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AUG 2 5 2005
Treas.
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v.425
Department of the Treasury
PRESS RELEASES
The following numbers were not used:
JS-2506 through 2605
JS-2481: The Honorable John W. Snow Prepared Remarks NYU Center for Law and Busi ... Page 1 of 6
FROM THE OFFICE OF PUBLIC AFFAIRS
June 1,2005
JS-2481
The Honorable John W. Snow Prepared Remarks NYU Center for Law and
Business
New York, NY
Good evening, and thank you so much for having me here. It is an honor to speak
with you about a subject that is near to my heart, and one that, by a necessity,
became a hallmark of the Bush Administration.
Before I begin, I'd like to put the subject in the context of some recent history economic history, to be specific.
Four years ago, we would have seen two great towers just south of here. We would
have walked in their shadows on our way here tonight. And when our enemies
felled those towers, our already-struggling economy was further battered, and allimportant jobs were shed for months.
Corporate scandals - which I'll talk more about in a moment - weakened trust in
markets and the timing of those eruptions literally kicked us when we were down.
Four short years later, this incredible, resilient American economy is once again the
leader and the envy of the world.
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 the first
Friday in May, 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 American system of corporate capitalism is a key ingredient of our success.
Modern American corporations are leading the world. They are a key source of
innovation, modernization and advancement, and are essential to our success.
The continuing vitality of the corporate sector - making sure corporations can
function effectively to carry out their critical role - is essential to our long-term
prosperity.
It has been said often that after 9-11 the world will never be the same again. The
same might be said for the world of corporate governance after the revelations of
widespread misconduct that rocked the investment world in the spring of 2002. The
scandals threatened to destroy this nation's confidence in corporate leadership and
in those entrusted to safeguard our system of corporate capitalism.
Corporate leaders who had been lionized in the nineties came to be vilified. The
corporate sector lost a large measure of its legitimacy and moral authority, and with
that a large measure of its claim to national leadership. The American public was
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understandably angered at what it saw as a massive breach of trust. People in
authority, people charged with overseeing the interests of shareholders were found
to be far more interested in advancing their own interests at the expense of those
shareholders they were supposed to have been protecting. Corporate capitalism
itself was being called into question.
Public support for the system of corporate capitalism, which had served our country
so well for so long, was hanging in the balance. The system had been found
wanting, and the guardians of the system had been found wanting. A clear, strong
response became a political imperative in the summer of 2002.
Was the public reaction appropriate? After all, the scandals occurred in a relatively
small number of public companies. Most of corporate America took their fiduciary
duties seriously. If they had not, the economy could not have performed as well as
it did throughout the nineties. GOP grew at a strong rate throughout the period. The
real output of the economy was expanding. Jobs were being created, corporations
were growing and investing and putting capital to good use. The strong results for
the economy as a whole is completely at odds with the view that corporate
malfeasance dominated corporate behaviors.
One could also argue that the market itself would have adjusted to the misconduct,
with capital being diverted from firms with bad reputations to those known to play by
the rules. It is also clear that the bulk of the misconduct was punishable under
existing fraud statutes. Moreover, we know from long experience that misconduct is
to be found in all aspects of human experiences and it cannot be legislated out of
existence.
But as intellectually intriguing as these economic arguments might sound, on a
practical level they were simply beside the point. We faced a crisis of confidence in
those who were charged with the responsibility to oversee the corporate sector.
Trust had been broken and trust is a precious thing. Trust under-girds our capital
markets. It is perhaps the one single element without which an impersonal capital
market cannot operate. Investors are both willing and able to invest on the basis of
whether or not they think a particular business will make money. But they cannot,
and will not, make that investment if they have no reliable information about the
business. If we can't trust the numbers how can capital markets function, how do
you know where to invest?
It would be difficult to overstate the importance of the role that corporations play in
both the American economy and the American culture. They are creatures of the
state and given a privileged position. By allowing large numbers of investors to
combine their resources, corporations serve as vehicles to create vast pools of
capital capable of exploiting economies of scale and scope. And investors will put
their money into corporations based on the belief that those in charge of the
corporation, the board of directors and the senior management, are bound both
legally and ethically to use those combined investments for the benefit of the
shareholders.
Investors can't be expected to vet the numbers themselves. They need to rely on
CFOs and audit committees to give them accurate information, and they look to
outside auditors and agencies like the SEC and stock exchanges to insure that the
information is accurate.
So when the public trust is breached on such a spectacular scale in a system that is
crucially dependent on trust, the political process calls out for answers; it calls out
for a response.
The response we got of course is the Sarbanes-Oxley legislation. Considering the
context in which it came about, Sarbanes-Oxley actually is in most respects quite a
measured response. Despite its celebrated status as the most far-reaching capital
market legislation since the creation of the SEC in the thirties, the fact is it
essentially reaffirms established norms and codes of corporate governance, albeit
with criminal penalties.
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It underscores the need for corporate executives and boards to take their duties
seriously. It calls for board independence. It reaffirms things that we had long taken
to be the case - that boards should oversee the corporation; that the audit
committee should retain the outside auditors; that the nominating committee, not
the CEO, should select the board members; and so on.
Nothing here is revolutionary. Nothing here changes the fundamental norms of
corporate governance that some of us learned about in law school decades ago.
The overall thrust is to add specific procedures to insure that those traditional
fundamental norms are followed. Not only is Sarbanes-Oxley a reasonable
response, it was also in my view essential legislation to hold the system together.
As somebody who spent most of my professional life in the corporate world, I am a
great believer in our form of corporate capitalism. Anything that endangers it puts
our prosperity, our national wealth and our future wellbeing in peril.
Our corporations are a unique American institution. They lie at the center of our
enormous economic success. America simply could not be what it has become
without a dynamic corporate sector that is continually marshalling capital and
allocating it to promising uses. Putting capital to good use lies at the heart of
economic success and rising living standards.
Using capital well is the essential function of corporations. Paraphrasing Adam
Smith, while the modern corporation seeks to advance its shareholders' interests, it
achieves far more than it intends. By putting capital in the right places and
withdrawing it from the wrong places, by continuously making good judgments
about how investments should be made, corporations lie at the center of the wealth
creation process.
In fact, I think it is not an exaggeration to say that the modern American corporation
ranks at the very forefront of all institutions that are shaping the world today. It is
hard to think of any institution that is more adaptive or flexible, more innovative or
creative, more focused on continuous improvement, more accountable for results.
They bring us new technologies, new products, new services, new management
structures, new ways of organizing labor and capital, and they are under relentless
pressure to continually produce better results, better products, better management
structures, to widen their vistas.
Corporations today are the modern explorers. They are taking their management
techniques, their capital and their resources to all the corners of the globe. They are
continuously expanding the reach of the principles of comparative advantage. In the
process they are uplifting the economic level of the entire world.
I would argue that there are no institutions in modern life that are more dynamic,
more creative or more central to the kind of world we are today and the kind of
world we will be tomorrow. In short, the modern business corporation is the most
innovative, adaptive and flexible major institution of modern life.
With privileges go responsibilities. No institutions or set of institutions can survive if
they lack integrity, if people don't play by the rules and rules aren't seen to be fair
and appropriate to the overriding goals of the institution. The role of formal rules,
though, in my view is of necessity secondary. A system that depends on outsiders
to enforce rules and catch wrongdoers is not a system that encourages public
support and investment. Ultimately, what holds the system together is not rules as
such but trust, ethics, virtue. To flourish, corporations need to be rooted in the
culture of high ethical behavior. They must exhibit the habits and practices of virtue.
Corporate cultures reflect the tone at the top. They reflect the ethical outlook of the
people who run the institutions. They reflect their values. The scandals of 2002 did
not occur in those great enterprises of America that had long exhibited a culture of
ethical behavior.
And that brings me back to my principle point: Sarbanes-Oxley was an absolute
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necessity. It played the crucial rule of giving the public confidence that somebody
was in charge, somebody was looking out for their interests, and somebody would
hold corporations accountable.
But the subtlety of Sarbanes-Oxley is that it did all of this by reaffirming the basic
rules of corporate governance, not by transforming them.
Let's take a minute and look at what I call the basic rules. We start with the
proposition that the shareholders, the owners, are owed a duty of loyalty by the
managers of the enterprise. The group we know as professional managers today
became commonplace of our culture a century or so ago when enterprises became
too large to be overseen by the original owners. The owners in effect retained
people to manage the business on their behalf. This has the huge additional
advantage of allowing investors to become partial owners in a business without
themselves needing to have the time and the right skills to manage that business.
Managers are supposed to run the enterprise primarily in the interest of
shareholders; otherwise, the system would lack fundamental integrity; it would not
hold together. How could capital markets function if investors didn't have
confidence that their interests were being served?
Another fundamental proposition gives boards of directors the ultimate
responsibility to oversee the corporation, its management and the strategic direction
of its business. A corollary here of course is that to do this properly the directors
must be independent. The role of the board is critical. Without a responsible board
the system would lack integrity because management would lack accountability to
anyone who could effectively oversee their conduct.
To perform its role, the board must act collectively. No single director has the
authority to set corporate policy or take corporate action. While we need to be
careful of cronyism, we also need to be sure that the board is capable of working
together effectively as a collective body. The appointment of directors with
individual agendas is less likely to result in better governance than it is to result in
an uncooperative, deadlocked board that fails to provide effective direction for the
corporation.
I am not aware of anyone coming up with a viable alternative to boards for
overseeing management. Theoretically, perhaps, the government could serve as an
effective watchdog over management, but we would not have corporate capitalism
as we know it. We would have something else, something that would be inherently
dangerous for a free society, something fundamentally at odds with the system that
has served us so well for so long. Only the board of directors, which establishes the
basic business policy and goals, has the necessary perspective to insist not only on
scrupulous honesty but also on the achievement of the economic goals that were
the real reason shareholders invested in the first place.
This brings us to a third tenet, that the shareholders get fairly rewarded from the
wealth created from the activities of the business. Again, it is a matter of basic
integrity. If managers can rig the game to gain a disproportionate share of the
spoils, then the system falls apart and investors won't want to be part of it. The
game won't be played.
It is also important that in our effort to reward shareholders, we don't confuse the
goals of a few particular shareholders with the goals of shareholders as a whole.
Whether you subscribe to the Lipton/ NYU school of thought or your personal
economic corporate philosophy runs more to the Chicago school, everyone agrees
that at its core the corporation is an economic engine.
As a whole, shareholders invest in the hopes of a financial return, and a corporation
that decides to pursue other goals, however worthwhile some group may feel those
goals are, needs to look hard at whether it is keeping faith with its shareholders. In
fact, corporations that don't pursue economic objectives - that are not concerned
with returns on capital - will find it hard to attract capital and survive. This is the
discipline of the game of corporate capitalism. Only those who play it well in the
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interest of shareholders can survive.
