous assessment of
exchange rate issues in its surveillance, even when the country authorities' views diverge with
those of IMF staff.
Country Examinations
Although a broad range of economies in all regions of the world are routinely examined, in light
of the requirements of Section 5304, those countries with large overall current account surpluses
or large bilateral surpluses with the United States are reviewed more thoroughly. The term
"material global current account surpluses," used in Section 5304, is taken to mean large current
account surpluses, measured as a percent of an economy's GDP. The term "significant bilateral
trade surplus," used in Section 5304, is taken to mean a large bilateral trade surplus with the
United States, relative to the size of U.S. trade.
In measuring bilateral trade surpluses, the Treasury uses Bureau of Census statistics on trade in
goods. Foreign official statistics are typically used in the examination of global current account
balances, which includes global trade balances. China's global trade surplus (a major component
of the current account surplus) as reported in aggregate by China's trading partners, however,
differs markedly from what is reported by Chinese official statistics. Treasury is undertaking an
investigation to see how this arises and what, if any, of the difference can be reconciled.
I See "Surveillance over Exchange Rate Policies," Decision No. 5392-(77/63), 4/2911977, as amended (also
included as Attachment III).

The discrepancy between the estimate of China's trade surplus reported by Chinese authorities
and by China's trading partners has been investigated in a number of studies. 2 One difficulty
that arises is that much trade to and from China travels via Hong Kong. Importing countries
usually accurately determine the source of their imports through certificates of origin. But
exporters (both Chinese and partner country exporters) often record the destination of their
exports as Hong Kong, even though the goods go on to other markets. This explains a
significant part of the discrepancy between Chinese and partner country trade estimates of
China's trade surplus, since a significant part of the trade between China and partner countries is
recorded as trade with Hong Kong. (It is worth noting that the discrepancy between Chinese and
partner country trade data is mirrored in partner country data with Hong Kong. In 2003 Hong
Kong reported a global trade deficit of $8 billion, while partner country data showed a $121
billion surplus with Hong Kong.)
Correction for exports reported to Hong Kong but destined elsewhere, and for the addition of
cost, insurance, and freight to exports substantially reduces, but does not completely eliminate,
the discrepancy between Chinese and partner country trade data. Treasury considers both
Chinese and partner country data in analyzing the size of China's global current account surplus.
Analysis of Foreign Exchange Rate Policies
In making its assessments, Treasury undertakes a careful review of trading partners' exchange
rates, external balances, foreign exchange reserve accumulation, macroeconomic trends,
monetary and financial developments, state of institutional development, and financial and
exchange restrictions. Developments in anyone area do not typically provide sufficient grounds
to conclude that exchange rates are being manipulated. A combination of factors can lead, and
has in the past led, Treasury to find that certain economies were manipulating their currencies
consistent with the terms of Section 5304. China, Taiwan, and South Korea were each
considered to be manipulating its currency in terms of Section 5304 during different periods in
the years 1988 through 1994 (see Attachment II).
Many formal models, as well as a great deal of informal reasoning, have been used over the
years to attempt to explain exchange rate determination. 3 These efforts have helped enhance
understanding of exchange rate trends and issues. But no approach or model has been fully able
to describe observed market-determined exchange rate behavior. The results of any analysis of
exchange rate behavior can vary substantially depending on the approach used.
2 The discrepancy between estimates of China's global trade surplus based on Chinese and partner country statistics
was analyzed in the 301 petition submitted by the Fair Currency alliance in April 2004. The global discrepancy is
currently being analyzed by Treasury, and also by John Schindler and Dustin Beckett at the Federal Reserve ("How
Big is China's Trade Surplus," unpublished draft, 2005). Studies of the US-China bilateral trade balance have been
conducted by Fung and Lao (K.C. Fung, Lawrence J. Lau, "New Estimates of the United States - China Bilateral
Trade Balances," Institute for International Studies, Stanford University, April 1999) and by Voon and Kueh (J.P.
Voon and Y.Y. Kueh, "Country of Origin, China's Value-Added Exports, and Sino-U.S. Trade Balance
Reconciliation," paper presented to the Third Sino-American Relations Conference, Hong Kong, November 15-16
1999).
J Examples include purchasing power parity, the monetary approach, and the portfolio balance approach, as well as
numerous formal macroeconomic models.

To assist in the identification of exchange rate manipulation, analysts examine indicators that are
consistent with official actions to manipulate currencies for the purposes of preventing effective
balance of payments adjustments or gaining unfair competitive advantage in international trade.
Though potentially helpful, these indicators are generally not dispositive in and of themselves in
determining that a specific economy has manipulated its exchange rate under the terms of
Section 5304. In addition to standard macroeconomic and microeconomic analysis, these
indicators include, inter alia: (l) measures of undervaluation; (2) protracted large-scale
intervention in one direction; (3) rapid foreign exchange reserve accumulation; (4) capital
controls and payments restrictions; and (5) trade and current account balances. These indicators
are described in detail below.
(1)

Measures of Undervaluation

A large "undervaluation" of a market exchange rate may exist relative to an "equilibrium
exchange rate," calculated using a specific model. However, calculating such an "equilibrium"
exchange rate is quite difficult given that the given methodological approach may not capture
observed market behavior.
Further, even if a currency can be identified as "misaligned" in the sense that it deviates
substantially from its "equilibrium exchange rate," as determined by a specific model, that does
not necessarily mean that "manipulation" is occurring. For example, if a country initiated a
contractionary fiscal policy and an expansionary monetary policy, which temporarily lowered
real interest rates, the model might be incapable of predicting the amount by which the country's
currency would depreciate. In such circumstances, the "misalignment" might reflect problems
with the model describing market reaction to the fundamental macroeconomic policy mix, but
not "manipulation" of the exchange rate.
Similarly, if there were a large, unexpected surge in private capital outflows from a country,
driving down the exchange rate, the exchange rate could appear to be "misaligned" due to
inadequate modeling of market behavior. However, this would not be attributable to
developments in the current account, and it again would not necessarily imply "manipulation."

(2) Protracted Large-Scale Intervention in One Direction
Protracted large-scale intervention in one direction also merits attention in any consideration of
"manipulation," insofar as such intervention could reflect an effort by the authorities to maintain
a given exchange rate level in the face of market pressure for the purposes of Section 5304.
Intervention can be carried out for a number of purposes. IMF surveillance procedures provide
that: "A member should intervene in the exchange market if necessary to counter disorderly
conditions, which may be characterized inter alia by disruptive short-term movements in the
exchange value of its currency. Members should take into account in their intervention policies
the interests of other members, including those of the countries in whose currencies they
intervene. ,,4
4

IMF, Surveillance over Exchange Rate Policies, April 29, 1977.

Evidence shows that the effectiveness of intervention in influencing exchange rate behavior is, at
best, short-lived. Intervention can, however, impact domestic inflation. As a result, most
countries "sterilize" their intervention so that the impact of intervention on the monetary base is
offset. Although short-term sterilized intervention may be effective in offsetting short-term
foreign exchange market shocks, there is little evidence that it has long-term effects on the
exchange rate.
The ability of governments to marshal sufficient resources for effective intervention is also often
limited by the size of the foreign exchange market - for example, according to the latest Bank for
International Settlements survey (2004), average daily turnover is $1.9 trillion in traditional
foreign exchange markets (spot transactions, outright forwards, and swaps) and $1.2 trillion in
over-the-counter currency and interest rate derivatives markets.

(3) Rapid Foreign Exchange Reserve Accumulation
When a country's financial authorities purchase foreign exchange, that country's reserve
holdings typically rise. For example, if a country had a large balance of payments surplus and
intervened heavily to absorb capital inflows, its foreign exchange reserves could rise rapidly.
There are many reasons why a country might wish to increase its reserves, and there is no
universally agreed optimum level of reserves. Some countries - for example, countries with a
heavy tourist season - experience large seasonality in their balance of payments, which they
might wish to smooth to avoid significant swings in their exchange rate. Other countries may
need to buy foreign exchange in order to make payments on external debt or to counter
disorderly market conditions.
After the Asian financial crisis, many economists came to believe that emerging markets and
developing countries needed to raise their reserves in order to take account of volatility in shortterm capital flows. U.S. foreign exchange reserves tend to be quite small, reflecting in large
measure the dollar's predominant role as a reserve currency in the international monetary system.
(4) Capital Controls and Payments Restrictions

Capital controls also warrant attention in making assessments regarding currency manipulation.
Capital controls can be applied to inflows (limiting upward pressure on domestic currency) or
outflows (limiting downward pressure on the domestic currency). Some countries have used
controls on inflows out of concern that large short-term portfolio investment from major
financial centers could suddenly reverse - disrupting small domestic capital markets. If controls
are placed on outflows, lifting them could result in increased capital outflows that cause the
domestic currency to depreciate.
More broadly, capital controls prevent capital from flowing to its most productive uses. They
involve significant administrative costs, reduce the pressure on countries to institute needed
economic reforms, and can increase the risk to the domestic economy in times of crisis (for
example, by limiting sources of funding if there is a shock to domestic credit markets).

7
Payments restrictions regulate the use of foreign currency to buy goods and services and can be
very distortionary. Residents of a country with such restrictions may wish to buy certain foreign
goods or services but may be denied the foreign currency necessary to make the purchase even if
they are willing to do the transactions at the formal exchange rate. The General Obligations of
IMF members severely discourage restrictions on current international transactions 5.
(5) Trade and Current Account Balances

Many analysts focus on the impact of exchange rates on trade flows, often examining
developments in bilateral trade balances and current account balances. Bilateral balances,
however, reflect unique patterns of demand or comparative advantage and are therefore highly
limited in their ability to explain exchange rate movements. For example, it is quite
understandable that the United States would have a large bilateral deficit with a country that is a
major oil exporter. At the same time, in a multilateral trading system, a bilateral deficit with one
country can be offset by a bilateral surplus with another.
Current account positions reflect a country's balance on trade in goods and services (normally
the largest component), plus its balance on income and transfers. Trade balances are heavily
affected by cyclical forces - the growth of one economy's income relative to that of its major
trading partners. Indeed, a principal cause of the widening of the U.S. current account deficit in
recent years has been the strong cyclical performance of the U.S. economy relative to many other
major industrial economies. Trade may also be affected by a number of factors that influence
costs and prices in one economy relative to its trading partners - for example, exchange rate
movements, growth in productivity, and relative monetary conditions. Given the large US
current account deficit, it is natural that the counterpart to the deficit is to be found in large
surpluses in other countries of the world.
The current account balance is, by accounting definition, equal to the gap between saving and
investment in a country.6 Saving is equal to public and private saving and is thus affected by
fiscal policy and individual saving decisions. Investment is determined by business decisions,
which depend on productivity, interest rates, and the relative attractiveness and risk-adjusted
returns of economies.
A current account deficit must be financed from abroad, by foreigners acquiring more assets in
the deficit country than the deficit country is acquiring abroad. Alternatively stated, a current
account deficit is mirrored in capital and financial account inflows (including changes in foreign
exchange reserves). Thus, exchange rate determination is strongly affected by global capital
flows. Strong inflows of capital into the United States in recent years have been attracted by
sound U.S. economic performance, the attractiveness ofthe U.S. investment climate, and the
5 Article

VIII, Section 2(a) of the IMF Articles of Agreement states: "Subject to the provisions of Article VII,
Section 3(b) and Article XIV, Section 2, no member shall, without the approval of the Fund, impose restrictions on
the making of payments and transfers for current international transactions." The IMF does not have authority over
the capital account.
6 In the first half of 2004, the US current account deficit was $594 billion (seasonally adjusted, on a national income
accounts basis). This deficit equaled the gap between $2,246 billion in investment and $1,652 billion in saving.
That is, U.S. domestic investment was $594 billion more than domestic saving with net foreign investment making
up the difference.

