Full text of Press Releases of the United States Department of the Treasury : Volume 424

View original document

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

Department of the TfUSUry
Library

AUG 2 5 2005

Treas.

HJ
10
.At3
P4
v.424

Department of the Treasury

PRESS RELEASES

The following numbers were not used:
JS-2423 and 2424

Department of the Treasury

Ubrary

AUG 2 6 2005

-2413: Treasury Secretary John Snow Marks Anniversary of Social Security Commission

Page I

FROM THE OFFICE OF PUBLIC AFFAIRS
May 2, 2005
IS-2413

Treasury Secretary John Snow Marks Anniversary of Social Security
Commission
In a speecll to the Association for Advanced Life Underwriting this morning,
Treasury Secretary John Snow recognized the fourth anniversary of the Social
Security Commission that President Bush convened four years ago on May 2 nd ,
2001
"The bipartisan commiSSion made recommendations to the President, who listened
carefully to their recommendations in establishing his priorities for reform," Snow
noted during his remarks, which focused primarily on reforming the financial
unsustainable system
"This anniversary reminds us that tile President has been courageously leadlllg the
discussion on thiS Issue for years. and that the time for action, for moving forward
on savlTlg and strengthening the system for future generations, is now."
-30-

http://www.treas.gov/pressfreleasesljf>2413.htm

5/3112

;-2414: Treasury Announces Market Financing Estimates

Page I

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

May 2, 2005
JS-2414

Treasury Announces Market Financing Estimates
The Treasury Department announced today that It expects to pay down $42 billion
in net marketable debt during the April - June 2005 quarter. The estimated cash
balance on June 30 IS $20 billion On January 31, Treasury announced a net
market borrowlIlg of $12 billion With an end-ol-quarter cash balance 01 $15 billion.
The decrease in borrOWing is primarily the result of higher indiVidual tax receipts
and State and Local Government Series security Issuances.
Treasury also announced that It expects net borrowing of marketable debt to total
$103 billion in the July - September 2005 quarter. The estimated cash balance on
September 30 IS $30 billion.
DUring the January - Marcil 2005 quarter. Treasury's net borrowing of marketable
debt totaled $144 billion and tile cash balance on March 31 was $22 billion. On
January 31, Treasury announced that It expected net borrowlIlg 01 marketable debt
to total $147 billion with an estimated end-of-quarter cash balance 01 $10 billion.
The higher cash balance is primarily the result 01 larger-than-proJected Issuances 01
State and Local Government Series securities.
Additional financlllg details relating to Treasury's Quarterly Refunding will be
released at 900 A.M. on Wednesday, May 4.
- 30 REPORTS
•

Market Financirig Estimates Table

http://www.treas.gov/pressfreleasesljf>2414.htm

5/3112

TREASURY ANNOUNCES MARKET FINANCING ESTIMATES

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

Quarter

Estimated
Borrowing
($ billion)

Estimated
End-of-Quarter
Cash Balance
J$ billionl

Apr-Jun 2005
Jul-Sep 2005

($42)
$103

$20
$30

Since 1997, the average absolute forecast error in net borrowing of
marketable debt for the current quarter is $9 billion and the average absolute
forecast error for the end-of-quarter cash balance is $9 billion. Similarly, the
average absolute forecast error for the following quarter is $29 billion and
the average absolute forecast error for the end-of-quarter cash balance is $11
billion.
The following tables reconcile the variation between forecasted and actual
net borrowing of marketable debt in the January - March 2005 quarter.

Quarter

Estimated
Borrowing
($ billions)

Actual
Borrowing
($ billions)

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

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

Jan - Mar 2005

$147

$144

$10

$22

Categories
Receipts
Outlays
Other
Larger End-of-Quarter
Cash Balance

Chg from
Nov Estimate

+$4
(I)

+12
( 12)

Additional financing details relating to Treasury's Quarterly Refunding will
be released at 9:00 A.M. on Wednesday, May 4.

S-2415: Assistant Secretary of the Office of Economic Policy Mark J. Warshawsky Statement... Page 1 (

FROM THE OFFICE OF PUBLIC AFFAIRS
May 2. 2005
JS-2415

Assistant Secretary of the Office of Economic Policy
Mark J. Warshawsky
Statement for the Treasury Borrowing Advisory Committee
of the Bond Market Association
May 2, 2005
The US. economy remains on a solid growth track. Real GOP rose at a 3.1 percent
annual rate in the first quarter. about In line With our estimate of trend growth.
follOWing a gain of 3.8 percent In the fourth quarter. The deceleration largely
reflected a slower pace of business investment after double-digit rates of growth
last year.
Investment in equipment and software rose by 6.9 percent at an annual rate in the
first quarter. follOWing an Increase of 14.5 percent during all of 2004. Although data
are not yet available by which to evaluate the Impact of the bonus expensing
provision of the Jobs and Growth Tax Relief Reconciliation Act. the expiration of the
provIsion at the end of last year may have contributed to the pullback. Investment In
structures. which has been slower to recover from the 2001 downturn, declined at a
2.6 percent annual rate. Overall. bUSiness fixed investment increased by 4.7
percent In the first quarter after rising by 11.0 percent over the four quarters of last
year. Inventory investment made a substantial positive contribution to first-quarter
growth, adding 1.2 percentage points to the increase in real GOP on top of a 0.5
pOint addition in the previous three-month period
Personal consumpllon expenditures moderated in the first quarter to a 3.5 percent
annual rate from a brisk 4.7 percent pace during the second half of 2004. A drop in
purchases of motor vehicles and parts accounted for most of the slowdown. The
fundamentals of the household sector nonetheless remain sound. Nearly half a
million Jobs were added to nonfarm payrolls during the first quarter, bringing the
Increase since the May 2003 employment trough to 3.1 million. The unemployment
rate continued to recede and in March stood at 5.2 percent, 1.1 percentage pOints
below the June 2003 peak.
There has been some concern of late about recent declines In real wages.
However, these declines followed unusual strength of real wages dUring the
recession and early recovery period Measured from tile Mal'ch 2001 bUSiness
cycle peak, the performance of real average Ilourly earnings of production and
other nonsupervisory workers in the current cycle is the second strongest on
record. Rising benefit costs have been an Important factor constraining wage
growth recently. The Employment Cost Index showed that hourly compensation
costs in private industry rose by a moderate 3.4 percent in nominal terms over the
year ending In March - a small gam in real terms. Because of a rapid 5.8 percent
increase In benefit costs, however, growth of wages and salaries was held to only
2.4 percent. We nonetheless are encouraged by the deceleration in benefit costs
over the past year from growth In the 7 percent range a year ago. As the labor
market continues to firm, real wages are expected to strengthen. In the meantime,
consumer balance sheets appear to be on solid gmund. Debt service payments do
not appear to be problematic, consumer loan performance has improved notably In
the past few years, and household net worth relative to disposable income is higher
than at any time prior to the late 1990s, when the runup In equity markets boosted
the wealth ratio to record levels

http://www.treas.gov/pressfreleasesljf>2415.htm

5/31/20

S-2415: Assistant Secretary of the Office of Economic Policy Mark 1. Warshawsky Statement... Page 2 of

Real residential investment picked up to a 5 7 percent pace in the first quarter from
the fourth quarter's 3.4 percent annual rate IIlcrease. The housing market has been
exceptionally vibrant the past few years. A number of records were broken In 2004
and in March new home sales shattered prevIous highs. On the other hand,
housing starts fell sharply In March and building permits have tilted lower in recent
months, possibly signallllg the sector's return to a more normal and sustainable
pace.
The trade defiCit Widened further In the first quarter, acling as a brake on growth for
the SIXtil consecutive quarter. Imports climbed by 14.7 percent, more than offsetting
a 7.0 percent Increase III exports ThiS boosted the trade gap by $421 billion In real
terms to $6632 billion and shaved 1 5 percentage points off the first-quaner
advance in real GOP. The strong performance of the U.S economy compared to ItS
major tradlllg partners is partly responsible for the growing deficit.
Inflation has shaded higher over the past year, boosted in part by rislllg oil prices.
The consumer price index rose by 3.1 percent over the year ending in March, up
from a 1.7 percent increase in the year-earlier period. Core IIlfiation has also
accelerated modestly but remains contained at 2.3 percent.
The rise in energy prices has affected the U.S. economy In other dimenSions as
well. The one-month futures price of West Texas Intermediate crude oil spiked to a
new monthly high of $54.63 per barrel in March. up more than $6.50 from the prior
month's average, and on the first day of April soared to a record $57.27 per barrel.
Retail gasolille prices averaged close to $2.25 per gallon In April, an all-time high
that exceeded year-ago levels by about 45 cents. By cutting Into real wages.
weighing on consumer confidence, and heightening business uncertainty, energy
pnces have exerted a drag on economic activity that became Visible at the end of
the first quarter. So far, the economy has shown conSiderable resilience In the face
of an approximate doubling of oil prices over the past 2-1/2 years but some
tempering of growth is consistent With both modeling results and past experience.
Persistently high fuel prices highlight the need to Implement the Administration's
proposals to bolster domestic energy supplies and adopt technologies to use
energy more efficiently, particularly in light of the rise In energy demand from the
developlllg world. Strong growth in consumption among emerging economies IS
one of the factors that IS putting considerable upward pressure on energy prices. It
is tllerefore imperative that we assist rapidly growing countries like China and India
in developing cleaner, more efficient technologies to reduce their own demand. By
sharing our knowledge, we will contribute to the conservation of energy resources,
helping to restrain pnces and preserve the environment
Unless oil prices surge sharply higher, the economy appears well-equipped to
weather any loss in momentum we may be experiencing currently. The
unemployment rate is low, IIlflatlon remalils contallled, and productivity continues to
rise. The strength of these underlying fundamentals suggests that the economy IS
poised to grow at a healthy rate for the remainder of the year.
- 30 -

http://www.treas.gov/pressfreleaseslj.. 2415.htm

5!31!20C

May 3, 2005
The President
The White House
Washington, DC 20500
Dear Mr. President:
It is with enom10US appreciation and gratitude that I respectfully submit my resignation
as Assistant Secretary of the Treasury effective May 31,2005. It has been a singular
privilege to serve you at the Treasury Department and to help implement your agenda for
economic growth over the last four years.

Under your leadership, the Treasury Department has advanced policies that have
strengthened the U.S. economy, created jobs, and spread prosperity around the
world. Your emphasis on free trade and free market capital flows is critical to growing
emerging economies as well as keeping our economy and our financial markets the most
dynamic, resilient and robust in the world.
I will always cherish the experience of working at the Treasury Department with an
extremely dedicated group of appointees and career civil servants; they have become
family to me. Thank you again for the privilege and the honor of serving under your great
leadership at such a critical time in our nation's history.
Sincerely,
Rob Nichols

S-2417: Statement of Treasury Secretary John W. Snow On the Departure of Treasury Assistant Se...

Page I of

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

May 3. 2005
JS-2417

Statement of Treasury Secretary John W. Snow

On the Departure of Treasury Assistant Secretary Rob Nichols
May 3, 2005
"The Treasury Depal1ment IS preparing to bid a very fond farewell to Rob Nichols.
who will be departing from a dlstillguished career In public service at the end of this
month He has served his country honorably as a public official and we wish him the
very best in his new life in the private sector
"As the Assistant Secretary of Public Affairs. and before that as Deputy Assistant
Secretary. Rob has been involved with every issue that the Treasury Department
handles. HIs communications and management skills. combined with his
understanding of financial markets. the financial services industry and a wide
breadth of economic matters. made him a uniquely valuable advisor to me. to the
Treasury Department leadership. and to officials throughout the Administration His
leadership and counsel on publiC relations. strategy and relationships with the news
media have been second-to-none, and his office is widely know as one of the most
well-managed and effiCient in the Treasury organization.
"On a more personal note. Rob has been a steady source of wisdom as well as
camaraderie since I became Treasury Secretary over two years ago. He has been
an IIlflnltely valuable member of the Treasury team and of the larger Bush
Administration team. he will be deeply missed"

REPORTS
•

"Assistant Secretary Nichols' Resignation Letter"

http://www.treas.gov/pressfreleasesljf>2417.htm

5/311200:

May 3, 2005
The President
The White House
Washington, DC 20500
Dear Mr. President:

It is with enomlOUS appreciation and gratitude that I respectfully submit my resignation
as Assistant Secretary of the Treasury effective May 31, 2005. It has been a singular
privilege to serve you at the Treasury Department and to help implement your agenda for
economic growth over the last four years.
Under your leadership, the Treasury Department has advanced policies that have
strengthened the U.S. economy, created jobs, and spread prosperity around the
world. Your emphasis on free trade and free market capital flows is critical to growing
emerging economies as well as keeping our economy and our financial markets the most
dynamic, resilient and robust in the world.
I will always cherish the experience of working at the Treasury Department with an
extremely dedicated group of appointees and career civil servants; they have become
family to me. Thank you again for the privilege and the honor of serving under your great
leadership at such a critical time in our nation's history.
Sincerely,
Rob Nichols

S-2418: The Honorable John W. Snow Prepared Remarks: The American Academy of Actuaries' ... Page I of5

FROM THE OFFICE OF PUBLIC AFFAIRS
May 3, 2005
JS-2418

The Honorable John W. Snow
Prepared Remarks: The American Academy of Actuaries' Spring
Meeting
Washington, DC
Good afternoon I'm thrilled to be here, to spend some time with all of you I have
an awful lot of respect for your profession, and for your perspective on the fiscal
and retirement policies of our great country.
Above all else, you are a fair and ethical profession. Unbiased. Motivated by what is
accurate, not by the opinions of the day. Tilat IS a difficult standard for mortals to
achieve, and you do it as well as any group I've been familiar with.
You may have noticed that I talk a lot about actuaries when I talk about Social
Security reform. I point to your work because I know that it stands solid, without the
lint or tarnish of politics
I have been aggravated, as I'm sure you have been, by the partisan politiCS that
have sullied the issue of saving and strengthenlllg Social Security
The national dialogue that the PreSident has engendered has really been terrific,
and we're very proud of the fact that Social Security IS being discussed allover the
country, from lunch counters to college dlnlllg halls, from family dinner tables to the
halls of Congress.
The national conversation has definitely changed from "should it be fixed?" to "how
can we fix It." and that IS great progress.

But not everyone has the PreSident's courage. The political temptation has been to
deny the problem or delay the solution, and that's a shame
Those of you in thiS room today know better than anyone that to deny that the
system IS In finanCial trouble IS to deny the facts, period. And delaylllg action IS
fiscal foolishness.
So I Imagille that we are preoccupied with some COlllmon concerns: the long-range
fiscal health of the nation's SOCIal Security system, and the Implications of both
reform and of inaction.
You know the scenario of Inaction A compounding problem, growing worse by
$600 to $700 billion each year
The President doesn't believe in ignoring that reality. He doesn't think It would be
wise to turn a blind eye to the reports of your non-partisan colleagues, which tell us
that the program, in its current form, is unsustainable
The President is too honest to ignore the irrefutable facts, the undeniable truth that

http://www.treas.gov/pressfreleasesljf>2418.htm

5/3112005

;-2418: The Honorable John W. Snow Prepared Remarks: The American Academy of Actuaries' ...

Page 2 of 5

the Social Security system IS on an unsustall1able path. As you well know. the
demographics. the anttlmetic. cannot be dellied Cash flows peak In 2008 and turn
negative in 2017. and the trust fund Itself will be exhausted In 2041 People are
living longer and haVing fewer children. so there are fewer workers to support
retll·ees. We had 16 workers paying II1tO a system for everyone beneficiary In 1950.
and tOday we oilly have about three workers for every benefiCiary That ratio Will
drop to two-to-one by the tll11e today's young workers retire.
When tllose young workels retlle. in 2041. the system will be exhausted. bankrupt
Today's 30-year-old can expect a nearly 30 percent benefit cut from the current
system when he/she reaciles retirement age Without action. our children and
grandchildren will be faced with huge benefit cuts or massive tax II1creases.
That's the scenario of Inaction And it's one the President won't accept He
understands that the government must plan for the future and deal With 1001111ng
financial threats when we see them
We also need to talk about the financial consequences of taking the wrong action
We have to do It right because of the enormous Impact Social Security can have on
our economy overall. The American economy IS the most dynamiC and resilient m
the world, but we cannot take that for granted.
Your association's website has a clever feature, "the Social Security game." I thmk
It'S a great way to show wilat some of the options are that we have to address
solvency. and It'S a helpful tool that inspires healthy debate.
Now I wish someone would corne up With a game that shows the economic
consequences of taking the wrong action on SOCial Security reform.
For example. the deeply negative consequences a tax mcrease would have on
American's take-home mcome and the ability of businesses to create new jobs
The Social Security Trustees' report showed that we would have to raise the payroll
tax immediately by 3.5 percentage points to make the system whole on a
permanent basis. In other words, the payroll tax would have to be Increased by
nearly 30 percent
Both workers and employers would bear a significant cost. For very small
employers - who employ more than half of America's private-sector employees - I
fear that much of a tax Increase would force them to make terrible choices. from
lay-offs to health benefit cuts. And it would make hiring new people even more
difficult which is worrisome since small bUSiness creates most of our nation's new
jobs
Increasmg payroll taxes hurts tile economy and It hurts job creation. period That's
why the President is against It
Tax mcreases aren't the answer. so the President has put a number of Ideas on the
table that might be. He has encouraged the Congress to propose a variety of ideas
that might be the answer as well. and we appreciate very much that those Ideas are
commg forward
One of the PreSident's core beliefs on thiS issue IS that we ought to move toward a
system that IS pre-funded. that we should gradually move away from a pay-as-yougo model and give Americans the chance to save their own money. He wants to
move away from the filmg cabinet of IOUs and toward something that people
actually own and that represents real capital
Voluntary personal accounts are a step toward pre-funding the system, and that's
going to put it on a more stable. guaranteed baSIS down the road
Additionally. the power of compound mterest is a mighty one - I don't need to tell

http://www.treas.gov/pressfreleasesljf>2AI8.htm

5/311200'::

;-2418: The HonorabTe JonnW. Snow Prepared Remarks: The American Academy of Actuaries' ...

Page 3 of 5

you that - and including personal retirement accounts In Social Security reform will
mean opening a door to that power for people who would not have had the
opportunity otherwise. This is an excltlllg and empowering proposition, and best of
all we know that it can be done without disrupting the system of benefits for their
parents and other generations of retired beneficiaries.
Former Democratic Congressmen Tim Penny amJ Charlie Stentlolm have said
recelltly that "If SOCial Secunty were being created from scratch today, Americans
would want to Include a way to help ever'yone bUild up a nest egg."
Now IS our chance to make the system work III today's - and tomorrow's demographic reality You are key players In tillS national dialogue: we seek and
welcome your input and ideas, and I suspect Congress does as well.
When talking about retirement, it is of course Important to include pension reform,
another issue that the PreSident is dedicated to, and the administration is working
on
As you all know, 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 nearterm, without corrective action, ultimately the IIlsurance 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 defllled 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.
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 funding status and the plan sponsor's risk
and ensure the pension IIlsurance system's fillancial 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 incenlives for adequate plan fundillg. 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 fundmg 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

http://www.treas.gov/pressfre1easesljf>2418.htm

5/311200.'::

S-2418: The Honorable John W. Snow Prepared Remarks: The American Academy of Actuaries'...

Page 4 of 5

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 fundlrlg rules
•

•

Fundll1g IJase(1 Oil rneill1lllgful and ilccumte measures of italJiltlies ami
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
fillanclal health of the employer.
Accrued benefits funded. Sponsors that fall below minimum fundlrlg levels
Will be required to fund up within a reasonable period of time The proposal
requires a 7 -year 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
Plall sponsors able to fund plans during gooe/ times. Many believe that the
Irlability of plan sponsors to bUild suffiCiently large funding surpluses dUring
good finanCial times under current rules has contributed to the current
underfundlng In the pension system. The proposal addresses this problem
directly by creating two funding Cusilions 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.
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
A final Issue that I think will be of Interest to all of you is the status of the Treasury
Department's study on TerrOrism Risk Insurance Act.
The terrorism risk insurance program was an Important confidence builder as this
country recovered from the attacks of September 11 and the recession.
The issue of reauthorization of TRIA is one that Will involve a detailed analysis. As
you know, the Act reqUired that Treasury study ItS effectiveness and report to
Congress by June 30, 2005. Through our study, ongoing at this time, we are
seeking to answer the questions Congress posed In the Act, such as the finanCial
capacity of the insurance industry, the priCing and take-up of terror risk Insurance,
whether risk can be priced and managed, the return of re-insurers to the market,
and what is the most efficient mechanism to produce insurance for the risk.
We are looking forward to a prompt completion of our study, so lilat we and
Congress can have a full and open discussion about these important questions.
It's an important issue, and Treasury is dedicated to the most thorough study and
analysiS possible so that Congress may make a fully informed deCision about
terrOrism risk Insurance in the future
Thanks again for haVing me here today; I look forward to taking your questions.

http://www.treas.gov/pressfreleases!jf>2418.htm

5/3112005

;-2419: U.S. Economic & Financial Engagement with Latin America Randal K. Quarles Ass... Page 1 of 4

FROM THE OFFICE OF PUBLIC AFFAIRS
May 3.2005
JS-2419

U.S. Economic & Financial Engagement with Latin America
Randal K. Quarles
Assistant Secretary of Treasury for International Affairs
Council of the Americas 35th Washington Conference
Washington, DC
May 3, 2005
It IS a pleasure to be here today to discuss U.S. economic and financial
engagement with Latin America
As those in this room know. recent economic performance in the region has been
outstanding. Growth is strong. inflation has fallen. and capital IS flowing back to the
region Underlying these improvements are good economic policies by Latin
American countries themselves. supported by extenSive and effective US.
economic engagement.
I would like to take my time today to review where the region's economies stand,
how we got here. and our priorities for the future. The Bush Administration is
committed to working with the countries of the region to transform the current
economic recovery into sustained economic growth that will produce Significant
Increases in income and reduclions in poverty. Our agenda for achieVing this is a
comprehenSive one, involVing a range of bilateral and multilateral, financial and
non-financial tools.
Regional Economic Performance
Economic developments In Latin America have exceeded even the most optimistic
forecasts In recent months. Real GOP growth for the region as a whole was almost
6 percent In 2004 That IS the highest growth rate since 1980. With the exceptions
of Haiti and Grenada--countries that experienced political unrest and natural
disasters--every country in the region registered positive growth last year. This
robust growth has created millions of new jobs and raised incomes for workers and
their families.
Economic stability in the region has also improved dramatically following the
turbulence of 2001-2002. No countries are currently experiencing recession or
financial crisis. Capital flows to Latin America have increased, with many countries
already completing large portions of their financing needs for the entire year. Some
governments have even prefinanced themselves through most of 2006. Risk
spreads for countries in the region remain near record lows, even as the Federal
Reserve has continued its tightening cycle in the United States.
When the Bush Administration entered office four years ago, the situation was not
so positive. Growth was slOWing across the region. Major financial crises were
unfolding In Argenllna, and then in Uruguay and Brazil. These came in the wake of
the serial financial crises of the 1990s, starting With Mexico in 1994-95, dUring
which financial difficulties leapt across borders even to countries that lacked direct
linkages to those that were Originally affected
The contrast to the present time couldn't be greater There was no contagion
following Argentina's default in 2001, versus the contagion seen after the ASian and

http://www.treas.gov/pressfreleasesljf>24 19.htm

5/3112005

;-2419: U.S. Economic & Financial Engagement with Latin America Randal K. Quarles Ass ... Page 2 of4

Russian crises In 1997-8 Mexlco--the country the typified the new generalion of
financial crlses--now has an investment grade ratlllg and among the lowest risk
spreads over U.S. Treasuries among ttle emerglllQ markets.
The reason for these improvements is clear: better economic policies.
Governments across the region have strengthened their fiscal balances with the
objective of reduclflg debt levels. Countries from Mexico to Colombia to Brazil have
moved aggressively to reduce the proportion of their publiC debt denomlflated in or
linked to foreign currencies. Better monetary policies--supported by flexible
exchange rates (or in some instances dollarization )--have successfully brought
inflation down and prevented large depreCiations Ifl 2002 from becoming
hyperlnflations. Countries Ilave also taken advantage of the favorable environment
to build International reserves to help cushion them against unexpected shocks in
the future
The Bush Administration has played a vital role In supporting better policies in the
region First, we have pursued sound economic poliCies at home. Timely changes
III monetary and fiscal pOIICy--sucll as President Bush's tax cuts in 2001 and 2003-helped make the U.S slowdown mild and the recovery rapid. This has enabled the
United States to contillue to serve as an englfle for the global economy.
Second, we have strongly supported countries following good poliCies in the region
through assistance from the International Monetary Fund (IMF), World Bank, and
Inter-American Development Bank. In 2002, Brazil, Colombia, and Uruguay faced
Intense fillancial difficulties that threatened to push these countries into default and
deep crisis. In each case, the governments articulated strong strategies to restore
economic stability and address sources of vulnerability.
Though success was not assured, we at the Treasury believed that these good
policies--backed by financial support from the IMF and multilateral development
banks--could underpin a return to strong growth. These assessments proven
accurate: In 2004, Brazil, Colombia, and Uruguay posted growth rates of 5.2
percent, 4.0 percent, and 12.0 percent respeclively
U.S. engagement with the region has been critical to ending this period of fillancial
IIlstabillty and putting the region back on the path of economic growth. We now
look to worklllg With our regional partners to translate thiS renewed growth Into
sustained improvements in standards of liVing for all the people of the region, a
subject I would like to turn to now.
Challenges Ahead
We think about the agenda ahead in terms of two malll challenges first,
institutionalizing the important Improvements in macroeconomic poliCY that have
been achieved recently: and second, addreSSing the bUSiness climate problems
needed to spur higher levels of productiVity growth and reduce poverty.
With respect to the first challenge, better fiscal policies in many countries have
succeeded in bringing down high levels of debt. But debt levels remain too high
and are a continuing source of vulnerability. So far most Latin American
governments have shown good leadership by malfltainlng fiscal discipline during
the recent economic recovery, reversing a pattern that was all-tao-frequent In the
past of expandlflg spending during economic booms There is a strong
appreciation In the region today of how running better fiscal balances during the
boom years can provide more flexibility to a country dUring the lean years.
But good IIltentlons in thiS regard are sometimes complicated by institutional .
features of tax and spending systems that act as obstacles to more effective fiscal
poliCies Addressing these impediments requires what we call structural fiscal
reforms These IIlclude policies to strengtilen tax administration and broaden the
tax base: reform pension systems to ensure sustainability and solvency: reduce
widespread revenue earmarking that creates "automatic" spending dUring periods
of tax revenue growth and inhibits adjustment during downturns: and adopt fiscal
responsibility regimes to institutionalize fiscal discipline at the provillcial and

http://www.treas.gov/pressfreleaseslj.. 2419.htm

5/3112005

~-2419: U.S.

Economic & financIal Engagement with Latin America Randal K. QuarJes Ass... Page 3 of 4

regional levels.
There are also actions on the monetary side that Latin American governments can
take to institutionalize better macroeconomic policies These IIlclude steps to
bolster the operational and Institutional underplnnlllgs of inflation-targeting
regimes. Chief among these IS legislation to increase central bank autonomy and
IIldependence
With respect to the second challenge, it IS well-known that Latin America has
lagged behind other regions of the world like East Asia in generating sustained
growth III per capita Income. The objective of economic policy in the region should
be to achieve growth rates like the 6 percent attaliled last year over the long term.
Robust growth of thiS magnitude IS needed to generate large reduclions III poverty
and gains in liVing standards. Chile, which achieved per capita Income growth of
nearly 5 percent during the 1990s, cut poverty In half during the same period.
Achieving higher rates of economic growth requires countries to improve the
environment for business and innovation. This means strengthening financial
sectors and expandlllg access to financing for the private sector, especially for
small businesses. It means eliminating distortions in the labor market that lead to
high levels of informal employment. It means investing in education and productive
infrastructure so that society has the basic building blocks for raising productivity
growth. It means openlllg markets and lowering trade barriers to take full
advantage of the opportunities for export-led growth. It means encouraging
entrepreneurship, improving the Investment climate, deregulatlllg, and fighting
corruption so that there are the right incentives for starting and expanding
businesses. The average time It takes to start a business In Latin America (70
days) IS higher than III any other region of the world. Finally, it means harnessing
the full potential of remittance transfers by reducing the cost of sending remittances
and bringing these funds into the formal banking sector to expand the options for
savings and investment.
US Economic and Financial Engagement
The Bush Administration IS committed to building upon the achievements to date
and advanCing a comprehenSive agenda aimed for raislllg economic growth and
living standards in the region
The Bush Administration is committed to an ambitious trade agenda in the region.
The United States has concluded or IS In the process of concludlllg numerous free
trade agreements (FTAs) with Latin American countries. These include the U.S.Chile FTA, the Dominican Republic-Central American Free Trade Agreement (DRCAFTA), as well as our ongoing negotiations with Panama and the Andean region.
These FTAs and NAFTA will cover 90 percent of US trade in thiS hemisphere. In
addition to promotlllg trade, these FTAs promote the rule of law, regulatory
transparency, and regional integration. The United States is continuing efforts to
conclude a Free Trade Area of the Americas (FTAA) that would encompass all
countries in the hemisphere in an Integrated market.
Increased trade is Critical to long-run economic growth in the region. The
importance IS evident in the role that trade has played as a driver of economic
growth during the current economic recovery. Exports grew 24 percent last year.
The growth is not merely a price phenomenon-- export volumes rose 11 percent
last year. It IS also not confilled to commodity exports; to take one example,
Brazil's exports of manufactured and semi-manufactured products have grown
nearly 30% over the last year. ThiS export growth has lead to the second straight
year III which Latlll America has run a current account surplus: In 2003, the region
ran ItS first current account surplus in 35 years.
We have actively used multilateral fora to advance creative IIlltiatlves for IIlcreaslllg
economic growth and creating Jobs At last year's SpeCial Summit of the Americas,
PreSident Bush reached agreement With other leaders in the hemisphere on actions
to halve the cost of sending remittances in the region, triple the amount of credit to
small businesses generated by the programs of the Inter-American Development

http://www.treas.gov/press(releaseslj);24t9.htm

5/3112005

;-2419: U.S. Economic & FinancIal Engagement with Latin America Randal K. QuarIes Ass ... Page 4 of 4

Bank, and Significantly reduce the time and cost of starting new businesses At this
year's Summit, we are working to develop addltlollal initiatives to advance
economic opportunity for the people of the region One area of particular
Importance IS encouraging more productive public and private Investment In
mfra s truct II re
Tile Bush Administration has made imprOVing the effectiveness of ttle multilateral
development banks a global Priority. We will continue our efforts to work with the
development banks to show measurable results In their activities by increasing
diSCipline over budget and project lending programs to acilleve quantifiable results
with strong controls over where the money goes Success in thiS effort is certainly
important for promoting development III Latin America
We have also ramped up our bilateral dialogues with key economies and subregional groupings of countries within Latin America Through the U.S.-Mexico
Partnership for Prosperity launched in 2001, we worked With our Mexican
counterparts to develop a secondary mortgage market In MeXICO and create the
conditions for the halving of remittance transfer costs that we have seen over the
past several years In the U.S.-Brazil Group for Growth, we hal7e shared
experiences on policies like small business regulation, which has influenced the
Lula Administration's approach to reforms In thiS area. We have reached out to
smaller countries through sub-regional meetings by Secretary Snow with finance
ministers of the Central American countries and the Andean countnes. Most
recently, we launched the Secunty and Prosperrty Partnership of North America
With MeXICO and Canada, aimed at boosting productiVity growth through regulatory
cooperation and improving the legitimate flow of people and goods across our
common borders
Finally, we are working with the poorest countries in our hemisphere to create Jobs
and fight poverty through the new Millennium Challenge Account (MCA). The idea
behind the MCA is to assist countries that are pursuing the right policies for
promoting economic growth through good governance, promotion of economic
freedom, and Investments in human capital like health and education. To make
sure that MCA assistance makes a difference In raiSing liVing standards, proposals
for its use must be specifiC, measurable, and well-targeted. Three countries In Latin
America--Bolivia, Honduras, and Nlcaragua--are In the process of developing
proposals for the use of MCA funds.
Conclusion
To be sure, thiS IS an ambitious agenda. And the challenges for policymakers in the
region are large. But I think that Latin America's leaders are ready to rise to this
challenge. We have already seen what strong leadership can accomplish--from
those like PreSident Lula in Brazil, to PreSident Uribe in Colombia, to President
Madura in Honduras Good economic pOlicies embraced by these leaders and
others helped take the region from criSIS to stability. Good poliCies In the future can
translate Improved stability Into sustained economic growth and poverty reduction
The countries of the region can count on the Bush Administration to support them in
this effort.
Thank you again

http://www.treas.gov/pressfreleasesljf>241!) htm

5/3112005

)05-5-3-17-33-1-15445: U.S. International Reserve Position

Page 1 of2

FROM THE OFFICE OF PUBLIC AFFAIRS
May 3,2005
2005-5-3-17-33-1-15445
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 $79,483 million as of the end of that week, compared to $79,577 million as of the end of the prior week.

I. Official U.S. Reserve Assets (m US nlll/Jons)
April 22, 2005

TOTAL

April 29, 2005

79,483

79,577

1. Foreign Currency Reserves 1

Euro

a. Securities

12,056

Yen

14,861

Of which, issuer headquartered m the US

TOTAL

Euro

26,917

11,941

1~
I

TOTAL
26,973
I

b. Total deposits with

bJ Other central banks and BIS

I b.11 Banks headquartered in the US
Ibli Of WhiCh, banks located abroad
I b iii Banks headquartered outside the US
Ibiii Of which, banks located in the U.S.

11,788

2,987

14,775

11,652

3,022

14,674

0
0

12 IMF Reserve Position 2

15,212

13 Special Drawing Rights (SDRs) 2

11,610

14 Gold Stock 3

I
I

11,632
11,041

11,041

15 Other Reserve Assets

15,184

I
I

II. Predetermined Short-Term Drains on Foreign Currency Assets
April 22, 2005

1 Foreign currency loans and securities
2. Aggregate short and long positions
12 a Sholt positIOns

12 b.

Long positIOns

3 Other
1

Euro

Yen

April 29, 2005

II
TOTAL

Euro

I
I
II
II
forwards and futures in foreign currencies ViS-a-VIS the US dollar
II
II
II

II
II
II

I
I
I

Yen

II
II

II
II
II

I
TOTAL
0

0
0
0

I
I

I
I
I

III. Contingent Short-Term Net Drains on Foreign Currency Assets

~pril 22, 200~

http://www.treas.gov/pressfreleaseszo.05531733115445.ht~

April 29, 2005

5/3112005

005-5-3-17-33-1-15445: U.S. International Reserve Position

I
I

II
II

1 Contingent liabilities In foreign currency
1.a. Collateral guarantees on debt due within 1
year
11 .b. Other contingent liabilities
2. Fmelgn cUrI'ency securities with embedded
options
3. Undrawn. unconditional credit lines

Euro

Page 2 of2

Yen

TOTAL

Euro

I
I

Yen

TOTAL

I
I

3.a. WilIJ other central banks

I
I
I

3.b. With banks and other fmancial institutions
Headquartered

IIJ

the US.

3.c. With banks and other fillanCial instilutions

IHeadquartered OLltslde the US

4. Aggregate short and long pOSitions of options
in foreign

ICurrencies vis-a-VIs the U.S
I·r a Short positions
14a 1. Bought puts

dollar

I
I
I

I
II
II

4.b. Long positIOns

4b2 Written puts
1

4.a.2. Written calls

14b1 . Bought calls

I
I

I
I
I
II

I
I

!
0

II
II

I
I

I
I
I
I
I

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 fm the latest week may be subject to reviSion Foreign Currency
Reserves for the prior week are final
2/ The items. "2. IMF Reserve POSition" and "3 Special Drawing Rights (SDRs)." are based on data provided by the IMF and are
valued In dollar terms at the offiCial SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments. including revaluation. by the US Treasury to IMF data for the prior month end.
3/ Gold stock

valued monthly at $422222 per fine troy ounce.

htto:llwww.tr.eas.gov/press/releases11005531733115445.htm

5/3112005

S-2420: Assistant Secretary for Financial Markets Timothy S. Bitsberger May 2005 Quarterly Refundin... Page 1 of 3

FROM THE OFFICE OF PUBLIC AFFAIRS
May 4, 2005
JS-2420

Assistant Secretary for Financial Markets Timothy S. Bitsberger May 2005
Quarterly Refunding Statement
We are offering $51.0 billion of notes to refund approximately $396 billion of
privately held securities and government account holdings maturing or called on
May 15, raising approximately $11.4 billion The securities are:
- A new 3-year note In the amount of $22 billion, maturing May 15, 2008:
- A new 5-year note

the amount of $15 billion, maturing May 15, 2010;

- A new 1O-year note in the amount of $14 billion, maturing May 15,2015.
These securities will be auctioned on a yield basis at 100 PM EDT on Tuesday,
May 10, Wednesday, May 11, and Thursday, May 12, respectively. All of these
auctions Will settle on Monday, May 16. The balance of our financing requirements
will be met with weekly bills, monthly 2-year and 5-year notes, the June 10-year
note reopening, and the July 1O-year TIPS and 20-year TIPS reopening. Treasury
also is likely to issue cash management bills in early June and July

Thirty-Year Nominal Issuance
Treasury is considering whether or not to reintroduce regular issuance of a 30-year
nominal Treasury bond. A decision on 3D-year nominal issuance Will be announced
at the August 2005 refunding on August 3, 2005.
We Will examine if we have the fleXibility to issue 30-year bonds while maintaining
deep and liqUid markets In our other securities and determine if nominal bond
issuance IS cost effective.
There are two possible outcomes
•
•

No change in current policy; or
Semi-annual auctions of a 30-year nominal security beginning in February
2006.

We welcome comments from all market participants on this Issue and will respect
the confidentiality of any proprietary information received.

New and Revised Data Releases
In November 2004, Treasury announced that we were assessing the data we
publish on Treasury auctions and holdings. We received many comments and
suggestions on this tOpiC. We have made the following changes to the data listed
below
•

Investor Class Auction Allotments

http://www.treas.gov/pressfreleasesljf>2420.htm

5/31/2005

S-2420: Assistant Secretary for Financial Markets Timothy S. Bitsberger May 2005 Quarterly Refundin... Page 2 of 3

Beginning on May 10, 2005, Treasury will release Investor class auction allotment
data for the previous month. We antiCipate releaSing future data at 300 PM EST on
the 7th bUSiness of each month
Data for both Treasury bill and coupon auctions will be released on the Office of
Debt Management's website at the follOWing link
Treasury previously released only the
coupon allotment data In the quarterly Treasury Bulletin table PDO-4.
•

State and Local Government Series (SLGS)

By August 2005, Treasury Will begin releaSing dally SLGS activity and balances,
with histOrical data back to 1999. Data for SLGS new subscriptions, cancelled
subSCriptions, new issues, summary of redemptions by type, and SLGS balances
by maturity range will be released on Bureau of the Public Debt's webSite at the
follOWing link
•

Savings Bonds

Beginning on June 10, 2005, Treasury will release monthly savings bond data for
the previous month. We anticipate releasing savings bond data on the 10th
calendar day of each month. Data for savings bond sales, redemptions, amounts
outstanding, Interest payments, and average matUrities will be released on Bureau
of the Public Debt's webSite at the follOWing link

•

Monthly Statement of the Public Debt

We have made several formatting changes to the MSPD to make it more user
friendly and easier to download. The MSPD can be found on Bureau of the Public
Debt's website at the follOWing link

State and Local Government Series (SLGS) Regulatory Changes
Treasury expects to Issue new final rules on State and Local Government
SeCUrities by June 30, 2005. On September 30, 2004 Treasury issued a Notice of
Proposed Rulemaking (NPRM) regarding the SLGS security program The
proposed rule IS deSigned to curb arbitrage activity that eXists largely because of
explOitable pricing lags between SLGS and marketable securities. Treasury
believes that such trading activity is against the spirit of the SLGS program. ThiS
arbitrage activity creates excessive volatility In Treasury cash balances, adversely
impacting marketable borrowing in a manner that IS costly to federal taxpayers.
Over a 45-day comment period follOWing publication of the NPRM, Treasury
received comment letters from market partiCipants concerning the proposed rule.
Treasury IS carefully considering these comments in crafting the final rule, Treasury
believes the final rule Will make SLGS securities better resemble other investment
opportunities that are available In the market. Treasury believes that the final rule
will maintain the SimpliCity, fleXibility, and ease of use of the SLGS program in a
fashion that meets its intended purpose of assisting tax-exempt borrowers in
complying With IRS arbitrage rebate rules, while eliminating opportunities to
arbitrage and exploit the current program,
Please send comments and suggestions on these subjects or others relating to
Treasury debt management to
The next quarterly refunding announcement will take place on Wednesday, August
3, 2005

http://www,treas.gov/pressfreleasesljf>2420.htrn

5/3112005

S-2421: Report to The Secretary Of The Treasury From The Treasury Borrowing Advisory Committee ...

Page 1 of 4

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

May 4, 2005
JS-2421
Report to The Secretary Of The Treasury From The Treasury Borrowing
Advisory Committee Of The Bond Market Association
May 3,2005

Dear Mr. Secretary
Since the Committee's last meeting in February, the economic expansion has
continued at a moderate pace. Real GOP grew at an annualized rate of 3.1 % in the
first quarter, reflecting conlinued growth In consumer spending, strong gains In
housing, and moderating strength In business Investment in equipment and
software. The latest economic readings show that domestic demand has softened
In the wake of higher energy costs and riSing interest rates, although home buying
ended 01 at a near record pace. NotWithstanding the threat from renewed
increases in energy prices, finanCial conditions remain supportive and along With
solid profits and income gains, likely will sustain growth this year modestly above
trend, on average.
Consumer spending grew by 3.5% in 01, follOWing an Impressive 3.8% growth
dUring 2004. Spending on durable goods stalled due In part to higher energy costs
and higher Interest rates. The moderation can be seen in recent downbeat
earnings reports from large auto manufacturers Higher energy costs have crimped
real Income gains and are limiting final demand growth temporarily. While energy
costs are likely to remain elevated, gasoline prices have stopped rising for now and
oil prices have retreated somewhat.
Record corporate profits have buoyed business confidence after a prolonged period
of unusual caution and the effects are evident generally in more entrenched
economic expansion and specifically in continued healthy growth In employment.
The trend In payroll employment has remained solid, with private sector Job gains
averaging 160,000 per month over the past half year While recent monthly gall1s
have been uneven. on balance the pace of hiring has been supportive of a gradual
but steady decline In the unemployment rate from 54% in December to 5.2% In
March. Non-farm payroll growth looks to remain firm In 2005. While jobless claims
rose In March, they have receded again and their four-week moving average is well
below year ago levels.
Record high oil prices have heightened concern about the potential for an
unfavorable mix of slower growth and higher inflation While underlYing economic
growth is strong enough to overcome these higher oil prices, the Fed's Beige Book
found that, "firms were able to pass at least a portion of cost Increases along to
their customers," highlighting the upside risks to inflation. Nonetheless, the
spillover to underlYing inflation has been relatively tame, the core CPI rose at a
2.6% annualized pace In 01, slightly faster than the 2.3% rate In 04. The core
PCE deflator Increased at a 2.2% annualized pace In 01, bringing the year-overyear change to 16%, up from an earlier cyclical low near 1%.
The pass-through of higher energy prices, the decline in the dollar, and gradually

http://www.treas.gov/pressfreleasesljf>2421.htm

5/3112005

S-242 1: Report to The Secretary Of The Treasury From The Treasury Borrowing Advisory Committee... Page 2 of 4

diminishing slack In both labor and product markets hint at a further modest pick up
In core Inflation There are Increased reports that businesses are successfully
passing along Iligher energy and other raw matenal prices And. the decline In H18
dollar already has resulted In a pick up In Import pnces excluding food and energy
Nonetheless. overall labor costs pressures are rtSlng only slowly and longer-term
Inflation expectations have been well contained to thiS pOint and should remain so
as the Fed continues to unwind accommodation
After riSing sharply ahead of the first FOMC tightening In June. 2004, long-term
Treasury yields have declined by roughly 25 basIs POints since thiS tightening cycle
began As the FOMC has Increased ItS short-term target by 200 basIs pOints, thiS
has led to a substantial flattening of the Yield curve The market IS currently priCing
In a 100''io probability that the FOMC will raise rates by 25 basIs pOints at ItS June
meetlllg and IS pricing In a funds rate of 3.75 % by year end.
First quarter reported operatlllg earnings moderated from 04 as IS typical but have
Increased nearly 12% from a year ago. With over 80% of the S&P 500 companies
having reported 01 earnings: 80% had met or beaten expectations, while 20% had
failed to meet expectations Operating earnings have thus far surpnsed to the
upSide by 4 6% and reflect a quarter of strong earnings results. The onglllal EPS
estimate for the S&P 500 In 01 was for 8.2% year-over-year growth vs. current
expected growth of greater than 12% year-over-year. The two main contnbutlng
factors were continued strength In the oil market leading to higher Energy Sector
earnings and better than expected results from the FinanCial Sector. After
accelerating In 04, the equity markets have declined year-to-date the S&P 500
Index has declined approximately 4 % and the NASDAO composite has declined
11%
The Federal budget performance on a twelve-month roiling basis has been on an
Improving trend. mainly reflecting both the diSSipation of last year's tax cuts and
solid Income growth However, ongoing military operations In the Middle East and
Afghanistan caused both the CBO and the Bush administration to revise their
budget numbers upwards Stili, It seems that a peak In the twelve-month roiling
budget defiCit IS behind us, largely due to expectations of stronger employment and
Income growth and hence stronger tax receipts Strong tax receipts in Apnl make It
likely that funding needs In 02 will be less that the Issues matunng dunng the
quarter
Against thiS economic and financial backdrop. the members of the Committee
responded to Treasury's charge The charge was compnsed of four questions In
the Initial section, a member presented charts depicting Treasury's publiC debt
portfoliO and its charactenstlcs including average matunty of debt, steady state
Issuance patterns. and rollover risk. ThiS member concluded that the Treasury
liability portfoliO appears to be well balanced and deSigned to meet Treasury's
objectives while prOViding for fleXibility for most fiscal scenarios A concern was
raised that upSide surpnses In budgetary defiCits might force Treasury action
Treasury asked If there are other metncs that should be used to develop debt
management policies. One member suggested developing other metncs of the
demand function for Treasury secuntles Broker/dealer technology advances could
support data collection that might be useful to Treasury for better understanding
trends on the demand Side. Another member pOinted out that Increased partial
duration hedging of mortgage secuntles has dnven greater activity and demand In
Intermediate matuntles The Committee felt that Treasury would be well served to
further study the changing long-term demand function resulting from shifts in
pension investing. growth In mortgage and credit markets. as well as foreign
partlclpatton trends
In the second part of the charge, Treasury asked the Committee to deSCrIbe any
trends In the Treasury market that It felt are Significant to Treasury as an Issuer
The presenting member showed a number of slides deplc\lng the strong demand
for long duration fixed-Income assets from pension funds. another shOWing the
shortening of mortgage durations due to a higher percentage of ARM onglnatlons
The member also discussed the maturation of the TIPS market and changes to
agency Issuance patterns The member discussed at length the bUying patterns of
both Chinese and Japanese offiCial Institutions and how their behaVior had been

http://www.treas.gov/pressfreleases;Jf>:421.htm

5/3112005

S-2421: Report to The Secretary Of The Treasury From The Treasury Borrowing Advisory Committee...

Page 3 of 4

modified. The member also discussed the explosive growth of credit derivatives
markets noting that derivative contracts in some Instances exceeded reference
credits. Members discussed the TIPS market and most felt that It was likely to
continue to Improve In liqUidity but concurred with the presenting member that It
lacked the liqUidity characteristics of nominals. Members also commented on the
bUying patterns of foreign central banks notmg that while their preference for higher
yielding fixed-Income assets and equities may Increase over time, they were
unlikely to abruptly shift their preference for Treasuries. A member also discussed
the contmued strong demand for Treasuries from dealers to affect other fixed
income and derivative transaclions. In general, members felt that there were not
apparent threatening trends afoot which might undermille demand for Treasuries
In the third part of the cl1arge. Treasury asked whether or not the Comrnlttee felt It
should conSider reintrodUCing 30-year bond Issuance. Treasury presented a
number of slides enunciating ItS belief that achieVing the lowest cost of borrOWing
over time requires Issuance diverSification. Treasury stated a number of
conSiderations It makes when deciding upon the maturity and amount of publiC
borrOWings, among them optimal levels of diverSification, the balance between
liqUid bond and short-dated Issuance, effects on portfoliO characteristics, issuance
sizes, borrowing costs and refunding needs. Slides followed that showed the
percentage of debt maturing In the next thirty-SIx months, distribution of marketable
debt outstanding by security, and average maturities. Further, Treasury depicted
several paths for the average maturity of outstandings with and without the
reintroduction of 30-year bonds. Most Committee members felt that Treasury
should reconsider 30-year bond Issuance given a number of factors. Most
members felt that given the decline In the average maturity of debt and the
likelihood that It will decline further in coming years, a reintroduction would give the
Treasury greater flexibility With a modest assOCiated cost. Additionally, reintroducing
30-year bonds would serve to mitigate rollover risk given large maturities in coming
years. Other members stated that given the market's familiarity with 30-year bonds,
there would be little, if any, disruption and that the supply would be easily absorbed
given current global and local demand dynamiCs. However, most members felt it
important that Treasury clearly communicate its reasoning for issuance pattern
changes In the context of ItS stated long-term objectives of achieving lowest-cost
borrOWing over time. Members also adVised against Irmiting discussions of issuance
changes to the 30-year bond In isolation, but rather urged Treasury to conSider the
full mYriad of longer duration finanCing alternatives.
In the next sectron of the charge, the Committee conSidered the composition of
marketable financing for the April-June quar1er to refund $396 billion of privately
held notes and bonds maturing May 16, 2005 as well as the composition of
Treasury marketable finanCing for the remainder of the April-June quarter and the
July-September quarter. To refund $396 billion of privately held notes and bonds
maturing May 16, 2005, the Committee recommended a $22 billion 3-year note
maturing May 15. 2008, a $15 billion 5-year note due May 15, 2010 and a $14
billion 10-year note due May 15. 2015. For the remainder of the quarter, the
Committee recommended a $24 billion 2-year note issued In May, and $24 billion 2year Issued in June, a $15 billion 5-year note Issued In June and $9 billion
http://WWW~5inftW;tpre~h'e1erlcg~yIj~une The Committee also recommended a $20
billion 17day cash management bill Issued June 3, 2005 and maturing June 15,
2005. For the July-September quarter. the Committee recommended financing as
contained in the attached table Relevant features include three $24 billion 2-year
notes, a $22 billion 3-year note, three $15 billion 5-year notes. a $ 14 billion 10-year
note in August followed by a $9 billion reopening of that 1O-year note In
September The Committee further recommended a $10 billion 1O-year TIPS for
issuance in July as well as an $8 billion second re-opening of the 20-year TIPS In
July.
Respectfully submitted,
Ian G. 8anwell
Chairman
Thomas G Maheras
Vice Chairman

http://www.treas.gov/pressfreleasesljf>Q421.htm

5/31/2005

S-2421: Report to The Secretary Of The Treasury From The Treasury Borrowing Advisory Committee ...

Page 4 of 4

Attachments (2)

- 30 REPORTS

http://www.treas.gov/pressfreleasesljf>2421.htm

5/31/2005

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

ISSUE

ANNOUNCEMENT AUCTION SETTLEMENT
DATE
DATE
DATE

4-WEEK AND
3&6 MONTH BILLS

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

CASH MANAGEMENT BILLS
14-DAY BILL
3/28
Matures 4/15
4/4
8-DAY BILL
Matures 4/15
4/11
4-0AY BILL
Matures 4/18
12-0AY BILL
6/1
Matures 6/15

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

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

4-WK

OFFERED
AMOUNT
3-MO

6-MO

24.00
1000
8.00
8.00
8.00

18.00
17.00
16.00
16.00
15.00

16.00
16.00
16.00
16.00
16.00
14.00
14.00
14.00

15.00
17.00
17.00
19.00
19.00
19.00
16.00
16.00

MATURING
AMOUNT

NEW
MONEY

16.00
15.00
14.00
14.00
1300

59.52
59.39
60.90
5502
63.00

-1.52
-17.39
-22.90
-1702
-27.00

1300
15.00
15.00
17.00
1700
17.00
16.00
16.00

49.00
45.00
46.00
46.00
54.00
53.00
53.00
52.00

-5.00
3.00
2.00
6.00
-2.00
-3.00
-7.00
-6.00

598.00

695.82

-97.82

3/30

4/1

25.00

0.00

4/6

4/7

15.00

000

4/13

4/14

7.00

000

6/2

6/3

20.00

0.00
0.00

COUPONS
CHANGE
IN SIZE
5-Year Note
10-Year TIPS (R)

4/11
4/11

4/13
4/14

4/15
4/15

15.00
9.00

5-YearTIPS (R)
2-Year Note

4/21
4/25

4/26
4/27

4/29
4/29

9.00
24.00

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

5/4
5/4
5/4

5/10
5/11
5/12

5/16
5/16
5/16

2-Year Note

5/23

5/25

5-year Note
10-Year Note (R)

6/6
6/6

2-Year Note

6/27

15.00
9.00

-1.00

26.30

9.00
-2.30

22.00
15.00
14.00

39.60

11.40

5/31

24.00

23.91

0.09

6/8
6/9

6/15

15.00
9.00

6/29

6/30

24.00

23.73

0.27

180.00

113.53

66.46

-300

15.00
9.00

Estimates are italicized

NET CASH RAISED THIS QUARTER:
R = Reopening

-31.36

US TREASURY FINANCING SCHEDULE FOR 3rd QUARTER 2005
BILLIONS OF DOLLARS

ISSUE

ANNOUNCEMENT
DATE

4-WEEKAND
3&6 MONTH BILLS

6/30
7/7
7/14
7/7
7/28
7/7
8/11
7/7
8/25
7/7
9/8
7/7
9/22

CASH MANAGEMENT BILLS
7/1
9-DAY BILL
Matures 7/15
14-DAY BILL
8/26
Matures 9/15
8-DAY BILL
9/2
Matures 9/15

AUCTION SETTLEMENT
DATE
DATE

7/5
7/11
7/18
7/25
8/1
8/8
8/15
8/22
8/29
9/5
9/12
9/19
9/26

7/7
7/14
7/21
7/28
8/4
8/11
8/18
8/25
9/1
9/8
9/15
9/22
9/29

4-WK

OFFERED
AMOUNT
3-MO

6-MO

16.00
20.00
20.00
20.00
20.00
22.00
22.00
22.00
18.00
18.00
1000
1000
16.00

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

16.00
16.00
16.00
16.00
16.00
16.00
16.00
16.00
16.00
16.00
15.00
15.00
15.00

MATURING
AMOUNT

NEW
MONEY

51.00
47.00
46.00
46.00
46.00
50.00
52.00
53.00
55.00
57.00
57.00
56.00
51.00

-3.00
5.00
6.00
6.00
6.00
5.00
3.00
2.00
-4.00
-6.00
-16.00
-15.00
-4.00

652.00

667.00

-15.00

7/5

7/6

25.00

0.00

8/31

9/1

30.00

0.00

9/7

9/15

12.00

0.00
0.00

COUPONS
CHANGE
IN SIZE

15.00
1000

5-Year Note
10-Year TIPS (R)

7/11
7/11

7/13
7/14

7/15
7/15

15.00
1000

20-Year TIPS ( R )
2-Year Note

7/21
7/25

7/26
7/27

7/29
8/1

8.00
24.00

24.13

8.00
-0.13

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

8/3
8/3
8/3

8/9
8/10
8/11

8/15
8/15
8/15

22.00
15.00
14.00

18.55

32.45

2-Year Note

8/22

8/24

8/29

24.00

23.17

0.83

5-year Note
10-Year Note (R)

9/1
9/1

9/7
9/8

9/15
9/15

15.00
9.00

2-Year Note

9/26

9/28

9/30

24.00

24.95

-0.95

180.00

90.79

89.20

15.00
9.00

Estimates are italicized

NET CASH RAISED THIS QUARTER:
R = Reopening

74.20

S-2422: Minutes Of The Meeting Of The Treasury Borrowing Advisory Committee Of The Bond Mark...

Page 1 of 5

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

May 4.2005
JS-2422
Minutes Of The Meeting Of The Treasury Borrowing Advisory Committee Of
The Bond Market Association
May 3, 2005
May 3. 2005
The Committee convened In closed session at the Hay-Adams Hotel at 3 p.m. All
members of the Committee were present. Assistant Secretary for Financial Markets
Timothy Bltsberger welcomed the Committee and gave them the charge.
The Committee addressed the first question In the Committee charge (attached) on
what characteristics of Treasury's liability portfolio are most salient, including the
average maturity of debt. steady state issuance. and rollover. A Committee member
presented a series of charts on this tOPIC (attached) showing that current issuance
patterns lead to a growing proportion of TIPS and 5-year notes In the portfolio and
that the percentage of debt maturing in 3 years or less was expected to remain
stable at around 60 percent.
The Committee member noted that rollover risk did not appear high compared to
the last 25 years but. absent changes In coupon sizes, bill issuance would need to
increase markedly In 2008. The member observed that Treasury may need to
decide If more long-term issuance was warranted. The Committee member
indicated that under the central forecast, there was no need for strategic changes
until bills begin to become a sizable portion of issuance in 2008. However. noting
that the market's consensus forecast was biased toward a peSSimistiC scenario. the
member observed that there may be a need to make a deCision to change financing
sooner. perhaps In 2007 or even 2006. Tile member suggested that the nature of
Treasury's rollover risk was related to refinanCing at less attractive terms, as
opposed to not having market access.
The Committee member briefly reviewed Treasury's debt management efforts to
meet its objective of lowest cost borrowing over time by issuing debt in a regular
and predictable pattern, engaging with the market in transparent fashion. and not
attempting to time markets. The Committee member concluded that Treasury's
portfolio appears to be well balanced, meeting Treasury's objectives and proViding
flexibility for most possible financing outcomes The Committee member did note
that there was an asymmetric risk profile. noting that higher unexpected borrOWing
needs would force a change In issuance before lower borrOWing needs would.
Continuing the discussion on overall demand for TreaSUries, the Committee
member noted that the yield curve has flattened recently. largely driven by
anecdotal stories of pension fund demand and speculative accounts trading on
those anecdotes. The Committee member questioned whether the demand for
long-term Issuance was temporal or persistent. and cautioned about reacting to
short-term changes in the market. Noting that the liqUidity for 30-year futures
contracts was stili low relative to the intermediate sector. the member suggested
that sustainable long term demand was not there yet.
The Committee member also noted that demand for Treasuries

http://www.treas.gov/pressfreleasesljf>2422.htm

being driven by

5/31/2005

S-2422: Minutes Of The Meeting Of The Treasury Borrowing Advisory Committee Of The Bond Mark...

Page 2 of 5

developments in other sectors of the fixed income universe. including the mortgage
market. One member stated that adjustable rate mortgages (ARM) are currently 36
percent of new orlglrlatlon. creating Significantly more Iledglllg demand In the
intermediate sector of the Treasury curve.
Turning to foreign demand, one Committee member noted that foreign participation
in primary and secondary markets can be unpredictable and that Treasury should
take a longer -term view towards foreign demand -- not a one or two year
perspective but a decade long view. The member noted that foreign partiCipation
will change over time but that Treasury should not change its policy based on high
concentrations of its largest three or four foreign buyers
One Committee member recommended efforts to Impmve collection of data on
foreign participation in the primary and secondary markets and analysis of longterm trends in foreign demand. The Committee member also noted that traditional
metrics of auction performance. the bid/cover ratio and market tall, are not very
helpful in explaining auction outcomes relative to issue size. In response to the
observation on the quality of metrics, one member suggested that the Treasury
should consider conducting annual surveys to ascertain the holders of Treasuries.
The member thought this would provide a better measure of sources of demand for
Treasuries.
Next the Committee turned to the second question of whether there are any market
trends of significance to Treasury as an issuer. A Committee member presented a
series of charts on this topic (attached). The Committee member noted several
trends - an imbalance between long duration supply and demand, foreign demand
for Treasury debt, and gmwth of the credit derivatives market.
Regarding long-duration supply and demand, the Committee member noted that
pension fund dynamics In the face of pending reform argue for a potential shift in
asset-liability management which could increase demand for long-term securities.
Demand for long-term assets has out-paced demand for intermediate term assets
but that much of this demand has been speculative in nature as hedge funds and
speculative accounts have tried to get ahead of the curve on pension reform.
The Committee member noted that some recent figures suggest that pension plans
are currently under-funded by $450 billion and that If pension reforms pass there
will likely be greater demand for long-term assets. However, another member noted
that the pmcess for introduction of pension reforms is expected to be a seven-year
process and that there is significant time for Treasury to assess the market before
bringing a long-term instrument.
The presenting Committee member noted a flattening of the 1Os-30s curve since
the Labor Department released a proposal for reform of defined benefit pension
funding rules. The Committee member also noted that the increase in ARM
origination has shortened the duration of mortgage assets and agency outstanding
securities, further decreasing longer-duration supply. While increased issuance of
long-dated TIPS was noted, the Committee member observed that the TIPS market
remains illiquid relative to the nominal Treasury market and was not seen as a
viable alternative for long-dated nominal securities until the TIPS market matured
further. The member stated that high levels of investor concentration in the TIPS
market posed risks of substantial dislocations should changes in investment
strategy occur.
The Committee member then presented a chart assessing the possible borrowing
costs of using a duration weighted combination of 2- and 30-year bonds in place of
5-year issuance. On a histOrical basis, it was noted that such a strategy would have
reduced interest costs in recent years, but the current attractiveness of such a
strategy is small.
Turning to foreign participation in Treasury auctions, the Committee member noted
that changes in China's exchange rate management could reduce Chilla and other
Asian official purchases of Treasuries The Committee member suggested that
reduced official purchases would exert upward pressure on Treasury rates which

http://www.treas.gov/pressfre1easesljf>2422.htm

5/3112005

S-2422: Minutes Of The Meeting Of The Treasury Borrowing Advisory Committee Of The Bond Mark... Page 3 of':

could be magnified by dollar weakness, Increasing Treasury's borrowing costs.
Oesplte these potential concerns, the Committee member noted that overall foreign
purchases remain robust
Fillally, the Committee member noted IIlat trading volume and notional outstanding
credit derivative markets had doubled over the last two years. The Committee
membel' noted that III the context of a slOWing economy and rising Interest rates It
was pOSSible that credit quality could deteriorate III the comlllg quarters. The
Committee member noted it was difficult to assess whether credit derivative
markets would function well If faced with a major credit event
III

Next, Assistant Secretary Bitsberger tumed to the third question of the charge
whether Treasury should consider the reintroduction of a 30-year nominal bond.
Assistant Secretary Bltsberger presented a series of charts on thiS tOpIC. Assistant
Secretary Bltsberger stated that Treasury's primary objective of lowest cost
financing over time requires issuance dlverslficalion. Such diversification Widens
Treasury's investor base, proVides fleXibility in financing, lowers operational and
event risk and faCilitates efficient cash management.
Next Assistant Secretary Bltsberger discussed questions that Treasury would
conSider regarding possible long-dated Issuance The questions were what is the
optimal level of diversification, can bond issuance be undertaken within Treasury's
commitment to a short-dated bias and do future financlllg needs and market
conditions prOVide a ralionale for bond reintroduction
Assistant Secretary Bitsberger then presented a chart shOWing the impact of bond
Issuance on the percentage of debt maturing III upcoming years, the consequences
of bond issuance on the distribution of debt outstandlllg by security, an average
maturity chart With and without hypothetical bond issuance, an illustration of the
Implications of bond Issuance on average changes In auction sizes, and an Interest
cost comparison between a portfoliO With and Without bonds.
One Committee member led off the discussion notlllg that based on the
presentation he felt better about the average maturity of Treasury's portfolio
including bonds. He noted that Treasury had issued bonds before and that Treasury
presently is one of the few in the G-7 that does not Issue a 30-year instrument. The
member also expressed the view that additional Treasury supply III the sector could
facilitate the work of the Federal Reserve.
Another Committee member noted the flattening of the Yield curve suggested longdated issuance made sense. However, a third Committee member observed that
the chart III the Committee's presentation on assesslllg the pOSSible borrowing
costs of uSing a duration weighted combination of 2- and 30-year bonds in place of
5-year issuance suggested that the time for Treasury to have Issued 30-years was
several years ago, not now. This member queried what had changed since 2001 or
even two years ago to cause Treasury to reconSider long-dated issuance, The
member observed that the yield curve had been extremely flat when Treasury had
discontinued the bond. He also observed the recent strength III tax receipts and
questioned as to whether It made sense for Treasury to contemplate reilltroduction
when defiCits appeared to have peaked.
Another member noted that Treasury needed to take a long-term perspective when
maklllg decisions and emphaSized the importance of not reac\lng to short-term
trends. In response, Assistant Secretary Bltsberger noted that Treasury was
assesslllg possible structural changes related to pension reform.
One Committee member noted tllat pension demand had been Identified by tile
Committee before as a reason to maliltalil 30-year Issuance but that Treasury had
argued that such demand could be met by the swaps market.
Another Committee member observed IIlat given the expectation of continUing
budget deficits it made sense for Treasury to increase Issuance further out the
curve to reduce risk. However, thiS member questioned whether IIlcreased 5- and
1O-year issuance might be preferable to resumed 30-year issuance. ThiS member

http://www.treas.gov/pressfre1easesljf>..J422.htm

5/311200:

S-2422: Minutes Of The Meeting Of The Treasury Borrowing Advisory Committee Of The Bond Mark... Page 4 of 5

noted greater liquidity In these maturity pOints as well as greater futures activity in
the intermediate portion of the curve as illustrated in the Commlttee's presentation
on market trends. The member observed that a small program, of say $10 billion In
semi-annual auctions of 3D-year SeCUrities, could prove IIlsufflclent to revive
liqUidity in the long-end of the Treasury curve,
ASSistant Secretary Bltsberger Iloted for the Committee that the two options
Treasury was contemplatlllg were elti18r no reintroduction or semi-annual issuance
of $20-$30 billion beginning In February. One Committee member observed that
while Issuance of $20-$30 billion would entail little loss of fleXibility for Treasury that
perhaps thiS level of issuance did not go far enough III terms of Increasing average
maturity
Assistant Secretary Bitsberger asked whether Treasury's consideration of
reintroduction of the 3D-year was consistent With Treasury's policy of regular and
predictable Issuance. One Committee member observed that Treasury was unlikely
to face buyback pressures In the medium-term. Another member felt it was
Important that If Treasury was to reintroduce the 3D-year that it explain clearly why
reintroduction made sense. ThiS member stated that an abrupt change In policy
would reflect poorly on Treasury's credibility and that Treasury should take time to
conSider reintroduction, ThiS member also echoed the observation of other
members that a modest benchmark 3D-year did not dramatically impact average
maturity,
This comment prompted several Committee members to question if Treasury
sought to change the average maturity of its debt whether the 3D-year was the best
way to achieve that. The Chair reminded members that the charge specifically
asked the Committee for adVice about a nominal 3D-year bond
Assistant Secretary Bltsberger noted that Treasury had purposefully elected to talk
about 3D-year securities so as to put some parameters on the diSCUSSion. A
Committee member noted that given budget deficits, Treasury should not let the
average maturity of ItS debt fall further and should Increase the duration of its
issuance, which might include Increasing Issuance in coupons as well as
reintroduction of the 3D-year, Another Committee member observed that focusing
on the 3D-year sector as opposed to diSCUSSing possible 20-year or 50-year
Issuance made sense given that the 3D-year had been a prior Issuance point and
that there remained a futures contract for the instrument
Finally, the Committee discussed its borrowing recommendations for the May
refunding and the remaining financing for this quarter as well as the July-September
quarter. Charts containing the Committee's recommendations are attached
The meeting adjourned at 442 p.m,
The Committee reconvened at the Hay-Adams Hotel at 645p.m. All members of
the Committee were present. The Chairman presented the Committee report to
Assistant Secretary Bltsberger A brief diSCUSSion followed the Chairman's
presentation but did not raise significant questions regarding the report's content
The meeting adjourned at 700 p.m,

Jeff Huther
Director
Office of Debt Management
May 3,2005
Certified by

Ian Banwell, Chairman
Treasury Borrowmg Advisory Committee

http://www.treas.gov/pressfre1easesljf>~422.htm

5/31/2005

S~2422:

Minutes Of The Meeting Of The Treasury Borrowing Advisory Committee Of The Bond Mark... Page 5 of 5

of The Bond Market Association
May 3,2005

Attachments:

Treasury Borrowing Advisory Committee Quarterly Meeting - Committee
Charge - May 3, 2005
Treasury's Public Debt Portfolio
Please discuss the characteristics of Treasury liability portfoliO including average
maturity of debt, steady state Issuance, and rollover. Do these metrics adequately
capture Treasury's policy concerns? Are there other metrics that we should be
uSing to develop debt management policies?

Demand for Treasuries
Please describe any trends In the Treasury market that you believe are Significant
to Treasury as an issuer.

Nominal Long-Dated Debt
Should Treasury consider reintroducing regular 30-year bond issuance?

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

The composition of Treasury notes to refund approximately $40 billion of
privately held notes and bonds maturing on May 15, 2005.
The composition of Treasury marketable financing for the remainder of the
April- June quarter, IIlcluding cash management bills.
The composition of Treasury marketable finanCing for the July - September
quarter.

- 30 -

http://www.treas.gov/pressfreleasesljf>.2422.htm

5/3112005

S-2425: Remarks of Greg Zerzan, Acting Assistant Secretary for Financial Institutions Before .. , Page 1 of 3

FROM THE OFFICE OF PUBLIC AFFAIRS
May 3, 2005
JS-2425

Remarks of Greg Zerzan, Acting Assistant Secretary for
Financial Institutions
Before the Federal Home Loan Bank Directors Conference
Washington, DC
Thank you very much for inviting me to speak to you today. It is a privilege to
appear before an audience of men and women dedicated to ensuring Americans
have access to financial services Of particular Importance is the role that your
institutions play in increaSing homeownershlp opportunities by ensuring that
mortgage credit and other programs are available for this purpose.
Increasing homeownership is near and dear to the heart of the President. Under the
President's leadership a record number of Americans have corne to own their own
homes. In fact, over 69 percent of Americans have now realized the American
dream of homeownershlp: that's over 73 million Americans, the most in our nation's
history.
The President has also set a goal to Increase the number of minority homeowners
by 5.5 million families by the end of the decade, and through his homeownershlp
challenge, he has called on the private sector to help In this effort. More than two
dozen companies and organizations have made commitments to Increase minority
homeownership - including pledges to provide more than $1.1 trillion in mortgage
purchases for minOrity homebuyers this decade. The President's efforts are already
showing success: for the first time ever, over 50 percent of minorities have
achieved homeownership.
The President and this Administration are committed to homeownershlp for a
number of reasons. It is not simply the fact that the housing industry provides an
Important source of Jobs and growth in our economy, though certainly this is
Important. It is because there is a societal good associated with homeownership
that we must not forget - owning a horne is an investment in one's family, one's
future, and one's community. The President supports homeownershlp because he
knows that homeowners make good citizens - people who are involved in the civic
life where they live.
And it is because of the importance of homeownership that the President has called
for reform of the regulation of our nation's housing government sponsored
enterprises.
A little more than a year ago I appeared before many of you In this room to discuss
the Administration's proposal for GSE reform. At that time. I told you that certain
powers were so essential to any competent regulatory scheme that any attempt at
reform would be incomplete without them. These powers included the ability of a
regulator to set minimum and risk-based capital levels: the power to review and
approve all business actJvitles of a GSE. on both a prospective and on-going basis:
and the power to place an entity In receivership, should that prove necessary One
year later it continues to be the case that these are essential to establishing a
world-class GSE regulatory framework Furthermore, since I last appeared before
you, much has happened to not only reinforce the need for these critical reforms,
but also to make clear that still more IS needed.

http://www.treas.gov/pressfreleasesljf>2425.htm

5/3112005

S-2425: Remarks of Greg Zerzan, Acting Assistant Secretary for Financial Institutions Before ...

Page 2 of 3

Questions regarding accounting issues at Fannie Mae and Freddie Mac caused
well publicized restatements and significant executive turnover at those companies
Meanwhile, among the Federal Home Loan Banks, Increases III interest rate risk
and decreased profitability caused credit downgrades for several banks. Also. some
banks entered Into consent agreements with the Federal Houslllg Finance Board to
spur ci1anges In their corporate governance regimes, capital structure, and other
practices and procedures Though none of these events posed serious threat to the
long-term health of the hOllSlllg finance system. they did once-and-for all abolish
any misperceptlon that the houslllg GSEs could forever continue operatlllg Without
regard to the normal rules and regulations that apply to America's other finanCial
services participants
And particularly In the case of Fannie Mae and Freddie Mac, they highlighted the
one perSistent danger that the hOllsing GSEs do pose to the long term health and
vitality of the housing finance systems the specter of unacceptable systemic risk
The nature of thiS risk is easily understood; as outlined by Secretary Snow and
others, It starts with the fact that the market's mistaken belief that some form of
government guarantee exists allows the housing GSEs to borrow at below-market
rates. In turn, this creates arbitrage opportunities which take the form, particularly In
the case of Fannie Mae and Freddie Mac, of the purchase of mortgages and
mortgage related securities. As these assets carry intel'est rate and pre-payment
risk, Fannie and Freddie hedge at least In part through the use of derivatives,
almost all of which tend to be concentrated in five or SIX money center banks.
Addlllg to this web of concentrated risk IS the fact that SIX out of ten institutions In
the banklllg industry hold as assets GSE debt in excess of 50 percent of their
capital Because of the tremendous size of Fannie and Freddie's mortgage
portfolio. the concentrated hedges they hold against them, and the widespread use
of GSE debt for capital purposes by America's banks it should be obVIOUS that a
financial crisis at one of these entitles will produce a npple effect that could
seriously harm the financial system Unfortunately, allOWing unrestrailled growth in
the GSEs mortgage portfolio only increases thiS risk,
In order to promote the safety and soundness of the houslllg finance system as a
whole. and to mitigate systemic nsk. the Admillistration has called for limiting the
retailled portfolios of the hOUSing GSEs. As Secretary Snow has stated, the GSEs'
mortgage portfolios should be limited to an amount of mortgage Investments that
are necessary to carry out their mission to create a liqUid secondary market for
mortgage backed securities,
Some have objected that holding large portfoliOS of mortgages does In fact help the
GSEs carry out their mission, or are necessary for other reasons. These claims are
unfounded As a recent Federal Reserve study noted, the GSEs' mortgage
IIlvestment portfoliOS do not proVide any benefit In reduclllg mortgage interest rates
beyond that prOVided by securitization Additionally. the market for mortgage related
investments is broad and deep; any reduction in demand created by reductions in
the GSEs retailled portfoliO would likely be qUickly replaced by private IIlvestors.
And it IS very Important to remember that greater diversification of mortgage
prepayment risk among a broader pool of investors addresses our fundamental
concern by reduclllg systemic nsk.
Giving the new regulator the power to place limits on the size of the GSEs retained
mortgage portfolios, accordlllg to strict crtteria defined In law, IS a critical element of
reform Without which no reform package would be complete.
The Administration looks forward to continuing to work with Chairman Shelby,
Chairman Oxley and Congressman Baker on their efforts for reform Although there
is more work to be done. the foundation for meanlllgful reform eXists prOVided that
the key elements outlined by the Administration are Incorporated III any fill a I
legislative proposal All of us should look forward to the day when we can stop
worrying about the regulation of the GSEs and focus Instead on their success In
performing their mission of promotlllg homeownershlp III Amenca,
It has been my privilege to appear before you today. Thank you again for the work
which you do, and for inviting me to Visit With you

http://www.treas.gov/pressfreleasesljf>2·~25.htm

5/31/2005

S-2426: Treasury Designates Charity Funneling Money to Palestinian Islamic lihad --Action Marks... Page 1 of 3

FROM THE OFFICE OF PUBLIC AFFAIRS
May 4,2005
JS-2426

Treasury Designates Charity Funneling Money to Palestinian Islamic Jihad
--Action Marks 400th Designation of a Terrorist or FinancierThe U.S Department of the Treasury today designated the Elehssan Society,
including all its branches, as a charitable front for the Palestinian Islamic Jihad
(PIJ). A deadly Palestinian terrorist group, PIJ has been named a Foreign Terrorist
Organization (FTO) and a Specially Designated Global Terrorist (SDGT) by the
U.S. Government and is also named on the European Union's list of terrorist
entities.
"Elehssan masquerades as a charity, while actually helping to finance Palestinian
Islamic Jihad's acts of terror against the Israeli people and other innocents," said
Stuart Levey, the Treasury's Under Secretary for the Office of Terrorism and
FinanCial Intelligence (TFI). "We will not hesitate to act against those who enable
murderers, regardless of how they disguise themselves."
Today's adon marks the 400th Individual or entity designated under Executive
Order 13224, President Bush's Order aimed at freezing the assets of terrorists and
their support networks.
On February 25, 2005, PIJ, claimed responsibility for a terrorist attack in Tel-AVIV
that killed five and wounded over 50. EVidence available to the US Government
corroborates that PIJ, based in Damascus, Syria, was Implicated in planning the
attacks. According to a Significant volume of Information available to the U.S.
Government, Plj leadership in Damascus, Syria controls all PIJ offiCials, aclivists
and terrorists In the West Bank and Gaza.
According to a fifty-three count indictment filed In February 2003 in the United
States District Court In the Middle District of Florida, beginning in the early 1990s,
the Elehssan Society served as the fund-raising arm of PIJ in Gaza and the West
Bank, soliCiting, collecting and distributing donations. According to the Indictment,
PIJ and Elehssan's objectives include murder, extortion, money laundering, fraud
and misuse of visas.
Elehssan also utilized Internet websites for the solicltallon of funds, according to the
Federal indictment These sites featured Plj claims of responSibility for terrorist
acts and material on PIJ leaders, such as PIJ's Secretary General, Ramadan
Abdullah Shallah. Shallah has been named a SpeCially Designated Terrorist by the
U.S. Government
According to a Signed declaration filed in open court In the US in October 2000,
PIJ runs or supports a number of organizations, including Elehssan. As of 2004.
information available to the U.S. indicates that Elehssan Society's leader played a
primary role in PIJ's financial council. Notably, he coordinated With Plj Secretary
General Ramadan Shallah on organizational and operational issues.
As of late 2003, Elehssan cooperated With PIJ to distribute funds to the families of
PIJ prisoners and deceased members, and was informed by PIJ when entitlements
were sent Information available to the US. shows that Elehssan maintains lists of
PIJ-assoclated families who are to receive compensation - including the families of
PIJ suicide bombers. For example, details of early 2004 financial transfers from PIJ

http://www.treas.gov/pressfreleasesljf>L426.htm

5/3112005

S-2426: Treasury Designates Charity Funneling Money to Palestinian Islamic lihad --Action Marks... Page 2 of 3

entities outside ttle Palestinian territories to Plj members and supporters in the
West Bank included a payment of $900 to benefit the family of a deceased Plj
operative, who died conducting a sUIcide attack.
Inforl11ation available to the US shows that to move money, select Plj members
serve as links between Plj headquarters and members In the Palestinian
territones. Plj funds were deposited directly IIltO Plj members' accounts and Into
Plj "charitable" accounts, Including the Elehssan Society. Plj funds for the
Elehssan Society primarily came from outside the West Bank and Gaza.
In late 2001 and early 2002, the Palestinian Authority closed several offices
belonging to PIJ in the Paiestlilian terntones, including Elehssan. Despite this
apparent set back, In 2003 PIJ initiated efforts to expand Elehssan's activities,
notably making plans to open a branch In Ramallah
As of 2005, information available to the US Government shows that PIJ contlflues
to fund activities via the Elehssan Society Notably, In 2005 Plj funds were
provided to Elehssan Bethlehem and in 2004, Iflformatlon shows that Plj provided
funds to Elehssan In Gaza and Lebanon. In mid-2002, Elehssan received hundreds
of thousands of dollars from abroad that were deposited Into accounts in the West
Bank.
In addition to ItS use as a financial condUIt, Elehssan is used by PIJ to recruit for its
operational cadre. In early 2003, Elehssan planned to open a youth center to
support Plj activity and conduct Plj-related recruitment and training. Information
available to the U.S. indicates that the absence of a Plj youth center in that location
was regarded as one reason behind a lack of Plj actiVity In the area
Also to support its recruitment efforts, in mld-2002, plJ prOVided money to a run a
summer camp project In the West Bank. In 2003, a Plj leader. also Identified as a
senior official for Elehssan. reportedly said that Plj summer camps emphaSize,
"culture, Islam and fun. with a marginal political dimenSion." Yet according to
another source, the aim of at least one PIJ-run summer camp is reportedly the
recruitment of suicide bombers.
Today's designation includes the entire Elehssan organization Including Its
headquarters, believed to be in Gaza City, and all its branch offices including in
janin. Ramallah, Tulkaram, Hebron and Bethlehem, as well as in Lebanon

Identifying Information
Elehssan
AKAs ELEHSSAN SOCIETY
ELEHSSAN SOCIETY AND BIRR
ELEHSSAN SOCIETY WA BIRR
BIRR AND ELEHSSAN SOCIETY
BIR WA ELEHSSAN SOCIETY
IHSAN CHARITY
jAMI'A AL-AHSAN AL-KHAYRIYYAH
AL-AHSAN CHARITABLE ORGANIZATION
AL-IHSAN CHARITABLE SOCIETY
AL-BIR AND AL-IHSAN ORGANIZATION
AL-BAR AND AL-IHSAN SOCIETIES
AL-BAR AND AL-IHSAN SOCIETY
AL-BIRR WA AL-IHSAN WA AL-NAQA
AL-BIRR WA AL-IHSAN CHARITY ASSOCIATION
THE BENEVOLENT CHARITABLE ORGANIZATION
Addresses: AI-Muzannar St, AI-Nasir area
Gaza City, Gaza (Headquarters)
Jenin
Bethlehem

http://www.treas.gov/pressfreleaseslj£2...!-26.htm

5/3112005

S-2426: Treasury Designates Charity Funneling Money to Palestinian Islamic lihad --Action Marks... Page 3 of 3
Ramallah
PO Box 398 Hebron
Tulkarm
Lebanon
Elehssan was designated today pursuant to Executive Order 13224 chiefly
pursuant to paragraphs (d)(I) and (d)(il) based on a determination tilat the
organization assists In, sponsors or provides finanCial, material, or technological
support for, or finanCial or other services to or In support of, or IS otilerwise
associated with, persons listed as subject to E.O 13224.
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. Blocklllg 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" tilat 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 and more costly
and higher-risk means of finanCing their activities.

http://www.treas.gov/pressfreleaseslj.. 14.6.htm

5/3112005

S-2427: Testimony of Stuart Levey, Under Secretary Office of Terrorism and Financial Intelligence... Page 1 of 6

FROM THE OFFICE OF PUBLIC AFFAIRS
May 4,2005
JS-2427

Testimony of Stuart Levey, Under Secretary
Office of Terrorism and Financial Intelligence
U.S. Department of the Treasury
Before the House Financial Services Subcommittee on Oversight and
Investigations
and the House International Relations Subcommittee on
International Terrorism and Nonproliferation
Chairwoman Kelly and Chairman Royce, Ranking Member Gutierrez. Ranking
Member Sherman, and distinguished members of these Subcommittees, thank you
for inviting me to testify before you today about the progress the US Government
has made In Its fight against terrorist finanCing in the Middle East. Your personal
leadership and that of these subcommittees have been Vital to our shared work to
keep our nation safe and I am grateful for it.
As Under Secretary for the Office of Terrorism and FinanCial Intelligence. my
highest priority IS cutting off the flow of support to International terrorist groups.
This has been the paramount focus of our office from day one, and we remain as
fixated on it today as we were at our formation. Thanks to Congressional support.
our office and our interagency colleagues grow stronger, more experienced, and
more capable with each passing day.
I would like to take thiS opportunity to give you a sense of how we are dOing.
Scientific metrics are simply not available in our line of work. AI Qalda does not
release financial statements. and we will never know precisely how much money
intended for terrorists never reached their hands due to our efforts. We therefore
find ourselves diSCUSSing proxies for the ultimate questions: how many donors and
facilitators have been captured: how many channels for moving terrorist funds have
been deSignated and blocked; or how many countries are equipped to monitor and
InterdlClllllclt financing channels. Each of these benchmarks points to only one
aspect of the problem. though, and Imperfectly at that. Most revealing, to my mind,
IS intelligence reporting that - although anecdotal - speaks to the difficulty with
which terrorists are raising. moving, and storing money. The information available
to us is encouraging. We are seeing terronst groups avoiding formal financing
channels and Instead resorting to riskier and more cumbersome conduits like bulk
cash smuggling. And. most importantly, we have indications that terronst groups
like al Qaida and HAMAS are feeling the pressure and al-e hurting for money.
This progress is a direct result of the Bush Administration's unrelenting efforts. As
the President said again Just last week, we must stay on the offenSive in cutting off
terrorist funding. The first-rate interagency team has made great stndes against
terrorist financing. identifYing, captunng, prosecuting. or otherwise Incapacitating
key financial operatives. We are applying pressure on our International partners.
particularly in the Middle East, to implement global standards and carry out their
own targeted actions.
Of course, we are threatened not only by known financiers but also by those we
don't know and those who may Join their ranks In the future. A key advantage that
we enJoy in the financial arena. however, IS that our targets have something to
lose. In contrast to terrorist operatives who may be willing to die for their hateful
cause, terrorist financiers typically live public lives With all that entails: property,
occupation, family. and social position Being publicly identified as a financier of

http://www.treas.gov/pressfreleasesljf>2427.htm

5/31/2005

S-2427: Testimony of Stuart Levey, Under Secretary Office of Terrorism and Financial Intelligence... Page 2 of 6

terror threatens an end to all of tillS, lending our acltons a real deterrent Impact.
Our reporting confirms this, indicating that once-Willing donors are now thinking
twice or balking altogether at sending money to terrorist groups
We are tracking and disrupting the flow of funds to terror in every area of the globe
Today, however, I would like to focus on the work we are dotng in the Middle East
In February, I headed a trip to tl18 Middle East, intended to engage With and deliver
a range of messages to leaders tn SYria, Jordan, Israel, and the Palestinian
Territories.
With respect to SYria, my proposed VISit was tntended to follow up on demands that
we had made to the Syrian Government one year ago wtlen we issued a proposed
rule, designating the Commercial Bank of Syria (CBS) as a "primary money
laundering concern" pursuant to Section 311 of the USA PATRIOT Act. This
designation, premised on ftnancial wrongdOing we observed at that bank Includtng
terrorist ftnanclng, has had a remarkable impact on an obstructionist regime. The
bank represents Syria's gateway to the tnternational financial system and its access
to international currencies like the US Dollar. In connection With the proposed
rule, Deputy Assistant Secretary Daniel Glaser traveled to Damascus to deliver a
series of demands to Syrian authorities, ranging from reform of their banking sector
to immediate, effective action to cut the flow of funds and other support across the
Syrian border to the Iraqi Insurgency We made clear that Syria would either take
effective steps to address our long list of concerns, or we would cut it off from our
finanCial system.
Over the past year, the Synan Government has sought desperately to aVOid
finalization of this proposed rule and has taken some steps to address our
concerns At our urging, the Synan Government JOined us in recommending the
designation of terrorist financier Sulayman Darwish at the United Nations, and
placed hiS name on a Syrian wanted list. They have also worked to Increase the
overSight and transparency of their financial sector. In other respects, though, we
have been nowhere near satisfied The Syrian Government has released over
$600 million of assets belonging to the Iraqi government to third parties, and thus
far refused to return over $250 million of Iraqi assets that remain frozen.
Days before my planned February trip. I met With the Syrian ambassador to the
United States and made clear that, above all, even if Syna met some of our
requirements, the continued flow of money and personnel from SYria Into the hands
of terrorists and insurgents In Iraq was absolutely unacceptable. My dissatisfaction
with the official Syrian response prompted me to cancel my planned viSIt. Our
office continues its engagement, but we will not be satisfied until all of our
requirements are met.
The remainder of the trip occurred as planned and was extremely productive. In
Jordan, I met with the Prime Minister and other ministers to diSCUSS regional
terrorism and money laundering trends. As a key and valued ally In the war on
terror, the Jordanians clearly appreciate the Importance of these issues. In my
meetings, I stressed the need for the Jordanians to ensure passage of an antimoney laundering law. The JordallJans recognize the importance of such a law in
assuring investors of a transparent and secure finanCial system and they are
working aggressively towards its passage. I also repeatedly emphasized to the
Jordanians the need for rigorous oversight of their financial institutions to help
prevent the type of serious defiCiencies that have recently come to light. The
Jordanians responded pOSitively and we will continue to work with their
government, the Central Bank of Jordan in particular, to assure that this oversight IS
as robust as it needs to be. Finally, the Jordanians agreed to work with FinCEN
Director Bill Fox to create a Financial Intelligence Unit (FlU) in Jordan.
In Israel and In the Palestinian Territories, I met With high level offiCials to diSCUSS
the current status of regional terrorism and terrorist financlllg In Israel, I was given
an encouraging account of a substantial reduction of funds flOWing to HAMAS,
particularly from the Gulf region. In general, the mood on both sides is one of
cautious optimism, with the political developments in the Palesttnian AuthOrity
clearing the way for productive dialogue and the beginnings of trust.

http://www.treas.gov/pressfreleaseslj5>2427.htm

5/3112005

S-2427: Testimony of Stuart Levey, Under Secretary Office of Terrorism and Financial Intelligence... Page 3 of 6

In speaking with President Abbas and in several follow-up sessions with Finance
Minister Fayyad, I noted serious commitment on their part to cutting off the flow of
funds to terrorism, and welcomed the message that responsibility for accountable
financial systems begills with the government.
A recurring theme in my meetings and a continual focus of our counter-terrmlst
finanCing efforts in the Middle East are charitable mganlzatlons TerrOrist groups
have long exploited charities for several key reasons
•

•
•

•

The "legitimate" activities of these charities, such as the operation of
schools, religious institutions, and hospitals, create fertile recrUitment
grounds, allowing terrorists to generate support for their causes and to
propagate extremist ideologies.
Charities attract large numbers of unwittlllg donors along with the wittlllg,
thus increasing the amount of money available to terrorists.
To the extent that these charities prOVide genuine relief, which nearly all of
them do. they benefit from public support and an attendant disinclination by
many governments to take enforcement action against them.
Charitable funds are meant to move in one direction only: accordingly, large
purported charitable transfers can move without a correspondlllg return of
value and Without arOUSing suspiCion.
International charllies naturally focus their relief efforts on areas of confliCt,
also prime locations for terrorist networks. Such charities prOVide excellent
cover for the movement of personnel and even military supplies to and from
11lgh-rlsk areas

Since September 11, the U.S. Government has confronted this problem head on.
Our interagency efforts In this arena have been a team effort in every sense of the
term. Two notable examples are the designations of the US. branches of the AI
Haramalll Islamic Foundation and the Islamic African Relief Agency (lARA), both al
Qaida-linked charities operating in the United States. In February 2004, federal
agents executed a search warrant on AI Haramalll, pursuant to a joint investigation
by IRS-CI. the FBI, and DHSIICE. Simultaneously, Treasury's OFAC blocked the
accounts of the organization pending investigation, freezing the organization's
assets In place and ensuring that no money would flow through this group during
further IIlvestlgatlon.
A similar coordinated Treasury/law enforcement action was taken in October 2004
against the Islamic African Relief Agency (lARA) and its affiliates, Including its U.S
alias, the IslamiC American Relief Agency. Treasury deSignated this global network
as well as five of its senior officials as Specially Designated Global Terrorists
pursuant to E.O. 13224. On the same day, the FBI raided lARA's headquarters in
Columbia, MISSOUri as part of a separate Criminal IIlvestigatlon.
Thanks to the work of the State Department. we have persuaded other nations,
Including Saudi Arabia, to JOin us In bringing these and other charities to the United
Nations Security Council for deSignation, and to shutter these dangerous
organizations In their respective countries.
Persistent investigations by the intelligence and law enfmcement communities have
illuminated the Illicit activities of multiple other charities, bOtt1 at home and abroad.
The Department of Justice and FBI-led Joint Terrorism Task Forces have taken
action against several other U.S -based charities, indicting organizations and their
directors. Just last month, the Department of Justice secured the convictions of
three brothers linked to the deSignated Holy Land Foundation on over twenty
counts, including material support for HAMAS. These convictions, just the latest In
a series of aggressive prosecutions coordinated by the Counterterrorism Section of
the Justice Department's Criminal DIVISion, are an enormous victory in the war on
terrorism.
Treasury has designated dozens of other charities worldWide as supporters of
terrorism. Some have criticized the use of designations against charities. I want to
make clear that the designation process entails exhaustive research to ensure It is
fair and fully supported by evidence All judicial challenges to our deSignations
have failed. Indeed, it has been the unanimous opinion of every judge to consider

http://www.treas.gov/pressfreleaseslj.;2427.htm

5/3112005

S-2427: Testimony of Stuart Levey, Under Secretary Office of Terrorism and Financial Intelligence... Page 4 of 6

these claims, including the appellate judges of the District of Columbia and the
Seventh CirCUits, that Treasury lias acted properly and within the law. See Holy
Land Foundation for Relief & Development v. Ashcroft, 333 F.3d 156 (D.C Clr.
2003): Global Relief Foundation. Inc. v. O'Neill, 315 F.3d 748 (7th Clr. 2002). We
are grateful to the top-notCh team in the CIVil Division of the Justice Department for
advocatmg our position in these cases so expertly.
From a different vantage pomt, we hear the criticism that designations are
ineffective. particularly if they are not endorsed by the U.N. or other multilateral
bodies. We do seek to enlist international support for our designations as a matter
of course, recognizing that multilateral action IS exponentially more effective than
action by ourselves. At the same time. there are cases where Joint action IS not
possible and 111 those Instances we must and will proceed by ourselves. As the
world's financial center. the impact of US sanctions carries tremendous weight In
and of itself. and 111 most cases prevents foreign designated entities from carrying
out transactions in U.S. Dollars, the international currency of choice.
But the ramifications of our actions extend even further, as we are seemg private
banks in other Jurisdictions voluntarily adopting the United States list of designated
parties as a screen to protect them against terrorists and criminals. even when not
required by law. Indeed, 111 Kuwait. a delegation from our office watChed as a bank
demonstrated how it uses Treasury's Office of Foreign Assets Control (OFAC) list
to determine whether to complete a transaction. Such practices give wide-rangmg
effect to our actions. and are a result of sustained engagement.
Designations and law enforcement actions are making an impact and are serving
as a valuable deterrent. Anecdotal evidence suggests that prospective donors are
avoiding suspicious II1ternational charities altogether and are bemg far more
watchful with their donations in general. This is a major success in its own right. as
the donor community is best-positioned to demand reform and accountability from
charitable organizations. The Treasury Department is dOll1g all we can to
encourage the chantable sector to police its own institutions against abuse and to
combat it. In a similar vein. Treasury is also working With private sector watchdog
groups to promote awareness of terrorist fll1ancing issues in the charitable sector.
We are of course cognizant that well-intentioned donors have given money to some
of the same charities abused by terrorist organizations. It is painful when funds and
services donated With the intention of providing legitimate relief do not reach their
Intended and needy beneflcianes. But frustration with this situation must be
directed at those who have corrupted the charities that have - either through
willfulness or Willful blindness - been used to support terrorism.
We recognize that enforcement actions have sometimes also cut off sources of
relief to communities in need and inadvertently decreased the support of charities
and donors that deliver funds to legitimate causes. Our goal is not to deter
charitable givmg but instead to protect the charitable sector such that donors'
generosity is not abused and they feel safe 111 providing their contributions. Wellmeaning donors in the United States are as eager to deliver aid to international
populations In need as the disadvantaged are to receive it. ThiS situation IS
significantly complicated In the Palestinian TerritOries. where the intermingling of
charitable actiVity. militant political activism. and terrorism has been a definll1g
characteristic of HAMAS and other terrorist groups. There IS therefore a particularly
urgent need in this region for safe channels of assistance that donors can be
assured will not be subverted by terrorists. I have explored thiS Idea with both
Palestinian and Israeli offiCials and I was gratified to find agreement that it is in the
interests of all involved We are currently workll1g with the Palestinian Authority to
develop options through which such aid could be provided in a safe and effective
manner and I am hopeful that we will be able to do so.
Apart from my recent trip, our office is involved in several other engagements in the
Middle East. both multilateral and bilateral.
One of the most promisll1g developments in the region is the emergence of the
Middle East North Africa Financial Action Task Force (MENA FATF). A delegation
led by my office just returned from the first plenary session of this body. hosted by

http://www.treas.gov/pressfreleaseslj.;2417.htm

5/3112005

S-2427: Testimony of Stuart Levey, Under Secretary Office of Terrorism and Financial Intelligence... Page 5 of 6

Bahrain Launched in November 2004, tillS FATF-style regional body of 14
member countries has taken on the charge of finding regional solutions to terrorist
financing and money laundering based on the global glildelilles set out by FA TF
This important first seSSion, attended by full delegations from each member
country, was characterized by enthusiasm and optlinlsm for the work which lies
ahead of It. Lebanon currently holds the MENA FATF preSidency and IS leadlllg It
adeptly, based on its own progress In building anti-money laundering and counterterrorist financing architecture at home. Strategies for dealing with the charitable
sector made up a key portion of the 4·day conference, both within the worklllg
sessions themselves and as part of the 2-day IMF/World Bank seminar series.
Kuwait, the UAE, Egypt, and Bahralll all took active leadership roles in the plenary,
making presentations on the comprehenSive nature of their anti-money laundering
and counter-terrorist financlllg reforms, particularly in the charitable sector. The
MENA FATF IS addresslllg more than Just the issue of chanties. Alternative
financing mechanisms such as tlawalas and cash couriers are the subjects of three
ad hoc worklllg groups which were formed dUring the first plenary session
The integration of the Middle East into a body like the MENA FATF serves the
important purpose of setting standards and tloldlllg countnes to tilose standards
We will continue to offer strong support to these initiatives as we attend these
meetings in observer status, and we look forward to the second MENA FATF
plenary in September of this year. We welcome the fact that countries are
discussing standards and how to police themselves. But this IS plainly Just the
beginning. Many of these countries have not passed their own money laundering
and terrorist financing laws: many have not established Financial Intelligence Units
(FlUs): many have no control over their informal hawala sectors: and many have
failed to implement standards to stop the Illicit flow of money through cash couriers
We see a long road ahead, but welcome the multilateral framework through which
pressure to Implement these standards can be applied
Our office also recently led a delegation to Kuwait We learned that Kuwait has
taken measures to increase the oversight of its charitable sector. Earlier this year,
Kuwait's Ministry of Labor and Social Affairs ordered five charities to remove
unlicensed cash boxes which were collecting unregulated funds to evade
government controls. Although Kuwait is taking steps In the right direction and we
are told that processes are in place to protect chantable giving, Kuwait must do
more to ensure that funds and extremist ideologies are not exported overseas in
support of terrorist causes Again, standards and gUidelines may be in place, but
what matters is what governments actually do with them. We have called upon
Kuwait to intensify its battle against terrorist financing and will continue to do so.
Saudi Arabia, too, has worked with us to some extent to address vulnerabilities in
ItS charitable sector. This progress IS the result of focused interagency attention
and cooperation, Treasury action, and Homeland Security Advisor Frances
Townsend's consistent outreach directly to the SaudiS on her many trips there. The
Saudis have taken proactive steps including the banning transfers of money from
charitable accounts abroad Additional measures include:
•
•
•

EnhanCing customer Identification reqUifements for charitable accounts:
Restricting charities to a single account with withdrawal access:
Eliminating cash disbursements from charitable accounts and instead
requiring that payments be made by check and deposited into a Saudi bank

The adoption of these measures has been the subject of much prevIous testimony
What continues to concern me are the measures which have not yet been taken.
The Government of Saudi Arabia announced that It would freeze all International
transfers until It had established an oversight commiSSion to regulate ItS charitable
sector. While that would represent a satisfactory short-term solution if actually
implemented, it is important that the announced commission take shape. It is
particularly Important that chanties like the International IslamiC Relief Organization
(IIRO), the World ASSOCiation of Muslim Youth (WAMY), and the Muslim World
League (MWL) - expressly excluded from the commiSSion - become subject to ItS
oversight once It is finalized.
In addition to the export of terrOrist funds from Saudi Arabia, we are extremely

http://www.treas.gov/pressfreleaseslj5>2427.htm

5/3112005

S-2427: Testimony of Stuart Levey, Under Secretary Office of Terrorism and Financial Intelligence ... Page 60f6

concerned with the export of terrorist ideologies that promote war and killing In the
name of religion. These distorted ideologies are Just as indispensable to terrorists
as money, and pOSSibly even more pernicious We must do all we can to ensure
that extremist, violent ideologies are not exported under the cover of religious
organizations, charities, or schools.
We have also been advocating and eagerly anticipating the establishment of a
Saudi FlU The Interaction of FlUs worldWide form the basis for cooperative action
based on suspicious activity reports. When I teslified here In August, I informed
you that we had not seen progress on this front. And, despite some assurances of
progress, Chairman Kelly recently confirmed that there stili IS no operational FlU In
Saudi Arabia Given the concentration of fillancial activity In Saudi Arabia and the
grim reality of terrorist activity in ItS own cities, the lack of an FlU must be remedied,
and we will contillue to press for its establishment.