Finally--and this lies at the core of Sarbanes-Oxley--for the system to work well it is
essential that the reported financial results of the enterprise reflect its true condition;
in other words the numbers have to have integrity. Here is where CFOs, audit
committees and outside auditors playa crucial role in making the system hold
together. Again, if you can't trust the numbers the system falls apart. Investors won't
have confidence and capital markets will be diminished.
Now what I have just laid out is the basic compact that underlies corporate
capitalism - the basic duties and responsibilities of the various participants in the
huge undertaking we call corporate capitalism.
In the context of the capital markets in the summer of 2002, two things stare out at
you from what I just said. First, at every point key parts of the system were fraying
badly and only would have gotten worse if we had not seen the spectacular
implosions at some specific companies. A form of Gresham's Law would come into
play under which bad management practices drop out good management practices,
at least in the short run.
I well remember being on the board of a major telecommunications company where
we continuously wondered how a particular competitor could be doing so much
better on its costs. Then we found out that it had nothing to do with superior
management and everything to do with failure to live by the norms of accounting.
Just think of it, at every juncture of the compact things broke down:
1.
2.
3.
Managements forgot their duties to the corporation and its shareholders,
running the corporation for their own benefit, and, in egregious cases lying
to investors about the financial results.
Boards, sometimes blinded by conflicts of interest, failed to provide the
required oversight, either in establishing business goals or seeing that they
were really achieved.
Audit committees, compensation committees, CFOs and outside auditors,
all fell far short in the special responsibilities that had taken on to look out
for investors and to insure that the numbers were reported honestly.
The second large point I want to leave you with is the fact that Sarbanes-Oxley-important and celebrated as it is--has not altered the fundamental norms of good
corporate governance. It has added criminal penalties. It has set up a separate
oversight for the audit profession. But it essentially reaffirmed the norms of good
corporate behavior and in doing so it made a critically important contribution at a
critical point to restore confidence in the system and insure it would hold together.
Today we are still going through the learning process with Sarbanes-Oxley. Boards
and managements are working their way through the requirements. All through
corporate America it is clear things have changed. Boards are much more serious.
The meetings are longer. Today there is no such thing as a 30 minute audit
committee meeting. So in many ways things are getter.
At the same time, we need to maintain balance in our enforcement. We need to
make sure the emphasis is on substance and not form. We need to make sure that
innocent mistakes are not criminal. No one can know the future, and no one is right
about every business decision. But there is a crucial difference between approving
a project that turns out to be a business failure, on the one hand, and "cooking the
books" to make a bad project look good, on the other. We must keep that
fundamental distinction in mind. Mis-forecasting is not a criminal offense;
misrepresenting the numbers is.
This is more than just a matter of fairness to the individuals involved. Our corporate
system cannot work if boards of directors are so afraid of civil or even criminal
liability that they simply refuse to make the tough business decisions, if they
become so risk averse that only business plans with no possible downside get
approved. The board has always played the dual role of both providing direction to
the corporation and making sure that management was performing properly. If we
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allow the system to be so skewed that all of the serious effort goes into oversight
and second-guessing management, then the corporations will be hamstrung,
legitimate business opportunities will be abandoned, and we will all suffer for it.
The American corporation has been and continues to be an extraordinary engine
for economic development, innovation and change. Sarbanes-Oxley was a much
needed and timely tool for keeping that engine on track and running properly. We
need to make sure it is not inadvertently applied in a way that cripples that engine. I
believe we can and will do just that.
-30-
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JS-2482!
StltklllCl1l Ur 1 reasury
Secretary John W. Snow on the Resignation of SEC Chai... Page 1 of 1
FROM THE OFFICE OF PUBLIC AFFAIRS
June 1,2005
JS-2482
Statement of Treasury Secretary John W. Snow on the Resignation of SEC
Chairman William H. Donaldson
William Donaldson's leadership of the Securities and Exchange Commission during
a crucial period for the U.S. financial markets will be remembered as the right
leadership at the right time. With Chairman Donaldson at the helm of this critical
agency, we have seen the shoring up of investor confidence and an extraordinary
strengthening of corporate accountability. His efforts have provided increased
protection for investors from unethical activity and enhanced disclosure and
transparency to promote stronger corporate governance at mutual funds. He's
sought out bad actors, held them accountable and brought them to justice. He has
steadfastly pursued reforms to ensure that our nation's financial markets remain
strong, fair and accessible for all Americans. Bill has been a highly effective and
moral steward of the SEC, and the strength of his leadership will be missed.
-30-
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PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
June 1,2005
2005-6-1-15-41-3-19716
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 $78,027 million as of the end of that week, compared to $77,291 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
TOTAL
1. Foreign Currency Reserves
1
a. Securities
Mall 20, 2005
Mall 27, 2005
77,291
78,027
Euro
Yen
TOTAL
Euro
Yen
TOTAL
11,618
13,802
25,420
11,652
14,581
26,233
0
Of which, issuer headquartered in the US.
0
b. Total deposits with:
11,336
b.i. Other central banks and BIS
2,923
14,259
2,931
11,353
14,284
b.ii. Banks headquartered in the US.
0
0
b.ii. Of which, banks located abroad
0
0
b.iii. Banks headquartered outside the US.
0
0
b.iii. Of which, banks located in the U.S.
0
0
15,159
15,100
11,412
11,368
11,041
11,041
0
0
2. IMF Reserve Position
2
3. Special Drawing Rights (SDRs)
4. Gold Stock
2
3
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
Mall 27, 2005
Mall 20, 2005
Euro
1. Foreign currency loans and securities
Yen
TOTAL
Euro
o
Yen
TOTAL
o
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
2.a. Short positions
0
2.b. Long positions
o
o
o
3. Other
o
o
III. Contingent Short-Term Net Drains on Foreign Currency Assets
May 20.2005
Euro
Yen
May 27.2005
TOTAL
Euro
Yen
TOTAL
o
o
2. Foreign currency securities with embedded options
o
3. Undrawn, unconditional credit lines
o
o
o
o
o
1. Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within 1 year
1.b. Other contingent liabilities
3.a. With other central banks
3.b. With banks and other financial institutions
Headquartered in the U.S.
3.c. With banks and other financial institutions
Headquartered outside the U. S.
4. Aggregate short and long positions of options in
foreign
Currencies vis-a-vis the U.S. dollar
4.a. Short positions
4.a.1. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.1. Bought calls
4.b.2. Written puts
Notes:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values,
and deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
2/ The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
JS-2483:
GldlCII1CHl
or 1 reasury Secretary John W. Snow <BR> on May Employment Re...
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FROM THE OFFICE OF PUBLIC AFFAIRS
June 3, 2005
JS-2483
Statement of Treasury Secretary John W. Snow
on May Employment Report
Today's labor market report shows that the economy keeps moving in the right
direction. The unemployment rate has dropped to 5.1 %, the lowest since
September 2001, and 78,000 jobs were created in May. The number of payroll jobs
is up by 3.5 million in the past two years and up by 900,000 in the past five months.
In these numbers we see the results of the President's commitment to low taxes
and economic growth. The underlying fundamentals of the economy are strong,
with last week's GDP report showing 3.5 percent real growth and much higher
wages and salaries than previously estimated. In this environment, it is no wonder
that the federal budget outlook is also showing improvement.
President Bush is committed to keeping the economy on the path of healthy growth
by making his tax cuts permanent, reducing the burden of frivolous lawsuits,
passing a national energy policy, and strengthening Social Security.
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FROM THE OFFICE OF PUBLIC AFFAIRS
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June 3, 2005
JS-2484
Treasury and IRS Announce New Rules On Tax Treatment Of Donations Of
Automobiles To Charity
WASHINGTON, DC -- Today the Treasury Department and IRS released guidance
on charitable deductions for donated vehicles. The American Jobs Creation Act
(AJCA) generally limits the deduction for vehicles to the actual sales price of the
vehicle when sold by the charity, and requires donors to get a timely
acknowledgment from the charity in order to claim the deduction
The AJCA does provide some limited exceptions under which a donor may claim a
fair market value deduction. Under the AJCA, if the charity makes a significant
intervening use of a vehicle--such as regular use to deliver meals on wheels-- the
donor may deduct the full fair market value. The guidance issued today explains
what a significant intervening use may include. For example, driving a vehicle a
total of 10,000 miles over a one year period to deliver meals is a significant
intervening use.
The AJCA also allows a donor to claim a fair market value deduction if the charity
makes a material improvement to the vehicle. Under the guidance, a material
improvement means major repairs that significantly increase the value of a vehicle,
and not mere painting or cleaning.
The guidance announced today also provides an additional exception to the sale
price limit that was not included in the AJCA. Today's guidance permits a donor to
claim a deduction for the fair market value of a donated vehicle if the charity gives
or sells the vehicle at a significantly below-market price to a needy individual, as
long as the transfer furthers the charitable purpose of helping a poor person in need
of a means of transportation.
The guidance also explains how to determine fair market value if one of these three
exceptions applies. Generally, vehicle pricing guidelines and publications
differentiate between trade-in, private-party, and dealer retail prices. The guidance
provides that the fair market value for vehicle donation purposes will be no higher
than the private-party price.
The AJCA also requires a donor to substantiate a deduction with an
acknowledgement from the charity that the deduction either reflects the sale price
or that one of the three exceptions applies. The AJCA imposes a penalty on the
charity for failure to provide a proper acknowledgement. The guidance also explains
the requirements for the content and the due dates for acknowledgements.
The Treasury Department and IRS request comments on the guidance and
suggestions for future guidance. The comment period will be open for the next 90
days.
A copy of the guidance is attached.
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REPORTS
•
Notice 2005-44
http://www.treas.gov/press/releases/js2484.htm
7/1/2005
Part III - Administrative, Procedural, and Miscellaneous
Charitable Contributions of Certain Motor Vehicles, Boats, and Airplanes
Notice 2005-44
SECTION 1. PURPOSE
This notice provides interim guidance regarding section 884 of the American
Jobs Creation Act of 2004, Pub. L. No. 108-357, 118 Stat. 1418 (2004), which adds
§§ 170(f)(12) and 6720 to the Internal Revenue Code. Section 170(f)(12) contains rules
for determining the amount that a donor may deduct for a charitable contribution of a
qualified vehicle the claimed value of which is more than $500, and related
substantiation and information reporting requirements. Section 6720 imposes penalties
on a donee organization that receives a contribution of a qualified vehicle subject to
§ 170(f)(12) and knowingly furnishes a false or fraudulent acknowledgment of the
contribution to the donor, or knowingly fails to furnish the acknowledgment. Sections
170(f)(12) and 6720 apply to contributions made after December 31,2004. This notice
also invites comments from the public regarding this notice and suggestions for future
guidance under §§ 170(f)(12) and 6720. The rules provided in this notice apply until
regulations are effective.