8
depth and liquidity of U.S. financial markets. When global tensions arise, there can also be "safe
haven" demand for such currencies as the U.S. dollar.
As a share of GOP, current account balances vary widely (see table). The globalization of
financial.mark~ts has give.n investors greater freedom in placing their assets and has sup~orted
greater dIsperSIOn of the SIze of current account balances and net foreign asset positions.
Different Exchange Rate Regimes
There is considerable diversity in the exchange rate
regime choices of countries, ranging from flexible
exchange rate systems with little or no intervention to
currency unions and full dollarization. Until the early
1970s, the international economy had generally
operated with pegged exchange rates - as under the
pre-WWII gold standard and the post-WWII Bretton
Woods system. Even after the collapse of the Bretton
Woods system, European economies continued to
maintain relatively fixed exchange rate arrangements
among themselves, culminating in the creation of the
euro. The IMF Articles of Agreement (Article IV)
provide that members have the right to determine
their own exchange rate arrangements. 8

Current Account Balances
Share of GDP, 2004
United States
-5.4
Australia
-5.3
Central and Eastern Europe
-4.4
United Kingdom
-2.0
Africa
0.4
India
0.5
Euro area
0.9
Brazil
1.2
China
2.4
Korea
3.1
Japan
3.4
Thailand
3.8
Taiwan
6.9
Middle East
12.7
Source: IMF

Many countries have continued to choose a form of pegged exchange rate regime, partiCUlarly
countries which are small and open; trade significantly with a country to whom their currency is
pegged; have limited financial sector development; lack a significant capacity to implement an
independent monetary policy and instead use the exchange rate as a nominal anchor; or believe
that exchange-rate based stabilization is an attractive method to address high inflation. Strong
exchange rate pegs, such as currency board arrangements and outright dollarization, have also
been used by a number of countries in recent years. A country's macroeconomic policies should
be consistent with whatever exchange rate regime is chosen.
Conclusion
The determination of foreign exchange rates is a complex process that involves countless
economic decisions, both at the national and global levels. Although there are many plausible
reasons that authorities might seek to influence an economy's exchange rate, there is a legitimate
concern that some countries might succeed in manipulating an exchange rate to prevent effective
balance of payments adjustments or to achieve an unfair competitive advantage in international
trade. The assessment of whether an economy is manipulating the rate of exchange in terms of
Section 5304 requires a comprehensive review of significant international economic
7 See,

for example, "Financial Globalization and Exchange Rates," Philip Lane and Gian Maria Milesi-Femetti,
IMF Working Paper, January 2005.
8 See also "Exchange Rate Regimes in an Increasingly Integrated World Economy;" Occasional Paper 193; Michael
Mussa, Paul Masson, et al., International Monetary Fund, 2000.

developments to determine if a country is able to manipulate the rate of exchange for those
purposes and succeeds in creating an unfair competitive advantage or preventing effective
balance of payments adjustments.
Treasury has broadly used the approach outlined above since it began assessing foreign exchange
policy under Section 5304. Treasury has stated, in the past, that it considered certain economies
to be manipulating their exchange rates in terms of that Section. It continues to carry out these
assessments vigorously and will report to Congress on any economy that it considers to be
manipulating its exchange rate in terms of Section 5304 and on the negotiations required with
such an economy under that Section. Treasury must continuously monitor country economic
developments and global financial markets in every corner of the world on a real-time basis to
render its assessments.

ATT ACHMENT I

22 USC § 5304. International negotiations on exchange rate and
economic policies
(a) Multilateral negotiations
The President shall seek to confer and negotiate with other countries(1) to achieve(A) better coordination of macroeconomic policies of the major industrialized
nations; and
(B) more appropriate and sustainable levels of trade and current account balances,
and exchange rates of the dollar and other currencies consistent with such balances;
and
(2) to develop a program for improving existing mechanisms for coordination and
improving the functioning of the exchange rate system to provide for long-term
exchange rate stability consistent with more appropriate and sustainable current account
balances.
(b) Bilateral negotiations
The Secretary of the Treasury shall analyze on an annual basis the exchange rate policies of
foreign countries, in consultation with the International Monetary Fund, and consider
whether countries manipulate the rate of exchange between their currency and the United
States dollar for purposes of preventing effective balance of payments adjustments or
gaining unfair competitive advantage in international trade. If the Secretary considers that
such manipulation is occurring with respect to countries that
(1) have material global current account surpluses; and
(2) have significant bilateral trade surpluses with the United States, the Secretary of the
Treasury shall take action to initiate negotiations with such foreign countries on an
expedited basis, in the International Monetary Fund or bilaterally, for the purpose of
ensuring that such countries regularly and promptly adjust the rate of exchange
between their currencies and the United States dollar to permit effective balance of
payments adjustments and to eliminate the unfair advantage. The Secretary shall not be
required to initiate negotiations in cases where such negotiations would have a serious
detrimental impact on vital national economic and security interests; in such cases, the
Secretary shall inform the chairman and the ranking minority member of the Committee
on Banking, Housing, and Urban Affairs of the Senate and of the Committee on Banking,
Finance and Urban Affairs of the House of Representatives of his determination.

22 USC § 5305. Reporting requirements
(a) Reports required
In furtherance of the purpose of this chapter, the Secretary, after consultation with the
Chairman of the Board, shall submit to the Committee on Banking, Finance and Urban
Affairs of the House of Representatives and the Committee on Banking, Housing, and Urban
Affairs of the Senate, on or before October 15 of each year, a written report on international
economic policy, including exchange rate policy. The Secretary shall provide a written
update of developments six months after the initial report. In addition, the Secretary shall
appear, if requested, before both committees to provide testimony on these reports.
(b) Contents of report
Each report submitted under subsection (a) of this section shall contain(1) an analysis of currency market developments and the relationship between the
United States dollar and the currencies of our major trade competitors;
(2) an evaluation of the factors in the United States and other economies that underlie
conditions in the currency markets, including developments in bilateral trade and capital
flows;
(3) a description of currency intervention or other actions undertaken to adjust the
actual exchange rate of the dollar;
(4) an assessment of the impact of the exchange rate of the United States dollar on(A) the ability of the United States to maintain a more appropriate and sustainable
balance in its current account and merchandise trade account;
(8) production, employment, and noninflationary growth in the United States;
(C) the international competitive performance of United States industries and the
external indebtedness of the United States;
(5) recommendations for any changes necessary in United States economic policy to
attain a more appropriate and sustainable balance in the current account;
(6) the results of negotiations conducted pursuant to section 5304 of this title;
(7) key issues in United States policies arising from the most recent consultation
requested by the International Monetary Fund under article IV of the Fund's Articles of
Agreement; and
(8) a report on the size and composition of international capital flows, and the factors
contributing to such flows, including, where pOSSible, an assessment of the impact of
such flows on exchange rates and trade flows.

22 USC § 286y. Promoting conditions for exchange rate stability
(a) In order to help assure that the resources provided under section 286e-li of this title
are used to support pro-growth policies which will help establish the economic conditions
necessary for more appropriate financial and exchange rate alignment and stability, it is the
sense of Congress that the Secretary of the Treasury shall(1) in consultation with the Secretary of State and the United States Trade
Representative, initiate discussions with other countries regarding the economic
dislocations which result from structural exchange rate imbalances; and
(2) instruct the United States Executive Director of the Fund to work for adoption of
policies in the Fund, both within the framework of article IV (of the Articles of Agreement
of the Fund) consultations and with respect to the conditions associated with Fundsupported balance of payments adjustments programs, which promote conditions
contributing to the stability of exchange rates and avoid the manipulation of exchange
rates between major currencies. Among other initiatives, the Secretary of the Treasury
shall propose strengthening the article IV consultation procedures of the Fund to
attempt to ensure that countries which are artificially maintaining undervalued or
overvalued rates of exchange agree to adopt market determined exchange rates.
(b) In determining his vote on extensions of assistance to any Fund borrower, the United
States Executive Director of the Fund shall take into account whether such borrower's
policies are consistent with the requirements of article IV of the Articles of Agreement of the
Fund.

ATTACHMENT II

ECONOMIES CONSIDERED TO HAVE MANIPULATED EXCHANGE RATES
AS DESCRIBED IN
TREASURY REPORTS TO CONGRESS ON
INTERNATIONAL ECONOMIC AND EXCHANGE RATE POLICIES

October 1988 Report:
Korea and Taiwan were considered to be manipulating their exchange rates under the terms of 22
V.S.c. 5304.
The report stated that undervalued exchange rates were a major factor in the increase in the
external surpluses of the two countries. The undervaluation was deemed the direct result of
currency intervention by the central bank, capital controls, and administrative mechanisms aimed
at preventing the exchange rates from reflecting market forces and achieving competitive gain.
With respect to Taiwan the report stated:
Taiwan's underlying economic fundamentals strongly suggest that further
appreciation would occur if capital and exchange restrictions were dismantled and
market forces were given freer rein. Taiwan has a strong economy with a large
global current account surplus, a large bilateral surplus with the United States, its
foreign exchange reserves have risen sharply and yet its currency is depreciating.
Pursuant to provisions of Section 3004, the United States intends to initiate
bilateral negotiations with Taiwan on an expedited basis for the purpose of
ensuring that Taiwan regularly and promptly adjusts the rate of exchange between
the NT dollar and the U.S. dollar to permit effective balance of payments
adjustment and to eliminate the unfair trade advantage.
With respect to Korea, the report stated:
Korea's strong economic fundamentals - 3 consecutive years of double digit real
growth, large and growing external surpluses, substantial prepayment of external
debt, and reserve accumulation - also point to an undervalued exchange rate. The
Korean authorities have used administrative arrangements and strict capital
controls to perpetuate the undervaluation of their currency. As with Taiwan,
numerous tariff and non-tariff barriers continue to restrict Korean imports and
prevent a sizable shift in its external surpluses, despite recent progress of trade
liberalization.