CONCLUSION
We have made real inroads In combating terrorist financlllg in the Middle East. Our
actions with respect to charities, both targeted and systemic, have made a tangible
difference And, With the establishment of the MENA FATF, the Middle East is now
subject to the leading counter-terrorist financing standards III the world. Enormous
work remains, however. Perhaps our most important task in the region is ensuring
implementation and enforcement. We do not measure success by the number of
laws put on the books but by changes made on the ground Real progress will
come in the form of border stops, cash seizures, account blockings, and arrests.
The challenges ahead are serious but we remalll fully committed to combating
terrorist finanCing in all of its forms wherever it may occur. We look forward to
continUing our work with you on these issues, and I would be happy to answer your
questions.

http://www.treas.gov/pressfreleaseslj.. 2427.htm

5/3112005

S-2428: UNITED STATES OF AMERICA BOBBY 1. PITTMAN (Temporary Alternate Governo ... Page 1 of3

FROM THE OFFICE OF PUBLIC AFFAIRS
May 6,2005
JS-2428

UNITED STATES OF AMERICA
BOBBY J. PITTMAN (Temporary Alternate Governor,
Head of Delegation)
It is an honor for me to be here in Istanbul for the 38 th Annual Meeting of the Asian
Development Bank, and I extend my deepest thanks to our Turkish hosts for their
gracious arrangements. I would also like to congratulate and warmly welcome
President Kuroda.

Recent Developments in Asian Economy
We meet at a time of great opportunity for East ASia. Growth rates III many East
Asian economies are at their highest levels since the 97 crisis. And the number of
poor in East Asia has declined at its most rapid pace since 1999. In this light, we
believe there is no better time than the present to implement the Critical structural
reforms that are required to assure that the development record of this region IS
sustained III the future
First, I urge countries to take advantage of this period of high growth to reduce their
budget deficits, thus freeing up future resources for growth-enhancing investments
IIlcluding infrastructure. Second, it is critical for countries with a record of corruption
and uneven application of regulatory burdens to strengthen their IIlvestment
climate Third, I note the importance of strengthening the financial sector and
capital markets to improve the efficiency of financial intermediation, which has long
been a bottleneck to growth and a systemic risk.
Fillally, I want to stress the importance of increased exchange rate fleXibility for
large economies in the region. I want to be clear why we believe this IS criticaL This
is important for the global economy - to ensure prompt and efficient transmission of
price signals and to facilitate adjustments to international Imbalances. It is also
strongly In the interest of the economies themselves. This is because it enhances
the ability of monetary authOrities to focus on price stability and stable growth. It
avoids the bUildup of imbalances that can lead to abrupt adjustments.
Many economies In the region, such as Korea and Thailand, have made notable
progress in establishing credible monetary policy frameworks With inflation targets
and more flexible regimes. Others, such as China, have Implemented Important
reforms to develop more liqUid foreign exchange markets and instruments to
manage foreign exchange risks. But macroeconomic imbalances in China are
rislllg, as is the risk of another boom/bust cycle that could adversely affect the
region. China is ready. It should move to a more fleXible reglille now.
The ADB has been a leading force in the region to help developlllg economies
address these challenges. We welcome the ADB's critical role, particularly as the
region has been coalescing around a core set of economiC Integration initiatives.
We strongly support such regional financial initiatives, especially where there has
been an urgent need to further develop and strengthen domestic fillancial markets
- particularly domestic bond markets.

Economic Development Agenda of the United States

http://www.treas.gov/pressfreleases/jfi 242.8.htm

5/31/2005

S-2428: UNITED STATES OF AMERICA BOBBY J. PITTMAN (Temporary Alternate Governo ... Page 2 of 3

Let me now turn to broader, institutional matters. The ADF-9 replenishment
agreement reached In May 2004 was a milestone for reform at the Bank We are
encouraged by the prospects for change that would make the ADB a more
transparent. responsive and results-onented institution It is our job as
shareholders to hold the ADB accountable and to set a high standard for
achievement. It IS our task now to see lIlat this ambitiOUs reform agenda is
implemented I would like to use thiS opportunity to take a closer look at three
cntlcal elements of the Bank's reform agenda: Implementation of measurable
results: grants: and the effort to fight cOITuption and Increase transparency
Rigorous Measurable Results
Results measurement needs to be strengthened at all levels if we are to achieve
the goals set out In ADF-9. ThiS means establishing new mechanisms and
strengthening eXisting practices. At the institutional level, we fully supported the
launch of a new human resources policy In October 2004 and expect, before the
end of this year, a new performance management system will be In place that
rewards staff for achieVing development outcomes. A Results Management Unit
has been established to guide Implementation of the results measurement agenda,
and it IS essential it become fully operational as soon as possible
Unfortunately, detailed and quantified targets are not yet consistently found In all
ADB project documents. We want to see higher standards for results measurement
adopted at all levels of the Bank. This means quantified, tlmebound indicators In all
projects and programs. We hope President Kuroda and ADB senior management
will communicate the importance of this agenda to Bank staff and the broader
publiC
Increased Grant Assistance
Last year, the Bank agreed to devote 21 percent of ADF-9 assistance for grants in
the region's poorest and most-vulnerable countries starting in 2005. We applaud
ADB's leadership and foreSight on thiS issue. However, we are concerned that only
2 grant projects amounting to $38 million have been approved to date. This is less
than 3 percent of the total grant envelope for ADF-9. We urge the Bank to
accelerate efforts to Identify and channel financing to grant projects We should not
delay In getting thiS assistance to the countries that need it mos\.
Fighting Corruption and Enhancing Transparency
In an environment of scarcity, every dollar lost to waste, fraud and mlsgovernance
is a dollar not invested in poverty reduction and growth ADB has already adopted
some important anticorruption measures, Including increosed assistance for good
governance, implementation of a more open disclosure policy, more corruption risk
assessments in project and country papers, and a doubling of the number of
procurement audits.
All of these elements are crillcal, but we believe much more can be done. We
would like to see a more proactive and powerful role for ADB's Integrity DIVISion.
Whistleblower protections also need to be further strengthened to encourage staff
to report allegations of fraud. ADB can establish an important deterrent by
publishing the names of debarred firms and indiViduals and by automatically
disqualifying those firms debarred by other flnanciallnslltutions. At the project
level, we would like to see a greater Willingness to cancel loans where corruption is
detected. We hope ADB will work With other MOBs to develop a set of tough,
uniform anticorruption standards.

Responding to the Tsunami
ADB's remarkable response to the ASian Tsunami tragedy has shown the institution
at ItS best. Over $700 million in grants and loans have already been approved for
India, IndoneSia, Sn Lanka and the Maldives. From the beginning, ADB worked
closely with the World Bank, UNDP and other major donors to aVOid duplication and

http://www.treas.gov/pressfreleases/jb2428.htm

5/3112005

S-2428: UNITED STATES OF AMERICA BOBBY 1. PITTMAN (Temporary Alternate Governo ... Page 3 of3

improve aid efficiency
We hope flexibility and pragmatism will continue to be the hallmark of ADB's
tsunami assistance. Tile challenge now is not lack of funds, but ensuring effeclive
coordination and rapid disbursement of assistance. ReCipient countries and donors
(Including civil society organizations) must focus on measuring the results of
reconstructiOll efforts and ensuring that assistance IS used efficiently, transparently
and accountably. Participants to ADB's March 18 tsunami conference agreed to
develop a Tsunami Results Matrix to monitor results and track funds. We believe
this is a critical tool that will demonstrate that real results are belllg made on the
ground to help tsunami vlctlfns.

Conclusion
Over the last year, ADB has begun to translate the ideals of the last replenishment
into concrete action However, the proof of wllether the ADB has become a better
Institution will be In the development impact felt on the ground. Results
measurement will have become a reality when we can account for every donor
dollar III terms of development outcomes achieved in poor countries. The United
States will continue to engage closely with the ADB on this reform agenda to see It
to successful completion.
Thank you

http://www.treas.gov/pressfreleasesljf>2428.htm

5!3112005

S-2429: Statement of Treasury Secretary John W. Snow on April Employment Report

Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
May 6,2005
JS-2429

Statement of Treasury Secretary John W. Snow on
April Employment Report
Last month, 274,000 Jobs were created and unemployment stayed below the
average of the last three decades, a low 52%, even With a welcome rise In the
participation rate, This illustrates PreSident Bush's Jobs and Growth agenda has
again produced results for Americans Altogether, about 3.5 million Jobs have been
created since May 2003, with roughly 2,2 million in the past 12 montilS. This IS
more evidence of the underlYing strength and reSilience of the American economy
PreSident Bush IS committed to keeping the economy on the path of healthy growth
by cutting the defiCit in half, enacting an energy POliCY, and strengthening SOCial
security. The President's leadership on economic policy IS clearly moving the
economy in the right direction,

http://www.treas.gov/pressfreleasesljf>2429.htm

5/31/2005

S-2430: IRS and Treasury Issue Revenue Procedure on Change in Methods for Apportioning Inte... 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®.
May 6.2005
JS-2430

IRS and Treasury Issue Revenue Procedure on Change in Methods for
Apportioning Interest Expenses
WASHINGTON, DC - Today the Treasury Department and the IRS issued
Revenue Procedure 2005-28, making It easier for certain taxpayers to adopt a
simpler method of allocating and apportionlllg interest expenses III determilling their
net U.S. and foreign source income for foreign tax credit purposes.
Taxpayers generally may elect to measure assets for purposes of apportioning
interest expense between U.S and foreign sources under the tax book value
method or the fair market value method Temporary and proposed regulations
issued In March 2004 provide taxpayers with an elective alternative approach, the
alternative tax book value method, which permits a taxpayer to determine the basIs
of its U.S. and foreign assets for interest allocation purposes Without incurring the
disparities that may arise under the regular tax book value method.
A taxpayer who has been using the fair market value method must obtain IRS
consent to change to a different method. Revenue Procedure 2005-28 provides
temporary rules, as suggested in the preamble to the temporary regulations,
granting taxpayers automatic consent to change from the fair market value method
to the alternative tax book value method. The revenue procedure authorizes
taxpayers to switch from the fair market value method to the alternative tax book
value method during the first two years in which the alternative tax book value
election can be made.

REPORTS

http://www.treas.gov/pressfreleasesljf>2430.htm

5/3112005

Part III
Administrative, Procedural, and Miscellaneous

26 CFR 601.105: Examination of returns and claims for refund, credit, or abatement;
determination of correct tax liability.
(Also Part I, §§ 864; 1.861-8T; 1.861-9T)

Rev. Proc. 2005-28

SECTION 1. PURPOSE
This revenue procedure sets forth the administrative procedure under which a
taxpayer described in § 3 of this revenue procedure may obtain automatic consent to
change from the fair market value method to the alternative tax book value method of
valuing assets for purposes of apportioning expenses pursuant to § 1.861-9T(g) of the
Temporary Income Tax Regulations. Accordingly, taxpayers that change from the fair
market value method to the alternative tax book value method pursuant to this revenue
procedure will be treated as expressly authorized by the Commissioner to change
methods. This automatic consent procedure applies to changes in apportionment
method requested for taxable years beginning on or after March 26, 2004 but before
March 26, 2006 and for which a return has not previously been filed.

SECTION 2. BACKGROUND
.01 Section 864(e)(2} of the Internal Revenue Code provides that allocation and
apportionment of interest expense is made on the basis of assets rather than on the
basis of gross income. For this purpose, §§ 1.861-8T(c)(2} and 1.861-9T(g)(1 )(ii) of the
temporary regulations permit a taxpayer to elect to compute the value of its assets
under either the tax book value method or the fair market value method. A taxpayer
using the tax book value method may elect to change to the fair market value method at
any time. See Rev. Proc. 2003-37, 2003-1 C.B. 950. However, § 1.861-8T(c}(2}
provides that a taxpayer electing to use the fair market value method must continue to
use that method unless expressly authorized by the Commissioner to change methods .
.02 On March 26, 2004, the Treasury Department and the Internal Revenue Service
(IRS) published temporary regulations in the Federal Register (T.D. 9120; 69 FR
15673). These regulations amended §1.861-9T by adding §1.861-9T(i}. Section 1.8619T(i} provides an alternative method of determining the tax book value of assets (the
"alternative tax book value method"). Prior to the issuance of the temporary regulations,
a taxpayer could value assets under one of two methods: the fair market value method
and the regular tax book value method. The alternative tax book value method set forth
in the temporary regulations is a third method which allows a taxpayer to elect to
determine the tax book value of its tangible property that is subject to a depreciation
deduction under § 168 as though all such property had been depreciated using the
straight line method, conventions, and recovery periods of the alternative depreciation
system of § 168(g}. The alternative tax book value method therefore provides a
taxpayer with the option of determining the adjusted bases of both foreign and domestic

assets under one consistent depreciation method and helps minimize basis disparities
that may arise under the regular tax book value method. The alternative tax book value
method applies solely for purposes of apportioning expenses (including the calculation
of the alternative minimum tax foreign tax credit pursuant to § 59(a) of the Code) under
the asset method described in § 1.861-9T(g) .
.03 Section 1.861-9T(i)(2)(i) generally allows a taxpayer to elect to value its assets
using the alternative tax book value method with respect to any taxable year beginning
on or after March 26, 2004. However, under § 1.861-8T(c)(2), a taxpayer using the fair
market value method must obtain the consent of the Commissioner to change methods,
including a change to the alternative tax book value method .
.04 The preamble to the temporary regulations states that the Treasury Department
and the IRS intend to issue a revenue procedure to provide temporary rules granting
taxpayers automatic consent to change from the fair market value method to the
alternative tax book value method. Accordingly, this revenue procedure provides
temporary rules for obtaining automatic consent to change from the fair market value
method to the alternative tax book value method of valuing assets pursuant to § 1.8619T(g)(1 )(ii). Notwithstanding these temporary rules for obtaining automatic consent, a
taxpayer may request, under the regular ruling process, the consent of the
Commissioner to change from the fair market value method to the regular tax book
value method or the alternative tax book value method. These temporary rules do not
affect the ability of taxpayers currently valuing assets under the regular tax book value
method to make a change to the alternative tax book value method with respect to any
taxable year beginning on or after March 26, 2004.

SECTION 3. SCOPE
.01 This revenue procedure applies to any taxpayer requesting to change from the
fair market value method to the alternative tax book value method of asset valuation for
a taxable year beginning on or after March 26, 2004 but before March 26, 2006 for
which no return has previously been filed.
SECTION 4. APPLICATION
.01 A taxpayer within the scope of this revenue procedure is granted the consent of
the Commissioner to change to the alternative tax book value method provided that the
other conditions of this § 4 are satisfied .
.02 A corporation described in § 3.01 shall request to change to the alternative tax
book value method on a timely filed Form 1118 by selecting that asset valuation method
on Part II of Schedule H and attaching to Form 1118 the statement set forth in § 4.04.
In the case of such taxpayers electronically filing Form 1118, the statement must be
included in the electronic version of Form 1118.
.03 A taxpayer, other than a corporation, described in § 3.01 shall request to change
to the alternative tax book value method on a timely filed Form 1116 by attaching to
Form 1116 the statement set forth in § 4.04. In the case of such taxpayers
electronically filing Form 1116, the statement must be entered into the Election
Explanation Record of the electronic version of Form 1040, Form 1041, or other
relevant form .
.04 The statement referred to in §§ 4.02 and 4.03 shall provide as follows: "For the
immediately preceding tax year, [name of taxpayer] valued assets for expense
apportionment purposes using the fair market value method. Pursuant to Rev. Proc.

2005-28, [name of taxpayer] is changing from the fair market value method to the
alternative tax book value method of asset valuation. This change to the alternative tax
book value method applies prospectively beginning with [name of taxpayer]'s [XXXX]
taxable year."
.05 Any taxpayer that changes to the alternative tax book value method under this
revenue procedure must maintain all documentation necessary to establish its change
in valuation methods and its eligibility for the benefits of this revenue procedure.
SECTION 5. EFFECTIVE DATE
.01 This revenue procedure is effective for requests to change from the fair market
value method to the alternative tax book value method for taxable years beginning on or
after March 26, 2004 but before March 26, 2006 for which no return has previously been
filed.
SECTION 6. PAPERWORK REDUCTION ACT
The collections of information contained in this revenue procedure have been
reviewed and approved by the Office of Management and Budget in accordance with
the Paperwork Reduction Act (44 U.S.C. § 3507) under control number 1545-1944.
An agency may not conduct or sponsor, and a person is not required to respond to,
a collection of information unless the collection of information displays a valid OMB
control number.
The collections of information in this revenue procedure are in § 4. They are
required to enable the IRS to determine whether the taxpayer is eligible for an automatic
change from the fair market value method to the alternative tax book value method.
The information will also inform revenue agents as to the years for which the alternative
5

tax book value method is being adopted. The collections of information are required in
order to obtain the benefit of the alternative tax book valuation method. The likely
respondents are businesses.
The estimated total annual reporting and/or recordkeeping burden is 100 hours. The
estimated annual burden per respondent and/or recordkeeper is an estimated average
of .5 hours. The estimated number of respondents and/or recordkeepers is 200. The
estimated frequency of response is occasional.
Books and records relating to a collection of information must be retained as long
as their statements may become material in the administration of any internal revenue
law. Generally, tax returns and tax information are confidential, as required by 26
U.S.C. § 6103.
SECTION 7. DRAFTING INFORMATION
The principal author of this revenue procedure is Margaret A. Hogan of the Office of
Associate Chief Counsel (International). For further information regarding this revenue
procedure contact Margaret A. Hogan at (202) 622-3850 (not a toll free call).

S-2431: Secretary Snow Visits Hartford, Connecticut on Monday to Discuss Strengthening and Pre... Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
May 6,2005
JS-2431

Secretary Snow Visits Hartford, Connecticut on Monday
to Discuss Strengthening and Preserving Social Security
U.S Treasury Secretary John W. Snow will be in Hartford, Connecticut on Monday,
May 9 to discuss the President's efforts to strengthen and preserve the U.S. Social
Security system
"To keep the promise of Social Security alive for our children and grandchildren, we
need to fix Social Security now once and for all," said Secretary Snow. "We cannot
pretend the problem doesn't exist. The fact is, Social Security will go broke when
our young workers get ready to retire. Every year we wait the problem becomes
worse for our children.
"If we do not act to fix Social Security now, the only solutions will be dramatically
higher taxes, massive new borrowing or sudden and severe cuts In Social Security
benefits or other government programs.
"The President is committed to saving Social Security and has laid out some basic
principles. He wants to preserve benefits for current and near-retirees while saving
and strengthening the system for future generations. The President has pledged to
work with Congress to find the most effective combination of reforms'"
The following event is open to credentialed media with photo identification
(credentials must be Visible at all times)
Roundtable with Connecticut Business and Industry Association
Remarks
350 Church Street
Hartford, CT
9:00 a.m. EDT
** Media must RSVP to Nancy Andrews at 860-244-1957
** Media must arrive by 8:15 a.m. EDT
** A brief media availability will be held immediately following the event

http://www.treas.gov/pressfreleasesljf;243i htm

5/3112005

S-2432: Deputy Assistant Secretary Iannicola Helps Launch Unique Public Awareness and Financi... Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
May 4,2005
JS-2432

Deputy Assistant Secretary lannicola Helps Launch
Unique Public Awareness and Financial Education
Campaign with D.C. Students
Treasury's Deputy Assistant Secretary for Financial Education, Dan lannicola, Jr,
today participated in the opening ceremony for the Stash Your Cash financial
education program at the Kennedy Recreation Center In Washington, D.C. In
addition to teaching young people about money in classrooms, the program will use
large colorful piggy bank statutes to promote savings in the District of Columbia.
lannlcola addressed volunteers during the launch ceremony and visited with the
children painting the large piggy banks, which will be displayed on D.C sidewalks In
May and June. "Having these figures on the street IS a fun and imaginative way to
emphasize savings," said lannlcola. "Parents can use them as a vIsible reminder for
their children, and for themselves, about the Importance of saving for their futures."
lannicola also commended the classroom portion of the Stash Your Cash program.
"Learning to save at an early age IS an important lesson that will benefit young
people their whole lives through," he said. "Whether it is saving for an education, a
home or retirement, saving is something that everyone needs to do, but that many
don't do. I'm glad to see today's effort to teach this crucial skill to our kids when It
can truly change their lives."
Today's Stash Your Cash event marks the introduction of the interactive money
management lesson in several D.C. middle schools The purpose of the program IS
to engage the publiC and attract attention to the need of teaching students the
important prinCiples of saving, spending and sharing. Sponsoring the event were
Capital One and the Federal Reserve Bank of Dallas.
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 ctlaired 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/pressfreleasesljf>2432 htm

5/3112005

;-2433: Secretary Snow to Announce $2 Billion in New Markets Tax Credit Awards

Page I of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
May 6, 2005
IS-2433

Secretary Snow to Announce $2 Billion in New Markets Tax Credit Awards
US Treasury Secretary John W Snow will Jom Community Development Financial
Institutions Fund Director Arthur A. Garcia next week to announce which
organizations were selected to receive the $2 billion available in the 2005 round of
New Markets Tax Credits. The ceremony will take place at 10 am EDT on May 11
In the Treasury's Cash Room
The New Market Tax Credit (NMTC) Program attracts private-sector capital
investment into urban and rural low-income areas to help finance community
development projects, stimulate economic opportunity and create Jobs In the areas
that need It most.
The NMTC Program, established by Congress in December of 2000, permits
individual and corporate taxpayers to receive a credit against federal income taxes
for making qualified equity investments in investment vehicles known as
Community Development Entities (CDEs) Substantially all of the taxpayer's
investment must in turn be used by the CDE to make qualified investments
supportmg certain busmess ac\lvities in low-income communities. The organizations
receiVing tax credit allocations thiS year were selected through a competitive
application and rigorous review process. More information on the NMTC program
can be found at
.'\ ,,1,1"1"\':"
Media without Treasury press credentials (including media with White House
credentials) planning to attend should contact Frances Anderson in
Treasury's Office of Public Affairs at (202) 622-2439 or
Flances.Allcil'ISOlliCl'(io.tlca.'''Jov by 12 p.m. EDT Tuesday, May 10.
Please be prepared to provide her with the following information: full name,
Social Security number and date of birth

-30-

http://www.treas.gov/pressfreleasesljf>2433 htrn

5/3112005

;-2434: The Honorable John W. Snow Prepared Remarks James Madison University Commenc... Page 1 of 2

FROM THE OFFICE OF PUBLIC AFFAIRS
May 9,2005
js-2434

The Honorable John W, Snow
Prepared Remarks
James Madison University Commencement
Harrisonburg, VA
Thank you so much for having me here on what is one of the most significant days
of your lives ... and of your parents' lives.
For you, today is about the future, and the enormous possibilities it holds. For those
of you entering the world of work, yesterday's employment numbers bode well for
you with 274,000 Jobs created in April, and the economy has created 3.5 million
new Jobs since May of 2003. This is an excellent time to be entering the workforce:
lob creation is strong.
Your futures are bright, indeed. I love what former New York Mayor Ed Koch once
said in a commencement speech "The fireworks begin today. Each diploma is a
lighted match. Each one of you IS a fuse."
For your parents, today is also about the future .. one without tUition payments.
So congratulations to one and all.
I promise you that the future of my remarks ... IS a short one. It has been said that
the greatest achievement of graduates is sitting through the commencement
address, and that's not the challenge I want you to face today.
So I'll simply offer you a few thoughts and then let you get those diplomas that you
have worked so very hard for.
I propose to you three things to think about today and in the months ahead as you
set out into this wonderful world
•
•
•

First, a way of looking at your education and what it means.
Second, a little bit of advice about living life to its fullest.
And third, a touch of inter-generational perspective

In terms of your education ... what does It mean, this diploma, these years of
classes, papers and exams?
This is very important: Education is not the knowledge you gain. It is the ability
to learn.
Your years at JMU have developed your ability to learn, to look hard at questions
and have a disciplined mind.
An educated person has a spirit of inquiry.
body of knowledge.

http://www.treas.gov/pressfreleasesljf>:2Z1-34.htm

and that is far more Important than a

5/3112005

;-2434: The Honorable John W. Snow Prepared Remarks James Madison University Commenc ... Page 2 of2

Because ultimately one must find answers through that spirit of inquiry, self-reliance
and self-confidence - the things that lie at the heart of a good liberal arts education
You're now equipped to entel into tile unknown and use your critical mind to
determine the best course.
Your education here has exposed you to so many different areas - from musIc to
phYSICS, poetry to psychology - you have by now learned how all facets of thiS life
are somehow connected, and that will help you draw conclusions and make critical
decisions.
Take your ability to learn and decide to use it pursuing a lifetime of learning.
As an IIlustralion of that, let me mention Alan Greenspan, the emment chairman of
the Federal Reserve, a man noted for his deep erudition and mastery of finanCial
matters. In talking with Alan some years back, he told me he Ilad gone back to the
books, the mathematics books, and he was working hard to master some elements
of mathematical theory. He explained that he felt compelled to do so because of
the development of the derivatives market, which had taken on far reaching
significance in the financial world. Alan explained that derivalives were becoming a
bigger and bigger part of what the Federal Reserve System needed to be
concerned about. And derivatives -- really sophisticated hedging on risks -- IS
based on a system of underlying set of mathematical constructs. Now think of that,
the Chairman of the Federal Reserve Board, who years ago got a PhD In
economiCS, and one of the leading financial figures in the world, going back to the
books. But that is the world we are in, that is the world you are entering, so you can
never be satisfied with what you know, but rather must draw strength from what you
have learned about how to learn.
Let me put it this way there's no road map for success But you do have to know
how to drive. And it doesn't hurt to know how to change a flat tire once in a while.
You've earned your driver's license: you've gassed up the car. It's time to hit the
road.
Keep your spirit of Inquiry sharp. Learn about each place that you visit, and each
person that you meet, each situation that you encounter.

~ttp:llwww.treas.gov/pressfreleasesljfi2434.htm

5/31/2005

s-2435: Secretary John W. Snow Prepared Remarks Connecticut Business and Industry Association Har... Page 1 of 4

FROM THE OFFICE OF PUBLIC AFFAIRS
May 9,2005
Js-2435

Secretary John W. Snow Prepared Remarks Connecticut Business and
Industry Association Hartford, CT
Thank you so much for having me here today; It'S great to be in Hartford l
I appreciate the ctlance to talk With you about strengthening the nation's Social
Security system The President's leadership on this issue IS providing our country
with a tremendous opportunity to save Social Securrty for current and near retirees
and improve it for younger generations. Conversations like this are an important
part of reaching decisions as to what. exactly, should be done.
Before we get Into Social Securrty, I do want to talk about the Amerrcan economy a
little bit. Social Security IS such an Important part of our economy - and the reform
choices that are made in WaShington Will have such an impact - that I think it's
important to start there. Furthermore, the strength of our economy is largely owed
to businesses like yours, so I want you to know just how much of a difference your
hard work is making.
We've seen amazing economic times In the last few years Well-timed tax cuts,
combined With sound monetary policy set by the Federal Reserve Board. got our
economy moving when we needed it most. They gave business and industry the
room you needed to grow, and you took over from there. As a result, economic
growth was 4.4 percent last year, the strongest In five years.
We have had terrific news on jobs - 23 straight months of job growth. On Friday,
the Labor Department announced that 274,000 jobs were created in Aprrl The
economy has created a total of 3.5 million new jobs since May 2003. That's great
news - the best news - for 3.5 million families.
The President has made clear his commitment to strengthen our economy further.
This includes redUCing the budget defiCit - as well as reforming Social Security and
the tax system, redUCing the regulatory burden on bUSiness, and passing energy
legislation We expect the defiCit to total 3.5 percent of GOP this fiscal year Tight
controls on discretionary spending and increased revenue as a result of economic
expansion are expected to cut the defiCit by more than half, to well under two
percent of GOP, by fiscal year 2009.
The Treasury announced last week that we expect to pay down $42 billion In debt
In the second quarter of thiS year, which IS very good news and is primarily the
result of higher IndiVidual tax receipts
I Imagine you also heard that Treasury IS considering whether or not to reintroduce
regular Issuance of a 30-year bond A deCision on 30-year nominal Issuance Will be
announced at the next quarterly refunding on August 3rd. In conslderrng such a
change, we will examine if we have the fleXibility to issue 30-year bonds while
maintaining deep and liqUid markets In our other securities. and determine If
nominal bond Issuance is cost effective.
All of the strong economic Indicators, and our ability to pay down debt, point to the
fact that reducing the tax burden proved to be a successful economic stimulus. And

http://www.treas.gov/pressfreleasesljf>2435.htm

5/3112005

;-2435: Secretary John W. Snow Prepared Remarks Connecticut Business and Industry Association Har... Page 2 of 4

when the economy is growing and spending is controlled, we can also reduce our
deficit.
But the Job of keeping our economy unencumbered is a never-ending one, Indeed
From tax cuts to regulations and energy policy, we need to work on It every day,
and we need to work on keeping It strong for the future, for the long-term
Reforming our Social Security and tax systems addresses some critical long-term
economic Issues.
I appreciate the President's leadership on tax reform, and I deeply admire hiS
leadership when it comes to the national diSCUSSion on Social Security reform
The PreSident doesn't believe in burying one's head In the sand which is
essentially what you have to do to ignore the serious nature of the SOCial Security
problem. The SOCial Security Trustees - for whom I serve as Board Chairman issued our annual report on the finanCial health of the programs' trust funds on
March 23rd, and the numbers contained in that report leave little doubt that the
system is finanCially unsustainable, and In need of expeditious and lasting change.
The Trustees' report showed that Social Security cash flows peak in 2008 and turn
negative in 2017, and the trust fund itself will be exhausted in 2041 The unfunded
obligation, that is, the difference between the present values of Social Security
inflows (plus the trust fund) and outflows, IS $11.1 trillion on a permanent basis, and
$4.0 trillion over the next 75 years
Now, the President doesn't believe that we should make up that shortfall with tax
increases. The report showed just how much we would have to raise taxes to
achieve long-term balance the payroll tax rate would have to be raised immediately
by 3.5 percentage paints to make the system whole on a permanent basis. In other
words, the payroll tax would have to be increased by nearly 30 percent.
That kind of tax increase would have Significant, negative economic reperCUSSions.
Americans would start taking home less pay, and that's bad for countless facets of
our economy. I imagine that, as business owners, you appreciate what I'm saying.
After all, you would shoulder half of that tax increase - because you pay that tax on
all of your employees. For the smallest of employers I fear that much of a tax
increase would force you to make terrible choices, from lay-offs to health benefit
cuts. And it would make hiring new people even more difficult.
Increasing payroll taxes hurts the economy and it hurts Job creation, period We
know this from talking to bUSiness leaders like you, and that's why the PreSident is
against it.
It is also worth noting that payroll tax increases have been the standard "solution" to
Social Security's problems, and they have never solved the problem I Payroll taxes
have been raised some 20 times since Social Security was established - and it has
failed to make the system solvent.

Tax Increases aren't the answer, so the PreSident has encouraged the Congress to
propose a variety of ideas that might be, and he has put a number of ideas on the
table as well.
Two weeks ago, in his Thursday evening press conference, the President spoke
very plainly about the realities of Social Security. Inevitably, workers face a
reduction In benefits because the system will go broke in 2041. He suggested a
progressive indexing plan to make sure that those who are most in need - lowincome workers - will be protected from that reduction In benefits.
The President proposes that, in the future, benefits for low-income workers should
grow faster than benefits for people who are better off. By slowing the rate of
increase of benefits for wealthier Americans, most of the funding challenges facing
Social Security would be solved and the government will make good on this
commitment: If you work hard and pay into Social Security your entire life, you Will

http://www,treas.gov/press(releasesljf>243S- htm

5/3112005

;-2435: Secretary John W. Snow Prepared Remarks Connecticut Business and Industry Association Har... Page 3 of 4

not retire into poverty.
A variety of other options are available to solve the rest of the solvency problern,
and the President will work with Congress on any good-faith proposal that does not
raise the payroll tax rate or harm our economy.
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 Arnericans to talk about Social Security, and a
national conversation has resulted.
People have been talking about tile issue from the halls of Congress to the 11alls of
local shopping rnalls. The President's leadership has drawn critical attention to the
problern and is creatlllg movement. Progress, real progress, IS belllg made
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.
I know that you understand that If you are 55 or older your Social Security benefits
are solid They will not change. You know that 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? 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.
The issue of Social Security IS really a matter of basic arithmetic, and the threat to
Social Security in the near future rnakes 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.
According to the new Trustees' report, the government will begin to payout more III
Social Security benefits than it collects in payroll taxes in 2017 - that's Just 12 years
from now. By 2041, when younger workers beg III to retire, the system will be
bankrupt.
We must make Social Security better for those younger workers.
Raising their payroll taxes won't make it better. What the President would 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 give workers the prospect of a
retirement that is 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.

http://www.treas.gov/pressfreleasesljf>zzn~.htm

5/3112005

5-2435: Secretary John W. Snow Prepared Remarks Connecticut Business and Industry Association Har... Page 4 of 4

Former Democratic Congressmen Tim Penny and Charlie Stenholm wrote
somethll1g very important in a recent op-ed They said that "opposing personal
accounts is not a substitute fOI' 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 bell1g created from scratch today, Americans
would want to II1clude 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 ttle 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 II1splred a national diSCUSSion and. I'm confident, Will
lead to histOriC results, I encourage you to be involved, whether It'S talking about the
Issue with your colleagues. With your children, or writll1g 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 busll1ess to be In top shape. fillancially. 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 footll1g for our
children and grandchildren
A fill a I issue that I think is of interest to so many busillesses in thiS area IS the
status of the Treasury Department's study on Terrorism Risk Insurance Act.
The terrorism risk insurance program was an imponant confidence builder as this
country recovered from the attacks of September 11 and the recession,
The issue of reauthOrization of TRIA is one that will involve a detailed analYSis. As
you know. the Act reqUired that Treasury study its effectiveness and repon to
Congress by June 30. 2005. Through our study. ongoing at this time, we are
seekll1g to answer the questions Congress posed in the Act, such as the finanCial
capacity of the IIlsurance industry. the pricing and take-up of terror risk Insurance.
whether risk can be priced and managed. the return of re-insurers to the market,
and what is the most efficient mechanism to produce insurance for the risk.
We are looking forward to a prompt completion of our study. so that we and
Congress can have a full and open diSCUSSion about these important questions.
It's an imponant issue, and Treasury IS dedicated to the most thorough study and
analysis possible so that Congress may make a fully informed decision about
terrorism risk Insurance in the future,
Thank you so much for having me here today to talk about the really historic policy
effons that are underway right now. ThiS IS an exciting time to be III government.
and I'm extremely proud to be helplllg the President as we seek to achieve a safe
and promising finanCial future for all Americans.
Thanks so much for haVing me here today,
-30-

http://www.treas.gov/press(releasesljf>2435.htm

5/3112005

S-2436: Treasury and IRS Announce Second Set of Repatriation Guidance Under sec. 965

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®.

May 10,2005
JS-2436
Treasury and IRS Announce Second Set of Repatriation Guidance
Under sec. 965
WASHINGTON, DC Today the Treasury Department and IRS announced the
second in a series of notices that provide detailed guidance for US companies that
elect to repatriate earnings from foreign subsidiaries subject to the temporary
reduced tax rate available under the American Jobs Creation Act (AJCA). The
notice released today provides guidance to companies on what constitutes a
qualifying dividend, the Impact of mergers and acquisitions and issues related to the
section 78 gross-up
ee

Internal Revenue Code section 965, enacted as part of the AJCA in October 2004,
is a temporary provision that allows a US company to repatriate earnings from Its
foreign subsidiaries at a reduced effective tax rate provided that specified
conditions and restrictions are satisfied. Section 965 provides that a U.S company
may elect, for one taxable year, an 85 percent dividends received deduction for
eligible dividends from Its foreign subsidiaries, giving It an effective 5.25 percent tax
rate on quailfymg diVidends
In January 2005, Treasury and IRS issued a notice (Notice 2005-10) that provided
guidance to companies on the domestic reinvestment plan requirement under the
new provision. The notice specified permitted investments in the United States for
which the repatriated funds may be used under this provision The notice
announced today (Notice 2005-38) provides additional guidance on the amount of
dividends that qualify for the dividends received deduction. Further, Treasury and
the IRS announced their intention to issue a third notice that Will address the Impact
of section 965 on a corporation's computation of its tax liability.
A copy of the regulations and a fact sheet providing additional details are attached.

REPORTS
• N-2005-38
• Final Second Repatriation Fact Sheet

http://www.treas.gov/pressfreleasesljf>2436.htm

5/3112005

Part III - Administrative, Procedural, and Miscellaneous

Section 965 -- Limitations on dividends received deduction and other guidance

Notice 2005-38
SECTION 1. OVERVIEW
This notice is the second in a series of items of published guidance regarding
new section 965 of the Internal Revenue Code (Code). It supplements guidance
previously set forth in Notice 2005-10, 2005-6 I.R.S. 1, which primarily addressed
requirements regarding a domestic reinvestment plan described in section 965(b)(4).
This notice primarily addresses the limitations, described in section 965(b )(1), (2), and
(3), on the amount of dividends that a corporation that is a U.S. shareholder of a
controlled foreign corporation may treat as eligible for the dividends received deduction
under section 965(a) (ORO or section 965(a) ORO), including the effects of certain
transactions on such limitations.
The Treasury Department and the Internal Revenue Service (IRS) intend to issue
additional guidance concerning section 965 to address certain issues ariSing with
respect to a U.S. corporation's computation of its tax liability, including the availability of
foreign tax credits, when section 965 is applied. The Treasury Department and the IRS
expect to issue regulations that incorporate the guidance provided in Notice 2005-10,
this notice, and any subsequent guidance addressing section 965.

The remainder of this notice is divided into 14 sections. Section 2 provides
background with respect to the issues addressed in this notice. Section 3 sets forth
general principles that apply in determining the amount of cash dividends received by a
U.S. shareholder that is considered extraordinary for purposes of section 965(b)(2).
Section 4 sets forth general principles that apply in determining the maximum amount of
dividends eligible under section 965(b)(1) to be taken into account under section 965(a).
Section 5 addresses the taxable year to which section 965 applies. Section 6 then
addresses the effects of certain transactions on the determination of a U.S.
shareholder's limitations determined under sections 3 and 4. Section 7 sets forth
guidance and principles for determining under section 965(b)(3) the amount of related
party indebtedness that reduces the amounts taken into account under section 965(a),
including special adjustments made as a result of certain transactions. Section 8
provides guidance regarding the impact of certain transactions on domestic
reinvestment plans. Section 9 addresses other issues arising under section 965,
including the application of section 78, the expenses disallowed under section 965(d)(2),
and the computation of the alternative minimum tax. Section 10 addresses reporting
and other administrative requirements. Section 11 sets forth transition rules that apply
to certain taxpayers that, prior to the issuance of this notice, either adopted a domestic
reinvestment plan or filed a tax return for a taxable year to which section 965 applies.
Section 12 describes the effect of this notice on other documents. Section 13 provides
the effective date of this notice, and section 14 provides information required under the

Paperwork Reduction Act of 1995. Finally, section 15 provides drafting information.
SECTION 2. BACKGROUND
.01 Section 965 -- In General
The American Jobs Creation Act of 2004 (P.L. No.1 08-357) (the Act), enacted
on October 22, 2004, added new section 965 to the Code. In general, and subject to
limitations discussed below, section 965(a) provides that a corporation that is a U.S.
shareholder of a controlled foreign corporation (CFC) may elect, for one taxable year,
an 85 percent ORO with respect to certain cash dividends it receives from its CFCs.
Section 951 (b) defines the term "U.S. shareholder" with respect to any foreign
corporation as a U.S. person who owns (within the meaning of section 958(a)), or is
considered to own (under the constructive ownership rules of section 958(b)), 10
percent or more of the total combined voting power of all classes of stock entitled to
vote of such foreign corporation. Section 965(c)(5)(A) provides that all U.S.
shareholders that are members of an affiliated group filing a consolidated return under
section 1501 are treated as one U.S. shareholder. For purposes of this notice, the term
"U.S. shareholder" means, unless otherwise indicated, a domestic corporation that, at
any time after the beginning of the base period (defined below), is a U.S. shareholder
(as defined in section 951(b)) with respect to a CFC and that owns (within the meaning
of section 958(a)) stock of such CFC.
For purposes of section 965, the term "dividends" includes cash amounts
included in gross income as dividends under sections 302 and 304, but does not include

amounts treated as dividends under section 78 or 1248 or, in certain cases, section
367.

H.R. Conf. Rep. No. 108-755, at 314-15 (2004). Also for this purpose, a cash

dividend includes a cash distribution from a CFC that is excluded from gross income
under section 959(a) (regarding distributions of previously taxed income (PTI)) to the
extent of inclusions under section 951 (a)(1 )(A) as a result of a cash dividend during the
election year to: (1) such CFC from another CFC in a section 958(a) chain of ownership;
or (2) any other CFC in such chain of ownership from another CFC in such chain of
ownership, but only to the extent of cash distributions described in section 959(b) made
during such year to the CFC from which such U.S. shareholder received such
distribution.
Section 965(b) imposes four limitations on the section 965(a) ORO. These
limitations are discussed in detail below in paragraphs .02 through .05 of this section.
Section 965(d) and (e) provide special rules that limit the use of foreign tax
credits and the deduction of certain expenses to offset the nondeductible portion of
section 965(a) dividends, respectively. See section 9.01 of this notice. These rules will
be addressed in greater detail in a subsequent notice that the Treasury Department and
the IRS expect to issue soon.
Section 965(f) provides that taxpayers may elect the application of section 965

1 Dividends resulting from liquidations qualifying under section 332 to which section 367(b) applies qualify
as cash dividends to the extent the U.S. shareholder actually receives cash as part of the liquidation.
Section 965(c)(3). A deemed liquidation effectuated through an election under Treas. Reg. §301.77013(c), however, does not by itself result in an actual distribution of cash as required under section 965. See
H.R. Conf. Rep. No. 108-755, at 315, n. 108 (2004).

for either the taxpayer's last taxable year which begins before October 22,2004, or the
taxpayer's first taxable year which begins during the one-year period beginning on
October 22, 2004. The election must be made on or before the taxpayer's due date
(including extensions) for filing its Federal income tax return. See Notice 2005-10; see
also H.R. Conf. Rep. No. 108-755, at 314, n. 107 (2004). The taxable yearforwhich a
taxpayer elects to apply section 965 will be referred to in this notice as the "election
year."
.02 Extraordinary Dividends
Section 965(b)(2) provides that only those cash dividends (within the meaning of
section 965(a)) received from CFCs during the U.S. shareholder's election year that are
considered "extraordinary" are eligible for the section 965(a) DRD. Cash dividends
received by the U.S. shareholder during the election year are considered extraordinary
only to the extent such dividends exceed the annual average for the base period years
of the following items reported on the U.S. shareholder's tax return as filed (including
any amended returns that were filed on or before June 30, 2003): (1) dividends received
during each base period year by such shareholder from CFCs2 ; (2) amounts includible
in such shareholder's gross income for each base period year under section
951 (a)(1 )(8) (regarding investments in United States property under section 956) with
respect to CFCs; and (3) amounts that would have been included for each base period

For this purpose, both cash and non-cash dividends received are taken into account. See section
965(b )(2)(8)(i).

year but for section 959(a) with respect to CFCs. 3
The term "base period" in this notice means the five most recent taxable years of
the U.S. shareholder that end on or before June 30, 2003. The term "base period
inclusion" in this notice means any amount described in (1), (2), or (3) of the preceding
paragraph, for any of the U.S. shareholder's taxable years in the base period. Under
section 965(c)(2)(A), the term "base period years" generally includes only three taxable
years in the U.S. shareholder's base period, determined by disregarding the years in the
base period for which the base period inclusions are the highest and the lowest.
However, if the taxpayer has fewer than five taxable years ending on or before June 30,
2003, then all taxable years ending on or before that date are considered base period
years. The average of the U.S. shareholder's base period inclusions for its base period
years is referred to in this notice as the "base period amount."
Section 965(c)(2)(C)(i) sets forth a general rule applicable to companies entering
and exiting corporate groups, which provides that for purposes of determining the base
period inclusions (and ultimately the base period amount), rules similar to the rules of
section 41 (f)(3)(A) and (8) apply. Section 41 generally provides for an incremental
credit for qualified research activities, but only to the extent that current year research
expenditures exceed the base amount for that year. For purposes of section 41, the
base amount is computed by multiplying a measure of the taxpayer's qualified research

3 For this purpose, distributions of PTI for any base period year do not include distributions excluded from
gross income by reason of an amount described in section 965(b)(2)(8)(ii) (relating to investments in
United States property) with respect to a prior taxable year.

expenses during a specified historical period by its average annual gross receipts for
the four years immediately preceding the credit year. Section 41 (f)(3)(A) and (8)
generally provide that, as a result of certain acquisitions and dispositions, a taxpayer
may increase or decrease the amount of its qualified research expenses and gross
receipts to the extent that such amounts are attributable to the acquired or disposed of
portion of a trade or business of the taxpayer.
In addition to the general references to section 41 (f)(3)(A) and (8), section
965(c)(2)(C)(ii) provides a special rule for distributions during the base period of stock of
a U.S. shareholder to which section 355 (or so much of section 356 that relates to
section 355) applies. Under this special rule, the U.S. shareholder, the stock of which is
distributed, is treated as having been in existence for the same period that the
distributing corporation has been in existence. Further, the base period inclusions of
the distributing and controlled corporations prior to the distribution are, in general,
allocated between such corporations on the basis of their respective interests in the
CFCs giving rise to such inclusions immediately after such distribution. Section
965(c)(2)(C)(ii) also provides that this rule does not apply if neither the controlled
corporation nor the distributing corporation is a U.S. shareholder of such CFCs
immediately after the distribution .

.03 Maximum Amount Eligible for Section 965(a) -- Greater of $500 Million or
Permanently Reinvested Earnings
Section 965(b )(1) limits the amount of dividends eligible for the section 965(a)

ORO to the greatest of the following three amounts: (1) $500 million ($500 million
limitation); (2) the amount shown on the taxpayer's applicable financial statement as
earnings permanently reinvested outside the United States; or (3) in the case of an
applicable financial statement that does not show a specific amount of earnings
permanently reinvested outside the United States but that does show a specific amount
of tax liability attributable to such earnings, the amount of such liability divided by 0.35.
If the applicable financial statement does not show a specific earnings or tax liability
amount, then the $500 million limitation applies. The section 965(b)(1) amount shown
on the taxpayer's applicable financial statement as earnings permanently reinvested
outside the United States and the amount shown as a specific amount of tax liability
attributable to such earnings divided by 0.35 is referred to in this notice as "APB 23
limitation."
Under section 965(c)(1), the term "applicable financial statement" means the
most recently audited financial statement (including notes and other documents which
accompany such statement) which is certified on or before June 30, 2003, as being
prepared in accordance with generally accepted accounting principles, and which is
used for the purposes of a statement or report to creditors or shareholders or for any
other substantial nontax purpose. If the taxpayer is required to file with the Securities
and Exchange Commission, the audited financial statement must be so filed on or
before June 30, 2003, to qualify as an applicable financial statement. The legislative
history states:

[APB 23 limitation] refers to elements of Accounting Principles Board Opinion 23
("APB 23"), which provides an exception to the general rule of comprehensive
recognition of deferred taxes for temporary book-tax differences. The exception
is for temporary differences related to undistributed earnings of foreign
subsidiaries and foreign corporate joint ventures that meet the indefinite reversal
criterion in APB 23.
H.R. Conf. Rep. No. 108-755, at 315, n. 111 (2004). The last day covered by the
applicable financial statement is referred to in this notice as the "APB 23 determination
date."
Section 965(c)(5) provides special rules for applying section 965 to controlled
groups of corporations. First, section 965(c)(5)(B) provides that all corporations treated
as a single employer under section 52(a) (section 52(a) group) are limited to one $500
million limitation, and the limitation must be divided among such corporations under
regulations prescribed by the Secretary. A section 52(a) group includes all corporations
that are members of a controlled group of corporations within the meaning of section
1563(a) substituting, however, "more than 50 percent" for "at least 80 percent"
throughout section 1563(a)(1), and making the determination without regard to section
1563(a)(4) and (e)(3)(C). Second, section 965(c)(5)(C) provides that if a financial
statement is an applicable financial statement for more than one U.S. shareholder, APB
23 limitation is divided among such shareholders under regulations prescribed by the
Secretary .

.04 Increase in Related Party Indebtedness
Section 965(b)(3) provides that the amount of a U.S. shareholder's dividends
otherwise eligible for the deduction under section 965(a) are reduced by any increase in
9

the indebtedness of the CFC to any related person (as defined in section 954(d)(3))
between October 3, 2004, and the close of the taxable year for which the election under
section 965 is in effect. For this purpose, all CFCs with respect to which the taxpayer is
a U.S. shareholder are treated as a single CFC and, therefore, indebtedness between
CFCs is disregarded for this purpose. See H.R. Conf. Rep. No. 108-755, at 314, n. 109
(2004). Section 965(b)(3) is intended to prevent a deduction from being claimed with
respect to a section 965 dividend where the dividend is financed, directly or indirectly,
by the U.S. shareholder. In such a case, there may be no net repatriation of funds, and
thus it is inappropriate to allow a deduction under section 965(a). H.R. Conf. Rep. No.
108-755, at 315 (2004) .

.05 Investment in the United States Pursuant to a Domestic Reinvestment Plan
Section 965(b)(4) requires a U.S. shareholder claiming a section 965(a) ORO
with respect to a dividend to invest the amount of the dividend in the United States
pursuant to a domestic reinvestment plan. The domestic reinvestment plan must be
approved by the taxpayer's president, chief executive officer, or comparable official
before the payment of the dividend and subsequently approved by the taxpayer's board
of directors, management committee, executive committee, or similar body. The
domestic reinvestment plan must provide for the investment of the dividend in the
United States (other than as a payment for executive compensation), including as a
source for the funding of worker hiring and training, infrastructure, research and
development, capital investments, or the financial stabilization of the corporation for the
10

purposes of job retention or creation. This list is not intended to be exclusive. H.R.
Conf. Rep. No. 108-755, at 316 (2004). For additional guidance with respect to
domestic reinvestment plans, see sections 8 and 9 of this notice and Notice 2005-10.
SECTION 3. BASE PERIOD AMOUNT -- GENERAL PRINCIPLES
.01 Determination of Base Period Amount
(a) In general. A U.S. shareholder determines its base period inclusions and its
base period amount by applying the rules of section 965(b)(2)(B) and (c)(2) with respect
to CFCs for which it was a U.S. shareholder at any time during its base period.
(b) Consolidated groups. A consolidated group4 determines its base period
inclusions by first aggregating the base period inclusions of each of the members in its
group. It then determines its base period amount by determining the average of such
inclusions as provided under section 965(b )(2)(B) and (c)(2).
(c) Short taxable years. Taxable years of fewer than 12 months are taken into
account as taxable years for purposes of determining the base period years pursuant to
section 965(c)(2). In addition, base period inclusions in a taxable year of fewer than 12
months are not annualized or otherwise adjusted for purposes of calculating the base
period amount.
(d) Intermediary pass-through entities. The Treasury Department and the IRS
expect to issue guidance soon on the treatment of distributions to intermediary pass-

The terms "consolidated group," "member," "subsidiary," and "separate return year" are defined in Treas.
Reg. § 1.1502-1. In addition, the term "member" also refers, when the context so requires, to a member of
a section 52(a) group.
4

through entities owned by U.S. shareholders for purposes of section 965(b)(2)(8)(i).
(e) Example. The following example illustrates the application of section
965(b)(2) and this section 3.01.
Example. (i) Facts. USP is the common parent of a consolidated group that
includes USP's wholly owned subsidiaries US1 and US2. US1 and US2 each wholly
owns a foreign corporation, CFC1 and CFC2, respectively. The USP consolidated
group maintains a taxable year ending July 31. US1 received a $100x dividend from
CFC1 in each of the consolidated taxable years ending July 31, 1996, 1997, and 1998.
US2 received a dividend from CFC2 during each of the consolidated taxable years
ending July 31, 1998, 1999, 2000, 2001, 2002, and 2003 in the amount of $150x,
$150x, $200x, $100x, $50x, and $100x, respectively.
(ii) Result. USP first determines the base period inclusions of US1 and US2 to
determine the consolidated group's base period inclusions. Pursuant to section
965(c)(2), the base period includes the five most recent taxable years of the USP group
that ended on or before June 30, 2003, which are the group's taxable years ending July
31, 1998 (year 1) through July 31, 2002 (year 5). Accordingly, USP will have base
period inclusions as follows:
Taxable year ending
July
July
July
July
July

USP group base period inclusions

31,1998
31, 1999
31,2000
31,2001
31, 2002

$250x
$150x
$200x
$100x
$50x

To determine its base period years pursuant to section 965(c)(2), USP
disregards the taxable years in its base period with the highest and lowest base period
inclusions, which are 1998 ($250x) and 2002 ($50x). To determine it base period
amount, USP then averages the base period inclusions for the remaining three taxable
years (that is, the base period years). Therefore, USP's base period amount is $150x
(($150x + $200x + 100x)/3) .
.02 Translation of Previously Taxed Income Distributed During the Base Period
For purposes of determining the dollar amount of base period inclusions
attributable to distributions of PTI described in section 965(b)(2)(8)(iii), distributions of
12

foreign currency are valued by multiplying the distributing CFC's foreign currency
amount of the PTI distribution by the spot rate (as defined in Treas. Reg. §1.9881(d)(1)) on the date of distribution.
SECTION 4. MAXIMUM AMOUNT ELIGIBLE FOR SECTION 965(a) -- GENERAL
PRINCIPLES
.01 Applicable Financial Statement
As noted above, the amount of dividends eligible for the section 965(a) ORO may
be limited by section 965(b)(1 )(B) or (C) to either: (1) the amount shown on the
taxpayer's applicable financial statement as earnings permanently reinvested outside
the United States; or (2) in the case of an applicable financial statement that does not
show a specific amount of earnings permanently reinvested outside the United States
but that does show a specific amount of tax liability attributable to such earnings, the
amount of such liability divided by 0.35. Also as noted above, the term "applicable
financial statement" means the most recently audited financial statement (including
notes and other documents which accompany such statement) which is certified on or
before June 30, 2003, as being prepared in accordance with generally accepted
accounting principles, and which is used for the purposes of a statement or report to
creditors or shareholders or for any other substantial nontax purpose. For purposes of
determining an amount shown on a taxpayer's applicable financial statement pursuant
to section 965(b)(1 )(B) or (C), the parenthetical reference to notes and other documents
accompanying the statement only includes notes and documents that form an integral
13

part of the financial statement; it does not include work papers or other materials
underlying or supporting the statement.

.02 Determination of APB 23 Limitation of a U.S. Shareholder
For purposes of section 965(b)(1 )(B) and (C), the specific amount shown on the
applicable financial statement that reflects the amount determined under paragraph 12
of APB 23 (or, in the case of section 965(b)(1 )(C), a specific amount of tax liability) and
that is disclosed as required under Financial Accounting Standards Board Statement
109, is treated as an amount of earnings permanently reinvested outside the United
States (or, the amount of tax liability attributable to such earnings), regardless of the
specific language used to describe such specific amount on the applicable financial
statement.

.03 Amount of Tax Liability Attributable to Earnings Permanently Reinvested
If an applicable financial statement fails to show a specific amount of earnings
permanently reinvested outside the United States, but instead shows a specific amount
of tax liability attributable to such earnings, the APB 23 limitation under section
965(b)(1 )(C) is the specific amount of such tax liability divided by 0.35. This amount
may not be adjusted (for example, to take into account the foreign taxes imposed on
such earnings).
The following example illustrates the application of section 965(b )(1 )(C) and this
section 4.03.
Example. (i) Facts. A CFC has earnings permanently reinvested outside the
United States that have been subject to foreign tax of $1 Ox. The applicable financial
14

statement of the U.S. shareholder that wholly owns such CFC does not show a specific
amount of earnings permanently reinvested outside the United States, but instead
shows a $25x tax liability attributable to such earnings.
(ii) Result. Although the applicable financial statement of the U.S. shareholder
does not show an amount of permanently reinvested earnings, it does show a tax
liability of $25x attributable to earnings permanently reinvested. Thus, the amount
described in section 965(b)(1 )(C) is $71.4x ($25x/0.35). This amount may not be
adjusted to take into account the foreign taxes imposed on such earnings .
.04 Allocation of APB 23 Limitation
As noted above, section 965(c)(5)(C) provides that if a financial statement is an
applicable financial statement for more than one U.S. shareholder, APB 23 limitation is
divided among such shareholders under regulations prescribed by the Secretary. In
such a case, the portion of the APB 23 limitation allocated to the U.S. shareholder is the
amount from the separate company financial statements (or supporting work papers) of
such U.S. shareholder that were prepared in connection with determining the amount
described in section 965(b)(1 )(B) or (C) shown on the applicable financial statement that
included such U.S. shareholder.
Section 965(c)(5)(C) contemplates not only the situation where the financial
statement reflects the operations of affiliated corporations that are not consolidated for
tax purposes (for example, a U.S. corporation and a domestic subsidiary thereof that
elects to apply section 936), but also the situation where the financial statement reflects
the operations of corporations that were formerly affiliated and/or consolidated but are
not in such relationship during a section 965 election year. See section 6 of this notice
for rules regarding the allocation of APB 23 limitation in such a case.
15

The following example illustrates the application of section 965(b)( 1) and this
section 4.04.
Example. (i) Facts. USP is a domestic corporation that files a consolidated return
with its wholly-owned subsidiaries US1 and US2. USP also wholly owns US3, which
does not join in the USP consolidated return because an election under section 936 is in
effect with respect to US3. US1, US2 and US3 each wholly owns a foreign corporation,
CFC1, CFC2 and CFC3, respectively. Even though US3 is not part of the USP
consolidated group for U.S. tax purposes, US3 is consolidated with USP, US1, and US2
for financial accounting purposes. On USP's applicable financial statement, USP
reported $350x of earnings permanently reinvested outside the United States. The
separate company financial statements of US1, US2, and US3 that were used in
preparing the USP applicable financial statement reported earnings permanently
reinvested by CFC1, CFC2 and CFC3 to be $100x, $50x and $200x, respectively.
(ii) Result. The portion of the USP APB 23 limitation allocated to US1, US2, and
US3 is that portion reflected on the separate company financial statements (or
supporting work papers) of US1, US2 and US3 that were used in determining the USP
APB 23 limitation on its applicable financial statement. Thus, US1 is allocated $100x,
US2 is allocated $50x, and US3 is allocated $200x of the $350x APB 23 limitation.
Because US1 and US2 are members of the USP consolidated group and such group is
treated as one U.S. shareholder, the USP consolidated group's APB 23 limitation equals
$150x ($50x + $100x) .

.05 Allocation of $500 Million Limitation
As noted above, section 965(c)(5)(B) provides that all corporations which are
included in a section 52(a) group are limited to one $500 million limitation, which is
divided among such corporations under regulations prescribed by the Secretary. Each
qualified member of a section 52(a) group is allocated a portion of the section 52(a)
group's single $500 million limitation if it is a qualified member on the last day of the
election year of the qualified member with the last election year to end (apportionment
date). A "qualified member" is either: (1) a domestic corporation that files a separate tax
return and is a member of a section 52(a) group; or (2) a consolidated group that is part
16

of a section 52(a) group. Accordingly, if a consolidated group is not a part of a section
52(a) group, it has its own $500 limitation, and, if a consolidated group is part of a
section 52(a) group, the portion of the $500 million allocated to the consolidated group
is not further allocated between and among the members of the consolidated group.
The section 52(a) group's single $500 million limitation is allocated to all qualified
members in proportion to the aggregate amount of total current and accumulated
earnings and profits that are not previously taxed (non-PTI earnings and profits) of all
CFCs owned (within the meaning of section 958(a)) by such qualified members. For
purposes of this rule, a consolidated group is treated as owning CFCs within the
meaning of section 958(a), if any member of the group owns CFCs within the meaning
of section 958(a). The amount of non-PTI earnings and profits of a CFC owned (within
the meaning of section 958(a)) by a qualified member is the sum of the amounts of
earnings and profits of such CFC appropriately reported on Schedule J, items 7(a) and
7(b), of the last Form 5471 filed by or on behalf of such qualified member on or before
the apportionment date with respect to such CFC, translated into U.S. dollars at the
average exchange rate for the CFC's taxable year (see section 989(b)(3)).
The following example illustrates the application of section 965(b)(1) and the
rules of this section 4.05.
Example. (i) Facts. FP, a foreign corporation, wholly owns two domestic
corporations, US1 and US2. US1 and US2 each wholly owns a foreign corporation,
CFC1 and CFC2, respectively. US1 and US2 each has a taxable year ending July 31,
and they each make an election under section 965 for the taxable year ending July 31,
2006. US1 and US2 have APB 23 limitations of zero. On US1's last Form 5471 filed on
or before the July 31, 2006 apportionment date with respect to CFC1, US1 reported an
17

amount of non-PTI earnings and profits for CFC1, translated into U.S. dollars using the
average exchange rate, of $100x. On US2's last Form 5471 filed on or before the July
31,2006 apportionment date with respect to CFC2, US2 reported an amount of non-PTI
earnings and profits for CFC2, translated into U.S. dollars using the average exchange
rate, of $300x.
(ii) Result. US1 and US2 do not have an APB 23 limitation and, thus, their
maximum amount eligible for the section 965(a) ORO is $500 million. Because US1 and
US2 are members of the same section 52(a) group, they are limited to one $500 million
limitation, which is allocated between them. Pursuant to this section 4.05, the $500
million limitation is allocated in proportion to the aggregate U.S. dollar amount of nonPTI earnings and profits reported on the last Form 5471 filed on or before the
apportionment date by US1 and US2 with respect to CFC1 and CFC2, respectively.
The apportionment date for the FP group is July 31, 2006. Consequently, US1 is
allocated $125 million of the $500 limitation ($100xJ$400x x $500 million) and US2 is
allocated $375 million of the $500 limitation ($300x/$400x x $500 million).

SECTION 5. TAXABLE YEAR TO WHICH SECTION 965 APPLIES

01. In General
Section 965(f) provides that a taxpayer may elect to apply section 965 to either
the taxpayer's last taxable year beginning before October 22, 2004, or the taxpayer's
first taxable year starting during the one-year period beginning on October 22, 2004
(eligible year). Thus, assuming that the other requirements of section 965 are met, a
taxpayer may elect to apply the section 965(a) ORO with respect to cash dividends (as
defined for purposes of section 965(a)) received by a u.S. shareholder from its CFCs in
an eligible year. Except as otherwise provided in this section 5, an eligible year may
include a short taxable year.

02. Consolidated Groups
For taxpayers that are members of a consolidated group, the common parent
may elect on behalf of all the members to apply section 965 to one of the group's
eligible years. The election applies to each member of the group that is included in the
group's income tax return for that eligible year, but only for the portion of the eligible
year during which such member is a member of the group. Further, every member can
receive a cash dividend from a CFC that otherwise qualifies under section 965(a) during
any period the recipient is a member of such group. This rule applies even if: (1) as a
result of a subsidiary entering or leaving the group, the group's election year is, with
respect to the particular subsidiary, neither the taxable year that includes October 22,
2004, nor the subsequent taxable year; or (2) a previous separate return year of the

subsidiary also was an election year for the subsidiary. This rule also applies as a
result of the acquisition of a consolidated group by an unrelated consolidated group,
where the previous separate return year of the acquired group was an election year.
Under the rules of the preceding paragraph, if a subsidiary leaves the group
during the group's election year, cash dividends received from the subsidiary's CFCs
during its short taxable year that ends within the group's election year are eligible for the
group's election. As a result, dividends received by the subsidiary during that initial
short taxable year can be eligible for the section 965(a) ORO. Moreover, dividends
received by the subsidiary during its next short taxable year as part of an acquiring
group may also be eligible for the section 965(a) ORO.
In addition, if the departing subsidiary is not immediately thereafter a subsidiary
member of another group, it may treat its next short taxable year as an eligible year and
make an election under section 965 for that year, even if that next taxable year is
neither the taxable year for that subsidiary that includes October 22, 2004, nor the
subsequent taxable year, provided that the two short taxable years together do not
exceed twelve months (or an equivalent 52-53 week year).
General consolidated return principles apply to reverse acquisitions as defined in
Treas. Reg. §1.1502-75(d)(3), so that the taxable year of the continuing group governs
its available eligible years and the terminating group members are subject to the
general rules for members leaving and entering groups, with the common parent in
effect treated as having become a subsidiary of the continuing group.
20

03. Examples

The following examples illustrate the application of the rules of section 965(f) and
this section 5.
Example 1. Member included in election year of different consolidated groups. (i)
Facts. USP is the common parent of a calendar year consolidated group that elects to
apply section 965 for its taxable year ending December 31, 2004. US1 is a member of
the USP group and a U.S. shareholder. USB is the common parent of an unrelated
consolidated group that elects to apply section 965 to its taxable year ending June 30,
2005. A member of the USB group acquires all the stock of US 1 on November 15,
2004.
(ii) Result. Because US1 is included in the USP group during the USP group's
section 965 election year (January 1,2004 through December 31,2004), US1 's taxable
year beginning January 1, 2004 and ending on November 15, 2004 is an election year
during which cash dividends received from US1 's CFCs may be eligible for the section
965(a) DRD. In addition, because US1 is included in the USB group during the USB
group's election year (July 1,2004 through June 30, 2005), cash dividends from US1 's
CFCs during US1 's taxable year beginning on November 16, 2004 and ending June 30,
2005, may be eligible for the section 965(a) DRD of the USB group.
(iii) Alternative facts. If USB instead makes an election under section 965 for its
taxable year ending June 30, 2006, cash dividends from US1's CFCs during the USB
group's election year may still be eligible for the section 965(a) DRD. In this case,
however, that election year is US1 's taxable year from July 1, 2005 through June 30,
2006. Section 965 will not apply to US1's year beginning November 16, 2004 and
ending June 30, 2005.
Example 2. Special rule for member departing but not joining a consolidated
illQ!!Q. (i) Facts. Assume the same facts as in Example 1, except instead of being

acquired by an unrelated consolidated group, the stock of US1 is distributed to the
shareholders of USP on November 15, 2004, and US1 becomes the common parent of
a new consolidated group which also maintains a taxable year ending December 31.
(ii) Result. Because the taxable year ending December 31,2004 is the USP
group's election year, US1's taxable year beginning January 1,2004 and ending on
November 15, 2004 is an election year during which cash dividends received from
US1's CFCs may be eligible for the section 965(a) DRD. Further, because US1 ceased
to be a member of the USP group during its election year and did not become a
subsidiary member of another consolidated group, US1 may make an election under
21

section 965 for the subsequent short taxable year, which begins on November 16, 2004
and ends on December 31,2004. This election will also apply to the other members of
the US1 group during that short taxable year. US1 will not be able to make an election
under section 965 for 2005.
Example 3. Acquisition of target resulting in single short election year. (i) Facts.
USP is the common parent of a calendar year consolidated group that elects to apply
section 965 for its taxable year ending December 31, 2004. US1 is a member of the
USP group and a U.S. shareholder. On November 15, 2004, the stock of US1 is
distributed to the shareholders of USP; after such distribution, US1 is not a member of a
consolidated group and therefore files a separate return. USB is the common parent of
an unrelated consolidated group that plans to apply section 965 to its taxable year
ending December 31,2005. On December 15, 2005, US1 purchases all the stock of
USB for cash. US1 and its subsidiaries elect to file a consolidated return for the taxable
year ending December 31,2005.
(ii) Result. Because the taxable year ending December 31,2004 is the USP
group's election year, US1's taxable year beginning January 1, 2004 and ending on
November 15, 2004 is an election year during which cash dividends received from
US1's CFCs may be eligible for the section 965(a) ORO. Further, because US1 ceased
to be a member of the USP group during its election year and did not become a
subsidiary member of another consolidated group, US1 may make an election under
section 965 for its short taxable year that begins on November 16, 2004 and ends on
December 31,2004. However, 2005 is not an eligible year for US1 or its consolidated
group. The USB group's final taxable year ends on December 15, 2005, when it is
acquired by US1. That short taxable year is an eligible year for which the USB group
may make an election under section 965. Thereafter, the members of the former USB
group will become members of the US 1 group. Because the USB group was acquired
after the US 1 election year, the former USB group members may not participate in an
election under section 965 for any period after December 15, 2005.
Example 4. Effect of reverse acquisition. (i) Facts. Assume the same facts as in
Example 3, except that US1's acquisition of USB is for US1 stock rather than cash and
the acquisition is a reverse acquisition described in Treas. Reg. §1.1502-75(d)(3).
(ii) Result. Under Treas. Reg. §1.1502-75(d)(3)(i), the USB group is treated as
continuing to exist after the reverse acquisition with US1 as its common parent. The
USB group's taxable year ending December 31, 2005 is an eligible year for which the
group may make an election under section 965. This election applies to cash dividends
received by US1 after the acquisition when US1 was in the USB consolidated group (the
period beginning December 16, 2005 and ending December 31, 2005), as well as to
dividends received by the USB group members during the calendar year while USB was
22

the common parent. As in Example 3, US 1's short taxable year that begins on
November 16, 2004 and ending on December 31,2004 is an eligible year. However,
US1 's taxable year beginning January 1, 2005 and ending December 15, 2005 is not an
eligible year for US1.
Example 5. Consolidated group included in election year of different consolidated
groups. (i) Facts. Assume the same facts as in Example 1 (i), except that a member of
the USB group acquires the USP group on November 15, 2004 and the USP group
makes an election under section 965(a) for the taxable year January 1, 2004 through
November 15, 2004.
(ii) Result. Because the USP group's election year is January 1, 2004 through
November 15, 2004, USP's taxable year beginning January 1, 2004 and ending on
November 15, 2004 is an election year during which cash dividends received from the
USP group's CFCs may be eligible for the section 965(a) ORO. In addition, because
USP is included in the USB group during the USB group's election year (July 1,2004
through June 30, 2005), cash dividends from the USP group's CFCs during USP's
taxable year beginning on November 16, 2004 and ending June 30, 2005 may be
eligible for the section 965(a) ORO of the USB group. If, in the alternative, USB elects
to apply section 965 to its taxable year ending June 30, 2006, cash dividends from the
USP consolidated group's CFCs during USP's taxable year beginning July 1, 2005 and
ending June 30, 2006 may be eligible for the section 965 ORO of the USB consolidated
group.
SECTION 6. EFFECTS OF CERTAIN TRANSACTIONS ON BASE PERIOD
INCLUSIONS AND MAXIMUM AMOUNT ELIGIBLE FOR SECTION 965(a) ORO

.01 Base Period Inclusions and APB 23 Limitation as U.S. Shareholder Attributes
(a) In general. For purposes of section 965, base period inclusions and APB 23
limitation are historical amounts that are treated as tax attributes particular to a U.S.
shareholder as of the date these amounts are fixed under section 965(b)(1) and (2).
See section 2.01 of this notice for the definition of the term "U.S. shareholder" for this
purpose. Consequently, base period inclusions and APB 23 limitation remain with a
particular U.S. shareholder (for example, when a U.S. shareholder ceases to be a
23

enters a U.S. consolidated group, adjustments are required to the selling 5 and/or
acquiring group's base period inclusions and APB 23 limitation to reflect that base
period inclusions and APB 23 limitation generally remain with a particular U.S.
shareholder (that is, with the specific member rather than with the group itself). The
selling group reduces its base period inclusions and APB 23 limitation by the amounts
that are attributable to a departed member, and the acquiring group correspondingly
increases its base period inclusions and APB 23 limitation to account for the new
member. For exceptions to these general rules, see paragraph (2), below, and
Examples 1,1, § and

of section 6.01 (d) of this notice. For specific rules addressing

the determination of base period inclusions, see section 6.01 (b)(3) of this notice.
When adjusting a consolidated group's base period inclusions to reflect the entry
or exit of a U.S. shareholder, the consolidated group makes the adjustment to the
specific base period inclusions (as opposed to the base period amount) for the group to
reflect the particular base period inclusions of the acquired or disposed of U.S.
shareholder or its successor. In the same way, the consolidated group makes an
adjustment to its APB 23 limitation to reflect the APB 23 limitation attributable to the
acquired or disposed of U.S. shareholder or its successor.
The rules of this paragraph that apply to dispositions or acquisitions of a member
of a consolidated group also apply, as relevant, in the context of the acquisition of an

5 For purposes of this section 6, the term "selling group" also includes a group in which a U.S. shareholder
ceases to be included as a member as a result of transactions other than sales (for example, through the
distribution of the stock of the member).

entire consolidated group.
(2) Special adjustment rules dependent upon timing of certain acquisitions or
dispositions of U.S. shareholders. Certain adjustments to base period inclusions and/or
APB 23 limitation provided under paragraph (b )(1) of this section are not made if certain
transactions occur during the selling group's election year, or certain transactions occur
before or after a selling group's or acquiring group's6 APB 23 determination date. In
addition, special rules are provided in section 6.01(c) of this notice with respect to
certain spin-off transactions.
Specifically, under this paragraph (b)(2), when a U.S. shareholder ceases to be a
member of a selling group during the selling group's election year, the selling group's
base period inclusions and APB 23 limitation are not reduced by amounts attributable to
the departing U.S. shareholder. Nonetheless, the acquiring group still increases its
base period inclusions and, subject to the special rules of this paragraph (b)(2), its APB
23 limitation attributable to the acquired U.S. shareholder under the general rules of
paragraph (b)(1) of this section. See Example 1 of section 6.01 (d) of this notice. In
addition, dividends received by the U.S. shareholder from its CFCs in any other election
year may be taken into account in that year for purposes of section 965. See also
section 5 of this notice for a discussion of taxable years to which section 965 applies.
This paragraph provides special rules to ensure that an acquiring consolidated

6 For purposes of section 6, the term "acquiring group" includes a consolidated group that comes into
existence after the acquisition of a corporation.

group appropriately reflects an APB 23 limitation with respect to an acquired member
when: (1) that member ceases to be a member of a selling consolidated group before
the selling group's APB 23 determination date; and/or (2) that member joins an
acquiring group before the acquiring group's APB 23 determination date. Specifically, if
a U.S. shareholder joins a consolidated group before the acquiring group's APB 23
determination date, there is no adjustment to the acquiring group's APB 23 limitation
because the U.S. shareholder's membership in the new group (and such U.S.
shareholder's ownership of CFCs at the relevant time with permanently reinvested
earnings) will be taken into account when determining the acquiring group's APB 23
limitation. Under the preceding sentence, if the selling group's APB 23 determination
date has passed, the selling group reduces its APB 23 limitation to account for the
departed U.S. shareholder. If a U.S. shareholder ceases to be a member of a
consolidated group before the selling group's APB 23 determination date, there is no
downward adjustment to the selling group's APB 23 limitation to reflect the departure
because the selling group's APB 23 limitation will reflect such disposition. However, if a
U.S. shareholder ceases to be a member of a consolidated group before the selling
group's APB 23 determination date but after the acquiring group's APB 23
determination date, the acquiring group's APB 23 limitation is increased by the amount
of the selling group's APB 23 limitation that would be allocated to the acquired U.S.
shareholder under section 4 of this notice if the selling group substituted "the date of the
acquisition" for "June 30, 2003" in applying section 965(c)(1).