SECTION 2. BACKGROUND
Section 170(a) allows as a deduction, subject to certain limitations, any charitable
contribution (as defined in § 170(c)), payment of which is made within the taxable year.
2
Section 1.170A-1 (c)(1) of the Income Tax Regulations provides that if a charitable
contribution is made in property other than money, the amount of the contribution is the
fair market value of the property at the time of the contribution, reduced as provided in
§ 170(e) and §§ 1.170A-4 and 1.170A-4A.
In general, § 1.170A-1 (h) provides that if a taxpayer transfers to a charitable
organization cash or property that is partly a charitable contribution and partly in
consideration for goods or services, the taxpayer is allowed a charitable contribution
deduction for the excess, if any, of the cash or fair market value of the property
transferred over the fair market value of the goods or services the organization provides
in return. See also United States v. American 8arEndowment, 477 U.S. 105, 117-118
(1986); Rev. Rul. 67-246, 1967-2 C.8. 104.
Section 170(f)(12)(A)(i) provides that no deduction is allowed under § 170(a) for
a contribution of a qualified vehicle the claimed value of which is more than $500 unless
the donor substantiates the contribution by a contemporaneous written acknowledgment
that meets the requirements of § 170(f)(12)(8). Section 170(f)(12)(A)(i) also provides
that the substantiation rules of § 170(f)(8) do not apply to a contribution of a qualified
vehicle the claimed value of which is more than $500.
In general, to meet the requirements of § 170(f)(12)(8), the acknowledgment
must include: the name and taxpayer identification number of the donor; the vehicle
identification number; and certain certifications, depending on the use or disposition of
the vehicle by the donee organization. See section 3.03 of this notice for all of the
requirements applicable to acknowledgments. To be considered contemporaneous, the
3
acknowledgment must be obtained within 30 days of the contribution or the disposition
of the vehicle by the donee organization, as applicable. See § 170(f)(12)(C) and section
3.03 of this notice. A copy of the acknowledgment must be included with the donor's
tax return on which the deduction is claimed. Section 170(f)(12)(E) defines a qualified
vehicle as any (i) motor vehicle manufactured primarily for use on public streets, roads,
and highways, (ii) boat, or (iii) airplane, but the term does not include any property
described in § 1221 (a)(1) (e.g., property held primarily for sale to customers).
If a donee organization sells a qualified vehicle without any significant intervening
use or material improvement by the donee organization, the deduction allowed under
§ 170(a) may not exceed the gross proceeds received from the sale, which must be
reported on the acknowledgment. See § 170(f)(12)(A)(ii). Section 170(f)(12)(F)
provides that the Secretary may prescribe regulations or other guidance that exempts
from the gross proceeds limitation and certain certification requirements sales by the
donee organization that are in direct furtherance of the organization's charitable
purpose. Section 170(f)(12)(F) also provides that the Secretary shall prescribe such
regulations or other guidance as may be necessary to carry out the purposes of
§ 170(f)(12).
SECTION 3. DEDUCTIONS IN EXCESS OF $500
3.01 General rule
If the claimed value of a donated qualified vehicle exceeds $500, the amount of
the deduction may be limited under § 170(f)(12), depending on the use of the qualified
vehicle by the donee organization (as described in section 3.02 of this notice). In
4
addition, under § 170(f)(12) the donor must obtain from the donee organization an
acknowledgment that meets the requirements of section 3.03 of this notice, and include
the acknowledgment with the tax return on which the deduction is claimed.
3.02 Disposition or use by donee organization
(1) Qualified vehicle sold by donee organization
If the qualified vehicle is sold by the donee organization without a significant
intervening use or material improvement by the donee organization, then (except as
provided in section 3.02(3) of this notice) the deduction claimed by the donor may not
exceed the gross proceeds received from the sale of the qualified vehicle. In no event
may the deduction for a donated vehicle exceed the amount that is otherwise allowable
under § 170(a) (fair market value). The donor must obtain from the donee organization
an acknowledgment that meets the requirements of section 3.03 of this notice.
(2) Significant intervening use of or material improvement to a qualified vehicle
If the donee organization makes a significant intervening use of (within the
meaning of section 7.01 (1) of this notice) or material improvement to (within the
meaning of section 7.01 (2) of this notice) a qualified vehicle, the donor is not subject to
the gross proceeds limitation in section 3.02(1) of this notice. However, the deduction
claimed by the donor may not exceed the fair market value of the qualified vehicle. The
donor must obtain from the donee organization an acknowledgment that meets the
requirements of section 3.03 of this notice. In addition, the donor must substantiate the
fair market value as described in section 5 of this notice.
(3) Qualified vehicle sold at a price significantly below fair market value (or
5
gratuitously transferred) to needy individual in direct furtherance of donee organization's
charitable purpose
Pursuant to § 170(f)(12)(F), the Internal Revenue Service and the Treasury
Department hereby provide that the gross proceeds limitation in section 3.02(1) does
not apply to a sale on or after January 1, 2005, of a qualified vehicle to a needy
individual at a price significantly below fair market value, or a gratuitous transfer to a
needy individual, in direct furtherance of a charitable purpose of the donee organization
of relieving the poor and distressed or the underprivileged who are in need of a means
of transportation. See H.R. Conf. Rep. No. 755, 10sth Cong., 2d Sess. 750 (2004).
Mere application of the proceeds from the sale of a qualified vehicle to a needy
individual to any charitable purpose does not directly further a donee organization's
charitable purpose within the meaning of this section. The donor must obtain from the
donee organization an acknowledgment that meets the requirements of section 3.03 of
this notice. In addition, the donor must substantiate the fair market value as described
in section 5 of this notice.
3.03 Contemporaneous written acknowledgment under § 170(f)(12)
(1) General rule
Under § 170(f)(12), a donor must obtain a contemporaneous written
acknowledgment from the donee organization, and include the acknowledgment with
the tax return on which the deduction is claimed. All acknowledgments under
§ 170(f)(12) must include the name and taxpayer identification number of the donor, the
vehicle identification number, and the date of the contribution. Additional information is
6
required depending on the use of the qualified vehicle by the donee organization, as
described in sections 3.03(2) through 3.03(4) of this notice.
(2) Qualified vehicle sold by donee organization
For a contribution of a qualified vehicle that is sold by the donee organization
without any significant intervening use or material improvement by the donee
organization in a sale that is not described in section 3.02(3) of this notice, the
acknowledgment also must contain the date the qualified vehicle was sold, a
certification that the qualified vehicle was sold in an arm's length transaction between
unrelated parties, a statement of the gross proceeds from the sale, and a statement that
the deductible amount may not exceed the amount of the gross proceeds. The
acknowledgment is considered contemporaneous if the donee organization furnishes
the acknowledgment to the donor no later than 30 days after the date of the sale.
Example 1. On October 1, 2005, A contributes a qualified vehicle with a fair
market value of $1 ,300 to 0, an organization that is described in § 170(c). On
December 1, 2005, the qualified vehicle is sold without any significant intervening use or
material improvement in a sale not described in section 3.02(3) of this notice. Gross
proceeds from the sale are $1,000. On or before December 31, 2005, 0 provides an
acknowledgment to A containing A's name and taxpayer identification number, the
vehicle identification number, a statement that the date of the contribution was October
1, 2005 , a statement that the date of the sale was December 1, 2005, a certification that
the qualified vehicle was sold in an arm's length transaction between unrelated parties,
a statement that the gross proceeds of the sale are $1,000, and a statement that the
7
amount of A's deduction may not exceed the amount of the gross proceeds. The
acknowledgment meets the requirements of § 170(f)(12).
(3) Significant intervening use of or material improvement to a qualified vehicle
For a contribution of a qualified vehicle for which the donee organization intends
a significant intervening use or material improvement within the meaning of section 7.01
of this notice, the acknowledgment also must contain: 1) a certification and detailed
description of a) the intended significant intervening use by the donee organization and
the intended duration of the use, or b) the intended material improvement by the donee
organization; and 2) a certification that the qualified vehicle will not be sold before
completion of the use or improvement. The acknowledgment is considered
contemporaneous if the donee organization furnishes the acknowledgment to the donor
within 30 days of the date of the contribution.
Example 2. On October 1, 2005, B contributes a qualified vehicle to 0, an
organization that is described in § 170(c). 0 intends to use the vehicle in its charitable
activities, and the intended use is a significant intervening use within the meaning of
section 7.01 (1) of this notice. On or before October 31, 2005, 0 provides an
acknowledgment to B containing B's name and taxpayer identification number, the
vehicle identification number, a statement that the date of the contribution was October
1, 2005, a certification stating that 0 intends to make a Significant intervening use of the
qualified vehicle and stating the duration of this use, a detailed description of the
Significant intervening use, and a certification that the qualified vehicle will not be
transferred in exchange for money, other property, or services before completion of the
8
use by O. The acknowledgment meets the requirements of § 170(f)( 12).
(4) Qualified vehicle sold at a price significantly below fair market value (or
gratuitously transferred) to needy individual in direct furtherance of donee organization's
charitable purpose
For a contribution of a qualified vehicle that meets the requirements of section
3.02(3) of this notice, the acknowledgment also must contain a certification that the
donee organization will sell the qualified vehicle to a needy individual at a price
significantly below fair market value (or, if applicable, that the donee organization
gratuitously will transfer the qualified vehicle to a needy individual) and that the sale (or
transfer) will be in direct furtherance of the donee organization's charitable purpose of
relieving the poor and distressed or the underprivileged who are in need of a means of
transportation. The acknowledgment is considered contemporaneous if the donee
organization furnishes the acknowledgment to the donor no later than 30 days after the
date of the contribution.
Example 3. On October 1, 2005, C contributes a qualified vehicle to 0, an
organization that is described in § 170(c). O's charitable purposes include helping
needy individuals who are unemployed develop new job skills, finding job placements
for these individuals, and providing transportation for these individuals who need a
means of transportation to jobs in areas not served by public transportation. 0
determines that, in direct furtherance of its charitable purpose, 0 will sell the qualified
vehicle at a price significantly below fair market value to a trainee who needs a means
of transportation to a new workplace. On or before October 31, 2005, 0 provides an
acknowledgment to C containing C's name and taxpayer identification number, the
9
vehicle identification number, a statement that the date of the contribution was October
1, 2005, a certification that 0 will sell the qualified vehicle to a needy individual at a
price significantly below fair market value, and a certification that the sale is in direct
furtherance of O's charitable purpose as described above. The acknowledgment meets
the requirements of § 170(f)(12).