Given Korea's strong underlying economic fundamentals, further exchange rate
appreciation within a framework of liberalized trade, exchange and capital
controls, is clearly required. As such, the United States also intends to initiate

bilateral negotiations with Korea on its exchange rate policy to allow for balance
of payments adjustment and to eliminate the unfair trade advantage.

April 1989 Report:
Korea and Taiwan were considered to be manipulating their exchange rates under the terms of22
U.S.c. 5304.
The reported noted progress but that this was insufficient to alter the basic judgments of October
1988.

October 1989 Report:
Korea was considered to be manipulating its exchange rates under the terms of 22 U.S.c. 5304.
The report stated that there continued to be indications, despite positive moves, of exchange rate
manipulation by Korea. The assessment was based on exchange rate developments over the
previous six months; questions as to whether a recent reduction in Korea's surpluses would
continue; the lack of a significant role for market forces in Korea's exchange rate determination
system; and the widespread capital and interest rate controls that contributed to the government's
ability to directly manipulate their exchange rate.

May 1992 Report:
China and Taiwan were considered to be manipulating their exchange rates under the terms of 22
U.S.c. 5304.
With respect to China, the report stated:
The size and growth of China's external payments surpluses are a source of
serious concern. These surpluses result in large part from pervasive
administrative controls maintained by the Chinese authorities over the external
sector of the economy, including a highly regulated system of foreign exchange
allocation and direct controls on imports. At the same time, balance of payments
adjustment in China has been hindered by continued devaluation of the
administered exchange rate and controls on exchange rates in the nation's foreign
exchange swap centers.

Given the size of China's external payments surpluses and the level of its foreign
exchange reserves, continued devaluation of the administered exchange rate and
control of swap center rates must be viewed as an effort by the authorities to
frustrate effective balance of payments adjustment.

The report also concluded that Taiwan was manipulating its exchange rate within the meaning of
the Act. This was based on the judgment, in the context of Taiwan's continued large bilateral
and overall trade surpluses and foreign exchange reserves, that continued official action that
directly interfered with the role of market forces in exchange rate determination, such as
intervention in the foreign exchange market and imposition of controls on capital inflows, must
be viewed as an effort by the authorities to inhibit effective balance of payments adjustment.

December 1992 Report:
China and Taiwan were considered to be manipUlating their exchange rates under the terms of22
U.S.C. 5304.
The report stated that Taiwan continued to manipulate its currency. It pointed, as a basis for this
conclusion, to continued large overall trade and current account surpluses; a large and increasing
bilateral trade surplus with the US; excessive foreign exchange reserves; and continued official
action that directly interfered with the role of market forces in exchange rate detennination.
The report also stated that China continued to manipulate its currency. It noted that, given the
size of China's external payments surpluses and the level of its foreign exchange reserves,
continued use of the administered exchange rate and of regulated swap center rates must be
viewed as an effort by the authorities to frustrate effective balance of payments adjustment.
May 1993 Report:
China was considered to be manipulating its exchange rates under the tenns of22 U.S.c. 5304.
The report noted that while China had committed itself to reform its trade regime, for example,
in the context of the GATT, similar commitments had not been made with respect to its foreign
exchange system. Chinese officials had expressed general support for reform of the system, and
the long-term objectives of unifying the dual exchange rates and making the currency
convertible. However, they had not indicated the specific nature of the steps they planed to take
nor the timing of reform.
While there was some prospect that China's current account surplus might diminish in 1993, its
foreign exchange restrictions continued to impede balance of payments adjustment and to
contribute to large bilateral trade surpluses. In 1992 and early 1993, no significant changes were
made in China's foreign exchange regime, and the authorities continued to maintain limits on
access to foreign exchange. Therefore it was Treasury's judgment that China was manipUlating
its foreign exchange system in a manner that prevents effective balance of payments adjustment
within the meaning of the Act.

November 1993 Report:
China was considered to be manipulating its exchange rates under the terms of22 V.S.c. 5304.

The report expressed support for China's plans to move towards a more market-based economy
and reform its foreign exchange system. It noted, nevertheless, that China's foreign exchange
system continued to be heavily regulated and the United States was seriously concerned with the
level of China's bilateral trade surplus with the United States. Based on China's continued
reliance on foreign exchange restrictions, Treasury considered that China continued to
manipulate its exchange rate under the meaning of the Act. Treasury urged Chinese authorities
to eliminate all restrictions on access to foreign exchange, a step which would facilitate imports
and promoted adjustment in China's large bilateral surplus with the United States.

July 1994 Report:
China was considered to be manipulating its exchange rates under the terms of 22 U.S.c. 5304.
Treasury welcomed China's decision to unify its dual exchange rates as of January 1, 1994.
Nonetheless, further reforms implemented on April I, 1994, segmented the foreign exchange
market and imposed restrictions that limited foreign-funded enterprises access to foreign
exchange. Based on China's continued reliance on foreign exchange restrictions that could limit
imports, the report concluded that Treasury considered that China manipulated its exchange
system to prevent effective balance of payments adjustment and gain unfair competitive
advantage.

ATTACHMENT III
IMF - Exchange Arrangements and Surveillance
SURVEILLANCE OVER EXCHANGE RATE POLICIES
1. The Executive Board has discussed the implementation of Article IV of the proposed Second
Amendment of the Articles of Agreement and has approved the attached document entitled
"Surveillance over Exchange Rate Policies." The Fund shall act in accordance with this
document when the Second Amendment becomes effective. In the period before that date the
Fund shall continue to conduct consultations in accordance with present procedures and
decisions.
2. The Fund shall review the document entitled "Surveillance over Exchange Rate Policies" at
intervals of two years and at such other times as consideration of it is placed on the agenda of the
Executive Board.

Decision No. 5392-(77/63)
April 29, 1977,
as amended by Decision Nos. 8564-(87/59), April 1, 1987,
8856-(88/64), April 22, 1988, and 10950-(95/37),
April 10, 1995
Surveillance over Exchange Rate Policies

General Principles
Article IV, Section 3(a) provides that "The Fund shall oversee the international monetary system
in order to ensure its effective operation, and shall oversee the compliance of each member with
its obligations under Section 1 of this Article." Article IV, Section 3(b) provides that in order to
fulfill its functions under 3(a), "The Fund shall exercise firm surveillance over the exchange rate
policies of members, and shall adopt specific principles for the guidance of all members with .
respect to those policies." Article IV, Section 3(b) also provides that "The principles adopted by
the Fund shall be consistent with cooperative arrangements by which members maintain the
value of their currencies in relation to the value of the currency or currencies of other members,
as well as with other exchange arrangements of a member's choice consistent with the purposes
of the Fund and Section 1 of this Article. These principles shall respect the domestic social and
political policies of members, and in applying these principles the Fund shall pay due regard to
the circumstances of members." In addition, Article IV, Section 3(b) requires that "each member
shall provide the Fund with the information necessary for such surveillance, and, when requested
by the Fund, shall consult with it on the member's exchange rate policies."
The principles and procedures set out below, which apply to all members whatever their
exchange arrangements and whatever their balance of payments position, are adopted by the
Fund in order to perform its functions under Section 3(b). They are not necessarily
comprehensive and are subject to reconsideration in the light of experience. They do not deal

directly with the Fund's responsibilities referred to in Section 3(a), although it is recognized that
there is a close relationship between domestic and international economic policies. This
relationship is emphasized in Article IV which includes the following provision: "Recognizing ...
that a principal objective [of the international monetary system] is the continuing development of
the orderly underlying conditions that are necessary for financial and economic stability, each
member undertakes to collaborate with the Fund and other members to assure orderly exchange
arrangements and to promote a stable system of exchange rates."
Principles for the Guidance of Members' Exchange Rate Policies
A. A member shall avoid manipulating exchange rates or the international monetary system in
order to prevent effective balance of payments adjustment or to gain an unfair competitive
advantage over other members.
B. A member should intervene in the exchange market if necessary to counter disorderly
conditions, which may be characterized inter alia by disruptive short-term movements in the
exchange value of its currency.

C. Members should take into account in their intervention policies the interests of other
members, including those of the countries in whose currencies they intervene.
Principles of Fund Surveillance over Exchange Rate Policies
1. The surveillance of exchange rate policies shall be adapted to the needs of international
adjustment as they develop. The functioning of the international adjustment process shall be kept
under review by the Executive Board and Interim Committee and the assessment of its operation
shall be taken into account in the implementation of the principles set forth below.
2. In its surveillance of the observance by members of the principles set forth above, the Fund
shall consider the following developments as among those which might indicate the need for
discussion with a member:
(i) protracted large-scale intervention in one direction in the exchange market;
(ii) an unsustainable level of official or quasi-official borrowing, or excessive and
prolonged short-term official or quasi-official lending, for balance of payments purposes;
(iii) (a) the introduction, substantial intensification, or prolonged maintenance, for
balance of payments purposes, of restrictions on, or incentives for, current transactions or
payments, or
(b) the introduction or substantial modification for balance of payments purposes
of restrictions on, or incentives for, the inflow or outflow of capital;
(iv) the pursuit, for balance of payments purposes, of monetary and other domestic
financial policies that provide abnormal encouragement or discouragement to capital

flows;
(v) behavior of the exchange rate that appears to be unrelated to underlying economic and
financial conditions including factors affecting competitiveness and long-term capital
movements; and
(vi) unsustainable flows of private capital.

3. The Fund's appraisal of a member's exchange rate policies shall be based on an evaluation of
the developments in the member's balance of payments, including the size and sustainability of
capital flows, against the background of its reserve position and its external indebtedness. This
appraisal shall be made within the framework of a comprehensive analysis of the general
economic situation and economic policy strategy of the member, and shall recognize that
domestic as well as external policies can contribute to timely adjustment of the balance of
payments. The appraisal shall take into account the extent to which the policies of the member,
including its exchange rate policies, serve the objectives of the continuing development of the
orderly underlying conditions that are necessary for financial stability, the promotion of
sustained sound economic growth, and reasonable levels of employment.