The rules of this paragraph that apply to dispositions or acquisitions of a member
of a consolidated group also apply, as relevant, in the context of the acquisition of an
entire consolidated group.
(3) Determining the base period inclusions to be inherited. When an acquiring
group adjusts its base period inclusions to take into account an acquisition of a U.S.
shareholder or consolidated group, the acquiring group takes into account five taxable
years in the relevant base period for any acquired shareholder or group, assuming at
least five taxable years are available. The inclusions are aggregated for taxable years
one through five without regard to whether they are short or full taxable years on either
side. An acquired U.S. shareholder or group cannot contribute more than five taxable
years of inclusions to the base period history of the acquirer. The fifth taxable year in
the acquiring group's base period is the last potential taxable year in its base period.
If the acquired U.S. shareholder or group joins the acquiring group after the end
of the acquiring group's base period, the acquired U.S. shareholder's or acquired
group's base period inclusions in its last five taxable years ending on or before June 30,
2003 are aggregated with the acquiring group's base period inclusions in its five base
period taxable years, on a year-by-year basis.
Similarly, if an acquired U.S. shareholder or group joins the acquiring group
before the end of the acquiring group's base period, the acquiring group inherits a base
period inclusion history for the acquired U.S. shareholder or group for each of the
taxable years in the acquiring group's base period that end on or before the date of the

acquisition. The acquired U.S. shareholder's or acquired group's taxable year ending
on the date of the acquisition shall correspond to the taxable year in the acquiring
group's base period that ends on or before the date of the acquisition. The acquiring
group then takes into account base period inclusions from the acquired U.S.
shareholder's or group's taxable years prior to the taxable year ending with the date of
the acquisition to the extent necessary to assemble a base period inclusion history for
the inherited years. An acquired U.S. shareholder or acquired group may contribute five
taxable years to the acquiring group's history even if the acquiring group did not itself
exist for its full five taxable year base period. For illustrations of these rules, see
Example 7 and Example 8 of section 6.01 (d).
(c) Special rules for spin-offs. (1) In general. Except as provided in paragraphs
(c)(2) and (3) of this section, a distribution to which section 355 (or so much of section
356 as relates to section 355) applies is treated in the same manner as a disposition of
the stock of the controlled corporation (controlled) by the distributing corporation
(distributing) for purposes of section 965 and this notice. See sections 5, 6.01(a) and (b)
of this notice and Example 2 of section 6.01(d) of this notice.
(2) Spin-off of a U.S. shareholder that occurs during the base period -- allocation
of base period inclusions. In the case of a spin-off of the stock of a U.S. shareholder to
which section 355 (or so much of section 356 that relates to section 355) applies that
occurs during the base period, and after which either distributing or controlled is a U.S.
shareholder of a CFC (applicable base period spin-off), any base period inclusions
29

received by either distributing or controlled from such CFC are allocated as provided in
section 965(c)(2)(C)(ii). For purposes of determining distributing's and controlled's base
period inclusions and base period amounts under section 965(c)(2)(C)(ii), section
965(c)(2)(C)(ii)(I) treats controlled as having been in existence for the same period that
distributing has been in existence. Further, section 965(c)(2)(C)(ii)(II) allocates base
period inclusions that are received or includible by distributing and controlled from a
CFC prior to an applicable base period spin-off of controlled based on the fair market
values of distributing's and controlled's interests in such CFC immediately after such
spin-off.
However, if stock of a member of a consolidated group is distributed pursuant to
an applicable base period spin-off and, as a result of such distribution a controlled
corporation leaves the consolidated group, the base period inclusions of the
consolidated group with respect to each of the group's CFCs before the applicable base
period spin-off are instead allocated between the members of the consolidated group
that remain in the distributing corporation's group (distributing group) and the members,
if any, that leave the group and thereafter file a consolidated return with the controlled
corporation (controlled group) in proportion to the fair market values of the distributing
group's and the controlled group's respective interests in each CFC owned by the
distributing group and the controlled group immediately after the applicable base period
spin-off. The base period inclusions allocated to the distributing group and the
controlled group are further allocated amongst the members of such groups in

proportion to the fair market value of such members' respective interests in each CFC
immediately after the applicable base period spin-off. See paragraph (c)(3) for the
treatment of APB 23 limitations as a result of applicable base period spin-offs described
in this paragraph (c)(2).
Section 965(c)(2)(C)(ii)(II) does not apply to any distribution that is not an
applicable base period spin-off, such as a distribution that occurs after the base period;
nor does it apply to allocate inclusions from CFCs with respect to which neither
controlled not distributing is a U.S. shareholder at the time of the spin-off. Instead, the
rules of section 6.01 (c)(1) of this notice apply to such distributions or inclusions.
(3) Spin-off of a U.S. shareholder that occurs during the base period -- allocation
of APB 23 limitation. If an applicable base period spin-off (as defined in paragraph
(c)(2) of this section) occurs with respect to a U.S. shareholder that is not a member of
a consolidated group after the APB 23 determination date of either distributing or
controlled, the APB 23 limitation of distributing or controlled is adjusted to the extent that
distributing's or controlled's APB 23 limitation is attributable to the stock of a CFC that
is transferred between distributing and controlled in connection with the spin-off.
Consistent with the treatment of base period inclusions, such adjustment is made by
allocating the portion of any APB 23 limitation attributable to distributing or controlled
with respect to the earnings of a CFC that is transferred between distributing and
controlled in proportion to the fair market values of such corporations' respective
interests as U.S. shareholders of such CFC immediately after the spin-off. If a spin-off
31

occurs before the APB 23 determination dates of both distributing and controlled, the
general rules of section 4 apply. See Example 3 of section 6.01 (d) of this notice.
If the stock of a member of a consolidated group is distributed pursuant to an
applicable base period spin-off and, as a result of such distribution a controlled
corporation leaves the consolidated group and, the spin-off occurs after the APB 23
determination date of the consolidated group, the APB 23 limitation that is attributable to
each CFC owned by the consolidated group before the applicable base period spin-off
is, instead, allocated between the distributing group and the controlled group in
proportion to the fair market values of the distributing group's and the controlled group's
respective interests in each CFC owned by the distributing group and the controlled
group immediately after the applicable base period spin-off. The APB 23 limitation
allocated to the distributing group and the controlled group is further allocated between
and among the members of such groups in proportion to the fair market values of such
members' respective interests in each CFC immediately after the applicable base period
spin-off.
(d) Examples. The following examples illustrate the application of section
965(b )(1) and (2) and this section 6.01. Unless otherwise indicated, the following facts
are assumed for purposes of these examples. All corporations and consolidated groups
maintain calendar taxable years and were in existence prior to 1997. USP is a domestic
corporation and the common parent of the USP consolidated group. USP wholly owns
US1 and US2. US1 and US2 are U.S. shareholders and members of the USP
32

consolidated group. US1 and US2 each wholly owns a foreign corporation, CFC1 and
CFC2, respectively. USP elects to apply section 965 to its 2005 taxable year. USB is a
domestic corporation and the common parent of the USB consolidated group, which is a
consolidated group prior to any transactions described below. All domestic corporations
acquired by the USB group that are eligible to do so elect to join in filling a consolidated
return with the USB group. USB elects to apply section 965 for its 2005 taxable year.
No elections are made under section 338 with respect to stock purchases.
Example 1. Sale of U.S. shareholder by consolidated group. (i) Facts. On
December 31, 2003, USP sells the stock of US1 to an unrelated foreign person, FP.
US1 files a separate return for the taxable years following such sale. On October 25,
2004 US2 sells CFC2 to USB for cash.
(ii) Result. On January 1, 2004, US1 is no longer a member of the USP
consolidated group as a result of the sale of the US1 stock to FP. Accordingly, the USP
group reduces its base period inclusions and APB 23 limitation attributable to US1. In
addition, because US1 files a separate return after it ceases to be a member of the USP
consolidated group, it takes into account its individual base period inclusions and APB
23 limitation. In contrast, US2's sale of CFC2 does not affect US2's base period
inclusion history or APB 23 limitation, because base period inclusions and APB 23
limitation are not tax attributes of CFCs. Consequently, the USP group does not reduce
its base period inclusions or APB 23 limitation as a result of the sale of CFC2. Similarly,
USB does not make any adjustment to its base period inclusions or APB 23 limitation as
a result of the acquisition of CFC2.
(iii) Alternative Facts. Assume the same facts as above, except that USP sells
the stock of US1 to FP on February 15, 2005. On February 16, 2005, US1 is no longer
a member of the USP consolidated group as a result of the sale of the US1 stock to FP.
Because the transaction occurs within the USP election year, the USP group does not
reduce its base period inclusions and APB 23 limitation attributable to US1. Further,
US1 still takes into account its individual base period inclusions and APB 23 limitation
should it make an election with respect to section 965(a) in its short taxable year
following the acquisition (February 16,2005 through December 31,2005). The result
with respect to USB is not changed under the alternative facts.

Example 2. Spin-off of U.S. shareholder by consolidated group. (i) Facts. The
facts are the same as in Example 1, except that instead of USP selling the stock of
US1, it distributes such stock in a distribution to which section 355 applies. US1 files a
separate return for the taxable years following the distribution.
(ii) Result. The result is the same as that in Example 1. The special rules under
section 965(c)(2)(C)(ii) and section 6.01 (c)(2) of this notice do not apply because the
distribution did not occur during USP's base period (which ended December 31, 2002).
Example 3. Section 368(a)(1 )(D) reorganization/section 355 distribution. (i) Facts.
USP owns CFC3. USP has base period inclusions and APB 23 limitation attributable to
CFC3. On December 31, 2002, USP transfers the stock of CFC3 to controlled, a newly
formed domestic corporation wholly-owned by USP, in a transaction to which section
368(a)(1 )(D) applies, and immediately thereafter distributes the stock of controlled in a
distribution to which section 355 applies.
(ii) Result. The distribution occurs during the USP group's base period and,
therefore, the special rules under section 965(c)(2)(C)(ii) and section 6.01 (c)(2) and (3)
of this notice apply. As a result, USP's base period inclusions and APB 23 limitation
that are attributable to CFC3 are allocated as provided in section 965(c)(2)(C)(ii) and
section 6.01 (c)(2) and (3) of this notice. Therefore, all of the base period inclusions and
APB 23 limitation of USP attributable to CFC3 are allocated to controlled because
controlled owns all the CFC3 stock immediately after the section 355 distribution.
(iii) Alternative facts. The facts are the same as in Example 3, except that the
transaction occurs on December 31,2003. Because the distribution does not occur
during USP's base period, section 965(c)(2)(C)(ii) and section 6.01 (c)(2) and (3) of this
notice do not apply. Instead, the general rules of section 6.01 (c)(1) of this notice apply.
Therefore, none of the base period inclusions, and no portion of the APB 23 limitation,
attributable to CFC3 are allocated to controlled; such amounts remain with USP.
Example 4. Internal spin-off of CFC followed by applicable base period spin-off.
(i) Facts. US1 has base period inclusions with respect to CFC1. On June 30, 2002,
US1 distributes the stock of CFC1 to USP in a transaction to which section 355 applies
(first spin-off). On December 31, 2002, USP transfers the stock of CFC1 to controlled, a
newly formed domestic corporation wholly owned by USP, in a transaction to which
section 368(a)(1 )(D) applies, and immediately thereafter distributes the stock of
controlled in a distribution to which section 355 applies (second spin-off).
(ii) Result. The first and second spin-offs occur during the USP group's base
period. Section 965(c)(2)(C)(ii)(II) does not apply to the first spin-off because CFC1 is
not a United States shareholder. As a result US1 's base period inclusions attributable

to CFC1 are not allocated between US1 and USP in accordance with US1 's and USP's
proportional ownership of CFC1 after the first spin-off. However, in the second spin-off
controlled is distributed out of USP's consolidated group. Accordingly, the USP group's
base period inclusions with respect to each of its CFCs before the spin-off of controlled
are allocated between the USP group and controlled (or controlled's group if controlled's
affiliated group files a consolidated return) in proportion to the USP group's and
controlled's (or the controlled group's) interests in each CFC owned by the USP group
and controlled (or the controlled group) immediately after the second spin-off.
Example 5. Merger of a U.S. shareholder and other transactions. (i) Facts. On
January 3, 2003, US1 sells its stock in CFC1 to USB for cash. On December 31, 2003,
in an unrelated transaction US1 merges into US2. The merger of US1 into US2 is a
reorganization under section 368(a)(1 )(A). On December 31, 2004, in a transaction
unrelated to the merger of US 1 into US2, USP sells the shares of US2 to USB for cash.
The APB 23 determination date for the USP and USB groups is December 31,2002.
(ii) Result. The sale of CFC1 stock to USB has no effect on the USP group's
base period inclusions and APB 23 limitation. The merger of US1 into US2 on
December 31, 2003 is a transaction described in section 381 (a), and US2 therefore
succeeds to and takes into account US1's base period inclusions and APB 23 limitation.
Because US2 ceases to be a member of the USP consolidated group as a result
of the sale of its stock to USB, the USP group reduces its base period inclusions and
APB 23 limitation attributable to US2, including those amounts US2 succeeds to and
takes into account as a result of the merger. Further, because US2 becomes a member
of the USB consolidated group on January 1, 2005, USB's base period inclusions and
APB 23 limitation are increased by the same amounts by which USP's base period
inclusions and APB 23 limitation amount were decreased.
(iii) Alternative facts. The facts are the same as Example 5 (i), except that instead
of USP selling the shares of US2 to USB, US2 sells its assets to USB in exchange for
cash (and the assumption of any liabilities of US2) and distributes the cash proceeds to
USP pursuant to a liquidation described in section 332.
Under the alternative facts, the result is the same as Example 5 (ii), except as
follows. USP does not make any adjustments to its base period inclusions or APB 23
limitation as a result of the sale of US2's assets to USB because the transaction with
USB is not described in section 381 (a) (this may not be the case, however, if the assets
sold by US2 to USB include stock of a U.S. shareholder that is a member of the USP
consolidated group). Further, USP continues to take into account the base period
inclusions and APB 23 limitation attributable to US2 after the liquidation of US2 because
the liquidation into USP is a transaction described in section 381 (a). In addition, the
35

USB consolidated group does not take into account the base period inclusions and APB
23 limitation attributable to US2, because US2 does not become a member of the USB
consolidated group (nor does the USB consolidated group acquire the assets of US2
pursuant to a transaction described in section 381 (a)).
(iv) Alternative facts. The facts are the same as Example 5 (i), except that USP
and USB make an election pursuant to section 338(h)(1 0) with respect to the sale of the
stock of US2. The result under the alternative facts in this paragraph (iv) is the same as
under the alternative facts of paragraph (iii) of this Example 5. This is the case
regardless of whether an election under section 338 is made with respect to the CFC2
stock owned by US2.
Example 6. Acquisition of U.S. shareholder consolidated group. (i) Facts. USB
acquires all the stock of USP on January 3, 2003, a date subsequent to the APB 23
determination dates for both the USP and USB groups. As a result of the acquisition,
the USP group terminates and all the members of the USP group become members of
USB consolidated group.
(ii) Result. USB's acquisition of all the stock of USP causes the USP consolidated
group to cease to exist as of the end of January 3, 2003, a date after the end of the
base periods of both the USP and USB groups. The USP group's base period
inclusions for each of the five taxable years in its base period is added to the USB
group's base period inclusions for each corresponding taxable year in its base period to
determine the USB group's base period amount. In addition, because the acquisition
occurs after the APB 23 determination dates of both the USB and USP groups, the
USB group's APB 23 limitation is increased by the USP group's APB 23 limitation.
Example 7. Taking into account base period inclusions of acquired U.S.
shareholder transferred after the end of the acquirer's base period. (i) Facts. The USB
consolidated group uses a taxable year ending March 31. The USB group elects to
apply section 965 to its taxable year that begins on April 1, 2005 and ends on March 31,
2006. On May 31, 2005, USB acquires from USP 100% of the stock of US1 for cash.
(ii) Result. The acquisition of US1 occurs during the section 965 election year of
the USP group and the section 965 election year of the USB group. Therefore, the
special rules set forth in section 6.01 (b)(2) apply. Under those rules, the USB
consolidated group takes into account the base period inclusions of US1 for purposes of
determining its base period amount under section 965(b)(2). Because US1 ceases to
be a member of the USP consolidated group during the election year of such group, the
USP consolidated group will also take into account the base period inclusions of US1 for
purposes of determining its base period amount under section 965(b )(2). Accordingly,
there is no corresponding decrease by the selling group for the increase by the buying
36

group of base period inclusions and APB 23 amounts as a result of the transaction.
The USB consolidated group's base period includes the five taxable years ending
on or before June 30, 2003 (that is, taxable years ending March 31, 1999 through
March 31, 2003). Similarly, the base period of US1 and USP includes the five taxable
years ending on or before June 30, 2003 (that is, the taxable years ending December
31, 1998 through December 31,2002).
To determine the USB group's base period amount, US 1's base period inclusions
for each taxable year in its base period are added to the base period inclusions for each
corresponding taxable year in the USB group's base period. Thus, US1's base period
inclusions for its taxable year ending December 31, 2002 are added to the base period
inclusions for the USB group's year ended March 31, 2003, and US1's base period
inclusions for the other four years in its base period are added to the USB group base
period inclusions for the other four corresponding years in the USB group's base period.
Because the acquisition of US1 occurs during the election years of both the USP
group and the USB group, both groups will also take into account the APB 23 limitation
attributable to US 1.
Example 8. Taking into account base period inclusions of acquired U.S.
shareholder transferred before the end of the acquirer's base period. (i) Facts. The facts
are the same as Example 7, except as follows. USB acquired US1 on February 15,
2002, a date prior to the APB 23 determination dates of both USP and USB. The USB
group's base period includes the five taxable years ending March 31, 1999, through
March 31, 2003. As a result of its acquisition, the base period of US1 includes its five
taxable years that end on the following dates: February 15, 2002; December 31,2001;
December 31,2000; December 31,1999; and December 31,1998.
(ii) Result. To determine the USB group's base period amount, US1's base
period inclusions for each taxable year in US1's base period are added to the USB
group's base period inclusions for each corresponding taxable year in the USB group's
base period. US1's short taxable year ending February 15, 2002, corresponds to the
last taxable year in the acquirer's base period that ends on or before the date of the
acquisition (that is, the USB group's taxable year that ends March 31, 2001). The USB
group also succeeds to that portion of US1's base period inclusion history for US1's
taxable years that precede the short taxable year ending on February 15, 2002, that
correspond to the USB group taxable years in its base period.
The corresponding taxable years in the respective base periods may be
illustrated as follows:

US 1 base period
year-ends

USB group base period
year-ends

3/31/03
3/31/02
2/15/02
12/31/01
12/31100
12/31/99
12/31/98

3131103
3/31/02
3/31/01
3/31/00
3/31/99

US1's taxable years ending on December 31,1999, and December 31,1998,
correspond to taxable years of the USB group that precede the USB group's base
period. Accordingly, the USB group does not take into account the base period
inclusions of US1 in those years. Nevertheless, the USP group will reduce its base
period inclusions attributable to US1 for these taxable years.
US1 's base period inclusions after February 15, 2002, are naturally taken into
account by the USB group in determining its base period inclusions because such
inclusions will occur during the time that US1 is a part of the USB consolidated group.
That is, US1 base period inclusions for its taxable year that ends March 31, 2002, and
March 31, 2003, are taken into account in determining the USB group's inclusions for
such taxable years.
US1 ceased being a member of the USP consolidated group and joined the USB
consolidated group before the APB 23 determination dates of both the USP and USB
consolidated groups. As a result, no adjustment is made to the APB 23 amount of the
USP or USB consolidated groups as a result of the sale of US1 stock as provided in
section 6.01 (a)(2) of this notice.
(iii) Alternative facts. The facts are the same as in Example 8, except that the
USB group's first taxable year begins on April 1, 2000. The results are unchanged.
Example 9. Acquisition of U.S. shareholder stock before Acquirer's but after
Seller's APB 23 determination date. (i) Facts. The USP group's applicable financial
statement provides for an APB 23 limitation of $700 million. The limitation is comprised
of, as of the APB 23 determination date (December 31, 2002), earnings permanently
reinvested in CFC1 of $400 million and in CFC2 of $300 million. The $400 million of
CFC1 earnings is attributable to US1, and the $300 million of CFC2 earnings is
attributable to US2. USB maintains a taxable year ending January 31. On January 3,
2003, USP sells to USB 81% of US1's outstanding stock and 60% of the outstanding
stock of US2. The USB group's APB determination date is January 31, 2003.
38

(ii) Result. By reason of the transactions, US1 and US2 cease to be members of
the USP consolidated group on January 3, 2003, a date that is after the USP group's
APB 23 determination date. Therefore, the USP consolidated group reduces its APB 23
limitation by $700 million because US1 and US2 are no longer members of the USP
consolidated group. Similarly, the USP group reduces its base period inclusions to the
extent they are attributable to US1 and US2. Further, the acquisition of US1 and US2
occurred prior to USB's APB 23 determination date. Therefore, the USB group does not
increase its APB 23 limitation with respect to the transactions because the USB group
will take into account permanently reinvested earnings of US1 and US2 for financial
accounting purposes on its APB 23 determination date. Finally, USB inherits the
relevant base period inclusion history of US1 because US1 joins the USB consolidated
group. After the transaction, US2 is not a member of a consolidated group and
therefore will file a separate return for subsequent taxable years. If US2 elects to apply
section 965 in an eligible year, it will take into account its base period inclusion history
and its APB 23 limitation.
(iii) Alternative facts. The facts are the same as in Example 9 (i), except that
US1 and US2 are sold on February 1, 2003. The USB group's reported APB 23
limitation is increased by $400 million as a result of USB's purchase of 81 % of the
shares of US1 because US1 joins the USB consolidated group after the USB group's
APB 23 determination date; it is not increased by the $300 million attributable to US2
because US2 does not join the USB consolidated group. The base period inclusion
results are unchanged .

.02 Allocated Portion of $500 Limitation
Pursuant to section 4.05 of this notice, the $500 million limitation described in
section 965(b)(1 )(A) is allocated among qualified members of a section 52(a) group on
a single date, the apportionment date (as defined in section 4.05 of this notice), and
only amongst the qualified members of the group on such date. A corporation or
consolidated group is not allocated any of the $500 million limitation and it has a $0
limitation for an election year during which the corporation or consolidated group was a
qualified member of a section 52(a) group if, on or after the end of its election year but
before the section 52(a) group's apportionment date (or, if none, the date that would
39

have been the apportionment date had the transaction not occurred), the corporation or
consolidated group becomes unrelated to the other qualified members of the section
52(a) group or ceases to exist.
Once an allocation occurs on an apportionment date, the allocated limit applies
to a corporation or consolidated group that is a qualified member of the section 52(a)
group for its election years ending while it is a qualified member of such group, including
those years that end before the apportionment date. However, if a corporation or
consolidated group becomes unrelated to the other qualified members of a section
52(a) group before the end of an election year of such corporation or consolidated
group, the corporation or group is entitled to its own $500 million limitation, unless it
becomes part of a different section 52(a) group on or before that group's apportionment
date. If it becomes part of a different section 52(a) group on or before that group's
apportionment date, it may be allocated a portion of that section 52(a) group's $500
limitation. Accordingly, if a corporation or consolidated group is no longer a qualified
member of a section 52(a) group, the former member does not retain any of the section
52(a) group's $500 million limitation after it leaves such group.
The following examples illustrate the application of section 965(b)(1) and this
section 6.02. Unless otherwise indicated, it is assumed in each example that all U.S.
shareholders have APB 23 limitations of zero.
Example 1. Disposition of a member which joins an unrelated consolidated
9LQ!dQ. (i) Facts. A, an individual, wholly owns two domestic corporations, US1 and
US2. US1 and US2 in turn each wholly own a foreign corporation, CFC1 and CFC2,
respectively. US1 and US2 maintain the calendar year as their taxable year.

On September 30, 2005, A sells US1 to USB. USB is an unrelated domestic
corporation and the common parent of a consolidated group that maintains a June 30
taxable year.
US1 elects section 965 for its taxable year ending September 30, 2005. US2
elects section 965 for its taxable year ending December 31,2005. The USB group
elects section 965 for its taxable year ending June 30, 2006.
(ii) Result. US2 is entitled to a full $500 million limitation for its election year
ending December 31, 2005, because it is not a member of a section 52(a) group on
December 31, 2005. US1 has a limitation of $0 for its election year ending September
30, 2005, because US1 and US2 would have been members of a section 52(a) group
on an apportionment date, December 31,2005, but for the disposition of US1 on or after
the end of US1's election year but before December 31,2005. The apportioned
limitation does not apply to US1 's second election year as a member of the USB group.
The USB group has its own $500 million limitation, which is not adjusted upward as a
result of the acquisition of US1.
Example 2. Disposition of a member which does not join an unrelated
consolidated group. (i) Facts. The facts are the same as in Example 1 except that the
buyer of US1 is B, an individual unrelated to A. As in Example 1, US1 elects section
965 for its taxable year, which however ends on December 31,2005.
(ii) Result. On December 31,2005, there is no section 52(a) group, and the
election year of neither corporation ended before that date. Therefore, US1 and US2
each has its own $500 million limitation.
Example 3. Merger into unrelated corporation. (i) Facts. The facts are the same
as in Example 1 except that instead of the stock of US1 being sold, US1 merges into
USB in a reorganization described in section 368(a)(1 )(A).
(ii) Result. The result is the same as in Example 1.
Example 4. Merger into related corporation. (i) Facts. The facts are the same
as in Example 3 except that US 1 merges into US2 in a reorganization described in
section 368(a)(1 )(A).
(ii) Result. US2 is entitled to a full $500 million limitation for its election year
ending December 31, 2005, because it is not a member of a section 52(a) group on
December 31, 2005. US1 has a limitation of $0 for its election year ending September
30,2005, because US1 and US2 would have been members of a section 52(a) group

on their apportionment date, December 31, 2005, but for the merger of US1 which
results in the end of US1's election year before December 31,2005.
Example 5. Spin-off resulting in unrelated corporation. (i) Facts. USP is a
publicly held corporation and the parent of a consolidated group. C and US1 are wholly
owned domestic subsidiaries of USP. US1 cannot be included in the USP consolidated
group by virtue of section 1504(a)(3) (relating to the five-year period required to elapse
before reconsolidation). The USP group and US1 each maintain the calendar year as
their taxable years and USP, C and US1 are each U.S. shareholders of CFCs.
On September 30, 2005. USP distributes the stock of C to its shareholders.
Thereafter, USP and C are not members of the same section 52(a) group.
The USP group and US1 each elect section 965 for their taxable years ending
December 31, 2005. C also elects section 965 for its short taxable year starting on
October 1,2005, and ending on December 31,2005.
(ii) Result. December 31,2005 is the apportionment date for the section 52(a)
group that consists of the USP group and US1, and the $500 million limitation is
allocated between the USP group and US1 on that date. None of the limitation is
allocated to C separately for its short taxable year ending September 30,2005 (its
limitation is $0), but the apportionment does not apply to C's second election year, the
short taxable year ending December 31, 2005. C has its own $500 million limitation for
that second election year.
Example 6. Spin-off resulting in related corporation. (i) Facts. The facts are the
same as in Example 5 except that all the stock of USP is owned by A, an individual, and
A acquires all the stock of C in the distribution. As a result, USP and C remain
members of a single section 52(a) group after the distribution.
(ii) Result. December 31,2005 is the apportionment date for the section 52(a)
group that consists of the USP group, US1, and C, and the $500 million limitation is
allocated between the USP group, US1, and C on that date. C's allocation applies to its
second election year, the short taxable year ending December 31, 2005. During the
time that C is a member of the USP group, it is not separately allocated any of the $500
million limitation of the section 52(a) group.
Example 7. Interaction of APB 23 limitation and $500 million limitation. (i) Facts.
The facts are the same as in Example 1, except that US 1 has an APB 23 limitation of
$300 million, and USB has an APB 23 limitation of $400 million.
(ii) Result. The result is the same as in Example 1 with respect to the $500
42

million limitation. The maximum repatriations allowed under section 965 for US1 in its
election year ending September 30, 2005, is the greater of its allocated portion of the
$500 million limitation or its APB 23 limitation. US1's APB 23 limitation of $300 million
exceeds its portion of the $500 million, which is $0. Thus, US 1's maximum amount
under section 965(b)(1) is $300 million. As in Example 1, the USB group's $500 million
limitation is not adjusted as a result of USB's acquisition of US1. However, the USB
group's APB 23 limitation is adjusted upward to reflect the $300 million APB 23
limitation attributable to US 1. Because the maximum repatriations allowed under
section 965 for the USB group is the greater of $500 million or APB 23 limitation, the
USB group's APB 23 limitation exceeds $500 million as a result of the acquisition.
Thus, USB's maximum amount under section 965(b)(1) is $700 million ($400 million +
$300 million).
SECTION 7. REDUCTION OF BENEFIT FOR INCREASES IN RELATED PARTY
INDEBTEDNESS

.01 Background
(a) General. Section 965(b)(3) provides that a U.S. shareholder reduces the
amount of dividends otherwise eligible for the deduction under section 965(a) by any
increase in the indebtedness of its CFC to any related person (as defined in section
954(d)(3)) between October 3,2004 and the close of the taxable year for which the
election under section 965 is in effect.

For purposes of section 965(b )(3), all CFCs with

respect to which the taxpayer is a U.S. shareholder are treated as a single CFC.
(b) Definitions. For purposes of section 965(b)(3) and this section 7, the following
definitions apply:

(i) The term "CFC" means all CFCs with respect to which the taxpayer is a U.S.
shareholder, treating such CFCs as a single CFC pursuant to section 965(b)(3).
(ii) The term "individual CFC" is used to refer to a single CFC (for example, to
identify a single CFC that is acquired or disposed of by a consolidated group U.S.
43

shareholder).
(iii) The term "U.S. shareholder" as used in this section 7 is defined in section
951 (b).
(iv) The term "related person" means a person that is related to a CFC within the
meaning of section 954(d)(3).
(v) The term "related party indebtedness" means the amount of indebtedness of
a CFC to a related person. However, indebtedness between individual CFCs of a U.S.
shareholder is disregarded for purposes of section 965(b)(3).
(vi) The term "initial measurement date" means the close of October 3, 2004 or, if
the U.S. shareholder so chooses, an alternative date which is provided as a matter of
administrative convenience for taxpayers and the IRS. The alternative date is either: (i)
the close of September 30, 2004, if such shareholder used a calendar year or a fiscal
year as its taxable year; or (2) the close of the last day of such shareholder's fiscal-year
month ending nearest October 3, 2004, if such shareholder used a 52-53 week taxable
year. However, the U.S. shareholder uses the same date as its initial measurement
date for all purposes of section 965.
(vii) The term "last measurement date" means the close of a U.S. shareholder's
taxable year for which an election is in effect.

.02 Definition of Indebtedness
(a) In general. Except as provided in this section, for purposes of section
965(b)(3), "indebtedness" is defined under general Federal income tax principles.
44

Further, the amount of indebtedness of a CFC to any related person pursuant to section
965(b)(3) is not reduced or otherwise offset by indebtedness of any related person to
the CFC. Thus, for example, if on the initial measurement date or the last measurement
date, there is $100x of indebtedness of a CFC to its U.S. shareholder, and $10x of
indebtedness from such U.S. shareholder to the CFC, the amount of indebtedness
under section 965(b)(3)(A) as of such date is $100x (and not $90x).
For purposes of section 965(b)(3), indebtedness of a CFC to a foreign
disregarded entity that is owned for Federal tax purposes by a related person is treated
as related party indebtedness. Thus, for example, if on the initial measurement date
there is $1 OOx of indebtedness from a CFC to a foreign disregarded entity owned by a
U.S. shareholder, which is a related person to the CFC, such amount is indebtedness
described in section 965(b )(3)(6).
(b) Exception for Intercompany Trade Payables. For purposes of section
965(b )(3), the term "indebtedness" does not include indebtedness arising in the ordinary
course of a business from sales, leases, or the rendition of services provided to or for a
CFC by a related person, provided that such indebtedness is actually paid within 183
days .
.03 Determination of Related Party Indebtedness
A U.S. shareholder considers the indebtedness of its CFC to related persons
only if the U.S. shareholder is a related person with respect to such CFC. For purposes
of determining the related party indebtedness of a CFC pursuant to section 965(b)(3),

the relationship between the CFC, its creditors, and any of its U.S. shareholders is
determined independently on the initial measurement date and the last measurement
date, respectively. For example, if on such date the creditor of the CFC is a related
person and a U.S. shareholder is a related person with respect to such CFC, the U.S.
shareholder has an amount of indebtedness that is considered under section 965(b)(3)
and the rules of this section .
.04 Amount of Reduction under Section 965(b)(3)

(a) In General. Pursuant to section 965(b)(3) and the rules of this section, a U.S.
shareholder reduces the amount of cash dividends that would otherwise be taken into
account under section 965(a) by the excess (if any) of its last measurement date RPI
(as determined under section 7.05(b)) over its initial measurement date RPI (as
determined under sections 7.05(a) and 7.05(c)). If two or more U.S. shareholders may
otherwise be considered to have an amount that is considered under section 965(b )(3)
attributable to the same CFC indebtedness, such shareholders take into account such
indebtedness under the rules of 7.06 of this section.
(b) Indirect Financing of Cash Dividend by a U. S. Shareholder. Section 965(b )(3)
is intended to prevent a U.S. shareholder from directly or indirectly financing a cash
dividend qualifying under section 965(a). In addition to the application of the related
party indebtedness rule under section 965(b)(3), general tax law principles such as the
substance-over-form doctrine and circular cash-flow principles may apply to various
financing structures. However, a related party guarantee of CFC indebtedness is not

considered to be an indirect financing of a cash dividend for purposes of section
96S(b)(3), provided that the CFC is treated as the obligor on the indebtedness for
Federal income tax purposes. See Plantation Patterns, Inc. v. Comm'r, 462 F.2d 712
(Sth Cir. 1972), cert. denied, 409 U.S. 1076 (1972) .

.OS Amount of Related Party Indebtedness on the Initial Measurement Date and the
Last Measurement Date
(a) Initial Measurement Date RPI-- General Rule. A U.S. shareholder
determines the amount of the related party indebtedness of its CFC on the initial
measurement date and such amount is the "initial measurement date RPI" of such U.S.
shareholder. The amount of the initial measurement date RPI is adjusted pursuant to
section 7.0S(c) of this notice in certain instances. See Example 1 of section 7.08 of this
notice.
(b) Last Measurement Date RPI-- General Rule. A U.S. shareholder determines
the amount of the related party indebtedness of its CFC on the last measurement date
and such amount is the "last measurement date RPI" of such U.S. shareholder. Thus,
to the extent that a CFC pays all or a portion of the principal on the related party
indebtedness before the last measurement date and does not incur any new related
party indebtedness before such date, the U.S. shareholder's last measurement date
RPI will be less than its initial measurement date RPI. See Examples 4 and 6 of section
7.08 of this notice.
(c) Special Adjustments to Initial Measurement Date RPI. A U.S. shareholder
47

reduces its initial measurement date RPI to the extent the U.S. shareholder's initial
measurement date RPI is attributable to any individual CFC with respect to which such
shareholder ceases to be a U.S. shareholder or a related person as the result of a
transaction before the last measurement date. However, the prior sentence does not
apply to the extent, before or as a result of such transaction, all or a portion of the
principal on the indebtedness is paid by the debtor (for example, as a result of the
liquidation of an individual CFC).
A domestic corporation that becomes a U.S. shareholder and a related person
with respect to an individual CFC after such corporation's initial measurement date, but
before the last day of its election year (or a U.S. shareholder that files a separate return
for its short taxable year immediately after a transaction during the same period), and
that remains a U.S. shareholder and a related person with respect to such individual
CFC on its last measurement date, increases its initial measurement date RPI by the
amount of related party indebtedness of such individual CFC immediately after the
transaction, excluding any indebtedness arising in connection with or as a result of the
transaction (for example, as a result of the incorporation of a branch). See Example 3
and Example 10 of section 7.08 of this notice.
If two or more U.S. shareholders may otherwise be considered to have an
amount that is considered under section 965(b)(3) attributable to the same CFC
indebtedness, such shareholders take into account such indebtedness under the rules
of section 7.06 of this notice.

.06 Related Party Indebtedness -- Multiple U.S. Shareholders
An increase in a CFC's related party indebtedness may not reduce the total
amount of dividends otherwise eligible for the section 965(a) ORO on anything but a
dollar-for-dollar basis. Consequently, if more than one U.S. shareholder is a related
person with respect to a CFC, then the effect of the increase in the related party
indebtedness of the CFC pursuant to section 965(b)(3) is allocated among and
between such U.S. shareholders. For this purpose, such increase is allocated on a
dollar-for-dollar basis to cash dividends received by such U.S. shareholders that are
otherwise eligible for the section 965(a) ORO in the order that those dividends are
received. If such dividends are received by more than one U.S. shareholder on the
same day, each U.S. shareholder takes into account the remaining amount of the
increase in related party indebtedness of such CFC based on the relative amount of
cash dividends received on such day. The overall reduction in dividends of all U.S.
shareholders eligible for the section 965(a) ORO under this rule may not exceed the
total increase in related party indebtedness under section 965(b)(3). See Examples 8
and 9 of section 7.08 of this notice .

.07 Translation of Foreign Currency-Denominated Related Party Indebtedness
The initial measurement date RPI and the last measurement RPI of a U.S.
shareholder is determined in U.S. dollars. The amount of any indebtedness on both the
initial measurement date and the last measurement date is translated into U.S. dollars
using the spot rate (as defined in Treas. Reg. §1.988-1 (d)(1)) on the initial
49

measurement date. See Example 7 of section 7.08 of this notice .
.08 Examples
The following examples illustrate the application of section 965(b)(3) and this
section 7. Unless otherwise indicated, the following facts are assumed for purposes of
these examples. USP, a domestic corporation and the common parent of the USP
consolidated group that uses the calendar year as its taxable year, wholly owns US 1.
US1 is a domestic corporation and a member of the USP consolidated group. US1
wholly owns CFC1, a foreign corporation that owes US1 $100x at the close of
September 30,2004 evidenced by a note ($100x note). USP wholly owns CFC2, a
foreign corporation with no indebtedness owed to persons described in section
954(d)(3). The USP group chooses September 30, 2004 as its initial measurement date
and it elects to apply section 965 to its 2005 calendar year tax year.
Example 1. Determination of the amount of initial measurement date RPI. (i)
Facts. The general facts apply.
(ii) Result. US1 and USP are each U.S. shareholders with respect to CFC1 and
CFC2 and are considered one U.S. shareholder for purposes of section 965(b)(3).
Further, CFC1 and CFC2 are considered one CFC for purposes of section 965(b)(3).
The USP group's CFC (CFC1 and CFC2) has indebtedness of $1 OOx owed to the USP
group (and directly to US1 as a member of that group), a related party. Therefore, the
USP group has initial measurement date RPI of $100x.
Example 2. Determination of initial and last measurement date RPI when CFC
transferred or sold. (i) Facts. On December 31, 2004, US1 sells all the stock of CFC1
and the $100x note to USB, an unrelated U.S. corporation that is the common parent of
a consolidated group. Immediately after the transaction, CFC1 owes $100x to USB.
USB makes an election under section 965 for its calendar year ending December 31,
2005. As of USB's last measurement date, it is a U.S. shareholder and related person
with respect to CFC1.
50

(ii) Result. Under section 965(b)(3) all CFCs of a U.S. shareholder are treated as
one CFC. Moreover, for purposes of section 965(b)(3), all U.S. shareholders that are
members of a consolidated group are considered one U.S. shareholder. Therefore,
CFC1 and CFC2 are considered one CFC and US1 and USP are considered one U.S.
shareholder (the USP group). Only the relationship between CFC1, CFC2 and the USP
group is taken into account for purposes of determining the initial measurement date
RPI of the USP group, while only the relationship between CFC1 and USB is taken into
account for purposes of determining the last measurement date RPI of the USB group.
As of the initial measurement date the USP group's CFC (CFC1 and CFC2) owes
$100x to related parties. Therefore, under section 7.05(a), and without regard to the
disposition of CFC1, the USP group's initial measurement date RPI is $1 OOx. Under
section 7.05(c), however, the USP group reduces its initial measurement date RPI to
account for the disposition of CFC1. Therefore, the USP group's initial measurement
date RPI is $0. As of the last measurement date, CFC1 is not related to the USP group.
Accordingly, the USP group's last measurement date RPI is $0.
With respect to the USB group, CFC1 is not related to the USB group on the
USB group's initial measurement date. Therefore, the USB group's initial measurement
date RPI, without consideration of the acquisition of CFC1 is $0. Under section 7.05(c),
however, the USB group increases its initial measurement date RPI by $100x, the
amount of the CFC1 's related party indebtedness immediately after the acquisition.
Therefore, the USB group has initial measurement date RPI of $1 OOx. Further, as of its
last measurement date, CFC1 owes USB, a related party, $100x. Therefore, the USB
group's last measurement date RPI is $1 OOx.
(iii) Alternative facts. The facts are the same as in (i), except that USB does not
purchase the $1 OOx note due from CFC1. Under section 7.05(c), the USP group
reduces its initial measurement date RPI from $100x to $0, to account for the
disposition of CFC1 (the same result reached in (ii)). Under section 7.05, the USP
group's last measurement date RPI is $0 (the same result reached in (ii)). Under the
alternative facts, however, the USB group does not adjust its initial measurement date
RPI to take into account the acquisition of CFC1 because immediately after the
acquisition CFC1 will owe an indebtedness to US1, which is not a related person. As a
result, the USB group has an initial measurement date RPI of $0. Further, the USB
group has a last measurement date RPI of $0.
(iv) Alternative facts. The facts are the same as in (i) except that CFC1 liquidates
(whether by reason of an actual liquidation or by reason of an election under Treas.
Reg. §301.7701-3) into US1 instead of being sold to USB. Under section 7.05(c), the
USP group does not decrease its initial measurement date RPI to account for the
liquidation. Consequently, the USP group's initial measurement date RPI is $100x.
51

Under section 7.05(b}, the USP group's last measurement date RPI is $0.
Example 3. Determination of initial and last measurement date RPI when a U.S.
shareholder is transferred to an unrelated person. (i) Facts. The facts are the same as
in Example 1, except that on December 31, 2004, all the stock of US1 (and indirectly
CFC1), is sold to an unrelated U.S. shareholder, USB. US1 joins the USB consolidated
group and USB makes an election under section 965 for the taxable year ending
December 31,2005. As of its last measurement date, USB is a U.S. shareholder and
related person with respect to CFC 1.
(ii) Result. Without regard to the disposition of US1, the USP group's initial
measurement date RPI is $1 OOx. Under section 7.05(c), the USP group's initial
measurement date RPI is decreased by $100x, resulting in the USP group having initial
measurement date RPI of $0.
USP computes its last measurement date RPI under section 7.05(b) of this
notice. As of the last measurement date, CFC1 owes an indebtedness to US1, a party
that is not related within the meaning of section 954(d)(3) to USP. Therefore, the USP
group's last measurement date RPI is $0.
Without regard to the acquisition of US1, the USB group's initial measurement
date RPI is $0. However, under section 7.05(c), the USB group increases its initial
measurement date RPI by $100x, the amount of the related party indebtedness of its
CFC (CFC1) immediately after the transaction. Further, the USB group's last
measurement date RPI is $100x because as of its last measurement date, CFC1 owed
$1 OOx to US 1, a related person.
(iii) Alternative facts. Assume that the stock of US1 is sold to USB on March 31,
2005, which is during the USP group's and the USB group's election year. The results
are the same as set forth in (ii), above.
Example 4. Determination of initial and last measurement date RPI when a new
CFC is formed. (i) Facts. The facts are the same as in Example 1, except that USP
incorporates CFC2 on November 1, 2004, and during the USP election year USP
acquires all the stock of USB (and indirectly all of USB's individual CFCs), an unrelated
U.S. shareholder. Further, USB is a member of the USP consolidated group on the last
day of the USP election year. In part, CFC2 is capitalized with $100x of related party
indebtedness and USP is a U.S. shareholder and a related person with respect to CFC2
on its last measurement date. USB has initial measurement date RPI of $400x,
attributable to its CFCs. Immediately after the acquisition, USB's CFCs continue to
have indebtedness owed to USB in the amount of $400x.
52

(ii) Result. Without regard to the acquisition of USB or the formation of CFC2,
under section 7.05(a), the USP group has initial measurement date RPI of $1 OOx.
Under section 7.05(c), the USP group increases its initial measurement date RPI by the
related party indebtedness of the USB CFCs immediately after the transaction. Note,
however, that no adjustment is made to the USP group's initial measurement date RPI
to account for CFC2's related party indebtedness under section 7.05(c). Thus, after
adjustment, the USP group's initial measurement date RPI is $500x. Under section
7.05(b), the USP group's last measurement date RPI is $600x, which includes the
indebtedness of CFC1 ($100x), CFC2 ($100x), and the acquired CFCs of USB ($400x).

(iii) Alternative facts. The facts are the same a~ in Example 6 (i), except that
CFC1 pays US1 $70x of the $100x indebtedness on November 1,2005. The USP
group's initial measurement date RPI is $500, the same as in (ii). Under section
7.05(b), the USP group's last measurement date RPI is $530x, which includes the
indebtedness of CFC1 ($30x), CFC2 ($1 OOx), and the acquired CFCs of USB ($400x).
Under section 7.04 of this notice and section 965(b)(3), USP group reduces its
dividends otherwise eligible for the section 965(a) ORO by $30x.
Example 5. Determination of initial and last measurement date RPI when a U.S.
shareholder and its CFC are transferred but the note due from the CFC is left behind. (i)
Facts. The facts are the same as in Example 1, except that all the stock of US1 (and
indirectly CFC1) is sold to an unrelated U.S. shareholder, USB, on December 31, 2004,
before USP group's election year ending December 31, 2005. Assume that CFC1 's
related party indebtedness on the initial measurement date ($1 OOx) was the result of the
indebtedness being owed to USP instead of US1. US1 is a member of the USB group
on the USB group's last measurement date.
(ii) Result. Without regard to acquisitions and dispositions, the USP group has
initial measurement date RPI of $100x. Because USP was a U.S. shareholder and a
related person with respect to CFC1 on the USP group's initial measurement date, but
is not a U.S. shareholder or a related person on its last measurement date, section
7.05(c) requires the USP group to reduce its initial measurement date RPI from $1 OOx
to $0.
On the USP group's last measurement date, CFC1 is not a related person.
Therefore, the USP group's last measurement date RPI is $0.
USB has initial measurement date RPI of $0, without regard to the acquisition of
US1 (and CFC1). No adjustment is made to this amount under section 7.05(c) because
immediately after the acquisition CFC1 owed an indebtedness to USP, an unrelated
party. Further, the USB group's last measurement date RPI is $0 because its CFC
(CFC1) does not have an indebtedness to a related party on the last measurement
53

date.
Example 6. Determination of initial and last measurement date RPI when a U.S.
shareholder is transferred without the debtor CFC. (i) Facts. The facts are the same as
in Example 1, except that on December 31,2004, before the USP group's election year,
US1 distributed CFC1 to USP, and then US1 was sold to USB. In addition, CFC1 's
related party indebtedness on the USP group's initial measurement date was owed to
USP instead of US1. Finally, USB has initial measurement date RPI of $0.
(ii) Result. Without regard to the distribution of CFC1 or the disposition of US1,
the USP group has initial measurement date RPI of $1 OOx. No adjustment is made
under section 7.05(c) to the USP group's initial measurement date RPI as a result of the
distribution of CFC1 because after the distribution the USP group is a U.S. shareholder
and related person with respect to CFC1. Further, under section 7.05(c), the sale of
US1 does not require the USP group to reduce its initial measurement date RPI
because after the disposition USP is still a U.S. shareholder and related person with
respect to CFC1. Therefore, USP has initial measurement date RPI of $100x. The
USP group's last measurement date RPI is also $1 OOx because on the last
measurement date CFC1 's indebtedness is owed to USP, a related party.
USB acquires US1, but US1 has no CFCs when it enters the USB consolidated
group. Therefore, under section 7.05(c), the USB consolidated group does not increase
its initial measurement date RPI. In addition, USB's last measurement date RPI is $0.
(iii) Alternative facts. The facts are the same as in (i), except that the CFC1
indebtedness is owed to US1. Under the alternative facts, the USP group would still
have initial measurement date RPI in the amount of $100x. No adjustment is made to
this amount under section 7.05(c) because on the USP group's initial measurement
date and last measurement date the USP group was a U.S. shareholder and a related
person with respect to CFC1. However, as of the last measurement date, CFC1 will
owe an indebtedness to US1, an unrelated party. Therefore, the USP group's last
measurement date RPI is $0. The results with respect to the USB group are the same
as set forth in (ii).
Example 7. Translating RPI denominated in a non-U.S. dollar currency. (i) Facts.
CFC1 's indebtedness to US1 is denominated in currency u. As of the close of
September 30, 2004 (the initial measurement date), CFC1 owed 100u to US1. As of
the close of December 31,2005, CFC1 continued to owe 100u to US1. As of
September 30,2004, the spot rate is 1u/$1. As of December 31, 2005, the spot rate is
1u/$1.5.
(ii) Result. Pursuant to section 7.05 of this notice, the indebtedness of CFC1 to
54

US1 on the initial measurement date and the last measurement date is converted into
U.S. dollars on the spot rate on the initial measurement date. As a result, the
indebtedness of CFC1 to US1 on both dates is $100x.
Example 8. U.S. shareholder not related to CFC (i) Facts. FP, a foreign
corporation, wholly owns US1, a domestic corporation. US1 owns 60% of CFC. US2, a
domestic corporation that is unrelated to FP or US1, owns the remaining 40% of CFC.
As of the initial measurement date of US1 and US2, CFC has related party
indebtedness in the amount of $100x that is owed to FP.
(ii) Result. US 1 is a related person with respect to CFC on its initial
measurement date. As a result, US1 takes into account the related party indebtedness
of CFC for purposes of section 965(b)(3). Because US2 is not a related person with
respect to CFC, the $1 OOx of related party indebtedness is not taken into account by
US2 for purposes of section 965(b)(3).
Example 9. Application of Section 965(b)(3) reduction to multiple U.S.
shareholders (i) Facts. USP is a domestic corporation and the common parent of a
consolidated group. USP wholly owns US 1, a domestic corporation that is not a
member of the USP group because an election under section 936 is in effect with
respect to US1. USP and US1 wholly own CFC1 and CFC2, respectively. The USP
group and US1 both maintain a calendar taxable year and elect to apply section 965 to
the taxable year ending December 31, 2005. USP receives a cash dividend of $200x
from CFC1 on February 1,2005. US1 receives a cash dividend from CFC2 of $300x on
March 1,2005. Both cash dividends received by USP and US1 during 2005 are
otherwise eligible for the deduction under section 965(a). There is a $300x increase in
CFC1 's related party indebtedness pursuant to section 965(b)(3). CFC2 does not have
related party indebtedness at any time.
(ii) Result. Under section 965(d)(3), the USP group and US1 are both U.S.
shareholders and related persons with respect to CFC1. Thus, both the USP group and
US1 are required to take into account CFC1 's increase in related party indebtedness.
Based upon the rules set forth in section 7.06, above, CFC1 's $300x increase in related
party indebtedness reduces the amount of the USP group's and US1 's dividends eligible
for the deduction under section 965(a) based on the earliest cash dividends eligible for
the section 965(a) DRD received by the USP group and US1 during the election year.
As a result, the USP group takes into account $200x of the $300x increase in RPI
because it received a cash dividend of $200x on February 1, 2005. US1 takes into
account the remaining $1 OOx of such increase because it received its cash dividend on
March 1, 2005.
(iii) Alternative Facts. The facts are the same as Example 2, except that USP
55

and US1 received the cash dividends from CFC1 and CFC2, respectively, on the same
day during the election year. Under section 7.06, the USP group and US1 take into
account the $300x increase in RPI attributable to CFC1 in proportion to their receipt of
cash dividends on such date. Thus, the USP group takes into account $120x of the
increase ($200x/($200x + $300x)) x $300x). US1 takes into account the remaining
$180x of the increase «$300x/($200x + $300x)) x $300x).
Example 10. Determination of initial and last measurement date RPI when
related party indebtedness arises in connection with or as a result of a transaction. (i)
Facts. The facts are the same as in Example 3, except that in connection with or as a
result of USB's purchase of the stock of US1 (and indirectly CFC1), US1 lends CFC1
$50x.
(ii) Result. With respect to the USP group, the initial measurement date RPI and
the last measurement date RPI are the same as in Example 3. The USB group's initial
measurement date RPI and last measurement RPI are affected. Without regard to the
acquisition of US1, the USB group's initial measurement date RPI is $0. However,
under section 7.05(c), the USB group increases its initial measurement date RPI by
$100x, the amount of the related party indebtedness of its CFC (CFC1) immediately
after the transaction, but excluding the indebtedness arising in connection with, or as a
result of, the transaction. The USB group's last measurement date RPI, however, is
$150x because as of its last measurement date, CFC 1 owes $150x to US 1, a related
person. Therefore, under section 7.04 of this notice and section 965(b)(3), the USB
group reduces its dividends otherwise eligible for the section 965(a) ORO by $50x.
SECTION 8. EFFECT OF CERTAIN TRANSACTIONS ON DOMESTIC
REINVESTMENT PLANS
.01 In General

This section addresses the effect of certain transactions on domestic
reinvestment plans adopted pursuant to section 965(b)(4) and Notice 2005-10. Section
8.02 of this notice addresses the effect of members entering and exiting a consolidated
group. Section 8.03 addresses the effect of certain asset acquisitions. Section 8.04
then provides rules that apply to a corporation that may make permitted investments
pursuant to more than one domestic reinvestment plan. Finally, section 8.05 of this
56

notice provides reporting and administrative requirements for transactions addressed by
this section 8 .
.02 Members Entering and Exiting a Consolidated Group
A consolidated group may rely on any domestic corporation (regardless of
whether such corporation is a U.S. shareholder) to fulfill the group's obligations to make
permitted investments under a domestic reinvestment plan if that corporation is a
member of the group at any time on or after the first day of the group's election year.
For example, if a consolidated group adopts a domestic reinvestment plan and a
member leaves the group during or after the group's election year, the group may rely
on the former member's subsequent domestic investment activity to satisfy the group's
obligations under its domestic reinvestment plan. Similarly, if a domestic corporation
joins a consolidated group during or after the first day of the group's election year, the
group may rely on the new member's domestic investment activity after it jOins the
group to satisfy the group's obligations under its domestic reinvestment plan. The rules
of this paragraph apply regardless of the amount of cash or property held by the former
member or new member at the time it leaves or joins the consolidated group, as the
case may be.
In addition, a domestic corporation may rely on any other domestic corporation
(regardless of whether such corporation is a U.S. shareholder) to fulfill its obligations to
make permitted investments under a domestic reinvestment plan if both corporations
are members of the same consolidated group at the time the investment is made, even

if they were not members of the same consolidated group during the corporation's
election year. For example, if a corporation adopts a domestic reinvestment plan and
the corporation joins a consolidated group after the end of the corporation's election
year, the acquired corporation may rely on the subsequent domestic investment activity
of any member of the acquiring consolidated group to satisfy the corporation's
obligations under its domestic reinvestment plan. Similarly, if a consolidated group
adopts a domestic reinvestment plan and the group is acquired by another consolidated
group after the acquired group's election year, the acquired group may rely on the
subsequent domestic investment activity of any member of its new consolidated group
to satisfy the acquired group's obligations under its domestic reinvestment plan .
.03 Asset Acquisitions
In general, if a corporation acquires assets of another corporation, the acquiring
corporation will not succeed to the obligations of the transferor corporation under a
domestic reinvestment plan, and investments made by the acquiring corporation
therefore are not eligible to satisfy such domestic reinvestment plan. However, if the
corporation acquires the assets of a transferor corporation in a transaction described in
section 381 (a), subsequent investments made by the acquiring corporation (or by
members of the acquiring corporation's consolidated group) therefore may be eligible to
satisfy the transferor's domestic reinvestment plan.
If, prior to the transaction described in section 381(a), the acquiring corporation
was also required or permitted to make permitted investments in order to satisfy a

domestic reinvestment plan, the acquiring corporation will continue to be required or
permitted to satisfy obligations under that domestic reinvestment plan in addition to any
obligations under the transferor's domestic reinvestment plan .

.04 Designation of Permitted Investment Activity
A single corporation may be able to make permitted investments in satisfaction of
more than one domestic reinvestment plan. However, the same expenditure of funds
may not satisfy the investment requirement of more than one domestic reinvestment
plan. For example, a single $1 OOx investment made by an acquired domestic
corporation cannot be counted toward the investment requirements of both the selling
consolidated group and the acquiring consolidated group. If a permitted investment by
a corporation would satisfy the investment requirement of more than one domestic
reinvestment plan, the corporation may designate which plan is being satisfied. If a
corporation fails to so designate, its domestic investment activities will be treated as
fulfilling domestic reinvestment plan obligations in the following order: first, under any
plan adopted with respect to its own earliest election year; second, under any plan
adopted with respect to its own subsequent election years, if any; and third, with respect
to any plan adopted with respect to any other corporation (for example, a transferor in a
transaction described in section 381 (a) or a consolidated group the corporation later
joined) in the order the corporation became required or permitted to make investments
in satisfaction of such plan .

.05 Reporting and Other Administration Requirements under Section 8 of Notice 2005-

10
If a former member of a consolidated group contributes to the completion of the
group's domestic reinvestment plan (in whole or in part), the obligation to comply with
the reporting and other administrative requirements contained in section 8 of Notice
2005-10 will remain with the group if such group continues to exist, or otherwise with the
common parent (or successor agent) for the election year, or the common parent of any
consolidated group that includes such former common parent (or successor agent) .
.06 Examples
The following examples illustrate the application of section 965(b)(4) and this
section 8. Unless otherwise indicated, the following facts are assumed for purposes of
these examples: USP is a domestic corporation and the common parent of a
consolidated group that uses the calendar year as its taxable year. USP wholly owns
US1 and US2, which are domestic corporations and members of the USP consolidated
group. US1 and US2 each wholly owns a foreign corporation, CFC1 and CFC2,
respectively. The USP group elects to apply section 965 for its taxable year ending
December 31,2005. The domestic reinvestment plan approved pursuant to section
965(b)(4) and Notice 2005-10 on behalf of the USP group requires that an amount of
cash equal to the $1 OOx cash dividends that are received from the USP group's CFCs
will be invested in the United States to fund research and development activities
(performed in the United States) of the USP group over a two-year period. On

December 31,2005, CFC1 and CFC2 each distributes $50x of dividends that are
eligible for the section 965(a) ORO.
Example 1. Member exiting a consolidated group. (i) Facts. On July 1,2006, all
of the stock of US2 is acquired for cash by USB, a domestic corporation and the
common parent of the USB consolidated group. Any permitted investments required to
be made by the USB group under any domestic reinvestment plan (other than that of
the USP group) are made prior to June 30,2006. Between July 1,2006 and December
31,2007, US2 funds $1 OOx of research and development activities.
(ii) Result. Because US2 is a member of the USP group after the beginning of the
USP group's election year, US2's funding of $100x of research and development
activities made while it is a member of the USB group will satisfy the USP group's
obligations to make such permitted investments specified under the USP group's
domestic reinvestment plan. However, the USP group satisfies the reporting and
administrative requirements contained in section 8 of Notice 2005-10 with respect to
such investment.
Example 2. Member entering a consolidated group. (i) Facts. On March 31,
2006, USP acquires for cash all the stock of US3, a domestic corporation that is not a
member of a consolidated group. US3 elected to apply section 965 to its taxable year
ending December 31, 2005. US3's domestic reinvestment plan requires that US3
expend $5x to compensate existing employees for services performed in the United
States over a two-year period. Between April 1,2006 and December 31,2007, US3
funds $100x of research and development activities. During the same period, US2
expends $5x to compensate existing employees for services performed in the United
States.
(ii) Result. Because US3 is a member of the USP group after the beginning of the
USP group's election year, US3's funding of $1 OOx of research and development
activities after joining the group will satisfy the USP group's obligations to make such
specified permitted investments under the USP group's plan. In addition, because US2
is a member of the same consolidated group as US3 when it expends $5 to
compensate existing employees for services performed in the United States (a
permitted investment pursuant to section 965(b)(4) and Notice 2005-10), US3 may rely
on US2's expenditure to satisfy its obligation specified under its plan. USP is required
to satisfy the administrative requirements with respect to investments under US3's plan.
Example 3. Asset acquisition of U.S. shareholder. (i) Facts. The facts are the
same as in Example 2, except that instead of USP acquiring the stock of US3, US3
merges into US2 in a reorganization under section 368(a)(1 )(A) and (a)(2)(D) on March
61

31,2006, after which US2 remains a member of the USP group. Between April 1, 2006
and December 31,2007, US2 funds $100x of research and development activities and
pays $5x to compensate existing employees for services performed in the United
States.
(ii) Result. Because US2 acquired the assets of US3 in a transaction to which
section 381 (a) applies, US2 succeeded to US3's domestic reinvestment plan
obligations. US2's payment of $5x to compensate existing employees for services
performed in the United States satisfies its obligation to make a permitted investment
specified under US3's plan. The USP group may also rely on US2's funding of $1 OOx of
research and development activities to satisfy the USP group's plan obligations. The
result would be the same if, after the merger of US3 into US2, US1, instead of US2,
paid $5x to compensate existing employees for services performed in the United States,
because US1 is a member of the same consolidated group as US2 and the
compensation is a permitted investment pursuant to section 965(b)(4) and Notice 200510.
Example 4. Failure to designate sufficient investment activity to fulfill multiple
domestic reinvestment plans. (i) Facts. The facts are the same as in Example 2, except
that US3's plan also required US3 to expend $5x to fund research and development
activities over a two-year period. The USP group fails to deSignate specific investment
activities for purposes of section 8.04 of this notice to satisfy either the USP group
domestic reinvestment plan or the US3 domestic reinvestment plan. Between March
31, 2006 and December 31, 2007, US3 funds $5x of research and development
activities and US2 funds $95x of research and development activities.
(ii) Result. Because the USP group failed to designate specific investment
activities to satisfy US3's and the USP group's domestic reinvestment plans, US3's
permitted investments will first be taken into account under the US3 plan, and US2's
permitted investments will first be taken into account under the USP group plan.
Consequently, US3's $5x expenditure will satisfy the US3 plan and cannot be taken into
account by the USP group to satisfy its obligation to conduct $1 OOx of research and
development activities. As a result, the USP group will have conducted only $95x of
research and development activities and the USP group's 2005 qualifying dividend is
reduced by $5x. If instead, US3 had merged into US2 on March 31,2006, as in
Example 3, and US2 spent the $1 OOx without designating, all $1 OOx would have
satisfied the USP domestic reinvestment plan. In addition, the US3 plan would fail to
have been satisfied, resulting in a $5x reduction in US3's qualifying dividends.
SECTION 9. OTHER GUIDANCE

.01 Section 78 Gross-Up, Disallowance of Expenses Pursuant to Section 965 (d)(2) , and
62

Computation of Alternative Minimum Tax in Election Year
Section 78 does not apply to any tax which is not allowable as a credit under
section 901 by reason of section 965(d).
The disallowance of expenses in section 965(d)(2) applies only to expenses that
are "directly allocable" to the deductible portion described in section 965(d)(1).
For purposes of calculating alternative minimum tax for the election year under
section 55(a) in accordance with section 965(e)(1 )(8), the taxpayer's regular tax
described in section 55(c) and tentative minimum tax determined under section
55(b)(1 )(8) do not include tax attributable to nondeductible CFC dividends.
The IRS and Treasury will incorporate the rules in this section 9.01 into
subsequent guidance. This subsequent guidance will provide detail regarding these
and related rules .
.02 Contiguous Country Branches of Domestic Life Insurance Companies
Amounts added to the life insurance company taxable income of a domestic life
insurance company by reason of section 814(e)(2) (dealing with contiguous country
branches of a domestic life insurance company) are not eligible for the section 965(a)
ORO .
.03 Cash Dividends in Excess of Amounts Covered by Domestic Reinvestment Plans
A domestic reinvestment plan may provide for the investment in the United
States of an amount that is less than the entire amount of cash dividends that are
otherwise eligible for the section 965(a) ORO. In such a case, the section 965(a) ORO

applies only to the amount of eligible dividends that are reinvested pursuant to the plan
(assuming that all the other requirements under section 965 are satisfied) .
.04 Section 958(a) Chain of Ownership -- Stock Deemed Issued Pursuant to Section

304 (a)(1)
If stock of an acquiring CFC is deemed to be issued to another CFC pursuant to
section 304(a)(1), the acquiring CFC is treated as being in a chain of ownership
described in section 958(a) for purposes of applying section 965(a)(2).
The following example illustrates the application of section 965(a)(2) and this
section 9.04:
Example. (i) Facts. USP, a domestic corporation, wholly owns two foreign
corporations, CFC1 and CFC2. CFC1 wholly owns a foreign corporation, CFC3. CFC2
has $1 OOx of current and accumulated earnings and profits described in sections
304(b)(5)(A) and 959(c)(3). During USP's section 965 election year, CFC1 sells all its
CFC3 stock to CFC2 for $1 OOx. Also during USP's election year, CFC1 distributes
$100x to USP that is excluded from gross income under section 959(a).
(ii) Result. Because CFC1 is in control of both CFC3 and CFC2 and receives
property from CFC2 in exchange for its CFC3 stock, CFC1 's sale of CFC3 stock to
CFC2 is subject to section 304(a)(1). Accordingly, CFC1 is treated as receiving $100x
as a distribution in redemption of CFC2 stock. Because CFC1 actually owns 100% of
CFC3 before the sale and is treated as owning 100% of CFC3 after the sale, pursuant
to section 302(d), section 302(a) does not apply to the deemed redemption distribution
and the proceeds of the deemed redemption are treated as a distribution to which
section 301 applies. Therefore, CFC1 is treated as transferring its CFC3 stock to CFC2
in exchange for CFC2 stock in a transaction to which section 351 (a) applies. The CFC2
stock CFC1 is treated as receiving in the deemed section 351 exchange is then treated
as redeemed by CFC2 for $1 OOx. Under section 302, that redemption is treated as a
distribution to which section 301 applies because CFC1 owns directly 100% of CFC3
before the redemption of the CFC2 stock that was deemed issued and is treated as
owning 100% of CFC3 after the redemption. The deemed redemption proceeds are
treated as a distribution to which section 301 applies, and CFC1 is treated as receiving
a dividend of $1 OOx from the current and accumulated earnings and profits of CFC2.
For purposes of section 965(a)(2), because CFC1 is treated under section 304(a)(1) as
64

receiving CFC2 stock in the deemed section 351 exchange, CFC1 is treated as
receiving the $1 OOx dividend from another CFC that is in a chain of ownership described
in section 958(a) .
.05 Acquisitions of Interests in Business Entities -- Modification of Section 5.06 of Notice
2005-10
Section 5.06 of Notice 2005-10 provides, in part, that in valuing assets with
respect to certain acquisitions of interests in business entities, the taxpayer must use
the same methodology that it uses, under section 864(e) and Treas. Reg. §1.861-9T(g)
(that is, tax book value, alternative tax book value, or fair market value), for purposes of
allocating and apportioning its interest expense for the taxable year. Notwithstanding
that section of Notice 2005-10, the Treasury Department and the IRS have decided that
taxpayers may elect to use the fair market value methodology under Treas. Reg.
§1.861-9T(g) for purposes of valuing assets pursuant to section 5.06 of Notice 2005-10,
even if they use the tax book value or alternative tax book value methodology for
purposes of allocating and apportioning interest expense under section 864(e). Such
election is made on the annual report (required under section 8.02(a) of Notice 2005-10)
filed by the taxpayer for the taxable year of the acquisition .
.06 Distributions to Intermediary Disregarded Entities - Clarification of Section 3.02 of
Notice 2005-10
Section 3.02 of Notice 2005-10 provides that for purposes of section 965(a), a
cash dividend paid by a CFC to a pass-through entity that is owned by a U.S.
shareholder is treated as received by such U.S. shareholder only if and to the extent
65

that such shareholder receives cash in the amount of the CFC dividend during the
taxable year for which such election is in effect. For this purpose, a disregarded entity
need not actually distribute cash to a U.S. shareholder of the CFC, provided that the
U.S. shareholder otherwise receives the cash from the disregarded entity and there is
no legal obligation for the U.S. shareholder to repay the cash to the disregarded entity.7
For purposes of the preceding sentence, the term U.S. shareholder is defined in section
951 (b).
Example. (i) Facts. USP, a domestic corporation, wholly owns DE, a disregarded
entity. DE wholly owns CFC, a foreign corporation. Since Year 1, USP has held a
$200x obligation of DE. CFC pays a $100x dividend to DE during Year 3, USP's
election year. Also during Year 3, DE repays $1 OOx of its obligation to USP.
(ii) Result. The $1 OOx dividend paid by CFC is paid to DE, a pass-through entity
that is owned by USP. As a result, pursuant to section 3.02 of Notice 2005-10, such
dividend is treated as a cash dividend for purposes of section 965 only if and to the
extent that USP receives $1 OOx from DE during Year 3 without an obligation to repay
those funds to DE. DE's repayment of $1 OOx of its $200x obligation held by USP
satisfies this requirement, and the $100x dividend paid by CFC during the election year
therefore qualifies as a cash dividend for purposes of section 965. The result is the
same regardless of whether the $100x repayment by DE is of principal, accrued
interest, or both.
(iii) Alternative Facts. The facts are the same except that instead of using the
$100x to satisfy a portion of an obligation held by USP, DE uses the $100x cash to
acquire an asset from USP. The result is the same.

SECTION 10. REPORTING AND OTHER ADMINSTRATIVE REQUIREMENTS
Pursuant to section 6001, the taxpayer must prepare, maintain, and, upon a

7 See section 3.02 of Notice 2005-10 (providing that a loan of cash from the disregarded entity to the U.S.
shareholder is not considered a distribution of cash for this purpose because there is a legal obligation for
the U.S. shareholder to repay the cash to the disregarded entity).

request by the Commissioner, make available within 30 days of such request, a general
description of any transaction that results in: (1) an adjustment to base period inclusions
or APB 23 amounts pursuant to section 6 of this notice; (2) an adjustment to initial
measurement date RPI pursuant to section 7 of this notice; or (3) a permitted
investment being made by a U.S. shareholder that, at the time of such investment, is
not a member of the consolidated group that adopted the domestic reinvestment plan
pursuant to which such investment is made, as provided under section 8 of this notice.
The description must include, as applicable, the name, address, and tax identification
number (if available), of all parties relevant to the transaction (for example, selling
group, departing or joining member, and acquiring group). In addition, it must include all
relevant dates and the amount of adjustments resulting from the transactions.
In addition, pursuant to section 6001, the taxpayer must prepare, maintain, and,
upon a request by the Commissioner, make available within 30 days of such request:
(1) a list of investments that may satisfy more than one domestic reinvestment plan and
the taxpayer designation of which plan the investment satisfies; and (2) those domestic
corporations that have participated in more than one election year.
In the case of an adjustment to base period inclusions pursuant to section 6 of
this notice, such adjustments may be determined by reference to the separate Form
1120 prepared for the departing U.S. shareholder for the base period years in question,
without regard to the fact that the separate Form 1120 does not constitute a processed
return, and was prepared to determine the consolidated return of the group of which it

was a member.
SECTION 11. TRANSITION RULES
.01 Domestic Reinvestment Plans Approved Prior to May 10, 2005
If a domestic reinvestment plan is approved prior to May 10, 2005, the taxpayer
may modify such plan to take into account the guidance herein not later than July 11,
2005, even if the dividend to which the domestic reinvestment plan relates has already
been paid. Any plan that is so modified must be subsequently approved by the
taxpayer's president, chief executive officer, or comparable official, and by the
taxpayer's board of directors, management committee, executive committee, or similar
body .
.02 Tax Returns filed Prior to May 10, 2005
If, prior to May 10, 2005, a taxpayer has filed its tax return for the taxable year for
which it acquires an interest in a business entity that qualifies, in whole or in part, as a
permitted investment pursuant to section 5.06 of Notice 2005-10, such taxpayer may
make the election to use the fair market value methodology pursuant to section 9.05 of
this notice with respect to such acquisition on an amended tax return that is filed on or
before December 31, 2005.
SECTION 12. EFFECT OF THIS NOTICE ON OTHER DOCUMENTS
Sections 9.05 and 9.06 of this notice modify section 5.06 and clarify section 3.02
of Notice 2005-10, respectively. See also section 11 of this notice, pursuant to which
domestic reinvestment plans approved prior to May 10, 2005 (including domestic

reinvestment plans adopted or modified pursuant to the guidance included in Notice
2005-10), may be modified to take into account the guidance in this notice.
SECTION 13. EFFECTIVE DATE
This notice is effective for the taxable year for which taxpayers have elected
section 965 to apply, and other taxable years as relevant.
SECTION 14. PAPERWORK REDUCTION ACT
The collections of information contained in this notice have been reviewed and
approved by the Office of Management and Budget in accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number [1545-1943].
An agency may not conduct or sponsor, and a person is not required to respond
to, a collection of information unless the collection of information displays a valid control
number.
The collections of information are in sections 5, 8, 9, 10, and 11 of this notice.
This information is required to provide the IRS sufficient information to determine
whether a taxpayer has properly elected to apply section 965 to a taxable year and
whether the taxpayer has properly determined the maximum amount of cash dividends
eligible for the DRD under section 965(a), taking into account the limitations on the DRD
that are imposed by section 965(b)(1), (b)(2), and (b)(3). The collections of information
are required to obtain the benefit of section 965 for a taxable year. The collections of
information are required to obtain the benefit of section 965 for a taxable year. The
likely respondents are business corporations.
69

Estimated total annual reporting and/or recordkeeping burden: 1,250,000 hours.
Estimated average annual burden hours per respondent: 50 hours.
Estimated number of respondents: 25,000.
Estimated annual frequency of responses: on occasion and annually.
The collections of information contained in this notice have been submitted to the
Office of Management and Budget for review in accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the collections of information
should be received by June 9,2005. Comments are specifically requested concerning:
Whether the proposed collections of information are necessary for the proper
performance of the functions of the Internal Revenue Service, including whether the
information will have practical utility;
The accuracy of the estimated burden associated with the proposed collections
of information (see below);
How the quality, utility, and clarity of the information to be collected may be
enhanced;
How the burden of complying with the proposed collections of information may be
minimized, including through the application of automated collection techniques or other
forms of information technology; and
Estimates of capital or start-up costs and costs of operation, maintenance, and
purchase of services to provide information.
Comments concerning the accuracy of the burden estimate and suggestions for
70

reducing the burden of the final or temporary regulations should be sent to the Office of
Management and Budget, Attn: Desk Officer for the Department of the Treasury,
Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the
Internal Revenue Service, Attn: IRS Reports Clearance Officer, W:CARMP:T:T:SP,
Washington DC 20224.
Books or records relating to a collection of information must be retained as long
as their contents may become material in the administration of any internal revenue law.
Generally, tax returns and tax return information are confidential, as required by 26
U.S.C.6103.
SECTION 15. DRAFTING INFORMATION
The principal authors of this notice are Jeffrey L. Vinnik of the Office of Associate
Chief Counsel (International) and Krishna P. Vallabhaneni, formerly of the Office of
Associate Chief Counsel (Corporate). However, other personnel from the IRS and the
Treasury Department participated in its development. For further information regarding
this notice contact Mr. Vinnik at (202) 622-3840 (not a toll-free call).

DEPARTMENT OF THE TREASURY
Office of Public Affairs
May 10, 2005

FACT SHEET:
Second Notice Providillg Guidance 011 Repatriation of Foreigll Earnings Under the
America" Jobs Creation Act
Overview:
Today the Treasury Department and IRS announced the second in a series of notices that
provide detailed guidance for U.S. companies that elect to repatriate earnings from
foreign subsidiaries subject to the temporary reduced tax rate available under the
American Jobs Creation Act (AJCA). The notice released today provides guidance to
companies on what constitutes a qualifying dividend, the impact of mergers and
acquisitions and issues related to the section 78 gross-up.

Background
Internal Revenue Code section 965, enacted as part of the AJCA in October 2004, is a
temporary provision that allows a U.S. company to repatriate earnings from its foreign
subsidiaries at a reduced effective tax rate provided that specified conditions and
restrictions are satisfied. Section 965 provides that a U.S. company may elect, for one
taxable year, an 85 percent dividends received deduction for eligible dividends from its
foreign subsidiaries giving it an effective 5.25 percent tax rate on qualifying dividends.

In January 2005, Treasury and IRS issued a notice (Notice 2005-10) that provided
guidance to companies on the domestic reinvestment plan requirement under the new
provision. The notice specified permitted investments in the United States for which the
repatriated funds may be used under this provision. The notice announced today (Notice
2005-38) provides additional guidance on the amount of dividends that qualify for the
dividends received deduction. Further, Treasury and the IRS announced their intention to
issue a third notice that will address the impact of section 965 on a corporation's
computation of its tax liability.

How it works
". Under the new section 965, for one year only, companies that repatriate earnings
from foreign subsidiaries and reinvest them in the United States are subject to a
reduced effective tax rate on the repatriated earnings.
". Before repatriating the earnings, the company must have a domestic reinvestment
plan for such earnings that is approved by the company's CEO or President and is
subsequently approved by its board of directors.
". There are limits on what dividends may qualify for the deduction. A quali(ying
dividend must, for example, be paid in cash and exceed the amount that a
company has historically repatriated from its foreign subsidiaries.

Dividends qualifying for the deduction
./ The qualifying dividends must be paid in cash .
./ The qualifying dividends must exceed the amount a company has historically
repatriated from its foreign subsidiaries .
./ Qualifying dividends may not exceed the greater of$500 million or the amount a
company has previously reported on its financial statement as permanently
reinvested overseas .
./ The amount of dividends otherwise qualifying for the deduction is reduced to the
extent of the total debt outstanding from the foreign subsidiaries to related parties
at the end of the company's election year exceeds the amount of debt owed by its
foreign subsidiaries to related parties on October 3, 2004 .
./ The amount of the dividends must be invested in the United States in accordance
with an approved investment plan (as outlined in Notice 2005-10).
Historical Threshold of Repatriations
The dividends that qualify for the deduction must be extraordinary in that they exceed the
amount that a company has historically repatriated. The notice provides guidance on how
to define the historical threshold above which dividends may qualify for the deduction .

./ In general, a domestic company must determine its threshold repatriation level
based on the annual average repatriations by its foreign subsidiaries during the
five most recent taxable years ending prior to June 30, 2003, taking out the high
and low years .
./ The repatriations by a foreign subsidiary during the five most recent taxable years
ending prior to June 30, 2003 are treated as a tax attribute of a domestic company
that owns such foreign subsidiary. Accordingly, this attribute remains with the
domestic company upon the sale of its stock.
Maximum Repatriations
./ In general, the statute limits thc maximum repatriations qualifying for the
deduction to the greater of the amount of earnings permanently reinvested
overseas as indicated on its financial statement or $500 million .
./ To the extent the earnings reported as permanently reinvested overseas are
attributable to the foreign subsidiaries held by a domestic company, these
amounts are treated as a tax attribute of such company. Accordingly, this
attribute remains with a domestic company upon thc sale of its stock.

Related party indebtedness
./ The amount of dividends otherwise eligible for deduction under section 965 must
be reduced by the amount of the increase in related party debt between October 3,
2004 and the last day of the election year.
./ This rule is intended to prevent a deduction from being claimed in cases in which
a domestic company directly or indirectly finances the payment of a dividend
from a foreign subsidiary .
./ The notice provides detailed rules on how certain transactions after October 3,
2004 may effect the general rules for calculating a foreign subsidiaries
indebtedness to related persons for purposes of section 965.

Sec. 78 gross-up
./ Under section 78 of the Internal Revenue Code, a U.S. company is required to
include in its income an amount of foreign taxes it is deemed to have paid during
the taxable year.
./ Section 965 does not allow a foreign tax credit, including the foreign taxes
deemed paid, for the deductible portion of the dividend .
./ The notice provides that a section 78 gross-up does not apply to any foreign tax
for which a foreign tax credit is disallowed under section 965.

QUESTIONS AND ANSWERS
When is the provision effective?
The provision generally applies to the first taxable year beginning on or after the October
22,2004 enactment (which would, for example, mean 2005 for calendar-year taxpayers).
Alternatively, the provision could be applied to the preceding taxable year (which means
2004 for calendar-year taxpayers).
Exactly what is the tax reduction to companies on the foreign earnings they
repatriate?
The U.S. company is permitted to deduct 85% of the qualifying repatriated dividends. If
the company is subject to the 35% corporate tax rate on the other 15% of the repatriated
amount, that represents effectively a 5.25% tax rate on the total repatriated dividend.
Do firms have to use the tax break in 2005 or could they save it and use it in later
years?
The provision applies only for the year specified and cannot be used in later years.

005-5-10-15-39-22-23520: U.S. International Reserve Position

Page 1 of2

FROM THE OFFICE OF PUBLIC AFFAIRS
May 10, 2005
2005-5-10-15-39-22-23520

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 S79,512 million as of the end of that week, compared to $79,483 million as of the end of trle pnor week.

I. Official U.S, Reserve Assets (In US (I7Il/lons)
April 29, 2005

May 6, 2005

79,483

79,512

TOTAL I

I
11.

Foreign Currency Reserves

la Securities

Euro

11,941

Of which, issuer headquartered in the US.

II
II

Yen
15,032

TOTAL

26,973

14,674

Euro

Yen

11.863

14,991

TOTAL

I
I
I

26,854

14.592

b. Total deposits with

Ibi. Other central banks and BIS

Ib.ii. Banks headquartered in the US
Ibli Of WhiCh, banks located abroad

11,652

3,022

11,579

3,013

b.ill. Of which, banks located In the US.

2. IMF Reserve Position 2

15,184

15,418

11,610

11,607

11,041

II
I

TOTAL

I
I
I

b.l/i. Banks headquartered outSIde the US.

Special Drawing Rights (SDRs) 2

4. Gold Stock 3

15. Other Reserve Assets

I
I
I

II. Predetermined Short-Term Drains on Foreign Currency Assets

II
I

I
1. Foreign currency loans and securities

April 29, 2005
Euro

Yen

II
II

May 6, 2005

II
TOTAL

Euro

Yen

II
II

2. Aggregate short and long positions in forwards and futures in foreign currencies Vis-a-VIS the U.S. dollar
12a

Short positions

12.b . Long pOSItIOns

[3. Other

II
II

II
II
II

II
II

I
I
I

III. Contingent Short-Term Net Drains on Foreign Currency Assets

April 29, 2005

ttp;IIWWW.tre36.gov/press/releases/2005)1015392223520.htm

May 6, 2005

5/3112005

005-5-10-15-39-22-23520: U.S. International Reserve Position

1. Contingent liabilities in foreign currerlcy
11.a. Collateral guarantees on debt due within 1
Iyear
1.b. Other contingent liabilities

[2.

Foreign currency securities with embedded
loptions
3. Undrawn, unconditional credit lines

13 a With other central banks

I
I

Page 2 0[2

Yen

Euro

I
I
I
I
I

If)

IGI
II

3.b With banks and other fmaneia! tnstltutions

IHeadquartered

II TOTAL II
0
I
II

I
I

Currencies vis-a-vis the US dollar

4.a. Short positions

II
I
I

4.a.1 Bought puts
14.a2. Wrrtten calls
14b Long positions
14b1

. Bought calls

14b .2

Wrrtten puts

II
II
II

II TOTAL I
0
I
I

I
I

I
II

3.e. With banks and other financial institutions

4. Aggregate short and long pOSitions of options
in foreign

Yen

II
I

the U S

IHeadquartered outSide the US

II
II

II
I

0
0

EUfO

I
0
0

I
I

I
0

II
I

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 holdrngs listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
2! The items, "2 IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/doliar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the US Treasury to IMF data for the prior month end.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce

ttp:IIWWW.treas;.gov/presslreleasesI200551015392223520.htm

5/31/2005

S-2437: Randal K. Quarles Actmg Under Secretary for International Affairs<brDepartment of the T... Page 10f6

FROM THE OFFICE OF PUBLIC AFFAIRS
May 11.2005
JS-2437

Randal K. Quarles
Acting Under Secretary for International AffairsTestimony before the House
Appropriations Subcommittee on
Foreign Operations, Export Financing, and Related Programs
FY2006 Budget Request for Treasury International Programs
Chairman Kolbe, Ranking Member Lowey, Members of the Subcommittee. thank
you for the opportunity to testify this morning on PreSident Bush's FY2006 budget
request for Treasury's International Programs
Treasury's International Programs - w~lich include the multilateral development
banks (MOBs), debt reduction. and technical assistance - are criticalillstruments In
promoting the Administration's international economic agenda. The MOBs promote
global economic growth and poverty reduction, thereby helping to create stronger
markets for US goods and services. They also support specific U S. foreign policy
priOrities, such as combating money laundering and terrorist finanCing, rebUilding
conflict-torn economies such as Iraq and Afghanistan, and assisting recovery from
natural disasters. Similarly. debt reduction can help poor countries remove debt
overhang, which inhibits a country's economic growth. A sustainable level of debt,
if properly structured, can end the cycle of lend and forgive Our technical
assistance tlelps countries Institute the sound budget and financial systems needed
for economic growth
The FY2006 request for Treasury's International Programs totals $1.46 billion. It
includes $1.33 billion to fully fund our annual commitments to the MOBs, $6.6
million towards clearing a portion of U.S. arrears to these Institutions, $99.75 million
towards Treasury debt reduction programs. and $20.0 million for technical
assistance.

Measurable Results, Debt Sustainability and Accountability at the MOBs
When former Under Secretary John Taylor testified before this Committee last year,
he highlighted an IDA education project in Kenya as an example of how more
development projects should be done. ThiS particular project - which prOVided a
$50 million grant to buy textbooks - had a detailed tlnleline outlining how to (1 )
provide the funding to 18.000 schools across the country. (2) to give parents and
teachers the authority to buy the books: and (3) to keep track of the funds. In fact.
one of the schools VISited dUring the former Under Secretary's trip included ItS
financing and expenditures to the last shilling on one of the school'S blackboards
Thus, the finanCing was provided on terms appropnate to the country's debt
Situation, was tied to explicit performance targets and tlmellnes, and was executed
in a completely transparent manner. The Bush Administration has stnvend to
ensure that more MOB projects have these critical components, which Will
maximize effectiveness and results on the ground
Our work has produced considerable progress, particularly as a result of the recent
replenishment agreements, the International Development ASSOCiation (IDA), the
African Development Fund (AfDF). and the Asian Development Fund (AsOF), all of
which Include enhanced results measurement provisions to this effect. As a result
of strong U.S. leadership - and drawing upon broad congressional support - these
institutions will now use significantly expanded results measurement systems,
increase grant assistance to poor countnes. use Improved performance allocation

tp:I/WWW.trea~,-gov/press/releases/js2431 htm

5/31/2005

S-2437: Randal K. Quarles Acting Under Secretary for International AtTairs<brDepartment of the T. .. Page 2 of 6

systems, focus more on private-sector development, fight corruption, and improve
transparency and accountability
Measuring Results The U S has led a high-priority campaign for the
establishment of results-based systems that set quantifiable performance targets
and measure results at the project, sector, countl'y and institutional levels of
operations It is not enough to say that a medical clinic has been built to prOVide
vaccinations for children, What matters IS whether the vaccines actually get given
to the children who need them and their health improves ThiS requires establishing
a pervasive results culture in the MOBs by Incorporating a measurable results
agenda into all operations, irlcluding staff evaluations and Incentives; strongly
encouraging and buildillg capacity in developing countries to collect the data
necessary to measure results; and emphasizing the need to establish outcome
Indicators and monitoring systems early in the deSign of country assistance
strategies and individual projects,
As a result of U,S, leadership, the MOBs are changing their operating style to focus
on results and are continuing to strengthen their systems of measurement and
accountability, All of the MOBs have begun to mainstream mechanisms to measure
and report the results of their projects The new reforms emphasize development
outcomes in addition to process indicators, For example, the recent IDA
Replenishment (IDA-14) significantly expands the existing results measurement
system The IOA-14 Agreement instructs World Bank Management to use a twotiered system to monitor: (1) progress on aggregate country outcomes, and (2)
IDA's contribution to country outcomes, In addition, it commits World Bank
Management to working to ensure that 100 percent of IDA loans and grants include
indicators connected to a timeline with baseline data and periodic assessments of
projects and programs, At the Asian Development Fund, results measurement was
a centerpiece of the AsDF-9 replenishment negotiations, which concluded In May
2004, As part of the African Development Fund Replenishment (AfDF-10), every
project and strategy coming to the Board of Directors will have a fully operational
results-based management system by mld-2006, These replenishment agreements
illustrate that U,S efforts to improve the effiCiency and effectiveness of MOB
operations are working,
Debt Sustainability and Increased Grants: For the last twenty-five years, the
international community has attempted to address the unsustainable debt burdens
of poor countries through a series of stop-gap measures, Durrng thiS period, a
number of countries have needed and received repeated debt reduction and
reschedullngs from the "Paris Club" of major bilateral creditors, Numerous poor
countries, including Cote d' Ivoire, Democratic Republic of Congo, Madagascar,
Mauritania, Mozambique, Niger, Senegal, Sierra Leone, Togo, Uganda, and
Zambia have received 8 or more Paris Club agreements each,
All of these responses were understandable in light of countries' debt problems;
however, they have not comprehenSively addressed the longer term systemic
determinants of debt distress, such as perverse incentives for excessive lending
and excessive borrowing, The result has been that as debt is cleared through
forgiveness and re-schedulings, the IFls have stepped in and provided new loans,
often exceeding the amount of debt relief and with little regard for a country's
capacity to pay, For example, between 1989 and 2002, countries eligible for the
Heavily Indebted Poor Countries initiative (HIPC) received a total of $40 billion ill
debt relief but accumulated nearly $93 billion in new debt.
The Bush Administration strongly believes that grant finanCing is a critical
component of any long-term debt sustalnabillty solution, In 2001, President Bush
called on the MOBs to provide 50 percent of their assistance to the poorest
countries in the form of grants, As a result of strong U.S leadership, the recently
agreed IDA and AfDF replenishments stipulate that approXimately 45 percent of
IDA and AfOF assistance to the poorest countries will be provided on grant terms.
These breakthrough achievements build on the significant progress that the U.S.
secured during the previous replenishment negotiations, which stipulated that IDA
and the AfOF would prOVide between 18 and 21 percent of total assistance In the
form of grants. Before then, less than one percent of assistance was provided as
grants. Clearly, we are making substantial progress toward ending the lend-and-

tip://WWW.treas.gov/press/releases/j s24 'j~ htm

5/3112005

S-2437: Randal K. Quarles Acting Under Secretary for lntemational Affairs<brDepartment of the T... Page 3 of 6

forgive approach to multilateral assistance and toward facilitating long-term debt
sustalnability In poor countries.
The U S IS contirlulng to have constructive discussions With the G-? and other MOB
shareholders about moving this Important Issue even further. The shift to greater
use of grant financing will reduce unslJstainable debt burdens over the long-term
However, debt will continue to act as a constraint on economic growth m the
interim To address this problem. the Bush Administration has put forth a concrete
and doable proposal that would relieve the debt burdens of poor countries and
fundamentally fix the multilateral system Our proposal calls for 1I11meciiate action to
provide up to 100 percent relief on IDA and AfDB loans to the HIPCs Without
additional cost. Net assistance levels would. at a minimum, remain unchanged
from current levels. In addition, those bilateral creditors not prOViding 100 percent
relief on pre-Cologne Summit (June 20, 1999) debt should take action immediately
to do so. Following debt relief. IDA and AfDF assistance to HIPCs would be
prOVided on grant terms. Over time, the HIPCs would gradually be eased into new
borrowing based upon tileir capacity to repay These actions will serve to
conclUSively end the lend-alld-forgive approach to multilateral assistance; put these
poor countries on a sustainable path over the long-term. and ellllilnate the need for
future rounds of debt relief In other words, the proposal not only drops the debt of
yesterday. but prevents debt from burdening countries agam wellmto the future
For our part, the US committed to prOVide 100 percent bilateral debt reduction to
eligible countries under the HIPC Initiative. While we have completed our funding
obligations for the majority of participating HIPC countnes, some work remains
This includes fully financmg bilateral debt reduction for the Democratic RepubliC of
Congo and prOViding HIPC relief for Liberia and other countnes if they achieve
political peace and make progress on their economic programs. The US also
provides funding to the HIPC Trust Fund, which helps fmance the HIPC debt
reduction costs of the regional multilateral institutions. In addition, the U.S.
provides debt reduction through the Tropical Forest Conservation Act (TFCA).
which relieves certam debts owed the U.S. while generatmg funds to support local
tropical forest conservation activities. To date, eigtlt countries have TFCA
agreements: Bangladesh, Belize, Colombia, EI Salvador. Jamaica, Panama (two
agreements). Peru, and the Philippines. These deals Will generate over $95 million
for tropical forest conservation in these countries over the life of the agreements. A
number of other countnes have qualified for or expressed interest in the TFCA.