SECTION 4. DEDUCTIONS OF $500 OR LESS
4.01 Contemporaneous written acknowledgment required to substantiate a
qualified vehicle contribution of $250 but not more than $500
A contribution of a qualified vehicle with a claimed value of at least $250 (as
determined in accordance with section 5 of this notice) must be sUbstantiated by a
contemporaneous written acknowledgment of the contribution by the donee
organization. For a qualified vehicle with a claimed value of at least $250 but not more
than $500, the acknowledgment must contain the following information as required by
§ 170(f)(8): the amount of cash and a description (but not value) of any property other
than cash contributed; whether the donee organization provided any goods or services
in consideration, in whole or in part, for the cash or property contributed; and a
description and good faith estimate of the value of any goods or services provided by
the donee organization in consideration for the contribution, or, if such goods or
services consist solely of intangible religious benefits, a statement to that effect. To
meet the contemporaneous requirement of § 170(f)(8)(C), the acknowledgment must be
obtained by the donor on or before the earlier of the date on which the donor files a
return for the taxable year in which the contribution was made, or the due date
10
(including extensions) of that return.
4.02 Sale of qualified vehicle yields gross proceeds of $500 or less
If a donor contributes a qualified vehicle that is subsequently sold, in a sale not
described in section 3.02(3) of this notice, without any significant intervening use or
material improvement by the donee organization, and the sale yields gross proceeds of
$500 or less, the donor may be allowed a deduction equal to the lesser of the fair
market value of the qualified vehicle on the date of the contribution or $500, subject to
the terms and limitations of § 170. Under these circumstances, the donor must
substantiate the fair market value (see section 5 of this notice), and, if the fair market
value is $250 or more, must substantiate the contribution with an acknowledgment that
meets the requirements of § 170(f)(8).
Example 4. 0, an individual who itemizes tax deductions, contributes a qualified
vehicle to 0, an organization that is described in § 170(c). The qualified vehicle is sold
without any significant intervening use or material improvement by 0, and gross
proceeds of $400 are received. In accordance with section 5 of this notice, 0
determined that the fair market value of the qualified vehicle at the time of the
contribution was $800. Provided that 0 timely obtains a written acknowledgment that
meets the requirements of § 170(f)(8) (see section 4.01 of this notice), and subject to
the terms and limitations of § 170, 0 may be allowed a deduction not to exceed $500.
Example 5. The facts are the same as in Example 4, except that in accordance
with section 5 of this notice 0 determined that the fair market value of the qualified
vehicle at the time of the contribution was $450. Provided that 0 timely obtains a
11
written acknowledgment that meets the requirements of § 170(f)(8) (see section 4.01 of
this notice), and subject to the terms and limitations of § 170, D may be allowed a
deduction not to exceed $450.
SECTION 5. FAIR MARKET VALUE
A donor claiming a deduction for the fair market value of a qualified vehicle must
be able to substantiate the fair market value. Section 1.170A-1 (c)(2) provides that fair
market value is the price at which the property would change hands between a willing
buyer and a willing seller, neither being under any compulsion to buy or sell and each
having reasonable knowledge of relevant facts.
A reasonable method of determining the fair market value of a qualified vehicle is
by reference to an established used vehicle pricing guide. Many factors must be taken
into account when using a used vehicle pricing guide to determine fair market value. A
used vehicle pricing guide establishes the fair market value of a particular vehicle only if
the guide lists a sales price for a vehicle that is the same make, model, and year, sold in
the same area, in the same condition, with the same or substantially similar options or
accessories, and with the same or substantially similar warranties or guarantees, as the
vehicle in question. See, e.g., Rev. Rul. 2002-67, 2002-1 C.B. 873.
The Service and the Treasury Department intend to issue regulations under
§ 170 clarifying that for purposes of § 170, the dealer retail value listed in a used vehicle
pricing guide for a particular vehicle is not an acceptable measure of fair market value of
a similar vehicle. The regulations will clarify that, for purposes of § 170, an acceptable
measure of the fair market value of a vehicle, for contributions made after June 3, 2005,
12
and before the date regulations become effective, is an amount not in excess of the
price listed in a used vehicle pricing guide for a private party sale of a similar vehicle.
The regulations limiting the fair market value of a vehicle to an amount not in excess of
the private party sale price will apply to contributions of vehicles made after June 3,
2005. In addition, the Service and the Treasury Department will consider whether other
values, such as the dealer trade-in value, are appropriate measures of the fair market
value of a vehicle for purposes of § 170. Any regulations limiting the fair market value
of a vehicle to an amount less than the private party sale value will not apply to
contributions made prior to the date that regulations to that effect become effective.
SECTION 6. QUALIFIED APPRAISAL
A qualified appraisal is required for a deduction in excess of $5,000 for a qualified
vehicle if the deduction is not limited to gross proceeds from the sale of the vehicle.
See § 170(f)(11 )(A)(ii)(I). For the definition of qualified appraisal, see § 1.170A-13.
SECTION 7. ACKNOWLEDGMENTS BY DONEE ORGANIZATIONS
7.01 Requirements of significant intervening use; material improvement; sale or
gratuitous transfer to needy individual in direct furtherance of donee organization's
charitable purpose
As described in section 3.03 of this notice, the contents of the acknowledgment
required under § 170(f)(12) depend upon whether the donee organization sells a
qualified vehicle without any significant intervening use or material improvement,
intends to make a significant intervening use of or material improvement to a qualified
vehicle prior to sale, or, in direct furtherance of a charitable purpose of the organization
of relieving the poor and distressed or the underprivileged who are in need of a means
13
of transportation, intends to sell a qualified vehicle to a needy individual at a price
significantly below fair market value, or gratuitously transfer a qualified vehicle to a
needy individual. This section provides rules for donee organizations to use in
determining the contents of the acknowledgments required under § 170(f)(12).
(1) Significant intervening use
To constitute a significant intervening use, a donee organization must actually
use the qualified vehicle to substantially further the organization's regularly conducted
activities, and the use must be significant. Incidental use by an organization is not a
significant intervening use. Whether a use is a significant intervening use depends on
its nature, extent, frequency, and duration. See H.R. Cont. Rep. No. 755, 1oath Cong.,
2d Sess. 750-751 (2004). For this purpose, use by the donee organization includes use
of the qualified vehicle to provide transportation on a regular basis for a significant
period of time or significant use directly related to instruction in vehicle repair. However,
use by the donee organization does not include use of the qualified vehicle to provide
training in general business skills, such as marketing and sales.
Example 6. E contributes a qualified vehicle to 0, an organization that is
described in § 170(c). As part of its regularly conducted activities, 0 delivers meals to
needy individuals. 0 uses the qualified vehicle only a few times to deliver meals and
then sells the qualified vehicle. Because O's use is infrequent and incidental, there is
no significant intervening use.
Example 7. The facts are the same as in Example 6, except that 0 uses the
qualified vehicle to deliver meals every day for one year. Because O's use is significant
14
and substantially furthers a regularly conducted activity of 0, there is a significant
intervening use.
Example 8. The facts are the same as in Example 6, except that 0 does not
use the qualified vehicle to deliver meals every day. However, 0 drives the qualified
vehicle a total of 10,000 miles over a 1-year period while delivering meals. Because O's
use is significant and substantially furthers a regularly conducted activity of 0, there is a
significant intervening use.
(2) Material improvement
Material improvement includes a major repair or improvement that improves the
condition of the qualified vehicle in a manner that significantly increases the value.
Cleaning, minor repairs, and routine maintenance are not considered material
improvements. See H.R. Cont. Rep. No. 755, 108th Cong., 2d Sess. 751 (2004). To be
a material improvement of a qualified vehicle, the improvement may not be funded by
an additional payment to the donee organization from the donor of the qualified vehicle.
For purposes of § 170(f)(12), services that are not considered material
improvements include: 1) application of paint or other types of finishes (such as
rustproofing or wax); 2) removal of dents and scratches; 3) cleaning or repair of
upholstery; and 4) installation of theft deterrent devices.
(3) Sale or gratuitous transfer to needy individual in direct furtherance of donee
organization's charitable purpose
As provided in section 3.02(3) of this notice, the gross proceeds limitation does
not apply to a sale of a qualified vehicle at a price Significantly below fair market value
15
(as described in section 5 of this notice), or a gratuitous transfer of a qualified vehicle, to
a needy individual if supplying a vehicle to a needy individual is in direct furtherance of a
charitable purpose of the donee organization of relieving the poor and distressed or the
underprivileged who are in need of a means of transportation.
7.02 Information reporting by donee organizations
Section 170(f)(12)(O) requires a donee organization to provide to the Secretary
the information given to the donor in the acknowledgment required under § 170(f)(12).
The time and manner rules for information reporting required under § 170(f)(12)(O) will
be addressed in separate guidance. See section 3.03 of this notice for guidance on the
content of the acknowledgment.
7.03 Penalties for false or fraudulent acknowledgments and for knowing failure
to furnish proper acknowledgment
Section 6720 imposes penalties on any donee organization required under
§ 170(f)(12)(A) to furnish an acknowledgment to a donor that knowingly furnishes a
false or fraudulent acknowledgment, or knowingly fails to furnish an acknowledgment in
the manner, at the time, and showing the information required under § 170(f)(12) or
regulations thereunder. An acknowledgment containing a certification described in
section 3.03(3) or (4) of this notice shall be presumed to be false or fraudulent, and
therefore subject to a penalty under § 6720, if the qualified vehicle is sold to a buyer,
other than a needy individual as described in section 7.01 (3) of this notice, without a
significant intervening use or material improvement within six months of the date of the
contribution. The penalty applicable to an acknowledgment relating to a qualified
16
vehicle described in section 3.02(1) of this notice is the greater of (1) the product of the
highest rate of tax specified in § 1 (currently 35%) and the sales price stated on the
acknowledgment, or (2) the gross proceeds from the sale of the qualified vehicle. The
penalty applicable to an acknowledgment relating to any other qualified vehicle the
claimed value of which is more than $500 is the greater of (1) the product of the highest
rate of tax specified in § 1 and the claimed value of the qualified vehicle, or (2) $5,000.