Procedures for Surveillance
1. Each member shall notify the Fund in appropriate detail within thirty days after the Second

Amendment becomes effective of the exchange arrangements it intends to apply in fulfillment of
its obligations under Article IV, Section I. Each member shall also notify the Fund promptly of
any changes in its exchange arrangements.
II. Members shall consult with the Fund regularly under Article IV. In principle, the
consultations under Article IV shall comprehend the regular consultations under Articles VIII
and XIV, and shall take place annually. They shall include consideration ofthe observance by
members of the principles set forth above as well as of a member's obligations under Article IV,
Section 1. Not later than three months after the termination of discussions between the member
and the staff, the Executive Board shall reach conclusions and thereby complete the consultation
under Article IV.

III. Broad developments in exchange rates will be reviewed periodically by the Executive Board,
inter alia in discussions of the international adjustment process within the framework of the
World Economic Outlook. The Fund will continue to conduct special consultations in preparing
for these discussions.
IV. The Managing Director shall maintain close contact with members in connection with their
exchange arrangements and exchange policies, and will be prepared to discuss on the initiative of
a member important changes that it contemplates in its exchange arrangements or its exchange
rate policies.

V. If, in the interval between Article IV consultations, the Managing Director, taking into
account any views that may have been expressed by other members, considers that a member's
exchange rate policies may not be in accord with the exchange rate principles, he shall raise the
matter informally and confidentially with the member, and shall conclude promptly whether
there is a question of the observance of the principles. Ifhe concludes that there is such a
question, he shall initiate and conduct on a confidential basis a discussion with the member under
Article IV, Section 3(b). As soon as possible after the completion of such a discussion, and in
any event not later than four months after its initiation, the Managing Director shall report to the
Executive Board on the results ofthe discussion. If, however, the Managing Director is satisfied
that the principles are being observed, he shall informally advise all Executive Directors, and the
staff shall report on the discussion in the context of the next Article IV consultation; but the
Managing Director shall not place the matter on the agenda of the Executive Board unless the
member requests that this procedure be followed.
VI. The Executive Board shall review the general implementation of the Fund's surveillance over
members' exchange rate policies at intervals of two years and at such other times as
consideration of it is placed on the agenda of the Executive Board.

rS-2309: Remarks by Anna ESl:Ubedo Cabral, Treasurer of the United Stales, before the N... Page I of 4

FROM THE OFFICE OF PUBLIC AFFAIRS
March 13, 2005
JS-2309
Remarks by Anna Escobedo Cabral, Treasurer of the United States, before
the National Association of Hispanic Publications

It is great to be with you today. I have had the pleasure of knowing and working
with this great organization and your leadership for many years now. They have
modeled an extraordinary commitment to the association members, and to the
Latino community. I congratulate Hernan Guaracao, Eddie Escobedo and Tom
Oliver for their vision, dedication and for a tremendously successful conference this
year. I also want to acknowledge and thank leke Montes. your immediate past
President, for the fine work he did and continues to do on behalf of NAHP.
As the largest minority, representing more than 14 percent of the population,
wielding greater than $700 billion in purchasing power, yours is a market few can
afford to ignore. Your newspapers continue to be an important medium for
reaching that market.
But perhaps most important, you are all examples of how a business can do well
and do good at the same time. Indeed, a core function of your mission is to inform.
As one of the most important sources of information for Latino households, your
continued success and viability is critical to our shared goal of improving the quality
of life for Latinos.
In this there is much work for us to do. Whether it is about working to increase high
school and college graduation rates, improving our access to and understanding of
health care and healthy living, or helping Hispanic business owners to grow and
prosper, your efforts to make sure families have the information they need to
succeed makes a difference to so many lives.
The same is true for a particularly important area we have in common. Like our
national Latino leaders, President Bush's Administration has been working to
ensure that financial literacy is accessible to Latino families.
The challenge can be daunting at times. A few facts help illustrate the point:
• When a group of Americans was given a 14-question test of their financial
literacy, they answered less than half the questions correctly.
• 82 percent of high school seniors failed a 13-question quiz examining their
knowledge of issues like interest rates, savings, loans, credit cards and
calculating net worth.
• An estimated 10 million Americans have no relationship with a mainstream
financial service provider such as a bank or credit union. And, unfortunately,
40 percent of those unbanked are Hispanic. Clearly, we do not represent
40 percent of the population.
• Finally, 75 percent of Hispanics have not accumulated enough savings for
retirement. They rely exclusively on Social Security for their retirement.
As highly successful and influential individuals in the publication industry, you hold
a number of competing titles: business owner, parent, son or daughter, spouse,
friend, committed citizen and community leader. These and the many others that
follow each of you lays the ground work for the generations to come. We share a
strong commitment to family and community, across generations.
I, like you, wear a number of those hats as well. Among them, is my current
position as Treasurer of the United States which affords me the opportunity to help
make the Presirlent's vision of an ownership society a reality_ I believe in that vision

http://www.tr6as.g()y/pre66/r~l~ascs!js2309.htm

4i26!2005

JS-2309: Remarks by Anna Escobedo Cabral, Treasurer of the United States, before the N... Pal!.c
2 of 4
....
ana the promise it holds tor Latino famIlIes.
The President has said that if you own something, you have a vital stake in the
future of our country. He believes that the federal government should change to
help meet the challenges of our times. Strengthening Social Security for future
generations; ensuring that the pension promises made to workers and retirees are
kept: making the tax code simpler, fairer and pro-growth; reducing the burden of
lawsuits on our economy; and expanding access to affordable health care options
with health savings accounts are all critical milestones toward meeting the needs of
Americans in our changing world. And we'll continue to work to grow the economy
and hold the line on spending so that we remain on track to cut the deficit in half by
2009.
When he talks about an ownership society, I believe the President is speaking
directly to the heart of Latinos. We have enormous faith and commitment in the
American Dream - to work hard and produce a bounty to share with your family, to
own a home, a business. to get our children through college, have access to quality
healthcare, to see our parents retire with dignity, and know that our children will be
able to do the same.
As a result of his vision and efforts, during the first four years of his Presidency. we
saw lower taxes spur our economy back to health, we saw businesses grow,
prosper and create new jobs, and we witnessed first hand a boom in
homeownership.
In his second term, the President has embarked on an aggressive campaign to
tackle the hard issues of our times, chief among them, Social Security reform. In
that way, he reminds me of my very brave and courageous grandparents, for they
had to risk all they had, they had to risk a great deal, to start a new life in the United
States.
The President in his State of the Union Address called on Congress and the
American people to work together to fix Social Security. It's a system in desperate
need of repair. It was created in 1935, 70 years ago. And if it's not fixed now, we
will end up saddling our children and grandchildren with an enormous financial
burden.
Changing our Social Security system is a tremendous task that can only be done if
we join together to make it happen. We all know that "En la union esta la fureza."
One will not make a difference but many will. It is important for each of you to know
and understand this debate, and what is at stake. Strong. independent men and
women like you can change the course of history for the better for this great country
and for the Latino community.
Social Security provides a critical foundation of income for retired and disabled
workers - people we know and care about. Perhaps your mother and father, or an
uncle or friend. Indeed, for one-third of Americans over age 65, Social Security
benefits constitute 90 percent of their total income. Hispanics, African-Americans,
and unmarried elderly women are even more reliant on Social Security. More than
40 percent of Latinos rely on Social Security as their sole source of revenue for
retirement.
We know two things - Social Security is safe for today's seniors, but it is in serious
danger for our children and grandchildren.
As you may know, Social Security is a pay-as-you-go system with today's workers
paying to support today's retirees. But each year, there are more retirees taking
money out, and not enough additional workers to support them. In the 1950s there
were about 16 workers paying for every benefiCiary. Today, there are about 3, and
eventually, when today's younger workers retire, there will only be two workers to
support each person on Social Security. Add to this the fact that the first members
ofthe Baby Boom generation tum 60 next year, in 2006. You see. this is not a
distant problem. It's just around the comer.
By 2018, the government will begin to payout more in Social Security benefits than
it collects in payroll taxes, and shortfalls then grow larger with each paSSing year.

http://www.treas.gov/presslrdeases/js2309.htm

4i26/2005

JS-2309: Remarks by Anna Escobedo Cabral, Treasurer of the United States, before the N... Page 3 of 4
As a r~s~lt, our .children g~t a raw deal. In order to make up the shortages, they will
face significant Increases In taxes. and huge cuts in benefits.
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. He knows that the longer we wait to take action,
the m?re difficult and the expensive the changes will be. Doing nothing will cost the
most In the long run, resulting in either dramatic tax increases. severe benefit cuts
or both.
Any fix will require bipartisanship. There are a variety of good plans that have been
proposed in the past to fix Social Security. The President will work with Congress
to determine the best elements of the proposals that have been put forward. This
nation must always strive to leave behind a better America for our children and
grandchildren. If we invest now and work to fix the problem, we can leave them
with a more secure retirement in the future.
Fixing Social Security is also going to require a productive and well-informed
debate of the issues. Secretary Snow last week launched the "60 Stops in 60 Days"
tour in which Administration officials will crisscross the nation to take the President's
message on strengthening Social Security to the American people. Another tool in
this effort to encourage a national dialogue is the Web site Treasury launched
yesterday: www.StrengtheningSociaISecurity.gov. Its purpose is to provide
Americans with information on the serious problems that the Social Security system
faces. I encourage you to check it out.
In order to move the debate forward, the President has laid out some principles for
reform as he works with Congress to find a solution.
He is committed to protecting current and near retirees. There will be no changes
for those in or near retirement. No one born before January 1. 1950 will be
affected.
The President has also said that he will not raise payroll tax rates because higher
taxes will slow economic growth. As business people. you know only too well the
potential dampening effect of increased taxes.
Another guiding principle of reform is that we must find a lasting solution - a
permanent fix. The system and the American people deserve better than a band-aid
approach that will find us back at square one in a few short years.
Finally, the President believes that voluntary personal accounts must be a part of
the solution because they give younger workers the option to build a nest egg they
can call their own. Government can't take it away. and they can pass it on to their
children.
Personal retirement accounts are a better deal for the younger worker. who would
be able to choose from a conservative mix of bonds and stocks that would yield a
greater return than the younger worker is earning in the Social Security Trust. A
young person who earns an average of $35.000 a year over his or her working
career that elects to participate in the personal account option. based on
conservative projections, would have nearly $250,000 saved in the account at
retirement. That's the power of compound interest. something you all know a great
deal about.
That money would provide a nest egg for the owner of the account and give them
the opportunity to watch it grow over time at a rate greater than anything the current
system can deliver. It is money that that person can pass on to whomever he or
she chooses.
You know. my father worked hard all his life. and paid into the Social Security
system. He filed the paperwork necessary to begin receiving benefits. but died
before receiving his first check. He died the same month the checks were
scheduled to start coming. He died too young. of course. We came from a very
modest home. He worked hard all his life. but could never really get ahead enough
to save money. Social Security was all he had to support himself in his retirement.
But he died before receiving a single check. He would have given anything to be

http://www.treas.gov/prC66/re-!-eases/js2309.htm

4/26/2005

J8-2309: Kemarks by Alllm ESl:obedo Cabral, Treasurer or the United States, before the N... Page 4 of 4
able to pass those tunds on to his children. Instead, the government kept that
money.
Personal retirement accounts would ensure that Latino families have a chance to
save and grow their hard earned money in an account that belonged to them, that
they CQuid pass on to their children.
Change is a scary thing. Few of us are comfortable with change, but, as we
learned during the course of our lives and careers, "Para nadar hay que tirarse al
agua." I know that you all have had to jump in the water a few times. Here's your
opportunity to jump in and make a real difference for your parents, yourselves, and
your children. I am very proud of being among so many young, bright, and
committed Latinos, because I know that together, we can accomplish remarkable
things.
My grandmother used to say "La gallina vieja da buen caldo." Not that I am a
gallina vieja by any means, and I'm not suggesting you are, but I do believe that the
talent and wisdom in this room ensures we have much to look forward to in the
future. The President has faith in you, as well. He is working hard to ensure that all
Americans share in his vision of an ownership society. That vision holds great
promise for our community.
Congratulations again for a successful conference. Thank you to each and every
one of you for the work you do everyday at work, at home, and in the community.