Performance-Based Allocations: Assistance is effective when it IS provided to
countries that are committed to and successful In implementing sound pro-growth
economic policies. A sound policy enVIronment also attracts investment because It
increases private sector confidence. On the other hand. providmg assistance to
countries that are not committed to good policies can actually be
counterproductive. As a result, the U.S. has urged the MOBs to focus their efforts
on projects that contain measurable results and raise liVing standards through
higher productivity. This means placing a greater emphasis on prrvate sector
development - particularly small and medium sized enterprises - as well as on
health and education. to help individuals realize their full potential It also means
aggreSSively promoting pro-growth policies that enable countries to use assistance
effectively. Because of U.S. leadership, the concessional windows of all the MOBs
- which are devoted to the poorest countnes - have established performancebased allocation systems. Such systems provide more resources to countries With
sound growth-oriented policies and fewer resources to countries Without them, With
an extra emphasis on governance to promote transparency and fight corruption.
For example, the best policy performers in IDA receive almost seven times more
resources per capita than the poorest performers.
Fighting Corruption: Governance, Transparency and Accountability. Good
governance IS essential for a vibrant private sector and for economic growth. Poor
governance. the lack of rule of law or enforceable contracts. and the prevalence of
corruption create diSincentives to invest, to start new firms. and to expand eXisting
firms With high-productiVity Jobs. This has a negative Impact on capital formation
and entrepreneurial activity In too many cases. potential entrepreneurs and
investors in developing countries are deterred by arbitrary rules. corrupt
bureaucracies, and weak judiciary systems. For these individuals to succeed,
governments must fairly enforce laws and contracts and respect human rigtlts and

ttP:/IWWW.treas\gov/presslreleases/js2437.htm

5/31/2005

S-2437: Randal K. Quarles Acting Under Secretary for International Affairs<brDepartment of the T... Page 4 of 6
property. As a result of strorlg US urgln~J, more dlagllostics on governance issues
are being undertaken by the MOBs, govemance and corruption are routinely
discussed in MOB country strategies, and more assistance IS being provided to help
countries tackle corruption Issues Ellons to fight anti-corruption are focused on
three levels the country level, the project level, and the institutional level.
At the country level, US. effons to strengthen anti-corruption actiVities are focused
on enhancing the transparency and accountability of recipient countries'
governance systems and disclosure in MOB operations and analysis, and to
channel MOB resources towards countries that have good governance in place At
the project level, U S effons are focused on encouraging the MOBs to conduct
analysis and design projects that help reduce opportunities for corruption,
strengthen fidUCiary and procurement standards. and help ensure that MOB funds
will be well spent At the institutional level, US efforts are focused on improving
the MOB internal control pl'ocesses for internal auditing, investigative mechanisms,
whlstleblower protections, and corporate procurement, as well as increasing the
disclosure of information and the accountability of MOB operations.
Transparency at the MOBs allows the kind of public scrutiny that is essential to
ensuring accountability and results. The U.S. continues to press the MOBs to
release more documents, especially those relating to Board decisions, country
strategies, measurable results, and anti-corruption measures. Section 581 of
Division 0 of the Consolidated Appropriations Act, 2004, directs the Secretary of
the Treasury to Instruct the United States Executive Director at each multilateral
development institution to inform his or her respective institution of certain policy
goals pertaining to transparency and accountability and to use the voice and vote of
the United States to achieve such goals.
Only one year after the legislation was passed, Ssubstantial progress has been
made on these goals Since the legislation was passed a little over one year ago All
the MOBs except two now publish the minutes of their Board meetings or are
moving forward With proposals to do so. All the institutions except one now either
post on their website an annual repon containing statistics and case studies of
fraud and corruption Investigations or are moving forward With proposals to do so.
All the institutions have taken measures to Increase public involvement in, and
awareness of, project and poliCY proposals that will be the subject of Board
decisions. And all the institutions are reviewing their whistleblower protections to
see how they can be enhanced. F or example. the World Bank makes publicly
available considerable information on all its projects This includes summary
information on all projects for approval by the Board of Directors, information on the
progress of individual projects durrng Implementation, and detailed Information on
output and outcome indicators upon project completion In addition, the IDA-14
Replenishment Agreement calls on the World Bank Board to take steps to (i)
publish project and program assessment reports; (II) complete and publish an
independent assessment of the World Bank's internal controls: (iii) strengthen
documentation of stakeholder feedback from consultations required under the
World Bank's safeguard policies; and (iv) enhance publiC access to Information on
World Bank Board proceedings, including the disclosure of Board minutes. Similar
reforms have been achieved at the other MOBs. We will continue to work tirelessly
to see these Important reforms to fruition.
The FY2006 Request
There are four basic components of our FY2006 request (1) annual funding for the
MOBs. (2) arrears clearance for the MOBs. (3) funding for debt relief programs, and
(4) technical assistance.

(1)

Annual Funding for the MOBs: $1.33 billion

The Administration's request of $1.33 billion for the MOBs includes the first annual
commitment to three new replenishments IDA ($950.0 million), the AfDF ($1357
million), and the AsOF ($115.3 million). Negotiations of these three replenishment
were very successful In achieVing key US reform obJectives. Each of these
replenishments includes profound advances in Improving debt sustainability through
increased grants. IDA and the AfDF will Increase the share of new funding

ttr;J://WWW.trea;;.~ov/press/releases/js2437~htm

5/31/2005

is-2437: Randal K. Quarles Acting Under Secretary for International Affairs<brDepartment of the T ... Page 5 of6

distributed to the poorest countries through grants. rather than loans. to about 45
percent from approximately 25 percent and 20 percent. respectively. Tile AsDF
established a grant window for the first time and approximately 30 percent of
assistance to tile poorest countries will be In the form of grants Success was also
achieved In the areas of debt sListalnability. measurable results, transparency, and
support for the private sector US cOlltrlbutlons leverage Significant resources In
the MOBs. for the new replenlsllment of IDA every $1 prOVided by the US. provides
more than $9 fro III other sources.

(2) Arrears Clearance for the MOBs: $6.6 million
The $6 6 million request for allears clearance IS part of an effort to pay down US
arrears to the Institutions, which now total $6870 million. IllS critical for the U S to
meet ils International commitments, thus helplllg to ensure U.S. leadership and
credibility on poliCY direction, program priorities, and institutional reform.

(3)

Debt Relief: $99.75 million

The Administration's request fm debt restructuring is $9975 million to be available
for bilateral HIPC and poorest country debt reduction. contributiollS to the HIPC
Trust Fund, and TFCA debt reduction, with flexibility in determining the amount for
each program Under the enhanced HIPC Initiative, the requested funding could be
used towards covering a portion of the cost of bilateral debt reduction for HIPCs,
including the Democratic RepubliC of the Congo and possible new countries such
as liberia, and/or completing the US pledge of $150 million in additional
contributions to the HIPC Trust Fund.

(4)

Technical Assistance: $20.0 million

The request also Includes $200 million for Treasury's technical assistance
programs, which form an Important part of our efforts to support countries facing
economic development or financial security Issues. and whose governments are
committed to fundamental reforms. The FY2006 request will allow us to contillue
current programs In the Middle East, Africa, Asia, and Central and South America,
as well to expand Into new countries committed to sound economic reform policies
Of the FY2006 request, we expect to use $10.0 million of the funds on programs
that focus on anti-terrorist initiatives, to be spent in coordination with other U.S.
Government agencies. and we will use $28 million on programs in Afghanistan

Authorization Requests
For FY2006, the Administration is seeking authorization for the replenishments of
three concessional windows of the MOBs the fourteenth replenishment of IDA; the
tenth replenishment of the AfDF; and the eighth replenishment of the AsDF.
Additionally, the Administration Will be seeking authority to reduce lend-lease debt
for Liberia under the HIPC initiative in order to be able to meet the Administration's
commitment to forgive 100 percent of debt for HI PC countrres. Draft authorization
legislation has been sent to the Speaker of the House and the PreSident of the
Senate. I look forward to working with you as well as the authOrizing committees to
achieve the authorization of these critical programs.

Conclusion
We will continue to work with the MOBs to make progress on Implementing our
strong reform agenda. I ask for your support as we strengthen these institutions In
ways that increase their effectiveness in utilizing US taxpayers' financing and In
serving vital U.S. economic and security interests around the world. Our debt
reduction and technical assistance programs also serve key US reform and growth
objectives in very important ways.
Thank you very much. I look forward to working with you on funding thiS request.
and I would be happy to respond to your questions

ttp://WWW.trea~.gov/press/releases/js243?htm

5/3112005

S-2438: Treasury Department Announces $2 Billion to Help Nation's Low-Income Communities<... Page I of I

FROM THE OFFICE OF PUBLIC AFFAIRS
To

VIE'W

()f

fJrlIll lil" POF

COlltOllt Oil

(Ill'; fJaW'. downl()dCI

the

{rtle

May 11, 2005
JS-2438

Treasury Department Announces $2 Billion to Help
Nation's Low-Income Communities
Awards Announced Under 3rd Round of New Markets Tax Credit Program
Treasury Secretary John W Snow today announced lilat 41 organizations have
been selected to receive $2 billion in tax credit allocations under the New Markets
Tax Credit (NMTC) Program in a ceremony held at the Treasury Department. The
NMTC Program attracts private-sector capital investment Into the nation's urban
and rural low-Income areas to help finance community development projects,
stimulate economiC growth and create Jobs.
"Today's announcement promises more Jobs and a brighter future for the
Wasilington, DC area and for every community where NMTCs are allocated," said
Secretary Snow. "By prOViding businesses with critical investments, job creation will
be stimulated in communities that are very much In need."
The NMTC program, established by Congress in December of 2000, permits
individual and corporate taxpayers to receive a credit against federal income taxes
for making qualified equity investments in investment vehicles known as
Community Development Entitles (CDEs). The credit provided to the Investor totals
39 percent of the cost of the Investment and IS claimed over a seven-year period
Substantially all of the taxpayer's Investment must III turn be used by the CDE to
make qualified investments III low-income communities Tile 41 organizations were
selected through a competitive application and rigorous review process. The
NMTC program is admillistered by Treasury's Commullity Development Financial
Inslltutlons (CDFI) Fund
"The New Markets Program IS dOlllg what it is suppose to do - attracting sources of
capital to our nation's low-income comillunities," said CDFI Fund Director Art
Garcia. "By partnering with the private sector and community organizations.
previous recipients have already leveraged their credits into more than $2 billion In
equity from investors."
The CDFI Fund antiCipates announCing the opening of the application period for the
next round of the NMTC Program during the summer of 2005.
A complete list of the 41 organizations selected can be found at the link below:
additional information on the NMTC Program can be found on the CDFI Fund's web
site at www.cdfifund.gov

REPORTS

tto://WWw.treasgov/press/releases/js2438.htm

5/3112005

Third Round (2005)
NMTC Allocation Recipients
Name of Allocatee

Headquarters

Service
Area

Predominant Market

Allocated
Amount

Predominant
Financing Activity

Advantage Capital Community
Development Fund, LLC

New Orleans, LA

National

AL, FL, HI, LA, MO, NY, TX

$50,000,000

Business

Appalachian Fund For Growth II, LLC

Chattanooga, TN

Multi-state GA, NC, TN

$17,000,000

Business

Bethany Square, LLC

Los Angeles, CA

Local

Los Angeles, CA

$11,000,000

Real Estate (Mixed Use)

Biotech Research Center, LLC

Kailua, HI

Local

Honolulu, HI

$28,000,000

Real Estate (Office)

GGG Community Partners, LLC

Princeton, NJ

National

CA, FL, IN, MO, NJ, TX, VA

$50,000,000

Real Estate (Office)

CDF Development, LLC

Baltimore, MD

National

KY, MD, MO, NJ, NY, TX, VA

$60,000,000

Real Estate (Retail)

Chase Community Development
Corporation

New York, NY

National

AZ, IL, MI, NJ, NY, OH, TX

$75,000,000

Financing CDEs

Chevron NMTC Fund, LLC

San Francisco, CA

National

CA, IL, LA, MD, NY, OR, PA

$20,000,000

Real Estate (Mixed Use)

Cincinnati Development Fund

Cincinnati, OH

Local

Cincinnati, OH

$52,000,000

Real Estate (Mixed Use)

Clearinghouse CDFI, The

Lake Forest, CA

Local

Los Angeles, CA
metropolitan area

$75,000,000

Real Estate (Retail)

Colorado Growth and Revitalization
Fund, LLC

Denver, CO

Statewide

Colorado

$40,000,000

Real Estate (Mixed Use)

Community Ventures Corporation, Inc.

Lexington, KY

Statewide

Kentucky

$12,000,000

Business

CSDC New Markets Fund, LLC

Washington, DC

National

AZ, CA, FL, IN, MN, NM, TX

$40,000,000

Business

Ecotrust CDE, LLC

Portland, OR

MUlti-state CA, OR, WA

$50,000,000

Business

ESIC New Market Partners, LP

Columbia, MD

National

$80,000,000

Real Estate (Mixed Use)

CA,FL,MD,NY,OH,TX,DC

Name of Allocatee

Headquarters

Service
Area

Predominant Market

Allocated
Amount

Predominant
Financing Activity

Forest City Community Development
Entity, LLC

Brooklyn, NY

National

CT, MA, NJ, NY, OH, PA, RI

$51,000,000

Real Estate (Retail)

Genesis LA CDE, LLC

Los Angeles, CA

Local

Los Angeles, CA

$80,000,000

Real Estate (Retail)

Hampton Roads Ventures, LLC

Norfolk, VA

Statewide

Virginia

$35,000,000

Real Estate (Retail)

Inner City Ventures CDE, LP

Atlanta, GA

Local

Atlanta, GA

$40,000,000

Real Estate (Mixed Use)

Kentucky Highlands Investment
Corporation

London, KY

Local

Southeastern Kentucky

$22,000,000

Business

Kista NMTC Fund, LLC

Frankfort, KY

Statewide

Kentucky

$25,000,000

Business

Lenders lor Community Development

San Jose, CA

Local

San Francisco-Oakland-San
Jose, CA

$25,000,000

Real Estate (Facilities)

Local Initiatives Support Corporation

New York, NY

National

CA, FL, IL, MI, MN, NY, WI

$90,000,000

Real Estate (Retail))

Louisville Development Bancorp, Inc.

Louisville, KY

Local

Louisville, KY

$8,000,000

Real Estate (Mixed Use)

Massachusetts Housing Investment
Corporation

Boston, MA

Statewide

Massachusetts

$54,000,000

Real Estate (Mixed Use)

Michigan Magnet Fund

Lansing, MI

Statewide

Michigan

$60,000,000

Real Estate (Mixed Use)

Milwaukee Economic Development
Corporation

Milwaukee, WI

Local

Milwaukee, WI

$18,000,000

Business

MK La Charitable Healthcare Facilities
Fund, LLC

New Orleans, LA

Statewide

Louisiana

$60,000,000

Financing CDEs

NAB Bank

Chicago,IL

Local

Chicago,IL

$5,000,000

Business

National Cities Fund, LLC

New Orleans, LA

National

FL, LA, MD, MO, MS, NC, VA

$25,000,000

Real Estate (Mixed Use)

National New Markets Tax Credit, Inc.

Minneapolis, MN

National

AL, CA, CO, MN, NJ, OR, PA

$100,000,000

Loan Purchases

New Markets Redevelopment LP

Oklahoma City, OK

Local

Oklahoma City, OK

$34,000,000

Real Estate (Office Space)

Page 2 of 3

Name of Allocatee

Headquarters

Service
Area

Predominant Market

Allocated
Amount

Predominant
Financing Activity

NYCB Community Development Corp

Westbury, NY

Local

New York City, NY
metropolitan area

$42,000,000

Real Estate (Mixed Use)

REI New Markets Investment, LLC

Durant, OK

Statewide

Oklahoma

$56,000,000

Business

Self Help Ventures Fund

Durham, NC

National

FL,GA,NC,NY, TX, VA,DC

$95,000,000

Real Estate (Mixed Use)

Structured Products Group CDE, LLC

Denver, CO

National

CA, CO, FL, MD, NJ, TX, DC

$90,000,000

Real Estate (Retail)

Sun Trust Community Development
Enterprises, LLC

Atlanta, GA

National

FL, GA,MD,NC, TN,VA,DC

$75,000,000

Real Estate (Retail)

Telesis CDE Corporation

Washington, DC

National

FL, IL, NJ, NY, OH, PA, DC

$60,000,000

Real Estate
(For Sale Housing)

UA LLC

New York, NY

National

CA, FL, MA, MD, NY, PA, TX

$50,000,000

Real Estate (Mixed Use)

Valued Advisor Fund, LLC, The

Chicago,IL

National

GA, IL, IN, KS, MI, MO, TN

$50,000,000

Financing CDEs

Wachovia Community Development
Enterprises, LLC

Charlotte, NC

National

FL,GA,NC,NJ,PA, TX,DC

$90,000,000

Financing CDEs

Page 3 of 3

S-2439: The Honorable John W. Snow Remarks on the New Markets Tax Credits Program

Page 1 of2

FROM THE OFFICE OF PUBLIC AFFAIRS
May 11,2005
JS-2439

The Honorable John W. Snow
Remarks on the New Markets Tax Credits Program
Good morning, everyone, and congratulations to all of today's awardees.
Communities across the country are fortunate to have each and everyone of these
groups working on Its behalf
One of the President's top pnorltles is to have a growing economy that creates lots
of good jobs. He IS especially interested in promoting economic growth and
entrepreneurship in economically distressed areas. This is where the New Markets
Tax Credits come in.
In this, the third round of the New Markets Tax Credits (N MTC) program, 41
awardees nationally will receive an aggregate total of $2 billion In New Markets Tax
Credits equity allocations. Each one was selected through an intensely competitive
process; you should be extremely proud of thiS accomplishment
We believe that you best know the answer to some vital questions. What is good for
the communities you server; What type of new venture would create the most jobs
and help tile most people?
For Instance, the people who live and work here in this area know the answers to
those questions better than the federal government Although It IS the Capital. the
case with Washington is no different than any other locality In the country - the
people closest to the community, the people who know the neighborhoods and their
residents, those are the people who know best what the community needs.
The desire to encourage business investment and job creation In areas of need is
the idea behind the NMTC program. Its simple but vital purpose IS to stimulate
economic and community development and job creation In the nation's low-income
communities by attracting capital from the private sector.
The NMTC program is an important community and economic development tool
because it should stimulate job creation - and nothing is more important to our
economy, to individuals, and to families than the creation of new jobs.
Self-Help Ventures Fund (SHVF), for example, creates jobs by making commercial
loans to businesses, community facilities and commercial real estate projects
located in low-income communities. With its allocation, SHVF will continue to
expand its geographic lending territol'y and offer loan ploducts that prOVide better
terms and conditions, such as loans at Irlterest rates up to two percent lower than
SHVF's regular, risk adjusted loan rates.
Another example is the good that Wachovia Community Development Enterprises
(WCDE) will do by uSing the value of the NMTC to SUbsidize the cost of financing
real estate transactions by lowering the interest rate to qualified real estate and
non-real estate bUSinesses. They will use the capital to finance the construction,
rehabilitation and operation of office, retail, Industnal, mixed-use and community
service properties and businesses. And that's terrifiC news for the communities
lA/here that development will take place

ttp://WWW.treas ~ov/press/releases/js243~ htm

5/31/2005

S-2439: The Honorable John W. Snow Remarks on the New Markets Tax Credits Program

Page 2 of2

The infusion of capital that groups like SHVF and WCDE bnngs to local business IS
a recipe for success I look fOlward to seeing the results that NMTCs can bnng to
this wonderful city, and communities across the nation with the help of these tax
credits
The message the New Markets Tax Credit program sends IS "ThiS community IS
open for business." I am thrilled that llleSsaCJ8 IS gOing out In the city that houses
the nation's Capitol on thiS day.
Today's announcement is a step toward a bnghter future for thiS area, and for every
community that IS home to an NI\,1TC awardee.

ttp:llwww.treas.gov/press/releases/js243 9_htm

5/31/2005

5-2440: Treasury Designation Targets North Valle Cartel Associates, Businesses -Sixty-thre ... Page 1 of 2

FROM THE OFFICE OF PUBLIC AFFAIRS
T[l VIPW Of' prim tlw PDF content on tlJ,S page. download tiJe free

May 11.2005
JS-2440

Treasury Designation Targets North Valle
Cartel Associates, Businesses
-Sixty-three Individuals, Entities Named
Colombian Narcotics TraffickersThe U.S Department of the Treasury's Office of Foreign Assets Control (OFAC)
today added 32 companies and 31 individuals to its list of Specially Designated
Narcotics Traffickers (SDNTs). The companies named form the Grajales bUSiness
group, known in Colombia as Grupo Grajales Also deSignated today was the head
of Grupo Graja/es. Raul Alberto Grajales Lemos
"Today's deSignation dealt another serious blow to the financial network of the
North Valle cartel," said Robert Werner, Director of OFAC "By breaking the
financial backbone of groups like North Valle, we help thwart ttle ability of cartels to
traffic lethal narcotics in the United States and abroad."
"Actions like today's weaken the Viability of rogue groups and reduce their ability to
undermine the legitimate, democratic governments of countries in which they
operate, like Colombia. The deSignation process is a truly Important tool that
furthers the national security and foreign policy Jrlterests of the Untied States by
helping to promote stability abroad," Werner continued.
Raul Grajales Lemos, the head of Grupo Grajales. is the subject of a cocaine
trafficking indictment filed In the Southern District of Florida In addition, he has
been associated With various leaders of the North Valle drug cartel for many years,
including SDNT principal Individuals Ivan Urdinola Grajales (deceased 2002) and
Carlos Alberto Renteria Mantilla (aka Beto Renteria) The North Valle drug cartel
is the target of a Racketeer Influenced and Corrupt Organizations (RICO) Act
indictment filed in the District of Columt)ia.
Lorena Henao Montoya (SDNT since February 2000), the Widow of confessed
narcotics trafficker Ivan Urdlnola Grajales. was captured in Panama Jrl January
2004. Documents seized from Lorena Henao Montoya's properties and associates
demonstrate her financial links to prinCipal Grupo Graja/es companies, including
Grajales S A (fruit cultivation), Casa Grajales S A (winery), Frexco SA (fruit
processing and exports) and Hotel Los Vmedos (La Union, Valle, Colombia). Other
documents seized in Panama exposed Lorena Henao Montoya's bribery of
Colombian officials Illvolved III asset forfeiture cases against her. Stle pleaded
gUilty to these charges and is now servlrlg a prison sentence in Colombia.
Beto Renteria, a fugitive who was named as a leader of Ule North Valle drug cartel
In the RICO indictment. also has a fmanclal interest in Grupo Graja/es cOlllpanles
Beto Renteria's key flrlanclal front man, MaUriCIO Pardo Ojeda (SDNT since March
2005), IS involved in the holding alld ITlcHlagement companies that operate Casa
Estrella, a Colombian department store chain. In addition, the wife of Beto Renteria,
Marla Nury Caicedo Gallego (SDNT slrlce March 2005), IS Irlvolved in Sa/orne
Grajales y Cia. Ltda, a company named after the sister of Raul Grajales Lemos
The Casa Estrella department store challl was once known as "Casa Grajales" and
remains a part of Grupo Gralales.

ttp:J1www,treas ~ov/press/releases/js2440 htm

5/3112005

S-2440: Treasury Designation Targets North Valle Cartci Associates, Businesses -Sixty-thre... Page 2 of 2

SDNTs are sllbJect to the eCOl101111C SilllCIlOI1S Il11posed ')(1<1IIISI CololntJl,lI1 dru(J
cal-tels III Execullve Order 12S)7B Tod;IY'S <Jcllon freezes ,my ,Isseis found 111 the
Unlled Slates and protllblls till fm:lI1C1dl tlilef CCJfIlIIlCrCI:lllliHlsdcllorls hetween Ihe
deslgllees and any U S pel-SOil
The assets of a total of 1,21 S bllslness ,Hid IndlvlcJuals Irl ArlJha, Colombl,,), Costa
Rica, Ecuadol-, Parlama, Peru, Spdlrl, VdIlU:llu, Vellezu(]/a, IIle Ballamas, llle
British Virgrn Islands alld IIle Caym:m Islimds ,ne flOW blockuJ Ullder E 0 12978
Tile 460 SDNT businesses Include Clgrlcultural, clVlatlon, consllltmg, constructlOIl,
distribution, fillallclill, IIIV(~slllWI11, mcIlHJfdcturlll~J, 111llllng, offsllOre, pliarnlilceutlccrl,
real estate and service firms Tile SDNT lislirlcilides 18 kll1(JPIl1S frolll tlie Call,
NOI-th Valle ,1IKI Norlll Coasl drllS] carlels In Colorllbla, IrlclucJlrlg IlCwly Ilanwd Nortll
Valle c<lltel leaelel Ri1ul AllJelto GraJClles Lemos
For more irlforlTli111011 011 recelll Treasury actions ag<lIIlSllhe North Valle caliel,
please VISit tile folloWlllg links

Treasury Designation Targets North Valle Drug Cartel Leader

http://www.treas.gov/press/releases/js2324.htm
Treasury Designates North Valle Drug Cartel Traffickers

http://www.treas.gov/press/releases/js2031.htm
A complete list of the entities identified today can be found at:
http://www.treas.gov/offices/enforcementiofac/actions/.
REPORTS

•

A diagram of the individuals and businesses designated today

ttp:llwww.treas.sov/press/releases/jsL440.htm

5/31/2005

u.s.

Department of the Treasury
Office of Foreign Assets Control

North Valle Cartel Financial Network
May 2005

n
~

~ I,

c-----_ _ _ _ ,Business

Partners

& Wife

Specially Designated Narcotics Traffickers (SDNTs)

~
,

---

Ivan
URDINOLA GRAJALES
CC 94190353
(SDNT; Deceased 2002)

. '\.or

Pleaded Guilty to Bribery;
Serving Prison
Sentence in Colombia

a~~

Pana.,..

Grupo Grajales

J/
Companies linked to
Lorena HENAO MONTOYA

- Raul Alberto- ~-~ ~ ~
Carlos Alberto
GRAJALES LEMOS
/H
RENTERIA MANTILLA
/'
CC 6356044
Indicted in U.S.
/ a.k.a. Beto RENTERIA
President
(SDNT)
for Drug Trafficking
/
CC 6494208

Lorena
-_____
'
HENAO MONTOYA
?
'
CC 31981533
INDUSlRIAS
(SDNT)
AGROPECUARlA

1~~<VaI~:1
-

.....-

'.r·

__ -

Business _ _ _ _ __
---Partners

./
Companies linked to

Additional Grupo
Grajales Companies

Beto RENTERIA
Casa Estrella Management Companies

Principal Grupo Grajales Companies
--------------------------------------------~

CRETAS.A.
La Union, Valle, Colombia

NIT# 800019962-6

I
I

CASA GRAJAlES S.A.
La Union, Valle, Colombia

FREXC05.A,
La Union, Valle, Colombia

I
I

NIT# 891902138-1

NIT# 800183514-0

GRAJAlES S.A.
La Union, Valle, Colombia

HOTEL lOS VlNEDOS
La Union, Valle, Colombia

:
!

AlMACAES S.A.

ILOVIN

Bogota, Colombia
NIT# 830086515-1
HEBRON 5.A.
Tulua, Valle, ~ombia

NIT# 800107304-7

C.A.D, S.A.
Bogota, Colombia
NIT# 800173121-0

Bogota, Colombia
NIT# 800141304-0
RAMAL S.A.

Bogota, Colombia
NIT# 800142109-5

L----------------------I----------~~~~l~~!~--J
NIT# 891900090-8

IBADAN 1 TDA.
Tulua, Valle, Colombia

NIT# 800112215-1

INVERSIONES

AGUILA 1 TDA.
la Union, Valle, Colombia

GRAME lTDA.
La Union, Valle, COlombia

NIT# 891903843-0

NIT# 891903520-7

INVERSIONES lOS
POSSO LTDA, S.C.S.

INVERSIONES SANTA
MONICA 1 TDA.
la Union, Valle, COlombia

TRANSPORTES DEL
ESPIRITU SANTO 5.A.

NIT# 800042933-9

INreRNAlIONAl
FREEZE DRIED ~
Bogota, Colombia

50CIEDAD DE NEGOCIOS
SAN AGUSTIN l TDA.
La Union, Valle, Colombia

NIT# 800042932·1

I ______ --------------------------------------~

MACEDONIA LTDA.
La Union, Valle, Colombia

NIT# 800121860-9

AGUSTIN GRAlAlES
Y CIA. lTDA.
La Union, Valle,. Cotombia

NIT# 830132968-1

INPUSTlUAS DEL
ESPIRITU SANTO ~
Malambo, Atlanttco, Colombia

NIT# 821002015-8

ARMAGEDON S.A.
La Un;on, Valle, Colombia

NIT# 80011222.1-4

NIT# 800166941-0

La Union, Valle, COlombia
NIT# 821002436-5

INVERSIONESSANTA

NIT# 800091914-8

CEOlIA S.C.S,
La Union, Valle, Colombia
NIT# 891903795-5

PANAMERICANA LIDA.
Cali, Colombia

NIT# 821002971-4

"1
La Union, Valle, Colombia
NIT# 891903760-8

Casa Estrella Holding Companies

GADS,A.
la Union, Valle, Colombia

Grupo Grajales Holding Companies

JOSAFAT 5.A.
Tulua, Valle, Colombia

NIT# 800112211-4

BLACKMORE
INVESTMENTS A.V.V.
Oranjestad, Aruba

SAUM S.A,

La Union, Valle, Co.Jombia
NIT# 821001412-4

C.R. No. 12128.0

Additional Companies

AGRONILO SA
Toro, Valle, Colombia

SALOME GRAJAlES Y CIA, 1TDA,
Bogota, Colombta

NIT# 800099699·5

NIT# 800141337·3

S-2441: Treasury Designates Jemaah Islamiyah's Emir, Top Bomb Maker and Military Cornman...

Page 1 of 4

FROM THE OFFICE OF PUBLIC AFFAIRS
May 12, 2005
JS-2441
Treasury Designates Jemaah Islamiyah's Emir, Top Bomb
Maker and Military Commander
The US Department of the Treasury today designated three Individuals for theil
role In Jemaah Islamiyah (JI), a terrorist group In Southeast Asia with links to al
Oaida
"JI, as a terrorist franchise of al Oaida, has demonstrated Its wanton desire to kill
innocent civilians of every race, religion and creed and continues to pose a real
threat to security in Southeast ASia We will continue to work with our COlleagues In
the region and the International community to identify and Isolate key members of
JI, like those we have deSignated today," said Juan Zarate, Treasury's Assistant
Secretary for Terrorist FinanCing and Financial Crimes
The Treasury's Office of Terrorism and Financial Intelligence (TFI) utilizes ItS
financial tools, including the Office of Foreign Assets Control's (OFAC) deSignation
powers, to safeguard the finanCial system through the financial Isolation of rogue
actors.
Abu Rusdan, Zulkarnaen and Joko Pltono were deSignated under Executive Order
13224, President Bush's Order aimed at freezing the assets of terrorists and their
support networks. The U.S. IS submitting the individuals to the United Nations 1267
Committee, which Will conSider adding them to the consolidated list of terrorists tied
to al Oaida, UBL arld the Tallban.
JI's stated goal IS to create an Islamic state comprised of MalaYSia, Singapore,
Indonesia and the southern Philippines. Members of JI have been trained, funded
and directed by al Oalda leadership to pursue al Oaida's agenda across trle region
The U.S Government possesses credible evidence that these indiViduals are key
officials in JI and support and/or commit acts of terrorism on behalf of JI and JI's
support for al Oaida Identifying Information
ABU RUSDAN
AKAs: Abu Thoriq
Rusdjan
Rusjan
Rusydan
Thoriquddin
Thoriqulddin
Thorlquldln
Toriquddin
DOB: August 16. 1960
POB Kudus, Central Java, IndoneSia
Information available to the U.S. Government shows Abu Rusdan replaced Abu
Bakar Bashlr as the "Emir" or leader of JI after Bashir's arrest As Emir, Rusdall
chaired JI leadership meetings and organized the group's affairs.

ttp:IIWWW.treas...gov/press/releases/js244: htm

5/31/2005

S-2441: Treasury Designates Jemaah Islamiyah's Emir, Top Bomb Maker and Military Cornman...

Page 2 of 4

In February 2004, Rusdan was convicted by an Indonesian court of hellJlrlg hide
Bali bomber Huda bill Abdul Haq Aka Mukhlas (SDGT) and was sentenced to three
and a half years in Jail

ZULKARNAEN
AKAs: Zulkarnan
Zulkamain
Zulkamll7
Arif Sunarso
Aris SUl1Jarsono
Aris Sunarso
Ustad Oaud Zulkamaen
Murshid
DOB: 1963
POB: Gebang Village, Masaran, Sragcn, Central Java, IndoneSia
Nationality Indonesli:ln
According to information available to the US Government, Zulkarnaen IS a
member of the JI central command and the head of its military section As military
commander, Zulkarnaen is authorized to launch terrorist attacks and IS responsible
for Intelligence operations and military training. Zulkarnaen was one of the first JI
members to go to Afghanistan and reportedly spent a decade there training other JI
members.

JOKO PITONO

AKAs: Joko Pltoyo
Joko PlI7tono
Oulmatin
Oul Matin
Abdul Manin
Abdul Matin
Amar Umar
Amar Usman
Anar Usman
Ojoko Supriyanto
Jak imron
Muktamar
Novananto
Topel
DOB: June 16, 1970
AL T OOB. June 6, 1970
POB: Petarukan Village, Pemalang, Central Java, Indonesia
Nationality IndoneSian

Information available to the U.S. Government shows that Joko Pitono is a top
bomb-maker for JI. Notably Pltono was Involved in making bombs for the
Christmas Eve 2000 attacks on churches In IndoneSia, which killed 19 people and
injured approximately 120. He was also involved in the August 2000 bombing of the
Philippine ambassador's house in Jakarta, which killed two people and seriously
Injured the Philippine ambassador.
Prior to the Ball bombings of 2002. a meeting to plan the attack was held at Pltono's
house in Solo, IndoneSia Pltono IS also suspected of being Involved In the J .W.
Marriott bombing in August 2003. Along With JI's Azaharl bin Husln (SDGT),
Noordin Mohamed Top (SDGT) and Zulkarnaen, Pltono is olle of tile most wanted
men In Southeast Asia.

Background on Jemaah Islamiyah (JI)

ttp:IIWWw.treas.gov/press/releases/js244 t htm

5/31/2005

S-2441: Treasury Designates Jemaah IsIamiyah's Emir, Top Bomb Maker and Military Comman...

Page 3 of 4

In December 2001, Singapore authorities arrested thirteen JI memhers, eilJht of
whom had trained In al Oaida c<=Imps ill Afghanistan, who planned to bomb the U S
and Israeli embassies, British and Australian diplomatiC bUildings and U Sand
Singapore defense targets In Singapore Members of the group had conducted
videotaped surveillance of potentl<=ll largets and had already acqUired explOSives In
preparation for the attacks A copy of the videotape made by members of ttle group
and shOWing intended targets in Singapore was found In Afghanistan In the
wreckage of an al Oalda leader's house ttlat saille month.
JI members carried out the ncar-slilluitaneous bombings In Ball, IndoneSia that
killed 202 people on OctoiJer 12, 2002 Two of the three blasts occurred in a busy
nightclub in a popular tourist district, allCi one occurred near ttle U S. consular
agency Citizens from over 20 countries were killed Irl the bombings Australia
suffered the greatest number of casualties with 88 Australian nationals killed.
JI has been blailled for the SUICide bombing of the J W Mamott hotel In Jakarta,
Indonesia on August 5,2003 that killed 12 people The attack took place during the
busy lunch hour In Jakarta's central business distrrct.
JI is also believed to be responsible for the September 9, 2004 suiCide bomb attack
outside the Australian embassy In Jakarta that killed nine pcople and Injured 182.
The United States named JI a SpeCially Designated Global Terrorist (SDGT) and a
Foreign Terrorrst Organization (FTO) on October 23,2002. Two days later, JI was
added to the United Nations 1267 Committee's consolidated list of terrorists tied to
Usama bin Laden (UBL), al Oaida or the Taliban. Notably, 36 countries supported
the UN listing of JI, the single largest deSignation action to occur since the attacks
of September 11, 2001
These JI individuals were deSignated today under Executive Order 13224, chiefly
pursuant to paragraphs (d)(l) and (d)(li) based on a determinatron that they assist
in, sponsor or proVide financial, material, or technological support for, or finanCial or
other services to or in support of, or are otherwise associated With, persons listed
as subject to E.O. 13224. These indiViduals also meet the standard for Inclusion In
the UN 1267 Sanctions Committee's consolidated list because of the support
provided to UBL, al Oalda or the Tallban
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 to them
Publicly IdentifYing these supporters of terrorism is a critical part of the irlternatlonal
campaign to counter terrorism. Additionally, other organizations and individuals are
put on notice that they are prohlbltec! 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 telrorist 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 SeClJrity Council
Resolutions.
For more information on Treasury actions against JI, please VISit the following links

Designation of Two Leaders of Jemaah /s/amiyah:
http://www.treas.gov/presslreleasesfkd3796.htm?IMAGE .X=24\& IMAG E .Y= 15

ttp:IIWWW.treas gov/press/releases/js244 j htm

5/3112005

S-2441: Treasury Designates Jemaah Islamiyah's Emir, Top Bomb Maker and Military Cornman...

Page 4 of 4

Snow Announces Designation of 10 Jemaah /s/amiyah (J/) Terrorists:
http://www.treas.gov/press/releases/js700.htm?IMAGE.X:::24 \&1 MAGE. Y::: 15

ttp://www.trea~.gov/press/releases/JsLLJ2ft.htm

5/3112005

5-2442: Deputy Assistant Treasury Secretary Iannicola Encourages Credit Card Lenders to Support Fina... Page I of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
May 12,2005
js-2442

Deputy Assistant Treasury Secretary lannicola Encourages Credit Card
Lenders to Support Financial Education at Industry Meeting in Nevada
Treasury's Deputy Assistant Secretary for Financial Education, Dan lannlcola, Jr.
today spoke to more than 40 Credit Card Bank Compliance Association (CCBA)
members about the Importance of Improving financial education across the country,
and about how credit card Issuers can work With the federal government to achieve
common obJeclives In this area
"The credit card Industry has the expertise and the distribution channels to make a
strong and positive impact on national levels of finanCial literacy," said
lannicola. "Some credit card issuers have used their unique positions to advance
finanCial education, while other issuers are Just beginning to recognize the need to
educate customers and others on finanCial tOPICS."
lannlcola continued. "The Department of Treasury stands ready to work With any
credit card company that wants to help Americans learn more about managing their
money"
Today's event was hosted by the CCBA. The CCBA is a non-profit educational
association comprised of individuals who work for banks engaged primarily in
consumer credit card lending The primary aclivity of the CCBCA is to conduct two
educational seminars per year focusillg on legal. regulatory and compliance issues
pertaining to consumer credit card lending
The Department of the Treasury IS a leader In promoting finanCial education
Treasury established the Office of Financial Education ("Office") in May 2002 The
Office works to promote access to the fmanclal educalion 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:

ttp;//\VWw,treas .gov/press/releases/js2442 htm

5/3112005

rS-2443 - Treasury International Capital Data for March

Page I of2

FROM THE OFFICE OF PUBLIC AFFAIRS
We recommend printing this release using the PDF file below.
,
To view or print the PDF content on this page, download the free Adobe®Acrob~t® Readerfl!J..

May 16, 2005
JS-2443

Treasury International Capital Data for March
Treasury International Capital (TIC) data for Marcil are released today and posted on tile U S Treasury web site (www.treas.gov/tic). TI
WhlCll will report on data for April. IS scheduled for June 15,2005

Long-Term Domestic Securities
Gross purchases of domestic securities by foreigners were $1,531 0 billion In March, exceedlllg gross sales of domestic seCUrities by fe
billion dUring tile same month
Foreign purchases of domestic securities I'eached $60 1 billion on a net basIs In Marcil. relative to $98.1 billion durlllg the previous mar
reached $745 billion In March Net private purchases of Treasury Bonds and Notes Increased to $429 billion from $31 2 billion the pre.
private purchases of Government Agency Bonds were $65 billion. down from $109 billion the prevIous month Net private purchases a
$234 billion. down from $299 billion the previous month Net private purchases of Equities declined to $1.7 billion from $7 4 billion.
OffiCial net purchases of US seCUrities were minus $144 billion in March, relative to plus $18.7 billion III February OffiCial net purchas
and Notes of minus $15.0 bllllOll accounted for the bulk of offiCial outflows In MarCil, down from a positive $11.3 billion Inflow the previol

Long-Term Foreign Securities
Gross purchases of foreign seCUrities owned by U S reSidents were $337 2 billion In March, relative to gross sales of foreign securities

$351.6 billion during the same month
Gross sales of foreign securities to US reSidents exceeded purchases by $14 4 billion. highlighting a net U S acquiSition of $144 billie
and IIlslgnlficant net US purchases of Foreign Bonds

Net Long-Term Securities Flows
Net foreign purchases of both domestic and foreign long-term securities from US reSidents were $45 7 billion In March compared With
February Net foreign purchases of long-term securities were $8004 billion In tile twelve months througll March 2005 as compared to $
twelve months through March 2004
The full data set, Including adjustments for repayments of prinCipal on asset-backed securrties, as well as historical series. CCln be fOLlIl(
http://www.treas.gov/tic/.

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 seasonal!y adjusted)
2003

Itto:llwww.trea£.gov/press/releases/js2442- htm

2004

12 Months Through
Mar-04 Mar-OS

Dec-04

Jan-O.

5/31/2005

JS-2443 - Treasury International Capital Data for March

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

Page 2 of2

14,3~3,6 15,270,2
13,644,9 14,366,2

15,009.7 15,772.6
14.177.9 14,845.9

1,318.5
1,235.1

1,305 ..
1,213.

738.8

904.0

831.8

926.7

83.5

9t.:

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

595.7
163.2
135.1
261.5
35.9

669.9
150.9
206.1
286.5
20.4

618.0
191.5
132.2
253.5
40.7

764.0
203.0
208.2
303.0
49.8

73.2
1.4
25.6
39.2
7.0

23.
19.'
17 ..
17.1

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

143.1
113.5
24.3
5.6
-0.3

234.2
201.1
20.3
11.4
1.4

213.8
183.0
25.3
6.3
-0.8

162.7
126.8
22.1
12.4
1.4

10.3
7.0
1.0
1.6
0.6

14.:
7.1

2,R93.8
2,959.7

3,119.8
3,228.6

3,134.1
3,201.4

3,116.9
3,243.2

262.2
282.7

250.'
250.

16 Foreign Secu rities Purchased, net (line 14 less IIlle

-65.9

-108.9

-67.3

-126.3

-20.5

0.1

17
18

18.9
-84.8

-25.5
-83.4

15.3
-82.6

-21.7
-104.5

-6.4
-14.1

5.1
-5.1

672.9

795.2

764.5

800.4

63.0

92.-

4
5
6
7

8
9

10
II
12
13

14 Gross Purchases of Foreign Securities
15 Gross Sales of Foreign Securities

Foreign Bonds Purchased, net
Foreign Equities Purchased, net

n
13

77.

6.
L
-0.1

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

Source: U.S. Department of the Treasury

REPORTS

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

ttp:IIWWw.trea~.gov/press/releases/is2443.htm

5/3112005

DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
May 16,2005
EMBARGOED UNTIL 9:00 AM

Contact:

Tony Fratto
202-622-2910

Treasury International Capital Data for March
Treasury International Capital (TIC) data for March are released today and posted on the U.S.
Treasury web site (www.treas.gov/tic). The next release date, which will report on data for
April, is scheduled for June 15,2005.

Long-Term Domestic Securities
Gross purchases of domestic securities by foreigners were $1,531.0 billion in March, exceeding
gross sales of domestic securities by foreigners of $1,470.9 billion during the same month.
Foreign purchases of domestic securities reached $60.1 billion on a net basis in March, relative
to $98.1 billion during the previous month. Private net flows reached 574.5 billion in March.
Net private purchases of Treasury Bonds and Notes increased to $42.9 billion from $31.2 billion
the preceding month. Net private purchases ofGovemment Agency Bonds were $6.5 billion,
down from $10.9 billion thc previous month. Net private purchases of Corporate Bonds were
$23.4 billion, down from $29.9 billion the previous month. Net private purchases of Equities
declined to $1.7 billion from $7.4 billion.
Official net purchases of U.S. securities were minus $14.4 billion in March, relative to plus $18.7
billion in February. Official net purchases of Treasury Bonds and Notes of minus $15.0 billion
accounted for the bulk of official outflows in March, down from a positive $11.3 billion inflow
the previous month.

Long-Term Foreign Securities
Gross purchases of foreign securities owned by U.S. residents were $337.2 billion in March,
relative to gross sales of foreign securities to U.S. residents of $351.6 billion during the same
month.

Gross sales of foreign securities to U.S. residents exceeded purchases by $14.4 billion,
highlighting a net U.S. acquisition of $14.4 billion in Foreign Equities and insignificant net U.S.
purchases of Foreign Bonds.

Net Long-Term Securities Flows
Net foreign purchases of both domestic and foreign long-term securities from U.S. residents
were $45.7 billion in March compared with $84.1 billion in February. Net foreign purchases of
long-teml securities were $800.4 billion in the twelve months through March 2005 as compared
to S764.5 billion during the twelve months through March 2004.
The full data set, including adj ustments for repayments of principal on asset-backed securities, as
well as historical series, can be found on the TIC web site, http://www.treas.gov/tic/.

Foreigners' Transactions in Long-Term Securities with U.S. Residents
(Billions of dollars, not seasonally adjusted)
2003
I
2
3
4
5
6
7

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

2004

14,383.6 15.270.2
13.644.9 14,366.2
738.8
904.0

12 Months Throllgh
Mar-OS
Mar-04

Dec-04

Jan-OS

Feb-OS

Mar-05

15.009.7
14.177.9
831.8

15.772.6
14.R459
926.7

1.318.5
1.215.1
83.5

1.305.3
1.213.5
91.8

1.376.4
1.278.4
98.1

1.531 0
1.470.9
60.1

595.7
163.2
135.1
261.5
35.9

669.9
150.9
206.1
286.S
26.4

618.0
191.5
1322
253.5
40.7

764.0
203.0
208.2
303.0
49.8

73.2
14
25.6
39.2
7.0

77.2
23.1
19.9
17.3
17.0

79.4
31.2
10.9
29.9
7.4

74.5
42.9
6.5

Private, net 12
Treasury Bonds & Notes. net
Gov't Agenc} Bonds. nct
Corporate Bonds. net
Equities. net

9
10
II
12
13

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

143.1
113.5
24.3
5.6
-0.3

234.2
201.1
20.3

162.7
126.8
22.1
12.4
1.4

10.3
7.0
1.0
1.6
06

14.5
7.6
6.1
1..1
-0.6

\8.7
11.3
5.2
2. I
0.1

-14.4
-15.0

\.4

213.8
183.0
25.3
6.3
-0.8

2.893.8
2.959.7
-65.9

3.1 19.8
3.228.6
-108.9

3.134.1
3.20 1.4
-67.3

3.116.9
3,243.2
-126.3

26~.2

282.7
-20.5

250.7
250.1
0.6

281.2
295.2
-14.0

337.2
351 6
·14,4

18.9

-84.8

-25.5
·83.4

15.3
-82.6

-21.7
-104.5

-6.4
-14.1

5.6
-50

1.4
- 15.3

0.0
-144

672.9

795.2

764.5

800.4

63.0

92.4

84.1

45.7

14
IS
16
17
18
19
/I
!7
13

Gross Purchases of Foreign Securities
Gross Sales of Foreign Securities
Foreign Securities Purchased, net (line 14 less line 15) 13
Fureign Bonds Purchased. net
Foreign Equities Purchased, net
Net Lone-Term Flows (line 3 plus line 16)

11.4

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

Source: U S. Department of the Treasury

234
1.7

1.0

-0.4
0.0

JS-2444: Deputy Assistant Secretary D. Scott Parsons Remarks before the Identity Management in F... Page 1 of 3

FROM THE OFFICE OF PUBLIC AFFAIRS
May 16,2005
JS-2444

Deputy Assistant Secretary D. Scott Parsons
Remarks before the Identity Management in Financial
Services Summit
Scottsdale, AZ
Beating Identity Crime: How the Public and Private
Sectors are
Working Together to Help Consumers and Put Fraudsters
Behind Bars
Good morning, ladles and gentlemen It is a privilege to be here
President Bush aptly stated, "The crime of identity theft undermines the basic trust
on which our economy depends." I know that all of you understand that trust is at
the heali of our finanCial system
This morning I want to talk with you about the risks of identity theft; outline the
actions of the public and private sectors; and finally, challenge each of you to
accelerate your efforts to protect personal information.
Identity theft is fraud, plain and simple But It's fraud in an often sophisticated
fashion With a vast web of victims. According to the Federal Trade Commission, In
2003 about 10 million Americans had their identities stolen by criminals. Secretary
Snow has stated that "It IS Important to realize that such Crimes exact a heavy toll
on our economy Every such crime weighs on our entire system of credit, raising
the cost of dOing business and subtly but surely impeding economic growth." The
ability to collect, use, and disclose reliable information securely IS essenlial to the
effectiveness of our financial system
For example, record numbers of Americans have bought or refinanced a home in
the past five years. Securing a mortgage at a favorable interest rate likely required
the lender--many of you In the audience today--to check the credit rating. The rating
was based in part on information in credit reports. Hopefully, that was a relatively
quick and painless process for the consumer. But we know that the mortgage
lending process would cost more, would take longer, and would be more difficult if
that underlying information about our credit worthiness were not reliable and
accessible.
Another risk of Identity theft is the potential "chilling effect" on e-commerce Surveys
suggest that some consumers are wary of buying online because they fear idenlity
theft. When fraud discourages Americans from taking advarltage of one of the
greatest Innovations of our age, we all suffer. Online banking. for example, not only
enables efficiency and cost-savings for financial Institutions, these electronic
transactions increase consumers chOice and enhance competition In the Industry.
An erosion of trust can threaten the effectiveness of our financial system
Collectively, we understand the COilcern of our Citizens, customers, and business
partners. We must communicate, though, that millions and millions of financial
transactions are processed dally Without inCident. Americans, as well as our trading
partners around the globe, should know that our financial system is the most
reliable in the world.

lttp://WWW.treas.gov/press/releases/js2444.htm

5/31/2005

rS-2444: Deputy Assistant Secretary D. Scott Parsons Remarks before the Identity Management in F... Page 2 of 3

There IS no single solution to this challenge Nor IS there a "one size fits i:lll"
solution. Fighting Identity theft reqlllres i:l cooperative effort among all of the
stakeholders. There IS an army of protectors In the public and private sectors
Businesses large and small, technology vendors, financial institutions, government
agencies and consumers all playa vital role In winning the fight agalilst this 21 st
century form of fraud.
PreSident Bush recognl7ed the threat of identity theft early In his first term and has
displayed a record of leadership In combating It. The PreSident signed the Fair and
Accurate Credit Transactions Act, known as the FACT Act in December of 2003
For consumers, it prOVides preventive resources and also help to "clean up" your
record If you become a victim of identify theft
By September 1 of this year,
report from each of the three
request system You will find
www.annualcreditreport.com
to catch identity theft early.

anyone may obtalll a free copy of his or her credit
nationwide credit bureaus by contactlllg a centralized
the Information needed to do thiS at
ReVieWing one's credit record is one of the best ways

Every American can put fraud alerts on his or her credit flies With the major credit
bureaus If you believe lilat you may be a Victim of identity theft or become one.
Victims of Identity theft can get additional free credit repons And witll proper
documentation, consumers can stop financial institutions and credit bureaus from
passing along IIlformation resultlllg from an Identity theft InCident
The PreSident also Signed into law the Identity Theft Penalty Enhancement Act In
2004. ThiS statute cl'eated a new crime of "aggravated Identity theft" and Increased
federal criminal penalties for thiS crime. Identity thieves can be sentenced for an
underlying crime, like mall fraud, and face an additional, consecutive sentence for
identity theft. This encourages prosecutors to pursue the Identity crime as well as
the underlying or related ones
Recently, the federal banklllg regUlatory agenCies issued gUidance about the
response plans that banks need to combat unauthorized access to or misuse of
customer information. The response plans must address when customers will be
notified that sensitive information about them has been breached
As you know, banks are highly regulated institutions when it comes to the
collection, use, and disclosure of consumer data. The Gramm-Leach-Bliley Act
governs the disclosure of consumer Information to rlon-affiliated third panies. It also
requires policies and procedures for the security of customer information, and
prohibits obtaining information from financial institutions under false pretenses.
The Fair Credit Reportlllg Act (FCRA) can have an Impact on financial institutions'
disclosure of information to affiliated entities. And the FACT Act helps consumers
enhance the accuracy of information about ttlerTl i:lnd restnct Its disclosure.
While regulation influences finanCial Institutions' responses to Identity thefl, the
actions freely chosen by finarlCial institutions are Significant We appreciate the
financial sector's effort and IIlvestment to preserve confidence In the security of all
financial transactions, onlille and off.
Today you would be hard pressed to find a financial Institution that does not offer ItS
customers information on how to prevent Identity theft and what to do about It The
financial sector trains employees to protect the security of customer Information to
assist customers who become victims
Members of the Financial Services Roundtable and others developed the Identity
Ttleft ASSistance Center (ITAC) Supported by about 50 of the largest finanCial
services companies, ITAC offers Individualized assistance to customers of the
member Institutions and to Victims who filld that accounts have been opened at
those institutions due to an identity theft crime.

Ittp://WWw.trea~.gov/press/releases/js2444 htm

5/3112005

rS-2444: Deputy Assistant Secretary D. Scott Parsons Remarks before the Identity Management in F... Page 3 of 3

We have also seen an explOSion of promising technological innovation. evident by
the exhibits on the latest and greatest solutions on display tlere today. We applaud
the oppmtunlty for a market based solution versus a more heavily regulated
environment. Anti-phlshing alld antl-spyware software. software updates. and
firewalls all eXist to help spot the crime. spot the origin of the Internet scam. and
slow the amount of potentially dall~lerous spam email that gets through to users
Fmancial II)stitutlons also have developed sophisticated automated anti-fraud
technologies that can spot unusual or risky trallsactlons and stop them qUickly
From a legal perspective. there are federal criminal and CIVil statutes for
prosecutlnSI Identity thieves. Including cmnlnal penalties for computer. wire. and
mall fraud. as well as anti-spam penalties States have anti-fraud statutes as well.
and some states have specIfic identity theft laws
Law enforcement IS committed to stopping 10 thieves and capturing those who
commit crimes. Networks of anti-fraud and Identity theft task forces bring federal,
state, and local enforcemerlt together to tackle some of the largest or most complex
cases
Identity theft knows no borders We've become a "connected world" and benefited
enormously from the Internet age. But unparalleled access has spawned previously
unimaginable threats. I've seen cases of crooks from one country uSing computers
from a series of other countries to create an elUSive criminal organization that is
difficult to find and then prosecute across geographic boundaries Fightlllg cybercrime In the global theater IS a daily challenge for law enforcement.
Some of you here today are bankers. Others are corporate security experts or
technology innovators. But we are all consumers And we are empowered to help
protect ourselves. Understanding the Crime, acting to protect your Identity. and
knowlllg what to do qUickly if you become a vrcllm is the most Critical defense.
Informed, proactive consumers will enable us to win the war 011 Identity theft.
At the Treasury. we are passionate about fighting fraud From partnership with the
private sector to direct consumer education - such as the upcoming release of a
OVO on how consumers can protect themselves from identity theft - Treasury is
committed to eqUipping our country to protect personal Information. And each of
you is at the center of the action. We need innovative Ideas, game-changing
technology and a cooperative spirit. I challenge you today to continue to work
cooperatively to assure the confidence that fuels our economic engine.
Thank you all for your attention.

ttp:llwww.treasgov/press/releasesl]s2444.htm

5/31/2005

rS-2445: Deputy Assistant Secretary Iannicola Teaches Personal Financc Skills to Middle School St... Page I of I

FROM THE OFFICE OF PUBLIC AFFAIRS
May 13, 2005
JS-2445

Deputy Assistant Secretary lannicola Teaches Personal
Finance Skills to Middle School Students in Las Vegas
Treasury's Deputy Assistant Secretary for FinanCial Education Dan lannlcola, Jr
today spoke to Garside Middle School students about the importance of planning
for their financial futures He taught them a personal finance lesson, which focused
on savings, controlling spending and credit management
lannicola praised the classroom teacher for her efforts to integrate finanCial
education lessons into her course
"Ms. Bautista understands the Importance of flTlancial education for young people
and she's dOing something about it," said lannJcola. "By Integrating flflancial
concepts into her math lessons, she has found a way to teach her students what
they need to know In both disciplines Without havlflg to choose between the two."
The Department of the Treasury IS a leader In promoting finanCial education.
Treasury established ttle Office of FinanCial Education In May of 2002. The Office
works to promote access to the flflancial education tools that can help all Americans
make wiser chOices In all areas of personal finanCial management, with a special
emphaSIS on savtng, 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
Educallon VISit

Ittp:llwww.treas.gov/press/releases/js2445.htm

5/3112005

ill
(J)

~
(\J
(\J

~
(\J

WASHINGTON, DC

20220

FEDERAL FINANCING BANK

Brian D. Jackson, Chief Financial Officer, Federal Financing
Bank (FFB) announced the following activity for the month of
April 2005.
FFB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $27.5 billion on April 30, 2005,
posting an increase of $63.2 million from the level on March 31,
2005.
This net change was the result of a decrease in holdings
of agency assets of $65.0 million and an increase in net holdings
of government-guaranteed loans of $128.2 million.
The FFB made
31 disbursements and received 12 prepayments during the month of
April.
The FFB also reset the interest rate for one loan
guaranteed by the Department of Education.
Attached to this release are tables presenting FFB April
loan activity and FFB holdings as of April 30, 2005.
JS-2446

'<j"
(\J
(\J
(\J

<fl

(\J

i£

cl:

May 3 J, 2005

Lfl

Page 2
FEDERAL FINANCING BANK
APRIL 2005 ACTIVITY
Date

Amount
of Advance

Final
Maturity

4/06
4/12
4/12
4/14

$2,369,707.62
$8,925.52
$158,875.11
$98,122.98

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

4/01

$9,398,445.90

10/03/05

4/01
4/04
4/04
4/04
4/06
4/08
4/11
4/13
4/13
4/13
4/13
4/14
4/14
4/15
4/15
4/15
4/18
4/18
4/18
4/18
4/18
4/21
4/22
4/25
4/26
4/26
4/29

$840,000.00
$400,000.00
$594,000.00
$3,000,000.00
$5,114,192.39
$2,700,000.00
$1,965,000.00
$19,700,000.00
$24,869,000.00
$34,415,000.00
$275,000.00
$3,974,000.00
$2,000,000.00
$1,000,000.00
$894,021.00
$1,750,000.00
$864,000.00
$2,073,000.00
$5,900,000.00
$3,628,000.00
$1,000,000.00
$621,000.00
$1,413,000.00
$5,000,000.00
$400,000.00
$4,950,000.00
$1,398,000.00

1/02/35
1/02/35
12/31/29
6/30/10
12/31/13
12/31/36
1/03/34
1/03/33
12/31/20
12/31/35
12/31/36
12/31/37
12/31/37
1/03/39
3/31/10
1/03/39
1/03/28
1/03/28
1/03/28
1/03/33
1/03/39
12/31/36
12/31/20
12/31/30
12/31/19
12/31/37
12/31/35

Borrower

Interest
Rate

GOVERNMENT-GUARANTEED LOANS
GENERAL SERVICES ADMINISTRATION
San Francisco Bldg Lease
Foley Services Contract
San Francisco OB
San Francisco OB

3.017%
4.737%
2.967%
2.972%

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

DEPARTMENT OF EDUCATION
*Shaw University

3.135% S/A

RURAL UTILITIES SERVICE
washington Electric #655
Brown County Elec. #687
Missoula Elec. #688
Navopache Electric #2021
Golden West Tele. Coop. #2197
Kankakee Valley Elec. #857
South Miss. Elec. #2109
East Texas Elec Coop Inc #2205
East Texas Elec Coop Inc #2206
East Texas Elec Coop Inc #2207
Niobrara Electric Assoc. #860
North Georgia Elec. #2135
Red River Valley Elec. #2095
Cental Virginia Elec. #2126
Endless Mtns. Wireless #2103
High West Energy #2102
Cornbelt Power #565
Cornbelt Power #565
Cornbelt Power #565
Cornbelt Power #2054
Tipmont Rural Electric #2150
Tri-County Electric #876
Scott County Telephone #2175
Volunteer Electric Coop. #803
Buggs Island Telephone #2040
Mountain View Electric #2110
Shelby Energy Coop. #758

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

4.733%
4.696%
4.677%
4.111%
4.173%
4.747%
4.735%
4.635%
4.562%
4.634%
4.588%
4.648%
4.648%
4.670%
4.231%
4.670%
4.561%
4.561%
4.561%
4.505%
4.595%
4.525%
4.321%
4.515%
4.222%
4.510%
4.463%

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

Page 3
FEDERAL FINANCING BANK HOLDINGS
(in millions of dollars)

Program

rrril 30. 2005

Agency Debt:
U.S. Postal Service

March 31. 2005

Monthly
Net Change
4/1/05- 4/30/05

Fiscal Year
Net Change
10/1/04- 4130/05

Subtotal*

$0.0
$0.0

-$1 800.0
-$1.800.0

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

$20.0
$230.0
$4.270.2
$4.520.2

$85.0
$230.0
$4.270.2
$4.585.2

-$65.0
$0.0
SO.O
-$65.0

-$180.0
-$450.0
$0.0
-$630.0

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

$1. 352.0
$119.3
$0.2
$971.9
$2.141. 3
$6.1
$487.7
$17.823.8
$45.5
$2.8
$22.950.7

$1.354.7
$119.5
$0.2
$971.9
$2.139.4
$6.1
$487.7
$17.693.0
$47.1
$2.8
$22.822.5

-$2.7
-$0.2
$0.0
$0.0
$1.9
$0.0
$0.0
$130.7
-$1. 5
$0.0
$128.2

-$112.9
$1.3
-$0.2
-$82.9
$0.0
- $1. 5
-$10.9
$862.8
-$11. 0
-$0.1
$644.6

$27.407.7

$63.2

-$1.785.4

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

$27.471. a

;-2447: Testimony of Robert Werner, Director Office of Foreign Assets Control U.S. Departm... Page 1 of 5

FROM THE OFFICE OF PUBLIC AFFAIRS
May 17,2005
JS-2447

Testimony of Robert Werner, Director
Office of Foreign Assets Control
U.S. Department of the Treasury
Before The Permanent Subcommittee on Investigations
Committee on Homeland Security and Governmental
Affairs
Chairman Coleman. Rankmg Member Levin and other dlstmgulshed members of
the Subcommittee, I appreciate the opportunity to discuss the responsibilities of the
Office of Foreign Assets Control or OFAC, as these pertain to the United Nations
"Oil-for-Food" program and the Iraqi sanctions.
My testimony tOday Will center on the Committee's interest In OFAC's role regarding
the administration, compliance and oversight of US. persons authorized to
participate in the "Oil-far-Food" program as well as those who obtained licenses to
engage in transactions related to travel to, and Within, Iraq
Before turning to a diSCUSSion of these responsibilities and processes, however, I
would like to provide you With a general overview of OFAC's miSSion and
JUrisdictional authorities.

Mission and Jurisdiction
Since becoming Director of OFAC in October of 2004, I have learned first hand that
It IS an exceptional agency of experienced, knowledgeable profeSSionals dedicated
to carrying out the complex miSSion of administering and enforCing economiC
sanctions programs based on US. foreign policy and national security goals With a
workforce of 140 authorized full-time staff.
OFAC currently administers 29 economic sanctions programs against foreign
governments. entitles and indiViduals. Though eight of these 29 programs have
been terminated, they still require residual administrative and enforcement
activities.
OFAC's authority to impose controls on transactions and to freeze foreign assets is
derived from the President's constitutional and statutory wartime, and national
emergency powers. In performing ItS mission, OFAC relies prinCipally on
delegations of authority made pursuant to the President's broad powers under the
Trading with the Enemy Act ("TWEA"), International Emergency Economic Powers
Act ("IE EPA"), and the United Nallolls Pal71cipation Act ("UNPA") to prohibit or
regulate commercial or finanCial transactions involving specific foreign countnes,
entities, or individuals. In administering and enforCing economic sanctions
programs, OFAC maintains a close working relationship with other federal
departments and agencies to ensure that these programs are implemented properly
and enforced effectively. OFAC works directly With the Department of State
("State"): the Department of Commerce ("Commerce"): the Department of Justice,
the Federal Bureau of Investigation (FBI), the Department of Homeland Security's
U.S. Customs and Border Protection (CBP) and U.S Immigration and Customs
Enforcement (ICE): bank regulatory agencies: and other law enforcement agencies
to fulfill our mission.

ttp://WWW.trea~..-gov/press/releases/Js2447.htm

5/3112005

,.2447: Testimony of Robert Werner, Director Office of Foreign Assets Control U.S. Departm... Page 2 of 5

I would also note. Mr Chairman, that all of the programs we administer reqUire that
we work closely with the broad range of Industries potentially affected by these
programs. We are expanding and Improving our communication with our diverse
constituencies ranging from ttle financial and services sectors to manufacturing and
agricultural industries. The cooperation we receive from U.S corporations In
complying With sanctions is generally exceptional

UNllraq Sanctions Overview and Implementation
Following the Iraq Invasion of Kuwait on August 2, 1990, the UN Security Council
issued UNSC Resolution 661 on August 6,1990, imposlllg sweeping economic
sanctions against Iraq and providing protective measures With I'espect to Kuwait.
Resolution 661 also established a committee consisting of all members of the UN
Security Council to monitor and supervise implementation of the sanctions (the
"661 Committee") Following the invasion of Kuwait, the PreSident also issued
Executive Order 12722. on August 2,1990, which froze the assets of the
Government of Iraq in the UflIIed States or under the control of US persons and
Imposed a comprehensive trade embargo against Iraq. Followlllg the adoption of
UNSC Resolution 661, the President Issued Executive Order 12724 on August 9,
1990, broadenlllg the sanctions previously imposed These sanctions were
Implemented by OFAC thmugh the Iraqi Sanctions Regulations, 31 C F.R. Part 575
(the "Regulations")
Section 575.205 of the Regulations prohibited any goods, technology or services
from being expor1ed from the U S to Iraq, except for donated ar1lcles mtended to
relieve human suffermg that were authorized by OFAC on a case-by-case baSIS.
Under sections 575.520 and 575.521 of the Regulations, U.S persons could apply
to OFAC for authorization to export to Iraq donated food and donated supplies
Intended strictly for medical purposes.
Except as otherwise authorized, section 575.207 of the Regulations prohibited U.S
persons from engaging in transactions relatlllg to travel to Iraq by any U.S Citizen
or permanent resident alien, or to activities by any US. citizen or permanent
resident alien within Iraq This prohibition Included payments by U.S. persons for
their own travel or living expenses while in Iraq The Regulations did not prohibit
travel transactions related to travel to Iraq or to activities within Iraq that were (1)
necessary to effect the depar1ure of a US. Citizen or permanent resident allen from
Kuwait or Iraq; (2) relating to travel and activities for the conciuct of the official
business of the United States Government or the United Nations; or (3) by persons
regularly employed in Journalistic actiVity by recognized newsgathering
organizations.
OFAC referred travel applications to the Department of State for foreign policy
guidance in appropriate cases, such as when an applicant claimed a compelling
humanitarian conSideration (e.g., a critical illness of an Immediate family member In
Iraq). or where circumstances mdicated that a national Interest was at stake. In
these Instances, licenSing determmatlons were made on a case-by-case baSIS In
consultation with the Depar1ment of State. In addition, US. persons planning to
travel to Iraq under a U.S passport were requil'ed by the Department of State to
have their passports validated for travel to Iraq by the Office of Passport Services.
In April of 1995, the Security Council adopted UNSC Resolution 986 (Oil-for-Food)
as a temporary measure to provide for the humanitarian needs of the Iraqi people.
In May of 1996, the Government of Iraq signed a Memorandum of Understanding
setting out detailed arrangements for the Implementation of Resolution 986. Under
Oil-for-Food, the Government of Iraq was permitted to sell and to export from Iraq
petroleum and petroleum products as well as purchase and import humanitarian
materials and supplies to meet the essential needs of the ciVilian population in Iraq
The proceeds from sales of Iraqi-origin petroleum and petroleum products were to
be depOSited into a speCial escrow account at the New York branctl of Banque
Nationale de Paris ("BNP New York") where they would be used to fund purchases
made by the Government of Iraq
The Secretary-General established a panel of independent exper1s In the
international oil trade to oversee Oil-purchase contracts and ensure that they

tto:IIWWw.trear;;.gov/press/releases/js2447.htm

5131/2005

;-2447: Testimony of Robert Werner, Director Office of Foreign Assets Control U.S. Departm...

Page 3 of 5

complied with requirements provided for In Resolution 986 The panel was
responsible for assessmg tile pricing mechanisms for petroleum purchases III order
to determine w~lether trley reflected fair market value The panel was also
responsible for providing analysis and recommendations to the 661 Committee
With respect to purchases of humanitarian lllateriClls and supplies, the Government
of Iraq was required to prepare a categollzed list of humanitarian goods and
supplies It intended to pur·chase and Ill1port pursuant to Resolution 986 and submit
It to the Secretary-General The Secretary-General would then forward the
distribution list to the 661 Committee Individual contracts for purchClses of
humanitarian goods and supplies were submitted to the 661 Committee through the
relevant UN mission of the exporting state. Committee members could disapprove
<lny contract. Payment from tile Iraq escrow account at BNP New York would oilly
be approved for items Included III the distribution list, unless the 661 Committee
decided otherwise 011 a case-by-case baSIS Experts In the UN Secretariat were to
examine each contract, espeCially regarding quality and quantity of Ole goods and
supplies In order to deterrlllne whetl18r a fair price and value were reflected in the
document
Effective December 10, 1996, OFAC amended the Regulations to provide
statements of licenSing policy with respect to Oil-far-Food, which appeared III the
December 11, 1996, edition of the Federal Register Section 575.522 of the
Regulations authorized US persons to enter Into executory contracts with the
Government of Iraq for the purchase of Iraqi-origin petroleum and petroleum
products, and to trade III oilfield parts and equipment and civilian goods, including
medicines, health supplies and foodstuffs, US, persons were also authorized to
enter into executory contracts with third parties outside OFAC's Jurisdiction that
were IIlcldental to permissible executory contracts with the Government of Iraq
U S. persons were not authorized to engage In transactions related to travel to, or
within, Iraq for the purpose of negotiatlllg and signing executory contracts.
However, U.S persons could enlist and pay the expellses of non-U,S. nationals to
travel to Iraq on their behalf for the purpose of negotiating and signing executory
contracts
OFAC reqUired US persons, who had entered into executory contracts with the
Government of Iraq for the sale of humanitarian materials and supplies or oilfield
parts and equipment, to submit an application to OFAC for a case-by-case review
and approval prior to performance of each contract. OFAC referred each application
to the Department of State and If appropriate the Commerce Department for
gUidance on whether to authorize performance of the contract. State was then
responsrble for submitting the contract to the UN 661 Committee for review
concerning whether to authorize release of funds from the Iraq account at BNP New
York to pay for the goods upon their delivery to Iraq OFAC issued a license
determination after it received from State a copy of the 661 Committee approval of
payment and a separate memorandum from State recommending that a speCifiC
license be Issued to the applicant.
OFAC issued approximately 1050 speCifiC licenses to US. persons for various
aspects of the Oil-for-Food program, primanly under three provisions of the
Regulations. Sales to the Government of Iraq of oilfield parts and equipment and
humanitarian aid were subject to Ilcensillg under, respectively, sections 575.524
and 575.525 of the Regulations. Three US companies were authorized under
section 575,524 to sell Oilfield parts and equipment directly to the Governrnent of
Iraq, and 23 US companies were authorized under section 575,525 to make direct
sales to the GOI of humanitarian aid A total of 48 licenses were issued to these 26
US companies authorizing performance of sales contracts entered Into With the
Government of Iraq.
Section 575.523 of the Regulations authorized the performance of contracts
approved by the UN 661 Committee for the purchase of Iraqi-origin petroleum or
petroleum products directly from the GOI. Nine U.S. companies were each Issued a
license under this section.
Most US, persons licensed by OFAC under this program were authorized to
engage in trade trrlnsactions with tilird country entitles who were contractors or

ttp:llwww.treas.gov/press/releases/js244 7 .htm

5131/2005

~-2447: Testimony of Robert Werner, Director Office of Foreign Assets ControJ U.S. Departm...

Page 4 of 5

subcontractors with the Govemment of Iraq In other words. these remaining
approximately 1000 specific licenses either authorized US persons to engage in
transactions with third parties related to sales to the GOI, or else authorized nOI1U.S. persons to engage in transactions Involving U.S -origin goods or components
beillg supplied to the Government of Iraq For example, under 575523, OFAC
issued thl11een specific licenses to seven US persons for activities that faCilitated
the purchase of Iraqi 011 by third parties
Finally, the general license In section 575.526 of the Regulations auHlOrized US
persons to import into the Uilited States, and otherWise deal In, Iraqi-origin
petroleum and petroleulll products prowjed that tile goods in question had been
approved for purchase and export from Iraq by the 661 Committee.

Outreach
Because of the complexity of the Oil-for-Food program, OFAC engaged in an
outreach program to assist licensees In understanding their obligations. OFAC
prOVided guidance about the Program's requirements In hundreds of sanctions
workshops. It also published Information on Iraqi sanctions in numerous plalnlanguage brochures, Including Iraq What Yau Need to Know About US Sanctions,
and Fareign Assets Control Regulatans for the Financial Cammunity,. far
for the Insurance Industry, alld
for the Secunties
Exporters and Importers,
Industry. Further, it referenced the program In articles published In industry
magazines for bankers, for shippers, alld for the International trade community
III addition to engaging in this general gUidance, in January of 1997, OFAC issued a
memorandum to the attention of the U.S. Customs Service recommending that
Customs require importers of Iraqi petroleulll or petroleum products to provide a
copy of the 661 Committee approval for which the petroleum or petroleum products
In question comprised all or a part of the original purchase. In addition, OFAC
suggested that Customs might wish to request from the importer a brief statement
describing the type and amount of the imported Iraqi products and affirming that, to
the best of the impolier's kllowledge and belief. the imported Iraqi petroleum or
petroleum products comprised all or a portion of ttle purchase covered in the
accompanying UN document. In a memorandum to OFAC dated March 6,1997,
Customs confirmed that it had Issued instructions to Customs field offices pursuant
to the gUidance contained in OFAC's memorandum
III December of 2000, OFAC also published expliCit information about authorized
and unauthorized payments under the Oil-for-Food program This document,
entitled "GUidance on Payments for Iraqi Origin Petroleum ," was prepared in
response to media reports that the Government of Iraq had attempted to force its oil
customers to violate UN Security Counsel Resolutions by demanding that they pay
premiums in the form of surcharges, port fees or other payments into an Iraqi
controlled account. The guidance specifically stated that no transfer of funds or
other financial or economic resources to or for the bellefit of Iraq or a person in Iraq
CQuid be made except for transfers to the 986 Escrow Account. The document
mirrored a December 15, 2000, communication from the 661 Committee with the
follOWing explicit points.
1 ) The Sanctions Committee did not approve a surcharge of any
kind on Iraqi Oil.

2.) Payments for purchaSing Iraqi crude oil could IlOt be made to a
Ilon-UN account.
3.) Therefore, buyers of Iraqi oil should not pay allY kind of
surcharge to Iraq

Designation Authority
Under the Iraq sanctions program, OFAC had the authOrity to specially deSignate -that is, to Identify publicly and to block assets of ally person, whether an indiVidual

ttp://WWw.trea~.gov/press/releases/Js2447.htm

5/31/2005

S-2447: Testimony of Robert Werner, Director Office of Foreign Assets Control U .S. Departm... Page 5 of 5

or a business, that was directly or indirectly owned or controlled by the Government
of Iraq, or IIlat purpmted to Olct fm or on behalf of tllei! government. As an essential
element of the Iraq sanctlollS, OFAC t)e~lan an Initiative to Identify front companies
and agents used to acquire technolugy equipment, and resources fm Iraq or to
otherwise act for or on behalf of the GovernrlH:nt of Iraq. Iraq Specially DeSignated
Nationals (SDN) Included Iraqi ~lovcrnrncntal bodies, replesentatlves, agents,
intermediaries or fronts, and could be either overt or covert entities of the
government. The designations not only exposed these persons and blocked their
assets but also cut them off frolll participation In the U.S finanCial and economiC
systems .. Ultlmately OFAC nailled approXimately 300 separate entrlies or
individuals as Iraq SDNs
Enforcement

OFAC also worked closely With federal law enforcement agencies to enforce
sanctions against Iraq. For example. CBP has responSibility to Irlterdlct goods
destined to or from OFAC·sanctioned countries or groups. CBP inspectors contact
OFAC's Enforcement DIVision wherl suspect goods are detained to determille if
OFAC has issued licenses for these goods. OFAC's outreach training to CBP
inspectors at the Federal Law Enforcement Training Center and at CBP Ports of
Entry throughout the country Included Information about sanctions against Iraq.
Moreover, OFAC has completed over 300 investigations and audits against U S
finanCial institutions cmporatlons and individuals Involving Violations of the Iraq
sanctions program The Violations investigated ranged from unauthorized attempts
to expurt goods to Iraq by US companies to the operation of brokerage accounts
for SpeCially Designated Nationals of Iraq by brokerage firms. In addition, audrts of
banking transactions conducted by OFAC have revealed other cases InvolVing
funds transfers destined for Iraq transmitted by U.S banks. OFAC's action agalilst
violators included the Issuance of warning letters, the Imposition of Civil monetary
penalties and, where no Violation was found, no further· agency action depending on
the nature, circumstances and scope of the violation.
Finally, OFAC Criminal investigations are conducted by ICE, the Commerce
Department's Office of Export Enforcement ("OEE"), and the FBI. OFAC plays a
coordinating and advisory role In such cases, and works closely With agents and
Assistant US Attorneys. OFAC often provides an expert witness at trial. Criminal
charges of IEEPA violations have been brought in at least 13 cases since August
1990, for unlicensed transactions With Iraq These cases have involved illegal
exports, money remittances and dealings in Iraqi oil.
OFAC IS also working with agents In a number of on-going crlmillal investigations,
includlllg Investigations by the Department of Justice of potential violations of the
Oil-for-Food program. In one case, dealing with the purchase of Iraqi oil In excess
of the amount authorized by the U.N under Oll-for-Food, OFAC ordered a US
company to place In excess of several million dollars IIltO a blocked account at a
U S. finanCial Institution. In another case, OFAC prOVided Information from an 011·
for-Food license file to a U.S Attorney's Office
Conclusion

I thank the Committee for the opportunity to diSCUSS OFAC's role In implementing
economic sanctions against Iraq, IIlcluding its role In the Oil-for-Food program I
look forward to taking your questions

lttp:IIWWw.trea~.gov/press/releases/js2447.htm

5/3112005

005-5-17-12-35-43-26679: U.S. International Reserve Position

Page I of2

FROM THE OFFICE OF PUBLIC AFFAIRS
May 17, 2005
2005-5-17 -12-35-43-26679
U.S. International Reserve Position
The Treasury Department today released U.S reserve assets data for the l<ltest week As Indicated In this table, U S reserve assets
totaled $78,410 million as of the end of that week, compared to $79,512 million as of the end of the prior week.

I. Official U.S. Reserve Assets (Ill US millions)

May 6,2005

May 13, 2005

79,512

78,410

TOTAL

I
1

1. Foreign Currency Reserves

Euro

a. Securities

11,863

IOf which, issuer headquartered III the US

II
II

Yen

TOTAL

Euro

14,991

26,854

11,706

II
II

Yen
14,682

II
II
II

TOTAL
26,388
0

b. Total deposits with

b.I. Other central banks and BIS

11,579

3,013

14,592

11,414

2,951

14,365

b.il. Banks headquartered III the US

I bii Of which, banks located abroad

Ib.iI; Banks headquartered outside the US
Ib.iii Of WhiCh, banks located In the US

IMF Reserve Position 2

3. Special Drawing Rights (SDRs)

I
II

15,418

4. Gold Stock 3
5. Other Reserve Assets

11,607

11,041

II
I

15,184

11,431

11,041
0

II. Predetermined Short-Term Drains on Foreign Currency Assets
May 6,2005

I
I

Euro

Yen

May 13, 2005

II
I

TOTAL

Euro

Yen

11. Foreign currency loans and securities

0
II
I
I
12 Aggregate short and long positions In forwards and futures In foreign currencies Vis-a-VIS the U S dollar

[2 a. Short positions
~b. Long poslttons
~. Other

II
II

I
TOTAL

0
0
0

I
I

III. Contingent Short-Term Net Drains on Foreign Currency Assets

Irr------------=-------,I!

May 6, 2005

ilttp:IIWWw.treas.gov!press!releases!200551712354326679.htm

May 13, 2005

5/31/2005

005-5-17-12-35-43-26679: U.S. International Reserve Position

L1. Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within 1
year

I
I

Euro

I
I

Page 2 of2

Yen

I TOTAL I
0

1.b. Other contingent liabilities

2. Foreign currency securities with embedded
options

I
I

3. Undrawn. unconditional credit lines
3.a With other central banks

3.b With banks and other finanCial institutlollS

IHeadquartered

III

the US

I
I

Yen

II TOTAL
II

I
I

II
I

I
I

Headqual1ered outside the US

4. Aggregate short and long positions of options
in foreign
Icurrencles vis-a-VIs the US dollar

14a Short positIOns

I
II
II

14a 1. Bought puts

14.a2. Written calls

14b Long positions

II
II
II

II
II

14b2 Written puts

II
II

3 c. With banks and otller financial instltu/Jolls

14b1. Bought calls

Euro

II
II

I
II
II

II
II

I
I
I
I
I
I

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

ttp://WWW.trea<;.gov/press/releases/2005S1712354326679.htm

5/31/2005

S-2448: Report to Congress International Economic and Exchangc May 2005

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®.

May 17, 2005
JS-2448

Report to Congress International Economic and Exchange
May 2005

LINKS
•

Statement of Secretary John W. Snow on the FOREX Report

REPORTS
•

Report to Congress on International Economic and Exchange Rate Policies

ttp:llww w.trea<:-.gov/press/releasesljs244R.htm

5/31/2005

Report to Congress on
International Economic and Exchange Rate Policies
May 2005

This repOli reviews developments in international economic policy, including exchange rate
policy, focusing on the second half 0[2004. The report is required under the Omnibus Trade and
Competitiveness Act of 1988, which states, among other things, that: "The Secretary of the
Treasury shall analyze on an annual basis the cxchange rate policies of foreign countries, in
consultation with the International Monetary Fund, and consider whether countries manipulate
the rate of exchange between their currency and the United States dollar for purposes of
preventing effective balance of payments adjustments or gaining unfair competitive advantage in
international trade."
This report reviews the effects that significant international economic developments have had on
the United States and foreign economies and evaluates the factors that underlie those
developments. For the specific purpose of assessing whether an economy is manipulating the
rate of exchange between its currency and the U.S. dollar according to the terms of the Act,
Treasury has traditionally undertaken a careful review of the trading partner's exchange rates,
external balances, foreign exchange reserve accumulation, macroeconomic trends, monetary and
financial developments, institutional development, and financial and exchange restrictions
among other things. Attention is given to both the changes and the interactions of significant
variables. Isolated developments in anyone area do not typically provide sufficient grounds to
conclude that exchange rates are being manipulated under the terms of the Act. A combination
of factors, on the other hand, can and has in the past led Treasury to find that certain countries
had satisfied the terms of the Ad.
After reviewing developments in the United States, the report examines exchange rate policies in
major economies across five regions ofthc world: (I) the Western Hemisphere, (2) Europe and
Eurasia, (3) Sub-Saharan Africa, (4) the Middle East and North Africa and (5) South and East
Asia.
To summarize, the report finds that:
•

Economies around the world continue to follow a variety of exchange rate policies,
ranging from a tlexible exchange rate with little or no intervention to currency unions and
full dollarization. For example, Canada follows a flexible exchange rate regime with no
intervention, twelve countries are members of the European Monetary Union, and EI
Salvador, Ecuador and Panama use the U.S. dollar as their "domestic" currency.

•

The report finds that no major trading partner of the United States met the technical
requirements for designation under the Omnibus Trade and Competitiveness Act of 1988
during the second half of 2004. A number of economies continue to use pegged

I These issues are discussed more completely in Treasury's March 11,2005, Report Ttl Thl' C'llllllll1lcc'
1\ PPi( lpria\ iOil, Oil (' Lui lic;JU~l!illl' \~llil~Jjn l.'-l,il lJl"-,1\ddll',siil~~J!IT<:Jl\:: .1\l~1ll11)lIlali ll.!l~

(!tl

exchange rates and/or intervene in foreign exchange markets. A peg or intervention,
though, does not in and of itself satisfy the statutory test. Treasury has consulted with the
IMF management and staff, as required by the statute, and they concur with these
conclusions.
•

Nevertheless, Treasury has engaged, and will continue to engage, with several
economies, including some in Asia, to promote the adoption of market-based exchange
policies and regimes. Most notable among these is China. Current Chinese policies are
highly distortionary and pose a risk to China's economy, its trading partners, and global
economic growth. Concerns of competitiveness with China also constrain neighboring
economies in their adoption of more flexible exchange policies. If current trends
continue without substantial alteration, China's policies will likely meet the statute's
technical requirements for designation.

•

While China's ten-year-Iong pegged currency regime may have at times contributed to
stability, it no longer does so. The peg blocks the transmission of critical price signals,
impedes needed adjustment of international imbalances, attracts speculative capital flows
and is a large and increasing risk to the Chinese economy. Indeed, Chinese officials have
publicly acknowledged the need to move to a more flexible system, have repeatedly
vowed to do so and have undertaken the necessary and appropriate preparations. It is
widely accepted that China is now ready and should move without delay in a manner and
magnitude that is sufficiently reflective of underlying market conditions. Treasury will
continue to engage with China and closely monitor changes in its foreign exchange
policy over the coming weeks and months.

•

Treasury is continuing to engage actively with economies to encourage, in both bilateral
and multilateral discussions, flexible market-based exchange rate regimes combined with
a clear price stability goal and a transparent system for adjusting policy instruments. In
this light, the communiques of the G-7 Finance Ministers and Central Bank Governors in
October of2004 and February and April of2005 stated: " ... that more flexibility in
exchange rates is desirable for major countries or economic areas that lack such
flexibility to promote smooth and widespread adjustments in the international financial
system, based on market mechanisms."