Example 9. 0, an organization that is described in § 170(c), receives a
contribution of a qualified vehicle that is a subcompact car that has been driven more
than 100,000 miles. The substance of O's charitable activities involves regularly
delivering food and other needed goods to the rural poor at remote locations. For this
purpose, 0 needs three large vehicles suitable for delivering heavy loads across rugged
terrain. Among many contributed qualified vehicles, 0 has identified three suitable
vehicles that 0 intends to use for this purpose. The subcompact car is not suitable for
O's use. 0 provides an acknowledgment to the donor of the subcompact car in which 0
knowingly makes a false certification of the intended use of the qualified vehicle and the
duration of such intended use. The donor of the qualified vehicle claims a deduction of
$2,300. 0 is subject to a penalty under § 6720 for knowingly furnishing a false or
fraudulent acknowledgment to the donor. The amount of the penalty is $5,000, because
that amount is greater than $805, the product of the claimed value ($2,300) and 35%.
Example 10. 0, an organization that is described in § 170(c), receives a
contribution of a qualified vehicle. The qualified vehicle is sold without any significant
intervening use or material improvement by O. Gross proceeds from the sale are $300.
17
o provides an acknowledgment to the donor in which 0
knowingly includes a false or
fraudulent statement that the gross proceeds from the sale of the vehicle were $1,000.
o is subject to a penalty under § 6720 for knowingly furnishing a false or fraudulent
acknowledgment to the donor. The amount of the penalty is $350, the product of the
sales price stated in the acknowledgment ($1,000) and 35%, because that amount is
greater than the gross proceeds from the sale of the vehicle ($300).
7.04 Sections 170(f)( 12)(0) and 6720 inapplicable if donor claims deduction of
$500 or less
For contributions within the scope of the rules described in section 4 of this notice
(regarding deductions of $500 or less), §§ 170(f)(12)(D) and 6720 do not apply.
SECTION 8. EFFECTIVE DATE AND INTERIM GUIDANCE FOR DONORS AND
DONEE ORGANIZATIONS
8.01 Effective date and transition rules.
This notice generally is effective for contributions made on or after January 1,
2005. However, the following transition rules are provided. A contemporaneous written
acknowledgment that is obtained on or before July 3, 2005, will be treated as satisfying
the requirements of § 170(f)(12)(A) if the acknowledgment contains all of the information
specified in § 170(f)(12)(8), even if the acknowledgment does not include the date the
qualified vehicle is sold (as required by section 3.03(2) of this notice), or a detailed
description of the intended significant intervening use or material improvement by the
donee organization (as required by section 3.03(3) of this notice). In the case of
contributions described in section 3.02(3) of this notice regarding qualified vehicles sold
at a price significantly below fair market value (or gratuitously transferred) to needy
18
individuals, the requirement of section 3.03(4) of this notice that an acknowledgment
contain the information described in that section is effective for contributions made on or
after January 1, 2005. For such contributions made on or before September 1, 2005,
the acknowledgment must be obtained by the donor on or before October 1, 2005.
8.02 Extension of time to obtain acknowledgments under § 170(f)(12) for
contributions made on or before September 1, 2005
Pursuant to § 170(f)(12)(F), the Service and the Treasury Department have
determined that it is appropriate to provide donors an extension of time to obtain the
contemporaneous written acknowledgment required by § 170(f)(12)(A). Therefore, for
contributions made on or before September 1, 2005, a written acknowledgment will be
considered contemporaneous for purposes of § 170(f)(12)(C) if it is obtained within the
time specified in § 170(f)(12)(C) or, if later, on or before October 1, 2005.
8.03 Form of acknowledgment
A donee organization may provide an acknowledgment to a donor containing the
information required under § 170(f)(12) in any reasonable manner. The Service and the
Treasury Department will be providing Form 1098-C for reporting to the Service the
information required to be reported under § 170(f)(12)(D). A copy of Form 1098-C may
be used by a donee organization to provide a contemporaneous written
acknowledgment to a donor pursuant to § 170(f)(12).
8.04 Satisfaction of contemporaneous requirement for purposes of § 6720
Section 6720 imposes penalties on any donee organization that knowingly fails to
furnish an acknowledgment within the time required under § 170(f)(12) or the
19
regulations thereunder. See section 7.03 of this notice. A donee organization that
provides a contemporaneous written acknowledgment that is treated as
contemporaneous under sections 8.01 and 8.02 of this notice will be treated as having
furnished the acknowledgment within the time required under § 170(f)(12) for purposes
of § 6720.
SECTION 9. REQUEST FOR COMMENTS
The Service and the Treasury Department invite comments regarding this notice
and suggestions for future guidance under §§ 170(f)(12) and 6720. In particular,
comments are requested on which markets are appropriate for measuring the fair
market value of vehicles for purposes of § 170, and for determining whether a sale was
at a price significantly below fair market value for purposes of sections 3.02(3) and
7.01 (3) of this notice. Commentators already have suggested that the most appropriate
market for measuring the fair market value of vehicles is the market either for private
party sales or for dealer trade-in transactions. Comments should address the factors
that distinguish private party sales and dealer trade-in transactions, and which type of
transaction is most similar to a charitable contribution. As discussed in section 5 of this
notice, any regulations limiting the fair market value of a qualified vehicle for purposes
of § 170 will not require use of a value less than the private party sale value for
contributions made before the date the regulations become effective, but may require
use of a value less than the private party sale value after that date. Comments should
refer to Notice 2005-44 and be submitted by September 1, 2005, to:
Internal Revenue Service
20
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044
Attn: CC:PA:LPD:PR
Room 5203
Alternatively, comments may be submitted electronically via e-mail to the following
address: Notice.Comments@irscounsel.treas.gov. All comments will be available for
public inspection and copying.
SECTION 10. PAPERWORK REDUCTION ACT
The collections of information in this notice have been reviewed and approved by
the Office of Management and Budget (OMB) in accordance with the Paperwork
Reduction Act (44 U.S.C. 3507) under control number 1545-1942.
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 notice are in sections 3, 4, 7, and 8. The
collections of information in sections 3, 4, and 8 are required from donors to satisfy the
substantiation requirements of § 170(f)( 12). The collections of information are required
from donors to obtain a benefit. The likely respondents are individual donors.
The collections of information in sections 3,4, 7, and 8 are required from donee
organizations to satisfy the donee reporting requirements of § 170(f)(12) and avoid the
penalties in § 6720. The collections of information are mandatory. The likely
respondents are tax-exempt charitable organizations.
The estimated total annual reporting burden is 3,041 hours for donors and
21
21,500 hours for donee organizations.
The estimated annual burden per donor varies from 1 minute to 5 minutes. The
estimated annual burden per donee organization varies from 30 minutes to 16 hours,
depending on individual circumstances. The estimated average annual burdens are 1
minute for donors and 5 hours for donee organizations. The estimated number of
donors is 182,500 and the estimated number of donee organizations is 4,300.
The estimated annual frequency of responses (used for reporting requirements
only) is annually.
Books or records relating to a collection of information must be retained as long
as their contents may become material in the administration of any internal revenue law.
Generally, tax returns and return information are confidential, as required by § 6103.
SECTION 11. DRAFTING INFORMATION
The principal author of this notice is Patricia M. Zweibel of the Office of Associate
Chief Counsel (Income Tax & Accounting). For information regarding whether a
transfer is in direct furtherance of a donee organization's charitable purpose, contact
Sean Barnett of the Tax Exempt and Government Entities Division at (202) 283-8913.
For information regarding penalties under § 6720, contact Donnell Rini-Swyers of the
Office of Associate Chief Counsel (Procedure and Administration) at (202) 622-4910.
For information regarding information reporting by a donee organization, contact Mr.
Barnett or Ms. Rini-Swyers. For further information regarding the remainder of this
notice, contact Ms. Zweibel at (202) 622-5020 (not a toll-free call).
js-2485. Statement ot <br>Acting Under Secretary for International Affairs Randal K. Qu... Page 1 of 6
FROM THE OFFICE OF PUBLIC AFFAIRS
June 7, 2005
js-2485
Statement of
Acting Under Secretary for International Affairs Randal K. Quarles
before the Senate Banking Committee
Subcommittee on International Trade and Finance
IMF Reform - Toward an Institution for the Future
Thank you Chairman Crapo, Ranking Member Bayh, and other members of the
Subcommittee. I am pleased to be here today to talk about our agenda as a
shareholder of the International Monetary Fund (IMF).
Reform of the IMF has been a high priority since the start of the first Bush
Administration. Former Under Secretary John Taylor appeared before the full
Committee last May and summarized our work to date in both the IMF and World
Bank. He laid out the underlying rationale for our quest to update these institutions noting the growing role of international debt securities, the increase in the volume of
private capital flows, and the increasing interconnection between financial markets.
As he said at the time, those factors, combined with the crises of the late 1990s,
made abundantly clear that greater predictability, accountability and more
systematic behavior on the part of the official sector were vital to enhance the
international financial policy framework.
The Path of Reform
The International Financial Institutions Advisory Commission (IFIAC), chaired by Dr.
Allan Meltzer, helped provide impetus for reform. The Commission's report in March
2000 provided important insights about how the IMF and other international
financial institutions could better realize their goals. The Commission's
recommendations contributed to a serious debate about IMF reform, in which this
Committee was an active participant. With strong advocacy from Treasury, the IMF
has acted on reform. Specific steps by the IMF have been detailed in a series of
annual reports to Congress - most recently in October 2004. Let me summarize
some of the highlights over the last five years:
• The international community has clarified the limits and criteria for largescale official sector lending. Consistent with the Meltzer recommendations,
there has been no quota increase in the IMF. With IMF liquidity at historic
highs, there is no need to add to its resources. Further, we have
encouraged the presumption that the IMF, rather than governments, is
responsible for providing large scale loan financing in the face of crises.
This presumption provides an overall budget constraint and thereby an
overall limit on loan assistance. Further, requests for large loans that
represent exceptional access to IMF resources now face new procedures,
including a higher burden of proof in the form of a special report that
documents how IMF financing will support strong policies and a rapid return
to private markets by the borrowing country.
• IMF programs are now more focused on its core macroeconomic areas of
expertise. In work on lending programs, the IMF is more tightly focused on
its core areas of monetary policy, fiscal policy, the balance of payments,
exchange rates, and the financial sector. Further, the IMF relies more
heavily on more robust analytical tools, particularly for risk assessment,
enhancing its capacity to anticipate and deter financial crises.
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•
We achieved changes to reorient IMF lending to focus more on short-term
financing, discourage casual or excessive use, and provide incentives to
repay as quickly as possible. This includes higher interest rates for higher
levels of access to discourage excessive reliance on Fund resources. It also
includes limited use of Extended Arrangements, to reinforce the focus on
making resources available only for the short term. These changing
incentives are having an effect.
• The IMF is much more transparent than it was five years ago. Seventy-eight
percent of staff reports for lending arrangements and Article IVs are made
public. The IMF provides extensive information publicly about its financial
operations. And the IMF has a permanent, independent evaluation office
that has been producing high-quality reviews of specific IMF policies and
activities.