-30-

http://www.treaa.gov/pre6s/releases/js2309.htm

4/26/2005

JS-2310: Remarks of Assistant Secretary lor Financial Markets Tim Bitsberger befo ... Page I of2

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free IInobe"<) AcroiJal'i'J Red(/P!(i<},

March 14,2005
JS-2310
Remarks of Assistant Secretary for Financial Markets Tim Bitsberger
before the Institute of International Bankers Annual
Washington Conference
Washington, DC

Thank you for having me here today to represent the Bush Administration and the
Treasury Department.
As you all know, the Department has some significant priorities before it in the
coming months, To name a few: strengthening Social Security for future
generations, reforming the tax code so that it is fairer, simpler and more pro-growth,
and growing the economy, creating jobs and exercising the fiscal discipline needed
to reduce the deficit.
Today I'd like to focus my remarks on an issue that is key to our fiscal health:
strengthening Social Security for the 21 sl Century. While Social Security is sound
for today's seniors and those nearing retirement, it must be fixed for younger
workers.
The baby-boom generation begins to turn 60 next year. The longer we wait to
address the challenges confronting Social Security, the costlier the solutions. Let
me spend a few minutes talking about the nature of the problem and how it
escalates over time. The demographics of our society have changed dramatically
resulting in fewer workers to support each retiree. In 1950, there were 16 workers
paying into the system for every one beneficiary, Today, there are only about three.
When today's youngest workers retire, there will only be two.
Additionally, Americans are getting older - by 2035, 20 percent of all Americans will
be over the age of 65. And people are living longer - life expectancy has hit a high
of 78 years, These demographic shifts have created significant challenges for
Social Security and threaten its solvency.
According to the 2004 Social Security Trustees Report, the cost of doing nothing to
fix the system has reached $10.4 trillion - that's twice the combined wages and
salaries of every working American last year. In 2018, Social Security will begin to
payout more than it takes in. The shortfalls will grow larger with each passing year
until the system is bankrupt in 2042,
The system simply cannot keep the promises its held out to our children and
grandchildren. If we don't act now to fix it, the only options will be drastically higher
taxes, massive new borrowing, or sudden and severe cuts in Social Security
benefits or other government programs.
The President has demonstrated the political courage necessary to take on the
great responsibility of fixing Social Security, He believes our children's retirement
security is more important than partisan politics and has shown the leadership
needed to confront this challenge.
The President has put forward some basic principles to guide reform,
The President believes we must make Social Security permanently sound. We
need to solve this now rather than pass the burden on to future administrations and

http://www.lIeas.ll.uv/press/reteases/js2310.htm

4/25/2005

JS-23IO: Remarks of Assistant Secretary for Fin~lI1cial Markets Tim Bitshcrgcr<13R~bero,.. Page 2 of 2
future generations with a short-term fix.
The President has said that there will be no benefit changes for those born before
1950. Social Security will not change for those 55 or older. There are 45 million
Americans receiving Social Security benefits now and millions more nearing
retirement. For these Americans, Social Security benefits are secure and will not
change in any way,
The President has ruled out an increase in tax rates. We will not jeopardize the
economic strength of our nation by raising payroll tax rates. The Social Security
payroll tax, which was once 2 percent, is now 12.4 percent - that's $1 out of every
$8 we earn Raising taxes further on American workers would stifle economic
growth and depress Job creation.
Another important pnnciple is to ensure fairness. We must ensure that lowerincome Americans get the help they need to have dignity and peace of mind in their
retirement. Reform should maintain the progressivity of the system.
And finally, critical for younger workers, is the establishment of personal retirement
accounts. This will allow younger workers to build a nest-egg for retirement that the
government cannot take away, They provide ownership, control and the opportunity
to watch your assets grow over time, They offer a chance to receive a higher rate of
return from sound, long-term investing beyond anything the current system can
deliver. The accounts would be voluntary and offer workers various low-cost options
similar to those available through the retirement system available to federal
workers.
With this framework guiding us, the Administration looks forward to working with
Congress to fix Social Security once and for all for future generations.
As a part of this effort, Secretary Snow recently launched a tour in which
Administration officials will criSSCross the nation to take the President's message to
the American people, As the Secretary has stated, real progress IS being made and
a meaningful national dialogue is underway, Another tool in our efforts to foster a
productive discussion on the challenges currently faced by Social Security is a Web
si,te Treasury launched a few days ago: wwwStrengtheningSociaISecurity.gov, I
encourage you all to take a look,
The President has committed to creatmg an environment that welcomes the
discussion of all good ideas and the Administration looks forward to a productive
debate on the many questions and issues before us.
Thank you for having me here today to discuss this important issue.

-30REPORTS
•

Treasury Departrnerlt Pno'ities

http://wwrdreas.gov/prcssirclcll~cs/js2310.htm

4125/20()5

Treasury Department Priorities

Tim Bitsberger, Assistant Secretary for Financial Markets
U.S. Treasury Department

:l
0

...J:
so
.-t: ..... ~
:l
t:
....- ...
...J: s- t:
C)

...,

Q)
\

...
en .'
"
0

Q: Why Act Now?

A: The first
Baby-Boomers start
turning 60 next year.

••••

••

!ill

rluIITTT~Tf~
II II .~ ~t It ~}. ,~,;

16 Workers paving for "-·
even 1 Beneficiarv
T
IJi)

4i;;

O:J;

1,;1:.

Cii

(6:

'-'1""

~ ~.~• •

I.:.

t,! ,

", '

-rrr'", : ~n'~s'~ rtf';'l" i)\n T~~;» {~,~~ t';;\ :~, ._, ",

•

t.~ h ~~; • ~:-~~'
;"
~,i'.,
i
.r ~ 4
'. I'"

m,.\~ • ~ !j',~ '

Q:-l

tl .:-

',",'

GI ::.>

I·

:' 1',
• ,,'

,mY)

3.3 Workers paring for
every 1 Beneficiarv

r i - - -%,

Onlv 2 Workers paving for
everv 1 Beneficiarv

......

IIU'Il ~ ~ ;";

II nil.

",.",' rilln
T
fii,.

g
6

'ip

I!~

11
....,

~.oA
r.r~j,~

r:n~~i

;-- -

$ :s= ;
•

-I

=
e

=(I)

(:!)

1i."":I

C
c
=.
c==.. = C ..
-

r.I> -en-

'J?

=
= = = .,.=
~

r.h

'3:(J:OM.I\)ti ISO;)

Q
(l)-

;,,:;:::
'"

I
I
I
I

I
I
I

,
I
I
I

I
I
I
I
I
I
I
I

I
I

I
I
I
I

I
I

oJ:)

,
t'tI

~ lL

ttl E
(])

=
.-:=
J_=
(he-..

-en-

<It

= =
= = = =
=
=
=
=
-en
I

....
=
N

=
=
=
N

=
-=r

=
=
N

===
=
..
,...
=
<I)

Promised Benefits "(Und~r current law) -"-,,_

''>I..
------------------------------------------------------ ----------~--~-:--------------- - - - T - - . " ' ........

Revenue

... --. Payable Ben-efits

(Under current law)

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

Permanent Fix
We must make Social Security
permanently sound, rather than
pass the burden on to future
generations.

No Benefit Changes for Those
Born Before 1950
For those in or near retirement,
Social Security will not change.

No Increase in Tax Rates
Raising taxes on American workers
would stifle the economy and
depress job creation.

Personal Retirement Accounts
Voluntary personal retirement
accounts will give younger workers the
opportunity to build a nest-egg for
retirement.

60 Stops in 60 Days
Secretary Snow recently announced a
tour in which Administration officials will
crisscross the nation to take the
President's message of strengthening
Social Security to the American people.