The United States International Accounts

The current account deficit is conceptually equal to the gap between domestic investment and
domestic saving, as a mattcr of international accounting. When investment in the United States
is higher than domestic saving, foreigners make up the difference, and the United States has a

2 The IMF annually reviews U.S. economic performance and policies through the so-called [MF Article IV
surveillance process. The last Article IV surveillance review took place in July 2004. The IMF staff paper and the
results of the IMF Executive Board's discussion of the U.S. Article [V review can bc found at
hnp:!lwww.imf.org/external/pubs/ft/scr/2004!cr04230pdf. [n addition, the IMF discusses U.S. economic policies
and performance in the context of its twice yearly World Economic Outlook reports. These can be found at
http://www. i m f. org/external/pubs/ltiweo/weorepts. him.

current account deficit. In contrast, if saving exceeds investment in a country, then that country
has a current account surplus as its people invest abroad.
The growth of the U.S. current account deficit over more than a decade has been linked to high
levels of domestic U.S. capital formation compared to domestic U.S. saving. Perceived high
rates of return on U.S. assets, based on sustained strong productivity growth relative to the rest of
the world, sound U.S. economic performance and the attractiveness of the U.S. investment
climate, attract foreign investment. Sustained external demand for United States assets has both
supported the dollar in the foreign exchange markets over the years and allowed the United
States to achieve levels of capital formation that would have otherwise not been possible.
Robust growth in investment is critical to the non-inflationary growth of production and
employment.
In the second half of 2004, for example, the U.S. current account deficit was $679 billion (at a
seasonally adjusted annual rate and on a national income and product accounting, or NIPA,
basis) or 5.7 percent of GOP. This $679 billion deficit equaled the gap between $2,369 billion in
investment and $1,690 billion in saving 3 . That is, U.S. domestic investment was $679 billion
more than domestic saving with net foreign investment making up the difference.
The U.S. economy performed well over the second half of 2004. Real GOP increased at an
average annual rate of 3.9 percent in the final two quarters, led by rapid gains in both business
fixed investment and personal consumption. Improved labor markets (with almost one million
new payroll jobs added during July-December and a decline in the unemployment rate to an
average of 5.4 percent), as well as a rise in household net worth, contributed to increased
consumer spending and favorable balance sheets despite low saving. Public saving is expected
to improve, as solid economic growth and tight controls imposed by fiscal policies are expected
to cut the Federal budget deficit by more than half, from 3.6 percent of GOP in FY 2004 to 1.5
percent by FY 2009.
The U.S. current account was $708 billion in deficit (at a seasonally adjusted annual rate and on
a balance of payments basis4) in the second half of 2004. A major item financing the current
account deficit has been net private foreign purchases of U.S. securities, which reached an
annualized $552 billion in the second half of 2004. (Included in these were net private foreign
purchases of U.S. Treasury securities amounting to $26 billion.) In addition, foreign official
institutions increased their U.S. assets by $308 billion.
Viewed over a longer period, the U.S. current account balance declined, as a percent of GOP,
from a one percent surplus in the first quarter of 1991 to a four percent deficit in the fourth
quarter of 2000, to a six percent deficit in the second half of 2004.
Due to the current account deficit the net investment position of the United States (with direct
investment valued at the current stock market value of owners' equity) fel1 to a negative $2.7
Including the (relatively small) statistical discrepancy.
Although the current account measures are conceptually the same, balance of payments statistics are compiled on a
slightly different basis from national income statistics. Saving includes the statistical discrepancy between the
income and product accounts.
J

trillion as of December 31,2003, the latest date for which data are available, from a negative
$2.6 trillion at the end of2002. A $398 billion valuation adjustment due to exchange rate
changes offset much of 2003's financial outtlow. Despite a large negative position, U.S.
residents earned $30 billion more on their foreign investments in 2004 than foreigners earned on
their U.S. investments. These positive net income receipts are the result of large net inflows of
income from direct investment offsetting net outtlows of income on portfolio investment.
The U.S. current account deficit is the counterpart of the aggregate surplus of other economies in
the world. The policies of all countries affect the global pattern of current account balances. It is
important that policies that the United States follo\vs keep the United States and the world
economy strong. The adjustment of global imbalances is a shared responsibility. First, in the
United States, policies aimed at increasing saving of the public sector and the private sector
should contribute to global adjustment and reinforce the continuing stability of the international
financial system. Second, in Europe and Japan, policies for further structural reforms are needed
to boost sustainable growth. Third, greater flexibility of exchange rates is needed, particularly in
emerging Asia economies that lack such flexibility.

The U.S. Dollar
The Federal Reserve Board's "broad" nominal dollar index decreased 6.7 percent during the
second half of 2004. The dollar depreciated 8.9 percent against the "major" foreign currencies
(seven other industrialized economy currencies) and 3.8 percent against the currencies of "other
important trading partners" of the United States (largely currencies of emerging market
economies). The broad index declined J6.9 percent from February 27, 2002, when it reached its
recent peak, through December 31, 2004. Over this latter period the dollar depreciated 29.5
percent against the major currencies while appreciating 1.8 percent against the currencies of
other important trading partners.
The consumer price index (CPI) rose 2.0 percent annualized rate from July through December
and in the final month of the year was 3.3 percent higher than a year earlier. Excluding food and
energy, the core CPI rose 2.2 percent during the 12 months ending in December 2004. With the
economy expanding and underlying inflation modest, the Federal Reserve continued to remove
monetary accommodation, increasing its federal funds target rate four times, by a total of 100
basis points, in the second half of the year to reach to 2.25 percent on December 14. The yield
on 1O-year Treasury notes tluctuated during the latter half of the year, but finished the year at
about 4.2 percent in December, essentially unchanged from the end of 2003 and 50 basis points
lower than in June despite the rise in short term interest rates.
As discussed below, the currencies of different economies showed varying degrees of flexibility
relative to the dollar, as some monetary authorities sought to dampen or prevent movements of
their exchange rates against the dollar while others did not intervene at all. The United States did
not intervene in foreign exchange markets during the second half of 2004.

Western Hemisphere
Nominal exchange rates in the region on average appreciated against the U.S. dollar in the
second half of the year, as Latin America posted nearly 6 percent real GDP growth in 2004, the
highest regional growth rate in a quarter-century. Interest rate spreads between the Latin
American Emerging Market Bond Index (EMBI+) and U.S. Treasury securities decreased from
569 basis points in end-June to 434 basis points by end-December 2004.
Argentina
Argentina has had a flexible exchange rate since the end of 200 I when it abandoned its
convertibility law, which pegged the peso one-to-one to the U.S. dollar. Argentina's currency
remained relatively steady in the second half of2004, depreciating 0.5 percent from 2.96 pesos
per dollar to 2.97 pesos per dollar. Argentina's trade surplus was $6.2 billion in the second half
of2004, with exports rising 20 percent and imports rising 53 percent compared to the same
period the previous year. The seasonally adjusted current account fell from 2.2 percent of GDP
in the first halfof2004 to 1.9 percent ofGDP in the second. The U.S. trade deficit with
Argentina was $334 miIlion in the second half of 2004.
Argentina's gross foreign exchange reserves grew by $2.2 billion during the second half of the
year to $19.6 billion at the end of December 2004 as Argentina's central bank accumulated
international reserves during periods of peso strengthening. The economic recovery continued
after the severe contraction in the first half of 2002, with real GDP growing 14.0 percent at a
seasonally adjusted annualized rate in the third quarter of 2004 and 1 1.4 percent in the fourth
quarter. Consumer prices accelerated, with a net increase of 5.2 percent in seasonally adjusted
terms from June 2004 to December 2004.
Brazil
Brazil has a flexible exchange rate regime and relies on inflation targeting to guide monetary
policy. The real appreciated 16.9 percent against the dollar during the second halfof2004 from
BRL3.11IUS$ to BRL2.66/US$. Brazil's sovereign risk spread stood at 383 basis points over
U.S. Treasuries at end-2004 versus 646 basis points at the end of June. Year-on-year inflation
stood at 7.6 percent in December, above the central bank's 5.5 percent target for 2004 but within
the target band. Brazil had a $6.3 biIlion, or 2.0 percent of GDP, current account surplus in the
second halfof2004 compared to $5.4 billion, or 1.9 percent ofGDP, in the first half. The
United States had a trade deficit with Brazil of$4.9 biIlion in the second halfof2004 compared
to a $3.4 billion deficit in the second halfof2003. Foreign direct investment increased to $14.1
billion in the second half of 2004 compared with $4.0 billion in the first half. The central bank
increased net international reserves to $27.5 billion by end-December 2004 compared to $24.9
billion at end-June, as the central bank purchased international reserves at the end of the year.
Real GDP (saar) increased 4.4 percent and 1.7 percent in the third and fourth quarters
respectively. For the full-year 2004, GDP posted a 5.2 percent increase~the highest growth rate
in ten years.

Canada
Canada has a flexible exchange rate regime. It has not intervened in the foreign exchange
market since 1998, except to make a small contribution to the brief G-7 intervention in support
of the euro in September 2000. Its central bank targets an inflation rate of 2 percent with a +/- I
percent band. During the second half of2004, the Canadian dollar appreciated against the U.S.
dollar by 11.4 percent, from 1.34 C$/US$ to 1.20 C$/US$. The J.P. Morgan broad real tradeweighted index for the Canadian dollar appreciated by 8.3 percent while the J.P. Morgan narrow
nominal trade-weighted index for the Canadian dollar appreciated by 9.S percent. Canada's
current account surpluses during the third and fourth quarters of2004 were $6.4 billion, or 2.6
percent of GOP, and $S.2 billion, or 1.9 percent of GOP, respectively. The merchandise trade
surplus with the U.S. during the period was $33.6 billion. Canada's international reserves
declined in second halfof2004 to $34.S billion from $3S.4 billion in the first half. Year-on-year
headline inflation in December 2004 was 2.1 percent. The economy expanded in the second half
of 2004, with annualized real GOP growth of3.4 percent and 3.0 percent in the third and fourth
quarters, respectively.
Mexico
Mexico has a flexible exchange rate regime. Its central bank targets an inflation rate of 3 percent
with a +/-1 percent band. The Bank of Mexico also follows a transparent rule for selling foreign
reserves accumulated by state enterprises. During the second hal f of 2004 the Mexican peso
appreciated by 3.S percent against the dollar, from I ) .S4 pesos/dollar to 11.IS pesos/dollar. The
J.P. Morgan narrow nominal trade-weighted index for the peso depreciated by 0.4 percent, while
the 1.P Morgan broad real trade-weighted index for the peso appreciated by 0.4 percent.
Mexico's current account deficits during the third and fourth quarters of2004 were $2.3 billion,
or 1.4 percent of GOP, and $2.9 billion, or 1.7 percent of GOP, respectively. Mexico's
merchandise trade surplus with the U.S. during the period was $22.8 billion. Foreign direct
investment in the second half of 2004 was $S.4 billion, versus $11.2 billion in the first half of the
year. International reserves grew by $2.4 billion during the second half of the year, reaching
$61.S billion by the end of December. Y car-on-year headline inflation was S.1 percent in
December. The economy grew robustly in the second six months of 2004, with real seasonally
adjusted GOP increasing at annual rates of 3.8 percent and S.6 percent during the third and fourth
quarters, respectively.
Europe and Eurasia
The Euro-zone
During the second half of 2004, the euro remained relatively stable through mid-October, but
appreciated sharply thereafter, gaining 9 percent from mid-October, or 11.2 percent from endJune, to year-end. The index of the real effective exchange rate of the European Central Bank
(ECB) appreciated 4.9 percent over the second half of the year. The ECB did not intervene in
foreign exchange markets during 2004.

The countries in the Euro-zone taken together had a current account surplus during the second
half of 2004 equal to $11.3 billion (sa), or 0.2 percent of GOP, down from $38.4 billion, or 0.8
percent of GOP, in the first half of the year. Goods exports increased 8.4 percent while goods
imports increased 12.9 percent in the second half of2004 over the same period in 2003. The
trade surplus of the Euro-zone vis-a-vis the U.S. was $44.2 billion in the second half 0[2004
compared to $39.7 billion in the second halfof2003.
Euro-zone growth was an estimated 0.8 percent (annualized) in the second half of 2004.
Germany and Italy have held back Euro-zone growth while France had annualized growth of 1.5
percent in the second half led by strong domestic demand. For the region, final consumption
expenditure rose 1.0 percent in the second half of2004 while investment increased 2.5 percent.
Core inflation was 1.9 percent yr/yr in December 2004 compared to 2.0 percent yr/yr in June
2004. Headline inflation - which includes energy and other volatile prices excluded in the core
index - was 2.4 percent yr/yr at the end of the second halfof2004, the same rate as at the end of
the first half.

Central Europe & Ukraine
The currencies of the major central European economics appreciated sharply against the dollar
during the second half of 2004. This partly reflected the dollar's depreciation against the euro
during the period, but each of the currencies also strengthened against the euro, their main
reference currency, supported by attractive domestic interest rates.
In Hungary, short term yields of 10.0 percent helped the forint appreciate 2.1 percent against the
euro (14.0 percent against the dollar), despite continued concern about large fiscal and current
account deficits. The National Bank of Hungary's index of the real value of the forint rose by
slightly less, 1.8 percent, as inflation slowed.

In Poland, the zloty rose 10.5 percent against the euro during the second halfof2004 (an
appreciation of23.4 percent against the dollar). Zloty appreciation reflected the differential
between domestic interest rates and Euro-zone yields, as well as increased political stability and
improved macroeconomic performance. The National Bank of Poland's index of the zloty in
real terms rose 8.1 percent.
In Ukraine, the hryvnia rose 0.3 percent against the dollar during the second half as the central
bank continued to manage the bilateral exchange rate against the dollar heavily.

Russia
The large net inflows resulting from high oil prices continued during the second halfof2004.
Russia's current account surplus in the second half of2004 was $33.8 billion (nsa), or 10.5
percent of GOP, compared to $15.8 billion, or 6.6 percent of GOP, in the second half of 2003.
The ruble appreciated 4.9 percent against the U.S. dollar in the second half of 2004 compared to
0.6 percent in the first half. However, because of the relative strength of the euro, J.P. Morgan's
Broad Real Effective Exchange Rate Index appreciated just 0.6 percent in the second half of
2004 compared to 5.1 percent in the first half. Russian monetary authorities continued to

intervene to moderate the appreciation of the ruble against the dollar, and official reserve assets
increased $36.3 billion to a record high of $124.5 billion. Consumer prices rose 11.9 percent in
the year through December 2004 compared to 10.2 percent in the year through June 2004.

Sub-Saharan Africa
Overall, Sub-Saharan African's current account deficit narrowed to an estimated 1.6 percent of
GOP in 2004 from 2.4 percent in 2003. An improvement in the current account balances of the
region's main oil exporters drove the overall change. The growth in the U.S. trade deficit to $27
billion, from $19 billion in 2003 with sub-Saharan Africa reflects higher U.S. oil imports, which
accounted for 73 percent of all U.S. imports from the region.
Roughly half of sub-Saharan African countries officially peg their currencies to other currencies,
primary the Euro. Most sub-Saharan African currencies appreciated in nominal terms against the
U.S. dollar in the second half of 2004. The South African Rand, which floats relatively freely
appreciated about 10 percent against the U.S. dollar during the second halfof2004, benefiting
from higher prices of South Africa's commodity exports. However, the value of the currencies
of six countries with managed or independently floating exchange rate regimes changed little
against the U.S. dollar over the six month period, most notably the Nigerian Naira, despite
significant increases in oil receipts. Of the countries for which reliable data is available. the
Democratic Republic of the Congo's currency depreciated the most in nominal terms (II
percent).

Middle East and North Africa
Strong economic growth continued across the Middle East and North Africa, supported by high
oil prices. GOP growth in the oil-exporting countries of the Gulf Cooperation Council countries
(Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE) remained robust. Mainly due to
higher oil prices, current accounts across the Gulfremained largely in balance or surplus, having
increased significantly, along with holdings of official reserves. Oil-exporting GCC countries tie
their currencies directly to the U.S. dollar.
Many other countries in the region, such as Jordan and countries in North Africa, also maintain
pegged exchange rate regimes. Changes in current account balances largely reflected changes in
terms of trade, with balances rising in large oil exporters like Algeria and falling in importers
like Morocco. In Egypt, exchange rate flexibility increased considerably following the launch of
an interbank foreign exchange market in December 2004. The current account surplus rose due
to higher oil prices and increased receipts from tourism and the Suez Canal (reflecting robust
global trade). This, along with a small but growing net increase in capital inflows due to tighter
monetary policy, growing investor confidence in the reform-oriented economic team, and an
expected surge in privatizations, led to upward pressures on the pound and virtually eliminated
the spread between official and parallel markets. In the six months ending December 2004, the
pound appreciated 1.9 percent in nominal terms against the dollar, and the current account
registered a $2.9 billion surplus, a $900 million increase over the same period in 2003. Net
international reserves increased from $14.8 billion end-June 2004 to $15.4 billion end-December
2004.

Turkey maintained its floating exchange rate regime. Overall, the Turkish lira appreciated by
10.4 percent in nominal terms against the U.S. dollar in the second half of 2004, as capital
inflows increased in anticipation of a European Union decision to begin accession negotiations
and high real interest rates. However, during this period, the central bank's index of the real
trade-weighted lira rose 4.1 percent, retlecting 1.7 percent nominal depreciation against the euro.
Inflation fell from 12.7 percent in 2003 to 9.4 percent in 2004, its lowest level in decades. The
current account deficit widened in 2004 to 5.1 percent of GNP ($15.4 billion), from 3.4 percent
in 2003, on the back of strong domestic demand, as GNP grew 9.9 percent over the first three
quarters of2004, compared to the same period in 2003. Imports and exports increased 39.1
percent and 30.8 percent, respectively, compared with 2003, driving the trade deficit to $23.8
billion, up 70 percent from $14.0 billion in 2003. Reserves stood at $37.6 billion at end-2004, up
from $35.2 billion at end-2003, still only 75 percent of short-term external debt.
In Israel, which also maintains a floating exchange rate, the shekel appreciated 4.4 percent in
nominal terms against the dollar during the second half of 2004, while remaining constant in real
trade-weighted terms due to significant trade weights of the euro and sterling. Capital inflows
surged in 2004 as the decline in foreign direct investment in 2004 was more than offset by strong
portfolio investment throughout the year (reversing the general trend of positive FDI and
negative portfolio investment). While posting a small deficit in the second half of 2004 as
private consumption rose, the current account registered a slight surplus for the year (0.4 percent
ofGDP) due to strong growth in goods and services exports. GOP growth increased in 2004 to
4.3 percent for the year, up from 1.3 percent in 2003, with an acceleration in the second half of
2004. Foreign exchange reserves rose 3.6 percent in the second half of2004, reaching $26.6
billion at end-December, after remaining unchanged in the first half of2004.

South and East Asia
South and East Asia contributed to the global economy's strong growth in 2004. Developing
East Asia grew at 7.3 percent in 2004. Japan grew at 2.7 percent, its highest rate since 1996.
Strong external demand, particularly in the United States, and the revival of the global IT
industry supported growth in the region. But a revival of domestic investment in economies of
the region also underpinned economic growth. The growth of domestic demand in China, in
particular, is contributing significantly to the global growth. Although imports into the region
grew rapidly with improving economic performance, export growth was also strong and current
account surpluses increased in most major economies of the region.
Within the year, growth was strongest in the first quarter. By the third and fourth quarter growth
rates had dropped significantly in a number of East Asian countries - Japan in particular. This
was in part due to excessive inventory buildups in the IT sector, but also reflected a moderate
slowing of U.S. growth and rising oil prices. Solid growth within the region and rising oil prices
also marked the end of concerns about detlation in a number of countries outside Japan, and the
beginning of a shift in monetary policy to avoid inflation. In some cases, notably Korea,
exchange rate appreciation was viewed as a way of containing imported inflation.

Capital flows into the region went through two broad cycles. After slowing significantly in the
second quarter of 2004, capital inflows picked up sharply in the last hal f of the year, and were
especially strong in the fourth quarter. As a result, private capital flows into the region rose for
the fourth straight year in 2004 and may be nearing pre-Asian Crisis levels. Net inward foreign
direct investment increased by more than 30 percent to an estimated $72 billion. Net portfolio
and other capital inflows increased as well. Monetary authorities faced growing foreign demand
for domestic currency assets and upward pressures on their currencies over the year as a whole,
particularly in the second half.
Trade flows among East Asian economies have increased sharply in recent years, reflecting
increased integration of economies in the region. But increased intra-regional trade also reflects
the increasing diffusion of component production among economies in the region, often for
products that are exported outside East Asia. As a result, monetary authorities of economies
with more flexible exchange rates appear to be increasingly concerned about the effect of
currency appreciation on their competitiveness relative to other economies in East Asia. While
noting these concerns, the Administration has encouraged increased exchange rate flexibility for
East Asian economies generally, both in bilateral discussions and in regional fora such as APEC.
APEC Finance Ministers made a significant move in this direction in their statement of
September 3, welcoming steps taken by member economies to facilitate the move to greater
exchange rate flexibility.

India
Faced with strong financial inflows and rising inflation, the central bank allowed greater
flexibility in the managed floating exchange rate regime and liberalized controls on capital
outflows. The Indian rupee appreciated against the U.S. dollar by 6.3 percent during the second
half of 2004. Foreign institutional investors poured $5 billion into Indian equity markets in the
second half of 2004 compared with $3.5 billion in the first haIt: as investor concerns that the
newly elected government would slow market oriented reforms receded. Income from
remittances also remained strong. The U.S. bilateral merchandise trade deficit with India was
steady at $4.7 billion in the second half of 2004, compared to $4.8 billion for the first half.
Despite increases in exports of services, a sharp rise in commodity imports due to higher prices
pushed the current account into a deficit of 0.1 percent of GDP in 2004, from a surplus of 1.3
percent of GDP in 2003. Foreign exchange reserves increased to $125 billion at year end from
$114 billion at the end of June.

Japan
Japan's economic recovery, which began in the second quarter of 2002, stalled in the second half
0[2004. Japan's economy contracted slightly in the second and third quarters of the year and
grew marginally in the fourth quarter. Japan also appeared to lose some ground in its long fight
to eliminate deflation, as core consumer prices (the Japanese CPI less fresh foods) fell by 0.2
percent year-on-year during the second half of2004, after falling 0.1 percent on a year-on-year
basis in the first half of the year. However, other price measures, such as the deflators for private
consumption and GDP, showed continued progress toward price stability.

Japan has had a persistent current account surplus and capital outflows to the rest of the world, a
consequence of a surplus of Japanese savings over domestic investment. Rates of return on
domestic investment have been generally low, although the Prime Minister's program of
structural reform and deregulation and the recent acceleration of corporate restructuring and
mergers and acquisition activity hold out the prospect of higher returns. Japan's global current
account surplus remained steady at about 3.5 percent ofGDP (or $83.1 billion) in the second half
of 2004. Japan's bilateral merchandise trade surplus with the United States totaled $39 billion in
the second half of 2004, up from $36.2 billion in the first half. Capital continued to flow out of
Japan in the second half of 2004 reportedly in response to changing expectations of U.S. growth
relative to Japanese growth and higher U.S. interest rates.
During the June 30 to December 3 I, 2004 reporting period, the yen appreciated 5.6 percent
against the dollar, reaching a level of 103.8 at year-end. At the same time that the Japanese
economy appeared to weaken, economic releases from the United States showed continued
strength. This differential was reflected in currency values during the first three months of this
year. The yen hit a peak value of 10 1.9 to the dollar on January 17,2005, but by March 31 was
trading at 107.0 to the dollar, a depreciation of 3.1 percent from its end-year level. Over a more
extended period, since early February 2002 through the end of March 2005, the dollar has
depreciated by 20 percent against the yen, less than its 29.5 percent depreciation against the
major currency component of the Federal Reserve Board's Broad Nominal Index of the dollar
over the same period.
Japanese authorities have not intervened in the foreign exchange market since March 16, 2004.
Japanese foreign exchange reserves rose by $25.7 billion in the second half of2004 to $824.3
billion, due to interest earnings and a depreciation of the dollar against other currencies held as
Japanese reserves. This contrasts with an increase in Japanese foreign exchange reserves of
$145.8 billion in the first half of 2004, a period in which the authorities did intervene.

China
China kept its fixed exchange rate of 8.28 to the U.S. dollar throughout the reporting period, a
rate it has maintained since 1995, through periods of both upward and downward pressures on
the exchange rate. While the benefits of China's ten-year-Iong pegged currency regime may
have at times served well the Chinese economy, this is no longer the case for the large,
increasingly market-based economy that China has become. China's fixed exchange rate is now
an impediment to the transmission of price signals and international adjustment, and imposes a
risk to its economy, China's trading partners, and global economic growth. China has clearly
stated that it intends to move to a market-based flexible exchange rate, and has undertaken the
necessary and appropriate preparations. It is now widely accepted that China is now ready and
should move without delay in a manner and magnitude that is sufficiently reflective of
underlying market conditions.

5 The

Japanese Ministry of Finance announces its total foreign exchange intervention at the end of each month, and
publishes the dates and amounts of intervention at the end of each quarter. See
http://www.mofgo.jp/english/elc021.htm

To maintain the fixed exchange rate the Chinese authorities supplied renminbi for net inflows of
foreign exchange, accumulating foreign exchange reserves in the process. This accumulation of
foreign reserves accelerated in second halfof2004. China's official foreign exchange reserves
grew by a net $139 billion to $610 billion during the second half of2004, with over two-thirds of
the increase taking place in fourth quarter.
China's fixed exchange rate regime and the large amount ofrenminbi the monetary authorities
supply in maintaining the fixed exchange rate made effective macroeconomic policy
management more difficult during the second half of 2004 and into 2005. To soak up
("sterilize") the additional renminbi created by purchasing foreign exchange, China's central
bank sells bonds to domestic banks. Net issuance of central bank sterilization bonds has risen
sharply since September 2004. Chinese policymakers also took a series of administrative
measures over the last year to curb lending, and raised domestic interest rates slightly in October
2004 in order to constrain investment and contain consumer prices.
These macroeconomic policy measures had some effect in cooling off the economy during the
second half of 2004. However, economic growth remained quite strong in the fourth quarter of
last year, and 2005 data suggest that China's growth rate and inflation risks are rebounding. In
the first quarter of2005, real GOP, driven by trade and investment, grew by 9.5 percent.
Industrial output and investment growth also remained brisk. China's exports grew rapidly on
sharp increases in textile and apparel exports following the end of quotas and increased
electronics shipments. After a 3.9 percent year-over-year increase in consumer prices in March,
inflation moderated in April, but still remains higher than at the end of 2004. Real interest rates
fell as a result, countering the authorities' efforts to contain the increase in bank lending.
China's experience over the reporting period illustrates some of the difficulties of maintaining
the fixed exchange rate. Rapid growth in exports, increased liquidity, and low real interest rates
continue to support China's economic growth, and concerns rcmain about overinvestment and
inflationary pressures. In this regard, China needs to rely more on domestic demand growth,
particularly consumption growth. The central bank has had to work hard to counteract the
growth in domestic liquidity from foreign exchange intervention. It is also very limited in its
ability to raise interest rates since this would spur greater capital inflows. The rapid growth of
credit and very high rate of investment in tum risk undermining the progress China has made in
refonning its banking system by creating new flows of non-performing loans.
China's global trade surplus increased in the second half of 2004 to a (seasonally unadjusted)
total of $40 billion (4.2 percent of GOP), up from a $21 billion surplus (2.6 percent of GOP) in
the same period in 2003. The trade surplus in the second halfof2004 offset a deficit during the
6
first half, bringing China's reported trade surplus to $32 billion for all of2004. The increase in
6 These trade figures are on an FOB-CIF basis, SL'\ eral ~tlldie, hal e fluted thill CllIlld', gloh,1I U'Jde 'lIrplliS (Olll:
compOIlc:nt of its (urrent aecoul1t surplus) as rcpllrted III aggreg~ltc hy Chll1a's trddlllg pal"tllcrs differs Illarh:l'dl y frulll
I,hat is reported hy Chinese offiCial sl<itlstic" (lile difficulty that arl~e, i, tllat Illuch trade tll alllilrom Chilld tr~1\ els
lia Iiollg Kong, Importlflg Clllllltl"le~ L1'lI~dl) <lC(lILltel) lietCl"lnlfll' thl' Slllll"Cc' olthel!" Ilnp'llb though lcl"tliic~ltc, Ill'
(lrigin, But e\por(er~ (hoth Chlll\.:se alld pClrtller Clllll1tl"\ nj111rtcrsj nllel1 rec\lrd thl' dc"tlll,IUIl11 ul thelr c'ports a~
I (PIlt' Kong, evelltllllllgh the gO"lb gu Oil tIl othel'llldrkch, ThiS e\pl<IIIl' a >lgJlIlil'<lllt p<ll"l ()ftlle dlscrc'P<lI1C\
betWl'l'll Chinese ,1I1d p:lrtner COUlltl'y tr,ldc estimates of('hill;l" tra(k- surplus, SIIlCl' ,1 ~iglliticallt part "ithe trClde
between C!tilla ;Illd P;lI"tllcf eOlilltrle' i, reeOflkd :IS tI"~lde II itll Ilnllg KOllg,

China's global trade surplus is partly due to recovery in the global IT market and the increase in
Chinese shipments of components. But there are also reports that trade transactions are also
being used to move capital into China for domestic investment or in anticipation of a revaluation
of the renminbi. This could occur either through accelerating the collection of payments due for
Chinese exports while delaying payment for imports, or by over-invoicing exports and underinvoicing imports. Both responses are common in countries with capital controls. China's
bilateral surplus on trade in goods with the United States also expanded in the second half of
2004 to $93.5 billion compared to $70.2 billion for the last half of2003. U.S. trade in both
directions continued to expand at a faster rate than total U.S. trade. While total U.S. exports to
all destinations grew by 13 percent in 2004, U.S. exports to China grew 22 percent during the
same period.
China's balance of payments surplus amounted to $206 billion in 2004, up 76 percent from 2003
(China's balance of payments data are available only on an annual basis). China's current
account surplus increased sharply in 2004 to $68.7 billion, or 4.2 percent of GOP. This surplus
has increased in recent years from $17.4 billion in 2001 (1.5 percent of GOP), to $45.9 billion
7
(3.1 percent of GOP) in 2003 . China's capital and financial account saw a net inflow of$lll
billion in 2004 (compared to $53 billion in 2003). Reserve accumulation figures suggest that
private financial inflows surged in the second half of 2004, as speculation on an appreciation of
the renminbi increased and as property markets in major urban areas heated up. Despite recent
liberalization, China maintains greater controls on capital outflows than inflows, which
contributes to upward pressure on reserves and the balance of payments.
In the context of an economy with large and dependable capital inflows, large prospects for
productivity gains, and unsustainably high rates of investment, China's current account surplus is
large.
China has committed to push ahead firmly and steadily to a market-based flexible exchange rate,
and is taking concrete steps to bring about exchange rate flexibility. Chinese Premier Wen said
on March 14,2005 that China would "create a market-based, managed and floating exchange
rate." Chinese Central Bank Governor Zhou has said recently that "rigid exchange rates present
huge risks."
Since September 2003, when the Treasury began its intensive engagement with China to hasten
its move to a more flexible exchange rate, the Chinese Government has taken important steps to
establish the necessary financial environment and infrastructure to support exchange rate
flexibility.
First, China has undertaken measures to increase the volume of foreign exchange trading, an
important step in aiding market development and reducing the volatility of exchange rates.
China has reduced restrictions on capital flows and allowed its firms and citizens greater scope to
engage in market transactions. In February, China eliminated the foreign exchange surrender
requirements for many commercial firms, which can now exchange their export earnings with
7 In addition to the trade balance, a widening surplus on transfers and a narrowing deticit on investment income are
significant factors increasing the current account surplus. At this time, trade statistics are thc only current account
items available for 2004.

authorized banks rather than the central bank. Domestic Chinese insurance companies and
China's national social security fund are authorized to invest in overseas capital markets, thereby
increasing the volume of renminbi foreign exchange transactions. Recently, China increased the
amount of foreign currency that business travelers can take out of the country, permitted Chinese
emigrants to transter assets overseas, and allowed Chinese students to take more money abroad
to pay for living expenses. As a result, the volume of foreign exchange market transactions in
renminbi has expanded rapidly in the past few years. China needs to continue to liberalize its
exchange regime by increasing the scope for foreign investment in China and allowing its
residents greater access to foreign exchange.
Second, China has also taken steps to develop foreign exchange market instruments and to
increase its financial institutions' experience in dealing with fluctuating currencies. China has
introduced, or will introduce soon, financial instruments and systems for trading currencies and
managing currency risk through hedging. Foreign exchange forward contracts can now be
offered in China, and foreign exchange futures trading systems and instruments are being
developed. Domestic and foreign banks can trade non-reminbi currency pairs (such as US
dollar-yen), and certain Chinese banks will act as market-makers for this foreign currency
trading. The Treasury and U.S. financial regulators provided substantial technical assistance to
China in these efforts, through the Technical Cooperation Program (TCP) established with the
People's Bank of China.
Finally, China has taken steps to strengthen its financial sector and its financial regulation,
making the financial sector more resilient to foreign exchange rate fluctuations. In addition to
raising one-year deposit and lending rates late last year, China's central bank eliminated a ceiling
on interest rates on bank loans, giving banks greater scope to price risk. Further market oriented
reforms in this area are needed. China's banking regulator tightened loan accounting standards
by introducing a risk-based loan classification system to track non-performing loans (NPLs)
more effectively. It also tightened loan supervision by increasing the number and scope of bank
audits and on-site bank examinations, and by setting more aggressive targets for reducing NPLs
and increasing capital. The larger banks have upgraded their credit risk management systems,
centralized and standardized credit extension procedures, and improved corporate governance
practices following regulatory measures to allow foreign interests to take strategic stakes, to
define clearly responsibilities for Boards, management and shareholders, and to raise disclosure
requirements. China needs to continue this progress and to take further steps to allow foreign
investment in the major commercial banks, show that its tightened NPL classification system is
yielding results, and strengthen the functioning of its securities markets. To assist the Chinese
authorities, Treasury provided technical guidance last year on banking supervision, credit
analysis, international accounting standards, and resolution of non-performing loans.
In summary, the fixed exchange rate that China now maintains is a substantial distortion to world
markets, blocking the price mechanism and impeding adjustment of international imbalances. It
is also a source of large and increasing risk to the Chinese economy. China has completed
significant preparations over the last two years for adoption of a more flexible, market-oriented
exchange rate. China is now ready to move to a more flexible exchange rate and should move
now. Treasury will monitor progress on China's foreign exchange market developments very
closely over the next six months in advance of preparation of the fall report.

Korea
In contrast to strong growth in other parts of emerging East Asia, Korean growth in 2004 was
held back by the continuing effects of a credit card boom and bust. With household spending
depressed, Korean economic growth during the year was largely driven by increased exports.
The growth rate decelerated in the second half of 2004 to 3.2 percent (annual ized), from 4.7
percent growth in the first half, largely due to a continued decline in private consumption.
Export growth slowed in the second half of 2004, but exports were still up 25 percent year-onyear, after growing at 37 percent year-on-year in the first hal f. Export growth to China was
particularly strong, up 42 percent for 2004. Total import growth did not keep pace, but still rose
by 26 percent for the year. The difference in import and export growth rates was reflected in
Korean external balances. The U.S. bilateral trade deficit with Korea totaled $19.8 billion for the
full year 2004. For the second half of2004 the trade deficit totaled $10.8 billion, up 44 percent
from the same period a year earlier, as U.S. imports from Korea grew by 23 percent and exports
to Korea by 10 percent. Korea's current account surplus was 4.0 percent of GOP for the second
half of 2004, compared to 4.1 percent for the first half of the year.
Total capital and financial flows, exclusive of reserve accumulation, registered a net surplus
(inflow) of$7.5 billion (n.s.a.) for the second half of2004, an increase over the small ($0.8
billion) inflow for the first half. The financial inflows resulted from Korean residents' increasing
their foreign borrowings. The Korean authorities continued to intervene in the second half, as
official foreign reserves increased by $32 billion to $199 billion, equivalent to 112 percent of the
total external debt of Korea.
Despite this intervention, the won appreciated 14.8 percent versus the dollar over the course of
2004; during the fourth quarter alone the won appreciated 10 percent. Citing a slowdown in the
pace of economic recovery, particularly in domestic demand, the Korean central bank reduced its
benchmark call rate a quarter-point again in November following on a similar cut in August.
The effect of the won appreciation in the fourth quarter was to reduce inflation pressures,
particularly those due to oil price increases. This, in tum, allowed the Central Bank of Korea to
pursue its more accommodative monetary stance despite inflation coming in at the upper end of
the 2.5-3.5 percent target range.

Taiwan
Taiwan's GOP growth moderated to 3.8 percent saar in the second halfof2004 relative to the
first halfofthe year. GOP growth in the second halfof2003 reached 9.4 percent due to a sharp
recovery of domestic demand (in particular business investment) and strong export growth
(particularly to China). The 2004 slowdown was the result of both a decline in investment and a
modest slowdown in government consumption.
Accommodative monetary policy, accompanied by higher oil and commodity prices, halted three
years of deflation in 2004 with headline consumer price index growing at a rate of2.9 percent in
the third quarter and 1.9 percent in the fourth. In the third quarter of 2004, the central bank

raised interest rates for the first time in four years on concerns of inflation, particularly related to
rising oil prices. It has continued to raise rates in the fourth quarter and first quarter of this year.
Taiwan's exports increased by 16.5 percent year-on-year in the second halfof2004, while
imports expanded by 28.8 percent, resulting in a trade surplus of$2.5 billion in the third quarter
and a trade deficit in the fourth quarter of $0.2 billion. Taiwan's bilateral trade surplus with the
United States increased slightly from $6.8 billion in the second half of 2003 to $7.1 billion in the
second half of 2004.
The current account surplus in the second halfof2004 was 4.8 percent of GOP ($7.5 billion),
down from a surplus of nearly 7.7 percent of GOP in the first half. The 2004 current account
surplus of $19.0 billion, 6.2 percent of GOP, was the smallest annual figure in three years.
Taiwan continued to experience portfolio capital inflows in the second half of 2004, primarily
due to increased investment in equities. This was more than offset by portfolio outflows during
that same period; resulting in a net outflow in the capital and financial account.
Taiwan's foreign exchange reserve accumulation slowed significantly in the second half of2004,
with foreign exchange reserves increasing by $12 billion, compared to a $23 billion in the first
half of 2004. By year end, total foreign exchange reserves had reached just over $242 billion, or
79.2 percent of GOP and about four times short-tenn external debt.
The New Taiwan (NT) dollar has been on an appreciating trend since the third quarter of2004,
increasing 6.0 percent against the dollar in the second half of2004. Since then the NT dollar
continued its appreciating trend reaching a peak ofNT030.79/USO in early March. While
Taiwan's central bank maintains that "the NT dollar exchange rate is detennined by market
forces," the Central Bank Governor has also recently stated that it may "enter the foreignexchange market to make adjustments" to maintain stability as the currency strengthens.

Malaysia
Although Malaysia's economic growth slowed a bit in the second half of 2004, to a 4.4 percent
annual rate, due in part to moderation in global growth, growth for 2004 as a whole - 7.1 percent
- was the highest in four years. Private consumption and exports were the primary drivers of
growth. Fiscal consolidation continued, as public spending on infrastructure was cut and total
public sector spending grew moderately. Investment grew modestly, but still remained we1l
below its levels in the early 1990s.
The current account surplus was $7.8 billion, or 12.7 percent of GOP, in the second halfof2004,
up from 11.5 percent in the second half of 2003. Large current account surpluses are a striking
feature of the Malaysian economy in the last few years. After running substantial external
deficits prior to the Asian Financial Crisis in 1997, Malaysia has had significant and growing
trade and current account surpluses. The trade surplus in 2004 was $25.2 billion (21.4 percent of
GOP), up from $21.8 billion (21.0 percent of GOP) in 2003. The current account surplus in
2004 was $14.9 billion. Malaysia's current account surplus is in large part the counterpart to a
sharp fall in domestic investment that took place in the aftennath of the Asian Financial Crisis.
After rising to over 40 percent of GOP in 1995-97, total investment dropped sharply in 1998, and

has not recovered. Over the last few years, investment as a percent of GOP has declined
gradually, reaching 20.5 percent in 2004. The decline in private investment has been even more
striking, falling from ovcr 30 percent ofGDP in 1997 to below 8 percent in 2003.
The trade balance is the predominant component of Malaysia'S current account surplus, and was
$11.4 billion for the second halfof2004, up from $10.6 billion in the latter halfof2003.
Malaysia's bilateral trade surplus with the United States totaled $9.8 billion in the second half of
2004, compared with $7.9 billion in the second half of2003.
Malaysia has maintained a fixed peg to the dollar (3.80 ringgit to a dollar) since September 1998,
when it also expanded capital controls. Most of the controls on capital flows have since been
relaxed. Further liberalization took effect April 1,2005, to allow: increased investment abroad;
maintenance of currency export proceeds with licensed banks onshore; and hedging in any
committed or anticipatory current account transaction or on any committed capital account
payments. Offshore trading of the ringgit remains, however, prohibited, and foreign portfolio
investment by residents continues to be limited.
Malaysia experienced net financial account inflows of$1.73 billion in the last halfof2004,
versus a net outflow of $0.55 billion in the second half of 2003, reportedly due in part to
speculation on an upward revaluation of the currency. At the end of2004, total foreign exchange
reserves stood at $61.7 billion, almost six times short-term external debt and up from $49.0
billion at end-June 2004.
Malaysian authorities remain publicly committed to the fixed exchange rate system, and have
declared that that the peg is supported by strong fundamentals. But the low level of private
domestic investment and the growing current account suggest opportunities for domestic-led
growth that Malaysia is not taking advantage of. Although a small open economy such as
Malaysia can benefit from a pegged exchange rate, increasing imbalances in the economy may
warrant closer scrutiny and monitoring of the exchange rate regime going forward.

is-2449: Statement of Secretary John W. Snow on the FOREX Report

Page I of 3

FROM THE OFFICE OF PUBLIC AFFAIRS
May 17, 2005
IS-2449

Statement of Secretary John W. Snow on the FOREX Report
Addressing Imbalances In the global economy IS a shared responsibility among the
major economic regions of the world. While imbalances occur as the patterns of
trade and investment flows shift between economic regions, uneven rates of growth
in the major economies and IneffiCient or distortionary policies restrict adjustments
and put stress on the global financial systems. Economic policymakers must
address these imbalances now; waiting increases the risk that adjustments will
occur abruptly
We know that the International economy performs best when large economies
embrace free trade, the free flow of capital, and fleXible currencies. Obstacles in
any of these areas prevent smooth adjustments. At best. such obstacles result in
less than maximum growth; at worst, they create distortions and increase risks
The United States is doing its part to address imbalances by aggreSSively tackling
our fiscal deficit and our long-term liabilities. Because of strong growth and
appropriate fiscal POliCY, the US budget deficit in 2004 was well below prOJections,
and with recent data, I expect improvement in our fiscal defiCit position thiS year as
well [Some private forecasters predict that oLir fiscal deficit will be below 3% of
GOP this year If we continue to hold the line on spending.] We are also working to
put In place innovative poliCies to increase the savings rate. But our actions alone
will not be sufficient.
I expect strong economic growth in the United States to continue. ThiS is In the U S.
interest, and the world's It is an essential component of our deficit reduction
strategy as strong growth results In rising government receipts, as we have been
seeing. But it is important to recognize that there IS also no one-to-one
correspondence between reductions in our fiscal and current account deficits We
do not, and will not, have a current account target The best contribution the United
States can make to our own people and the global economy is to keep our
economiC house In ol'der and ensure continued strong growth
Our actions alone will not be sufficient to unwind global imbalances. Simply put.
large imbalances will continue If growth In our major trading partners continues to
lag. European and Japanese GOP together exceeds that in the United States.
Some European countries, such as Ireland and Spain. continue to perform well.
But on the continent, notable weaknesses perSist, and Japanese growth. while
turning upward. remains modest. These economies must continue to adopt and
implement vigorous and necessary structural reforms to establish robust rates of
growth - both for the good of their own citizens and to contribute to reduction In the
imbalances In the global economy.
Today I have sent to Congress a report outlining the currency practices of
America's major trading partners. The report addresses the third -- and most
immediately pressing -- element of the effort to address global Imbalances. the
imperative of eXChange rate fleXibility, espeCially in emerging Asian economies
The report finds that no major trading partner of the United States met the technical
reqUirements of the statute for designation dUring the period covered, which is the
second half of 2004. However, it would be a mistake to Interpret this conclusiorl as

http://www.tNas.gov/press/releases/js2449.htm

5/3112005

js-2449: Statement of Secretary John W. Snow on the FOREX Report

Page 2 of 3

acquiescence with the foreign exchange policies of many of America's trading
partners. In fact Treasury is actively ellgaged with several economies to promote
the adoption of flexible, market-based exchange policies and to help facilitate
broader adjustment Most notable among these is China
China's rigid currency regime has become highly dlstortlonary. It poses risks to the
health of the Chinese economy, such as sowing the seeds for excess liquidity
creation, asset price Inflation, large speculative capital flows, arld over-investment.
It also poses risks to its neighbors, since their ability to follow more independent
and anti-inflationary monetary policies is constrained by competitiveness
considerations relative to China 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.
A more flexible system Will also support economiC stability, which we understand is
of paramount concern to Chinese leadership. China's ten-year-Iong pegged
currency regime may have contributed to stability in the past, but that is no longer
the case today, as China has grown to be a more Significant participant in global
trade and financial flows. Currently, China relies largely on administrative controls
to manage its economy - controls that are cumbersome and increasingly
ineffective. An independent monetary policy will allow China to more easily and
effectively pursue price stability, stabilize growth, and respond to economic shocks.
China has a history of significant sWings in credit-fueled investment and Inflationary
pressures and these have often ended In "hard landings." Such sWings are
disruptive to the Chinese economy and may prove more disruptive in the future not only to China but also to the global economy
A more flexible system Will allow for a more efficient allocation of resources and
higher productivity. The CUITent system is fueling over-investment and excessive
reliance on export-led growth while under-emphasizing domestic consumption
Moreover, much of the investment and capital flows Into these favored sectors and
projects may not prove profitable under market-determined prices, which could lead
to another investment hard landing, more non-perforllling loans and a weakened
banking sector.
And a more flexible system would also quell speculative capital inflows that are
costly to China's government and Increasingly likely to prove disruptive. China's
ability to sterilize capital inflows is increasingly limited and harmful to its banking
sector.
Finally, recent history has taught us that it's better to move from a fixed to a flexible
currency system during from a position of strength, and not when economic
weakness compels reform.
Chinese officials have publicly acknowledged the need to move to a more flexible
system, have repeatedly vowed to do so, and have undertaken the necessary and
appropriate steps to prepare for such a move.
Unfortunately, the debate on China's currency regime is clouded by a number of
misconceptions of US poliCy. Allow me to address a couple of these. First, we
are not calling for an Immediate full float with fully liberalized capital markets. ThiS
would be a mistake at thiS time - China's bankmg sector is not prepared What we
are calling for is an intermediate step that reflects underlying market conditions and
allows for a smooth transition - when appropriate - to a full float
Second, we recognize that a more fleXible system in Chma, in and of itself, Will not
solve global imbalances - as I have said, this is a shared responsibility However,
greater flexibility in China and other Asian economies is a necessary componenl
Third, some argue that a more fleXible system will prove deflationary and increase
Chinese unemployment. In fact, a fleXible system will provide China with a more
sophisticated array of poliCY tools - namely an independent monetary policy - that
will prove much move effective in achieVing price stability and the ability to adjust to
shocks.

http://www.r.eas.gov/press/releases/j51449.htm

5/31/2005

js-2449: Statement of Secretary John W. Snow on the FOREX Report

Page 3 of 3

Our engageillellt Wltll China over tile P;lst two yeZlrs, Includlllg fruitful
accolllpiisilillellts associated WillI TI(~dSUly'S JOint Tectlilical CooperzltlOrl Program,
leaves me with little douiJl tll,lt Clllrlil IS flOW prep;lI(;ri to beqlfl reform of tile
cUlrency reglille
In fact. I believe !fldt tile Iisks dSS()Cldteri Wltll d(~I;Jy f;lr OlltW81Qil <Illy c(JrlU~rllS Wltll
IllllllecilClte leform Trw curr,,;!ll SystClll P()S(~S d fisk \u CllIlld'S (;COI10lllY, liS tr;lclllleJ
partllers, allCl qloh;ll eCOI10rlilC growtil COI1CCIrIS of COllipetlllvclJeSS wllh Chlrl;]
also COllstl'al1l nClgilborlllCJ CCOI10rlliCS III their ;JCloptlorl of Illore fI(;xIIJle CxcilcJrlqe
poliCies
As Treasury's repmt states, If currellt tremis cOlllllllle Without substantial alteration,
Cillna's poliCies will likely Illeet IIle teclllllCi.ll requlremellts of !fie statute for
designation China IS now leady and shoulcl Illove Without delay III a Illanller and
magnitude tilClt IS suffiCiently reflective of underlYlrlg mClrket conditions
As tile Ileed for acijustmellt IS global, Illultilateral mganlzatlons al'e addresslllg the
need fm fleXibility Group of 7 flllClllce Illlnisters alld celltral bank govcrnms have
adopted a policy, stClted III ItS COllllnLlIllques, that" more fleXibility III eXc/lange
rates IS deSirable for Illajol countrres or eCOllomlC areas that lack such fleXibility to
promote smooth and wlciespread adjustments In the Illternatiollal financial system,
based 011 market mechanisms" The ASian Developillent Bank and the ASia-Pacific
EconOlllic Cooperatioll (APEC) have also publicly stressed Hle ImpOitance of
fleXible currency reglilles.
The chief officers of the International Monetary Fund anci the ASian Development
Bank have also stressed the need for currency fleXibility I also call on the
International Monetary Fund (IMF), as part of ItS strengthening of multilateral anci
regional surveillance, to report on the potential contributloll of emerging ASia to
unwlfldlng global Imbalances, Including an analYSIS of the regional Impact of the
Chillese foreign exchange system As policy-makers, we have a responSibility to
fully understanci these Important forces that are sllaplng the global econoilly. As
the centrallflternatlonal Institution for global monetary cooperation, Wltll a wealth of
technical expertise, the IMF IS best placed to ullclertake thiS work, anci Indeed has
the responSibility for dOing so
It IS critical that we address the Issues of IInbalances aggl'esslvely and in a
cooperative spirit With the goal of raising global growth Nothing would do more
damage to the prospects of increaSing liVing standards throughout the world Hlan
efforts to inhibit the flow of trade Howevel', It IS Incumbent on China to addl'ess
concerns before mounting pressures worldWide to restrict trade halill the openness
of the international trading system

LINKS
•

Report to Congress International Economic and Exchange

http://www.tn·ds.gov/presslreleasesljs2.::lA9.htm

5/3\ 12005

JS-24S0: Deputy Assistant Secretary Iannicola Leads Pinancial Education Roundtable in EI Paso

Page I of I

FROM THE OFFICE OF PUBLIC AFFAIRS
May 16,2005
JS-2450

Deputy Assistant Secretary lannicola Leads Financial
Education Roundtable in EI Paso
Treasury's Deputy Assistant Secretary for Financial Education Dan Iclllnicola, Jr.
today led a flllanCial education rOLllleltable alon~J with the EI Paso Affordai)le
HOllslng Credit Uilion Service Orgclllization III EI Paso, Texas lallnlcola spoke to
representatives from eight credit unions alld other community leaders about the
Depal-tment of the Treasury alld the Financial Literacy "lIlel Educatloll Commission's
role In Improvlllg fillallcial literacy In partnership Wltll various community-based
organlzatlolls across the country
lanilicoia commended the rOLllldtable partlclpclllts for tllelr work III flllanClal literacy
"This group shows a strong COmlTlltment to tile Idea that financial educatloll can
make a real difference In people's lives," said lannlcola "The organlzatlolls here
today help a variety of people With a variety of Issues They help recent Immigrants,
membel-s of the military, Native Americans and others With matters such as getting
an account With a finallclalillstitutlon, managing credit and purchasing a first home
The people of EI Paso are well served by these strong community leaders"
The CUSO IS a non-profit organization formed by tile followlIlg eight local credit
unions EI Paso AI-ea Teachers Federal Cledlt Union, EI Paso Employees Federal
Credit Union, Ft. BliSS Fedelal Credit Union; GECU, Golden Key Federal Credit
Union, Mountain Star Federal Credit Union; One Source Federal Credit Union, and
tile West Texas Credit Union It focuses on promoting financial educatioll alld
savings, and providing access to capital Tile CUSO has Ileld approximately 200
flnallclal education and homeownersilip workshops over the last 2 '/2 years enrolllllg
over 3,500 participants
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 III all areas of personal financial management, With a special
emphasis on savlllg, credit management, home ownership and retirement
planning The Office also coordillates the efforts of tile FinanCial Literacy and
Education CommiSSion, a group chaired by the Secretary of Treasury and
composed of representatives from 20 feelel-al departments, agellCles and
commiSSions, which works to IlTlprove flnallClal literacy arld education for people
througllout the United States. For more Information about tile Office of Financial
Education VISIt. www,treas,gov/financialeducation.

http://www.tr~as.gov/press/releases/Js2450.htm

5/31/2005

is.2451: Assistant Secretary of the Office of Economic Policy Mark J. Warshawsky The Urge...

Page 1 of 4

FROM THE OFFICE OF PUBLIC AFFAIRS
May 18, 2005
jS-2451

Assistant Secretary of the Office of Economic Policy
Mark J. Warshawsky
The Urgent Need for Social Security Reform
National Press Foundation
Washington, D.C.
Thank you for the kind introduction I am honored to be here today.
I want to thank the organizers of this conference at the National Press Foundation
This is a great opportunity to discuss topical issues, like social secunty, in an open
forum.
President Bush said In his February State of the Union address that he wanted to
engender a national dialogue about Social Security. Regardless of where you stand
on the solution to address the looming Social Security insolvency, one thing is for
sure, the national dialogue has been raised. Now, people are talking about it. not
only in the halls of Congress - but it is the topic at lunch counters and kitchen
tables, college dining halls and office water coolers all over the country

SOCIAL SECURITY REFORM
President Bush has made Social Security reform a major prionty of his second
term Today I'll explain why it IS so important that responsible Social Secunty reform
occur now, why one element of a successful reform plan must be personal
retirement accounts that give individuals more control over their fillancial futures,
and why progressive indexing is a good approach to Improving the solvency of the
system.

The Size of Social Security's Financial Shortfall
How big is Social Security's current funding gap? The most widely cited measure of
that gap IS the 75-year actuanal imbalance, which is now estimated at $4.3 tnilion or
1.92 percent of taxable payroll. This measure suggests that immediately raising the
payroll tax rate by 1.92 percentage pOints, to 14.32 percent. would permanently fix
Social Security. But as many of you are aware, that is not true. With each passing
year, the Trustees would report an ever larger finanCial Imbalance as the 75-year
scoring window is moved forward to include years with ever larger gaps between
expected system costs and income.
As this example makes clear, estimates made over a 75 year horizon do not fully
capture the financial status of the Social Security program. In fact. no finite forecast
period completely embodies the finanCial status of the program because people pay
taxes in advance of receiVing benefits: at any finite cutoff date, people will have
accrued benefits that have not yet been paid
In order to 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 2005 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 $11 1

http://WWw.trdls.gov/press/releases/js2451.htm

5/31/2005

is-2451: Assistant Secretary of the Office of Economic Policy Mark 1. Warshawsky The Urge .. , Page 2 of4

trillion, To put this In perspective, ellmlllating the permanent neflcil could be
accomplished Wltll elil ilTlmediate and permallent 35 percentage POIllt Inuease lil
the payroll tax I'ate (to 15 9 percent), 01 Wlttl a 22 percent reduction In all current
and future benefits In both cases. It would be worth noting, there would be massive
near-term Trust Fund accUITlUlatlons

Intergenerational Equity: Why Social Security Must be Reformed Now
It is clear that the Social Security system IS not financially viable and must be fixed
How to close tile permanent financlilg gap raises difficult questions over how the
net benefits of SOCIal Security should be shared across generations. In this context,
It is Important to recognize that tile large unfunded obligations In the system are
primailly the cOllsequence of the past system generOSity to generations that are
now either dead or retired Of course, tilose early generations are beyond reform's
reach, so the entitlement reforms needed to close the finanCing gap lTlust 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 fairly distributing the benefits of SOCial
Security across generations Most people agree that It would not be fair to alter
SOCial Securrty'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 IIlcrease were instead delayed until 2041 when the
trust fund is depleted, the requIsite tax increase would be 6.3 percentage POllltS,
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
I would also point out that purely pay-as-you go financing of Social Security would
be grossly unfair to future generations. For example, one way to make SOCial
Security solvent would be to leave benefits unchanged and to raise payroll taxes
year by year beginning when the Trust Fund IS exhausted According to current
prOJections, the payroll tax rate under that policy would steadily rise beginning In
2041 and reach 19 percent at the end of the 7S-year projection period and would
continue to rise thereafter. No reasonable person would view that as a fair policy.
conclude that any reform that IS fair across generations would avoid pay-as-you go
financing and therefore would at least partially pre-fund SOCial Security benefits.

Fixing the System
Fortunately, the current untenable Situation of SOCial Security 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 Amerrcan
people n The President supports social secul'lty 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 prrnclple is that the benefits of seniors at or near retirement
should be protected, and that payroll tax rates 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

http://WWw.tr~s.gov/press/reteases/js7451.htm

5/3l/2005

js-2451: Assistant Secretary of the Office of Economic Policy Mark 1. Warshawsky The Urge",

Page 3 of4

Personal Retirement Accounts
I would like to focus on the advantages of PRAs PRAs prOVide individual control.
ownership, and offer individuals the OpportLlrllty 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 retirement accounts will be voluntary. At any time a worker can "opt In" by
maklllg a one-time electioll 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 so as to make the system permanently
solvent.
Perhaps most importantly, the I'etirement security of our current young and future
workers depends on PRAs. PRAs 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 alld give our children and grandchildren a fair deal IS with
personal accounts. Personal accounts serve as private and therefore effective "lock
boxes" When pre-funding IS done using a personal account. there is no pressure to
increase government spending, because this pre-fundlllg belongs to individuals and
does not appear on the government balance slleet as budget surpluses.

Progressive Indexing
Recently, In a primetime news conference, President Bush outlined his proposals to
permanently strengthen SOCial Secunty. The PreSident believes that future
generations should receive benefits equal to or greater than today's seniors - and
that the safety net should be strengthened for those who need it most. Middle- and
low-income Americans are among those With the most to gain from these reforms.
Common sense dictates that the highest earning seniors in the future do not need
benefits dramatically higher than the highest earners receive today -- especially
when ttle cost of paymg such benefits would mean cnppllng tax increases. To
protect the neediest Americans. President Bush IS proposing a progressive indexing
approach which would offer greater benefits for most Americans than the current
system carl afford to pay. For middle- and lOW-Income seniors, benefits would
continue to grow faster than inflation. For the highest-earnlllg seniol-s, however,
benefits would grow no faster than the rate of mflatlon
Progressive indeXing would mean real income security for millions of middle class
Amencans who would otherwise face certain benefit cuts. Under the President's
proposal, all future seniors would receive benefits at least as high as today's
seniors. even after adjusting for inflation and some - those most In need - will do
much better. Today's middle-income 20-year-old would get $17,300 per year In
benefits, which is $1.800 more than the current system can pay and $2,500 more
than today's middle-Income retiree receives. Expected benefits for those workers
who invest in personal accounts would be even higher.
A responsible, reasonable and sustainable rate of benefit growth for wealthier
seniors would also eliminate poverty among future seniors Today. roughly two
million retirees who paid Into SOCial Security their whole lives are collecting benefits
that leave them below the poverty line. By 2041, this number would double. A
sliding-scale benefit formula would eventually be able to ensure that no American
who works a full lifetime need retire in distress.
President Bush is proposing a reformed system that can afford to keep the
promises it makes. Progressive indexing would create benefits which middle class
Americans can rely on, rather than the empty promises of the current system. The
Administration wants to see Social Security strengthened for those Americans who
need it most and PreSident Bush IS leading the way towards a permanent solution.

Ittp:IIWWw.tr~~s.gov/press/releases/Js2451.htm

5/31/2005

is-2451: Assistant Secretary of the Office of Economic Policy Mark 1. Warshawsky The Urge...

Page 4 of4

CONCLUSION
To conclude. let me say that I am encouraged that Social Security reform is finally
being earnestly debated. and that i'lll parties are motivated to make Social Security
fair and permanently solvent. Today. Illy small contribution to thiS debate consists
of five lllaJor pOints
1.

Social SeCLJrlty as currently designed cannot be sustained We know with
absolute certainty that Social Security will ultilnCltely be reformed The only
question IS when alld how
Social Security reform is urgent. The longer reform IS delayed, the more
unfair refo I'll 1 will be to future generations, and the more difficult it Will be for
individuals to plan tllell' 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 tllat would be unfair to future generations.
Making SOCial Security permanently solvent requires that retirement
Incomes be pre-funded in PRAs rather than Ule 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.
Progressive indexing would solve most but not all of SOCIal Security's
finanCing shortfalls. The President IS committed to working With Congress
to find the best way to resolve the remaining shortfall.

lttp://www.tr~us.gov/press/releasesJJs2451.htm

5/3112005

rS-2452: The Honorable John W. Snow Prepared Remarks to the American Iron and Steel Institutc<... Page 1 of 3

FROM THE OFFICE OF PUBLIC AFFAIRS
May 18,2005
JS·2452

The Honorable John W. Snow
Prepared Remarks to the American Iron and Steel Institute
2005 General Meeting
Washington, DC
Good afternoon: thanks for having me here today. I hope you're having a terrific
meeting
I appreciate how close you are to the pulse of markets and current events. And I
know that few, if any, can match you in the steel industry for your grasp of
commodities markets and materials markets, as well as a sense of long term
production and capacity trends.
That's why I would like to talk today about a topic that I know is foremost In your
minds ... one that wasn't on our radar screens a few years ago, but is now central to
world economic events. the Chinese economy and Chinese economic policy.
The three decades since the Chinese took a decisive step toward the creation of a
market economy have seen a remarkable transformation of the Chinese economy.
Since 1987, Chinese growth has averaged over nine percent per year, catapulting
that country from a minor player to the seventh largest economy in the world. Per
capita income has more nli:Hl tripled In that period and hundreds of millions of
people have been lifted from poverty Even more remarkable has been their
transformation In terms of trading with other countries. China has gone from being
almost cut off from the outside world to now being the 3rd largest trading country
after the United States and Germany. Over the past four years China, along with
the United States, has been a key growth engine for the entire world economy.
Today, as you well know, what takes place in China affects the entire world
economy That means that turbulence in China's growth - periods of acceleration
and overheating of production and investment, followed by hard·landings - now
have a big effect on the global economy, as well as on markets for commodities
and basic materials.
There can be no doubt that much of Cllirla's growth performance is the result of the
policy choices that it has made - especially ItS embrace of the market over central
planning. But this remarkable transformation could not have taken place without
access to the world market, the open·trading system, and foreign investment.
China benefits greatly from the world trading and financial system
role comes responsibility, which is truly the issue of the day.

But with that

First, China must live up to its WTO commitments, including opening markets,
protecting Intellectual property and respecting the rules of the international trading
system
Second, China must also play Its part In promoting sustained world economic
growth and the adjustment to international Imbalances. This IS where China's
exchange rate policy is key.

http://www.trNls.gov/press/releases/Js2452.htm

5/31/2005

rS·2452: The Honorable John W. Snow Prepared Remarks to the American Iron and Steel Institute<... Page 2 of 3

China has kept its exchange rate fixed to the dollar for the last ten years And while
a fixed exchange rate may have had benefits for China originally. that is not true
today.
China's fixed excllange rate Impedes the transmission of international price signals
and international adjustment. It also skews Incentives Within the Chinese economy
toward production for export and away frorn production for domestic demand
Of great concern to you, I know, and to me and the President China's fixed rate is
inappropriate for the wOlld econoilly It is also inappropriate for the Chinese
economy It has Widened regional Imbalances and income disparities. It has also
led to huge capital inflows that have fueled overinvestment and speculation in the
property market. as well as the creation of a new generation of bad loans. The fixed
exchange rate coupled with large capital flows deprives China of the ability to run ItS
own monetary poliCy or alter domestic interest rates - greatly diminishing the ability
of economic policy makers to avoid the cycle of boom and bust that has occurred In
the past. And finally. a fixed exchange late allows imbalances to build up and
speculators to identify what becomes an increaSingly sure bet. The result IS that
adjustments. when they take place, are all the more disruptive
What China needs IS a more market-based, fleXible exchange rate - one that
responds to international price Signals and faCilitates international and domestic
adjustment. The Chinese leadership recognizes this. and they have made a
commitment to move to a market based flexible exchange rate.
This Administration has worked closely and Intensively with the Chinese authOrities
over the past 2 years -- both at the senior poliCy level and at the technical level - to
prepare for a more fleXible exchange rate. We have also been Joined by China's
major trading partners and the international Institutions, making clear that this is not
simply a US issue.
China has taken major steps as well It has deepened markets for foreign
exchange by liberalizing controls on transactions and surrender of foreign
exchange, and by loosening controls on capital flows. China has also introduced
financial instruments and trading systems to support a flexible exchange rate.
A major step actually took place today in Shanghai The Chinese Foreign
Exchange Trading System and Reuters began operation of a new trading system
that. among others things. expands the number of currencies that can be traded
and allows banks to act as market makers.
Finally. China has strengthened its financial system, including the regulation of
foreign exchange exposure and trading.
As a result of these efforts, China is now ready to Introduce a more market-based.
flexible exchange rate regime ... and the time to do so is now. Further delay would
not only postpone adjustment In the Chinese and global economies, it would also
add to the risks that are now bUlldlllg up.
Yesterday I released Treasury's annual Foreign Exchange Report. The report
contained a very careful evaluation of the foreign eXChange practices of China and
other economies. Wilile we did not find that China Illet the technical requirements
for designation under the terms of the 1988 Trade Act, the report made it very clear
that China must act soon to aVOid deSignation In the future
A flexible exchange rate would give China greater ability to ensure stable growth
aVOid inflation and bad loan problems, and address internal income disparities It
would also facilitate smooth and rapid adjustments to imbalances, both in the
Chinese economy and the global economy
Greater eXChange rate flexibility by China in particular, and by a number of large
economies in Asia in general, IS an Important part of bringing down the US trade
and current account imbalances while maintaining robust global growth

http;IIWWw.tmas.gov/press/releases/Js24 52.htm

5/3112005

rS-2452: The Honorable John W. Snow Preparcd Remarks to the American Iron and Steel Institute<... Page 3 of 3

That said, we should recognize that Chinese exchange rate flexibility is not a
panacea. Tile reduction of global imbalances IS a shared responsibility, and each
of the major economies has ItS part to play. The United States must cut the fiscal
defiCit and increase domestic savings We know thiS, and tile President has made
a clear commitment to cut the federal defiCit In half as a share of GOP by 2009
The Administration is also committed to Increasing the U.S savings rate ... and as
you know President Bush would like to see rp.forms of the Social Security System
that give Americans more control over their retirement Income.
Global imbalallces arp. also widener! by economies lila! are not growing as fast as
they could. The economic engines In Europe and Japan, for example, Ilave been In
neutral for too long. The European Union and Japan neer! to address the structural
problems that limit domestic growtll, so that Incomes there can grow at full
potential, and so that they can dl'ive global growth forward, Faster growth in
Europe and Japan IS cntlcal to Sllrtnklng the U,S current account deficit without
shackling the global economy
The third component IS greater exchange rate flexibility in China, along with other
emerging Asiarl economies.
Adjustment of International Imbalances and the maintenance of sustained global
growth is a shared responsibility InvolVing macroeconomic policy, structural policy,
and exchange rate policy. The International Monetary Fund has a unique role In
mobiliZing policy responses to international imbalances, and a unique role in
considerations of exchange rate policy. Yesterday I called on the IMF to undertake
a comprehensive review of current Imbalances and report on its findlrlgs,
A more flexible exchange rate for China IS not a panacea It will not eliminate the
US trade deficit. But Chillese fleXibility is part of the solution - along With fleXibility
of other currencies, stronger domestic-led growth in Europe and Japan, and
bringlrlg down the deficit and raising savlrlgs In the United States.
A market-based fleXible exchange rate IS now the next step in China's move to a
market economy, It recognizes the role that China now plays in the world economy,
as well as the need for effective market economy poliCy tools. It's a good step for
China, and It'S a good step for the rest of the world.
I'd be happy to take your questions now.

lttp:llwww.tn·.as.gov/press/re1eases/js24 52.htm

5/3112005

rS-2453: Key Note Address of Under Secretary Stuart Levey California & Florida Bankers Associa... Page 1 of 4

FROM THE OFFICE OF PUBLIC AFFAIRS
May 18, 2005
JS-2453
Key Note Address of Under Secretary Stuart Levey
California & Florida Bankers Associations'
Business Leaders Luncheon
I would like to thank Janet Lampkin (CBA CEO) "md the California Bankers
Association and Alex Sanchez (FBA CEO) and the Florida Bankers Association for
the opportunity to speak with you today.
Your organizations are vitally important to this nation's efforts to combat terrorist
financing and financial crime, and it is a pleasure for me to be speakmg before you
I have the honor of serving as the first ever Under Secretary for Terrorism and
Financial Intelligence at the Department of the Treasury. My Job is to marshal
Treasury's resources to combat national security threats, such as proliferation and
terrorism, and to safeguard our financial system from terrorist financing and money
laundering Many facets of my role, I am sure, are important to your Institutions that IS, oversight of both the Financial Crimes Enforcement Network (FinCEN),
which administers the Bank Secrecy Act, and the Office of Foreign Assets Control
(OFAC), which administers U.S. sanctions imposed upon terrorists, drug kingpins
and rogue countries.
Before I begin my remarks today, I would like to take a moment on behalf of both
Secretary Snow and myself to tllank you for the terrific support you and your
institutions have provided us In our efforts. Before I came to Treasury. I worked at
the Justice Department for the Deputy Attomey General. I knew then of the
assistance financial institutions allover the country were giving to help make our
country safer. Since I have come to Treasury. I have seen many more examples.
want you to know that we appreciate your assistance and great corporate
citizenship very much The partnership between the govemment and the financial
Industry established after September 11 th must continue to grow as we make our
country safer.
In some ways, our partnership has been codified in the USA PATRIOT Act in which
the Congress recognized a new national security paradigm brought about by 9/11.
Information is key to the security of the nation There are many critical proviSions in
the PATRIOT Act, but perhaps the most important ones deal with information
sharing. The PATRIOT Act broke down walls that prevented the sharing of
Information between law enforcement and the Iriteiligence community. Slgrllficalltly
for those of us here today, the PATRIOT Act provided us new tools to share
information both between the government and finanCial Institutions and among
financial institutions themselves. These tools - when used effectively - can add
immeasurably to our national security for one key reason: financial information,
unlike some other types of intelligence, is highly reliable and valuable to identifying,
locating and disrupting terrorist networks and others that mean to do us tlarrn.
I am often asked how we are doing in the fight against terrorist financing. It IS a
difficult question, because, frankly al Oaida and other terrorist groups do not publish
finanCial statements Instead, we must rely on various proxies to give us a sense of
our progress. In my mmd, the most useful of these proxies is the intelligence
information we receive. While I am limited in what I can say about It, I can tell you
that the information we have been receiving lately IS encouraging We have seen
intelligence suggesting that terrorists are having trouble ralslllg, moving and storing

lttp:IIWWW.trt..as.gov/pressJreleases/Js2.lJ53.htm

5/31/2005

;.2453: Key Note Address of Under Secretary Stuart Lcvey California & Florida Bankers Associa ... Page 2 of 4

money. We are also seeing terrorist groups aVOiding formal financing channels, and
instead resortlllg to riskier and more cUllliJersome financial conduits like bulk cash
smuggling. Because of aggressive action by the Departments of Treasury and
Justice and other agencies to shut down corrupt charities and to hold IndlvldlJi3ls
who fund terrorism personally accountable as terrorists - Just like terrorist
operatives - we are seeing thi3t once willint] donors are being deterred from
sending money to terrorist groups
We have also lIsed financial information to identify and disrupt terrorist networks
and operations Most Importantly, we have inclicatlons that terrorist groups like al
Oalda and Haillas are feeling the pressure and are hurting for money During thiS
saille tillle period. we have also made our financial system's Infrastructure more
resilient. In shorl, through our partnership, we have made a difference
I am keenly aware that this partnership has meant significant Investment on your
part The Bank Secrecy Act and the burden that It places on financial institutions
have gotten a great deal of attention recently. I think that attention is healthy and
appropriate. Those of us charged With responsibilities in this area realize there are
problems that must be resolved. We want to do a better Job defining your
obligations and helping you meet theill. and we need to hear your ideas about the
implementation of the Act for us to do thiS correctly. We have no desire to Impose
unnecessary burdens on industry and we certainly do not have all of the answers in
Washington

In the spirit of that candid dialogue, I would like to rnake a couple of points to keep
In mind as we discuss the compliance burdens being placed upon you
First, the threat against us continues to be real. The enemy we face is motivated,
patient and ruthless. Our terrorist enelllies do still want to attack us and they are
very focused on our economy and financial systems In particular. We know that al
Oaida targeted our nation's finanCial sector on September 11 th With the attack on
the World Trade Center, and the financial sector continues to be a favored target
We are reminded of this on a regular baSIS. Just last month, Indictments were
handed down In New York charging Issa ai-Hindi and two others with conspiring to
use weapons of mass destruction and providing material support to terrorists
According to the Indictment, they conducted surveillance of the International
Monetary Fund (IMF) and World Bank (WB) headquarters in WaShington, the
Prudential Financial headquarters in New Jersey, and the New York Stock
Exchange Building and Citlgroup Centre in New York. I am sure that you find thiS as
chilling as I do. I am sure you will recall the heightened threat level in August of
2004 in response in part to these matters. The further we get from September 11,
2001, the harder it may be to keep our sense of urgency, but we must never let our
guard down
It is not just terrorism that we have to guard against. Many national security threats
have a sophisticated finanCial underpinning that we can work together to degrade.
proliferation of weapons of mass destruction for example We must stay vigilant and
continue to Improve our capabilities to identify and act on financial information.
The second item I would like to address is the assertion made by some that the
BSA reports you file are useless or at the very least unused. This IS, quite frankly, a
myth. To the contrary, the importance of these reports cannot be overstated. I had
lunch last week with the terrorist financing section of the FBI. and they were
shocked when I mentioned thiS assertion was being made. They were able to show
me statistics suggesting that BSA data IS by far the most valuable source of leads In
terrorism investigations arld in other sophisticated illvestigations being cOllducted
by the Bureau.
I am constantly receiving examples of criminal investigations initiated by BSA
reporting Each of the federal law enforcement agencies routinely reviews
SUSpICIOUS activity reports, often With dedicated SAR review teams. Recently, the
Drug Enforcement Administration, conducting a routine SAR review by zip codes,
followed leads that uncovered a Violent street gang using a money remitter to move
drug proceeds both domestically and Internatiollally. Also recelltly, the FBI, using

ttp://WWw.tre?-S.gov/press/releases/js2453.htm

5/31/2005

rS-24S3: Key Note Address of Under Secretary Stuart Levey Califomia & Florida Bankers Associa ... Page 3 of 4

SAR analysIs, initiated an investlgiltion thilt resulted In federal felony charges filed
against seven people associated with an organization that purported to be a charity
raising money for needy people In tile Middle East Four people have already pled
guilty and are cooperating with the ongoing Investigation
The list of such cases is virtually endless I hope you are as pleased as I am that
the SARs and CTRs YOLir institutions have been filing are so valuable, and
understand ttlat we take them very seriously
We are also well aware that we need to do better on our end of the partnership, and
you should know we are committed to dOing that. I believe that Bill Fox, FInCEN's
director, tlas demonstrated that he is committed to meeting you halfway In thiS
partnership and to engage In the open dialogue I mentioned before. Let me Just say
a few words about how we are trying to do better.
First, we have recognized that there IS a need for a single, clear voice about what is
expected from the Industry. We have heard the complaints about conflicting and
mixed messages from various agenCies, and we are taking steps to do something
about It. We are now acting to coordinate the bureaucracies with responSibilities
under the Bank Secrecy Act to ensure that we are Implementing the BSA in a
reasonable and consistent way that achieves the Act's policy goals FInCEN IS
dOing an outstanding Job In endeavoring to direct and harmonize the government's
guidance Orl BSA compliance. As the administrator of the Bank Secrecy Act,
FinCEN must ensure that when one of the delegated examiners takes action, it is
consistent With the policy goals of the BSA. Also, FinCEN must ensure that policy
set In Washington translates into action by the line examiners. The federal banking
regulators have shown great commitment and cooperation in working with FinCEN
to bring coherence to the enforcement of the BSA. We are starting to see a change
already
I have also begun a dialogue with the Department of Justice to see what can be
done to improve coordination With respect to prosecutorlal deCISions to seek, or
even to threaten, Criminal charges under the Bank Secrecy Act. I know this is
something the industry IS very concerned about, and I think we will be seeing
Significant Improvements In the very near future.
Finally, we are making it a high priority to Improve the flow of information to the
private sector. Section 314 of the USA PATRIOT Act envISioned a robust flow of
sensitive Information to the private sector - a flow that we are working to create. In
the past few weeks FInCEN has finalized a secure web site that can be used for
this purpose, and we will now endeavor to make that reat. This is a Critical step
because it will enable us to help you help us in identifying the types of suspicious
activity that pose real dangers.
We are also working ~lard to ensure that your counterparts allover the world are
being asked to do their part In thiS fight. International cooperation In combating
money laundering and terrorist financing IS more important than ever. As this
audience well knows, the US financial system does not eXist as an island, whicll is
why I spend a great deal of my time reaching out globally, working With
multinational organization and regional bodies, and bilaterally With other countries
to encourage the adoption of fundamental anti-money laundering and counter
terrorist financing policies and procedures.
One of the most significant advances we have seen In recent weeks is foreign
banks adopting OFAC's SpeCially DeSignated Nationals, or SON, list even for
transactions that do not touch the U.S ThiS IS a momentous event In terms of
multiplying the effects of our dOlllestlc sallctiolls authOrities In countries 1I1at lack
the infrastructure to establish sanctioning bodies like OFAC, we are working directly
With the private sector at the inVitation of national governments and central banks.
Our goal is to engage the private sector as our partners agalilst Illoney laundering
and the finanCing of terrorislll Just as we are doing here at home.
Our contillued success requires building bridges across governmental departments,
between the regulatory agencies and to you, the private sector. It IS a big project

ttp://WWW.tre~s.gov/press/re1eases!js2453.htm

5/3112005

S-2453: Key Note Address of Under Secretary StuaIi Levey California & florida Bankers Associa ... Page 4 of 4

and it is ongoing. We are keenly aware of the mixedrnessages you have received
and the growing pains we have all endured. However, I want to leave you with the
thought that our efforts against terrorist financing and to protect our national
security are a shared responsibility
The old paradigm of governments defending their citizenry from outside threats
vanished on 9/11. The threats to our security are no longer purely external, but can
come from Within, and require that we all think about the threat differently. In short,
the government cannot do it 310ne. We need YOUl- help. We will work tirelessly to
fulfill Oul' obligations in this partnerShip. Working together, we have made great
progress, and only by working together carl we build upon that success.
Thank

YOLI

Ittp://www.tre85.gov/press/reJeasesl)s2453.htm

5/3112005

S-2454: Remarks of Greg Zerzan Acting Assistant Secretary for Financial fnstitutions before th... Page I of 3

FROM THE OFFICE OF PUBLIC AFFAIRS
May 18,2005
JS-2454

Remarks of Greg Zerzan
Acting Assistant Secretary for Financial Institutions
before the Exchequer Club
Washington, DC
Thank you very much for inviting me to appear before you today. I am honored to
be speaking before a group dedicated to discllssing the Important economic and
financial policy questions of the day--a field which IS always the source of lively
debate, but rarely more so than today.
Back in 2003 I had been In my newly appointed position at Treasury for less than a
month when I was tasked With going out on the road to discuss the PreSident's tax
cuts. It's something I was eager to do; long a believer In the power of keeping
money in the hands of those who earned it, I looked forward to spreading the good
news about the President's plan
And In fact I did hear a tremendous amount of support; so much so that we were
able to pass the legislation despite some vehement Congressional opposition But
what surprised me more was the fact that I heard any opposition at all. Yet there I
was, in the middle of southern New Jersey, accosted by a group of men and
women complaining that the budget for a government program they suppor1ed had
been so curtailed that they were not able to get a grant for their local theater hall.
How could the President being proposing tax cuts, they asked. when they couldn't
even put on a performance of "Death of a Salesman"?
So here, staring me in the face, was ttle problem that afflicts all poliCY makers for
every program there is a constituency, for every Jot and title of the law there is a
group that feels dearly invested.
But the President proposed hiS successive rounds of tax cuts because he believed
In something even more fundamental: leaving capital In the hands of private citizens
to spend and invest as they see fit is more productive than having government
redistribute it for them. It amazes that thiS idea remains controversial, but even now
we face the looming prospect of further fights In Congress over whether to make
the tax cuts permanent, and over what types of reforms to expect when the
PreSident's tax panel comes out With ItS recommendations later thiS summer But
let's look at the record in light of the PreSident's tax cuts: for the first seven months
of the current fiscal year, receipts total $1.217 trillion, up 14% from the same period
in 2004 The government recorded a $5771 billion budget surplus in April, up
sharply from the $17.58 billion budget surplus in April 2004. Since May of 2003 over
3 million new jobs have been created. Simply put, the tax cuts have done exactly
what they were designed to do they have promoted economic growth and Job
creation, and played a large part in lifting our economy out of recession while at the
same time helping to reduce defiCits. As we move forward In the coming years let
us hope that the lesson of the PreSident's leadership in this area is not forgottentax cuts work.
Of course, tax issues are not the only dilemma which we are confronting As you
know, the President has called for fixing the broken Social Security system to
ensure that the promises made to future generations will be kept. Currently, the
SOCial Security trust fund is heading towards insolvency by 2017 the system Will
begin to payout more in benefits than It receives in contributions. By 2041, the trust

Ittp:llwww.trem:;.gov/press/reieases/js2454.htm

5/3112005

IS-2454: Remarks of Greg Zerzan Acting Assistant Secretary for Financial Institutions before th ... Page 2 of3
fund will be broke.
Reforming Social Secunty IS not a Republican or a Democrat Issue; It IS an
American problem Unfortunately, some seem willing to deny a problem even eXists
in tile hope 1I1at they can score political pOints The problem Wltll this approach IS
self eVICJent- evelltually they will have to explain to the American people why the
Social Security checks they wele promised are not arriving In the mail Some have
claimed that voters have short memories, but that ~las not been my expenence
In order to fix a broken system the President has stated that one way to fiX the
system is for benefits to grow faster In the future for lOW-Income workers than for
those who are better off. Under a reform proposal, low-income workers shOuld
receive benefits that grow faster than IIlflatloll. In order to return the system to
solvency, the benefit Increases fOl- wealthier seniors would grow no faster than the
rate of Inflation
Additionally, younger workers should be allowed to have a nest-egg through
personal accounts, and one option for such an account should be Investlllg In
Treasury securities.
In any event, workers 55 years and older wlil see no changes to the benefits they
have been promised. The President wants to save Social Security in a responsible
way that ensures the program exists for future generations. We could not avoid this
upcoming debate about Social Security reform even if we wanted to- demographics
and basic economics tell us the system IS on the road to collapse. By acting now
the President has sounded the clanon call to Congress, and those who would seek
short term political advantage on thiS issue are doing a disserVice to our child ren
and grandchildren
We are of course also in the midst of an histonc debate about the role and
regulation of the housing government sponsored enterprises It is worth noting at
the outset what a tremendous success our houslllg market has been- currently
homeownership is at 69%, an all-time Iligh, and housing starts continue to rise at a
record pace. This Administration supports homeownership not only because of the
important role the houslllg industry plays In our economy, but also because
homeownershlp benefits society. Home owners tend to be involved in their
communities, involved in the ciVIC life where they live, and are both literally and
figuratively IIlvested in their neighborhoods, schools and towns.
And it IS because homeownership is so highly regarded that the Administration has
proposed comprehensive reform of the regulatory structure for the housing GSEs.
The Administration has called for the creation of a Single regulator for Fannie Mae,
Freddie Mac and the Federal Home Loan Banks, one eqUipped With all the powers,
tool and stature of our other finanCial regulators. This means that the new regulator
should have Hle power to set the minimum and risk-based capital levels of the
GSEs, approve the types of businesses a GSE can enter into, including those
newly proposed and those which already exist, and the power to place an entity In
receivership should that prove necessary.
These powers also include the ability to place limits on the retained portfolios of the
GSEs. Retaining enormous portfolios of mortgages does little to further the mission
of creating a liquid secondary market in mOl1gaged backed securities, but does
present significant systemic risk. Any regulatory reform legislation passed by
Congress should give the GSE regulator the power to IlIlllt retained portfolio
holdings, and should provide the regulator with clear and explicit direction to do so
These issues which I have shared With you today are of course not the only topics
which occupy our time here in Washington, but certainly they are among the most
pressing. In the weeks and months ahead we have the opporlurllty to promote
change that can prOVide a firm foundation for the continued sliccess and prosperity
of our country. I thank you for allOWing me to appear before you to advance these
ideas, and I look forward to your continued participation in the public diSCUSSion of
them.

ttp:llwww.tre?-.i.gov!press!releases/js2454.htm

5/31/2005

S-2455: MEDIA ADVISORY The U.S. Department of Treasury to Host Economic Roundtable,<...

Page lof2

FROM THE OFFICE OF PUBLIC AFFAIRS
May 18,2005
JS-2455

MEDIA ADVISORY
The U.S. Department of Treasury to Host Economic Roundtable,
"The Need to Strengthen Social Security"
Secretary John W. Snow will host a roundtable event, "The Need to Strengthell
Social Security," at the Treasury Department on Thursday, May 19th, from 9 am to
12 p.m.
The event will bring together some of the nation's leading economists for a
conversation on the problems facing Social Security and the best way to structure a
permanent solution. The program will include a panel discussion, "Yesterday's
Promises + Tomorrow's DemographiCS = Today's Challenge," followed by remarks
from some of the leading voices In the Social Security debate.
Roundtable partiCipants will IIlclude Harvey S. Rosen, Chairman of the President's
Council of Economic AdVisers; Robert C. Pozen, Chairman, MFS Investment
Management: Benjamin J. Stein, renowned author. economist, lawyer, and
entertainer; Mark J. Warshawsky, Treasury ASSistant Secretary for Economic
Policy; Carolyn L. Weaver, former Director of SOCial Security & Pension Studies at
the American Enterprise Institute; Sylvester J. Schieber, Vice President and
Director of U.S Benefits Consulting at Watson Wyatt Worldwide; Dr. June O'Neill,
former Director of the Congressional Budget Office; and Charles P Blahous,
Special Assistant to the President for Economic PoliCy.
"President Bush has laid out goals for reform - to ensure that future generations
receive benefits equal to or grealer than today's seniors; to protect those who
depend on Social Security the most: and to replace the empty promises being
made to younger workers with real money," said Secretary Snow "The Department
of the Treasury and the Council of Economic Advisers share the President's vision
for bipartisan SOCial Security reform and Thursday's roundtable will move the policy
discussion forward"
The following event IS open to credentialed media with photo Identification
(credentials must be visible at all times). Full agenda follows below.

Thursday, May 19th
"The Need to Strengthen Social Security"
U.S. Department of the Treasury
Cash Room
1500 Pennsylvania Avenue, NW
WaShington, D.C.

9:00 a.m. to 12:00 p.m. EDT
** Media without Treasury credentials must send their name, organization,
date of birth and Social Security number to Frances Anderson at
fr~llu::s.all(jfJi·SOlhl1,uu.trl'ds 'Jov or (202) 528-9086 by 5pm today.
AGENDA
The Need to Strengthen Social Security:
A Roundtable by the U.S. Department of the Treasury

lttp:/IWWw.tre~.gov/press/releases/js24'i5.htrn

5/3112005

S·2455: MEDIA ADVISORY The U.S. Depa11ment of Treasury to Host Economic Roundtable,<."