• As part of the effort to correct incentives and prepare for more effective
resolution of crises that occur, there has also been a major step forward on
making the process of restructuring sovereign bonds more orderly. In that
regard, the Administration worked closely with other countries to make
routine the use of collective action clauses (CACs) in sovereign bond
documentation to promote orderly restructuring and reduce disruption. One
year after the launch of this initiative, Mexico responded by including CACs
in its New York law governed bonds. Brazil, Korea, South Africa, and Turkey
soon followed, and inclusion of CACs quickly became standard market
practice.
These are major steps forward. Yet we are not prepared to relax our efforts. More
needs to be done to ensu re that the 1M F is positioned for the challenges off the 21 st
century. In partnership with the G-7 and others, the United States has called for a
strategic review to identify changes needed to make the IMF (and the World Bank)
more responsive, relevant, and helpful to their members. The IMF has taken up this
charge and is now undertaking a review of its role and strategy for the medium
term.
Pushing the Next Wave of Reform - U.S. Priorities
Like any other institution, the IMF must continually examine itself to make sure that
it is doing the best it can to achieve its core objectives. Fostering international
monetary cooperation and balance of payments adjustment to support international
financial stability and economic growth clearly remains its key aim. The purpose of
this review is to make sure the institution is doing all it can to advance this goal.
As we engage in this review with other members of the IMF, the United States has
several key priorities: strengthening IMF surveillance and crisis prevention; creating
a more effective way for the IMF to actively support strong policies without lending;
and realigning the IMF's role in low income countries to achieve better results. Let
me explain what we have in mind in each of these areas.
Strengthening Surveillance and Crisis Prevention
The IMF's core mission is to oversee the international monetary system to ensure
its effective operation, and for that purpose to exercise surveillance of the
macroeconomic and exchange rate policies of its members. In this way the IMF
should help prevent crises and foster adjustment in global imbalances.
This process offers the IMF a unique opportunity to assess risks, influence policy
and help prevent crises. Indeed, surveillance has proven a very useful tool. Yet the
execution of surveillance needs further enhancement. Action is needed, for
instance, to further tighten the focus and selectivity of analysis. We also believe that
the IMF needs to integrate more fully capital market and financial sector analysis
into the daily life of the Fund. In addition, the IMF has a critical role to play in
exercising firm surveillance over its members' exchange rate policies to promote
international adjustment. In recent months the IMF has called for multilateral
actions, including greater exchange rate flexibility in emerging Asia, and particularly
in China.
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Promoting Strong Policies without Lending
The IMF has traditionally had two levels of engagement with member countries either the IMF reviews economic performance and policies annually through
surveillance or, at the member's request, the IMF provides financial support
conditioned on implementation of economic reforms that the IMF helps design and
monitor. There is no middle ground between routine review and conditional finance.
The United States strongly believes that the IMF needs a new tool to provide for
structured engagement in support of strong economic policies where there is no
need for borrowing. We have proposed a new non-borrowing program to serve this
role. Participation would be voluntary for member countries. The process of laying
out an economic program would be led by each participating country, with the
opportunity for country authorities to engage closely with IMF staff as they work to
strengthen their country's macroeconomic policy framework and macroeconomic
institutions.
The proposal now has the support of our partners in the G-7, and we expect it to be
taken up by the IMF's Executive Board this summer. Demand for such an
arrangement is already emerging from IMF member countries. We expect that
some countries may actively seek to convert their borrowing relationship with the
IMF to this basis and that others will welcome such a non-lending arrangement
once their existing program expires, as a way of maintaining a signal from the IMF
about the strength of their economic policies. This signal could be particularly useful
to countries with strong macroeconomic foundations that nonetheless continue to
depend on other donors for development financing or that are transitioning to
market-based financing away from development finance. And it should help protect
IMF resources for those countries with specific balance of payments needs.
Supporting Low Income Countries Effectively
Low-income countries face enormous economic and development challenges.
Engaging with these countries to help them achieve macroeconomic stability through policy advice, technical assistance, and financing when appropriate - is a
vital part of the IMF's mission. Yet the Fund is not a development institution, and its
financial operations should reflect its mission to provide short-term balance of
payments financing rather than longer-term development aid.
While there is disagreement among economists about the impact of IMF assistance
on economic growth in low income countries, the growth performance of many of
these countries has been disappointing over the past two decades. A central
challenge for the IMF is to improve the effectiveness of its own engagement in low
income countries to help them achieve sustained improvement in economic
outcomes.
Prolonged use of IMF resources is a serious problem, particularly for low-income
borrowers, and is exacerbated by the Fund's practice of rolling-over existing
exposure. Nearly all (30 of 32) countries with PRGF programs at the start of 2005
had at least two prior PRGF arrangements, each of which lasts three years.
Prolonged reliance on IMF support can impede domestic ownership of economic
policies and the development of institutions and can blur the IMF's short-term
balance of payments role vs. the longer-term development finance role of the
MOBs.
We have encouraged the IMF to undertake a close examination of its approach in
low-income countries - with a view to helping these countries achieve better
economic results. Good economic policies are fundamental to the efforts of low
income countries to increase economic growth and improve the lives of their
citizens. The IMF needs to find a way to support good policies more effectively, and
in a way that is consistent with its role as providing temporary and short-term
assistance in response to balance of payments shocks.
As a top priority, the IMF needs to establish and maintain high standards for its
support for countries' economic programs. Weak or half-hearted policy efforts
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should not merit IMF financial support, in emerging markets or low-income cases.
When countries are pursuing strong policies, the PRGF should be flexible enough
to respond to countries facing short-term adverse developments in their balance of
payments. The PRGF also needs to be available to support needed
macroeconomic reform over the medium term. It should not, however, be geared to
provide long-term development finance. Indeed, we believe that the proposed nonborrowing program that I have described for you above would offer a particularly
important tool for low-income countries that have progressed through stabilization
and no longer need to rely on IMF financing.
And perhaps most important, helping low-income countries depends on ending the
lend-and-forgive cycle, so that they can move into an era of sustainable debt. The
IMF has recently implemented a new debt sustainability framework, which
establishes new standards for determining whether countries can or should take on
additional debt.
It is critical that the IMF and other lenders integrate this framework into their
operations. This, along with increased use of grants in IDA and the AfDF, as well as
further bilateral and multilateral debt relief in those institutions for the HIPC
countries, can provide a clear path to end the cycle of repeat lending and debt
problems holding back the poorest countries.
With respect to debt relief, the Bush Administration has put forward a bold proposal
that would relieve the debt burdens of poor countries. The proposal calls for
immediate action to provide up to 100 percent relief on IDA and AfDF loans to the
Heavily Indebted Poor countries (HIPCs). Action on this debt is critical to putting
these poor countries on a sustainable path.
Any debt relief in the IMF would need to be financed from existing resources in the
IMF.
We do not believe that gold sales - whether they were to be executed in the market
or "off-market" - are necessary or warranted. I know that the issue of gold is of
particular interest. Treasury has repeatedly voiced our opposition to a sale of IMF
gold. Gold provides important underlying strength to the IMF's financial position.
Selling IMF gold requires an 85 percent majority vote; since the United States has a
17.1 percent voting share in the IMF, our agreement is required before such a sale
can go forward. Congressional approval is required for the U.S. Executive Director
to vote in favor of such an IMF gold sale.
Modernizing the IMF's Governance
The IMF is accountable to its 184 member governments through a weighted voting
structure aligned with countries' global economic standing. However, change in the
world economy has outpaced that in the IMF's voting structure, particularly given
fast-paced growth in emerging market economies and integration in Europe.
We feel strongly that the IMF is a financial and shareholder institution the
governance of which should evolve along with the world economy. If countries are
growing strongly and making increasing contributions to the global economy, then
there should be a parallel enhancement of their position in the IMF. This is vital to
maintaining the goodwill of members, on which the IMF relies to make its lending
possible, and to preserving the centrality of the IMF in the global financial system.
Beginning in October 2004, Secretary Snow has emphasized that change is
needed to address the growing disparity between the IMF's governance structure
and the realities of the world economy. In April, he took a further step when he
asserted that it is time to examine these issues now - and that progress should not,
and indeed need not, be linked to an increase in the IMF's quota resources, which
is not necessary given the current strength of the IMF's financial position. In
particular, he has suggested that shifting quotas within the existing total could yield
substantial progress. This could allow for quota shares to reflect the advent of
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monetary union in Europe and the increasing role of fast-growing emerging
markets, especially in Asia.
Change will not come quickly or easily. The issues are complex, and extensive
dialogue and cooperation will be needed to find a way forward. Yet we believe the
effort is worthwhile - and indeed essential to the long-term effectiveness of the
institution. An IMF for the future must be an IMF in which all have a stake.
Argentina
One of the important tasks that has faced the IMF over the last four years has been
dealing with the situation in Argentina, so let me say a few words about Argentina's
economy and engagement with the IMF.
The Argentine economy continues to recover from the sharp contraction that
accompanied the 2001-2 financial crisis. Real GOP grew 9% in 2004, following
growth of 8.8% in 2003. Inflation ended 2004 at 6% after spiking to 41 % at the end
of 2002. The exchange rate has been roughly stable since mid-2003 and reserves
have grown $11.5 billion since the end of 2002.
These positive results have been underpinned by better macroeconomic policy
since the crisis. The federal government increased its primary surplus to nearly 4%
of GOP in 2004 from a zero balance in 2001. Monetary policy succeeded in limiting
the growth of the money supply to prevent an upward inflationary spiral.
The United States has supported IMF engagement with Argentina through the
transitional program launched in January 2003 and the three-year program
launched in September 2003. The purpose of these programs was to lock in
macroeconomic stability and attack impediments to growth. These programs
include essential reforms addressing Argentina's fiscal problems related to federalprovincial fiscal relations and weak tax administration, restoring the health of the
banking sector, and improving the investment climate. The IMF program helped
establish a basis for facilitating the normalization of Argentina's relations with its
external creditors.
Argentina has continued to perform strongly on its macroeconomic targets.
However, concerns remain regarding the implementation of its structural policy
commitments under its IMF program. The IMF has not made any disbursements to
Argentina since March 2004.
With respect to the debt restructuring, in January 2005 Argentina launched a debt
exchange offer to restructure its $82 billion in principal claims of defaulted debt.
Over 76% of creditors accepted Argentina's offer, while 24% (representing $20
billion in principal claims) did not.
With the recent settlement of the debt exchange, Argentina is now returning its
focus to negotiating a new arrangement with the IMF. A key issue will be the
development of an Argentine strategy to resolve the rest of the defaulted debt.