.p;:=v~~"-

sociiifS8CiNftv .~~~u
\ -~
\'

A recently launched Web site will
communicate the problems facing Social
Security and the Administration's efforts
for bipartisan reform:
www.StrengtheningSocialSecurity .gov

FROM THE OFFICE OF PUBLIC AFFAIRS
March 14, 2005
2005-3-14-15-36-55-13281
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
totated $80,869 million as of the end of that week, compared to $80,079 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

March 4, 2005

March 11, 2005

80,079

80,869

Euro

Yen

TOTAL

Euro

Yen

TOTAL

12,143

15,058

27,201

12,346

15,135

27,481
0

Of which, issuer headquartered in the U. S.
b. Total deposits with:

11,914

b.i. Other central banks and BIS

3,027

14,941

3,042

12,118

15,160

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

b.ii. Of which, banks located abroad

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

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

15,241

15,406

11,654

11,780

11,042

2.IMF Reserve Position

3. Special Drawing Rights (SDRs)

4. Gold Stock 3

5. Other Reserve Assets

II. Predetermined Short-Term Drains on Foreign Currency Assets

March 11, 2005

March 4, 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 US. dollar
2.a. Short pOSitions
2.b. Long positions

3. Other

o
o
o

o
o

lit. Contingent Short·Tenn Net Drains on Foreign Currency Assets
March 4. 20G5
Euro

1. Contingent liabilities in foreign currency

Yen

March 11, 2005
TOTAL

Euro

Yen

TOTAL

o
o

1.a. Collateral guarantees on debt due within 1 year
l.b. Other contingent liabilities

2. Foreign currency securities with embedded options
3. UndraWn, unconditional credit lines

3.a. With other central banJcs
3.b. With banks and other financial institutions
Headquallered 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. Shott positions
4.a.1. Bought puts

4.a2. Written calis

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

Notes:
1/1naudes holdings of the Treasury's Exchange Stabifization Fund (ESF) and the Federal Reserve's System Open Market Account

(SOMAl, 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 SDRldollar 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-2311: Deputy Assistant Secretary lanni(:ola Addresses Iligh School Teachers

Page I oj

FROM THE OFFICE OF PUBLIC AFF AIRS
March 13, 2005
JS-2311

Deputy Assistant Secretary lannicola Addresses
High School Teachers
Treasury's Deputy Assistant Secretary for Financial Education Dan lannicola, Jr.
today addressed high school teachers from across the country at a National
Academy Foundation meeting in Baltimore, Maryland. lannicola shared best
practices in financial education with the teachers and explained techniques for
integrating personal finance topics into existing curricula. lannicola also shared
information on financial education resources including www.mymoney.gov.
"The teachers I met today are committed to bettering their students' futures. We
spoke about how they can do just that by bringing personal finance topics into their
high school classrooms: said lannicola. "The National Academy Foundation is to
be commended for their support of teachers like these."
The mission of the National Academy of Finance is to sustain a national network of
career academies to support the development of America's youth toward personal
and professional success in higher education and throughout their careers. The
National Academy of Finance focuses on preparing young people for future careers
through a combination of school-based curricula and work-base experiences.
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 Stales. For more information about the Office of Financial
Education visit: www.treasgovlfinancialeducation.

http://ww\l.r.tn}a6.gov/pre.s.~releases~is23ll.htln

4/25/2005

js-2312: AssIstant Treasury Secretary Warshawsky's I)rcp,m:d Remarks N,llional League... Page J of 4

:'.

FROM THE OFFICE OF PUBLIC AFFAIRS
March 14,2005
js-Z312

Assistant Treasury Secretary Warshawsky's Prepared Remarks National
League of Cities Congressional City Conference
Thank yo~, May~r Williams, and thank you all so much for having me here today; I
hope you re having a terrific meeting.
Yours is an important group, and it's wonderful to have you here in our nation's
capital. You're a good reminder to people -inside the beltway- that the country
doesn't revolve around this city - in fact, the country is your cities.
Policies that are set by mayors, city councils, town boards of selectmen and private
or non-profit community groups really impact people's lives, on a day-to-day basis,
more than most of the things we do here in Washington, DC. So I commend you for
handling the critical responsibilities you have. and for dedicating your professional
and/or personal lives to making your cities and towns better places to live, work and
raise families.
Being a public servant - as many of you are, so you certainly appreciate - is a
humbling job. It forces us to look at the big picture and plan for long-term future.
I know that you understand all too well that one of the toughest things a government
at any level faces, each year. is set~in9 budget priorities and then making al\ of
those funding deCisions, one by one.
By focusing on priorities and looking for savings in every agency, across the board,
the President's administration has come up with a budget for FV 2006 that we
believe is fair while also holding the govemment accountable. As the President
announced in his State of the Union Address, his budget adheres to the principle of
"Taxpayer dollars must be spent wisely, or not at all. n
It's an awesome responsibility, is it not? Deciding how to spend taxpayer dollars. It
requires the highest level of dedication and scruples.
With this respect for taxpayer money in mind, the President's budget holds the
growth of discretionary spending to just 2.1 percent, below the expected rate of
inflation. Non-security discretionary spending in this budget falls by nearly one
percent, the tightest such restraint proposed since the Reagan administration.
We appreciate that cutling taxes and exercising fiscal discipline must go hand in
hand. We appreciate that this is the people's money with which we are dealing, and
that we work for the taxpayers.
That is why we are committed to making the President's pro-growth tax cuts
permanent and building on our strengthened economic fundamentals, and it is why
we submitted, to the Congress, a budget that will increase the efficacy of our
govemment programs without over-spending the taxpayers' money.
The Administration is mindful that the way that the federal govemment manages the
taxpayers' money sends a message to the people of America as well as to o~r
trading partners and investors around the glObe. ~he~ ~e ~ontroJ. o~r spending: we
are showing our citizens and the world that fiscal dlsclplrne IS a Priority on par WIth
our policies that promote economic growth.
Policies that promote growth are part of the proposed federal budget as well. It

http://www.treas.gov/presslre leases/js2312.htm

4/25/200~

js-2312: Assistant Treasury Secretary Warshawsky's Prepared Rcmarh \lational League ...

Page 2 of 4

seeks to make the President's tax cuts permanent, which we feel strongly about
given the ex~ellent track record of economic growth and job creation that have
~ollo~ed ~helr enactment: three million jobs, GOP growth of 4.4 percent, low
Inflation, mterest rates, and mortgage rates and record-high homeownership rates
have all followed reduced taxes and sound monetary policy decisions by the
Federal Reserve Board.
As no doubt you have seen in the budgets of your cities and towns, tax cuts can be
hard on budgets and deficits in the short term, but if the tax cuts are geared toward
improving incentives there are long-term benefits as well as short-term ones.
I point to the recent of growth because it is so important that we continue on a progrowth path. Continued economic growth is needed, and will be needed, to
continue to improve our standard of living and until every worker in America who is
still looking for a job can find one.

Economic growth is also, importantly, part of a winning strategy on deficit reduction
- one of the top priorities of the President's budget - because economic growth
increases Treasury receipts.
Treasury receipts are rising - in the second half of calendar 2004, individual income
tax revenue was up 10.5 percent versus the same period in 2003 - and will continue
to rise, as long as we have economic growth. That must be accompanied, as I
emphasized earlier, by strict fiscal discipline. That is why the President's budget
proposes real savings. I know it will have its critics as a result, but its frugality is
essential.
Let me be very clear on this: we have deficits and they are unwelcome. But we are
not under-taxed and higher taxes will not be the solution to reducing deficits. Fiscal
discipline, combined with economic growth, is the correct path.
Using this approach, we are making headway on deficit reduction, and we're on
track to halve the deficit by 2009. The deficit is also forecast to fall to 3.0 percent of
GOP in 2006 and to 1.5 percent by 2009, well below the 40-year historical average
of 2.3 percent of GDP.
The 2004 deficit came in at 3.6 percent of GDP - nearly a full percentage point
lower than had been projected. And the 2005 deficit is projected to show another
decline.
While we are pleased with this progress, we recognize that more needs to be done.
We need to make the tough choices on spending and stand steadfast in our
commitment to continuing economic growth in order to see that deficit whittled
down.
We also need to look at our long-term deficit situation.
That is why the President is courageously leading the country in a dialogue on
Social Security reform. Simply put: we've got to save Social Security.
Social Security is sound for today's retirees, but the system must be fixed to keep
the promise of Social Security for our children and grandchildren, penod.
The good news, the great news, is that the national dialogue on S~c~al Security is
terrific; it's the topic at lunch counters and kitchen tables, college dining halls a~d
office water coolers all over the country. And as ideas begin to come forward,. It s
important to remember that reform of the Social Security system must be lastmg,
permanent, not just a temporary 'band-aid.'
It takes courage to do more than patch up a syste~ that affects every citizen's life.
But you know that's what Americans expect of their leaders; they expect elected
officials like many of you, and like the PreSident and the Congress, to really solve
problems, not just tinker with them.
That's why the President has said that Social Security must be put on solid financial

http://www.trcfl5.gov!pn:ss!r.clcascs/js2312.htm

4/25!200~

· '31"_. Asslstam Treasu1"V
J5-..
. J Secretary Warshawsky's Prepared Remarks l\ational League...

Page 3 of 4

ground p~nlli:meJllly. ~or the I~ng haul. He believes that it would be an injustice to
the Amencan people If Washington, DC simply put a band-aid on the problem.
Because then the whole country would be back at the starting line in a few years.

So if someone promises you a 75-year fix, I encourage you to read the fine print. In
1983 we were promised a "75-year fix· - but 2 years later, the system was headed
out of balance aga·ln.
I know those of you who were born before 1950 know that nothing changes for you.
You know a political game when you see one, and you aren't going to be scared by
that type of thing. And if you are approaching retirement, you know better than
anyone how important it is to have a secure retirement. You're also always thinking
about what's best for your kids and your grand kids.
The generations of current and near-retirees have an awfully important opportunity:
to be the ones to usher in a new generation of shareholders in the American
Dream. Our children and grandchildren have an opportunity we didn't have - an
opportunity to own their retirement, a nest egg they could pass on to their heirs.
The creation of voluntary personal accounts is the element that makes the
President's vision 50 different from- a band-aid approach. They would change our
children'S financial prospects and give Social Security a future that won't need
constant patching-up.
It's inspiring to imagine, and inspiring that we've seen a clear shift in the course of
the last month or so from the question: "Is there a problem?" to the question: -How
do we fix it?"
And that's the question Americans want to hear. It's why the President encouraged
this dialogue; he wants lots of ideas on the table. An open discussion with lots of
ideas - not partisan politics - is the best way to accomplish the goal of securing the
financial future of our children and grandchildren.
President Bush has established some basic principles. He wants a permanent
solution, as I mentioned earlier, not a band-aid.
He wants to preserve benefits for current and near-retirees while saving and
strengthening the system for future generations. Specifically, Social Security will not
be changed for those 55 or older (born before 1950). For the more than 45 million
Americans who are currently receiving Social Security benefits, and those nearing
retirement, benefits are secure and will not change in any way, period.
The President has also said that he won't raise the payroll tax rate. Payroll taxes
have been raised some 20 times since Social Security was established - and it has
failed to make Social Security solvent. Raising the payroll tax will harm our
economy, hurt job growth and fail to achieve the President's goal to create a
permanent fix for Social Security. Even the most resilient economy can be
devastated by dramatic tal( increases.
For future generations of retirees, the President believes an awful lot of hope lies in
personal accounts - something that would allow younger workers to build a nest
egg that they own and control, something the government could never take away
from them, and that would tap into the great force of compound interest.
Albert Einstein believed, and the President and I agree, that compound interest is
one of the most powerful forces in the universe. It's why a personal account nest
egg would have a real return on investment that is far better than the rapidlyweakening promise of Social Security benefits.
For the life of me, I can" imagine why anybody would argue against young workers
having the ability to invest and build a better retirement for their future. It costs the
Social Security system nothing to do so, it will cost current and near-retirees
nothing, it gives our children and grandchildren a better retirement, and it helps our
country create a larger pool of savings. And as the President has said, the
retirement security of our young people is too important for partisan politics. Why
wouldn't we do this? I have not heard one good reason not to and I can't figure out
why anybody would oppose it.

http://www.treasgov!pressLrcleases/js2312.htm

4/25!2005

js-2312: Assistant Trl!asury Sccrl!tary Warshawsky's Prepared Remarks National League ... Page 4 of 4
Furthermore, as former Democratic Congressmen Tim Penny and Charlie Stenholm
wrote in an op-ed last week, "opposing personal accounts is not a substitute for
offering a positive solution for dealing with the challenges that face Social Security."
They went on to say. astutely, that they "believe that if Social Security were being
created from scratch today, Americans would want to include a way to help
everyone build up a nest egg." The President and I couldn't agree more.
I encourage all of you, when you return to the fine cities and towns that you serve,
to keep this dialogue going. If you have questions, we hope the new website,
www.StrengtheningSociaISecurily.gov can answer them.
Working together. keeping our minds open and our goals for our children and
grandchildren high, we can save and strengthen this American institution. I look
forward to the dialogue ahead.
Thanks again for having me here today: have a wonderful meeting.

http://WWW.trcD3.gov/presslrclcases/js2312.htm

4/25i2005

JS-2314 - Treasury International Capital Data For January

Page I 01'2

PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
We recommend printing this release using tha PDF file below.
To view Of print the PDF content on this page, download the free Ilrl,,/)(,") Aero/J.:tI'" HUn(h:.'!"!.