Page 2 of2

Schedule of Proceedings
9:00 am
Welcome:
The Honorable John W. Snow
Secretary of the Treasury
9:15 am
Speaker Ben Stein
Renowned a Util or , economist, lawyer, and entertainer
9:30 am
Pallel "Yestel'day's Promises + Tomorrow's Demographics

= Today's

Challenge"

Moderator:
The Honorable Mark J. Warshawsky
Assistant Secretary for Economic Policy
U.S Department of the Treasury
Panelist:
Carolyn L Weaver, PhD
Former Director of SOCIal Security & Pension Studies,
American Enterprise Institute
"Yesterday's Promises"
Panelist:
Sylvester J Schieber, Ph.D.
Vice President, Watson Wyatt Worldwide
"Tomorrow's Demographics"
Panelist:
The Honorable June O'Neill
Former Director, Congressional Budget Office
"Today's Challenge"
10:30 am Scheduled Break
10:45 am
Speaker: Robert C. Pozen
Chairman, MFS Investment Management
"On Pmgressive IndeXing"
11:15am
Speaker The Honorable Harvey S. Rosen
Chairman. Council of Economic AdVisers
"The Case for Personal Retirement Accounts"
11:30am
Speaker The Honorable Charles P BlatlouS
SpeCial Assistant to the President for Economic POliCY,
National Economic Council
"Tying It All Together"

http://www.tnas.gov!press!releases!js2455.htm

5/3112005

S-2456: Treasury and IRS to Provide Morc Timc to Spcnd<I3R> FSA Funds

Pagc 1 of 1

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

May 18, 2005
JS-2456

Treasury and IRS to Provide More Time to Spend
FSA Funds
WASHINGTON, DC -- Toclay tile Treasury Depaltment zlIlcl the IRS Issuecl Notice
2005-42 which Will allow employels to modify Flexible Spending AI'rangeillel1ts
(FSAs) to extend the deacJilne for reimbursement of health and dependent care
expenses up to 2'/; months after tile end of the plan year Previously, employees
were required to "use-or-Iose" FSA fUl1ds by the end of the year. Ullder the old
rules, any unspent fUllds at year's end would be forfeited
"The ilew rule Will give workers Wltll FSAs I1lme time to pay for medical and
dependent care expenses and Will ease the year-end spending rush prompted by
the pllor rule," stated Treasury Secretary John Snow. "Puttlng people back In
charge of their own care IS one of the most Important things we can do to
strengthen our health care system. That's why PreSident Bush 11as made It a
priority to make It easier to access and pay for care through FSAs and to el1courage
consumel' driven health care Initiatives such as Health Savings Accounts"
FSAs allow employees to pays for uncovered or unrell1lbursed medical costs With
pre-tax funds FSAs are different than Health Savings Accounts (HSAs), which
allow IndiViduals and families With hlgll-deductlble health care plans to set pre-tax
money aSide for health expenses Unlike an FSA, Wl1lch must be spent Within a
certain period of time, HSAs can be rolled over from one year to the next

REPORTS
•

The text of Notice 2005-42

tttp:llwww.treas.gov/press/releases/JsT456.htm

S/3 1/200S

Section 125 - Cafeteria Plans -- Modification of Application of Rule Prohibiting
Deferred Compensation Under a Cafeteria Plan
Part III - Administrative, Procedural, and Miscellaneous
Notice 2005-42
PURPOSE
The purpose of this notice is to modify the application of the rule
prohibiting deferred compensation under a § 125 cafeteria plan. This notice
permits a grace period immediately following the end of each plan year during
which unused benefits or contributions remaining at the end of the plan year may
be paid or reimbursed to plan participants for qualified benefit expenses incurred
during the grace period.
BACKGROUND
In general, no amount is included in the gross income of a participant in a
cafeteria plan solely because, under the plan, the participant may choose among
the benefits of the plan. Section 125(a). A cafeteria plan is defined in
§ 125(d)(1) as a written plan maintained by an employer under which all
participants are employees, and the partiCipants may choose among two or more
benefits consisting of cash and qualified benefits. Section 125(f) defines a
"qualified benefit" as any benefit which, with the application of § 125(a), is not
includable in the gross income of the employee by reason of an express
provision of Chapter I of the Internal Revenue Code (other than §§ 106(b), 117,
127 or 132). Qua lified benefits include employer-provided accident and health
plans excludable from gross income under §§ 106 and 105(b), group-term life
insurance excludable under § 79, dependent care assistance programs
excludable under § 129 and adoption assistance programs excludable under §
137. Elections under a cafeteria plan, once made, can be changed or revoked
only as provided in Treas. Reg. § 1.125-4. A cafeteria plan must have a plan
year specified in the written plan document. Prop. Treas. Reg. § 1.125-1, Q&A-

3.
Section 125(d)(2)(A) states that the term "cafeteria plan'" does not include
any plan which provides for deferred compensation. The statutory prohibition on
deferred compensation in a cafeteria plan is addressed in Prop. Treas. Reg. §§
1.125-1 and 1.125-2. Prop. Treas. Reg. § 1.125-2, Q&A-5 states that:
A cafeteria plan may not include any plan that offers a benefit that defers
the receipt of compensation. In addition, a cafeteria plan may not operate
in a manner that enables employees to defer compensation. For example,
a plan that permits employees to carry over unused elective contributions
or plan benefits (e.g., accident or health plan coverage) from one plan
year to another operates to defer compensation. This is the case

regardless of how the contributions or benefits are used by the employee
in the subsequent plan year (e.g., whether they are automatically or
electively converted into another taxable or nontaxable benefit in the
subsequent plan year or used to provide additional benefits of the same
type). Similarly, a cafeteria plan operates to permit the deferral of
compensation if the plan permits participants to use contributions for one
plan year to purchase a benefit that will be provided in a subsequent plan
year ....
See also Prop. Treas. Reg. § 1.125-1, Q&A-7.
Thus, a cafeteria plan does not include any plan that defers the receipt of
compensation or operates in a manner that enables participants to defer
compensation by, for example, permitting participants to use contributions for
one plan year to purchase a benefit that will be provided in a subsequent plan
year. This rule is commonly referred to as the "use-it-or-Iose-it" rule, requiring
that unused contributions or benefits remaining at the end of the plan year be
"forfeited."
However, other areas of tax law provide that for a short, limited period,
compensation for services paid in the year following the year in which the
services that are being compensated were performed is not treated as "deferred
compensation." For example, Treas. Reg. § 1.404(b)-1T, Q&A-2(a) provides that
for purposes of the deduction rules in § 404(a), (b) and (d), a plan, or method or
arrangement defers the receipt of compensation or benefits to the extent it is one
under which an employee receives compensation or benefits more than a brief
period of time after the end of the employer's taxable year in which the services
creating the right to such compensation or benefits are performed. Under Treas.
Reg. § 1.404(b)-1T, Q&A-2(c), a plan, or method or arrangement shall not be
considered as deferring the receipt of compensation or benefits for more than a
brief period of time after the end of the employer's taxable year to the extent that
compensation or benefits are received by the employee on or before the fifteerth
day of the third calendar month after the end of the employer's taxable year in
which the services are rendered. See also Weaver v. Commissioner, 121 T.C.
273 (2003); Rev. Rul. 88-68, 1988-2 C.B. 117. Cf. H. R. Conf. Rep. No. 755,
108th Cong., 2d Sess. at 735 (2004) (§ 409A "does not apply to annual bonuses
or other annual compensation amounts paid within 2 and 1/2 months after the
close of the taxable year in which the relevant services required for payment
have been performed"). Consistent with these other areas of tax law, Treasury
and the IRS believe it is appropriate to modify the current prohibition on deferred
compensation in the proposed regulations under § 125 to permit a grace period
after the end of the plan year during which unused benefits or contributions may
be used.

MODIFICATION OF APPLICATION OF RULE PROHIBITING DEFERRED
COMPENSATION UNDER A § 125 CAFETERIA PLAN
The rule that a cafeteria plan may not defer the receipt of compensation
as set out in Prop. Treas. Reg. §§ 1.125-1 and 1.125-2 is modified as follows: A
cafeteria plan document may, at the employer's option, be amended to provide
for a grace period immediately following the end of each plan year. The grace
period must apply to all participants in the cafeteria plan. Expenses for qualified
benefits incurred during the grace period may be paid or reimbursed from
benefits or contributions remaining unused at the end of the immediately
preceding plan year. The grace period must not extend beyond the fifteenth day
of the third calendar month after the end of the immediately preceding plan year
to which it relates (i.e., "the 2 and 1/2 month rule"). If a cafeteria plan document
is amended to include a grace period, a participant who has unused benefits or
contributions relating to a particular qualified benefit from the immediately
preceding plan year, and who incurs expenses for that same qualified benefit
during the grace period, may be paid or reimbursed for those expenses from the
unused benefits or contributions as if the expenses had been incurred in the
immediately preceding plan year. The effect of the grace period is that the
participant may have as long as 14 months and 15 days (the 12 months in the
current cafeteria plan year plus the grace period) to use the benefits or
contributions for a plan year before those amounts are "forfeited" under the "useit-or-Iose-it" rule.
During the grace period, a cafeteria pia n may not permit unused benefits
or contributions to be cashed-out or converted to any other taxable or nontaxable
benefit. Unused benefits or contributions relating to a particular qualified benefit
may only be used to payor reimburse expenses incurred with respect to that
particular qualified benefit. For example, unused amounts elected to payor
reimburse medical expenses in a health flexible spending arrangement (FSA)
may not be used to payor reimburse dependent care or other expenses incurred
during the grace period. To the extent any unused benefits or contributions from
the immediately preceding plan year exceed the expenses for the qualified
benefit incurred during the grace period, those remaining unused benefits or
contributions may not be carried forward to any subsequent period (including any
subsequent plan year) and are "forfeited" under the "use-it-or-Iose-it" rule. As
under current practice, employers may continue to provide a "run-out" period
after the end of the grace period, during which expenses for qualified benefits
incurred during the cafeteria plan year and the grace period may be paid or
reimbursed.
An employer may adopt a grace period as authorized in this notice for the
current cafeteria plan year (and subsequent cafeteria plan years) by amending
the cafeteria plan document before the end of the current plan year.
The rules of this notice are illustrated by the following examples:

Example (1 ). Employer with a cafeteria plan year ending on December
31,2005, amended the plan document before the end of the plan year to permit
a grace period which allows all participants to apply unused benefits or
contributions remaining at the end of the plan year to qualified benefits incurred
during the grace period immediately following that plan year. The grace period
adopted by the employer ends on the fifteenth day of the third calendar month
after the end of the plan year (March 15, 2006 for the plan year ending
December 31,2005). Employee X timely elected salary reduction of $1,000 for a
health FSA for the plan year ending December 31, 2005. As of December 31,
2005, X has $200 remaining unused in his health FSA. X timely elected salary
reduction for a health FSA of $1 ,500 for the plan year ending December 31,
2006. During the grace period from January 1 throug h March 15,2006, X incurs
$300 of unreimbursed medical expenses (as defined in § 213(d)). The unused
$200 from the plan year end ing December 31, 2005 is applied to payor
reimburse $200 of X's $300 of medical expenses incurred during the grace
period. Therefore, as of March 16,2006, X has no unused benefits or
contributions remaining for the plan year ending December 31,2005. The
remaining $100 of medical expenses incurred between January 1 and March 15,
2006 is paid or reimbursed from X's health FSA for the plan year ending
December 31,2006. As of March 16, 2006, X has $1,400 remaining in the health
FSA for the plan year ending December 31,2006.
Example (2). Same facts as Example (1), except that X incurs $150 of

§ 213(d) medical expenses during the grace period (January 1 through March
15,2006). As of March 16,2006, X has $50 of unused benefits or contributions
remaining for the plan year ending December 31,2005. The unused $50 cannot
be cashed-out, converted to any other taxable or nontaxable benefit, or used in
any other plan year (including the plan year ending December 31,2006). The
unused $50 is subject to the "use-it-or-Iose-it" rule and is "forfeited." As of March
16,2006, X has the entire $1,500 elected in the health FSA for the plan year
ending December 31,2006.
EFFECT ON OTHER DOCUMENTS
Future guidance will modify Prop. Treas. Reg. §§ 1.125-1 and 1.125-2 to
reflect the provisions in this notice.
DRAFTING INFORMATION
The principal author of this notice is Elizabeth Purcell of the Office of
Division Counsel/Associate Chief Counsel (Tax Exempt and Government
Entities). For further information regarding this notice contact Ms. Purcell on
(202) 622-6080 (not a toll-free call).

S-24S7: Deputy Assistant Secretary Iannicola Teaches Personal Finance to Girl Scouts and Helps Laun...

Page I of I

FROM THE OFFICE OF PUBLIC AFFAIRS
May 17, 2005
JS-2457

Deputy Assistant Secretary lannicola Teaches Personal Finance to Girl
Scouts and Helps Launch Financial Literacy Initiative in San Antonio, Texas
Treasury's Deputy Assistant SecretalY for Financial Education, Dan lannlcola, Jr
today taugllt a personal fillance lesson to more tllan fifty Girl Scouts In San AntoniO,
Texas lannlcola Ilelped kick off (' firlanciailitelacy initiative sponsoled by tile Girl
Scouts called CelltsAbillty lannlcola taugllt the Scouts Ilow to set realistic financial
goals, how to plall for tllose goals, how to establlsll a savrngs plan and to create a
realistic budget based on current income and expenses
"Knowing how to mallage one's money IS ,111 essential life skill Today we're
empowering these Girl Scouts WI til tile knowledge to someday function as
Independent adults," said lannlcola "I commend the Girl Scout CounCil of San
AntoniO for making financial literacy a priority tilrougll ItS use of the CentsAbllity
financial education program," Ile continued
The participants were started on a savings plan and given tllelr own new piggy
ballk as a remillder of what they had learned durrng today's lesson Tile Girl
Scouts is a worldwide organization dedicated to helping girls bUild character and
skills for success In tile leal world In partnership with committed adults, the
organization focuses on helprng girls develop qualities that Will serve them
throughout tilelr lives Tile CentsAblllty progl-am, was developed to Ilelp girls ages
9-11 develop and flex their financial literacy muscles The projects and activities
Included In tile CentsAbillty kit offer opportunities for volunteers to help girls leam,
and put Into action key concepts and skills related to personal money management
The Department of the Treasury IS a leader In promoting financial edllcation
Treasury established the Office of FinanCial Education ("Office") In May 2002. The
Office works to promote access to tile finanCial education tools that can help all
Amerrcans make wiser chOices In all areas of personal financial management, With
a speCial emphaSIS on saving, credit management. home ownersilip and retirement
planning. The Office also coordinates the efforts of the FinanCial Literacy and
Education Commission, a group chaired by tile Secretary of Treasury and
composed of representatives from 20 federal depal'tmerlts, agencies arld
commiSSions, which works to Improve flnallClal literacy and educatlorl for people
throughout the United States. For more irlformatloll about the Office of FinanCial
Education VISIt. www.treas_90v/financialeducation.

Ittp:llwww.tre?s.gov/press/releases/js24S7.htm

5/31/2005

5-2458: Secretary Snow's Remarks at Treasury's Social Security Economic Roundtable

Page 1 of2

FROM THE OFFICE OF PUBLIC AFFAIRS
May 19,2005
js-2458
Secretary Snow's Remarks at Treasury's Social Security Economic
Roundtable
Treasury Department Hosts Economic Roundtable, "The Need to Strengthen Social
Security" Leading Economists Gather To DIscuss Ttle Need For A Permanent
Solution
Secretary John W SllOW today welcomed leading economists and policy experts to
the Treasury Department for a roundtable event, "The Need to Strengthen Social
Security."
The roundtable, which took place this morning In Treasury's historic Cash Room,
was a productive discussion of the problems facing Social Security and the best
way to structUie a permanent solution. The program featured a panel, "Yesterday's
Promises + Tomorrow's Demographics = Today's Challenge," followed by remarks
from some of the leading vOices in the SOCial Security debate.
Roundtable partiCipants included Harvey S Rosen, Chairman of the President's
Council of Economic Advisers: Robert C. Pozen, Chairman, MFS Investment
Management: Ben Stein, renowned author, economist, lawyer, and entertainer:
Mark J WarshaWSky, Treasury Assistant Secretary for Economic Policy: Carolyn L.
Weaver, former Director of Social Security & Pension Studies at the American
Enterprise Institute: Sylvester J Schieber, Vice President and Director of US.
Benefits Consulting at Watson Wyatt Worldwide: Dr. June O'Neill, former Director of
the Congressional Budget Office: and Charles P Blahous, Special Assistant to the
President for Economic Policy.
Secretary Snow's Remarks:
The Honorable John W. Snow
Prepared Remarks: Economic Roundtable on SOCial Security Reform
Treasury Department Cash Room
Good morning: thank you all for coming It is always a pleasure to welcome guests
to thiS stunning and historic room In the Treasury.
I believe that our speakers, and our program today, will do thiS impressive room
lustice. Some of the sharpest economic minds in the country are here to discuss the
most pressing and eXCiting economic Issue of the day saving and strengthening
our nation's SOCial Security system
The system IS financial unsustainable, and America knows It. The question is no
longer whether to fix Social Security .. the question today IS how are we going to fiX
it.
The Social Security trustees report, after all, cannot be denied. The work of nonpartisan actuaries shows that Social Security cash flows peak in 2008 and turn
negative In 2017. The trust fund Itself will be exhausted in 2041. The unfunded
obligation IS a staggering $11 1 trillion on a permanent basis, and $4.0 trillion over
the next 75 years.

Itip:IIWWw.treat.:.gov/press/re1eases/js2458.htm

5/3112005

is-2458: Secretary Snow's Remarks at Treasury's Social Security Economic Roundtable

Page 2 of2

No one knows these facts, this reality, better than today's speakers and panelists.
Today's diScussion will therefme be a significant part of the terrifiC national dialogue
that has been In full-sWlllg since the President talked about savirlg Social Security
In his State of the Union Address. I've traveled allover the country to engage
Americans in a conversation about the Issue, and It's been wonderful to see the
diSCUSSions IIlat al'e taking place, frolll lunch counters to kitchen tables, from
college dining halls to the halls of Congress - wllere specific proposals and ideas
are emerging, and the President and I are delighted to see that progression.
As all of you know, the President IS leadlllg the national dialogue on thiS Issue by
VOIcing his commitment to some key prinCiples - his IS not an overly prescriptive
approach - and by maintaliling openness to Ideas and solutions from everyone who
comes forward with them.
One of the most important thlllgs that the President talks about IS the need fm any
solution to be a permanent one We need to make the system solvent on a
permanent baSIS. Too Illany times now SOCial Security has been patched up with
tax increases and other band-aids that get us through a few more years, but don't
offer a lasting answer. Waiting to act would invite the next band-aid solution ... for
Without action, younger workers face maSSive, economically damaging tax
IIlcreases (payroll taxes would have to be raised immediately by 3.5 percentage
points - that's about a 30 percent increase - to make the system whole on a
permanent basis) or steep benefit cuts to keep the program solvent
Because of our changing demographics, the structure of the program simply isn't
going to work for future generations the way It did for retirees of the 20th century. It
IS time to modernize the program, and the sooner we do so, the better. The future
of our children and grandchildren, and future of our great economy, absolutely
depend on It
Let me be clear that the promises of the system do not have to change We can
keep the promises - more accurately, we can Illlprove the system to deliver on the
promises - but to do so we must thoughtfully re-configure how they are delivered.
For example, the President has proposed a form of progressive indeXing of
benefits. By slowing the rate of growth of benefits for wealthier Americans, we can
protect the future benefit levels for lower income people. Under this approach,
those most In need Will retire with benefits which are greater than the current
system can deliver while higher income people will see their benefits rise over
current levels, but at a slower rate.
The President's IndeXing proposal IS an approach that IS socially just while also
being finanCially responsible, bringing the program about 70 percent of the way
toward solvency. I know he IS looking forward to working with Congress to bring the
program all the way to 100 percent, permanent solvency
I'm looking forward to hearing the excellent diSCUSSion of Ideas on solvency,
personal accounts, permanent solutions and more today at thiS roundtable, so I
won't delay us any longer. let's get started. Thank you
-30-

Ittp:IIWWw.treas.gov/press/releases/Js24S8.htm

5/31/2005

S-2459: Treasury Secretary Snow Appomts UIIIl L. Wethington as Special Envoy on China

Page 1 of2

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

May 19,2005
JS-2459

Treasury Secretary Snow Appoints Olin L. Wethington
as Special Envoy on China
Treasury Secretary Jolll1 SI10W today al1rlOunced tllat 11e IS appoillting Olin L
Wethington as his Special Envoy 011 ClllnZl Mr Wethington Will be responsible for
direct engagemellt With Cll111a all ISSLIes relatecl to exchange rate and financial
market reform
''I'm very pleased that Olin Wetllington Ilas agreed to take on thiS assignment," said
Secretary John Snow. "His appoilltmellt comes at a time when contrnuatlon of
cenalll poliCies constrains adJlIstment of Illternational Imbalances and poses risk to
global economic growth HIS appoliltment seeks to continue and intellslfy a
constructive dialogue With Cilina on these Issues. TillS IS a critical time for China to
Implement necessary economic reforms - most notably, reform of ItS currency
regime and the adoption of market-based exchange poliCies Olill Wetilington
brings extensive experience and talent to thiS position I have enormous
cOllfldence In IllS ability to do thiS Job"
Secretary Snow directed Mr. Wethlngtoll, III carrying out hiS responsibilities, to
consult With other governments as necessary, particularly In ASia and among tile G7, alld wltillnternatlonal frnanclallnstltutlons, most Importantly the Intematlonal
Monetary Fund
HIS responsibilities Will also IfIclude tile Chlfla portfoliO of Ambassador Paul Speltz,
WllO Will continue IllS full-time position as U.S Executive Director at tile Asian
Development Bank In Manilla, Plllllpplnes SecretalY Snow praised tile work of
Ambassador Speltz "Ambassador Speltz did an outstalldlllg Job over the past year
and has actlleved so much, particularly Wltll our Technical Cooperation Program
With Cilina There IS no greater testament to Paul's accompllsllments tilan the fact
tilat China today IS now ready to IIltroduce Clll'rellcy fleXibility I greatly appreciate
the Job he has done and I am very pleZlsed that ile Will COlltlnue to lepresent the
United States at ttle ASian Development Ballk "
"It IS a great Ilonor to take tillS asslgllmenl, as It IS an Important priority for tile Bush
Administration that China Implements sound economic poliCies. I look forward to
working wltil ttle Chinese government, as well as other governments In the region,
and our panners In tile G7 to encourage China to I'eforrn ItS currency poliCY· Such a
reform IS in Chrna's best Interest and It IS rn the best Interest of tile global
economy," Wethington said
Mr, Wethington has a successful track recorcl In international financial diplomacy
and cleep experience 111 cleallng With foreign govermnents on matters of financial
market reform In 1991-92, he sel'vecl as ASSistant Secretary for Intematlollal
Affall's at tile U S Tl'easLJry In that capacity, Ile led a Ilumber of Impol-tallt fillancial
market initiatives, panlcularly If) ASia, including the US (Japan Structural
Impediments Initiative, ancl was a key paltlclpallt III the clollar/yell talks He also
chaired the US/Korea flf1anclal services talks and lecl, on bellalf of the Treasury.
diSCUSSions during that period With Cilina on exchange I'ate matters. He served as
chief negotiator of the financial services components of tile NAFT A, Including

IttP://www.treas.gov/press/releases/js2459.htm

5/31/2005

S-2459: Treasury Secretary Snow Appoints Olin L. Wcthington as Special Envoy on China

Page 2 of 2

b'lllklllg. seClllitles dlld InSllrdllc(~ III 1~JU()-D1. Mr Wettllll(jtoll selved ZlS Executive
Secretary, Econolllic ['ollcy COlI11CiI. ,It ttw WI11((~ HOIlse 111 tile private sector. as
senior panner Wlttl Step(()(~ & JOllilSOIl LLP. Iw drlVIS(~d ovel ttl(; PZlst sevelClI
decades 11UI11elOUS ill,ljOl AnH'rlcdll cOlllpanles un IlltcrnatlOrlill flllclilcial alld trade
mattels, IIlclu(1111~j wltll ICSP(~ct to ClllnCl

More recently. Mr WC'tillllCltOIl S(~lv(!d dS 011 i!CtlJI. ECUlllJllllC f)ollcy. Willi tlw
Cualltloll PIOVISIUlldl ALltllUrity 111 B;l(jI1di]d. wlwre fOi close to t}lgllt Illollflls IH~ was
ttle seillor TredSLIry ufliCk]1 Oil b'lIlklnq. fillililce iliid eC0110111IC nlCltters. IrlclllcJlrlCJ tile
effort to bulici tile CdjlLlClty ()f tlw CC;11tldl Bclilk dnd Fillclilce MI11lstry of Irdq UPOI1
illS retuill from Bdgillicid. Ile WilS 11dllWd Counselor tu tile Secretary of the TleClsLlry
iHld playec! Cl centrell role III tile Illfernatiolidl dfmt to lerillce substantially Iraq's
S 125 bill 1011 extclllClI debt He leel tile CHHjrCJUllcJ Ilegotlatlulls for tile United States
Witilill lile Paris Club lilat produced International aqreement to elllllinate 80'1" of
Iraq's extemal debt--tlle largest debt write-cjowil by sovereign creditors Irl tile flftyyear history of the Paris Club
Mr. Wetlllllgton Will continue to selve III
Secretary

~llS

capClclty as COLinselor to tile Treasury

He IS a graduate of tile University of Perlilsylvanla. wilel-e Ile majored III Orlelltal
Studies. Irlcludlng Clllrlese Illstmy and language. and of tile Harvard Law School

REPORTS
•
•

Snow Letter
Speltz Letter

Ittp:llwww.tre(l.).gov/presslreleasesljs22f59.htm

5/31/2005

DEPARTMENT OF THE TREASURY
WASHINGTON, D.C.
SECRETARY OF THE TREASURY

May 19,2005

Ambassador Paul W. Speltz
Emissary of the U.S. Secretary of the Treasury
To the People's Republic of China
c/o U.S. Embassy Manila
1201 Roxas Blvd.
Ennita, Manila
Philippines 1000
Dear Paul:
I want to express my heartfelt thanks for your impressive efforts over the past year as my
Special Emissary to the Chinese Government, while at the same time serving admirably in your
post as U.S. Executive Director to the Asian Development Bank.
In large part due to your efforts, we have established numerous and effective channels of
communication to the Chinese authorities, and China has completed the preparations necessary
to now move to a more market-based flexible exchange rate. You should be very proud of that
accomplishment. As we have made clear, it is strongly in the interest of China to now adopt a
more flexible exchange rate.
Our efforts will intensify over the coming months as we work with China, and
increasingly with other Asian economies, to bring about a move to greater exchange rate
flexibility.
As we enter this new stage, you have my full support as you now devote your entire
energies to the critical job of U.S. Executive Director to the Asian Development Bank. I know
that the demands on your time at the Asian Development Bank are significant- for relief of the
tsunami-affected countries and for a range of other issues.
I want to thank you again for your extraordinary efforts in bringing us to this new stage in
U.S.-China relations. I will continue to seek your counsel on issues relating to China's economic
reform efforts. Please know how much 1 appreciate being able to count on your continued work
for the Administration at the Asian Development Bank.
Sincerely,

Emissary of the U.S. Secretary of Treasury to the
People's Republic of China

American Embassy
Manila, Philippines

May 18,2005

The Honorable 10hn W. Snow
Secretary of the Treasury
U.S. Department of The Treasury
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20220

U.S.A.
Dear Mr. Secretary,
Thank you for giving me the opportunity to serve as your Economic and Financial
Emissary to China over the past thirteen months. As China has made sufficient reforms
to now begin to introduce flexibility in its currency regime, this is an appropriate time for
me to return to my full-time service as U.S. Executive Director at the Asian Development
Bank:.
Over the last year, we have made significant progress with China on economic and
banking reforms. It is important to note that in addition to the progress on our chief goal
of persuading China to move to a flexible exchange rate regime, we have also achieved a
number of other noteworthy objectives related to that goal. Clearly, the most important
accomplishment of the past year was to achieve the understanding from China's
economic leadership that adopting a flexible currency system is in China's own best
interests to help it effectively manage its economy. Today there is no doubt that China is
prepared to introduce greater flexibility in its exchange rate regime.
The reforms undertaken by the Chinese during this period are substantial and critical to
China's progress, specifically in the financial sector; meeting WTO compliance; and
building the financial infrastructure for sustainable economic growth with a flexible
currency regime.

In support of China's preparations for exchange rate reform, we have engaged with the
People's Bank of China in the bilateral Technical Cooperation Program (TCP) that you
established during your September 2003 visit. M part of this cooperation. we have
actively worked with the State Administration of Foreign Exchange (SAFE) to encourage
further capital account liberalization and develop the foreign exchange markets. The
Chlcago Mercantile Exchange has already established a close working relationship with

Letter to Secretarry Snow
Page 2 of3

Speltz: 5/18/05

SAFE's China Foreign Exchange Trading System (CFETS) that will soon allow China to
trade foreign exchange derivatives products. Reflecting China's new capabilities in
foreign exchange trading, CFETS began trading an additional eight currency pairs in
China on May 18.
We also provided valuable assistance in the area of banking refonn to assist in China's
resolution of non-performing loans (NPLs) in its banking system. Our efforts have been
so well-received that the People's Bank of China has asked for follow-up efforts to
continue progress in this area. Separately, Treasury and the Federal Deposit Insurance
Corporation (FDIC) are also teaming up to provide a seminar on bank deposit insurance.

In the area of expanding market access in China's securities industry. our ongoing
discussions with the China Securities Regulatory Commission (CSRC) have also helped
persuade the Chinese authorities that allowing more foreign investment in Chinese
securities firms will be helpful in strengthening China's troubled securities sector. A
number of deals are currently in progress that will allow foreign 1inns to acquire an
effective controlling interest in local securities firms.
These are just a few of the more notable results of the strengthened U.S.-China
relationship on financial issues. This cooperative relationship is clearly helping China to
manage its transition as it moves into a flexible exchange rate regime.

As you know. I have been honored to serve you as your Financial Emissary in China I
have done this job in addition to continuing to serve as United States Executive Director
for the Asian Development Bank (ADB). Balancing these two full-time responsibilities
while commuting between the Philippines, China and the many other Asian member
countries of the ADB, has been an effective arrangement. However. this extensive travel
in Asia makes it difficult for me to come to Washington enough to confer directly with
senior administration officials and to be responsive to Congress' need for ongoing
updates. I have found that my many meetings with members of Congress have proved
helpful to all sides in providing a clear understanding of the Administration's overall U.S .
• China economic engagement and specifically on the difficulties regarding the Chinese
action on currency reform.
I would ask that my remaining time in the Philippines be focused. on my responsibilities
in representing President Bush at the ADB. The United States, as a major shareholder at
the ADB, plays a critical role in advancing the adoption of sound economic policies,
generating economic growth, and raising living standards of poor people in Asia. During
the last two years. we have made positive and significant steps in reforming this
multilateral development bank, specifically in the areas of combating corruption,
promoting management reform, and good governance. Externally, my work and frequent
travel to Mghanistan. Pakistan, Indonesia, and other countries in the region, have all been
carefully coordinated with the various U.S. Government agencies to further our bilatern.1
and international development objectives. This is very important and we need to continue

Letter to Secretany Snow
. Page 3 00

Speltz: 5118/05

to actively drive this initiative forward. Our ongoing work in assisting with the Tsunami
disaster is another critical program that we are focusing on.
I remain at your service to provide any advice and counsel as you and your team at
Treasury continues the effort to ensure that China adopts sound economic policies.

R1Z

YYOurs
•

Anibassador Paul W. S

S-2460: Treasury and IRS Announce Proposed Rcgulations Regarding Dual Consolidated L... Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adob~®Acrobat®RefJd~r$.

MC1Y 19, 2005
JS-2460
Treasury and IRS Announce Proposed
Regulations
Regarding Dual Consolidated Losses
WASHINGTON, DC -- The TreClsury Depal'tment alld the Internal Revenue Service
today announced proposed regulations regardlllg dual consolidated losses under
section 1503(d) of the Internal Revenue Code. The eXisting regulations, as
rnodlfled by the new proposed I'ules, are generally Intended to prohibit a U S
corporation from taking a deduction for a loss frorn Its operations for U,S tax
purposes If that same loss may be used to offset Income III a foreign coulltry The
new proposed regulations update the eXlstlllg regulations to take Into account
changes III the laws and regulations of both the United States alld other countries
since the eXlstrng regulations were Issued, as well as to reflect tile US experrellce
with admlnlsterrng nle eXisting regulations
The most significant changes provided by nle ploposed regulations address three
concerns that arise under the current regulations First, the scope of the proposed
I'egulatlons rnlillmizes the over- and under-InclUSive application of the current
regulations. Second, the proposed regulations rnodernlze the regime to take Into
account updated US elltlty claSSification regulations and related Issues so that the
rules can be applied with greater certainty Finally, the proposed regulations
reduce adrnlnlstrative burdens Imposed on taxpayers and the IRS.
The regulations are proposed to be effective for dual consolidated losses that ale
rncurred In taxable yeals beglnnlllg after the date upcoming final I'egulatlons are
Issued

REPORTS
•

Dual Consolidated loss Regulations

1ttP://WWw.tre;s.gov/press/releases/Js24~0.htm

5/31/2005

[4830-01-p]
DEPARTMENTOFTHETREASURY
Internal Revenue Service
26 CFR Part 1
REG-102144-04
RIN 1545-BD10
Dual Consolidated Loss Regulations
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rule making and notice of public hearing.
SUMMARY: This document contains proposed regulations under section 1503(d) of the
Internal Revenue Code (Code) regarding dual consolidated losses. Section 1503(d)
generally provides that a dual consolidated loss of a dual resident corporation cannot
reduce the taxable income of any other member of the affiliated group unless, to the
extent provided in regulations, such loss does not offset the income of any foreign
corporation. Similar rules apply to losses of separate units of domestic corporations.
The proposed regulations address various dual consolidated loss issues, including
exceptions to the general prohibition against using a dual consolidated loss to reduce
the taxable income of any other member of the affiliated group.
DATES: Written and electronic comments and outlines of topics to be discussed at the
public hearing scheduled for September 7,2005, at 10:00 a.m., must be received by
August 22, 2005.
ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-102144-04), room 5203,
Internal Revenue Service, P.O. Box 7604, Washington, DC 20044. Submissions may

JS-2461: Treasury and IRS Announce Proposed Regulations on Equity Partnerships

Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or punt the PDF content on tillS page. duwn/oad tile free 1\,1, ,/),.

;\, ,uil,,!· i,'!',,<I, ,,'

May 20,2005
JS-2461
Treasury and IRS Announce Proposed Regulations on Equity Partnerships
WASHINGTON, DC -- Today the Treasury Department and the Internal Revenue
Service issued proposed regulations describing the tax consequences of
transferring partnership interests in exchange for services.
The proposed regulations provide that the amount includible in income by the
transferee of the partnership interest, and the amount of the corresponding
compensation deduction to the partnership, generally is equal to the fair market
value of the transferred interest.
Because partnership interests can be difficult to value, and to help partnerships
maintain capital accounts properly, the proposed regulations allow a partnership
and its partners to elect a safe harbor under which the fair market value of a
partnership Interest is treated as equal to the liquidation value of the interest. The
proposed regulations generally provide that a partnership that transfers a
partnership Interest in exchange for services recognizes no gain or loss on the
transfer.
In addition, the Internal Revenue Service Issued Notice 2005-43, which includes a
draft revenue procedure describing additional rules and conditions relating to the
safe ha rbor election.

REPORTS
•
•

Proposed Revenue Procedure Regarding Partnership Interests Transferred
in Connection with the Performance of Services
FJartllershlp EqlJ'ty for SrHVICl!S

http://WWW.treltS.gov/presslreleases/js2461.htm

7/612005

Part III - Administrative, Procedural, and Miscellaneous

Proposed Revenue Procedure Regarding Partnership Interests Transferred in
Connection with the Performance of Services

Notice 2005-43

Purpose
This notice addresses the taxation of a transfer of a partnership interest in
connection with the performance of services. In conjunction with this notice, the
Treasury Department and the Internal Revenue Service are proposing
regulations under § 83 of the Internal Revenue Code. The proposed regulations
grant the Commissioner authority to issue guidance of general applicability
related to the taxation of the transfer of a partnership interest in connection with
the performance of services. This notice includes a proposed revenue procedure
under that authority. The proposed revenue procedure provides additional rules
for the elective safe harbor under proposed § 1.83-3(1) for a partnership's
transfers of interests in the partnership in connection with the performance of
services for that partnership. The safe harbor is intended to simplify the
application of § 83 to partnership interests and to coordinate the provisions of

§ 83 with the principles of partnership taxation. Upon the finalization of the
proposed revenue procedure, Rev. Proc. 93-27,1993-2 C.B. 343, and Rev. Proc.
2001-43,2001-2 C.B. 191, (described below) will be obsoleted. Until that occurs,

taxpayers may not rely upon the safe harbor set forth in the proposed revenue
procedure, but taxpayers may continue to rely upon current law, including Rev.
Proc. 93-27, 1993-2 C.B. 343, and Rev. Proc. 2001-43, 2001-2 C.B. 191.

Effective Date
The Treasury Department and the Service intend for the revenue procedure
proposed in this notice to be finalized and made effective in conjunction with the
finalization of the related proposed regulations under § 83 and subchapter K of
chapter 1 of the Internal Revenue Code (subchapter K).

Request for Comments
Comments are requested on the proposed revenue procedure in this notice.
Although the Treasury Department and the Service request comments on all
aspects of the proposed revenue procedure, comments are requested
specifically on the following:

1. Whether additional guidance is needed to address the transfer of an
interest in a partnership to a person who is not rendering services
directly to such partnership (for example, an upper-tier partnership
transfers an interest in a lower-tier partnership to a person for services
rendered to the upper-tier partnership).

2. Whether election of the safe harbor described in proposed § 1.83-3(1)
and the proposed revenue procedure should be permitted on Form
1065, U.S. Return of Partnership Income, and whether continued use

of the safe harbor should be reported annually on Form 1065 and
Schedule K-1, Partner's Share of Income, Credits, Deduction, etc.

Comments may be submitted on or before August 22, 2005 to Internal Revenue
Service, PO Box 7604, Washington, DC 20044, Attn: CC:PA:LPD:PR (Notice
2005-43), Room 5203. Submissions may also be hand-delivered Monday
through Friday between the hours of 8 a.m. and 4 p.m. to the Courier's Desk at
1111 Constitution Avenue, NW, Washington DC 20224, Attn: CC:PA:LPD:PR
(Notice 2005-43), Room 5203. Submissions may also be sent electronically via
the internet to the following email address:

Notice.comments@irscounsel.treas.gov. Include the notice number (Notice
2005-43) in the subject line.

Drafting Information
The principal authors of this notice are Stephen Tackney of the Office of
Associate Chief Counsel (Tax Exempt and Government Entities); and Audrey
Ellis and Demetri Yatrakis of the Office of Associate Chief Counsel
(Passthroughs and Special Industries). For further information regarding this
notice and the application of § 83, contact Stephen Tackney on (202) 622-6030
(not a toll-free call). For further information regarding this notice and the
application of the rules contained in subchapter K, contact Audrey Ellis or
Demetri Yatrakis on (202) 622-3060 (not a toll-free call).

PROPOSED REVENUE PROCEDURE
SECTION 1. PURPOSE

Proposed § 1.83-3(1) of the Income Tax Regulations allows taxpayers to
elect to apply special rules (the Safe Harbor) to a partnership's transfers of
interests in the partnership in connection with the performance of services for the
partnership. The Treasury Department and the Internal Revenue Service intend
for the Safe Harbor to simplify the application of § 83 of the Internal Revenue
Code to partnership interests transferred in connection with the performance of
services and to coordinate the principles of § 83 with the principles of partnership
taxation. This revenue procedure sets forth additional rules for the elective safe
harbor under proposed § 1.83-3(1) for a partnership's transfer of interests in the
partnership in connection with the performance of services for that partnership.
SECTION 2. LAW AND DISCUSSION

Section 83(a) provides that if, in connection with the performance of
services, property is transferred to any person other than the person for whom
such services are performed, the excess of (1) the fair market value of such
property (determined without regard to any restriction other than a restriction
which by its terms will never lapse) at the first time the rights of the person having
the beneficial interest in such property are transferable or are not subject to a
substantial risk of forfeiture, whichever occurs earlier, over (2) the amount (if any)
paid for such property, is included in the gross income of the person who
performed such services in the first taxable year in which the rights of the person

having the beneficial interest in such property are transferable or are not subject
to a substantial risk of forfeiture, whichever is applicable.
Section 1.83-3( e) provides that, for purposes of § 83 and the regulations
thereunder, the term property includes real and personal property other than
either money or an unfunded and unsecured promise to pay money or property in
the future. For these purposes, under proposed § 1.83-3(e) property includes a
partnership interest. Generally, a mere right to allocations or distributions
described in § 707(a)(2)(A) is not a partnership interest. Proposed § 1.83-3(e)
also provides that, in the case of a transfer of a partnership interest in connection
with the performance of services, the Commissioner may prescribe generally
applicable administrative rules to address the application of § 83 to the transfer.
Section 83(b) provides that a service provider may elect to include in his
or her gross income, for the taxable year in which substantially nonvested
property is transferred, the excess of (1) the fair market value of the property at
the time of the transfer (determined without regard to any restriction other than a
restriction which by its terms will never lapse), over (2) the amount (if any) paid
for the property. If such an election is made, § 83(a) does not apply with respect
to the transfer of the property upon vesting and, if the property is subsequently
forfeited, no deduction is allowed to the service provider in respect of the
forfeiture.
Section 1.83-2(b) provides that an election under § 83(b) must be filed not
later than 30 days after the date the property was transferred and may be filed
prior to the date of the transfer. Section 1.83-2(c) provides that the election is

made by filing one copy of a written statement with the Internal Revenue Service
Center with which the service provider files his or her return. In addition, one
copy of such statement must be submitted with the service provider's income tax
return for the taxable year in which the property was transferred.
Section 1.83-1 (a) provides that, unless an election under § 83(b) is made,
the transferor is regarded as the owner of substantially nonvested property
transferred in connection with the performance of services until such property
becomes substantially vested, and any income from such property received by
the service provider (or beneficiary thereof), or the right to the use of such
property by the service provider, constitutes additional compensation and is
included in the gross income of the service provider for the taxable year in which
the income is received or the use is made available. Under this rule, a
partnership must treat as unissued any substantially nonvested partnership
interest transferred in connection with the performance of services for which an
election under § 83(b) has not been made. If the service provider who holds
such an interest receives distributions from the partnership with respect to that
interest while the interest is substantially nonvested, the distributions are treated
as compensation in the capacity in which the service provider performed the
services. For example, if a service provider that is not a pre-existing partner
holds a substantially nonvested partnership interest that the service provider
received in connection with the performance of services and the service provider
did not make an election under § 83(b) with respect to that interest, then any
distributions made to the service provider on account of such interest are treated

as additional compensation and not partnership distributions. If, instead, the
service provider who receives a substantially nonvested partnership interest in
connection with the performance of services makes a valid election under

§ 83(b), then the service provider is treated as the owner of the property. See
Rev. Rul. 83-22,1983-1 C.B. 17. The service provider is treated as a partner
with respect to such an interest, and the partnership must allocate partnership
items to the service provider as if the partnership interest were substantially
vested.
Section 1.83-3(b) provides that property is substantially nonvested for § 83
purposes when it is subject to a substantial risk of forfeiture and is
nontransferable. Property is substantially vested for § 83 purposes when it is
either transferable or not subject to a substantial risk of forfeiture.
Section 1.83-3(c) provides that, for § 83 purposes, whether a risk of
forfeiture is substantial or not depends upon the facts and circumstances. A
substantial risk of forfeiture exists where rights in property that are transferred
are conditioned, directly or indirectly, upon the future performance (or refraining
from performance) of substantial services by any person, or the occurrence of a
condition related to a purpose of the transfer, and the possibility of forfeiture is
substantial if such condition is not satisfied.
Section 1.83-3(d) provides that, for § 83 purposes, the rights of a person
in property are transferable if such person can transfer any interest in the
property to any person other than the transferor of the property, but only if the

rights in such property of such transferee are not subject to a sUbstantial risk of
forfeiture.
Proposed § 1.83-3(1) provides that, subject to such additional conditions,
rules, and procedures that the Commissioner may prescribe in regulations,
revenue rulings, notices, or other guidance published in the Internal Revenue
Bulletin, a partnership and all of its partners may elect a safe harbor under which
the fair market value of a partnership interest that is transferred in connection
with the performance of services is treated as being equal to the liquidation value
of that interest for transfers on or after the date final regulations are published in
the Federal Register if the following conditions are satisfied: (1) the partnership
must prepare a document, executed by a partner who has responsibility for
federa,l income tax reporting by the partnership, stating that the partnership is
electing, on behalf of the partnership and each of its partners, to have the safe
harbor apply irrevocably as of the stated effective date with respect to all
partnership interests transferred in connection with the performance of services
while the safe harbor election remains in effect and attach the document to the
tax return for the partnership for the taxable year that includes the effective date
of the election; (2) except as provided below, the partnership agreement must
contain provisions that are legally binding on all of the partners stating that (a)
the partnership is authorized and directed to elect the safe harbor, and (b) the
partnership and each of its partners (including any person to whom a partnership
interest is transferred in connection with the performance of services) agrees to
comply with all requirements of the safe harbor with respect to all partnership

interests transferred in connection with the performance of services while the
election remains effective; and (3) if the partnership agreement does not contain
the provisions described in clause (2) of this sentence, or the provisions are not
legally binding on all of the partners of the partnership, then each partner in a
partnership that transfers a partnership interest in connection with the
performance of services must execute a document containing provisions that are
legally binding on that partner stating that (a) the partnership is authorized and
directed to elect the safe harbor, and (b) the partner agrees to comply with all
requirements of the safe harbor with respect to all partnership interests
transferred in connection with the performance of services while the election
remains effective. The specified effective date of the safe harbor election may
not be prior to the date that the safe harbor election is executed. Proposed

§ 1.83-3(1) provides that the partnership must retain such records as may be
necessary to indicate that an effective election has been made and remains in

effect, including a copy of the partnership's election statement under this
paragraph (I), and, if applicable, the original of each document submitted to the
partnership by a partner under this paragraph (I). If the partnership is unable to
produce a record of a particular document, the election will be treated as not
made, generally resulting in termination of the election. The safe harbor election
also may be terminated by the partnership preparing a document, executed by a
partner who has responsibility for federal income tax reporting by the partnership,
which states that the partnership, on behalf of the partnership and each of its
partners, is revoking the safe harbor election on the stated effective date, and

attaching the document to the tax return for the partnership for the taxable year
that includes the effective date of the revocation.
Section 83(h) provides that, in the case of a transfer of property in
connection with the performance of services or a cancellation of a restriction
described in § 83(d), there is allowed as a deduction under § 162, to the person
for whom the services were performed (the service recipient), an amount equal to
the amount included under § 83(a), (b), or (d)(2) in the gross income of the
service provider. The deduction is allowed for the taxable year of the service
recipient in which or with which ends the taxable year in which such amount is
included in the gross income of the service provider. Under § 1.83-6(a)(3), if
property is substantially vested upon the transfer, the deduction is allowed to the
service recipient in accordance with its method of accounting (in conformity with

§§ 446 and 461).
Section 1.83-6(c) provides that if, under § 83(h) and § 1.83-6(a), a
deduction, an increase in basis, or a reduction of gross income was allowable
(disregarding the reasonableness of the amount of compensation) in respect of a
transfer of property and such property is subsequently forfeited, the amount of
such deduction, increase in basis, or reduction of gross income shall be
includible in the gross income of the person to whom it was allowable for the
taxable year of the forfeiture. The basis of such property in the hands of the
person to whom it is forfeited shall include any such amount includible in the
gross income of such person, as well as any amount such person pays upon
forfeiture.

Section 704(b) requires that a partner's distributive share of income, gain,
loss, deduction, or credit (or item thereof) be determined in accordance with the
partner's interest in the partnership, determined by taking into account all facts
and circumstances, if (1) the partnership agreement does not provide otherwise
as to the partner's distributive share, or (2) the allocation to a partner under the
agreement does not have sUbstantial economic effect.
Proposed § 1.704-1(b)(2)(iv)(Q)(1) provides that a partner's capital
account includes the amount contributed by that partner to the partnership, and,
in the case of a compensatory partnership interest that is transferred on or after
the date final regulations are published in the Federal Register, the amount
included on or after that date as the partner's compensation income under

§ 83(a), (b), or (d)(2). For these purposes, a compensatory partnership interest
is an interest in the transferring partnership that is transferred in connection with
the performance of services for that partnership (either before or after the
formation of the partnership), including an interest that is transferred on the
exercise of a compensatory partnership option. A compensatory partnership
option is an option to acquire an interest in the issuing partnership that is granted
in connection with the performance of services for that partnership (either before
or after the formation of the partnership). See proposed § 1.721-1(b)(4).
Proposed § 1.704-1(b)(4)(xii)(.e.) provides that if a § 83(b) election has
been made with respect to a substantially nonvested interest, allocations of
partnership items while the interest is substantially nonvested cannot have
economic effect.

Proposed § 1.704-1 (b)(4 )(xii)(Q) provides that allocations of partnership
items to a holder of a nonvested interest for which a § 83(b) election has been
made will be deemed to be in accordance with the partners' interests in the
partnership if the partnership agreement requires that: (1) in the event that the
interest for which the § 83(b) election is made is later forfeited, the partnership
shall make forfeiture allocations in the year of the forfeiture; and (2) all material
allocations and capital account adjustments under the partnership agreement not
pertaining to substantially nonvested partnership interests for which a § 83(b)
election has been made are recognized under § 704(b). Proposed

§ 1.704-1 (b)(4)(xii)(§) provides that proposed § 1.704-1 (b)(4)(xii)(Q) does not
apply to allocations of partnership items made with respect to a substantially
nonvested interest for which the holder has made a § 83(b) election if, at the time
of the § 83(b) election, there is a plan that the interest will be forfeited. In
determining whether there is a plan that the interest will be forfeited, the
Commissioner will consider all of the facts and circumstances (including the tax
status of the holder of the forfeitable compensatory partnership interest).
Proposed § 1.704-1(b)(4)(xii)(f) defines forfeiture allocations as
allocations to the service provider (consisting of a pro rata portion of each item)
of gross income and gain or gross deduction and loss (to the extent such items
are available) for the taxable year of the forfeiture in a positive or negative
amount equal to (1) the excess (not less than zero) of (a) the amount of the
distributions (including deemed distributions under § 752(b) and the adjusted tax
basis of any property so distributed) to the partner with respect to the forfeited

partnership interest (to the extent such distributions are not taxable under § 731),
over (b) the amounts paid for the interest and the adjusted tax basis of property
contributed by the partner (including deemed contributions under § 752(a)) to the
partnership with respect to the forfeited partnership interest, minus (2) the
cumulative net income (or loss) allocated to the partner with respect to the
forfeited partnership interest. Proposed § 1.704-1 (b)( 4 )(xii)(Q) provides that for
purposes of proposed § 1.704-1(b)(4)(xii)(g), items of income and gain are
reflected as positive amounts, and items of deduction and loss are reflected as
negative amounts.
Section 721 (a) provides that no gain or loss is recognized to a partnership
or to any of its partners in the case of a contribution of property to the partnership
in exchange for an interest in the partnership.
Proposed § 1.721-1 (b)(1) provides that § 721 generally does not apply to
the transfer of a partnership interest in connection with the performance of
services. Such a transfer constitutes a transfer of property to which § 83 and the
regulations thereunder apply. However, under proposed § 1.721-1 (b)(2), except
as provided in § 83(h) or § 1.83-6{c), no gain or loss is recognized by a
partnership upon: (i) the transfer or substantial vesting of a compensatory
partnership interest, or (ii) the forfeiture of a compensatory partnership interest.
Proposed § 1.761-1 (b) provides that if a partnership interest is transferred
in connection with the performance of services, and that partnership interest is
substantially nonvested (within the meaning of § 1.83-3(b)), then the holder of the
partnership interest is not treated as a partner solely by reason of holding the

interest, unless the holder makes an election with respect to the interest under

§ 83(b).
Rev. Proc. 93-27, 1993-2 C.B. 343, provides generally that if a person
receives a profits interest for the provision of services to or for the benefit of a
partnership in a partner capacity or in anticipation of becoming a partner, the
Service will not treat the receipt of such an interest as a taxable event for the
partner or the partnership. The revenue procedure does not apply if (1) the
profits interest relates to a substantially certain and predictable stream of income
from partnership assets, such as income from high-quality debt securities or a
high-quality net lease; (2) within two years of receipt, the partner disposes of the
profits interest; or (3) the profits interest is a limited partnership interest in a
"publicly traded partnership" within the meaning of § 7704(b).
Rev. Proc. 2001-43, 2001-2 C.B. 191, clarifies Rev. Proc. 93-27 and
provides that, for purposes of Rev. Proc. 93-27, if a partnership grants a
substantially nonvested profits interest in the partnership to a service provider,
the service provider will be treated as receiving the interest on the date of its
grant, provided that: (1) the partnership and the service provider treat the service
provider as the owner of the partnership interest from the date of its grant and the
service provider takes into account the distributive share of partnership income,
gain, loss, deduction and credit associated with that interest in computing the
service provider's income tax liability for the entire period during which the
service provider has the interest; (2) upon the grant of the interest or at the time
that the interest becomes substantially vested, neither the partnership nor any of

the partners deducts any amount (as wages, compensation, or otherwise) for the
fair market value of the interest; and (3) all other conditions of Rev. Proc. 93-27
are satisfied.

SECTION 3. SCOPE
.01 In General. The Safe Harbor in section 4 of this revenue procedure
applies to any Safe Harbor Partnership Interest transferred by a partnership if the
transfer is made during the period in which the Safe Harbor Election is in effect
(whether or not the Safe Harbor Partnership Interest is substantially vested on
the date of transfer). Thus, for example, sections 4.02 through 4.04 of this
revenue procedure apply to a Safe Harbor Partnership Interest that is transferred
during the period in which the Safe Harbor Election is in effect, even if that Safe
Harbor Partnership Interest does not become substantially vested until after the
Safe Harbor Election is terminated, a § 83(b) election is made after the Safe
Harbor Election is terminated, or that Safe Harbor Partnership Interest is forfeited
after the Safe Harbor Election is terminated. Further, a Safe Harbor Election is
binding on the partnership, all of its partners, and the service provider. The Safe
Harbor includes all of the rules set forth in section 4 of this revenue procedure,
and a partnership, its partners, and the service provider may not choose to apply
only certain of the rules in section 4 of this revenue procedure or to apply the
Safe Harbor only to certain partners, service providers, or partnership interests .
.02 Safe Harbor Partnership Interest. (1) Except as otherwise provided in
section 3.02(2) of this revenue procedure, a Safe Harbor Partnership Interest is
any interest in a partnership that is transferred to a service provider by such

partnership in connection with seNices provided to the partnership (either before
or after the formation of the partnership), provided that the interest is not (a)
related to a substantially certain and predictable stream of income from
partnership assets, such as income from high-quality debt securities or a highquality net lease, (b) transferred in anticipation of a subsequent disposition, or (c)
an interest in a publicly traded partnership within the meaning of § 7704{b).
Unless it is established by clear and convincing evidence that the partnership
interest was not transferred in anticipation of a subsequent disposition, a
partnership interest is presumed to be transferred in anticipation of a subsequent
disposition for purposes of the preceding clause (b) if the partnership interest is
sold or disposed of within two years of the date of receipt of the partnership
interest (other than a sale or disposition by reason of death or disability of the
seNice provider) or is the subject, at any time within two years of the date of
receipt, of a right to buy or sell regardless of when the right is exercisable (other
than a right to buy or sell arising by reason of the death or disability of the seNice
provider). For the purposes of this revenue procedure, "disability" means a
condition which causes a seNice provider to be unable to engage in any
substantial gainful activity by reason of a medically determinable physical or
mental impairment expected to result in death or to last for a continuous period of
not less than 12 months.
(2) An interest in a partnership is not a Safe Harbor Partnership
Interest unless at the date of transfer the requirements of section 3.03 of this
revenue procedure are satisfied and a Safe Harbor Election has not terminated

pursuant to section 3.04 of this revenue procedure. For the first taxable year that
a partnership is subject to a Safe Harbor Election, a partnership interest may be
a Safe Harbor Partnership Interest if a Safe Harbor Election is attached to the
partnership tax return for the taxable year including the date of transfer, provided
that the other requirements of section 3.03 of this revenue procedure are
satisfied on or before the date of such transfer .
.03 Required Conditions for Safe Harbor Election. In order to effect and
maintain a valid Safe Harbor Election the following conditions must be satisfied:
(1) The partnership must prepare a document, executed by a
partner who has responsibility for federal income tax reporting by the partnership,
stating that the partnership is electing, on behalf of the partnership and each of
its partners, to have the Safe Harbor described in Rev. Proc. 200X-XX apply
irrevocably with respect to all partnership interests transferred in connection with
the performance of services while the Safe Harbor Election remains in effect.
The Safe Harbor Election must specify the effective date of the Safe Harbor
Election, and the effective date for the Safe Harbor Election may not be prior to
the date that the Safe Harbor Election is executed. The Safe Harbor Election
must be attached to the tax return for the partnership for the taxable year that
includes the effective date of the Safe Harbor Election.
(2) Except as provided in section 3.03(3) of this revenue procedure,
the partnership agreement must contain provisions that are legally binding on all
of the partners stating that (a) the partnership is authorized and directed to elect
the Safe Harbor described in this revenue procedure, and (b) the partnership and

each of its partners (including any person to whom a partnership interest is
transferred in connection with the performance of services) agrees to comply with
all requirements of the Safe Harbor described in this revenue procedure with
respect to all partnership interests transferred in connection with the performance
of services while the election remains effective. If a partner that is bound by
these provisions transfers a partnership interest to another person, the
requirement that each partner be bound by these provisions is satisfied only if the
person to whom the interest is transferred assumes the transferring partner's
obligations under the partnership agreement. If an amendment to the
partnership agreement is required, the amendment must be effective before the
date on which a transfer occurs for the Safe Harbor to be applied to such
transfer.
(3) If the partnership agreement does not contain the provisions
described in section 3.03(2) of this revenue procedure, or the provisions are not
legally binding on all of the partners of the partnership, then each partner in a
partnership that transfers a partnership interest in connection with the
performance of services must execute a document containing provisions that are
legally binding on each partner stating that (a) the partnership is authorized and
directed to elect the Safe Harbor described in this revenue procedure, and (b) the
partner agrees to comply with all requirements of the Safe Harbor described in
this revenue procedure with respect to all partnership interests transferred in
connection with the performance of services while the election remains effective.
Each person classified as a partner must execute the document required by this

paragraph (3), and the document must be effective, before the date on which a
transfer occurs, for the Safe Harbor to be applied to such transfer. If a partner
who has submitted the required document transfers a partnership interest to
another person, the condition that each partner submit the necessary document
is satisfied only if the person to whom the interest is transferred either submits
the required document or assumes the transferring partner's obligations under a
document required by this paragraph that was previously submitted with respect
to the transferred interest.
.04 Termination of Safe Harbor Election. A Safe Harbor Election
continues in effect until terminated. A Safe Harbor Election terminates
automatically on the date that a partnership fails to satisfy the conditions and
requirements described in sections 3.02 and 3.03 of this revenue procedure. A
Safe Harbor Election also terminates automatically in the event that the
partnership, a partner, or service provider reports income tax effects of a Safe
Harbor Partnership Interest in a manner inconsistent with the requirements of this
revenue procedure, including a failure to provide appropriate information returns.
A partnership may affirmatively terminate a Safe Harbor Election by preparing a
document, executed by a partner who has responsibility for federal income tax
reporting by the partnership, indicating that the partnership, on behalf of the
partnership and each of its partners, is revoking its Safe Harbor Election under
Rev. Proc. 200X-XX and the effective date of the revocation, provided that the
effective date may not be prior to the date the election to terminate is executed.
Such termination election must be attached to the tax return for the partnership

for the taxable year that includes the effective date of the election. The rules of
the Safe Harbor in section 4 of this revenue procedure do not apply to any
partnership interests transferred on or after the date of a termination of the Safe
Harbor Election under this paragraph but continue to apply to any Safe Harbor
Partnership Interests transferred while the Safe Harbor Election was in effect.
.05 Election After Termination. If a partnership has made a Safe Harbor
Election and if such Safe Harbor Election has been terminated under section
3.04 of this revenue procedure, then, absent the consent of the Commissioner,
the partnership (and any successor partnerships) are not eligible to make a Safe
Harbor Election for any taxable year that begins before the fifth calendar year
after the calendar year during which such termination occurs. For purposes of
this paragraph, a successor partnership is any partnership that (1) on the date of
termination, is related (within the meaning of § 267(b) or § 707(b)) to the
partnership whose Safe Harbor Election has terminated (or, if the partnership
whose Safe Harbor Election has terminated does not exist on the date of
termination would be related if it existed on such date), and (2) acquires (either
directly or indirectly) a substantial portion of the assets of the partnership whose
Safe Harbor Election has terminated .
.06 Recordkeeping Requirement. Under proposed § 1.83-3(1), the
partnership is required to keep as records: (1) a copy of the Safe Harbor
Election submitted by the partnership to the Service under section 3.03(1) of this
revenue procedure, and (2) if applicable, the original of each document submitted
to the partnership by a partner under section 3.03(3) of this revenue procedure.

If the partnership is unable to produce a record of a particular document, the
election will be treated as not made, generally resulting in termination of the Safe
Harbor Election under section 3.04 of this revenue procedure.

SECTION 4. SAFE HARBOR
.01 Safe Harbor. For purposes of § 83, the rules in sections 4.02 through
4.04 of this revenue procedure apply to any Safe Harbor Partnership Interest for
which a Safe Harbor Election is in effect.
.02 Liquidation Value. Under the Safe Harbor, the fair market value of a
Safe Harbor Partnership Interest is treated as being equal to the liquidation value
of that interest. For this purpose, liquidation value is determined without regard
to any lapse restriction (as defined at § 1.83-3(i)) and means the amount of cash
that the recipient of the Safe Harbor Partnership Interest would receive if,
immediately after the transfer, the partnership sold all of its assets (including
goodwill, going concern value, and any other intangibles associated with the
partnership's operations) for cash equal to the fair market value of those assets
and then liquidated .
.03 Vesting. Under the Safe Harbor, a Safe Harbor Partnership Interest is
treated as substantially vested if the right to the associated capital account
balance equivalent is not subject to a substantial risk of forfeiture or the interest
is transferable. A Safe Harbor Partnership Interest is treated as substantially
nonvested only if, under the terms of the interest at the time of the transfer, the
interest terminates and the holder may be required to forfeit the capital account
balance equivalent credited to the holder under conditions that would constitute a

substantial risk of forfeiture, and the interest is not transferable. For these
purposes, the capital account balance equivalent is the amount of cash that the
recipient of the Safe Harbor Partnership Interest would receive if, immediately
prior to the forfeiture, the interest vested and the partnership sold all of its assets
(including goodwill, going concern value, or any other intangibles associated with
the partnership's operations) for cash equal to the fair market value of those
assets and then liquidated. Notwithstanding the previous sentence, a Safe
Harbor Partnership Interest will not be considered substantially non vested if the
sole portion of the capital account balance equivalent forfeited is the excess of
the capital account balance equivalent at the date of termination of services over
the capital account balance equivalent at the end of the prior partnership tax year
or any later date before the date of termination of services .
.04 Forfeiture Subsequent to § 83(b) Election. If a Safe Harbor
Partnership Interest with respect to which a § 83(b) election has been made is
forfeited, the service provider must include as ordinary income in the taxable year
of the forfeiture an amount equal to the excess, if any, of (1) the amount of
income or gain that the partnership would be required to allocate to the service
provider under proposed § 1.704-1(b)(4)(xii) if the partnership had unlimited
items of gross income and gain, over (2) the amount of income or gain that the
partnership actually allocated to the service provider under proposed §1.7041(b)(4)(xii).

SECTION 5. APPLICATION OF SAFE HARBOR TO SERVICE PROVIDER
AND SERVICE RECIPIENT

.01 Application of Safe Harbor to the Service Provider. Under the Safe
Harbor, the service provider recognizes compensation income upon the transfer
of a substantially vested Safe Harbor Partnership Interest in an amount equal to
the liquidation value of the interest, less any amount paid for the interest. If the
service provider receives a Safe Harbor Partnership Interest that is substantially
nonvested, does not make an election under § 83(b), and holds the interest until
it substantially vests, the service provider recognizes compensation income in an
amount equal to the liquidation value of the interest on the date the interest
substantially vests, less any amount paid for the interest. If the service provider
receives a Safe Harbor Partnership Interest that is substantially nonvested and
makes an election under § 83(b), the service provider recognizes compensation
income on the date of transfer equal to the liquidation value of the interest,
determined as if the interest were substantially vested, pursuant to the rules of

§ 83(b) and § 1.83-2, less any amount paid for the interest.
.02 Application of Safe Harbor to the Service Recipient. Under § 83(h),
the service recipient generally is entitled to a deduction equal to the amount
included as compensation in the gross income of the service provider under

§ 83(a), (b), or (d)(2), but only to the extent the amount meets the requirements
of § 162 or § 212. Under the Safe Harbor, the amount included in the service
provider's gross income in accordance with section 4.02 of this revenue
procedure is considered the amount included as compensation in the gross
income of the service provider under § 83(a) or (b) for purposes of § 83(h). The
deduction generally is allowed for the taxable year of the partnership in which or

with which ends the taxable year of the service provider in which the amount is
included in gross income as compensation. However, in accordance with

§ 1.83-6(a)(3), where the deduction relates to the transfer of substantially vested
property, the deduction is available in accordance with the service recipient's
method of accounting.

SECTION 6. EXAMPLES
The following facts apply for all of the examples below:
SP is an individual with a calendar year taxable year. PRS is a
partnership with a calendar year taxable year. Except as otherwise stated,
PRS's partnership agreement provides for all partnership items to be allocated to
the partners in proportion to the partners' interests in the partnership. PRS's
partnership agreement provides that the partners' capital accounts will be
determined and maintained in accordance with § 1.704-1 (b )(2)(iv), that
liquidation proceeds will be distributed in accordance with the partners' positive
capital account balances, and that any partner with a deficit balance in the
partner's capital account following the liquidation of the partner's interest must
restore that deficit to the partnership. All allocations and distributions to all
parties are not recast under § 707(a)(2), and § 751 (b) does not apply to any
distribution. The partnership, its members, and the service providers elect the
Safe Harbor provided in section 4 of this revenue procedure and file all affected
returns consistent with the Safe Harbor, and each partnership interest transferred
constitutes a Safe Harbor Partnership Interest under section 3.02 of this revenue
procedure. The issuance of the partnership interest in each example is not

required to be capitalized under the rules of § 263 or other applicable provision of
the Code. In examples in which the partnership interest transferred to the
service provider is not substantially vested, there is not a plan that the service
provider will forfeit the partnership interest.
(1) Example 1: Substantially Vested Profits Interest
Facts: PRS has two partners, A and

!2,

each with a 50% interest in PRS.

On March 1, 2005, SP agrees to perform services for the partnership in
exchange for a partnership interest. Under the terms of the partnership
agreement, SP is entitled to 10% of the future profits and losses of PRS, but is
not entitled to any of the partnership's capital as of the date of transfer. Although
SP must surrender the partnership interest upon termination of services to the
partnership, SP will not surrender any share of the profits accumulated through
the end of the partnership taxable year preceding the partnership taxable year in
which SP terminates services.
Conclusion: Under section 4.03 of this revenue procedure, SP's interest
in PRS is treated as substantially vested at the time of transfer. Under section
4.02 of this revenue procedure, the fair market value of the interest for purposes
of § 83 is treated as being equal to its liquidation value (zero). Therefore, SP
does not recognize compensation income under § 83(a) as a result of the
transfer, PRS is not entitled to a deduction, and SP is not entitled to a capital
account balance.
(2) Example 2: Substantially Vested Interest

Facts: PRS has two partners,

8 and 6.,

each with a 50% interest in PRS.

On March 1, 2005, SP pays the partnership $10 and agrees to perform services
for the partnership in exchange for a 10% partnership interest that is treated as
substantially vested under section 4.03 of this revenue procedure. Immediately
before SP's $10 payment to PRS and the transfer of the partnership interest to
SP in connection with the performance of services, the value of the partnership's
assets (including goodwill, going concern value, and any other intangibles
associated with the partnership's operations) is $990.
Conclusion: Under section 4.02 of this revenue procedure, the fair market
value of SP's interest in PRS at the time the interest becomes substantially
vested is treated as being equal to its liquidation value at that time for purposes
of § 83. Therefore, in 2005, SP includes $90 ($100 liquidation value less $10
amount paid for the interest) as compensation income under § 83(a), PRS is
entitled to a deduction of $90 under § 83(h), and SP's initial capital account is
$100 ($90 included in income plus $10 amount paid for the interest).
(3) Example 3: Substantially Nonvested Interest; No § 83(b)
Election; Pre-Existing Partner
Facts: PRS has two partners,

8 and

SP, each with a 50% interest in PRS.

On December 31,2004, SP agrees to perform services for the partnership in
exchange for a 10% increase in SP's interest in the partnership from 50% to
60%. SP is not required to pay any amount in exchange for the additional 10%
interest. Under the terms of the partnership agreement, if SP terminates services
on or before January 1,2008, SP forfeits any right to any share of accumulated,

undistributed profits with respect to the additional 10% interest. The partnership
interest transferred to SP is not transferable and no election is made under

§ 83(b). SP continues performing services through January 1, 2008. PRS has
taxable income of $500 in 2005 and $1,000 in each of 2006 and 2007. No
distributions are made to

8. or SP during such period. On January 1,2008, the

value of the partnership's assets (including goodwill, going concern value, and
any other intangibles associated with the partnership's operations) is $3,500.
Conclusion: Under section 4.03 of this revenue procedure, the 10%
partnership interest transferred to SP on December 31, 2004, is treated as
substantially nonvested at the time of transfer. Because a § 83(b) election is not
made, SP does not include any amount as compensation income attributable to
the transfer, and correspondingly, PRS is not entitled to a deduction under

§ 83(h).
In accordance with the partnership agreement, PRS's taxable income for
2005 is allocated $250 to A and $250 to SP, and PRS's taxable income for each
of 2006 and 2007 is allocated $500 to

8. and $500 to SP.

On January 1, 2008, SP's additional 10% interest in PRS is treated as
becoming substantially vested under section 4.03 of this revenue procedure. At
that time, the additional 10% interest in the partnership has a liquidation value of
$350 (10% of $3,500). Under section 4.02 of this revenue procedure, the fair
market value of the interest at the time it becomes substantially vested is treated
as being equal to its liquidation value at that time for purposes of § 83.
Therefore, in 2008, SP includes $350 as compensation income under § 83(a),

PRS is entitled to a deduction of $350 under § 83(h), and SP's capital account is
increased by $350.
(4) Example 4: Substantially Nonvested Interest; No § 83(b)
Election
Facts: PRS has two partners,

8 and .12, each with a 50% interest in PRS.

§ 83(b). SP continues performing services through January 1, 2008. PRS earns
$500 of taxable income in 2005, and $1,000 in each of 2006 and 2007. A and

each receive distributions of $225 in 2005, but neither 6. nor 12 receive
distributions in 2006 and 2007. PRS transfers $50 to SP in 2005, but does not
make any transfers to SP in 2006 or 2007. On January 1, 2008, SP's partnership
interest has a liquidation value of $300 (taking into account the unpaid
partnership income credited to SP through that date).
Conclusion: Under section 4.03 of this revenue procedure, SP's
partnership interest is treated as substantially nonvested at the time of transfer.
Because a § 83(b) election is not made, SP does not include any amount as
compensation income attributable to the transfer and, correspondingly, PRS is
not entitled to a deduction under § 83(h). Under proposed § 1.761-1 (b), SP is

not a partner in PRS; therefore, none of PRS's taxable income for the years in
which SP's interest is substantially nonvested may be allocated to SP. Rather,
PRS's taxable income is allocated exclusively to A and

.12. In addition, the $50

paid by PRS to SP in 2005 is compensation income to SP, and PRS is entitled to
a deduction of $50 under § 162 in accordance with its method of accounting.
On January 1, 2008, SP's interest in PRS is treated as becoming
substantially vested under section 4.03 of this revenue procedure. Under section
4.02 of this revenue procedure, the fair market value of the interest at the time
the interest becomes substantially vested is treated as being equal to its
liquidation value at that time for § 83 purposes. Therefore, in 2008, SP includes
$290 ($300 liquidation value less $10 amount paid for the interest) as
compensation income under § 83(a), PRS is entitled to a $290 deduction, and
SP's capital account is increased to $300 ($290 included in income plus $10
amount paid for the interest).
(5) Example 5: Substantially Nonvested Interest; § 83(b) Election
Facts: The facts are the same as in Example 4, except that SP makes an
election under § 83(b) with respect to SP's interest in PRS. The liquidation value
of the interest is $100 at the time the interest in PRS is transferred to SP. SP
continues performing services through January 1, 2008.
Conclusion: Under section 4.02 of this revenue procedure, the fair market
value (disregarding lapse restrictions) of SP's interest in PRS at the time of
transfer is treated as being equal to its liquidation value (disregarding lapse
restrictions) at that time for § 83 purposes. Because a § 83(b) election is made,

in 2004 SP includes $90 ($100 liquidation value less $10 amount paid for the
interest) as compensation income, PRS is entitled to a $90 deduction, and SP's
initial capital account is $100 ($90 included in SP's income plus $10 amount paid
for the interest). Under proposed § 1. 761-1 (b), as a result of SP's election under

§ 83(b), SP is treated as a partner starting from the date of the transfer of the
interest to SP. Accordingly, SP includes in 2005 taxable income SP's $50
distributive share of PRS income, and the $50 payment to SP by PRS in 2005 is
a partnership distribution under § 731. SP includes in 2006 and 2007 taxable
income SP's $100 distributive shares of PRS income for those years.
(6) Example 6: Substantially Nonvested Interest; § 83(b) Election;
Forfeiture; Net Profit
Facts: The facts are the same as in Example 5, except that SP terminates
services on September 30,2007, and is repaid the $10 that SP paid for the PRS
interest in 2004. The partnership agreement provides that if SP's partnership
interest is forfeited, SP's distributive share of all partnership items (other than
forfeiture allocations) will be zero with respect to the interest for the taxable year
of the partnership in which the interest is forfeited.
Conclusion: The tax consequences for 2004 through 2006 are the same
as in Example (5). As a result of the forfeiture in 2007, PRS is required under

§ 1.83-6(c) to include in gross income $90 (the amount of the allowable
deduction on the transfer of the interest to SP). In accordance with the
partnership agreement, PRS also makes forfeiture allocations in 2007 to offset
partnership income and loss that was allocated to SP and partnership

distributions to SP prior to the forfeiture. Cumulative net income of $150 was
allocated to SP prior to the forfeiture ($50 in 2005 and $100 in 2006) and SP
received a total of $60 of distributions from PRS ($50 in 2005 and $10 in 2007
(the repayment of SP's initial contribution to PRS)). Under proposed § 1.7041(b)(4)(xii), the total forfeiture allocations to SP is $100 of partnership loss and
deduction, the difference between $50 ($60 of distributions to SP less $10 of
contributions to PRS by SP) and $150 (cumulative net income allocated to SP).
Pursuant to the partnership agreement, none of the partnership income for the
year 2007 is allocated to SP. In accordance with § 83(b)(1) (last sentence), SP
does not receive a deduction or capital loss for the amount ($90) that was
included as SP's compensation income as a result of the election under § 83(b).
(7) Example 7: Substantially Nonvested Interest; § 83(b) Election;
Forfeiture; Net Loss
Facts: PRS has two partners,

and B, each with a 50% interest in PRS.

On December 31,2004, SP pays the partnership $10 and agrees to perform
services for the partnership in exchange for a 10% partnership interest. Under
the terms of the partnership agreement, if SP terminates services before January
1, 2008, SP forfeits any right to any share of accumulated, undistributed profits,
but is entitled to a return of SP's $10 initial contribution. SP's partnership interest
is not transferable. The partnership agreement provides that if SP's partnership
interest is forfeited SP's distributive share of all partnership items (other than
'forfeiture allocations) will be zero with respect to the interest for the taxable year
of the partnership in which the interest is forfeited. At the time of the transfer, the

liquidation value of the 10% partnership interest is $100, and SP makes an
election under § 83(b) with respect to the interest. In 2005, PRS earns $500 of
taxable income, which is allocated and distributed $225 to each of ~ and Band
$50 to SP. In 2006, PRS has net taxable loss of $1,000, $100 of which is
allocated to SP. PRS does not make any distributions in 2006. PRS has no
items of income, gain, loss, or deduction in 2007, other than gross income
recognized under § 1.83-6(c). SP terminates services on September 30,2007,
and is repaid the $10 that SP paid for the PRS interest in 2004. PRS does not
make any distributions in 2007, other than the return of SP's $10 contribution.
Conclusion: Under section 4.02 of this revenue procedure, the fair market
value (disregarding lapse restrictions) of SP's interest in PRS at the time of
transfer is treated as being equal to its liquidation value (disregarding lapse
restrictions) at that time for purposes of § 83. Because a § 83(b) election is
made, SP includes as compensation income in 2004 $90 ($100 liquidation value
less $10 amount paid for the interest), PRS is entitled to a $90 deduction under §
83(h), and SP's initial capital account is $100 ($90 compensation income plus
$10 amount paid for the interest). Under proposed § 1.761-1(b), as a result of
SP's election under § 83(b), SP is treated as a partner starting from the date of
the transfer of the interest to SP. Accordingly, SP includes in 2005 taxable
income SP's $50 distributive share of PRS's income, and the $50 payment to SP
in 2005 is a partnership distribution under § 731. SP includes in computing 2006
taxable income SP's $100 distributive share of PRS's loss.

As a result of the forfeiture in 2007, PRS is required under § 1.83-6(c) to
include in gross income $90 (the amount of the allowable deduction on the
transfer of the interest to SP). In accordance with the partnership agreement,
PRS also makes forfeiture allocations in 2007 to offset partnership income and
loss that was allocated to SP and partnership distributions to SP prior to the
forfeiture. Cumulative net loss of $50 was allocated to SP prior to the forfeiture
($50 of income in 2005 and $100 of loss in 2006) and SP received a total of $60
of partnership distributions ($50 in 2005 and $10 in 2007 (the repayment of SP's
initial contribution to PRS)). If PRS had unlimited items of gross income and
gain, the total forfeiture allocations to SP under proposed § 1 .704-1 (b)( 4 )(xii)
would be $100 of partnership income and gain, the difference between $50 ($60
distributions to SP less $10 of contributions to PRS by SP) and -$50 (cumulative
net loss allocated to SP). However, PRS's only income in 2007 is the $90 of
income recognized by PRS under § 1.83-6(c), all of which must be used to make
forfeiture allocations to SP. Under section 4.04 of this revenue procedure, in
2007, SP must include in ordinary income $10 (the difference between the
forfeiture allocations that would be required under proposed § 1.704-1 (b )(4 )(xii) if
PRS had an unlimited amount of gross income and gain, $100, and the actual
forfeiture allocations to SP, $90). PRS is not entitled to a deduction for the
amount ($10) that SP is required to include in income under section 4.04 of this
revenue procedure.

SECTION 7. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 93-27, 1993-2 C.B. 343, and Rev. Proc. 2001-43, 2001-2 C.B.
191, are obsoleted.

[4830-01-P]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-105346-03]
RIN 1545-8892
Partnership Equity for Services
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Partial withdrawal of notice of proposed rulemaking, notice of proposed
rulemaking, and notice of public hearing.
SUMMARY: This document withdraws the remaining portion of the notice of proposed
rulemaking published in the Federal Register on June 3,1971 (36 FR 10787) and
contains proposed regulations relating to the tax treatment of certain transfers of
partnership equity in connection with the performance of services. The proposed
regulations provide that the transfer of a partnership interest in connection with the
performance of services is subject to section 83 of the Internal Revenue Code (Code)
and provide rules for coordinating section 83 with partnership taxation principles. The
proposed regulations also provide that no gain or loss is recognized by a partnership on
the transfer or vesting of an interest in the transferring partnership in connection with the
performance of services for the transferring partnership. This document also provides a
notice of public hearing on these proposed regulations.
DATES: Written or electronic comments must be received by August 22, 2005.
Outlines of topics to be discussed at the public hearing scheduled for October 5, 2005,
at 10 a.m. must be received by September 14,2005.

2
ADDRESSES:

Send submissions to: CC:PA:LPD:PR (REG-105346-03), room 5203,

Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044.
Submissions may be hand-delivered Monday through Friday between the hours of 8
a.m. and 4 p.m. to CC:PA:LPD:PR (REG-105346-03), 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 REG-105346-03).
FOR FURTHER INFORMATION CONTACT: Concerning the section 83 regulations,
Stephen Tackney at (202) 622-6030; concerning the subchapter K regulations, Audrey
Ellis or Demetri Yatrakis at (202) 622-3060; concerning submissions, the hearing,
and/or to be placed on the building access list to attend the hearing, Robin Jones, (202)
622-7180 (not toll free numbers).
SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act
The collection of information contained in this notice of proposed rulemaking has
been submitted to the Office of Management and Budget for review in accordance with
the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the collection
of information should be sent to the Office of Management and Budget, Attn: Desk
Officer for the Department of the Treasury, Office of Information and Regulatory Affairs,
Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS
Reports Clearance Officer, SE:W:CARMP:T:T:SP, Washington, DC 20224. Comments

3
on the collection of information should be received by July 25, 2005.

Comments are

specifically requested concerning:
Whether the proposed collection of information is necessary for the proper
performance of the functions of the IRS, including whether the information will have
practical utility;
The accuracy of the estimated burden associated with the proposed collection of
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 services to provide information.
The following collections of information in this proposed regulation are in
§1.83-3(1):
(1) Requirement that electing partnerships submit an election with the
partnership tax return.
(2) Requirement that certain partners submit a document to the partnership;
(3) Requirement that such documents be retained; and
(4) Requirement that partnerships submit a termination document with the
partnership tax return as one method of terminating the election.

4
These collections of information are required by the IRS to determine whether
the amount of tax has been calculated correctly. The respondents are partnerships and
partners or other service providers.
The estimated total annual reporting and/or record keeping burden is 112,500
hours.
The estimated annual burden per respondentlrecordkeeper varies from .10 hours
to 10 hours, depending on individual circumstances, with an estimated average of 1
hour for partnerships and .25 hour for a partner or service provider. The estimated
number of respondents and/or record keepers is 100,000 partnerships and 50,000
partners or other service providers.
The estimated annual frequency of responses (used for reporting requirements
only) is on occasion.
An agency may not conduct or sponsor, and a person is not required to respond
to, a collection of information unless it displays a valid control number assigned by the
Office of Management and Budget.
Books or records relating to a collection of information must be retained as long
as their contents may become material in the administration of any internal revenue law.
Generally, tax returns and tax return information are confidential as required by 26
U.S.C. 6103.

Background
Partnerships issue a variety of instruments in connection with the performance of
services. These instruments include interests in partnership capital, interests in
partnership profits, and options to acquire such interests (collectively, partnership
equity). On June 5, 2000, the Treasury Department and the IRS issued Notice 2000-29
(2000-1 C.B. 1241), inviting public comment on the Federal income tax treatment of the
exercise of an option to acquire a partnership interest, the exchange of convertible debt
for a partnership interest, and the exchange of a preferred interest in a partnership for a
common interest in that partnership. On January 22,2003, the Treasury Department
and the IRS published in the Federal Register (REG-1 03580-02) (68 FR 2930),
proposed regulations regarding the Federal income tax consequences of
noncompensatory partnership options, convertible equity, and convertible debt. In the
preamble to those proposed regulations, the Treasury Department and the IRS
requested comments on the proposed amendment to §1.721-1(b)(1) that was published
in the Federal Register on June 3, 1971 (36 FR 10787), and on the Federal income tax
consequences of the issuance of partnership capital interests in connection with the
performance of services and options to acquire such interests. In response to the
comments received, the Treasury Department and the IRS are withdrawing the
proposed amendment to §1.721-1(b)(1) and issuing these proposed regulations, which
prescribe rules on the application of section 83 to partnership interests and the Federal
income tax consequences associated with the transfer, vesting, and forfeiture of
partnership interests transferred in connection with the performance of services.