In addition to completing its debt restructuring, Argentina needs policies that
support sustained growth so that it can continue to raise living standards and meet
its financial obligations. Sustained growth requires improving the investment climate
in order to attract private capital. Resolving the situation in the utilities sector will be
an especially important signal to investors in this regard. Growth also requires
locking-in fiscal improvements by fixing federal-provincial fiscal relations to prevent
the provincial overborrowing that contributed to the 2001 financial crisis. Finally,
continued strengthening of the banking sector will be important for providing the
credit Argentina needs to grow.
Conclusion
I appreciate the opportunity to reflect on the path of IMF reform and layout for you
the Administration's priorities as we continue to press for change in this vital
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institution. I believe that important progress has been made. Yet there is more to be
done to ensure that the IMF operates effectively. I hope my remarks today make
clear our commitment to maintain the momentum of reform.
I welcome your questions.
-30-
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FROM THE OFFICE OF PUBLIC AFFAIRS
June 8, 2005
JS-2486
Prepared Remarks of Acting Under Secretary
for
International Affairs Randal K. Quarles
Press Conference: Pre-G8 Finance Ministers Meetings
Good morning. Secretary Snow will attend a meeting of Finance Ministers in
London on Friday and Saturday to help prepare for the Gleneagles Summit.
Our primary focus in these discussions remains growth. The global expansion
remains robust, yet there are challenges to be faced to sustain strong growth going
forward.
The U.S. economy is on sound footing, and growth is strong. First quarter
performance was robust at 3.5 percent. Solid gains in consumer expenditures,
prompted by increased hiring and strong household net worth, have supported GDP
growth. The labor market has improved substantially, with payroll jobs up 3.5 million
in the last two years and the unemployment rate at its lowest level since September
2001. In sum, growth is well balanced, with expanding business and residential
investment, and strong household demand each contributing.
America's economy is moving in the right direction. President Bush is committed to
keeping the economy on the path of healthy growth. Fiscal consolidation is a top
priority. Already, we are seeing progress. Increased hiring, growth in demand, and
expanding profits have led to a sizable increase in tax revenue so far this fiscal
year. As a result, the Federal budget balance is likely to come in well below the
$427 billion that had been projected for fi~cal year 2005. The Administration
remains steadfast in its effort to create the conditions for strong growth well into the
future by making the tax cuts permanent, reducing the burden of frivolous lawsuits,
passing a national energy policy, and strengthening social security.
Japan's economy had a welcome rebound in the first quarter, although growth
forecasts remain modest and deflation persists. Growth in Europe has been
generally disappointing, and the outlook for domestic demand is weak.
As the Secretary has emphasized, global adjustment is a shared responsibility. The
United States is doing its part by addressing the fiscal deficit. But our actions alone
will not be sufficient to unwind global imbalances. Europe and Japan must continue
to adopt and implement vigorous and necessary structural reforms to lay the
foundation for vibrant growth.
During the course of the weekend, Secretary Snow and his colleagues will meet
with Finance Ministers from key emerging market countries - India, Brazil, South
Africa, and China. These countries represent an increasing share of the global
economy and will play an ever larger role over time. They will bring important
experience and perspectives to the discussion. The Secretary also looks forward to
meeting bilaterally with a number of these Ministers.
I expect that development will be a key focus of discussions this weekend. The
plight of the poorest countries is a high priority for all of us. The United States is
keenly aware of the challenges faced by these countries, and we are actively
engaged in supporting economic reform and promoting long-term growth in Africa
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and beyond. Through our Millennium Challenge Corporation, we have taken the
lead in identifying and implementing more effective ways to provide development
assistance. The MCC aims to assist countries that govern justly, invest in people,
and encourage economic freedom - policies that are fundamental to achieving
growth, catalyzing investment, and ensuring that foreign assistance has a real
effect. Furthermore, through the President's Emergency Plan for AIDS Relief
(PEPFAR), the United States is leading the international fight against the
debilitating HIV/AIDS epidemic.
Helping low-income countries depends on ending the lend-and-forgive cycle, so
that they can move into an era of sustainable debt. The Bush Administration has
put forward a bold proposal to provide up to 100 percent relief on IDA and African
Development Fund loans to the Heavily Indebted Poor countries. This plan also
would include additional resources for low-income countries, which will both finance
important new development projects and preserve the long-term financial strength
of these international financial institutions. The removal of unsustainable external
debt and the delivery of additional development resources will provide significant
support for countries' efforts to reach the development goals of the Millennium
Declaration.
Free trade is also fundamental to a vibrant world economy. Fully open financial
services sectors can make important contributions for growth. I expect this is an
issue that Secretary Snow will raise with other Ministers, with the goal of working
together for an ambitious result at the Hong Kong WTO Ministerial. Similarly, the
Secretary will likely also take notice of the role free trade can play in solidifying the
gains in democracy, such as in the Administration's Middle East free trade
agreements (e.g., Morocco, Bahrain) and DR-CAFTA, which is currently being
considered by Congress. We will also address the importance of the financial
services agenda with European finance ministries and key EU regulators in a trip to
The Netherlands, Belgium, France and Germany immediately following our
Ministers' meeting in London.
Let me close by drawing to your attention our ongoing work to combat terrorist
financing. This will be another key item on the Ministers' agenda. I expect Ministers
will review the progress made by Financial Experts to implement their Action Plan
to strengthen the process of multilateral asset freezing, improve information
sharing, and explore the possibility of broadening the application of new financial
tools to disrupt serious crime. In regard to the latter, Secretary Snow will share with
his colleagues the tools that we, in the United States, have available via Section
311 of the U.S. Patriot Act. These tools enable us to adopt a graduated approach,
ranging from enhanced due diligence to the closure of correspondence accounts.
Thank you.
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FROM THE OFFICE OF PUBLIC AFFAIRS
June 9, 2005
JS-2487
Syrian Company, Nationals Designated by Treasury for
Support to Former Saddam Hussein Regime
The U.S. Department of the Treasury today announced the designation of a Syrianbased company and two senior officials that acted on behalf of Saddam Hussein's
fallen regime.
SES International Corp., based in Damascus, General Zuhayr Shalish and Asif
Shalish were designated today pursuant to Executive Order 13315, which is aimed
at blocking property of the former Iraqi regime, its senior officials and their family
members and those who act for or on their behalf.
"Zuhayr and Asif used SES as a vehicle to put military goods into the hands of
Saddam Hussein and his regime, all while evading UN sanctions," said Stuart
Levey, the Treasury's Under Secretary for Terrorism and Financial Intelligence.
SES, which is owned by Zuhayr and managed by Asif, acted as a "false end user"
for Iraq, helping to procure defense-related goods for the Iraqi military. As a Syrian
company, SES was able to provide exporters in multiple countries with end-user
certificates indicating Syria, rather than Iraq, as the final destination for the exported
goods. SES would then arrange for the items to be transshipped to Iraq, which
allowed the Iraqi regime to obtain military goods in contravention of UN sanctions.
Zuhayr and Asif acted on behalf of the former Iraqi regime and several of its senior
officials. Zuhayr and Asif provided personal assistance to Hussein's oldest son,
Uday Saddam Hussein, and to former Iraqi Presidential Secretary, Abid Hamid
Mahmud al-Tikriti, both of whom were previously designated under EO 13315.
Information shows that Uday greatly benefited from his relationship with Zuhayr,
Asif and SES. Notably, Zuhayr and Asif reportedly worked at the request of Uday
to repatriate Adib Shaban, Uday's assistant, after Adib had fled from Iraq.
According to information available to the U.S. Government, Zuhayr was involved in
efforts to help Abid Hamid Mahmud al-Tikriti flee Iraq during Operation Iraqi
Freedom. There is reason to believe he offered to help Hussein's younger son,
Qusay Saddam Hussein, leave Iraq.
U.S. Government information also indicates that before October 2003, al-Tikriti
allegedly transferred large amounts of money to Zuhayr, who in turn earmarked the
money as a monthly allowance for Abid Hamid Mahmud al-Tikriti's family.
Information available to the U.S. Government indicates that, since the fall of the
former Iraqi regime, SES has employed or supported a number of former regime
officials, notably Munir Mamduh Awad al-Qubaisi. the director of the AI Basha'ir
Trading Company. AI Basha'ir was one of Iraq's largest arms procurement front
companies. Both Munir and AI Basha'ir were previously designated under EO
13315.
General Zuhayr Shalish
AKAs: Brigadier General Thu AL-HEMMEH
AL-SHALlSH, Brigadier General Dhu AI-Himma
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Major General Dhu Himma SHALEESH
Thu AI Hima SHALEESH
Dhu AI-Himma SHALISH
Dhuil Himma SHALISH
Zuhilma SHALISH
DOB: Circa 1956
POS:
AI-Ladhiqiyah, Syria
Nationality: Syrian
Address: Damascus, Syria
Asif Shalish
AKA: Dr. Asef AL-SHALISH
AKA: Assef ISSA
AKA: Asef Isa SHALEESH
AKA: Dr. Assef Essa SHALEESH
DOB: January 1, 1959
PPN: 4713277 (Syria)
Nationality: Syrian
Address: Damascus, Syria
SES International Corp.
AKA: SES Automobile
AKA: SES Group
Address 1: Harasta Homs Highway
P.O. Box 241
Damascus, Syria
Address 2: Harsta Hams Road
P.O. Box 291
Damascus, Syria
Today's action is taken pursuant to Executive Order 13315 which blocks property
and interests in property of senior officials of the former Iraqi regime, and those
acting for or on their behalf, within the possession or control of U.S. persons.
For more information on additional Treasury actions against the former Iraqi regime,
please visit the following links:
Treasury Designates 16 Family Members of the Former Iraqi Regime, Submits
191 Iraqi Entities to United Nations
http://www.treas.gov/press/releases/js1242.htm
Treasury Designates Front Companies, Corrupt Officials Controlled by
Saddam Hussein's Regime
bJ1R:llwww.treas.gov/press/releases/js1331.htm
Uday Saddam Hussein's Inner Circle Designated by Treasury
http://www.treas.gov/press/releases/js1600.htm
U.S., Iraq, U.K. Jointly Designate Ambassadors Intel Ops of the Former
Hussein Regime
btlp:llwww.treas.gov/pg3ss/releases/js1821.htm
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FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page. download the free Adobe@ /ic[obai".fl)J?eade('JS!,
June 8, 2005
JS-2488
Joint Press Release of the Council of Economic Advisers,
the Department of the Treasury,
and the Office of Management and Budget
The Administration today released an updated economic forecast that shows the
economic expansion is expected to continue at a healthy and sustainable pace.