March 15, 2005
JS-2314
Treasury International Capital Data For January
Treasury International Capital (TIC) data for January are released today and posted on the U.S. Treasury web site (vv
which will report on data for February, is scheduled for April 15, 2005.
Long-Term Domestic Securities
Gross purchases of domestic securities by foreigners were $1,304.1 billion in January, exceeding gross sales of dom
billion during the same month.
Foreign purchases of domestic securities reached $92.5 billion on a net basis in January, relative to $83.2 billion duril
reached $78.2 billion in January. Net private purchases of Treasury Bonds and Notes increased to $23.1 billion from
private purchases of Government Agency Bonds were $19.9 billion, down from $25.6 billion the previous month. Net
were $18.0 billion, down from $39.2 billion the previous month. Net private purchases of Equities rose to $17.2 billior
Official net purchases of U.S. securities were $14.3 billion in January, relative to $10.3 billion in December. Official nNotes of $7.6 billion accounted for the bulk of official inflows in January, up from $7.0 billion the previous month.
Long-Term Foreign Securities
Gross purchases of foreign securities owned by U.S. residents were $248.7 billion in January, relative to gross sales
$249.7 billion during the same month.
Gross sales of foreign securities to U.S. residents exceeded purchases by $1.1 billion, highlighting a net U.S. acquisil
net U.S. sales of $5.5 billion in Foreign Bonds.
Net Long-Term Securities Flows
Net foreign purchases of both domestic and foreign long-term securities from U.S. residents were $91.5 billion in Janl
December. Net foreign purchases of long-term securities were $828.6 billion in the twelve months through January 2
the twelve months through January 2004.
The full data set, including adjustments for repayments of principal on asset-backed securities, as well as historical Sl
http://www.trcas.govitic!.
###
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. Residents
(Billions of dollars, nol seasonally adjusted)
2003

1 Gross Purchases of Domestic Securities
2 Gross Sales of Domestic Securities
3 Domestic Securities Purchased, net (line 1 less line 2) 11

http://www.tr-ells.gov/press/rclcas~s/js2314.htm

2004

14,374.715,389.4
13,628.8 14,473.6
745.9
915.7

12 Months'
JE

Jan-04

14,580.51 E
13,785.9 1
794.7

4/25/2005

JS-2314 - Treasury International Capital Data For January
4

Page 2 of2

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

5
6
7
8
9

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

10
11
12
13
14 Gross Purchases of Foreign Securities
15 Gross Sales of Foreign Securities
16 Foreign Securities Purchased, net (line 14 less line 15) f3
17
18

Foreign Bonds Purchased,
net
Foreign Equities Purchased.
net

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

602.8

679.5

627.9

160.5

153.7

179.2

140.9

212.2

144.7

263.3

289.4

249.4

38.2

24.2

54.6

143.1

236.2

166.7

113.5

203.1

138.8

24.3

20.3

23.4

5.6

11.4

5.5

-0.3

1.4

-1.0

2,891.0 3,176.7
2,953.4 3,268.3
-62.3
-91.6

2,954.9
3,016.5
-61.6

20.1

-3.1

27.6

-82.4

-88.5

-89.2

683.6

824.1

733.1

Net foreign purchases of U.S. securities (+)
Includes International and Regional Organizations
Net U.S. acquisitions of foreign securities (-)
U.S. Department of the
Source:
Treasury

11
12
13

REPORTS
• (PDF) Foreigners' Tra1sactions ill Long-Term Securities with U S Residents (Rillions of dollars. not seasonall

http://www.treus.gov/pr~8s/-rclca..jcs/js2314.htI11

4/25/2005

DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
March 15,2005
EMBARGOED UNTIL 9:00 AM

Contact:

Tony Fratto
202-622-2910

TREASURY INTERNATIONAL CAPITAL DATA FOR JANUARY

Treasury International Capital (TIC) data for January 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
February, is scheduled for April 15, 2005.
Long-Term Domestic Securities
Gross purchases of domestic securities by foreigners were $1,304.1 billion in January, exceeding
gross sales of domestic securities by foreigners of $1 ,211.6 billion during the same month.
Foreign purchases of domestic securities reached $92.5 billion on a net basis in January, relative
to $83.2 billion during the previous month. Private net flows reached $78.2 billion in January.
Net private purchases of Treasury Bonds and Notes increased to $23.1 billion from $1.4 billion
the preceding month. Net private purchases of Government Agency Bonds were $19.9 billion,
down from $25.6 billion the previous month. Net private purchases of Corporate Bonds were
$18.0 billion, down from $39.2 billion the previous month. Net private purchases of Equities
rose to $17.2 billion from $6.7 billion.
Official net purchases orv.s. securities were $14.3 billion in January, relative to $10.3 billion in
December. Official net purchases of Treasury Bonds and Notes of$7.6 billion accounted for the
bulk of official inflows in January, up from $7.0 billion the previous month.
Long-Term Foreign Securities
Gross purchases of foreign securities owned by U.S. residents were $248.7 billion in January,
relative to gross sales of foreign securities to U.S. residents of $249.7 billion during the same
month.

Gross sales of foreign securities to U.s. residents exceeded purchases by SI.1 billion,
highlighting a net U.S. acquisition of $6.6 billion in Foreign Equities and net U.S. sales of$S.s
billion in Foreign Bonds.
Net Long-Tenn Securities Flows
Net foreign purchases ofbotb domestic and foreign long-tenn securities from U.S. residents
were $91.5 billion in January compared with $60.7 billion in December. Net foreign purchases
of long-term securities were $828.6 billion in the twelve months through January 2005 as
compared to $733.1 billion during the twelve months through January 2004.
The full data set, including adjustments for repayments of principal on asset-backed securities, as
well as historical series, can be found on the TIC web site, http://www.treas.goy/tic/.
Foreigners' Transactions in Long-Term Securities with U.S. Residents
(Billions of dollars, not seasonally adjusted)
Forelpen' Tnuactions In Lo.-Term Securities witll U.s. Resideab
(Bill'IODSOf dollars, not seasolllily
II ad'usted)
~
12 Moab llImub
2003
I Gross PurchllSe8 of Domestic Securities
2 Gross Sales ofDomcslie Securities
3 Do_lie: SftUrltlll PuRO_d, .et Cline I Ie.. line 2) II

Prh-.lletn.

2004

14,374.7 15.389.4
13,628.8 14,473.6
915.7
745.9

.,9,5

JIIJo04

Jan-OS

14,510.S 15.535.9
13,785.9 14.m.9
794.7
'13.0

0I:t-04 Nov-04 Jlec.04

JIIMS

1,4OP.5 1,315.1

1.304.1
1.211.6

1,203.4
1.138.7
64.7

IJ09.3
IOU

1,231.7
83.2

611.9
179.2
144.7
249.4
54.6

8U
ISB.7
208.6

49.9

'11.1

,.2

11.8

72.9
1.4

22.9

298.3

18.0
3.7

24.3
23.7
12.4

39.2
6.7

166.7
138.8
23.4
5.S
-1.0

219,5
183.1
22.8
12.3

2,891.0 3.116.7
14 Gross I'IIrcbaacI of Fomp Secll"ilicl
2,953.4 3,268.3
IS Gross Sal.. ofFoniJIII SecuriIi..
-91.6
42.3
16 'orelp Securities Purchased,.et (line 14 less line IS) 13

2.9S4.9

3,150.0

3.0I/j,5
.(iU

3,234.4

4
5
Ii

Trcamy Boad8 .t Nola, _

Gov't AJeItI:'I Bands. net
Corporate SOlIds. net
Equitics,_

9
10

Ollldll,net
Treasury Bollds II NOIeI. Del
Oov't At,mr:y Bonds. net
CoqIol8te Bonda. net

II
12
I)

Equities, IICI

AU
160.5
140.9
263.3
38.2

153.7
212.2
289.4

24.2

143.1

236.2

113.5

203.1

24.3

20.3
11.4
1.4

'.6

·0.3

27.9

14.9
15.6
-0.9
0.9
-0.7

27.9
21.0

-114.3

251.7
266.9
.15.1

1.3

~.6

92,5

78.1
23.1
19.9
18.0

17.2

10.3
7.0
1.0
1.7
0.6

14.3
7.6
6.1
1.3
..0.7

28.7
2110.3

259.9

·IU

·22.4

241.7
249.7
-1.1

3.S
1.9
I.S

282.3

Foreip Bonds l'Im:IIatcd. lid
Forcilll Equities Purchased. net

20.1
-12.4

-3.1
.B8.S

27.6
-19.2

-2.1
.81.5

-S.I
.10.2

-2.9
-1.7

-u

50S

.15.5

.6.6

19 Net Lo....Term Flows (line 301115 line 161

683 ••

824.1

733.1

828.6

49.5

89.5

60.1

111.5

n
n.
13

Net fareisn pun:hasa of U.s.. _urities (+,
Includn Intemaliollll and Regional Organizations
Net U.s. acquisitions ofbeilllla:uriIics (-)

Source:

U.s. Deparbnellt of the TteIIIIlY

JS-2315: The Honorable Mark W Warshawsky, br>PrqxlI'l:d Rl.:lllal"ks ;\ll1crica's Co .. , Pagc I of 4