Explanation of Provisions
1. Application of Section 83 to Partnership Interests
Section 83 generally applies to a transfer of property by one person to another in
connection with the performance of services. The courts have held that a partnership
capital interest is property for this purpose. See Schulman v. Commissioner, 93 T.C.
623 (1989) (section 83 governs the issuance of an option to acquire a partnership
interest as compensation for services provided as an employee); Kenroy, Inc. v.
Commissioner, T.C. Memo 1984-232. Therefore, the proposed regulations provide that
a partnership interest is property within the meaning of section 83, and that the transfer
of a partnership interest in connection with the performance of services is subject to
section 83.
The proposed regulations apply section 83 to all partnership interests, without
distinguishing between partnership capital interests and partnership profits interests.
Although the application of section 83 to partnership profits interests has been the
subject of controversy, see, e.g., Campbell v. Commissioner, T.C. Memo 1990-162,
affd in part and rev'd in part, 943 F.2d 815 (8th Cir. 1991), n. 7; St. John v. U.S., 84-1
USTC 9158 (C.D. III. 1983), the Treasury Department and the IRS do not believe that
there is a substantial basis for distinguishing among partnership interests for purposes
of section 83. All partnership interests constitute personal property under state law and
give the holder the right to share in future earnings from partnership capital and labor.
Moreover, some commentators have suggested that the same tax rules should apply to

7
both partnership profits interests and partnership capital interests. These commentators
have suggested that taxpayers may exploit any differences in the tax treatment of
partnership profits interests and partnership capital interests. The Treasury Department
and the IRS agree with these comments. Therefore, all of the rules in these proposed
regulations and the accompanying proposed revenue procedure (described below)
apply equally to partnership capital interests and partnership profits interests. However,
a right to receive allocations and distributions from a partnership that is described in
section 707(a)(2)(A) is not a partnership interest. In section 707(a)(2)(A), Congress
directed that such an arrangement should be characterized according to its substance,
that is, as a disguised payment of compensation to the service provider. See S. Rep.
No. 98-169, 98 Congo 2d Sess., at 226 (1984).
Section 83(b) allows a person who receives substantially nonvested property in
connection with the performance of services to elect to include in gross income the
difference between: (A) the fair market value of the property at the time of transfer
(determined without regard to a restriction other than a restriction which by its terms will
never lapse); and (8) the amount paid for such property. Under section 83(b )(2), the
election under section 83(b) must be made within 30 days of the date of the transfer of
the property to the service provider.
Consistent with the principles of section 83, the proposed regulations provide
that, if a partnership interest is transferred in connection with the performance of
services, and if an election under section 83(b) is not made, then the holder of the
partnership interest is not treated as a partner until the interest becomes substantially

8
vested. If a section 83(b) election is made with respect to such an interest, the service
provider will be treated as a partner for purposes of Subtitle A of the Code. These rules
are similar to the current rules pertaining to substantially nonvested stock in a
subchapter S corporation. See §1.1361-1(b)(3) (upon an election under section 83(b),
the service provider becomes a shareholder for purposes of subchapter S).
These principles differ from Rev. Proc. 2001-43. Under that revenue procedure,
if a partnership profits interest is transferred in connection with the performance of
services, then the holder of the partnership interest may be treated as a partner even if
no section 83(b) election is made, provided that certain conditions are met.
Certain changes to the regulations under both subchapter K and section 83 are
needed to coordinate the principles of subchapter K with the principles of section 83.
Among the changes that are proposed in these regulations are: (1) conforming the
subchapter K rules to the section 83 timing rules; (2) revising the section 704(b)
regulations to take into account the fact that allocations with respect to an unvested
interest may be forfeited; and (3) providing that a partnership generally recognizes no
gain or loss on the transfer of an interest in the partnership in connection with the
performance of services for that partnership. In addition, Rev. Procs. 93-27 (1993-2
C.B. 343), and 2001-43 (2001-2 C.B. 191), which generally provide for nonrecognition
by both the partnership and the service provider on the transfer of a profits interest in
the partnership for services performed for that partnership, must be modified to be
consistent with these proposed regulations. Accordingly, in conjunction with these
proposed regulations, the IRS is issuing Notice 2005-43 (2005-24 I.R.B.). That Notice

9
contains a proposed revenue procedure that, when finalized, will obsolete Rev. Procs.
93-27 and 2001-43. The Treasury Department and the IRS intend for these proposed
regulations and the proposed revenue procedure to become effective at the same time.
The proposed amendments to the regulations under section 83 and subchapter K, as
well as the Notice, are described in further detail below.
The proposed revenue procedure and certain parts of the proposed regulations
(as described below) only apply to a transfer by a partnership of an interest in that
partnership in connection with the performance of services for that partnership
(compensatory partnership interests). The Treasury Department and the IRS request
comments on the income tax consequences of transactions involving related persons,
such as, for example, the transfer of an interest in a lower-tier partnership in exchange
for services provided to the upper-tier partnership.
2. Timing of Partnership's Deduction
Except as otherwise provided in §1.83-6(a)(3), if property is transferred in
connection with the performance of services, then the service recipient's deduction, if
any, is allowed only for the taxable year of that person in which or with which ends the
taxable year of the service provider in which the amount is included as compensation.
See section 83(h). In contrast, under section 706(a) and §1.707-1 (c), guaranteed
payments described in section 707(c) are included in the partner's income in the
partner's taxable year within or with which ends the partnership's taxable year in which
the partnership deducted the payments. Under §1.721-1(b)(2) of the current
regulations, an interest in partnership capital issued by the partnership as compensation

10
for services rendered to the partnership is treated as a guaranteed payment under
section 707(c). Some commentators suggested that the proposed regulations should
resolve the potential conflict between the timing rules of section 83 and the timing rules
of section 707(c).
Under the proposed regulations, partnership interests issued to partners for
services rendered to the partnership are treated as guaranteed payments. Also, the
proposed regulations provide that the section 83 timing rules override the timing rules of
section 706(a) and §1.707-1 (c) to the extent they are inconsistent. Accordingly, if a
partnership transfers property to a partner in connection with the performance of
services, the timing and the amount of the related income inclusion and deduction is
determined by section 83 and the regulations thereunder.
In drafting these regulations, the Treasury Department and the IRS considered
alternative approaches for resolving the timing inconsistency between section 83 and
section 707(c). One alternative approach considered was to provide that the transfer of
property in connection with the performance of services is not treated as a guaranteed
payment within the meaning of section 707(c). This approach was not adopted in the
proposed regulations due to, among other things, concern that such a characterization
of these transfers could have unintended consequences on the application of provisions
of the Code outside of subchapter K that refer to guaranteed payments. The Treasury
Department and the IRS request comments on alternative approaches for resolving the
timing inconsistency between section 83 and section 707(c).
3. Allocation of Partnership's Deduction

11
The proposed regulations provide guidance regarding the allocation of the
partnership's deduction for the transfer of property in connection with the performance
of services. Some commentators suggested that the proposed regulations require that
the partnership's deduction be allocated among the partners in accordance with their
interests in the partnership prior to the transfer.
Section 706(d)(1) provides generally that, if, during any taxable year of a
partnership, there is a change in any partner's interest in the partnership, each partner's
distributive share of any item of income, gain, loss, deduction, or credit of the
partnership for such taxable year shall be determined by the use of any method
prescribed by regulations which takes into account the varying interests of the partners
in the partnership during the taxable year. Regulations have not yet been issued
describing the rules for taking into account the varying interests of the partners in the
partnership during a taxable year. Section 1.706-1 (c )(2)(ii) provides that, in the case of
a sale, exchange, or liquidation of a partner's entire interest in a partnership, the
partner's share of partnership items for the taxable year may be determined by either:
(1) closing the partnership's books as of the date of the transfer (closing of the books
method); or (2) allocating to the departing partner that partner's pro rata part of
partnership items that the partner would have included in the partner's taxable income
had the partner remained a partner until the end of the partnership taxable year
(proration method). The Treasury Department and the IRS believe that section
706(d)(1) adequately ensures that partnership deductions that are attributable to the

12
portion of the partnership's taxable year prior to a new partner's entry into the
partnership are allocated to the historic partners.
Section 706(d)(2), however, places additional limits on how partnerships may
allocate these deductions. Under section 706(d)(2)(8), payments for services by a
partnership using the cash receipts and disbursements method of accounting are
allocable cash basis items. Under section 706(d)(2)(A), if during any taxable year of a
partnership there is a change in any partner's interest in the partnership, then (except to
the extent provided in regulations) each partner's distributive share of any allocable
cash basis item must be determined under the proration method. To allow partnerships
to allocate deductions with respect to property transferred in connection with the
performance of services under a closing of the books method, the proposed regulations
provide that section 706(d)(2)(A) does not apply to such a transfer.
4. Accounting for Compensatory Partnership Interests
A. Transfer of compensatory partnership interest
Under the proposed regulations, the service provider's capital account is
increased by the amount the service provider takes into income under section 83 as a
result of receiving the interest, plus any amounts paid for the interest. Some
commentators suggested that the amount included in the service provider's income
under section 83, plus the amount paid for the interest, may differ from the amount of
capital that the partnership has agreed to assign to the service provider. These
commentators contend that the SUbstantial economic effect safe harbor in the section
704(b) regulations should be amended to allow partnerships to reallocate capital

13
between the historic partners and the service provider to accord with the economic
agreement of the parties.
The reallocation of partnership capital in these circumstances is not consistent
with the policies underlying the substantial economic effect safe harbor and the capital
account maintenance rules. The purpose of the substantial economic effect safe harbor
is to ensure that, to the extent that there is an economic benefit or burden associated
with a partnership allocation, the partner to whom the allocation is made receives the
economic benefit or bears the economic burden. Under section 83, the economic
benefit of receiving a partnership interest in connection with the performance of services
is the amount that is included in the compensation income of the service provider, plus
the amount paid for the interest. This is the amount by which the service partner's
capital account should be increased.
As explained in section 6 below, a proposed revenue procedure issued
concurrently with these proposed regulations would allow a partnership, its partners,
and the service provider to elect to treat the fair market value of a partnership interest
as equal to the liquidation value of that interest. If such an election is made, the capital
account of a service provider receiving a partnership interest in connection with the
performance of services is increased by the liquidation value of the partnership interest
received.
B. Forfeiture of certain compensatory partnership interests
If an election under section 83(b) has been made with respect to a substantially
nonvested interest, the holder of the nonvested interest may be allocated partnership

14
items that may later be forfeited. For this reason, allocations of partnership items while
the interest is substantially nonvested cannot have economic effect. Under the
proposed regulations, such allocations will be treated as being in accordance with the
partners' interests in the partnership if: (a) the partnership agreement requires that the
partnership make forfeiture allocations if the interest for which the section 83(b) election
is made is later forfeited; and (b) all material allocations and capital account
adjustments under the partnership agreement not pertaining to substantially nonvested
partnership interests for which a section 83(b) election has been made are recognized
under section 704(b). This safe harbor does not apply if, at the time of the section 83(b)
election, there is a plan that a substantially nonvested interest will be forfeited. All of the
facts and circumstances (including the tax status of the holder of the substantially
nonvested interest) will be considered in determining whether there is a plan that the
interest will be forfeited. In such a case, the partners' distributive shares of partnership
items shall be determined in accordance with the partners' interests in the partnership
under §1.704-1 (b)(3).
Generally, forfeiture allocations are allocations to the service provider of
partnership gross income and gain or gross deduction and loss (to the extent such
items are available) that offset prior distributions and allocations of partnership items
with respect to the forfeited partnership interest. These rules are designed to ensure
that any partnership income (or loss) that was allocated to the service provider prior to
the forfeiture is offset by allocations on the forfeiture of the interest. Also, to carry out
the prohibition under section 83(b)(1) on deductions with respect to amounts included in

15
income under section 83(b), these rules generally cause a forfeiting partner to be
allocated partnership income to offset any distributions to the partner that reduced the
partner's basis in the partnership below the amount included in income under section
83(b).
Forfeiture allocations may be made out of the partnership's items for the entire
taxable year. In determining the gross income of the partnership in the taxable year of
the forfeiture, the rules of §1.83-6(c) apply. As a result, the partnership generally will
have gross income in the taxable year of the forfeiture equal to the amount of the
allowable deduction to the service recipient partnership upon the transfer of the interest
as a result of the making of the section 83(b) election, regardless of the fair market
value of the partnership's assets at the time of forfeiture.
In certain circumstances, the partnership will not have enough income and gain
to fully offset prior allocations of loss to the forfeiting service provider. The proposed
revenue procedure includes a rule that requires the recapture of losses taken by the
service provider prior to the forfeiture of the interest to the extent that those losses are
not recaptured through forfeiture allocations of income and gain to the service provider.
This rule does not provide the other partners in the partnership with the opportunity to
increase their shares of partnership loss (or reduce their shares of partnership income)
for the year of the forfeiture by the amount of loss that was previously allocated to the
forfeiting service provider.
In other circumstances, the partnership will not have enough deductions and loss
to fully offset prior allocations of income to the forfeiting service provider. It appears

16
that, in such a case, section 83(b)(1) may prohibit the service provider from claiming a
loss with respect to partnership income that was previously allocated to the service
provider. However, a forfeiting partner is entitled to a loss for any basis in a partnership
that is attributable to contributions of money or property to the partnership (including
amounts paid for the interest) remaining after the forfeiture allocations have been made.
See §1.83-2(a).
Comments are requested as to whether the regulations should require or allow
partnerships to create notional tax items to make forfeiture allocations where the
partnership does not have enough actual tax items to make such allocations.
Comments are also requested as to whether section 83(b)(1) should be read to allow a
forfeiting service provider to claim a loss with respect to partnership income that was
previously allocated to the service provider and not offset by forfeiture allocations of loss
and deduction and, if so, whether it is appropriate to require the other partners in the
partnership to recognize income in the year of the forfeiture equal to the amount of the
loss claimed by the service provider. In particular, comments are requested as to
whether section 83 or another section of the Code provides authority for such a rule.
5. Valuation of Compensatory Partnership Interests
Commentators requested guidance regarding the valuation of partnership
interests transferred in connection with the performance of services. Section 83
generally provides that the recipient of property transferred in connection with the
performance of services recognizes income equal to the fair market value of the
property, disregarding lapse restrictions. See Schulman v. Commissioner, 93 T.C. 623

17
(1989). However, some authorities have concluded that, under the particular facts and
circumstances of the case, a partnership profits interest had only a speculative value or
that the fair market value of a partnership interest should be determined by reference to
the liquidation value of that interest. See §1.704-1 (e)(1 )(v); Campbell v. Commissioner,
th

943 F.2d 815 (8 Cir. 1991); St. John v. U.S., 1984-1 USTC 9158 (CD. III. 1983). But
see Diamond v. Commissioner, 492 F.2d 286 (th Cir. 1974) (holding under pre-section
83 law that the receipt of a profits interest with a determinable value at the time of
receipt resulted in immediate taxation); Campbell v. Commissioner, T.C. Memo 1990162, affd in part and rev'd in part, 943 F.2d 815 (8 th Cir. 1991).
The Treasury Department and the IRS have determined that, provided certain
requirements are satisfied, it is appropriate to allow partnerships and service providers
to value partnership interests based on liquidation value. This approach ensures
consistency in the treatment of partnership profits interests and partnership capital
interests, and accords with other regulations issued under subchapter K, such as the
regulations under section 704(b}.
In accordance with these proposed regulations, the revenue procedure proposed
in Notice 2005-43 (2005-24 I.R.B.) will, when finalized, provide additional rules that
partnerships, partners, and persons providing services to the partnership in exchange
for interests in that partnership would be required to follow when electing under § 1.833(1} of these proposed regulations to treat the fair market value of those interests as
being equal to the liquidation value of those interests. For this purpose, the liquidation
value of a partnership interest is the amount of cash that the holder of that interest

18
would receive with respect to the interest if, immediately after the transfer of the interest
the partnership sold all of its assets (including goodwill, going concern value, and any
other intangibles associated with the partnership's operations) for cash equal to the fair
market value of those assets, and then liquidated.
6. Application of Section 721 to Partnership on Transfer
There is a dispute among commentators as to whether a partnership should
recognize gain or loss on the transfer of a compensatory partnership interest. Some
commentators believe that, on the transfer of such an interest, the partnership should
be treated as satisfying its compensation obligation with a fractional interest in each
asset of the partnership. Under this deemed sale of assets theory, the partnership
would recognize gain or loss equal to the excess of the fair market value of each partial
asset deemed transferred to the service provider over the partnership's adjusted basis
in that partial asset. Other commentators believe that a partnership should not
recognize gain or loss on the transfer of a compensatory partnership interest. They
argue, among other things, that the transfer of such an interest is not properly treated as
a realization event for the partnership because no property owned by the partnership
has changed hands. They also argue that taxing a partnership on the transfer of such
an interest would result in inappropriate gain acceleration, would be difficult to
administer, and would cause economically similar transactions to be taxed differently.
Generally, when appreciated property is used to pay an obligation, gain on the
property is recognized. The Treasury Department and the IRS are still analyzing
whether an exception to this general rule is appropriate on the transfer of an interest in

19
the capital or profits of a partnership to satisfy certain partnership obligations (such as
the obligations to pay interest or rent). However, the Treasury Department and the IRS
believe that partnerships should not be required to recognize gain on the transfer of a
compensatory partnership interest. Such a rule is more consistent with the policies
underlying section 721 -- to defer recognition of gain and loss when persons join
together to conduct a business -- than would be a rule requiring the partnership to
recognize gain on the transfer of these types of interests. Therefore, the proposed
regulations provide that partnerships are not taxed on the transfer or substantial vesting
of a compensatory partnership interest. Under §1.704-1 (b)(4)(i) (reverse section 704(c)
principles), the historic partners generally will be required to recognize any income or
loss attributable to the partnership's assets as those assets are sold, depreciated, or
amortized.
The rule providing for nonrecognition of gain or loss does not apply to the
transfer or substantial vesting of an interest in an eligible entity, as defined in
§301.7701-3(a) of the Procedure and Administration Regulations, that becomes a
partnership under §301.7701-3(f)(2) as a result of the transfer or substantial vesting of
the interest. See McDougal v. Commissioner, 62 T.C. 720 (1974) (holding that the
service recipient recognized gain on the transfer of a one-half interest in appreciated
property to the service provider, immediately prior to the contribution by the service
recipient and the service provider of their respective interests in the property to a newly
formed partnership).
7. Revaluations of Partnership Property

20
The proposed regulations concerning noncompensatory partnership options
published on January 22, 2003, contained special rules regarding the revaluations of
partnership property while noncompensatory partnership options were outstanding.
Specifically, the regulations proposed modifications to §1.704-1(b)(2)(iv)(f) and (b.) to
provide that any revaluation during the period in which there are outstanding
noncompensatory options generally must take into account the fair market value, if any,
of outstanding options. These proposed regulations do not contain similar provisions,
because under recently proposed modifications to the regulations under
§ 1. 704-1 (b )(2)(iv), the obligation to issue a partnership interest in satisfaction of an
option agreement is a liability that is taken into account in determining the fair market
value of partnership assets as a result of a revaluation. See REG-106736-00, 68 FR
37434 (June 24, 2003) (relating to the assumption of certain obligations by partnerships
from partners).
8. Characterization Rule
The proposed regulations concerning noncompensatory partnership options
published on January 22,2003 contained a rule (§1.761-3) providing that the holder of a
noncompensatory option is treated as a partner under certain circumstances. However,
the Treasury Department and the IRS have concluded that these proposed regulations
should not contain a similar rule for partnership options transferred in connection with
the performance of services because of the possibility that constructive transfers of
property, subject to section 83, may occur under circumstances other than those
described in the proposed rules for treating the holder of a noncompensatory option as

21
a partner. The Treasury Department and the IRS request comments on whether antiabuse rules are necessary to prevent taxpayers from using the rules in these proposed
regulations or the rules in Notice 2005-43 to inappropriately shift items of partnership
income or loss between the service provider and the other partners.
9. Retroactive Allocations
Section 761 (c) generally allows a partnership to modify its agreement at any time
on or prior to the due date for the partnership's return for the taxable year (without
regard to extensions). Thus, for example, a partnership could, at the end of its taxable
year, amend its partnership agreement to provide that a service provider was entitled to
a substantially vested or nonvested interest in partnership profits and losses from the
beginning of the partnership's taxable year. It is expected that, if a substantially vested
compensatory partnership interest is transferred to an employee or independent
contractor (or an election under section 83(b) is made with respect to the transfer of a
substantially nonvested compensatory partnership interest to an employee or
independent contractor), the partnership will report the transfer on Form W-2, "Wage
and Tax Statement," or Form 1099-MISC, "Miscellaneous Income," as appropriate. The
Form W-2 or Form 1099-MISC would be issued to the service provider by the
partnership by January 31 of the year following the calendar year in which the
partnership interest is transferred, and the partnership would file such forms with the
Social Security Administration or IRS, respectively, by February 28 (March 31 if filed
electronically) of the year following the calendar year in which the partnership interest is
transferred. The service provider would be required to report any income recognized on

22
the transfer of the partnership interest on the service provider's return for the taxable
year (of the service provider) in which the transfer occurs.
It is unclear whether the retroactive commencement date of such an interest
should be treated as the date of the transfer of the interest for purposes of section 83
and other provisions of the Code outside of subchapter K. If the retroactive effective
date of the interest is treated as the transfer date for all purposes, a number of
administrative concerns arise. For example, the partnership may not, by the January 31
deadline, have the information necessary to issue Form W-2 or Form 1099-MISC to the
service provider. Also, the service provider may not, by the due date for filing the
section 83(b) election, have the information necessary to file the election. The Treasury
Department and the IRS request comments on the timing for section 83 purposes of
retroactive transfers of partnership interests and on any actions that may be appropriate
to address the associated administrative concerns.
10. Information Reporting to Partners
As explained above, the proposed regulations treat the transfer of a partnership
interest to a partner in connection with the performance of services as a guaranteed
payment. To ensure that the service provider partner has the information necessary to
include the transfer in income for the taxable year in which the transfer occurs (rather
than the taxable year in which or with which ends the partnership taxable year in which
the transfer occurs), the Treasury Department and the IRS are considering the
possibility of amending the section 6041 regulations to provide that this type of
guaranteed payment must be reported by the partnership on Form 1099-MISC, which is

23
required to be issued to the service provider on or before January 31 of the year
following the calendar year of such transfer. The Treasury Department and the IRS
request comments on whether such a requirement is appropriate and administrable.
Proposed Effective Date
These regulations are proposed to apply to transfers of property on or after the
date final regulations are published 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 also has been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations.
It is hereby certified that the collection of information in these regulations will not have a
significant economic impact on a sUbstantial number of small entities. This certification
is based upon the fact that the reporting burden, as discussed earlier in this preamble,
is not expected to be significant. Partnerships with partnership agreements that contain
the binding provisions referred to in §1.83-3(1) only will be required to submit a single
election form in order to rely on the safe harbor described in that paragraph.
Partnerships that desire to elect to use the safe harbor described in §1.83-3(1), but
which do not have partnership agreements containing these provisions, are required to
obtain partner-level consents to the election. However, these partnerships are expected
to be rare. Moreover, in most cases the partners in such partnerships are not expected
to be small businesses. Therefore, a Regulatory Flexibility Analysis under the

24
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 Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any electronic or written comments (a signed original and
eight copies) 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 has been scheduled for October 5, 2005, beginning at 10 a.m. in
the IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW.,
Washington, DC. Due to building security procedures, visitors must enter at the
Constitution Avenue entrance. In addition, all visitors must present photo identification
to enter the building. Because of access restrictions, visitors will not be admitted
beyond the immediate entrance area more than 30 minutes before the hearing starts.
For information about having your name placed on the building access list to attend the
hearing, see the "FOR FURTHER INFORMATION CONTACT" portion of this preamble.
The rules of 26 CFR 601.601 (a)(3) apply to the hearing. Persons who wish to
present oral comments must submit written comments and an outline of the topics
to be discussed and the time to be devoted to each topic (a signed original and

25
eight (8) copies) by September 14, 2005. A period of 10 minutes will be allotted
to each person for making comments. An agenda showing the scheduling of the
speakers will be prepared after the deadline for reviewing outlines has passed. Copies
of the agenda will be available free of charge at the hearing.

Drafting Information
The principal authors of these regulations are Audrey Ellis and Demetri Yatrakis
of the Office of Associate Chief Counsel (Passthroughs and Special Industries), and
Stephen Tackney of the Office of Associate Chief Counsel (Tax Exempt and
Government Entities). However, other personnel from the IRS and Treasury
Department participated in their development.

Withdrawal of Notice of Proposed Rulemaking
Accordingly, under the authority of 26 U.S.C. 7805, §1.721-1(b) of the notice of
proposed rulemaking that was published in the Federal Register on June 3, 1971 (36
FR 10787) is withdrawn.

List of Subjects in 26 CFR Part 1
Income taxes, Reporting and record keeping 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
follows:
Authority: 26 U.S.C. 7805 * * *

26
Par. 2. Section 1.83-3 is amended as follows:
1. Paragraph (e) is amended by adding two new sentences after the first
sentence.
2. Paragraph (I) is added.
The revision and addition read as follows:
§1.83-3 Meaning and use of certain terms.
*****

(e) Property. * * * Accordingly, property includes a partnership interest. The
previous sentence is effective for transfers on or after the date final regulations are
published in the Federal Register. * * *
*****

(I) Special rules for the transfer of a partnership interest. (1) Subject to such
additional conditions, rules, and procedures that the Commissioner may prescribe in
regulations, revenue rulings, notices, or other guidance published in the Internal
Revenue Bulletin (see §601.601 (d)(2)(ii)(Q) of this chapter), a partnership and all of its
partners may elect a safe harbor under which the fair market value of a partnership
interest that is transferred in connection with the performance of services is treated as
being equal to the liquidation value of that interest for transfers on or after the date final
regulations are published in the Federal Register if the following conditions are
satisfied:
(i) The partnership must prepare a document, executed by a partner who has
responsibility for Federal income tax reporting by the partnership, stating that the

27
partnership is electing, on behalf of the partnership and each of its partners, to have the
safe harbor apply irrevocably as of the stated effective date with respect to all
partnership interests transferred in connection with the performance of services while
the safe harbor election remains in effect and attach the document to the tax return for
the partnership for the taxable year that includes the effective date of the election.
(ii) Except as provided in paragraph (1)(1 )(iii) of this section, the partnership
agreement must contain provisions that are legally binding on all of the partners stating
that(A) The partnership is authorized and directed to elect the safe harbor; and
(8) The partnership and each of its partners (including any person to whom a
partnership interest is transferred in connection with the performance of services)
agrees to comply with all requirements of the safe harbor with respect to all partnership
interests transferred in connection with the performance of services while the election
remains effective.
(iii) If the partnership agreement does not contain the provisions described in
paragraph (1)(1 )(ii) of this section, or the provisions are not legally binding on all of the
partners of the partnership, then each partner in a partnership that transfers a
partnership interest in connection with the performance of services must execute a
document containing provisions that are legally binding on that partner stating that(A) The partnership is authorized and directed to elect the safe harbor; and
(8) The partner agrees to comply with all requirements of the safe harbor with
respect to all partnership interests transferred in connection with the performance of

28
services while the election remains effective.
(2) The specified effective date of the safe harbor election may not be prior to the
date that the safe harbor election is executed. The partnership must retain such
records as may be necessary to indicate that an effective election has been made and
remains in effect, including a copy of the partnership's election statement under this
paragraph (I), and, if applicable, the original of each document submitted to the
partnership by a partner under this paragraph (I). If the partnership is unable to produce
a record of a particular document, the election will be treated as not made, generally
resulting in termination of the election. The safe harbor election also may be terminated
by the partnership preparing a document, executed by a partner who has responsibility
for Federal income tax reporting by the partnership, which states that the partnership,
on behalf of the partnership and each of its partners, is revoking the safe harbor election
on the stated effective date, and attaching the document to the tax return for the
partnership for the taxable year that includes the effective date of the revocation.
Par. 3. Section 1.83-6 is amended by revising the first sentence of
paragraph (b) to read as follows:
§1.83-6 Deduction by employer.
*****

(b) Recognition of gain or loss. Except as provided in section 721 and section
1032, at the time of a transfer of property in connection with the performance of services
the transferor recognizes gain to the extent that the transferor receives an amount that
exceeds the transferor's basis in the property. * * *

29
*****
Par. 4. Section 1.704-1 is amended as follows:
1. In paragraph (b)(O), an entry is added to the table for §1.704-1 (b)(4)(xii).
2. In paragraph (b)(1 )(ii)(g), a sentence is added at the end of the paragraph.
3. Paragraph (b)(2)(iv)(Q)(1) is revised.
4. Paragraph (b)(2)(iv)(f)(§)(fu) is revised.
S. Paragraph (b)(4 )(xii) is added.
6. Paragraph (b)(S) Example 29 is added.
The additions and revisions read as follows:
§ 1. 704-1 Partner's distributive share.

*****
(b) * * *(0) * * *
*****

Substantially nonvested interests .................................... 1.704-1 (b)(4)(xii)
*****
(1) * * *
(ii) * * * (g) * * * In addition, paragraph (b)(4)(xii) and paragraph (b)(S) Example
29 of this section apply to compensatory partnership interests (as defined in §1.7211(b )(3)) that are transferred on or after the date final regulations are published in the
Federal Register.
*****

(2) * * *
(iv) * * *

30
(h) * * *
(1) the amount of money contributed by that partner to the partnership and, in thE
case of a compensatory partnership interest (as defined in §1. 721-1 (b)(3)) that is
transferred on or after the date final regulations are published in the Federal Register,
the amount included on or after that date in the partner's compensation income under
section 83(a), (b), or (d)(2).
*****
(f)***

(.§) * * *
(iii) In connection with the transfer or vesting of a compensatory partnership
interest (as defined in §1. 721-1 (b)(3)) that is transferred on or after the date final
regulations are published in the Federal Register, but only if the transfer or vesting
results in the service provider recognizing income under section 83 (or would result in
such recognition if the interest had a fair market value other than zero).
*****

(4) * * *
(xii) Substantially nonvested interests--(S!) In general. If a section 83(b) election
has been made with respect to a substantially nonvested interest, the holder of the
nonvested interest may be allocated partnership income, gain, loss, deduction, or credit
(or items thereof) that will later be forfeited. For this reason, allocations of partnership
items while the interest is substantially nonvested cannot have economic effect.

(!;!) Deemed Compliance with Partners' Interests in the Partnership. If a section
83(b) election has been made with respect to a substantially nonvested interest,
allocations of partnership items while the interest is substantially nonvested will be
deemed to be in accordance with the partners' interests in the partnership if-(1) The partnership agreement requires that the partnership make forfeiture
allocations if the interest for which the section 83(b) election is made is later forfeited;
and
(~)

All material allocations and capital account adjustments under the partnership

agreement not pertaining to substantially nonvested partnership interests for which a
section 83(b) election has been made are recognized under section 704(b).

(f) Forfeiture allocations. Forfeiture allocations are allocations to the service
provider (consisting of a pro rata portion of each item) of gross income and gain or
gross deduction and loss (to the extent such items are available) for the taxable year of
the forfeiture in a positive or negative amount equal to-(1) The excess (not less than zero) of the-(l) Amount of distributions (including deemed distributions under section 752(b)
and the adjusted tax basis of any property so distributed) to the partner with respect to
the forfeited partnership interest (to the extent such distributions are not taxable under
section 731); over
(li) Amounts paid for the interest and the adjusted tax basis of property
contributed by the partner (including deemed contributions under section 752(a)) to the
partnership with respect to the forfeited partnership interest; minus

32
(£) The cumulative net income (or loss) allocated to the partner with respect to
the forfeited partnership interest.

(9.) Positive and negative amounts. For purposes of paragraph (b )(4 )(xii)(£) of
this section, items of income and gain are reflected as positive amounts, and items of
deduction and loss are reflected as negative amounts.
(~) Exception. Paragraph (b)(4)(xii)(Q) of this section shall not apply to

allocations of partnership items made with respect to a substantially nonvested interest
for which the holder has made a section 83(b) election if, at the time of the section 83(b)
election, there is a plan that the interest will be forfeited. In such a case, the partners'
distributive shares of partnership items shall be determined in accordance with the
partners' interests in the partnership under paragraph (b)(3) of this section. In
determining whether there is a plan that the interest will be forfeited, the Commissioner
will consider all of the facts and circumstances (including the tax status of the holder of
the forfeitable compensatory partnership interest).
(f) Cross references. Forfeiture allocations may be made out of the partnership's
items for the entire taxable year of the forfeiture. See §1.706-3(b) and paragraph (b)(5)
Example 29 of this section.
*****
(5) * * *
Example 29. (i) In Year 1, A and B each contribute cash to LLC, a newly formed
limited liability company classified as a partnership for Federal tax purposes, in
exchange for equal units in LLC. Under LLC's operating agreement, each unit is
entitled to participate equally in the profits and losses of LLC. The operating agreement
also provides that the partners' capital accounts will be determined and maintained in
accordance with paragraph (b)(2)(iv) of this section, that liquidation proceeds will be

33
distributed in accordance with the partners' positive capital account balances, and that
any partner with a deficit balance in that partner's capital account following the
liquidation of the partner's interest must restore that deficit to the partnership. At the
beginning of Year 3, SP agrees to perform services for LLC. In connection with the
performance of SP's services and a payment of $10 by SP to LLC, LLC transfers a 10%
interest in LLC to SP. SP's interest in LLC is substantially nonvested (within the
meaning of §1.83-3(b)). At the time of the transfer of the LLC interest to SP, LLC's
operating agreement is amended to provide that, if SP's interest is forfeited, then SP is
entitled to a return of SP's $10 initial contribution, and SP's distributive share of all
partnership items (other than forfeiture allocations under §1.704-1 (b)(4 )(xii)) will be zero
with respect to that interest for the taxable year of the partnership in which the interest
was forfeited. The operating agreement is also amended to require that LLC make
forfeiture allocations if SP's interest is forfeited. Additionally, the operating agreement is
amended to provide that no part of LLC's compensation deduction is allocated to the
service provider to whom the interest is transferred. SP makes an election under
section 83(b) with respect to SP's interest in LLC. Upon receipt, the fair market value of
SP's interest in LLC is $100. In each of Years 3, 4, 5, and 6, LLC has operating income
of $100 (consisting of $200 of gross receipts and $100 of deductible expenses), and
makes no distributions. SP forfeits SP's interest in LLC at the beginning of Year 6. At
the time of the transfer of the interest to SP, there is no plan that SP will forfeit the
interest in LLC.
(ii) Because a section 83(b) election is made, SP recognizes compensation
income in the year of the transfer of the LLC interest. Therefore, SP recognizes $90 of
compensation income in the year of the transfer of the LLC interest (the excess of the
fair market value of SP's interest in LLC, $100, over the amount SP paid for the interest,
$10). Under paragraph (b)(2)(iv)(Q)(1) of this section, in Year 3, SP's capital account is
initially credited with $100, the amount paid for the interest ($10) plus the amount
included in SP's compensation income upon the transfer under section 83(b) ($90).
Under §§ 1.83-6(b) and 1.721-1 (b )(2), LLC does not recognize gain on the transfer of
the interest to SP. LLC is entitled to a compensation deduction of $90 under section
83(h). Under the terms of the operating agreement, the deduction is allocated equally
to A and B.
(iii) As a result of SP's election under section 83(b), SP is treated as a partner
starting from the date of the transfer of the LLC interest to SP in Year 3.
Section 1.761-1 (b). In each of years 3, 4 and 5, SP's distributive share of partnership
income is $10 (10% of $100), A's distributive share of partnership income is $45 (45%
of $100), and B's distributive share of partnership income is $45 (45% of $100). In
accordance with the operating agreement, SP's capital account is increased (to $130)
by the end of Year 5 by the amounts allocated to SP, and A's and B's capital accounts
are increased by the amounts allocated to A and B. Because LLC satisfies the
requirements of paragraph (b)(4)(xii) of this section, LLC's allocations in years 3, 4 and
5 are deemed to be in accordance with the partners' interests in the partnership.

34
(iv) As a result of the forfeiture of the LLC interest by SP in year 6, LLC is
required to recognize income ($90) equal to the amount of the allowable deduction on
the transfer of the LLC interest to SP under §1.83-6(c). LLC repays SP's $10 capital
contribution to SP, reducing SP's capital account to $120. Under the terms of the
operating agreement, because SP forfeited SP's interest, SP's distributive share of all
partnership items (other than forfeiture allocations) is zero for Year 6. To reverse SP's
prior allocations of LLC income, LLC makes forfeiture allocations of $30 of deductions
($0 (the difference between the $10 distributed to SP and the $10 contributed to LLC by
SP) minus $30 (the cumulative net LLC income allocated to SP) to SP in Year 6.
Notwithstanding section 706(c) and (d), these allocations may be made out of LLC's
partnership items for the entire taxable year of the forfeiture. Thus, in Year 6, $30 of
deductions are allocated to SP, and the remaining $220 of net operating income ($200
of gross receipts and $90 of income under §1.83-6(c) less $70 of remaining deductions)
are allocated to A and B equally for tax purposes. In accordance with section 83(b)(1)
(last sentence), SP does not receive a deduction or capital loss for the amount ($90)
that was included in SP's compensation income. Because LLC satisfies the
requirements of paragraph (b)(4)(xii) of this section, LLC's allocations in year 6 are
deemed to be in accordance with the partners' interests in the partnership.
*****
Par. 5. Section 1.706-3 is added to read as follows.
§1.706-3 Property transferred in connection with the performance of services.
(a) Allocations of certain deductions under section 83(h). The transfer of
property subject to section 83 in connection with the performance of services is not an
allocable cash basis item within the meaning of section 706(d)(2)(B).
(b) Forfeiture allocations. If an election under section 83(b) is made with respect
to a partnership interest that is substantially nonvested (within the meaning of
§1.83-3(b)), and that interest is later forfeited, the partnership must make forfeiture
allocations to reverse prior allocations made with respect to the forfeited interest. See
§1.704-1(b)(4)(xii). Although the person forfeiting the interest may not have been a

35
partner for the entire taxable year, forfeiture allocations may be made out of the
partnership's items for the entire taxable year.
(c) Effective date. This section applies to transfers of property on or after the
date final regulations are published in the Federal Register.
Par. 6. In §1.707-1, paragraph (c) is amended by revising the second sentence
to read as follows:
§ 1. 707-1 Transactions between partner and partnership.
*****

(c) Guaranteed Payments. * * * However, except as otherwise provided in
section 83 and the regulations thereunder, a partner must include such payments as
ordinary income for that partner's taxable year within or with which ends the partnership
taxable year in which the partnership deducted such payments as paid or accrued
under its method of accounting. * * *
*****

Par. 7. In §1.721-1, paragraph (b) is revised to read as follows.
§1.721-1 Nonrecognition of gain or loss on contribution.
*****

(b)(1) Except as otherwise provided in this section or §1.721-2, section 721 does
not apply to the transfer of a partnership interest in connection with the performance of
services or in satisfaction of an obligation. The transfer of a partnership interest to a
person in connection with the performance of services constitutes a transfer of property
to which section 83 and the regulations thereunder apply. To the extent that a

36
partnership interest transferred in connection with the performance of services rendered
by a decedent prior to the decedent's death is transferred after the decedent's death to
the decedent's successor in interest, the fair market value of such interest is an item of
income in respect of a decedent under section 691.
(2) Except as provided in section 83(h) and 1.83-6(c), no gain or loss shall be
recognized by a partnership upon-(i) The transfer or substantial vesting of a compensatory partnership interest; or
(ii) The forfeiture of a compensatory partnership interest. See §1.704-1(b)(4)(xii)
for rules regarding forfeiture allocations of partnership items that may be required in the
taxable year of a forfeiture.
(3) For purposes of this section, a compensatory partnership interest is an
interest in the transferring partnership that is transferred in connection with the
performance of services for that partnership (either before or after the formation of the
partnership), including an interest that is transferred on the exercise of a compensatory
partnership option. A compensatory partnership option is an option to acquire an
interest in the issuing partnership that is granted in connection with the performance of
services for that partnership (either before or after the formation of the partnership).
(4 ) To the extent that a partnership interest is-(i) Transferred to a partner in connection with the performance of services
rendered to the partnership, it is a guaranteed payment for services under section
707(c);
(ii) Transferred in connection with the performance of services rendered to a

37
partner, it is not deductible by the partnership, but is deductible only by such partner to
the extent allowable under Chapter 1 of the Code.
(5) This paragraph (b) applies to interests that are transferred on or after the date
final regulations are published in the Federal Register.
*****
Par. 8. Section 1.761-1(b) is amended by adding two sentences to the end of the
paragraph to read as follows.
§1.761-1 Terms defined.

*****
(b) * * * If a partnership interest is transferred in connection with the performance
of services, and that partnership interest is substantially nonvested (within the meaning
of §1.83-3(b)), then the holder of the partnership interest is not treated as a partner
solely by reason of holding the interest, unless the holder makes an election with
respect to the interest under section 83(b). The previous sentence applies to

38
partnership interests that are transferred on or after the date final regulations are
published in the Federal Register. * * * * *

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

S-2462: Remarks of Randal K. Quarles Acting Under Secretary of the United States Treasury<BR... Page 1 of 3

FROM THE OFFICE OF PUBLIC AFFAIRS
May 22, 2005
JS-2462
Remarks of Randal K. Quarles
Acting Under Secretary of the United States Treasury
at the Annual Meeting of the
European Bank for Reconstruction and Development
I am very pleased to be in Belgrade for the European Bank for Reconstruction and
Development's 14th Annual Meeting. I'd like to thank our hosts from Serbia and
Montenegro for their work in ensuring the success of this event. And at the very
outset, I also want to thank Noreen Doyle for her years of service to the EBRD.
She has dedicated 13 years of her career to the Bank, beginning as the head of
syndications in 1992, and most recently serving as the First Vice President. We all
wish her well in her future endeavors.
It has been a remarkable year for the region - one that has affirmed the
fundamental importance of peaceful democratic change to a successful transition to
an open market economy. The second wave of peaceful revolutions spreading east
and south has drawn inspiration from the EU-8 accession countries that have
demonstrated the concrete benefits of completing the transition to market-oriented
democracies. Now the new democratic reformers are using their political mandates
to achieve major breakthroughs on economic reforms and the fight against
corruption.
In Georgia, the state has stepped back from the brink of financial collapse. By no
longer tolerating corruption, the government increased revenues by 50 percent in
one year and is meeting its commitments to its people in full and on time for the first
time in its history. Not satisfied with marginal refinements, it completely rewrote the
tax code, making it one of the most investor friendly in the region. In return,
confidence and investment have soared.
In Ukraine, we remain impressed by the new government's commitment to tackle
corruption through strengthening the rule of law. The government has eliminated a
wide range of exemptions and privileges that were previously exploited by large
companies to
evade tax obligations. This is a good start. Moving ahead rapidly on other priority
reforms will demonstrate that Ukraine's authorities are serious about leading
Ukraine to its rightful place in Europe.
Serbia and Montenegro experienced their own transition from dictatorship to
democracy and are now poised to reap the benefits of reform and strengthening
relations with the international community. Following last year's elections, the
government moved forward resolutely on economic stability, privatization and
development of the financial sector. The July 2004 agreement with the London
Club was a landmark achievement, which normalized the country's relations with
international capital markets. We hope that
progress on bringing the final war crimes indictees to justice in The Hague will allow
the U.S. to resume supporting EBRD operations in Serbia.
Romania has demonstrated how democratic and economic development can be
mutually reinforcing. A surprise opposition victory served to reignite the country's
movement toward EU membership by freeing the government's hand to take on
entrenched interests and improve the investment climate. The introduction of the
flat tax has been accompanied by efforts to improve tax collection and strengthen
anti-corruption legislation. Early results have been positive with higher revenues
and registered employment indicating a shift out of the shadow economy.

5/31/2005

http://treas.gov/press/releusoo/js2462.htm

'8-2462: Remarks of Randal K. Quarles Acting Under Secretary of the United States Treasury<BR... Page 2 of 3

The changes sweeping the region represent a new wave of transition, potentially as
transformational as the dramatic events of 1989-1991. But the trends are by no
means inevitable and must be nurtured if the high expectations of citizens are to be
fulfilled.
In the Kyrgyz Republic, the people have taken a stance against the corrupt status
quo in favor of change. It is our hope that the recent changes will result in free and
fair elections in July. If this happens, the new government will need to show that
democracy can deliver the economic opportunity that was denied under the old
regime.
In some countries the people have yet to have their say. I would like to reiterate the
U.S. stance on Belarus -- we stand with those struggling for democracy in Europe's
last dictatorship.
In Uzbekistan, we are seriously disturbed about recent events and believe the
EBRD should give these events careful consideration during its upcoming review of
the Uzbek country strategy in July.
Given the tremendous changes sweeping east and south, it is only natural that the
EBRD should continue to playa major role in supporting economic and political
transformation in the region.
To do so, the EBRD must look back to its creation and renew itself as an
institution. It must refocus on its transition mandate by directing its resources to
those poorer countries of the region where its transformational effect can be the
greatest. It must take the valuable lessons learned in the advanced transition
countries and apply them to those countries that are still making this transition.
And to effectively apply the lessons learned to the early and intermediate transition
countries, the EBRD must be willing to recognize its successes. This includes
acknowledgment of when its work is done and it is time to move on.
In several countries, the EBRD is already at that point. The eight countries of
Central and Eastern Europe that joined the EU last spring have completed their
transition. While EBRD s work is done, these countries will have support for their
economic convergence into the EU from EU structural and cohesion funds and the
European Investment Bank. I
wish to repeat our call for the EBRD to cease new operations in the EU-8 within the
next two to three years. Our intention is to acknowledge their remarkable
success. And most importantly, to free the Bank to focus completely on the less
advanced countries of operation and to serve them with the same dedication and
intensity of purpose that it brought to the EU-8.
Sometimes in response to our call for a movement south and east, we hear the
objection that this move is not practical. We hear that the poorer countries of the
region are too risky. We hear of the obstacles to investment and the barriers to
activity.
But when we hear of the difficulties of operating in the poorer countries in the
region, we must remember that there were no easy investments in Hungary or
Estonia or Slovenia in 1991. Yet the Bank dove in, and both the region and the
EBRD prospered. I am convinced that with the vision and professionalism and
dedication that have characterized the management and staff of this Bank since its
inception, we can do it again.
As the Bank expands its operations in the early and intermediate transition
countries, I want to reiterate our long-standing support for efforts to expand
financing for local entrepreneurs, particularly micro, small, and medium-sized
enterprises. These
entrepreneurs are essential to creating a vibrant, market-oriented economy, and, as
stakeholders in their communities, they facilitate the development of more open and
transparent government. We hope that the EBRD will fully staff and use the Group
for Small Business and the Direct Investment Facility, among others, to advance
the Bank s efforts in this area.
At a time when so many countries in the region are taking steps to fight corruption, I

http://treas.gov/press/releusoo/js2462.htm

5/3112005

S-2462: Remarks of Randal K. Quarles Acting Under Secretary of the United States Treasury<BR ... Page 3 of3

want to emphasize the importance we attach to the EBRO's work in this area.
Because democracy and free markets depend on an open, transparent, and rulebased system of law, the elimination of corruption is a vital component of the
EBRO's transition objectives. Consequently, the Legal Transition Program and
other work in this area have
been as important to the Bank's mission as its financial operations.
To promote good governance effectively in the region, the EBRO must make sure
that its own operations are consistent with best practices. There have been several
positive developments on this front, including the implementation of a COSO
system of internal
controls, new measures leading toward full independence of the evaluation
function, work underway to revise the Code of Conduct, and a planned, annual anticorruption report.
The Bank, however, must make further improvements in public disclosure,
particularly by making its budget and the minutes of Board meetings available to the
public as is done by other international financial institutions. The Bank should also
make public its draft country strategies for comment. In addition, the EBRO must
take further steps to ensure the operational independence of its internal audit and
compliance functions. Furthermore, reviewing the operation of the Board should be
part of the process of bringing the Bank in line with best current corporate
governance practices.
In conclusion, let me reiterate our fundamental point -- now is the time for the EBRO
to renew itself as an institution so that it might maximize its impact going forward.
The Bank was created to bring the former communist countries into the community
of free, open societies. To remain true to its mission, the EBRO should recognize
where the mission has been accomplished and what tools have been instrumental
to that success so that it is in the best possible position to seize the historical
opportunities developing elsewhere in the region.

http://treas.gov/press/releusoo/js2462.htm

5/3112005

·S.2463: Remarks Hy Umted States Treasury Assistant :secretary ~uarles Harvard :symposIUm <1:1...

Page 1 of4

FROM THE OFFICE OF PUBLIC AFFAIRS
April 22, 2005
JS-2463

Remarks By United States Treasury Assistant Secretary
Quarles Harvard Symposium
on Building the Financial System of the 21st Century:
An Agenda for Europe and the United States
Eltville, Germany
April 22, 2005
I am delighted to participate again in this Symposium. Being an after dinner speaker
at the first session presents opportunities and risks. The opportunity is that I can
talk about any topic without fear of repeating what others have said. Risks, in that I
am standing between you and a good night's sleep after such a wonderful meal. I
will seize the opportunity by talking about the US-EU Informal Financial Markets
Regulatory Dialogue. I will try to minimize the risks by being as brief as possible.
The three messages I would like you to take away tonight are that (1) the dialogue
is moving to the next stage; (2) markets are driving this process; and (3)
convergence is happening.
The US-EU Financial Markets Regulatory Dialogue began three years ago. The
Treasury, the lead in the United States, is joined by the SEC, the Federal Reserve,
and other regulators on an ad hoc basis, in meetings with the European
Commission. The dialogue works informally, quietly and professionally.
About 1-112 years ago, I spoke about the attributes of the Dialogue to this
Symposium. There was polite applause, but I detected a certain skepticism.
During the last year and a half, the weight of opinion has shifted. By all accounts,
the Dialogue has proven its worth. By promoting quiet discussion and
understanding, and avoiding hectoring or public brinkmanship, the Dialogue has
assisted in problem solving, has evolved to focus on implementation and forward
looking issues, and has helped deepen cooperation.
In the first two years of the Dialogue, both sides were frankly reactive, because
there was a lot to react to. Both needed to respond quickly to events as they
arose. We sought to address "spillover effects" of legislation adopted for domestic
regulatory reasons on both sides of the Atlantic, but with distinct implications for
international firms. The Financial Conglomerates Directive and the Sarbanes-Oxley
Act are the two best examples. Give and take on both sides allowed
implementation to proceed, taking into account special attributes of each other's
markets without sacrificing the letter and spirit of the legislation.
We were able to work thorough the issues because we share similar objectives of
promoting dynamic and sound global capital markets, although each side goes
about its business differently. Through frequent discussion and taking each other's
views into account, we worked through difficult issues and engendered mutual trust.
With passage of much of the EU's Financial Services Action Plan, the focus of the
Dialogue has broadened to include the practicalities of the Plan's active
implementation. This will prove every bit as challenging as the work already
completed.
Implementation of Basle II, which you will discuss tomorrow, is one example. It has

http://treas.goy/press/releusoo/js 2463 .htm

7/6/2005

S-l40j: KemarKS oy unnea

~taIeS

1 reasury ASSiStant

~ecretary

(Juarles Harvard Symposium <B ...

Page 2 of 4

been taken up at all Dialogue sessions. While the Basle Accord Implementation
Group is charged with addressing implementation details, the Dialogue has
provided a useful reminder that the basic rationale for such an international
agreement is to promote fair competition among major financial institutions. In this
respect, the EU's capital adequacy directive should incorporate provisions
emerging from Basle, including those being developed on trading books of
investment banks.
Other hot implementation issues include the Market in Financial Instruments
Directive (MiFID), in which details of the implementing measures should respect the
delicate compromises reached on that legislation--particularly regarding
internationalization of trades--and the Prospectus and Transparency Directives on
which I will comment later.
Problem solving and reaction will always be part of the Dialogue. But having gotten
past the first wave of reaction, the Dialogue has been able to shift gears. We have
developed a forward-looking agenda that identifies key issues for building an
increasingly integrated transatlantic capital market.
The United States well knows from its history that innovative and flexible financial
markets not only provide the capital needed to fuel investment, but they also
discipline economic agents and reward efficiency. "Growth" has been a buzzword of
the Bush Administration; we want to see a global economy with vibrant growth in
many economies, rather than the uneven pattern that now holds. We are well
aware of the many studies in Europe showing that full implementation of a liberal
pan-European financial system will boost EU growth by at least one percentage
point per annum in a decade's time. US firms are also some of the key European
financial institutions that can make higher sustained growth a reality.
For all of these reasons, we are also watching closely many aspects of European
capital market development. The depth of our interest might surprise some
observers, but it should come as no surprise to you. For example, we are keenly
interested in Europe's progress on clearing and settlement, mutual funds, corporate
governance, auditing supervision, takeover bids, and insurance. On the takeover
directive, the erection of barriers to US investment in Europe under the guise of
"reciprocity" or "national champions" could impede European economic dynamism.
On insurance, both reinsurance as well as the Solvency II project to strengthen
capital adequacy standards, Dialogue participants are actively exchanging views.
Banking issues, such as retail banking, mergers and acquisitions, and a legal
framework for payment services, are other topics to be taken up soon. We are
keenly interested in the Commission's efforts to promote cross-border retail banking
mergers and competition in Europe. The advent of inter-state banking in the United
States is a parallel and it is one that bolstered our economy's dynamism. These are
all areas that hold significant promise for reducing transaction costs and bringing
benefits to consumers.
We want to broaden the reach of the Dialogue, while retaining its informal nature.
We will be continuing to reach out to the academic community, private sector,
member state governments and legislatures.
As implementation issues are now coming to the fore, it is natural that the EU
supervisory committees develop their own cooperative dialogues with their US
counterparts. CESR has dialogues with the SEC and US CFTC; the US National
Association of Insurance Commissioners is engaging with the newly created
Committee of European Insurance and Occupational Pension Supervisors; and
officials of the Committee of European Banking Supervisors already have visited
Washington for initial consultations with US bank regulators. The Dialogue will be
infused with the substance of the work concerning each of these supervisory
dialogues.
My second proposition tonight is that markets are driving the agenda. Markets are
always ahead of the regulators, and frankly that's how it should be. It's analogous
to the advice that my father provided me that "if you don't miss at least two or three

http://treas.gov/press/releusesJjs2463.htm

7/612005

IS-2463: Remarks Hy Umted States Treasury AssIstant Secretary Quarles Harvard SymposIUm <tL.

Page 3 of 4

planes a year, you're spending too much time in airports." If the regulators aren't a
little behind the market in a few areas at any given time, they would be stifling
innovation and evolution. The regulators' task is to promote investor protection,
while ensuring that prudential and supervisory activities do not stifle efficiency
gains. For effective regulation, the regulators must work with the markets. The
global trend toward transparency is key to letting regulators and markets achieve
the right balance. Open and full consultation with markets is essential. Politics is
inevitable in our societies, but if politics are allowed to trump sound policies, we will
all be hurt.
While EU financial markets are big, they are not fully integrated. Thus,
implementation of enacted directives and the Commission's follow-on measures
that it will propose this summer are of critical importance. In order for Europe to
reap the fruits of a single capital market, regulators in each member state must
implement these measures in identical fashion and enforce them consistently.
Markets are pushing for this - demanding streamlined reporting requirements and
supervision to gain efficiencies at the EU level.
In the United States, large US banks increasingly hold the preeminent share of
assets. In Europe, as consolidation and mergers take hold, especially crosscountry, concentration will also strengthen. And it is not just Europe and the US several years ago, there were 16 major banks in Japan. Now, Japanese bank
balance sheets are becoming stronger and "conglomerization" - to use a Japanese
term of art that I'm fairly sure is not an English word - is taking root with three large
banking entities taking hold.
While markets are increasingly global, regulation is national. Moreover, regulatory
requirements are increasing - understandably in the light of recent developments.
But these requirements can be duplicative across jurisdictions, thus piling up
additional costs for global institutions. Limiting client operations, or segmenting
them into different accounts to deal in different financial products subject to different
regulatory regimes, is costly and inefficient. Financial firms and their clients
understandably demand better.
So, how do we square this circle - how do we match the global reach of markets
with the national orientation of regulation? The reality is that supervision is already
going global and it is doing so through convergence. As policy-makers, we have a
duty to ensure that convergence orients itself around high quality standards and not
a race to the bottom.
Four years ago there was an interesting analysis of the politics of international
capital market harmonization. The hypothesis was that a dominant financial center
serves as a "regulatory anchor," basically making decisions that the rest of the
world would have to emulate for competitive reasons. In essence, the US was
viewed as the dominant center.
With the policy measures under its Financial Services Action Plan, the EU is in the
process of creating a second "dominant" center. Data in the IMF's most recent
Global Financial Stability Report paint the picture. The sum of stock market
capitalization, debt securities and bank assets in the EU was nearly $47 trillion in
2003; in the US the total was around $41 trillion. Together they account for twothirds of the world total.
One risk of having a second pillar in the international financial regulatory system is
that we could lose the "anchor" that has helped us to avoid a race to the bottom.
Two large regulatory centers could engage in competition to attract capital that
leads to excessively low regulation. Under certain conditions, the two sides could
also engage in the opposite behavior, seeking to exceed one another with everhigher levels of regulation that could frustrate innovation and efficiency in the
financial markets. Our cooperation in this and other forums is an important means
by which we can avoid these pitfalls.
A few years ago, very few people would have known the alphabet soup of
international regulation - BCBS; laSCO, IAIS, etc. Now, these organizations are

http://treas.gov/presslreleasoo/js2463.htm

7/6/2005

IS-24oj: KemarKS JjY unnea ::states I reasury AssIstant

~ecretary

Quarles Harvard Symposium <B...

Page 4 of 4

known quantities. Their activities are also on the plate of the world's financial
officials . In March, I attended the Financial Stability Forum meeting in Tokyo , which
heard progress reports from each of the key supervisory bodies .
And the regulatory alphabet soup does not just exist at the global level. It also
exists at the US-European level. CESR and the SEC are working on credit rating
agencies, and on implementation and enforcement of lAS. CESR and the CFTC
developed a common work plan on transatlantic derivatives. CEIOPS and NAIC are
working on information sharing and re-insurance issues, and the PCAOB with
European auditing supervisors.
I already discussed the "conglomerization" underway among global banks .
Consolidated comprehensive supervision and Basel II are a natural reflection of this
process . So is the fact that the Financial Conglomerates Directive was patterned
on the principles of the Joint Forum and that Europe's Solvency 2 Directive is
striving to emulate Basel II. Convergence has far to go, but the trend is
unmistakable .
In that regard. let me touch on convergence for listings in the US and European
market. Endorsement of lAS by the EU followed improved IASB governance and
IASB's improvement of its accounting standards . Requiring the 7,000 EU listed
companies to use lAS was a dramatic move that gave a push to accounting
convergence . And I am pleased to note that the SEC is working on a roadmap for
accepting IFRS accounts without reconciliation in the US in the next few years .
Meanwhile, the IASB and FASB are making progress on the convergence exercise
for global accounting standards, pursuant to the Norwalk Agreement. Japan is
closely following these developments . While I doubt accounting and auditing
practices will ever be identical in our jurisdictions. I hope that if accountants
worldwide follow a similar standard, and follow that standard similarly, then
accounting statements could become in time broadly similar throughout the world .
Such convergence - in terms of principles and practice - could lay the basis for
ushering in a truly global capital market. It is important not to cast doubts in the
public mind about the integrity and technical strength of accounting standard setting
by interjecting politics into the process .
In this context it is disappointing to see the old canard -- "reciprocity" - reappear.
For years , US firms have listed securities in the Euromarkets on the basis of
statements using US GAAP . Some now argue that US firms listing in Euromarkets
should be required to follow lAS because the SEC does not recognize the lAS
accounts prepared by EU firms. I think such an approach would be a mistake.
Such a shortsighted pol icy would only hurt the depth and liquidity of the
Euromarkets.
To conclude, we strongly support Europe's FSAP and are committed to working
with Europe to promote a strong Transatlantic Capital Market anchored in best
global practices . The US-EU Financial Markets Regulatory Dialogue is thriving and
moving on to the next steps; it is evolving to meet new challenges posed by
markets ; and it is supporting regulatory convergence between the US and Europe.
I am looking forward to remaining engaged with all of you on these issues and to
hearing the ideas that come out of this conference .
Thank you .

http://treas.gov/press/releusesJjs240j.htm
7/612005

fS-2464: Testimony of Deputy Assistant Secretary (Tax Analysis) of Treasury Robert 1. Carroll be... Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page. download the free Adobe(r;) AcrobaN!) HeadeN!).

May 23,2005
JS-2464
Testimony of Deputy Assistant Secretary (Tax Analysis) of Treasury
Robert J. Carroll before the Senate Finance Subcommittee on
Taxation and IRS Oversight
Mr. Chairman, Senator Jeffords, and Distinguished Members of the Committee.
Thank you for the opportunity to discuss the individual alternative minimum tax.
The alternative minimum tax, or AMT, is an example of a tax provision that was
intended to address a relatively small, targeted problem that has had unintended
consequences, grown far beyond Its original purpose, and created a far larger
problem than it was ever intended to address. Unfortunately, because of the way
the AMT is now intertwined with the rest of the individual income tax, a long-term
solution to the AMT problem needs to be considered in the broader context of
reform of the income tax.
REPORTS
•

Full Report

http://treas,goy/press/releusoo/js .2464 .htm

5/31/2005

Mr. Chairman, Senator Jeffords, and Distinguished Members of the Committee.
Thank you for the opportunity to discuss the individual alternative minimum tax. The alternative
minimum tax, or AMT, is an example of a tax provision that was intended to address a relatively
small, targeted problem that has had unintended consequences, grown far beyond its original
purpose, and created a far larger problem than it was ever intended to address. Unfortunately,
because of the way the AMT is now intertwined with the rest of the individual income tax, a
long-term solution to the AMT problem needs to be considered in the broader context of reform
of the income tax.

History of the AMT
The predecessor of the AMT - the minimum tax -- was first enacted in 1969 in an attempt to
insure that a small group of high-income individuals who had managed to avoid paying any
income tax would pay at least a minimum amount of tax. Then Treasury Secretary Barr noted in
his testimony before the Joint Economic Committee of Congress in 1969 that 155 taxpayers with
incomes over $200,000 paid no tax in 1966. The AMT we have today is projected to affect over
50 million taxpayers by 2015.
Moreover, even though the minimum tax and later the AMT did reduce the number of highincome taxpayers who otherwise would have paid no income tax, neither provision has been
successful in attaining the original goal of ensuring that all high-income taxpayers pay at least
some tax. Each year several thousand high-income taxpayers continue to be nontaxable,
generally for various combinations of legitimate reasons and in spite of the AMT.
Several major and many minor changes since 1969 have transformed the original minimum tax
into the current alternative minimum tax which, for too many taxpayers, is now a second income
tax that runs parallel to the regular individual income tax. The broad reach and design flaws of
the AMT result in a tax system that is complex, unfair, and discourages economic growth.
Taxpayers must comply with two parallel tax systems - even for the many millions who do the
calculations but ultimately have no AMT liability.

The AMT: A Looming Problem
The AMT is a parallel tax system with its own tax base, exemption amounts, tax rates, and
usable tax credits. A taxpayer's AMT liability is essentially the difference between the liability
calculated under the AMT and the liability calculated under the regular income tax. The AMT
itself is not an especially complex tax. It is the requirement that taxpayers understand and
comply with two parallel tax systems makes the AMT complex. Moreover, because many
taxpayers become subject to the AMT for reasons that are not the result of tax-motivated
planning, many taxpayers are not aware that they will be affected by the AMT until they
complete their tax returns. They become unsuspecting - and unintended - victims of the AMT.
The major reason the AMT has become such a growing problem is that, unlike the regular tax,
this parallel tax system is not indexed for inflation. The AMT tax rate thresholds, the AMT

-2exemption, and its phase-out are all fixed in nominal terms. Consequently, the passage of time
and the erosive effects of inflation have steadily increased the size and scope of the AMT.
Because of budgetary constraints and the large and ever-increasing amount of revenue from the
AMT, solving the AMT problem in isolation would be extremely difficult.

-3The large AMT exemption has generally kept the vast majority of taxpayers free from the reach
of the AMT. Indeed, each of the major tax cuts enacted by the Congress in the last several years
have included provisions to increase the AMT exemption or other provisions to prevent a large
increase in the number of AMT taxpayers. The higher AMT exemption and the provision to
allow all personal credits to be claimed against the AMT - the so-called "AMT patch" - both
remain in effect through
2005.
Chart 1: Number of AMT Taxpayers
Beginning in tax year 2006,
after the temporary AMT
provisions expire, the
number of taxpayers
projected to be affected by
the AMT rises sharply, from
3.8 million in 2005 to 20.5
million in 2006 (Chart 1).
By 2015, 51.3 million or 45
percent of all taxpayers with
income tax are projected to
be subject to the AMT.

AMT Taxpayers (millions)
60
50
40
30
20
10

'---~-

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Note: Assumes EGTRRA and JGTRRA sunsets are repealed and the temporary AMT pro\1sions are allowed to expire in 2005
Source: U.S. Department of Treasury. Office of Tax AnalysIs

The AMT will increasingly affect middle-income taxpayers. In tax year 2005, about 13 percent
of taxpayers with incomes between $\00,000 and $200,000 will be subject to the AMT. But,
when taxpayers file their tax returns in the spring of 2007 for tax year 2006, over 75 percent of
taxpayers in this income group will be subject to the AMT.

To put this into perspective,
consider how the AMT will
affect a hypothetical joint
filer with two children in tax
year 2006 (see Chart 2). The
taxpayer calculates tax
liability under both the
regular tax and the AMT and
pays whichever is larger.
The illustration reveals that
in 2006 the hypothetical
taxpayer becomes subject to
the AMT when his income
exceeds $67,890. The AMT
is no longer a tax that applies
only to the high income.

Chart 2: An illustration for a jOint filer with two children in 2006
$Tax liability
12.000

10.000

8.000

Regular tax
exceeds
tentatil.e AMT,
so taxpayer
NOT subject to
theAMT

At what income does
the taxpayer become
subject to the AMT?

Tentatil.e AMT exceeds
regular tax, so AMT
taxpayer

$67,890
$9.100

6,000

$7.768
4.000

--<

$3.900

Taxpayer with $60,000
of AGI in 2006

Taxpayer with $67,890 of
AGlin 2006

Taxpayer with $80,000 of
AGI in 2006

I Note TaKPayer.s assumed to be marned. file lolnUy. WIth two children. wage Income only, and vse the standard deductl()n

ISoufce

!\j"

$4.768
$5.951

2.000

US Department of the Treasury. Office of Tall AnalYSIS

-4The AMT also increasingly affects families with children because it does not allow deductions
for personal exemptions. Nearly all AMT taxpayers will lose at least part of the benefit of the
2001 through 2004 tax cuts, including some who will lose all the benefit. And many
unsuspecting AMT taxpayers are subject to an effective marginal tax rate of 35 percent even
though the maximum statutory AMT rate is only 28 percent because of the phase-out of the
AMT exemption.
The increases in the number of
AMT taxpayers over the next
decade wi II be accompanied by
dramatic increases in tax revenues
from the AMI. AMT revenue will
increase from $18 billion in 2005
to $210 billion in 2015 (roughly 11
percent of total individual income
tax revenue). In fact, by 2013 the
revenue raised by the AMT alone
actually exceeds the revenues from
the regular tax (Chart 3). Both the
large numbers of taxpayers
affected and the large amount of
revenue suggest that the AMT
problem will have to be addressed
in the context of broader changes
to the tax system.

Chart 3: Revenue from the Regular Tax Versus the AMT
Billions of Dollafll

2000

1800

1600

1400
Individual Income lax

1200
receipts from the AMT
alone

1000

800

600

400

200

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Fiscal Year

Tax Reform and the AMT

Nola Assum~ EGTRRA and JGTRRA sunse\s a'~ repealed eno the temporary AMT prOllll'.IOn5 9"pt16 In 200S

Source US Department of Treasury Office of Tax AnalySIS

In many respects, the AMT is a poster child for the need to reform the tax system. The AMT
fails to meet all three of the criteria the President laid out when creating the Advisory Panel for
Reform of the Federal Tax System. First, the AMT is not simple. The AMT requires taxpayers
to comply with two parallel tax systems, often does not warn taxpayers that they have to deal
with the second system, and the second system itself is unnecessarily complicated. Second, the
AMT does not promote economic growth. In fact, the extra compliance costs and for many
taxpayers the higher marginal tax rates imposed by the AMT discourages economic growth.
And, third, the AMT is not fair. It disproportionately affects large families. It disallows some
legitimate expenses incurred by taxpayers in order to earn income. It affects many middleincome and upper-middle-income taxpayers, but does not affect many taxpayers with the highest
Incomes.
Given the large revenue impact of the AMT and the extent to which the AMT is closely related
and intertwined with the regular income tax, we need to consider broader solutions that will
involve changes to the regular income tax. Thus, it is both inevitable and timely that the longterm solution to the AMT problem will be through broad reform of the income tax. Inevitable,
because budgetary constraints preclude simple AMT repeal. Timely, because our overly

-5complicated tax system, which distorts economic decision-making and discourages economic
growth, is in dire need of reform.
The current tax system imposes large costs on our economy by distorting the economic decisions
of households and businesses, and tax reform that reduces those costs would encourage
economic growth and improve living standards. Fundamental tax reform could increase our
capital stock by 10 to 15 percent and ultimately increase real GDP by as much as 2 to 6 percent.
More uniform treatment of different types of income, businesses and individuals could also
produce significant economic gains by improving the allocation of economic resources and
reducing economic waste.
The complexity of the income tax leaves many taxpayers with the sense that the system is unfair
because others use special provisions to pay less tax. This sense of unfairness undermines
voluntary compliance. It also encourages taxpayers to believe that they, too, should seek out tax
minimizing strategies and behavior. In tum, that behavior only increases the economic costs and
inefficiencies of our tax system.
Major revisions to our tax code occur every few years, with minor changes almost every year.
Frequent changes in the tax code and uncertainty about the future make it difficult for individuals
and businesses to make economic decisions. One goal of tax reform is a more stable tax system.
Taxpayers should be able to plan without having to gamble about the future of the tax system.
The U.S. tax system not only imposes a cost to the economy by distorting households' and
businesses' economic decisions and slowing economic growth, but it also imposes direct costs on
taxpayers measured by the value of the time and resources devoted to complying with the tax
system that could be put to more productive uses. According to the IRS, business and individual
taxpayers spend more than 6 billion hours per year to comply with the tax system. To put this in
perspective, this translates into a million and a half additional IRS agents. The total compliance
costs of the income tax are estimated to be roughly $130 billion annually - about 13 cents for eve]
dollar in income tax revenues collected.' These compliance costs include both out-of-pocket cost
and the time taxpayers spend to learn about the tax laws, keep and assemble necessary records, an
prepare and submit tax returns.
Recent estimates are that individual taxpayers (including sole proprietors) spent roughly 3.5 billio
hours annually complying with the tax system. According to a recent study based on IRS data,
compliance costs for individuals - including the value of taxpayers' time - are roughly $90 billior
a year. On average, individuals spent 26 hours a year on their federal income taxes and spent an
average of $157 on out-of-pocket costs for the services of tax professionals, filing fees, software
purchases, etc., in tax year 2002. Although taxpayers with self-employment income tend to have
more complex affairs and spend more time and money on their taxes, even taxpayers without any
self-employment income spend an average of 15 hours and $76 in out-of-pocket costs each year
determining their tax obligations.
IRS estimates that businesses spend over 3 billion hours a year complying with the tax system.
One analyst estimates the total cost to be about $40 billion annually. Recent academic research

-6indicates that compliance costs are the highest for the very largest businesses. Those with over
$5 million in assets reported compliance costs of nearly $25 billion per year.
Certainly, a simpler tax system could decrease these burdens substantially and put these
resources to more productive uses.
Criteria of a Well-Functioning Tax System

We suggest five criteria for evaluating proposals for tax reform: simplicity; pro-growth; fairness;
fiscal responsibility; and stability.
A tax system should be easy to understand, have reasonable filing and record keeping
requirements, including reduction or elimination of return filing, if possible, and have low cost
and non-intrusive tax administration.
A tax system should be consistent with a strong economy. Business and household decisions
should not be based on the tax code as little as possible. The tax code should promote economic
growth by removing tax distortions and should maintain U.S. international competitiveness
A tax system should be fair. It should provide equal tax treatment of similarly situated taxpayers
(horizontal equity) and a reasonable degree ofprogressivity, imposing higher taxes on those with
a greater ability to pay (vertical equity).
A tax system should be fiscally sound. It should raise sufficient revenue to fund the federal
programs that government chooses to provide.
A tax system should be stable. It should be resistant to frequent changes, especially those that
change taxpayers' legitimate expectations.
The President's Tax Reform Panel

The President has made reforming our tax system a key priority. The President's Advisory Panel
on Federal Tax Reform, named by the President earlier this year, is developing options to reform
our tax system to make it simpler, fairer and more pro-growth. The Tax Panel brings a fresh
perspective to tax reform. The members of the Panel are both independent and open-minded and
are not wedded to particular approaches to tax reform. The Panel has a mandate to consider all
options. The only constraints in the Panel's mandate are that its proposals should be revenue
neutral, they should recognize the importance of housing and charitable giving to our American
society, and that one of its options must include reform of the current income tax.
The Panel has been holding public hearings here in Washington, DC, and across the country to
obtain the views of a wide range of knowledgeable and interested individuals about the problems
with the current tax system and the merits of alternative ways to improve or reform the current
system.

-7We are looking forward to the Panel's final report to the Secretary of the Treasury due by July
31. The options developed by the Panel will provide critical input for the recommendations on
tax reform - including recommendations to address the AMT problem - the Secretary will then
make to the President and the President will then make to the Congress.

Thank you again, Mr. Chairman, Senator Jeffords, and Members of the Committee for the
opportunity to appear before you today. We look forward to working together with this
Committee and others in the Congress on the AMT issue, on tax reform in general, and on other
issues. I would be pleased to answer questions from the Committee.

5-2465: Address of Under Secretary Stuart Levey The American Israel Public Affairs Committee ... Page 1 of 5

FROM THE OFFICE OF PUBLIC AFFAIRS
May 23.2005
JS-2465
The Honorable John W. Snow
Prepared Remarks to: American Institute of
Certified Public Accountants
Washington, DC
Thanks so much for having me here this afternoon. I hope you're having a terrific
meeting. and that you're spending some quality time with your representatives on
Capitol Hill. They need to hear your valuable perspective on the financial issues of
the day I
Before I get started today I want to commend this group for your 360 Degrees of
Financial Literacy effort. Treasury's Office of Financial Education is delighted to be
working with you on national financial education efforts; our partnership is awfully
important to the young people who will benefit from those efforts.
It has been said that. regardless of how much money you have. wisdom has to be
acquired on the installment plan. Similarly. it is true that regardless of an individual's
income. saving must be done steadily. deliberately. over a lifetime. Learning about
how to become. and stay. financially healthy. is a life-long pursuit as well. So I want
to thank you for giving back on this issue. It's a great gift to generations of
Americans.
Speaking of generational issues. and of helping young Americans see a brighter
financial future ... I really appreciate the chance to talk with you today about a
couple of policy items that I know are important to you in your profession. and that
are of utmost importance to our President: strengthening the nation's Social
Security system and reforming our tax code.
The President's leadership on Social Security is providing our country with a
tremendous opportunity to save the program for current and near retirees and
improve it for younger generations. His initiative to study and re-vamp the tax code
offers great hope for increasing economic growth and decreasing taxpayer
headaches!
Conversations like this are an important part of reaching decisions as to what.
exactly. should be done in both of these critical areas.
Before we get into Social Security. I do want to talk about the American economy a
little bit. Social Security and our tax code are such important parts of our economy and the reform choices that are made in Washington will have such an impact that I think it's important to start there
We've seen amazing economic times in the last few years. Well-timed tax cuts.
combined with sound monetary policy set by the Federal Reserve Board. got our
economy moving when we needed it most. They gave business and industry the
room they needed to grow. and they took over from there. As a result. economic
growth was 4.4 percent last year. the strongest in five years.
We have had terrific news on jobs - 23 straight months of job growth. On the first
Friday of this month. the Labor Department announced that 274.000 jobs were

http://treas.gov/press/reieaseslis2465.htm

5/3112005

5-2465: Address of Under Secretary Stuart Levey The American Israel Public Affairs Committee ... Page 2 of 5
created in April. The economy has created a total of 3.5 million new Jobs since May
2003. That's great news - the best news - for 3.5 million families.
The President has made clear his commitment to strengthen our economy further.
In addition to the Social Security and tax reform that I want to talk about in detail,
this commitment also includes reducing the budget deficit, reducing the regulatory
burden on business, and passing energy legislation. We expect the deficit to total
3.5 percent of GOP this fiscal year Tight controls on discretionary spending and
increased revenue as a result of economic expansion are expected to cut the deficit
by more than half, to well under two percent of GOP, by fiscal year 2009.
The Treasury announced two weeks ago that we expect to pay down $42 billion in
debt in the second quarter of this year, which is very good news and is primarily the
result of higher individual tax receipts.
All of the strong economic indicators, and our ability to pay down debt, point to the
fact that reducing the tax burden proved to be a successful economic stimulus. And
when the economy is growing and spending is controlled, we can also reduce our
deficit.
But the job of keeping our economy unencumbered is a never-ending one, indeed.
From tax cuts to good trade policy, regulations and energy policy, we need to work
on it every day, and we need to work on keeping it strong for the future, for the
long-term. Reforming our Social Security and tax systems both address some
critical long-term economic issues.
For example, the President's Advisory Panel on Tax Reform is working right now to
come up with some options that will encourage growth and save Americans much
of the time and headache that they currently spend complying with the tax code.
No one knows that headache better than the people here today, and I appreciate
the fact that you have reached out to the tax panel to offer help and advice. We
welcome your input.
A few raw facts illustrate well the problems of our current code: American taxpayers
and businesses spend an estimated $130 billion dollars in lost time and money
trying to comply with our increasingly unwieldy tax code. That's $130 billion in
resources that could be used to create jobs, invest in new business, or spur
consumer spending. The $130 billion burden our tax code places on the American
people is a drag on economic growth and an unnecessary headache for Americans.
The President has asked that the fine people on the advisory panel be guided by
the goals of increased fairness, simplicity and ease of understanding, and economic
growth and job creation. He has also asserted that any reform proposal should
carryon the good traditions of recognizing the importance of homeownership and
charity in our society.
The panel has held 9 meetings so far and have heard testimony from about 90
expert witnesses. They are also receiving a wide range of critiques and ideas from
all over the country. They're doing great work, and I am looking forward to receiving
their recommendations by the end of July.
Please take a look at the tax panel's webSite for more information. The site,
www.tClxreform gOY, includes a great new summary of the issues and key themes
the panel is considering.
I appreciate the President's leadership on tax reform, and I deeply admire his
leadership when it comes to the national discussion on Social Security reform.
The President doesn't believe in burying one's head in the sand ... which is
essentially what you have to do to ignore the serious nature of the Social Security
problem. The Social Security Trustees - for whom I serve as Board Chairman issued our annual report on the financial health of the programs' trust funds on

http://treas.gov/press/reieaseslis 2465 .htm

5/3112005

5-2465: Address of Under Secretary Stuart Levey The American Israel Public Affairs Committee ... Page 3 of 5

March 23 , and the numbers contained in that report leave little doubt that the
system is financially unsustainable, and in need of expeditious and lasting change.
The Trustees' report showed that Social Security cash flows peak in 2008 and turn
negative in 2017, and the trust fund itself will be exhausted in 2041. The unfunded
obligation, that is, the difference between the present values of Social Security
inflows (plus the trust fund) and outflows, is $11.1 trillion on a permanent basis, and
$4.0 trillion over the next 75 years.
Now, the President doesn't believe that we should make up that shortfall with tax
increases. The report showed Just how much we would have to raise taxes to
achieve long-term balance: the payroll tax rate would have to be raised immediately
by 3.5 percentage points to make the system whole on a permanent basis. In other
words, the payroll tax would have to be increased by nearly 30 percent.
That kind of tax increase would have significant. negative economic repercussions.
Americans would start taking home less pay, and that's bad for countless facets of
our economy. I imagine that you appreciate what I'm saying, as people who work
closely with small businesses ... and especially those of you who are small
employers yourselves. Because employers, regardless of size, shoulder half of that
tax increase - because they pay that tax on all of their employees. For the smallest
of employers I fear that much of a tax increase would force you to make terrible
choices, from lay-offs to health benefit cuts. And it would make hiring new people
even more difficult.
Increasing payroll taxes hurts the economy and it hurts job creation, period. We
know this from talking to job-creators - primarily small-business owners - all over
the country, and that's why the President is against it.
It is also worth noting that payroll tax increases have been the standard "solution" to
Social Security's problems, and they have never solved the problem! Payroll taxes
have been raised some 20 times since Social Security was established - and it has
failed to make the system solvent.
Tax increases aren't the answer, so the President has encouraged the Congress to
propose a variety of ideas that might be, and he has put a number of ideas on the
table as well.
The President has spoken very plainly about the realities of Social Security.
Inevitably, workers face a reduction in benefits because the system will go broke in
2041. He has suggested a progressive indexing plan to make sure that those who
are most in need - low-income workers - will be protected from that reduction in
benefits.
The President proposes that, in the future, benefits for low-income workers should
grow faster than benefits for people who are better off. By slowing the rate of
increase of benefits for wealthier Americans, most of the funding challenges facing
Social Security would be solved and the government will make good on this
commitment: If you work hard and pay into Social Security your entire life, you will
not retire into poverty.
A variety of other options are available to solve the rest of the solvency problem,
and the President will work with Congress on any good-faith proposal that does not
raise the payroll tax rate or harm our economy.
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 resulted.
People have been talking about the issue from the halls of Congress to the halls of
local shopping malls. The President's leadership has drawn critical attention to the
problem and is creating movement. Progress, real progress, is being made.

http://treas.gov/press/reieaseslis2465.htm

5/31/2005

5-2465: Address of Under Secretary Stuart Levey The American Israel Public Affairs Committee ... Page 4 of 5

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.
I know that you understand that if you are 55 or older your Social Security benefits
are solid. They will not change. You know that 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 even grandchildren? 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.
The issue of Social Security is really a matter of basic arithmetic, and 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 - some of you may 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.
According to the new Trustees' report, the government will begin to payout more in
Social Security benefits than it collects in payroll taxes in 2017 - that's Just 12 years
from now. By 2041, when younger workers begin to retire, the system will be
bankrupt.
We must make Social Security better for those younger workers.
RaiSing their payroll taxes won't make it better. What the President would 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 give workers the prospect of a
retirement that is 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.
Former Democratic Congressmen Tim Penny and Charlie Stenholm wrote
something very important in a recent op-ed. They said that "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 results. I encourage you to be involved.

http://treas.gov/press/reieaseslis2465 ..htm

5/31/2005

5-2465 Address of Under Secretary Stuart Levey The American Israel Public Affairs Committee ... Page 5 of 5

Thank you for having me here today to talk about the really historic policy efforts
that are underway right now. This is an exciting time to be in government, and I'm
extremely proud to be helping the President as we seek to achieve a safe and
promising financial future for all Americans.
Thanks again: I'd be happy to take your questions now.

http://treas.gov/press/reieaseslis 2465.htm

5/31/2005

5-2466: Address of Under Secretary Stuart Levey The American Israel Public Affairs Committee ... Page 1 of 5

FROM THE OFFICE OF PUBLIC AFFAIRS

May 23,2005
js-2466
Address of Under Secretary Stuart Levey
The American Israel Public Affairs Committee Policy Conference 2005
It is a real pleasure to be speaking with you today. I have been an admirer of the
great work this organization does since my days on the one-year program at
Hebrew University in 1983 and 1984. I want to commend you for the important work
that you are doing to promote strong ties between Israel and the United States and
to advocate for a lasting peace in the Middle East.

The world's view of terrorism today is very different from when I attended my first
AIPAC event. In 2005, people all over the world have come to recognize terrorism
as among the most serious threats to freedom. Sparked by the attacks of 9/11, the
world now recognizes the fight against terrorism as a vital cause. Brutal attacks
from Madrid to Riyadh to Bali have shown that this threat is limited neither by region
nor by ethnicity. And world leaders are beginning to see that terrorism is an
absolute wrong - unjustifiable by cause or context. One striking symbol of this
progress is that U.N. Secretary General Kofi Annan very recently published a report
urging the U.N. to proclaim "loud and clear that terrorism can never be accepted or
justified in any cause whatsoever." And significant for this audience, he also
asserted that "The right to resist occupation ... cannot include the right to
deliberately kill or maim civilians." We have come a long way.
These changes are welcome, but long overdue. For me, as I suspect for many of
you, the events of 9/11 were shocking, but they did not introduce us to the threat of
terrorism. Those of us here today have long been well aware of this threat, mindful
that there were groups out there whose murderous attacks were limited only by
means and opportunity. We all remember the Munich Olympics and Leon
Klinghoffer and Pan Am 103 and Entebbe and Maalot and so many more. We all
knew all along that terrorist groups could not be reasoned with or negotiated with,
and that they sought nothing but destruction. As President Bush articulated in his
address to you last year, "[Terrorists] kill without mercy. They kill without shame.
And they count their victories in the death of the innocent."
You can imagine, then, how meaningful it is for me to playa role in this
Administration's efforts to combat terrorism. I start off every morning reading the
daily intelligence book, and then spend my day working to undercut the supply-lines
of terrorist groups. It is, quite honestly, exhilarating. I often feel like the baseball
players I used to watch growing up who, when asked about salary issues, would
say "Are you kidding?? I get paid to do something that I love. I would do this for
free." That is not something you hear very often these days from baseball players,
but if you walked around my office, I think you would hear it quite a bit.
I would like to talk with you today about the work that we in the Treasury
Department and the rest of the US Government are doing to track and disrupt the
flow of money to terrorists.
To start, allow me to first introduce my office. I am the Under Secretary of the
Treasury for Terrorism and Financial and Intelligence, or "TFI." TFI is a relatively
new office. It was created in 2004 to oversee the Treasury Department's
enforcement and intelligence functions aimed at stopping illicit money flows to
terrorists and other criminals. The office brings a wide range of authorities and
capabilities together under a single umbrella, allowing us to wield a range of tools

http://treas.gov/press/reieaseslis2466.htm

5/3112005

5-2466: Address of Under Secretary Stuart Levey The American Israel Public Affairs Committee '"

Page 2 of 5

against various threats - whether they are terrorists, narcotics traffickers,
proliferators of WMD or rogue regimes, like Iran and North Korea. We levy
economic sanctions to pressure obstructionist regimes, and we have the ability to
freeze the assets of wrongdoers We also use regulatory authorities to help banks
and other U.S. institutions implement systems to detect and halt corrupt money
flows. Diplomatically, we work with governments around the world, pushing them to
act with us against terrorists and other bad actors and to take critical steps to stem
the flow of illicit finances.
I sometimes say that TFI fills an important niche in our national security system.
When the U.S. is confronted with an overseas threat that is unreceptive to
diplomatic outreach and when military action is not an option, TFI's tools - such as
sanctions or the leverage we exert through the international financial bodies - are
often the best authorities available to exert pressure and to wield a tangible impact.
Of all of the threats that we confront. terrorism is at the center of our sights.
Combating terrorism effectively requires that we fight our enemies not only on the
battlefield, but also in banks, money exchange houses, and underground financial
networks. We do this both through targeted actions, such as blocking the accounts
of terrorist financiers and front companies and sanctioning corrupt banks, and by
systemic actions, such as by working with countries around the world, prodding
them to put systems in place that will allow them to take similar actions.
It is now universally accepted that attacking terrorist financing is one of the most
important ways we have to attack a terrorist organization. There are a number of
reasons for this: first, money trails do not lie. Financial intelligence tends to be very
reliable and people do not send money to another person for no reason at all.
Tracking financial transactions is therefore often the best way to identify terrorists
and their facilitators. Second, financing is a vulnerability for a terrorist group. Every
time terrorists raise, store, or move money, they expose themselves to surveillance
and attack. And third, while individual attacks may be inexpensive, it takes quite a
bit of money to run a terrorist organization of global reach. AI Qaida paid the
Taliban $10 to $20 million a year for safe haven. These organizations also need
money to train, recruit, payoff operatives' families, purchase false travel
documents, and so on. For all of these reasons, we are making our fight against
terrorist financing a central part of the overall counterterrorism campaign.
I would like to focus today on charities, a funding channel that has proved to be
especially attractive to terrorist groups -- al Qaida and HAMAS in particular. These
organizations have long explOited the images of widows and orphans to fund an
agenda of terror. There are a number of reasons why charities are so often abused
by terrorists.
•

•

•
•

•

Charities naturally focus their relief efforts on areas of conflict, which tend
to also be prime locations for terrorist networks. Charities provide excellent
cover for the movement of money, personnel, and even military supplies to
and from high-risk areas.
Unlike the funds of for-profit organizations, charitable funds are meant to
move in one direction only; accordingly, large purported charitable transfers
can move without a corresponding return of value and without arousing
suspicion.
Charities attract large numbers of unwitting donors along with the witting,
thus increasing the amount of money available to terrorists.
The "legitimate" activities of these charities, such as the operation of
schools, religious institutions, and hospitals, create fertile recruitment
grounds, allowing terrorists to generate support for their causes and to
propagate extremist ideologies.
To the extent that these charities provide genuine relief, which nearly all of
them do, they benefit from public support and an attendant disinclination by
many governments to take enforcement action against them.

We have attacked this problem aggressively, on multiple fronts. First, we have
taken enforcement action to shut down those charities that we know to be aiding
terrorists. To date, we have identified and deSignated more than thirty charitable
organizations as supporters of terrorist groups, from al Qaida to HAMAS and

http://treas.gov/press/reieaseslis2466.htm

5/31/2005

5-2466: Address of Under Secretary Stuart Levey The American Israel Public Affairs Committee ...

Page 3 of 5

Palestinian Islamic Jihad.
Where the charities have a presence in the United States, we have frozen their
assets and prevented them from engaging in any further fund-raising or donations.
Where appropriate, we have also taken coordinated action with law enforcement. In
the cases of the Holy Land Foundation and the AI Haramain Islamic Foundation, we
blocked the assets of the organizations on the same day as law enforcement
agents executed search warrants. We were thus able to ensure that no money
flowed through these groups to terrorists as the investigations proceeded.
When the charities do not have a U.S. presence, we designate them domestically to
prevent U.S. donors from contributing and to ensure that any money that transits
the United States in the name of the charity is blocked. We also approach our
international partners and the United Nations, where appropriate, to internationalize
the sanctions. A good example of this is the HAMAS-affiliated AI Aqsa Foundation.
Through its offices in Europe, Yemen, and elsewhere, AI Aqsa acted as a conduit of
money for HAMAS. International action has now been taken against this
organization: German authorities closed their AI Aqsa Foundation office, Dutch
authorities blocked the charity's assets in The Netherlands, and criminal charges
were pursued against three AI Aqsa Foundation officials in Denmark for supporting
terrorism. Branch offices of AI Aqsa continue to function in other countries,
however, and we will continue to pressure those governments to close the entire
organization down.
One very positive development is that we are beginning to see international banks
using the U.S. list of designated entities to screen transactions, even when they are
under no domestic requirement to do so. Recently, a delegation from our office to
Kuwait watched as a local bank demonstrated how it uses our list to determine
whether to block or complete a transaction. These practices broaden the impact of
U.S. designations exponentially, and we will continue to urge financial institutions to
protect themselves against abuse in this manner.
Our most recent enforcement action against a charity took place on May 4, when
we designated a Palestinian Islamic Jihad (PIJ) front, the Elehssan Society I do not
need to tell this audience about PIJ, which, as recently as February of this year,
took responsibility for a terrorist attack in Tel-Aviv that killed five and wounded over
50. The Elehssan Society served as the fund-raising arm of PIJ in Gaza and the
West Bank. It distributed funds to the families of PIJ prisoners and suicide bombers.
We will continue to pursue this organization and any that rise up to take its place.
As we take enforcement actions, we have witnessed a noticeable deterrent impact
on complicit donors who in the past might have used charities to direct money to
terrorists. Our reporting indicates that once-willing donors are now thinking twice or
balking altogether at sending money through charitable fronts, knowing that it may
expose them to investigation or legal action.
This highlights an advantage that we enjoy in the financial arena of the war on
terrorism: our targets have something to lose. In contrast to terrorist operatives who
may be willing to die for their hateful cause, terrorist financiers typically live public
lives with all that entails: property, occupation, family, and social position. Being
publicly identified as a financier of terror threatens an end to all of this, lending our
actions a real deterrent impact. We will continue to hold donors who knowingly
contribute to terrorist organizations personally accountable as terrorists - just as
much as operatives themselves.
Of course, the great majority of charitable donors in this country are well intentioned
and are genuinely looking to help those in need. In one sense, our actions have
warned such donors away from corrupt charities and encouraged them to be more
careful with their donations In general. This is a success in its own right.
We recognize, however, that enforcement actions have also discouraged some
well-intentioned donors from giving altogether, cutting off sources of needed relief.
This predicament is especially acute in the Palestinian Territories, where HAMAS,
PIJ, and other terrorist groups have so infiltrated the charitable sector that it is

http://treas.gov/press/reieaseslis24~~.htm

5/31/2005

is-2466: Address of Under Secretary Stuart Levey The American Israel Public Affairs Committee ...

Page 4 of 5

difficult for innocent overseas donors to find a safe conduit for relief. We therefore
see a particularly urgent need in this area to assure that such secure channels
exist, beyond the reach of terrorists. In February, I met with President Abbas and
various Israeli officials, in part to explore this idea. I was gratified to receive support
and agreement from all sides. The Palestinian Authority needs to be able to provide
a social safety net to the poor - that niche cannot be filled by terrorist organizations
if there is to be peace. We are currently working with the relevant parties to develop
options through which such aid can be provided safely, and I am hopeful that we
will be able to do so.
Another regional focus of ours in addressing charities and terrorism has been the
Gulf, and Saudi Arabia in particular For too long, wealthy donors and multinational
charities in Saudi Arabia were underwriting terrorism of all kinds, without any
meaningful controls. Since 9/11, our government has worked aggressively to press
the Saudis to take action against these financiers and to clean up their charitable
sector. It is true that the Saudis have come a long way to improve their efforts
against terrorist financing It is also true that they probably had the furthest to go.
Some progress has been made. The Saudis have closed down the domestic offices
of the designated charity AI Haramain. In addition, until they are prepared to
oversee their charitable sector properly, they have prohibited nearly all charities
from moving money outside the country altogether.
One byproduct of these steps is that Palestinian terrorist groups, HAMAS in
particular, have seen a sharp drop-off in funding from Saudi Arabia. While perhaps
unintentional on the part of the Saudis, this is a real success, and one that Israeli
officials told me had made a noticeable impact.
Of course, much remains for the Saudis to do. We impatiently await the creation of
a commission to monitor the charitable sector, and continue to insist that this
commission regulate all Saudi charities, without exception of such groups as the
Muslim World League and the International Islamic Relief Organization, or "IIRO."
Also, in addition to the export of terrorist funds, we are extremely concerned about
the export of terrorist Ideologies. These teaChings are as indispensable to terrorists
as money, and possibly even more dangerous. We must do all we can to ensure
that extremist, violent ideologies are not disseminated under the cover of religious
organizations, charities, or schools.
We are also continuing to press our European allies to address terrorist charities in
their countries. The European Union has not yet reached agreement that Hizbollah
should be deSignated a terrorist organization. HAMAS has been designated, but
several prominent HAMAS charities continue to operate openly. Progress has been
slow, but we will contmue to stress these issues at every opportunity. We are still
hopeful that our European counterparts will take a more aggressive role in
combating terrorism of all kinds.
Time does not allow me to explore the work we are doing with respect to charities in
all regions of the world, or the work we are doing in other sectors to counter the
various conduits that terrorists have exploited to move money illicitly. I would like to
note one other area, however, that I think will be of interest.
Last May, the Treasury Department deSignated Syria's primary international bank the Commercial Bank of Syria - as a "primary money laundering concern," based on
a lack of financial transparency and other issues, including terrorist financing.
Pursuant to this designation, we issued a proposed rule that, when adopted in final
form, will oblige U.S. financial institutions to sever all correspondent relations with
this bank. This designation has had a remarkable impact on a notorious state
sponsor of terrorism. The bank represents Syria's gateway to the international
financial system and its access to international currencies like the U.S. Dollar.
In connection with the proposed rule, we delivered a long list of demands to the
Syrians, ranging from reform of their banking sector to immediate, effective action
to cut the flow of funds and other support across the Syrian border to terrorists and
insurgents in Iraq. Over the past year, the Syrian Government has sought
desperately to avoid finalization of this proposed rule and has taken some steps to
address our concerns. In key respects, though, we remain unsatisfied - especially

http://treas.gov/press/reieaseslis2466.htm

,\/11 noo';

5-2466: Address of Under Secretary Stuart Levey The American Israel Public Affairs Committee...

Page 5 of 5

about the support of terrorism and the Iraqi insurgency coming from within Syria.
Syria will either take effective steps to address our concerns, or we will cut it off
from our financial system.
The question I am asked most frequently is "How are we doing in fighting terrorist
financing?" It is difficult to quantify our successes. AI Qaida does not release
financial statements. and we will never know precisely how much money intended
for terrorists never reached their hands due to our efforts. We therefore find
ourselves discussing proxies for the ultimate questions: How many donors and
facilitators have been captured; how many channels for moving terrorist funds have
been designated and blocked; or how many countries are equipped to monitor and
interdict illicit financing channels. Each of these benchmarks pOints to only one
aspect of the problem. though. and imperfectly at that. Most revealing. to my mind.
is intelligence reporting that - although anecdotal - speaks to the difficulty with
which terrorists are raising. moving. and storing money. The information available to
us is encouraging. We are seeing terrorist groups avoiding formal financing
channels and instead resorting to riskier and more cumbersome conduits like bulk
cash smuggling. Most importantly. we have indications that terrorist groups like al
Qalda and HAMAS are feeling the pressure and are hurting for money.
It is critical. though. that we remain aggressive and adaptive. Terrorists and their
supporters are constantly exploring new means to move and store money. and we
cannot afford to become set in our ways. Those who work with me will tell you that I
am not complacent and not very patient either. I can assure you that we will bring
every intelligence and enforcement tool at our disposal to bear in attacking the
financial underpinnings of terrorism. We have no higher priOrity.
Thank you.

http://treas.gov/press/reieaseslis2466.htm

5/3112005

IS-2467: Treasury Secretary JOhn

snow Remarks to the National Association of State Treasurers... Page 1 of 5

FROM THE OFFICE OF PUBLIC AFFAIRS
May 23,2005

JS-2467
Treasury Secretary John W. Snow
Remarks to the National Association of State Treasurers
Legislative Conference
May 23,2005
Thank you for having me here today. It's a pleasure to spend some time with the
people who "safeguard the public pursel"
Every member of this group has weighty responsibilities, and I appreCiate the goal
of this organization to promote and encourage the highest ethical standards for its
members.
Because when it comes to finance - whether it's the public or the private sectorthe element of trust is critical. And without ethical standards and honest behavior,
precious trust is quickly lost, and very slowly re-gained.
We've seen that in recent years with corporate scandals and corruption, and we've
made progress in reminding corporate CEOs and boards and others that no one is
above the law.
Yours is a group that has helped in those efforts, and I want to thank you for what
you've done to rebuild investor confidence, boost market confidence and protect
shareholder value. Your voices are very important in this area, and we welcome
your input and the example you set.
A key element in your jobs - and in mine - is always remembering that the money
comes from the people, from their work and the sweat of their brow. The money in
state and federal coffers it is not magically generated by the government. As long
as we remember where it came from, we will always respect it.
I appreciate the chance to talk with you today about a couple of issues that involve
the people's money like no other, and they are issues that are of utmost importance
to our President: strengthening the nation's Social Security system and reforming
our tax code.
The President's leadership on Social Security is providing our country with a
tremendous opportunity to save the program for current and near retirees and
improve it for younger generations. His initiative to study and re-vamp the tax code
offers great hope for increasing economic growth and decreasing taxpayer
headaches I
Conversations like this are an important part of reaching decisions as to what,
exactly, should be done in both of these critical areas.
Before we get into Social Security, I do want to talk about the American economy a
little bit. Social Security and our tax code are such important parts of our economy and the reform choices that are made in Washington will have such an impact that I think it's important to start there.

http://treas.gov/press/reieaseslis2467.htm

5/3112005

rS-2467: Treasury Secretary John W. Snow Remarks to the National Association of State Treasurers... Page 2 of 5

We've seen amazing economic times in the last few years. Well-timed tax cuts,
combined with sound monetary policy set by the Federal Reserve Board, got our
economy moving when we needed it most. They gave business and industry the
room they needed to grow. and they took over from there. As a result, economic
growth was 4.4 percent last year, the strongest in five years.
We have had terrific news on Jobs - 23 straight months of job growth. On the first
Friday of this month, the Labor Department announced that 274,000 Jobs were
created in April. The economy has created a total of 3.5 million new jobs since May
2003. That's great news - the best news - for 3.5 million families.
The President has made clear his commitment to strengthen our economy further.
In addition to the Social Security and tax reform that I want to talk about in detail,
this commitment also includes reducing the budget deficit, reducing the regulatory
burden on business, and passing energy legislation. We expect the deficit to total
3.5 percent of GOP this fiscal year. Tight controls on discretionary spending and
increased revenue as a result of economic expansion are expected to cut the deficit
by more than half, to well under two percent of GOP, by fiscal year 2009.
The Treasury announced two weeks ago that we expect to pay down $42 billion in
debt in the second quarter of this year, which is very good news and is primarily the
result of higher individual tax receipts.
All of the strong economic indicators, and our ability to pay down debt, point to the
fact that reducing the tax burden proved to be a successful economic stimulus. And
when the economy is growing and spending IS controlled, we can also reduce our
deficit.
But the job of keeping our economy unencumbered is a never-ending one, indeed.
From tax cuts to good trade policy, regulations and energy policy, we need to work
on it every day, and we need to work on keeping it strong for the future, for the
long-term. Reforming our Social Security and tax systems addresses some critical
long-term economic issues.
For example. the President's Advisory Panel on Tax Reform is working right now to
come up with some options that will encourage growth and save Americans much
of the time and headache that they currently spend complying with the tax code.
A few raw facts illustrate well the problems of our current code: American taxpayers
and businesses spend an estimated $130 billion dollars in lost time and money
trying to comply with our increasingly unwieldy tax code. That's $130 billion in
resources that could be used to create jobs, invest in new business, or spur
consumer spending. The $130 billion burden our tax code places on the American
people is a drag on economic growth and an unnecessary headache for Americans.
The President has asked that the fine people on the advisory panel be guided by
the goals of increased fairness, simplicity and ease of understanding, and economic
growth and job creation. He has also asserted that any reform proposal should
carry on the good traditions of recognizing the importance of homeownership and
charity in our society.
The panel has held 9 meetings so far and have heard testimony from about 90
expert witnesses. They are also receiving a wide range of critiques and ideas from
all over the country. They're dOing great work, and I am looking forward to receiving
their recommendations by the end of July.
Please take a look at the tax panel's website for more information. The site,
inCludes a great new summary of the issues and key themes
the panel is considering.
WWIN laxreforrll.~J()v,

I appreciate the President's leadership on tax reform, and I deeply admire his
leadership when it comes to the national discussion on Social Security reform.

http://treas.gov/press/releaseslis2467.htm

5/31/2005

~-2467: Treasury Secretary John W. Snow Remarks to the National Association of State Treasurers... Page 3 of 5

The President doesn't believe in burying one's head in the sand ... which is
essentially what you have to do to ignore the serious nature of the Social Security
problem. The Social Security Trustees - for whom I serve as Board Chairman issued our annual report on the financial health of the programs' trust funds on
rd
March 23 , and the numbers contained in that report leave little doubt that the
system is financially unsustainable, and in need of expeditious and lasting change.
The Trustees' report showed that Social Security cash flows peak in 2008 and turn
negative in 2017, and the trust fund itself will be exhausted in 2041. The unfunded
obligation, that is, the difference between the present values of Social Security
inflows (plus the trust fund) and outflows, is $11.1 trillion on a permanent basis, and
$4.0 trillion over the next 75 years.
Now, the President doesn't believe that we should make up that shortfall with tax
increases. The report showed just how much we would have to raise taxes to
achieve long-term balance: the payroll tax rate would have to be raised immediately
by 3.5 percentage points to make the system whole on a permanent basis. In other
words, the payroll tax would have to be increased by nearly 30 percent.
That kind of tax increase would have significant, negative economic repercussions.
Americans would start taking home less pay, and that's bad for countless facets of
our economy. Employers, regardless of size, would shoulder the other half of that
tax increase - because they pay that tax on all of their employees. For the smallest
of employers I fear that much of a tax increase would force them to make terrible
choices, from lay-offs to health benefit cuts. And it would make hiring new people
even more difficult.
Increasing payroll taxes hurts the economy and it hurts job creation, period. We
know this from talking to job-creators - primarily small-business owners - allover
the country, and that's why the President IS against it.
It is also worth noting that payroll tax increases have been the standard "solution" to
Social Security's problems, and they have never solved the problem I Payroll taxes
have been raised some 20 times since Social Security was established - and it has
failed to make the system solvent.
Tax increases aren't the answer, so the President has encouraged the Congress to
propose a variety of ideas that might be, and he has put a number of ideas on the
table as well.
The President has spoken very plainly about the realities of Social Security.
Inevitably, workers face a reduction in benefits because the system will go broke in
2041. He has suggested a progressive indexing plan to make sure that those who
are most in need - low-income workers - will be protected from that reduction in
benefits.
The President proposes that, in the future, benefits for low-income workers should
grow faster than benefits for people who are better off. By slowing the rate of
increase of benefits for wealthier Americans, most of the funding challenges facing
Social Security would be solved and the government will make good on this
commitment: If you work hard and pay into Social Security your entire life, you will
not retire into poverty.
A variety of other options are available to solve the rest of the solvency problem,
and the President will work with Congress on any good-faith proposal that does not
raise the payroll tax rate or harm our economy.
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 resulted.
People have been talking about the issue from the halls of Congress to the halls of

http://treas.gov/press/reieaseslis2467.htm

5/3112005

IS-2467: Treasury Secretary .John W. Snow Remarks to the National Association of State Treasurers... Page 4 of 5

local shopping malls. The President's leadership has drawn critical attention to the
problem and is creating movement. Progress, real progress, is being made.
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.
I know that you understand that if you are 55 or older your Social Security benefits
are solid. They will not change. You know that 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 even grandchildren? 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.
The issue of Social Security is really a matter of basic arithmetic, and 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 - some of you may 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.
According to the new Trustees' report, the government will begin to payout more in
Social Security benefits than it collects in payroll taxes in 2017 - that's just 12 years
from now. By 2041, when younger workers begin to retire, the system will be
bankrupt.
We must make Social Security better for those younger workers.
Raising their payroll taxes won't make it better. What the President would 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 give workers the prospect of a
retirement that is 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.
Former Democratic Congressmen Tim Penny and Charlie Stenholm wrote
something very important in a recent op-ed. They said that "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.

http://treas.gov/press/reieaseslis2467.htm

5/31/2005

JS-2467: Treasury Secretary Tohn W. Snow Remarks to the National Association of State Treasurers... Page 5 of 5

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 results. I encourage you to be involved.
Thank you for having me here today to talk about the really historic policy efforts
that are underway right now This is an exciting time to be in government, and I'm
extremely proud to be helping the President as we seek to achieve a safe and
promising financial future for all Americans.
Thanks again; I'd be happy to take your questions now

http://treas.gov/press/reieaseslis2467.htm

5/31/2005

js-2468: Statement Of I1momy D.

Ad ams

Nominee for Under Secretary of the Treasury for Internati... Page 1 of 2

FROM THE OFFICE OF PUBLIC AFFAIRS
May 24, 2005
js-2468
Statement of Timothy D. Adams
Nominee for Under Secretary of the Treasury for International Affairs
to the Committee on Finance
United State Senate
Chairman Grassley, Ranking Member Baucus, and members of the Committee on
Finance, thank you for the opportunity to appear before you today. I am honored
that President Bush nominated me to serve as Under Secretary of the Treasury for
International Affairs and, if confirmed, to have the opportunity to work With
Secretary John W. Snow, the Treasury staff and others in the administration.
If confirmed, I also look forward to working closely with this committee, the United
States Senate and your colleagues in the House of Representatives to advance the
President's economic agenda and to further the well-being of the American people.
I also want to thank Senator McConnell for introducing me. I have known the
Senator for many years and am honored by his presence here today. Finally, I
want to thank my wife Jennifer and our children for their unwavering support of my
great passion, which is public service.
Indeed, If I am confirmed, this will be my third stint working in the Federal
government, and I look forward to bringing my skills, knowledge and experiences to
help address the great challenges before us and to seize the historic opportunities
to advance the cause of freedom and improve living conditions everywhere.
For over 20 years, my academic and professional pursuits have helped prepare me
for this position. My undergraduate and graduate work strongly focused on
economic policy, especially international economic policy, and foreign affairs.
Further, I co-founded and managed for seven years a highly respected consulting
firm that advised leading financial institutions and corporations on global economic
trends, conditions and policy.
I also served as Chief of Staff to two Treasury Secretaries (Paul O'Neill and John
W. Snow), advising on key international economic issues, among other
responsibilities. I participated in most of the important international events that
Secretary O'Neill and Secretary Snow attended during the three year period 20012003, including meetings of the G7, APEC, G20, IMF, and the World Bank, as well
as numerous bilateral meetings and foreign trips. I believe that I have a firm
understanding of the critical international economic issues that confront the U.S. as
well as the important participants and institutions
In addition to policy issues, I also have substantial management experience in both
the private and public sector. The Office of International Affairs at the Treasury
Department is a large and critical organization with scores of talented people, and if
confirmed, I will pay close attention to the management issues facing this office.
Finally, I believe that I bring to this challenging position important personal
attributes, such as an inclusive, practical and analytical approach to problem
solving and a diplomatic demeanor.

http://treas.gov/press/reieaseslis2468.htm

5/31/2005

js-2468: Statement of'T1mothy ~. Adams Nominee for Under Secretary of the Treasury for Intemati ... Page 2 of2

If confirmed, I will immediately tackle several pressing issues, including growing
global imbalances, China's stable integration into the global financial system,
preventing financial crisis and ensuring that development assistance is more
effective -- especially in Africa. I will also work to implement the President's vision
for the Middle East, establish closer ties with Latin America, open foreign markets
for U.S. good and services, and support transitioning economies and democracies.
Finally, I will continue to push the critical importance of economic growth, good
governance, the rule of law and capital formation so that all parts of the global
economy will become more vibrant and prosperous in the future.

Mr. Chairman, Senator Baucus, I am grateful for this opportunity to appear before
you today. I would be pleased to answer any questions you and the other members
of the Committee may have.

-30-

http://treas.gov/press/reieaseslis 2468 .htm

5/31/2005

lO05-5-24-13-51-29-18826: U.S. International Reserve Position

Page 1 of~

FROM THE OFFICE OF PUBLIC AFFAIRS
May 24,2005
2005-5-24-13-51-29-18826
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 $77,291 million as of the end of that week, compared to $78,410 million as of the end of the prior week.

I. Official U.S. Reserve Assets (in US millions)
May 13, 2005

May 20, 2005

78,410

77,291

TOTAL
1. Foreign Currency Reserves

a. Securities

Euro

Von

TOTAL

11,706

14,682

26,388

IOfwhich, issuer headquartered in the US.

Euro

11,618

Yen

TOTAL

13,802

25,420
0

b. Total deposits with:

~her central banks and BIS

11,414

2,951

.ii. Banks headquartered in the US.

14,365

11,336

14,259

2,923

I
I

b.ii. Of which, banks located abroad

b.iii. Banks headquartered outside the US.

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

15,184

15,159

11,431

11,412

2. IMF Reserve Position 2

3. Special Drawing Rights (SDRs) 2

0
0

14 Gold Stock 3

11,041

15. Other Reserve Assets

II. Predetermined Short·Term Drains on Foreign Currency Assets
May 13,2005

Euro

Yen

1. Foreign currency loans and securities

TOTAL

I
I

May 20, 2005
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

12.b. Long positions

3. Other

III. Contingent Short·Term Net Drains on Foreign Currency Assets

May 13,

http://www.trep.8.Qov/nress/reteases/w(}.552413512918826.htm

200~

May 20, 2005

5/3112005

2005-5-24-13-51-79-18826: U.S. International Reserve Position

Page 2 of2

Yen

Euro

TOTAL

1. Contingent liabilities in foreign currency

1.a. Collateral guarantees on debt due within 1
year
[1 .b. Other contingent liabilities
2. Foreign currency securities with embedded
options

13. Undrawn, unconditional credit lines

3.b. With banks and other financial institutions

Us.

. With banks and other financial institutions

3.a. With other central banks

IE:dquarte,ed;n the

TOTAL

Yen

Euro

IHeadquartered outside the US.

I
I

4. Aggregate short and long positions of options
in foreign

Currencies vis-a-vis the U.S . dollar

I
II

4.a. Short positions

4.a.1. Bought puts

~ W,;lIe" calls
4.b. Long positions

~Ughtcalls
ritten puts

Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates . Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values . Foreign Currency Reserves for the latest week may be subject to revision . Foreign Currency
Reserves for the prior week are final.
2/ The items, "2. IMF Reserve Position" and "3 . Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
3/ Gold stock is valued monthly at $42 .2222 per fine troy ou nce.

http://treas.gov!press/releases/200511313132618565.htm

5/31/2005

I1S-2469: The lfonorable John W. ~now Prepared Remarks Financial Literacy and Education Co... Page 1 of 2

FROM THE OFFICE OF PUBLIC AFFAIRS
May 25,2005
JS-2469

The Honorable John W. Snow
Prepared Remarks
Financial Literacy and Education Commission Meeting
Washington, DC
It's my pleasure to welcome you all to the Treasury Department, and to its historic
Cash Room.
We often talk about the history that echoes in this room ... but I want to point out
that history is still being made in this room today, and your group is a perfect
example of that fact.
Yours is the kind of public-private coordination that really makes a difference in
people's lives, and you are to be commended for that. Every time your work gives a
young person - or a new American, or a baby boomer - the tools and knowledge
they need to strengthen their financial future and protect themselves from identity
theft, you have made an historic contribution to our country.
Every time a student leaves a "Teach Children to Save Day" event and opens a
savings account, your work has made a difference. Every time a worker learns
more about saving for their retirement from mymoney.gov or the 1-888-mymoney
hotline, your work has mattered. And, down the road, when fewer young people are
declaring bankruptcy and the national savings rate has increased ... your work will
have changed lives.
So I want to thank you for your commitment to this issue that is fundamentally
important to all Americans. I'm extremely proud that President Bush and his
administration are so dedicated to this cause. And I'm looking forward to seeing the
national strategy for financial education next month, which I know you've worked
very hard on.
You are capitalizing on 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.
As I've traveled the country to talk about saving and strengthening Social Security,
it has been easy to see that there IS a tremendous interest on the part of high
school and college students to learn the financial facts of life. Young people want to
know how to manage a credit card, how to save and invest. They have a growing
appreciation for how important it is to save for retirement at the beginning of a
career. not at the end.
As my son often tells me, young people don't believe Social Security will be there
for them ... so they want to learn about how to invest and save for their own
retirement. The President and I hope that they will have the opportunity to save, to
build a nest egg, as part of the Social Security system, and I believe that this
interest in financial learning among younger generations will really help the launch
and success of personal accounts.

http://treas.gov/press/reieaseslis ·2469 .htm

5/31/2005

\JS-2469: The ftorrorabtc Jutm W. ~ Prepared Remarks Financial Literacy and Education Co... Page 2 of 2

One of the best things to come out of the Social Security debate so far has to do
with financial education. Thanks to the President's leadership, more Americans
understand how Social Security really works, and why its fiscal future is bleak.
There is also an increased appreciation for the need to get involved in one's own
retirement future. Participating in the Social Security debate is part of that
involvement, as is contributing to one's 401 (k) or IRA.
The shape of the Social Security program for future generations is still a work in
progress, but I believe that we can be very proud of the financial education that the
debate has engendered thus far.
Thank you again for the excellent work you are doing on this Commission .. I don't
want to delay that work any longer, so I'll let you start this meeting by welcoming
Chairman Dreier to the stage. Mr. Chairman, thank you for joining us ...

5/311200';

http://treas.gov/press/releaseslis2470.htm

IJS-2470: Secretary JOhn w.--snow Prepared Remarks to Hunter College High School Students ...

Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
May 25,2005
JS-2470

Secretary John W. Snow
Prepared Remarks to Hunter College High School Students
Washington, DC
Good afternoon, and welcome to the Department of the Treasury. It's terrific to have
you here, and I hope you enjoy your time in this historic building. Before you leave
here today, don't forget to look at the wonderful statue of our first Treasury
Secretary, Alexander Hamilton, outside the building's south entrance Hamilton was
an immigrant to this country, but lived much of his life as a New Yorker; his
incredible life history should make you, his fellow New Yorkers, very proud.
I'm very happy to be able to talk with you today; spending time with sharp students
like you is a real pleasure.
I want to commend you for studying government, and for your academic
achievements. I know that you study very hard. But even with a lot of studying,
sometimes it can be difficult to see the real-life importance of what you are learning.
My hope is that our discussion today will help make what you've learned in class
more "real."
I know that you have a keen interest in government, and I imagine you've learned
quite a bit about the political parties - isn't it interesting how each party started and
evolved? And you're learning about the checks-and-balances of our government,
and how our founders designed it thiS way to get the best results for the people.
After all, what makes our government special is that it was designed "of the people,
by the people, for the people."
For so many decades, the parties have fought each other, battled for power and
engaged in fascinating philosophical debates. But some of the greatest
achievements of the two-party system have occurred when the two parties really
work together, without animosity, to achieve great reforms, great good for our
country.
Today, President Bush is encouraging the political parties to put aside their partisan
bickering for the sake of your generation ... specifically, so that we can strengthen
and preserve the Social Security system for your benefit.
I know that retirement and Social Security must seem like such far-away parts of
your life that you barely think about them. And I understand that; it's very natural.
But I also hope you know that the national debate, the national dialogue about
Social Security reform is really about you l The youngest generations of Americans
stand to benefit so much from this debate ... so I encourage you to read the
newspaper and talk to your parents and teachers about it.
Your grandparents are the ones who receive Social Security benefits now ... but
reforming the system actually won't impact them. For anyone at or over the age of
55, the President has pledged that the system and its benefits won't change at all.
It could change for you. It must change for you. And it must change for the better.
The results of this reform effort will Impact the American economy. the amount of

http://treas.gov/press/reieaseslis2470.htm

5/31/2005

IIs.2470: Secretary John W. Snow Prepared Remarks to Hunter College High School Students ...

Page 2 of3

taxes you'll pay when you're older, and whether you will be able to look forward to a
comfortable retirement when you are done working.
Here's where we are right now: As your parents can tell you, part of each of their
paychecks goes to fund Social Security. Workers pay half of the tax, and their
employers pay the other half. If they are self-employed, they pay the whole tax
themselves. That money goes to pay the Social Security benefits of their parents that's your grandparents' generation.
Right now, this works pretty well because there are more than three people paying
that tax for everyone person collecting the benefits (receiving a Social Security
check)
As you know from buying things to share with your friends - like splitting the cost of
a pizza - the more people chipping in, the less each person pays
When your generation is working and paying those taxes, there will only be two of
you paying for the benefits of every retiree. Unless each of you pays a lot more in
taxes - something the President doesn't think would be fair - then there won't be
enough money to pay the full, promised benefits for your parents.
You see, when your parents' generation - called the baby boomers because there
are so many of them - begins to retire, it will dramatically increase the cash flow
demands of the system. By the year 2041 - when some of your parents are still
collecting benefits and when you yourselves are beginning to approach retirement if nothing is done to change the system, benefits would have to be cut, abruptly, by
26 percent and would continue to fall thereafter.
The problem only gets worse with every passing year, as generations get smaller in
number and people live longer lives. Throughout the future of the system it will be
more than $11 trillion short.
This is serious stuff. It can be downright frightening. But the good news is that we
don't have to accept that as our future .. it doesn't have to be your future.
The President wants to work with the Congress to make Social Security solvent - so
that it runs "in the black," not in debt. He also wants to see your generation have
the ability to save your own money in a personal account. That means you'd be
able to build a nest egg of your very own that wouldn't belong to the government.
And, very importantly, the President wants to make sure that the taxes you pay
when you are working full-time aren't too high. He wants workers to keep as much
of the money they earn as possible. That's good for workers and it's good for our
economy, for our prosperity.
I know you are learning in this class that government affects everyone. This issue of
Social Security is a very good example of that fact. The decisions made by your
government - that means your locally elected leaders, your state legislators, your
governor, Congress and the President - really do impact your life. They impact your
present and, in this case, they profoundly impact your future.
So while your retirement seems to be a million years away right now .. take it from
me, the time will go by quickly and it's never too early to think about saving money
for the future. I hope that you'll follow the Social Security debate and think about
what type of reform would make the future brighter for you.
We are all 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 results. I encourage you to be involved, whether it's talking about the
issue with your parents and teachers, or writing a letter to your Members of
Congress.

http://treas.gov/press/reieaseslis2470.htm

5/31/2005

IIS-2470: Secremry John W. 3rruw",-bt?Prepared Remarks to Hunter College High School Students ...

Page 3 of 3

If we act now, we can make sure that Social Security, and our economy, are on
sound financial footing for your generation.
I really appreciate the chance to talk with you about this important issue, and would
be happy to take your questions now.

http://treas.gov/press/reieaseslis2470.htm

5/31/2005

IJS-2471: Treasury-amf m..S 'rru~ Itt-gulations on Retirement Plans Proposed Rules Allow Memb ... Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe(r;) AcrobaN!) HeadeN!).

May 25,2005
JS-2471

Treasury and IRS Propose Regulations on Retirement Plans
Proposed Rules Allow Members of the National Guard and Reserve
to
Contribute to Retirement Plans While on Active Duty
WASHINGTON, DC -- The Treasury Department and IRS today issued proposed
regulations relating to the section 415 limits on benefits and contributions under
qualified retirement plans. These regulations consolidate past guidance on
changes in the law over the past 25 years and provide additional guidance that
answers many outstanding questions for plan sponsors and administrators. The
regulations will, among other things, address the application of the defined benefit
limits when an employee receives multiple benefit streams beginning at different
ages and the treatment of compensation paid after an individual terminates
employment.
Significantly, the proposed regulations will specifically provide that National Guard
and Reserve members are permitted to continue to contribute to their employer's
retirement plan while on active duty. "We believe it is important that members of
the National Guard and Reserve not lose the opportunity to save for retirement
while they are serving our country," said Eric Solomon, Treasury's Acting Deputy
Assistant Secretary for Tax Policy.
The rules relating to post termination compensation and the associated
clarifications on the ability to contribute to retirement plans for members of the
National Guard and Reserve will also apply to section 403(b) tax deferred annuities
and Section 457 eligible deferred compensation plans. Plan administrators may
rely on today's proposed regulations immediately to allow service members to
contribute to qualified retirement plans.
The proposed regulations will formally go into effect in years beginning in 2007. A
public hearing on the proposal is scheduled for August 17, 2005.

REPORTS
•

Pro),)()S8rJ

Re(JlIlilll011S

http://treas.gov/press/reieaseslis2471.htm

5/3112005

1
[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 11
[REG-130241-04]
RIN 1545-BD52
Limitations on Benefits and Contributions Under Qualified Plans
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
SUMMARY: This document contains proposed amendments to the regulations under
section 415 of the Internal Revenue Code regarding limitations on benefits and
contributions under qualified plans. The proposed amendments would provide
comprehensive guidance regarding the limitations of section 415, including updates to
the regulations for numerous statutory changes since regulations were last published
under section 415. The proposed amendments would also make conforming changes
to regulations under sections 401(a)(9), 401(k), 403(b), and 457, and would make other
minor corrective changes to regulations under section 457. These regulations will affect
administrators of, participants in, and beneficiaries of qualified employer plans and
certain other retirement plans. This document also provides notice of a public hearing
on these proposed regulations.
DATES: Written or electronic comments must be received by July 25, 2005. Requests
to speak and outlines of topiCS to be discussed at the public hearing scheduled for
August 17, 2005, at 10 a.m., must be received by July 27,2005.

IJS.2472: Statement ri-om Treasury ~eCretary Snow on House Financial Service Committee passage... Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
May 25,2005
JS-2472
Statement from Treasury Secretary Snow on House Financial
Service Committee passage of GSE Reform Legislation
Today's action by the House Financial Services Committee on GSE reform
legislation moves the process forward.
As the process continues, we will be working with the House and Senate to ensure
that the bill is strengthened so that the final product provides for a strong,
independent regulator which has all the necessary tools to do the job. Directing the
regulator to place limits on the size of the GSE's retained mortgage portfolio is a
critical element of reform

http://treas.gov/press/reieaseslis2473.htm

5/31/2005

I1s-2473: Testimony orneasury ~ecterary John W. Snow Before the Senate Committee on B...

Page 1 of 4

FROM THE OFFICE OF PUBLIC AFFAIRS

May 26,2005
JS-2473
Testimony of Treasury Secretary John W. Snow
Before the
Senate Committee on Banking, Housing and Urban Affairs
on the Treasury Department's
"Report to Congress on International Economic and
Exchange Rate Policies"
May 26, 2005

Chairman Shelby, ranking member Sarbanes, members of the Committee, it is a
great pleasure to appear before you to testify on the Treasury Department's latest
report on "International Economic and Exchange Rate Policies."
The May 2005 Report encompasses a period of strong global economic
performance, which reflects both great opportunity and challenge. The global
expansion remains robust, more so than in many decades.
Addressing imbalances in the global economy is a shared responsibility among the
major economic regions of the world. While imbalances occur as the patterns of
trade and investment flows shift between economic regions, uneven rates of growth
in the major economies and inefficient or distortionary policies restrict adjustments
and put stress on the global financial systems. Economic policymakers must
address these imbalances now; waiting increases the risk that adjustments will
occur abruptly.
We know that the international economy performs best when large economies
embrace free trade, the free flow of capital, and flexible currencies. Obstacles in
any of these areas prevent smooth adjustments. At best, such obstacles result in
less than maximum growth; at worst, they create distortions and increase risks.
The United States is dOing its part to address imbalances by aggressively tackling
our fiscal deficit and our long-term liabilities. Because of strong growth and
appropriate fiscal policy, the U.S. budget deficit in 2004 was well below projections,
and with recent data, I expect improvement in our fiscal deficit position this year as
well. [Some private forecasters predict that our fiscal deficit will be below 3% of
GOP this year if we continue to hold the line on spending.] We are also working to
put in place innovative policies to increase the savings rate. But our actions alone
will not be sufficient.
I expect strong economic growth in the United States to continue. This is in the US.
interest, and the world's. It is an essential component of our deficit reduction
strategy as strong growth results in rising government receipts, as we have been
seeing. But it is important to recognize that there is also no one-to-one
correspondence between reductions in our fiscal and current account deficits. We
do not, and will not, have a current account target. The best contribution the United
States can make to our own people and the global economy is to keep our
economic house in order and ensure continued strong growth.
Our actions alone will not be sufficient to unwind global imbalances. Simply put,
large imbalances will continue if growth in our major trading partners continues to
lag. European and Japanese GOP together exceeds that in the United States.
Some European countries, such as Ireland and Spain, continue to perform well.

http://treas.gov/press/reieaseslis2473.htm

5/31/2005

bS.2473: Testimonyuf'YreasOlY ~ecrelary John W. Snow Before the Senate Committee on B...

Page 2 of 4

But on the continent, notable weaknesses persist, and Japanese growth, while
turning upward, remains modest. These economies must continue to adopt and
implement vigorous and necessary structural reforms to establish robust rates of
growth - both for the good of their own citizens and to contribute to reduction in the
imbalances in the global economy.
The Treasury Department's Report to Congress on International Economic and
Exchange Rate Policies outlmes the currency practices of America's major trading
partners. The report addresses the third -- and most immediately pressing -element of the effort to address global imbalances: the imperative of exchange rate
flexibility, especially in emerging Asian economies.
The report finds that no major trading partner of the United States met the technical
requirements of the statute for designation during the period covered, which is the
second half of 2004. However, it would be a mistake to interpret this conclusion as
acquiescence with the foreign exchange policies of many of America's trading
partners. In fact Treasury is actively engaged with several economies to promote
the adoption of flexible, market-based exchange policies and to help facilitate
broader adjustment. Most notable among these is China.
While the currency report that you have before you discusses several countries I
would like to focus my remarks here on China. China's rigid currency regime has
become highly distortionary. It poses risks to the health of the Chinese economy,
such as sowing the seeds for excess liquidity creation, asset price inflation, large
speculative capital flows, and over-investment. It also poses risks to its neighbors,
since their ability to follow more independent and anti-inflationary monetary policies
is constrained by competitiveness considerations relative to China. Sustained, noninflationary growth in China is important for maintaining strong global growth and a
more flexible and market-based renminbi exchange rate would help the Chinese
achieve this goal.
A more flexible system will also support economic stability, which we understand is
of paramount concern to Chinese leadership. China's ten-year-Iong pegged
currency regime may have contributed to stability in the past, although it no longer
does so, as China has grown to be a more Significant participant in global trade and
financial flows. Currently, China relies largely on administrative controls to manage
its economy - controls that are cumbersome and increasingly ineffective. An
independent monetary policy will allow China to more easily and effectively pursue
price stability, stabilize growth, and respond to economic shocks. China has a
history of significant swings in credit-fueled investment and inflationary pressures
and these have often ended in "hard landings." Such swings are disruptive to the
Chmese economy and may prove more disruptive in the future - not only to China
but also to the global economy.
A more flexible system will allow for a more efficient allocation of resources and
higher productivity. The current system is fueling over-investment and excessive
reliance on export-led growth while under-emphasizing domestic consumption.
Moreover, much of the investment and capital flows into these favored sectors and
projects may not prove profitable under market-determined prices, which could lead
to another investment hard landing, more non-performing loans and a weakened
banking sector.
And a more flexible system would also quell speculative capital inflows that are
costly to China's government and increasingly likely to prove disruptive. China's
ability to sterilize capital inflows is increasingly limited and harmful to its banking
sector.
Finally, recent history has taught us that it's better to move from a fixed to a flexible
currency system during from a position of strength, and not when economic
weakness compels reform.
Chinese officials have publicly acknowledged the need to move to a more flexible
system, have repeatedly vowed to do so, and have undertaken the necessary and
appropriate steps to prepare for such a move.

http://treas.gov/press/reieaseslis2473.htm

5/3112005

~S·2473: Testimuny OrTreaSUlY gecretary John W. Snow Before the Senate Committee on B...

Page 3 of 4

In September of 2003, I began an intensive engagement with China, aimed at
hastening China's move to a more flexible exchange rate, I believe that this
financial diplomacy has yielded important results, Since then, China has taken
critical steps to establish the necessary financial environment and infrastructure to
support exchange rate flexibility,
•

•

It has introduced a foreign currency trading system permitting onshore spot
trades In eight foreign currency pairs and allowing banks to act as market
makers_
It has adopted measures to increase the volume of foreign exchange
trading, for example: eliminating the foreign exchange surrender
requirement for many commercial firms; allowing domestic Chinese
Insurance firms and the national social security fund to invest in overseas
capital markets; and increasing the amount of foreign currency business
travelers can take out of the country,
It has taken steps to develop foreign eXChange market instruments and
increase financial institutions' experience in dealing with fluctuating
currencies, Foreign exchange forward contracts can now be offered in
China; foreign exchange futures are being developed; and domestic
Chinese banks can now trade dollars against other foreign currencies, not
just remnimbi,
It has also acted to strengthen its financial sector and regulation, so that this
sector is more resilient to any fluctuations in exchange rates,

As a result of our approach, of constant intense engagement, China is now ready to
introduce flexibility and should do so now,
Unfortunately, the debate on China's currency regime is clouded by a number of
misconceptions of US, policy, Allow me to address a couple of these, First, we
are not calling for an immediate full float with fully liberalized capital markets, This
would be a mistake at this time - China's banking sector is not prepared, What we
are calling for is an intermediate step that reflects underlying market conditions and
allows for a smooth transition - when appropriate - to a full float.
Second, we recognize that a more flexible system in China, in and of itself, will not
solve global imbalances - as I have said, this is a shared responsibility, However,
greater flexibility in China and other Asian economies is a necessary component.
Third, some argue that a more flexible system Will prove deflationary and Increase
Chinese unemployment. In fact, a flexible system will provide China with a more
sophisticated array of policy tools - namely an independent monetary policy - that
will prove much more effective in achieving price stability and the ability to adjust to
shocks,
Our engagement with China over the past two years, including fruitful
accomplishments associated with Treasury's jOint Technical Cooperation Program,
leaves me with little doubt that China is now prepared to begin reform of its
currency regime_
In fact, I believe that the risks associated with delay far outweigh any concerns with
immediate reform, The current system poses a risk to China's economy, its trading
partners, and global economic growth, Concerns of competitiveness with China
also constrain neighboring economies in their adoption of more flexible exchange
policies,
As the report that was sent to Congress last week states, if current trends continue
without substantial alteration, China's policies will likely meet the technical
requirements of the statute for designation, China is now ready and should move
without delay in a manner and magnitude that is sufficiently reflective of underlying
market conditions,
As the need for adjustment is global, multilateral organizations are addressing the
need for flexibility, The Group of Seven finance ministers and central bank
governors have adopted a policy, stated in its communiques, that "", more flexibility

http://treas.gov/press/reieaseslis-2473.htm

5/31/2005

~S.2473:

Testimonyof-rreasury'Seccetary John W. Snow Before the Senate Committee on B...

Page 4 of 4

in exchange rates is desirable for major countries or economic areas that lack such
flexibility to promote smooth and widespread adjustments in the international
financial system, based on market mechanisms." The Asian Development Bank
and the Asia-Pacific Economic Cooperation (APEC) have also publicly stressed the
importance of flexible currency regimes.
The chief officers of the International Monetary Fund and the Asian Development
Bank have also stressed the need for currency flexibility. I have called on the
International Monetary Fund (IMF), as part of its strengthening of multilateral and
regional surveillance, to report on the potential contribution of emerging Asia to
unwinding global imbalances, including an analysIs of the regional impact of the
Chinese foreign exchange system. As policy-makers, we have a responsibility to
fully understand these important forces that are shaping the global economy. As
the central international institution for global monetary cooperation, with a wealth of
technical expertise, the IMF is best placed to undertake this work, and indeed has
the responsibility for dOing so.
It is critical that we address the issues of imbalances aggressively and in a
cooperative spirit with the goal of raising global growth. Nothing would do more
damage to the prospects of increasing living standards throughout the world than
efforts to inhibit the flow of trade. However, it is incumbent on China to address
concerns before mounting pressures worldwide to restrict trade harm the openness
of the international trading system.

http://treas.gov/press/reieases/is 2473.htm

5/3112005

;-2474: StatemefTt ofTreasUIY gecretary John W. Snow on First Quarter GOP Growth

Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
May 26.2005
js-2474
Statement of Treasury Secretary John W. Snow on First Quarter GOP Growth
Today's announcement that real GOP grew at a 3.5 percent annual rate in the first
quarter shows that the foundation of America's economy continues to be sound and
strong. Payroll Jobs are up by 3.5 million. the homeownership rate is at a record
high. and, at 52%. the unemployment rate IS below the average of each of the past
three decades. Furthermore, today's GOP report revised wages and salaries for the
end of last year much higher, showing added strength in income for U.S. workers.
America's economy has been moving in the right direction and Americans are
seeing results because of President Bush's commitment to reducing their tax
burden.
President Bush is committed to keeping the economy on the path of healthy growth
by making the tax cuts permanent. redUCing the burden of fflvolous lawsuits,
passing a national energy policy, and strengthening Social Security.

http://treas.gov/press/reieaseslis2474.htm

5/31/2005

~S·2475: Statement of rreasury !,ecretary John W. Snow on Resignation of Acting Assistant Secre... Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or pnnt the PDF content on this page, download the free Aaobe(r;) AcrobaN!) HeaaeN!).

May 27,2005
JS-2475

Statement of Treasury Secretary John W. Snow on
Resignation of Acting Assistant Secretary for Financial
Institutions Gregory Zerzan
The Treasury is preparing to bid farewell to a highly valued member of its team,
Gregory Zerzan has served in Treasury's Office of Domestic Finance since March
of 2003, first as Deputy Assistant Secretary for Financial Institutions Policy and
currently as Acting Assistant Secretary for Financial Institutions, His expertise and
contributions on legislative and policy matters involving financial institutions have
been invaluable, and he has been a highly effective leader within the Office of
Domestic Finance, as well as among the Treasury management team, Greg's sharp
mind and engaging personality will be missed by his colleagues and staff, and I
speak on behalf of the Department in saying we wish him the very best in his future
endeavors,

REPORTS

http://treas.gov/press/reieaseslis2475.htm

5/31/2005

The Honorable George W. Bush
President of the United States
The White House
Washington, DC 20500
Dear Mr. President:

It has been my privilege to serve your Administration for over two years. In that time, I
have been honored to help playa part in many historic undertakings, including
overseeing the Terrorism Risk Insurance Program, reforming the regulation of the
government sponsored enterprises, and helping to keep the promise of Social Security for
future generations.

It is with a heavy heart, therefore, that I now tender my resignation from service as
Acting Assistant Secretary for Financial Institutions in the United States Treasury,
effective June 20, 2005. I am grateful to you and the many fine people with whom I have
served, and I will always feel privileged to have worked to promote your leadership in
keeping America safe both at home and abroad. Thank you for honoring me with your
trust.

Sincerely,
Gregory Zerzan

IS·2476: Treasury and titS lssne ~ufdance on Personal Use of Corporate Aircraft

Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Aaobe(r;) AcrobaN!) HeaaeN!).

May 27,2005
JS-2476

Treasury and IRS Issue Guidance on Personal Use of Corporate Aircraft
WASHINGTON, DC -- Today the Treasury Department and the IRS issued
guidance on the tax treatment of the personal use of corporate aircraft for
entertainment travel. The Notice issued today explains how to apply the American
Jobs Creation Act of 2004 (AJCA) limitation on the costs that a business may
deduct when an executive uses the company's aircraft for entertainment travel.
This Notice provides interim guidance until regulations are promulgated.
Under prior law, if an employee used a business aircraft for entertainment travel,
the employer could deduct the cost of providing the flight. As is commonly the case
with fringe benefits, the employee is then required to report the value of the flight as
additional income for tax purposes. Previously, while the employer generally would
deduct the total cost of providing the flight, often many thousands of dollars, the
employee would add only a relatively small amount, calculated under the
Department of Transportation's Standard Industry Fare Levels (SIFL) formula, to
income. For flights by executives, this asymmetry between the large amount the
company deducted and the small amount the executive included as taxable income
was addressed by the AJCA.
Under the AJCA, the business' deduction may no longer exceed the amount that
the executive takes into income for the entertainment use of the aircraft. The
definition of "entertainment use" in the guidance is taken from the existing statute.
Generally, "entertainment use" is considered an amusement or recreational activity,
such as traveling to a sporting event or to a vacation destination. If the purpose of
the trip is business related entertainment, the limitation enacted by the AJCA
applies to the executive as well.
Today's Notice clarifies who is covered by the limitation, describes the relevant
costs, and illustrates the allocation of the costs for an entertainment flight. Although
the Notice focuses on aircraft, the principles of the Notice may apply to other
entertainment as well.

REPORTS
•

A copy of the Notice

http://treas.gov/press/reieaseslis2476.htm
5/31/2005

Part III - Administrative, Procedural, and Miscellaneous

Deductions for Entertainment Use of Business Aircraft

Notice 2005-45
This notice provides interim guidance to taxpayers on the limitation under

§ 274(e) of the Internal Revenue Code on the deductible amount of trade or business
expenses for use of a business aircraft for entertainment. Section 274(e) was amended
by § 907 of the American Jobs Creation Act of 2004 (AJCA), effective for amounts
incurred after October 22, 2004. The rules provided in this notice apply until regulations
are effective.
A. BACKGROUND
Under § 274(a)(1)(A), no deduction is allowed for an activity generally considered
to be entertainment, amusement, or recreation, unless the taxpayer establishes that the
activity is directly related to or (in certain cases) associated with the active conduct of
the taxpayer's trade or business. Section 27 4(a)(1 )(B) disallows deductions for facilities
used in connection with entertainment, amusement, or recreational activity, regardless
of connection to the taxpayer's trade or business.
Section 1.274-2(b)(1) of the Income Tax Regulations provides that entertainment
means any activity of a type generally considered to constitute entertainment,
amusement, or recreation, such as entertaining at night clubs, cocktail lounges,
theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing,

2
vacation and similar trips. Similar activities relating solely to the taxpayer's family also
may constitute entertainment. Entertainment may include an activity that satisfies the
personal, living, or family needs of an individual, such as providing food and beverages
or a hotel suite to a business customer or the customer's family. Entertainment does
not include activities, however, that are clearly not regarded as constituting
entertainment, such as the provision of supper money by an employer to an employee
working overtime, the maintenance of a hotel room by an employer for lodging of
employees while in business travel status, or the use of an automobile in the active
conduct of a trade or business even though also used for routine personal purposes
such as commuting to and from work. Under § 1.274-2(b)(1 )(ii), an objective test is
used to determine whether an activity is of a type generally considered to constitute
entertainment.
Section 274(e) provides exceptions to the general disallowance provisions of

§ 274(a). Prior to amendment by the AJCA, § 274(e)(2) excepted expenses from §
274(a) "to the extent that the expenses are treated by the taxpayer" as compensation to
the employee/recipient of the entertainment activity. Section 274( e )(9) similarly
excepted expenses to the extent that the expenses are treated by the taxpayer as
income to persons who are not employees.
Section 274(0) provides that the Secretary shall prescribe regulations necessary
to carry out the purposes of the section.
Generally, § 1.61-21 (b) requires an employee to include in gross income the fair
market value of a fringe benefit, such as an entertainment flight (reduced by any

3
reimbursement or statutory exclusion). For employee flights on employer-provided
noncommercial aircraft, § 1.61-21 (g) provides that an employer may value such flights
using the Standard Industry Fare Level (SIFL) formula. Under § 1.61-21(g)(14)(i), an
employer that uses the SIFL formula in a calendar year to value any flight provided to
an employee during a calendar year must use the SIFL formula to value all flights
provided to employees during that calendar year. The fringe benefit rules under § 1.6121 (g) generally apply to all service providers, including employees, independent
contractors, partners, and directors. The regulations do not permit valuation of a flight
by reference to the employer's costs.
Ann. 85-113, 1985-31 IRS 31, allows an employer to elect the frequency at which
in-kind fringe benefits are treated as paid. The benefits must be treated as paid no later
than the end of each calendar year, but in-kind fringe benefits provided during the last
two months of a calendar year may be treated as paid during the subsequent calendar
year. See Ann. 85-113, sections 1 and 5(a).
In Sutherland Lumber-Southwest, Inc. v. Comm'r, 114 T.C. 197 (2000), aff'd 255
F.3d 495 (8th Cir. 2001), acq. AOO 2002-02 (Feb. 11, 2002), the Tax Court held that the
amount a taxpayer may deduct for the cost of entertainment-related flights under the §
274(e)(2) exception is not limited to the amount included in the income of the
employees and corporate officers who took the flights. Rather, the court held that a
taxpayer may deduct the full cost of an employee's or officer's non-business flight on
the taxpayer's aircraft if the taxpayer includes in the recipient's income the value of the
flights computed under the rules of § 1.61-21. As a result, a deduction greater than the

4
amount included in the recipient's income was allowable.
The ACJA amendment to § 274(e)(2) and (9) is intended to overturn Sutherland
Lumber-Southwest, Inc. v. Comm'r. H.R. Conf. Rep. No. 108-755, at 798 (2004).
Specifically, as amended by § 907 of the AJCA, the § 274(e)(2) and (9) exceptions to
the § 274(a) disallowance apply in the case of a "specified individual" only "to the extent
that the expenses do not exceed the amount of expenses" that are treated as
compensation to the specified individual. A specified individual is any individual who is
subject to the requirements of § 16(a) of the Securities Exchange Act of 1934 (15
U.S.C. § 78p(a)) with respect to the taxpayer, or who would be subject to those
requirements if the taxpayer were an issuer of equity securities referred to in that
section. Section 274(e)(2)(B).
Thus, in the case of a specified individual, the § 274(e)(2) and (9) exceptions
apply only to the extent that a taxpayer treats as compensation to the specified
individual an amount equal to or greater than the amount of deductible entertainment
expenses allocable to entertainment provided to the specified individual. Expenses
allocable to entertainment provided to the specified individual that are not treated as
compensation to the specified individual are disallowed.
This notice specifically addresses expenses paid or incurred in connection with
the use of aircraft as entertainment. Section 274 (e )(2) and (9), however, apply to all
expenses subject to § 274(a). Taxpayers may apply the principles of this notice to
expenses paid or incurred in connection with other entertainment activities.
B. APPLICATION

5
(1) In general
In general, the use of an aircraft for an employee's or other recipient's
entertainment, amusement, or recreation is subject to § 274(a) unless excepted by §
274(e). Expenses for entertainment use of an aircraft by a specified individual are
disallowed except to the extent of the amount treated as compensation to the specified
individual, as provided in this notice. The amount disallowed with regard to a specific
flight also is reduced by any amount that a specified individual reimburses the taxpayer
for that flight.
(2) Use of aircraft for entertainment
Whether an aircraft is used for entertainment of a specified individual is
determined without regard to the ownership of the aircraft. Therefore, the costs of
leased or chartered aircraft are subject to disallowance under § 274(a) (unless excepted
by § 274(e)) and this notice. Furthermore, § 274(a) and (e) and this notice apply to the
costs of aircraft operated on a regular schedule or used for bona fide security concerns
(as provided in § 1.132-5(m)).
(3) Specified individuals
A "specified individual" is either an individual who is subject to § 16(a) of the
Securities Exchange Act of 1934 with respect to the taxpayer, or an individual who
would be subject to § 16(a) if the taxpayer were an issuer of equity securities referred to
in that section. "Specified individual" includes every person who (a) is the direct or
indirect beneficial owner of more than 10 percent of any class of any registered equity
security (other than an exempted security), (b) is a director or officer of the issuer of the

6
security, (c) would be the direct or indirect beneficial owner of more than 10 percent of
any class of a registered equity security if the taxpayer were an issuer of equity
securities, or (d) is comparable to an officer or director of an issuer of equity securities.
Thus, a "specified individual" is an officer, director, or more than 10% owner of a
corporation taxed under subchapter C or subchapter S, or a personal service
corporation. For partnership purposes, "specified individual" includes any partner that
holds a more than 10% equity interest in the partnership, general partner, officer, or
managing member of a partnership. "Specified individual" also includes a director or
officer of a tax-exempt entity.
The provisions of this notice apply to the use of an aircraft for the entertainment
of a specified individual of a party related to the taxpayer within the meaning of § 267(b)
or § 707(b). Thus, if X and Yare related corporations within the meaning of § 267(b)
and Y provides entertainment use of an aircraft to A, who is a specified individual as to
X, Y's costs are disallowed (except to the extent treated as compensation to A or
reimbursed by A) under § 274(e)(2)(8).
For purposes of this notice, a specified individual is the recipient of entertainment
provided to a spouse or family member of the specified individual or to another person
because of the person's relationship to the specified individual. See § 1.61-21(a)(4).
Thus, costs allocable to entertainment provided to a spouse, family member, or other
person are attributed to the specified individual for purposes of determining the amount
of disallowed costs. As used hereafter in this notice, the term "specified individual"
includes any person to whom a taxpayer has provided entertainment that is attributable

7
to a specified individual under this paragraph.
(4) Expenses of aircraft subject to disallowance
For purposes of calculating the amount of expenses for entertainment use of an
aircraft that are disallowed (except to the extent treated as compensation to or
reimbursed by a specified individual) under § 274(e)(2)(8) or (9), taxpayers must take
into account all of the expenses of maintaining and operating the aircraft (all fixed and
operating costs). These expenses include, but are not limited to, fuel costs; salaries for
pilots, maintenance personnel, and other personnel assigned to the aircraft; meal and
lodging expenses of flight personnel; take-off and landing fees; costs for maintenance
and maintenance flights; costs of on board refreshments, amenities, or gifts; hangar
fees (at home or away); management fees; depreciation; amounts deductible under §
179 ; in the case of chartered aircraft, all costs billed for the charter (including amounts
for flight time, waiting time, fuel, and overnight expenses); and, in the case of leased
aircraft or other leased equipment, lease payments.
(5) Method of allocating expenses to flights
For purposes of § 274(e)(2)(8) and (9), the total deductible expenses attributable
to the aircraft must be allocated to expenses for use of the aircraft for entertainment of
specified individuals and expenses for all other uses. A taxpayer must allocate
expenses for each taxable year using either occupied seat hours or occupied seat miles
flown by the aircraft and must apply the chosen method consistently for all usage for the
taxable year. Occupied seat hours or miles is the sum of the hours or miles flown by an
aircraft multiplied by the number of seats occupied for each hour or mile. For example,

8
a flight of 6 hours with three passengers aboard results in 18 occupied seat hours. See
the special rule for "deadhead" flights, below.
Taxpayers must aggregate all fixed and variable expenses to determine the total
expenses paid or incurred during the taxable year and divide the amount of total
expenses by total occupied seat hours or occupied seat miles flown to determine the
cost per occupied seat hour or occupied seat mile. Taxpayers may calculate the cost
per occupied seat hour or occupied seat mile separately for each aircraft or may
aggregate the costs of aircraft of similar cost profiles. For example, the costs of a
turboprop aircraft may not be aggregated with the costs of a jet aircraft and the costs of
a two-engine jet aircraft may not be aggregated with the costs of a four-engine jet
aircraft.
The amount disallowed under § 274 is the sum of (a) the cost of each occupied
seat hour (or mile) flown by a specified individual for entertainment purposes, less (b)
the sum of the amount treated as compensation and the amount reimbursed for each
specified individual and each flight. Therefore, to determine the amount subject to
disallowance, taxpayers must allocate the costs to the specific entertainment flight
provided to a specified individual and compare the cost of each flight to the amount
treated as compensation to or reimbursed by the specified individual for that flight.
Example
A taxpayer's aircraft is used for Flights 1, 2, and 3, of 5 hours, 5 hours, and 4
hours, respectively, during the taxpayer's taxable year. On Flight 1, there are four
passengers, none of whom are specified individuals or traveling for entertainment. On

9
Flight 2, passengers A and B are specified individuals traveling for entertainment and
passengers C and D are not specified individuals or are not traveling for entertainment.
On Flight 3, all four passengers (A, B, E, and F) are specified individuals traveling for
entertainment. The taxpayer incurs $56,000 in expenses for the operation of the aircraft
for the taxable year.
The aircraft is operated for a total of 56 occupied seat hours for the period (four
passengers times 5 hours or 20 occupied seat hours for Flight 1, plus four passengers
times 5 hours or 20 occupied seat hours for Flight 2, plus four passengers times 4 hours
or 16 occupied seat hours for Flight 3). The cost per occupied seat hour is $1,000

($56,000/56 hours). The total entertainment usage of the aircraft for specified
individuals subject to disallowance is 26 occupied seat hours (two passengers for 5
hours each on Flight 2 and four passengers for 4 hours each on Flight 3) and the total
cost subject to disallowance is $26,000 (26 occupied seat hours X $1,000).
For purposes of determining the amount disallowed (to the extent not treated as
compensation or reimbursed), $5,000 ($1,000 X 5 hours) each is allocable to A and B
for Flight 2, and $4,000 ($1,000 X 4 hours) each is allocable to A, B, E, and F for Flight
3.
For Flight 2, the taxpayer treats $1,200 (the fair market value of the flight) as
compensation to A, and B reimburses the taxpayer $500. The taxpayer may deduct
$1,700 of the cost of Flight 2 allocable to A and B. The deduction for the remaining
$8,300 cost allocable to entertainment provided to A and B on Flight 2 is disallowed
(with respect to A, $5,000 less the $1,200 treated as compensation, and with respect to

10
B, $5,000 less the $500 reimbursed). For Flight 3, the taxpayer treats $1,300 (the fair
market value of the flight) each as compensation to A, B, E, and F. The taxpayer may
deduct $5,200 of the cost of Flight 3. The deduction for the remaining $10,800 cost
allocable to entertainment provided to A, B, E, and F on Flight 3 is disallowed ($4,000
less the $1,300 treated as compensation to each specified individual).
(6) Special rule for "deadhead" flights
For purposes of this notice, an aircraft returning empty from a flight after
discharging passengers or traveling empty to pick up passengers (deadheading) is
treated as having the same number and character of occupied seat miles or hours as
the leg or legs of the trip on which passengers are aboard.
(7) Allocation of expenses on trips of a specified individual involving both business and
entertainment
The costs of a flight provided to a specified individual that includes a segment or
segments for business and for entertainment must be allocated to the business and
entertainment use. The entertainment cost is the excess of the total cost of the flights
(by occupied seat hours or miles) over the cost of the flights that would have been taken
without the entertainment segment or segments.
Example. G, a specified individual, is the sole passenger on an aircraft on a twohour flight from City A to City B. The flight from City A to City B is for business. G then
travels on a three-hour flight from City B to City C for entertainment purposes, and
returns from City C to City A on a four-hour flight. G's flights have resulted in nine
occupied seat hours (two for the first segment, plus three for the second segment, plus

11
four for the third segment). If G had returned directly to City A from City B, the flights
would have resulted in four occupied seat hours. Five occupied seat hours are
allocable to G's entertainment use of the aircraft (nine total occupied seat hours less
four occupied seat hours). If the taxpayer's cost per occupied seat hour is $1,000,
$5,000 must be allocated to G's entertainment use of the aircraft ($1,000 X five
occupied seat hours). The amount disallowed is $5,000 less any amount the taxpayer
treats as compensation to G or G reimburses the taxpayer for this flight.
(8) Non-commercial flight valuation consistency rule
Under § 1.61-21(g)(14)(i), a taxpayer who uses the SIFL formula in a calendar
year to value any flight provided to an employee must use the SIFL formula to value all
flights provided to employees during that calendar year. The Internal Revenue Service
and the Treasury Department plan to amend these regulations to permit taxpayers to
value the entertainment use of aircraft by specified individuals under the fair market
value rules of § 1.61-21(b), but continue to value flights for other employees and for
specified individuals not traveling for entertainment using the SIFL formula. Until
regulations are published, taxpayers may rely on this notice to allow this inconsistency
in the treatment of specified and non-specified individuals for income inclusion
purposes. If the amount treated as compensation is greater than the amount of the
taxpayer's costs (as determined under this notice) for a flight, however, the taxpayer's
deduction is limited to the taxpayer's costs.
(9) Interaction with § 162(m)

12
Any amount for the entertainment use of an aircraft that is treated by the
taxpayer as compensation to a specified individual who is also a "covered employee"
(as defined in § 162(m)(3)) is subject to § 162(m). Thus, to the extent the covered
employee's "applicable employee remuneration" (as defined in § 162(m)(4)), including
remuneration related to entertainment, exceeds $1,000,000, the taxpayer's deduction is
disallowed under § 162(m).
(10) Costs treated as compensation
The amount of costs to which this notice applies is reduced by an amount treated
as compensation to a specified individual who is an employee of the taxpayer if the
amount is treated as compensation for the flight on the taxpayer's income tax return as
originally filed and as wages for purposes of chapter 24 (relating to withholding of
income tax at the source on wages). See § 1.274-2(f)(2)(iii)(A) and Ann. 85-113. For a
specified individual who is not the taxpayer's employee, costs are treated as
compensation if the amount for the flight is included in an information return under Part
III of subchapter A of chapter 61 (unless not required to be reported under those
provisions). See § 1.274-2(f)(2)(iii)(B).
C. REQUEST FOR COMMENTS
The Service and the Treasury Department request comments on issues arising
under this notice. Comments should be submitted in writing on or before August 1,
2005, and should include a reference to Notice 2005-45. Comments may be submitted
to CC:PA:LPD:PR (Notice 2005-45), Room 5203, Internal Revenue Service, P.O. Box
7604, Ben Franklin Station, Washington, DC 20044. Alternatively, comments may be

13
submitted electronically" via the following e-mail address:
Notice.Comments@irscounseLtreas.gov. Please include "Notice 2005-45" in the
subject line of any electronic communications.
Submissions may be hand delivered Monday through Friday between the hours
of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (Notice 2005-45), Courier's Desk, Internal
Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20224. All
comments are available for public inspection and copying.
D. EFFECTIVE DATE
This notice applies to expenses incurred after June 30, 2005. The Service will
not challenge a reasonable method of determining disallowed expenses incurred after
October 22, 2004, and before July 1, 2005. Application of this notice to determine
disallowed expenses is a reasonable method.
E. TRANSITION RULE FOR REPORTING DISALLOWED EXPENSES
A taxpayer that incurs expenses to which § 274(e), as amended by the AJCA,
applies in a taxable year ending after October 22, 2004, but on or before May 27, 2005,
may apply the disallowance of expenses for that taxable year against expenses incurred
in the taxpayer's first taxable year ending after May 27, 2005. Thus, for example, a
calendar year taxpayer may choose to adjust its taxable income either (a) for its 2005
taxable year to reflect the disallowance of expenses to which this notice applies that are
incurred after October 22,2004, and before January 1, 2006, or (b) for its 2004 taxable
year to reflect the disallowance of the portion of the expenses incurred after October 22,
2004, and before January 1, 2005, and for its 2005 taxable year to reflect the

14
disallowance of the portion of the expenses incurred after December 31, 2004, and
before January 1, 2006.
DRAFTING INFORMATION
The principal author of this notice is Michael A. Nixon of the Office of the
Associate Chief Counsel (Income Tax & Accounting). For further information regarding
this notice, contact Mr. Nixon or Christian Wood at (202) 622-4930 (not a toll-free call).

5-2465: Address of Under Secretary Stuart Levey The American Israel Public Affairs Committee ... Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
To vIew or print the PDF content on this page, download the free Adobe(r;) AcrobaN!) HeadeN!).

May 27,2005
JS-2477

IMF Concludes Article IV Consultation with the United States
The Treasury Department is releasing today the concluding statement by the staff
of the International Monetary Fund (IMF) following this year's Article IV consultation
with the United States, This statement represents IMF staff's independent judgment
and assessment of U,S, economic performance and policies,
Release of this statement is consistent with the United States' longstanding, strong
support for enhanced transparency of the IMF, The United States also plans to
release the IMF staff report and Public Information Notice on the U,S, Article IV
review following the Executive Board's discussion of the mission later this summer,

REPORTS
•

Illternatlclilal r,101lF:\;lry FllllO 2 ()():, CDllcllldlrlCj Stc1lelllf;llt of thi" FIJllcJ
1\11ssioll

http://treas.gov/press/reieaseslis2465.htm

5/31/2005

INTERNATIONAL MONETARY FUND

2005 Article IV Consultation with the United States of America
Concluding Statement of the Fund Mission
(May 25,2005)
1.
The United States has continued to be the main locomotive ofglobal growth. Over
the past year, the expansion has solidified as robust productivity growth and high corporate
profits have contributed to a strong rebound in business investment and an acceleration in
employment. As the output gap has narrowed, the policy focus has appropriately shifted
toward a steady removal of stimulus in a manner that supports macroeconomic stability and
sustained growth.
2.
Looking ahead, there is general agreement that the U.S. outlook for 2005 and 2006
appears broadly favorable. As the expansion matures, GOP growth is projected to slow to
around 3 Y:z percent in the coming two years, reflecting the withdrawal of policy stimulus,
higher oil prices, and the return of the household saving rate to a more sustainable level,
partly offset by a diminution of the drag from net exports. Although productivity growth is
projected to ease somewhat, the remaining small output gap would help contain inflationary
pressures. Nonetheless, the current account deficit is likely to remain around its recent record
highs, in part because increasing U.S. foreign indebtedness and higher interest rates cause the
net factor income balance to weaken.
3.
While the U.S. economy is again expected to outperform other G-7 members, the
challenge is to safeguard the outlook from the considerable uncertainties and risks,
particularly against the background of looming demographic challenges.
•

A record-low household saving rate and a large federal fiscal deficit are being
supported by unprecedented borrowing from foreigners and domestic firms. This
unusual constellation of financial flows has sustained growth by keeping long-term
interest rates low and stimulating house prices. However, this creates a number of
vulnerabilities, including the possibility of a marked slowdown of household spending,
particularly were the housing market to cool.

•

External imbalances present a significant risk to the global economy. The U.S. current
account deficit and its counterparts elsewhere in the world are widely viewed as
unsustainable. A gradual adjustment of the U.S. external position and exchange rate
remains the most likely scenario, especially if it involves stronger growth in the rest of
the world. The challenge is to support the adjustment by stronger U.S. national saving to
avoid the burden falling on investment and growth, both in the United States and abroad.
Moreover, there will be limits to the global demand for U.S. assets, and there is a risk that
an abrupt and disorderly shift in investor preferences could have a significant adverse
effect on interest rates and global capital markets.

- 2-

High corporate net lending ...

... and a widening current account deficit...

3 I percent of GOP

, 3

2 1 percent of GOP

o'
0

-2
-3

-2

-1 I,

, 0

-1

, -1

-1

, -2

-3 '

! -2

, -4

I
-4 i
-5,

-3

-4
1980

1984

1988

1992

1996

-4

-6
-7

2000

-6
-7

1980

... have financed large federal fiscal
deficits ...

1984

1988

1992

1996

2000

2004

... and low household saving.
3

percent of GOP

, -5

! -5

-5

I -3

14 'percent of disposible income
12

1 :

-1

: -1

-2·
-3

-4'

-5 '

, -5

, -6

-6 !

1980

1984

1988

1992

1996

2000

2004

: -4

1980

I
I

1984

1988

1992

1996

2000

2004

Source: Haver Analytics.

•

While continued strong productivity growth would buttress the outlook, a sudden drop
could have significant repercussions. A continuation of the exceptional productivity
growth observed since the recent downturn would provide further support to household
wealth and spending, the fiscal position, and capital inflows. However, a significantly
faster-than-anticipated productivity slowdown would increase cost pressures, pushing up
global interest rates and risk premiums, and rendering even more challenging the goal of
achieving fiscal and current account sustainability.

•

A closing output gap and higher commodity prices imply a less benign inflation
outlook. Although core peE inflation and inflation expectations have remained
contained, the federal funds rate is still close to zero in real terms and unit labor costs
have started to rise. At the same time, softer-than-expected indicators of activity in recent
months have highlighted the risk that high oil prices could dampen domestic spending.

-3-

•

The leading edge of the baby-boom generation is only a few years away from
retirement. Although the long-term rise in the old-age dependency rate is modest
compared with other industrial countries, the shift implies an enormous additional burden
on government programs, most notably as regards health care, and will weigh further on
the household saving rate.

4.
These considerations underscore the importance of u.s. leadership in
implementing the G-7 Agenda for Growth. In combination with structural reforms and
greater exchange rate flexibility in major trading partners, the key challenge for the United
States will be to achieve fiscal consolidation and higher national saving. Together with
policies to address long-term fiscal sustainability and maintain high productivity growth, this
would provide a solid basis for continuing economic prosperity.

Monetary policy
5.
The Federal Reserve has successfully balanced the need to support activity while
preserving price stability in recent years. After having injected extraordinary stimulus over
the downturn, the Fed appropriately reversed course in mid-2004 as the expansion became
increasingly self-sustained and deflation risks receded, and has since raised the federal funds
rate in 25 basis point moves to 3 percent.

6.
The mission supports the Federal Reserve's gradual andflexible approach to
monetary tightening. The Fed's commitment to price stability has ensured that inflation
expectations have remained anchored in the face of substantial shocks to energy and other
commodity prices. Coupled with a skillful communications strategy, this has strengthened
the expectations channel and enabled a gradual pace of tightening. At the same time, the past
year has also witnessed substantial changes in market forecasts of the pace of future interest
rate hikes, illustrating confidence in the Fed's willingness to respond rapidly to changing
circumstances. While expectations of tightening have recently been scaled back, the Federal
Open Market Committee's (FOMC's) May 3 statement has appropriately cautioned that more
forceful action would be required if price pressures continued to intensify.

7.
The Federal Reserve is highly transparent and its communications strategy is
highly effective. Several steps have recently been taken to further increase transparencyincluding shortening the publication lag for FOMC minutes and extending the horizon of
forecasts. More fundamentally, the Committee has also debated whether to adopt an explicit
inflation objective. As we have suggested before, the experience in other countries illustrates
that defining the central bank's inflation objective more clearly can help further anchor
inflation expectations and long-term bond yields, without unduly constraining the ability of
policymakers to meet shorter-term stabilization objectives.

-4-

Fiscal policy

8.
The Administration's call for
deficit reduction is welcome. The
FY 2004 outturn was significantly
better than expected; recent tax revenue
data suggest overperformance in
FY 2005; and this year's Budget
Resolution has endorsed the goal of
halving the nominal deficit by
FY 2009. That said, budget targets for
next year and beyond do not appear
ambitious-the structural budget
balance would only improve by around
1Yz percent of GOP through FY 2009.
Moreover, the assumed compression in
the ratio of nondefense discretionary
spending is unprecedented, and no
account has been taken of funding for
operations in Iraq and Afghanistan after
FY 2006 or of pressures to limit the
growing scope of the Alternative
Minimum Tax.

The FY2006 budget re-affirms the commitment to
halving the deficit in dollar terms within five years ...
23

Ipercent of fiscal year GOP

23
22

I 21

Stringent
restraint

~Surplus

181

17 !
16

I 20

- - - -...·19

Deficit

Revenues

Buovancy

15 ,

: 17
I 16
. 15

1997

2001

1999

2003

2005

2007

2009

... based on tight spending controls.
5.5

5.5

5.0

4.5

, 4.5

4.0
3.5
3.0

3.0

2.5

~ 2.5

I 2.0

2.0
1962 66

98 2002 06

Sources OMS; and IMF staff calculations.

9.
The currentfavorable growth conjuncture suggests room for bolder deficit
reduction over the coming years. Annual reductions in the fiscal deficit ofroughly 1 percent
of GOP through structural measures over the next few years-aimed at achieving a balanced
budget excluding Social Security early in the next decade-would ease the burden on
monetary policy to contain inflation pressures as the economy returns to full employment and
could likely be achieved without placing an undue drag on activity. It would also support
national saving, domestic investment, and the external position, forming an important pillar
in the international strategy for reducing external imbalances and the associated
vulnerabilities. Most importantly, by significantly lowering the federal debt ratio over time, it
would provide fiscal room to cope with impending pressures on health and retirement
programs and reduce the burden on future generations.
10.
Expenditure discipline will be an essential part of any deficit reduction, but tax
reform should also playa role in supporting fiscal sustain ability. The President's Advisory
Panel on Federal Tax Reform has been charged with reporting on ways to simplify the tax
system and improve its efficiency-an undertaking that the mission strongly supports-in a
revenue-neutral manner. However, the magnitude of the fiscal adjustment needed and the
strict spending discipline already assumed make it seem prudent to explore options for
revenue enhancements. Measures that would help avoid having to unwind recent tax rate cuts
and their associated supply-side benefits include broadening the income tax base by curbing

-5-

deductions, such as the generous treatment of mortgage interest, or introducing a national
consumption-based tax.

11.
A legislated budget rule could help support fiscal responsibility. Both domestic and
international experience suggests that legislated budget rules can be helpful in enhancing
budget discipline, particularly if supported by political consensus. However, the expiration of
the Budget Enforcement Act (BEA) seems to have coincided with a weakening of fiscal
discipline, including through the use of sunset provisions in recent tax legislation. The
Administration has re-iterated its support for a number of useful proposals, but it is
unfortunate that these have not been carried forward, and that pay-as-you-go provisions
would be limited to expenditure measures.
Entitlement reform

12.
Reforms of retirement and (in
particular) health care en(itlement
programs are essential for long-term
fiscal sustainability. Although much of
the recent debate has been on Social
Security, federal health care spending has
been rising at a much faster pace,
reflecting cost pressures on the broader
U.S. health care system. Coupled with the
new prescription drug benefit and the rise
in the elderly population in coming
decades, the unfunded liability of the
Medicare system has been estimated at
200 percent of GDP over the next 75
years, dwarfing the 30 percent of GDP
liability of the Social Security system.

13.
It is questionable whether
Medicare spending can be contained
without reforms to the overall health
care sector. The public sector already

In the absence of reform, spending on entitlement
programs, especially for health care, is set to grow
to unsustainable levels ...

18 ~p~e~~e~nt~of~G~D~P~~~~~----------' 18

16
14

... -

~~~~~~-~------------

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

16
Medic;id
1
_.-- 14
-------. 12
Medicare
10
8

o
2045

2035

2025

2015

2005

2050

...and international comparisons suggest that
there is considerable scope for improving the
efficiency of the health care system.

16~~~~~~~--~~-------16

g
'0

14'

'"g

;J!.

•

United Slales

:g,

'"
£
n;

.c
n;

• •
# ••••

'"S
-0
c

114

•

• ••••••
• •
•

finances about half of all U.S. health
I 4
spending, including through the Medicare
"6
I4I.
!2
and Medicaid programs, and total U.S.
79
75
77
71
73
69
67
health care outlays are nearly twice the
Life expectancy (males) in 2001, years
OECD average as a share ofGDP,
Sources: OMB; and OECD.
without seeming to yield commensurate
benefits in terms of health outcomes.
Administration proposals-including malpractice reform-together with the provisions of
the 2003 Medicare Modernization Act could help moderate price pressures, but the added
prescription drug benefit significantly worsened Medicare's financial position. With the

••

I
I

-6-

Medicaid system under similar strains, a large uninsured population, growing numbers of the
elderly, and a projected tripling of public health care outlays as a ratio to GDP in coming
decades, further steps are urgently needed to improve the efficiency of the system.

14.
We welcome the current debate on measures to address the solvency of the Social
Security system. The Administration has helpfully lent its support to the principle of
"progressive price indexation," which would significantly reduce Social Security's unfunded
liabilities by curbing the growth of accrued benefits for higher-income households. The
emphasis on containing benefit growth appears appropriate, but additional options should be
considered to help eliminate the funding shortfall, such as an increase in the retirement age or
raising the cap on the Social Security payroll tax. However, as we have emphasized in
previous years, the key priority is to ensure that reforms that fully fund the system are not
delayed, since this would only increase the adjustments that will eventually be needed.
15.
The Administration proposal to permit younger workers to divert a portion of their
Social Security contributions into personal retirement accounts (PRAs) would pose fiscal
challenges. While PRAs hold the potential for raising the return on Social Security
contributions, they would also imply a significant increase in federal deficits and debt in
coming decades as off-budget liabilities are recognized, albeit offset over time by lowering
future benefits as the PRAs mature. Even if such instruments were to be introduced, it would
be essential that they be coupled with other measures that assure the long-run solvency of the
Social Security system.
Structural policies

16.
Structural reforms to support saving and capital accumulation would help sustain
high labor productivity growth. Recent Administration initiatives are aimed at establishing
an "ownership society" by lowering taxes on capital income and facilitating access to capital
markets for a wider segment of the population. The steady decline in coverage by definedbenefit pension plans and employer-sponsored health care plans in recent years has meant
that financial risks carried by households have already been increasing. This suggests the
importance of public policies that encourage appropriate saving decisions, such as by
promoting retirement plans in which participation is the default option.
17.
The U.S. financial sector has proven exceptionally resilient in recent years, but
there remains scope for further reform. The Administration has taken the welcome step of
proposing legislation to strengthen the supervision and limit the size of the housing
government sponsored enterprises (GSEs) to contain systemic risk in mortgage markets.
Recent developments-including the large new liabilities taken on by the Pension Benefit
Guarantee Corporation-illustrate the need for reforms that increase funding requirements
and strengthen risk-based premiums for defined-benefit pension plans. Moreover, recent
irregularities in the insurance sector suggest that there may be a need to supervise
systemically important entities on a national level.

-7-

18.
As demonstrated by last year's framework agreement for the Doha Round, the
United States has an important leadership role in the quest for global trade liberalization.
The mission welcomes Administration proposals to reduce agricultural subsidies, as well as
plans to offer and elicit stronger commitments for liberalization in services. At the same time,
specific areas for U.S. leadership would be to ensure that bilateral free trade agreements
complement the multilateral framework so as to minimize the potential costs of regionalism
and to achieve significant increases in market access, particularly for agricultural products. It
is also imperative to resist protectionist responses to the recent surge in Chinese imports,
including those related to the expiry of the Agreement on Textiles and Clothing.

19.
Recent increases in U.S. official development assistance (ODA) and progress on the
Millennium Challenge Account are welcome. However, U.S. ODA relative to GNI remains
among the lowest across industrial countries and argues for continued efforts to boost U.S.
foreign assistance.

5.2478: Address of Under Secretary Stuart Levey The American Israel Public Affairs Committee ... Page 1 of 4

FROM THE OFFICE OF PUBLIC AFFAIRS
May 26,2005
JS-2478

Randal K. Quarles
U.S. Treasury Assistant Secretary for International Affairs
Institute for International Bankers
Washington, DC
May 26,2005
I am delighted to be here again to share with you a brief overview of Treasury's
international financial sector work. I'd like to begin with a just few comments on
major regulatory matters that will be impacting financial markets in the years ahead.
Then I'll give you an update on some of the issues we discussed last October:
multilateral and bilateral financial services negotiations and our financial markets
dialogues particularly with China, Japan and the European Union.
Before I begin, let me emphasize that the underlying goal of our financial sector
work is to strengthen global economic growth and development prospects.
Financial stability, financial sector openness and sound regulatory policy are
essential financial pillars for growth. We work to strengthen these three pillars via a
variety of means: from global and multilateral programs to bilateral engagement.

Basel II
One of the biggest contributors to financial stability has been adherence to the
international standards on capital adequacy for banking institutions embodied in the
Basel Accord. We anticipate that implementation of the revision of those standards,
known as Basel II, will prove equally valuable. As you know, the U.S. banking
regulators jointly announced on April 29 a delay in the publication of the joint notice
of proposed rule-making (NPR) which will implement the Basel II risk-adjusted
capital framework in the US. Originally targeted for June, our regulators agreed to
delay the NPR to consider issues raised in a fourth impact study, which showed
wide dispersion of impact with a drop in required capital levels for half of the 26
surveyed institutions. The goal is to issue the NPR at the earliest date possible,
while allowing time to consider how to minimize these unintended consequences
and thus get it right the first time. Our regulators remain committed to the Basel
process and will continue to take the steps necessary to try and implement the
revised Accord by their original 2008 target.

Consolidated Supervised Entity (CSE) Rule:
Regarding the CSE rules of the SEC, we are aware of a number of issues you have
raised with respect to the application of the CSE regime. These include the
alternative net capital treatment of broker-dealer subsidiaries, reporting and
recording keeping for non-US holding companies and "deference" in supervisory
regimes. These matters cut across a number of Important supervisory and
regulatory areas and are areas that I understand you are continuing to pursue with
the SEC and Federal Reserve. As further experience is gained in implementing the
rule, I trust that any misunderstandings regarding the rule and its application will be
fully clarified ..

Financial Services Trade Negotiations
The next topic on our growth agenda is trade in financial services. As I've

http://treas.gov/press/reieaseslis2478.htm

5/3112005

5-2478: Address of Under Secretary Stuart Levey The American Israel Public Affairs Committee ... Page 2 of 4

discussed with this group before, liberalization of financial services is vital to the
Doha Development Agenda. Research has shown that developing countries with
open financial sectors experience higher economic growth.

WTO Financial Services Negotiations
This "growth" orientation has several implications for our WTO stance. For
example, we have advocated to a large number of WTO Members--not just the big
emerging markets--the adoption of fundamental openness, especially to foreign
direct investment in this sector. We also have proposed the adoption of
transparency principles in the regulation of financial services.
We are entering an important phase of these negotiations. WTO members will
submit revised offers by the end of this month. Treasury and USTR held a series of
meetings in February in Geneva to encourage improved offers and more talks will
take place in June. We will continue to articulate the benefits of financial services
liberalization in our bilateral meetings and other fora. We have no illusions that
securing a WTO financial sector agreement will be quick or easy, but the
importance of the issues and breadth of WTO participation merit our continued
efforts.

Bilateral Free Trade Agreements
Since 2002, we have expanded the number of countries which with we are
negotiating (or have completed) bilateral free trade agreements. Agreements are
now in place with Chile, Singapore and Australia and negotiations have been
concluded with Bahrain, Morocco, five Central American countries and the
Dominican Republic. Negotiations are actively underway with Thailand, Oman, the
UAE and three Andean countries. These agreements provide our financial
institutions with key legal rights and IIlcrease regulatory transparency, contributing
to an overall sounder financial sector and more sustainable economic growth.
Ongoing Dialogues in Financial Services
In addition to trade negotiations, we conduct informal financial dialogues with our
counterparts from a number of countries, as we seek to: (1) encourage movement
toward more competitive, better regulated financial systems; and (2) find ways to
mitigate cross border friction.
In addition to our long running Japan financial sector dialogue, we now also hold
financial dialogues with our NAFTA partners, as well as with China. Australia, India,
Russia and the European Union. Before each of these meetings, Treasury officials
reach out to U.S. private financial sector officials and trade associations for their
input and expertise. Let me give you a brief update on what has been happening
with some of these dialogues.

U.S.-China
As I'm sure most of you know, the Bush Administration has had an unprecedented
level of engagement with the Chinese to encourage them to move to a marketbased, flexible exchange rate regime as quickly as possible. While Secretary
Snow, myself and others have been out front, publicly making the macro-economic
case that a flexible exchange rate is in China's own best interest, we have also
been working behind the scenes to help China prepare its financial sector for such
a move.
In addition to our high level annual Joint Economic Committee meetings, Treasury
has established a Technical Cooperation Program (TCP) to share our experiences
on the regulatory and financial market underpinnings that support market-oriented
reforms. The TCP's four session have covered a broad set of topics including:
banking supervision, corporate governance, asset disposition, forex derivatives
markets, treasury cash management and debt management operations Another
session, next week in Beijing, will cover deposit insurance. And a follow up on
banking issues is under consideration We believe that these efforts have helped
the China prepare to move ahead and introduce flexibility in the exchange rate
regime.

http://treas.gov/press/reieaseslis2478.htm

5/3112005

5-2478: Address of Under Secretary Stuart Levey The American Israel Public Affairs Committee ... Page 3 of 4

Of course, no financial sector is perfect, and despite their progress, the Chinese will
still need more sophisticated financial technology and human capital to address
coming competitive challenges. Since foreign banks and other financial institutions
bring just such technology and know-how as well as much needed fresh capital,
we've continued to push for market access. China's commitment under its WTO
accession to open the banking sector to foreign banks by 2007 is on track, but we
continue to advocate raising the cap on foreign ownership in banks, securities
companies and asset management firms beyond their WTO commitments.

u.s - Japan
Notwithstanding all of the attention on China, we must remember that Japan is still
the world's second largest economy. We have an active financial dialogue with
Japan on a variety of Issues and in a variety of forums, some on-going, and other
ad hoc. The latter enables us to address issues as they arise.
Over recent years, a persistent subject of discussion has been banking sector
stability. Significantly. Japan's banking sector seems to have stepped back from
the brink thanks to an Improved economy, and importantly, a tougher supervision
regime. Japan's FSA has made remarkable progress by focusing on resolving
NPLs, improving the quality of bank capital, and inspecting banks the major banks
more thoroughly.
While more remains to be done, especially at regional banks. the major Japanese
banks have cut reported bad debt to within the government target of 4 percent of
total loans. That's a remarkable 50 percent decline over just three years. Less
regulatory forbearance has raised the pressure on banks to restructure their bad
debts, while stronger balance sheets have made the banks more willing, and able.
to do so.
The privatization of Japan Post has also been a frequent topic of discussion --especially with regard to its savings and life insurance businesses, which are the
world's two largest financial institutions. We are watChing closely to ensure that
privatization does not disadvantage private firms, including foreign ones, that are
already operating in Japan. It is also important to note that a successful
privatization has the potential to significantly improve (1) the efficiency in Japan's
financial markets. (2) the profitability and stability of bank earnings, and (3)
ultimately the prospects for growth in Japan.

u.s. - EU
Three years ago, we launched the U.S-EU informal financial markets regulatory
dialogue between Treasury, the US regulators and the European Commission. By
promoting quiet discussion, this dialogue has contributed to stronger working
relationships among regulators and is now moving beyond just problem solving to
more forward looking issues.
The EU has fundamentally overhauled the legal framework of its financial markets,
but still faces the difficult stage of implementation. The challenge is to have the
new measures implemented, interpreted and enforced consistently across all 25
member states. This would be a big victory for growth, as various studies have
shown that the integrated, efficient, open capital market envisioned by Europe's
Financial Services Action Plan could boost annual economic growth by over one
percentage point.
Moreover, this convergence within the EU has given impetus to convergence
between the U.S. and EU and, indeed between other markets, most notably in
accounting standards The EU's requirement for listed EU firms to use IFRS
beginning this financial year has encouraged the U.S. SEC staff to layout roadmap
by which they could recommend SEC acceptance of IFRS financial statements from
US-listed firms by as early as 2007 (and no later than 2009). ThiS roadmap has
been well received in Europe, and would be a remarkable achievement, reducing
costs for businesses on both sides of the Atlantic.
US-Mexico-Canada

http://treas.gov/press/reieaseslis2478.htm

5/3112005

Is.2478: Randal K. Quarles U.S. Treasury Assistant Secretary for International Affairs Institute... Page 4 of 4
Treasury and US regulators have been discussing financial sector issues with our
NAFTA partners for the past eleven years since the trade agreement was signed.
Much has been achieved but some issues in financial services and in many other
areas pertaining to economic integration remain unresolved. In March of this year,
Presidents Bush and Fox and Prime Minister Martin launched the Security and
Prosperity Partnership of North America, which will entail wide-ranging discussions
by officials of the three countries on economic and security issues under various
working groups. I will chair the Financial Services Working Group (FSWG). Other
US participants in this group will include representatives from the Department of
Commerce, USTR and our financial regulators.
This group will address cross-border issues for banking, securities and insurance.
All three parties agree that well-developed, efficient capital markets are essential for
economic growth and national security. We will identify and discuss ways to
facilitate the free flow of capital and the efficient provision of financial services
throughout the three countries. Preparatory work for the FSWG has included
outreach to private sectors and legislatures in the three countries to ensure that
interests and concerns are appropriately being taken into account. On June 23, our
Leaders will meet again and are expected to formally kick of the real work
envisaged under SPP.

Conclusion:
As you can tell, Treasury has been busy promoting more robust financial policy
regimes in many different fora around the globe. Close contact among U.S. and
foreign regulators and financial institutions has led to better policy reform. We've
worked together to improve the quality of financial regimes and to enhance
opportunities for competition in each other's markets. To the extent we have been
successful. the efficiency of capital markets will Increase and the capacity for higher
sustained economic growth will expand. Thank you.

http://www.treas gov/press/releases/js247 ~ htm

5/31/2005

~.2479: Statement of Under Secretary Levey Upon ConclusIOn <HK>ot Meetmgs wIth SenIOr LatvIan '"

Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
May 31, 2005
JS-2479

Statement of Under Secretary Levey Upon Conclusion
of Meetings with Senior Latvian Officials
Riga, LATVIA - Stuart Levey, the Treasury Department's Under Secretary for
Terrorism and Financial Intelligence, made the following statement upon the
conclusion of meetings with senior Latvian officials:
"Both the United States Government and the Latvian Government are committed to
working together to safeguard the international financial system from abuse. My
meetings with senior officials from the Prosecutor General's Office, the Financial
and Capital Markets Commission, the Bank of Latvia, the Latvian State Police, the
commercial banking sector and notably with Prime Minister Kalvitis were positive
and productive.
"Latvia has taken many important steps to combat money laundering and corruption
in the financial sector. Prime Minister Kalvitis has shown strong leadership on this
issue. I am also encouraged by the Saeima's recent passage of an anti-money
laundering law. This is a vital move that will not only help protect Latvia's financial
sector, but also reaffirms the Latvian Government's commitment to these issues.
"However, there is still important progress to be made. I encourage the Latvians to
swiftly and credibly implement the new anti-money laundering law. I look forward to
seeing significant results come to fruition as a result of both this legislation and the
ongoing efforts of Latvian law enforcement and regulatory authorities.
"The U.S. Treasury Department's recent designation of two Latvian banks as
"primary money laundering concerns" reflects the importance to the U.S
Government of having the systems and oversight in place to keep corrupt funds
from flowing through the Latvian, as well as the international, financial system.
"The United States and Latvia have forged a strong partnership in many areas,
including, notably, our commitment to combating money laundering and financial
crime. Continued collaboration and cooperation will only enhance this relationship.
The Bush Administration will continue to work with Latvia to help rid its financial
sector of illicit funds as we conlinue to battle the scourge of money laundering
worldWide," said Levey.

http://treas.gov/press/reieaseslis2479.htm

5/31/2005

tS-2480: Statement ot Treasury Secretary John W. Snow on the announced departure of Enrique V. Igles... Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
May 31,2005
JS-2480
Statement of Treasury Secretary John W. Snow on the announced departure
of Enrique V. Iglesias, President of the Inter-American Development Bank
With today's announcement that Enrique V. Iglesias intends to depart as President
of the Inter-American Development Bank, I wanted to be among the first to praise
him for the important contributions he has made to the international financial system
and in leading development policy in the Americas.
It would be difficult to overstate the contribution that Enrique has made to the InterAmerican Development Bank and to economic development in Latin American and
Caribbean nations over the last eighteen years. The Bank, which now has over
$100 billion in capital thanks to Enrique's leadership, remains the main source of
multilateral development financing for the region. It has provided critical financial
support and policy advice to emerging markets and poor countries in the region,
helping them to increase productivity, raise economic growth and lift millions out of
poverty. We are deeply indebted to Enrique for his visionary leadership and
prodigious achievements over nearly two decades, and congratulate him on his
new appointment the First Secretary General of the Ibero-American Summit. In this
prestigious new role, I have no doubt that he will continue to serve with distinction
to further our common interests in the hemisphere.
The process now begins for selecting President Iglesias' successor. I look forward
to discussing with my fellow Governors from Latin American and the Caribbean,
and other shareholders, the outstanding candidates who might be interested in
serving as the next President of the lOB.

http://treas.gov/press/reieaseslis2480.htm

7/612005

Full text of Press Releases of the United States Department of the Treasury : Volume 424

FRASER