FROM THE OFFICE OF PUBLIC AFFAIRS
March 15, 2005
JS-2315
The Honorable Mark W. Warshawsky
Prepared Remarks
America's Community Bankers
March 15, 2005
Washington, DC
Thank you so much for having me here today; I hope you're having a terrific
meeting and are spending plenty of time on the Hill with your Congressional
Representatives. They need to hear from you l You're a very important part of the
free-market system that makes this great American economy so strong. and your
perspective on financial policy issues is invaluable.
I'll get into the topic of Social Security more in a moment, but want to start today by
noting that, over the past two years, America's community bankers have been part
of a phenomenal economic recovery and are helping to finance terrific economic
growth You are on the front lines, working closely with your customers to buy a
new house or perhaps grow a small business. That's important work that has
helped our economy prosper and has therefore made a real difference in people's
lives.
Well-timed tax cuts, combined with sound monetary policy set by the Federal
Reserve Board, led to this very good economic growth and, most importantly,
continual Job creation. The economy has created over three million jobs since May
of 2003. And while job growth can never be fast enough for those looking for work,
the steady pace of job creation has been an unmistakable sign of an economy that
has recovered from very tough times, and is now expanding.
The evidence abounds: In addition to continued job growth, we've also seen new
jobless claims decline and productivity continue to expand, Real GDP growth for
2004 was 4.4 percent. The unemployment rate is down to 5.4 percent - lower than
the average rate of the 1970s, 1980s and 1990s. Inflation, interest rates, and
mortgage rates remain at low levels. Homeownership rates are at record highs,
The people here in this room should be very proud of those numbers, Because you
are very much a part of our country's economic recovery and strength. Whether it's
home equity lines of credit or small-business start-up loans, you are providing the
capital that enables terrific, job-creating economic growth,
So I encourage you to keep up the good work at home. Here in Washington, DC
lawmakers need to work on keeping the path clear and solid for an economic future
that is as good, or better. than the present. To do that, we've got to keep taxes low.
We've got to keep the homeland secure - that's something you're helping with and
I'll talk more about that later. And we've got to save Social Security.
Social Security is sound for today's retirees, but the system must be fixed 10 keep
the promise of Social Secunty for our children and grandChildren, period.
The good news, the great news, IS that the national dialogue on Social Security is
terrifiC; It's the topiC at lunch counters and kitchen tables, college dining halls and
office water coolers all over the country, And as ideas begin to come forward, it's
important to remember that reform of the Social Security system must be lasting,
permanent, not just a temporary 'band-aid.'
It takes courage to do more than patch up a system that affects every citizen's life.
But ii's Whill AlllcriUlI1S expect of their leaders; they expect elected officials like the

http://www.tretl3.gov/press!r016a~es/js2315.htm

4125!2005

JS-2315: The Honorable Mark W. Warshawsky Prepared Remarks Ameriea's Co... Page 2 of 4
President and the Congress to really solve problems, not just tinker with them.
That's why the President has said that Social Security must be put on solid financial
ground p~rmanently, ~or the I~ng haul. H~ believes that it would be an injustice to
the Amencan people If WashIngton, DC simply put a band-aid on the problem.
Because then the whole country would be back at the starting line in a few years.
So if someone promises you a 75-year fix, I encourage you to read the fine print. In
1983 we were pro~ised a "75-year fix" - but 2 years later, the system was headed
out of balance again.
I know th.at all of you born before 1950 know that nothing changes for you. You
aren't gOing to be scared by ads, or misled by politicians. You know better than
anyone how important it is to have a secure retirement, and you also want what's
best for your kids and your grandkids ... which is why we welcome your ideas on
this issue.
The generations of current and near-retirees have an awfully important opportunity:
to be the ones to usher in a new generation of shareholders in the American
Dream. All of our children and grandchildren should have an opportunity that not all
of us currently have - an opportunity to own their retirement, a nest egg they could
pass on 10 their heirs.
It's inspiring to imagine that future for them.
It is also inspiring that we've seen a clear shift in the course of the last month or so
from the question: "Is there a problem?" to the question: "How do we fix it?"

And that's the question Americans want to hear. It's why the President encouraged
this dialogue; he wants lots of ideas on the table. An open discussion with lots of
ideas - not partisan politics - is the best way to accomplish the goal of securing the
financial future of our children and grandchildren.
President Bush has established some basic principles. He wants a permanent
solution, as I mentioned earlier, not a band-aid.
He wants to preserve benefits for current and near-retirees while saving and
strengthening the system for future generations. Specifically, Social Security will not
be changed for those 55 or older (born before 1950). For the more than 45 million
Americans who are currently receiving Social Security benefits, and those nearing
retirement, benefits are secure and will not change in any way, period.
The President has also said that he won't raise the payroll tax rate. Payroll taxes
have been raised some 20 times since Social Security was established - and it has
failed to make Social Security solvent. Raising the payroll tax will harm our
economy, hurt job growth and fail to achieve the President's goal to create a
permanent fix for Social Security. Even the most resilient economy can be
devastated by dramatic tax increases.
For future generations of retirees, the President believes an awful lot of hope lies in
personal accounts - something that would allow younger workers to build a nest
egg that they own and control, something the government could never take away
from them, and that would tap into the great force of compound interestsomething you, as bankers, understand very well.
Albert Einstein believed, and the President and Secretary Snow agree, that
compound interest is one of the most powerful forces in the universe. It's why a
personal account nest egg would have a real return on investment that is far better
than the rapidly-weakening promise of Social Security benefits.
It is hard for me to imagine why anybody would argue against young workers
having the ability to invest and build a better retirement for their future. ~t costs the
Social Security system nothing to do so, it will cost current .and near-retl~ees
nothing, it gives our children and grandchildren a better .retlrement, ~nd It helps our
country create a larger pool of savings. And as the PreSident has said, ~~e
retirement security of our young people is too important for partisan pol~tlcs. Why
wouldn', we do this? I have not heard one good reason not to and I cant figure out

http://www.trea6.gov/press/r.eleas~s/js2315.htl11

4i25!2005

JS-231 5: The Honorable Mark W. \Varshawsky..:..:br;..Prepared Remarks America's Co... Page.3 01'4
why anybody would oppose it.
Furthe.rmore, as for~er Dem~cratic .Congressmen Tim Penny and Charlie Stenholm
In an o~-~d this ,,:,eek, Opposing personal accounts is not a substitute for
offering a poSItive solution for dealing with the challenges that face Social Security."
They went on to say, astutely, tha.t they "believe that if Social Security were being
created from. scratch today, Amencans would want to include a way to help
everyone bUild up a nest egg." The President and I couldn't agree more.

wrot~

I know that this audience understands and appreciates what I'm saying here today.
You understand the value of ownership, and how sound investments and savings
lead to a financially independent future.
You've seen your customers improve their financial futures through the investment
and savings products you offer.
Perhaps you are even offering your customers Health Savings Accounts (HSAs)and If you aren't yet, I hope you consider it. It's something that 1think has huge
market potential, and is of particular interest to your small-business customers.
HSAs are really super-charged IRAs that put patients back in charge of their health
care. They own it, they control it, they can leave it to their heirs.
It's a new option for health coverage that is good news for individuals and
employers who are struggling with their health-care costs.
One of the most common observations we hear from consumers is their desire to
find a local bank that offers these accounts. So I am confident that the market is
there for you and that consumers are anxious for you to add this to your product
line. This is a real opportunity for you.
HSAs are a critical step toward increasing the availability and affordability of health
insurance for all Americans. They are also helping to put individuals in charge of
their own health care ... and that's something that is good news both for the
American family and for the American economy as a whole.
The American economy also does well when our citizens feel a sense of safety and
stability. In short: we must be secure in order to be prosperous.
And that's why, in today's world you, as bankers, are taking care of your customers
in a new way. In addition to providing essential financial services, you also work
with law enforcement and intelligence services every day in the war against
terrorism.
While hatred fuels the terrorist agenda, money makes it possible. That's why the
work you do, and the information you share with authorities, is a critical element in
winning the war on terror. With every battle that we win, every terrorist or
organization that we designate, we tighten the noose on terrorist financial networks.
While terrorist groups need enormous amounts of money to train, recruit, travel and
essentially exist, September 11 th and the train bombings in Madrid taught us that
relatively small amounts of money are needed to carry out actual terrorist attacks.
That's why it is so very important that we remain constantly vigilant, attacking
tainted sources of funding while also creating systems that help prevent blood
money from moving through our banks and financial system.
I deeply appreciate the work you do in this area. I know that many of you here today
are concerned about developments related to the Bank Secrecy Act, and I'd like to
talk about that because it's important we work together on this.
Compliance with the Bank Secrecy Act is vital; we take it seriously at the. Tre.a.sury
Department, and information reported by your institutions under thiS Act IS Critical to
the national security of our country and to our efforts to protect our finanCial .~ystem
from the abuses of money laundering and other financial crime. Your due diligence
with respect to suspicious activity makes you the gatekeepers for entry into the
financial system.

http://w.~·w.treas.gov/pr~s.s/rclcascs/js2315.htm

4125!200

JS-231S: The Honorable Mark W. Warshawsk y Prcpared Rcmarks i\ml:rica 's Co... Page 4 of-+
We hear your concerns about the need tor consistent enforcement. That is why
Secretary Snow has asked Under Secretary Stuart Levey, Assistant Secretary
Zarate and Director Fox of the Financial Crimes Enforcement Network to fully
engage the bank supervisory agencies and the Department of Justice to ensure
that the examination and enforcement processes under the Bank Secrecy Act are
fair, consistent, and achieving the ultimate policy goals of the statute.
Again, I want to thank you, on behalf of Secretary Snow and the Treasury
Department, for the efforts you and your institutions have made in complying with
the Bank Secrecy Act. Please know that the Secretary and the Department are
aware of the efforts you are making and the monies you are spending to ensure
compliance. The financial sector - particularly depository institutions - has led the
private sector in assisting in the war against terrorism, and it is clear that you
appreciate the fact that you are on the front lines. On behalf of the President and
the Secretary, we thank you for your efforts. The Secretary often says how much he
appreciates your good corporate citizenship here in Washington.
I believe that the best days lie ahead for this country ... because we are resolved to
make it so. From the war on terror to the salvation of Social Security to the spread
of democratic values across the globe, these are historic times that we will look
back on with the great sense that America saw what needed to be done and didn't
shrink from the challenge. I'm proud to be working for the President on each of
these goals, and I'm looking forward to working with all of you as we protect
America from terror and continue on a path of economic growth.
Thank you again; have a great meeting.

http://www.treaS.80v/rn~s~rclcasesijs2315.htm

4!25i20()

Full text of Press Releases of the United States Department of the Treasury : Volume 422

FRASER