The updated economic forecast - which will be used for the Mid-Session Review of
the Budget later this summer - is similar to the forecast released last December
and used for the President's FY 2006 budget. Early indicators of activity suggest
the 3.4 percent forecast for real gross domestic product (GOP) growth during the
four quarters of 2005 remains on track. This forecast is consistent with the
consensus of professional economic forecasters.
"The updated forecast remains largely the same as what we projected six months
ago," said Harvey S. Rosen, Chairman of the Council of Economic Advisers. "The
economic expansion is continuing."
The forecast for the labor market in 2005 is also on track. Payroll employment has
increased 180,000 per month during the first 5 months of 2005, in line with the
forecast of 175,000 jobs per month released in December. The revised forecast
now predicts an average of 178,000 payroll jobs being added per month in 2005.
The unemployment rate is now expected to be a tenth of a percentage point lower
than previously projected,
"Economic growth is steady, it is strong, and our economy's underlying
fundamentals are robust. All signs indicate that the President's economic policies
are working, especially for job-seekers. With the unemployment rate at a low that
we've rarely seen in history and 3.5 million new jobs created over the past two
years, there is considerable good news to report on, as well as to look forward to,"
remarked Treasury Secretary John W. Snow,
The Administration's economic forecast shows moderate inflation. Inflation has
been higher than expected so far this year, but most of the increase has been
concentrated in volatile energy prices. The forecast for inflation, as measured by
the price index for GOP, is revised up slightly to 2,3 percent during the four quarters
of 2005; it then drops to 2.1 percent as previously projected.
Overall inflation in the consumer price index (CPI) has similarly been elevated by
rapid energy price increases. The overall CPI increased by 3.5 percent during the
12 months through April, a rate that is not expected to persist. The core CPI (which
excludes food and energy) increased only 2.2 percent during the past 12 months.
As a result, the forecast of CPI inflation during the four quarters of 2005 has been
revised up to 2.9 percent, but the Administration still forecasts overall CPI inflation
to stabilize around 2.4 percent in 2006 and beyond. Again, the inflation forecasts
are in line with the consensus of economic forecasters.
Recent trading in financial futures markets suggests that market participants expect
short-term interest rates to rise a bit further, and the Administration's interest rate
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projections reflect those views. The rate on 91-day Treasury bills, which closed at
3.01 percent on June 3, is expected to gradually increase to 3% percent by 2007.
The forecast shows rates on 1O-year Treasury notes rising as well, from about 4
percent on June 3 to about 5.2 percent in 2007. By 2010, the difference between
the rates on 10-year and 91-day Treasury securities is projected to be close to its
historical average.
"With the President's focus on spending discipline, we are seeing positive signs for
the American economy, and for the federal government's balance sheet," said
Joshua B. Bolten, Director of the Office of Management and Budget.
Real GDP growth is expected to slow over the projection period, from 3.4 percent
during 2005 and 2006, and eventually to taper off to 3.1 percent in 2009 and 2010.
The predicted slowdown reflects slower anticipated growth in the working-age
population and the retirement of the baby-boom generation.
The forecast was developed by a team from the Council of Economic Advisers, the
Department of the Treasury, the Office of Management and Budget, with assistance
from other agencies.
REPORTS
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T eble 1-1. -A dJ11inistfrltion Forecrlst < 1~
Noninal
G)P
Real GOP
(chaintype)
GDP price ConsLl'ller
inde~
[chain-
type:
price
index
(CPI-U)
Unemplo"rrent
rate
Intere~
rate,
£1-da'l
merest
rate,
10-year
(pe'cent]
Tr~Bsuty
TreBsury
bills<b
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2005
2003
2007
2003
2003
201)
(adual)
p erc~nt change fourth C1 uarte r to fourth qu arter
E.4
3.9
3.4
2.4
~.9
~,5
!:.5
!:.4
~.3
!:.3
2.~
3.4
:3.4
3.3
2.3
2,1
2.1
2,4
2.4
3.2
3.1
3.1
2.1
2.1
2.1
2.4
2.4
2.4
5.5
5.2
5,1
5.1
5.0
5.0
5.0
notes
(p~rcert)
(oercent)
Le"el calendar veltr
4.3
1.4
3.0
J.4
3.5
3.6
3.B
4.0
Non~rm
payoll
empoy-
mEnt
(m illi)ns)
131.5
4.3
4,e
5.2
133.6
1:35,e
137.8
5.4
139.6
141_1
142.6
5_5
5.B
<1> Based on dataaveilltble as of June6,2005.
<2> Disc)unt basis.
SOlrces: Council 0' Economic Advsers Dep:lrtm ent of Com 'Tl erc~ (Bureou of E mnomic Pollolysi~),
Departm ent 01 Labor (Bureau of Lebor Statis1ics), )epartm ent oft1e Treasu'y, ard Offce 0' Maragem ent
and Budget.
JS-2489: Commerce Secretary Gutierrez and Treasury Secretary Snow Laud <BR>Oecd ...
Page 1 of 1
FROM THE OFFICE OF PUBLIC AFFAIRS
June 9, 2005
JS-2489
Commerce Secretary Gutierrez and Treasury Secretary Snow Laud
Oecd Study on the Benefits of Transatlantic Free Trade and Investment
U.S. Secretary of Commerce Carlos Gutierrez and Secretary of Treasury John W.
Snow applaud the Organization for Economic Cooperation and Development
(OECD),s release of a report indicating the importance of reducing regulatory
barriers between the United States and the European Union. The report finds that
further work could result in benefits of up to $300 billion for the United States and a
similar - or even greater- benefit for the European Union.
"The American consumer is currently picking up the tab for duplicative regulations
at the grocery store, the electronics store, car dealerships and department stores,"
Secretary Gutierrez said. "As this study displays, creating greater efficiency in
transatlantic trade and investment, while maintaining high standards of safety, will
put more money back in the pocket of American consumers: The publication of this
report is particularly timely as the U.S. and EU are developing a roadmap for
revitalizing the transatlantic marketplace."
The OECD report, entitled, "The Benefits Of Liberalizing Markets and Reducing
Barriers to International Trade and Investment: The Case of the United States and
the European Union," sheds new light on the mutual benefits to greater
liberalization and deregulation in the transatlantic economic relationship. The study
concludes that reducing State control on the business environment, cutting tariff
barriers and easing restrictions on foreign direct investment could generate great
benefits for the United States, the European Union and all OECD Member
Countries.
"The most striking part of the study is that it highlights the importance of domestic
regulatory reforms for increasing trade, productivity and growth," Secretary Snow
said. "This is especially true in Europe where deregulation would account for threefourths of the total benefits. Deregulation would allow businesses to provide
services on an EU-wide scale, and to make competitive business decisions - such
as, for example, on retail shop hours."
For more information on the OECD report, entitled, "The Benefits Of Liberalizing
Markets and Reducing Barriers to International Trade and Investment: The Case of
the United States and the European Union, please visit http;llwww.oec(j.o~g!.
http://www.treas.goy/press/releases/js2489.htm
71112005
js-2490: StaTement of Treasury Secretary John W. Snow Regarding <br>Introduction ofP ... Page 1 of 1
FROM THE OFFICE OF PUBLIC AFFAIRS
June 9, 2005
js-2490
Statement of Treasury Secretary John W. Snow Regarding
Introduction of Pension Reform Legislation
The introduction of comprehensive pension reform legislation by Education and
Workforce Committee Chairman John Boehner, Ways and Means Commitee
Chairman Bill Thomas, and Employer-Employee Relations Subcommittee Chairman
Subcommittee Chairman Sam Johnson is a significant step forward towards
strengthening and securing pensions for American workers. I am pleased that their
bill employs the essential structure of the Administration's proposal.
To ensure that worker's benefits are adequately funded, we continue to believe that
pension plan assets and liabilities must be measured accurately, based on current
market and credit conditions. Therefore, we will continue to work with the Congress
to achieve pension reforms that ensure that the pension promises made are
promises kept.
http://www.treas.gov/press/reJeases/js2490.htm
7/1/2005
JS-2401. Slah:ment by Secretary John W. Snow<br>Pre G8 Summit Finance Ministers' ...
Page 1 of3
FROM THE OFFICE OF PUBLIC AFFAIRS
June 11, 2005
JS-2491
Statement by Secretary John W. Snow
Pre G8 Summit Finance Ministers' Meeting
June 11. 2005
Good afternoon. I was pleased to meet with my fellow Finance Ministers in London
these last two days as we prepared for Leaders to gather in Gleneagles.
We have just concluded what I think will be viewed as a very successful and even
historic meeting in preparation for the Gleneagles Summit next month.
As you know, development was a key focal point of our meetings. The Ministers
were able to come to agreement on a proposal put forth by the United States and
United Kingdom to cancel 100 percent of the debt obligations owed to the World
Bank (IDA), African Development Bank (AfDF), and International Monetary Fund
(IMF) by countries eligible for the Heavily Indebted Poor Countries (HIPC) initiative
- building on the landmark agreement by President Bush and Prime Minister Blair
earlier this week. Relieving poor countries from their debt burdens so that they can
focus on meeting their development goals is an important element of President
Bush's comprehensive development strategy for Africa.
It is my hope today that this reform will conclusively end the destabilizing lend-andforgive approach to development assistance in low-income countries. The removal
of unsustainable debt combined with additional development resources will provide
significant support for countries' efforts to reach their development goals. We are
making remarkable strides in delivering assistance to Africa in more robust and
smarter ways, and this agreement builds on those efforts. President Bush has
tripled America's development assistance budget for Africa so that today nearly a
quarter of every dollar of assistance in the region comes from America, when four
years ago only 10% of assistance to the region came from America. So we are
proud of our record. And with the Millennium Challenge Account program and
President's Emergency Plans for AIDS Relief more assistance is on the way especially if countries continue to implement economic reforms, end corruption, and
invest resources in their people.
We also agreed that grants would be used to ensure that countries do not quickly
re-accumulate unsustainable debts. The eighteen countries that have already
reached the initiative's "completion point" requirements would see their debts
immediately cancelled. Other HIPCs would be eligible for debt forgiveness as they
fulfill their obligations under the program -- improving governance, reducing
corruption, and completing a program with the IMF that demonstrates a
commitment to sound economic policies.
Importantly, under this agreement donors have committed to preserve the financial
integrity of the IMF, World Bank (IDA), and African Development Bank (AfDF). This
would this include additional contributions IDA and AfDF that would be available to
all low-income countries based on existing performance-based allocation
mechanisms.
The eighteen countries that have already reached Completion Point will have their
debt stock owed to the IMF immediately cancelled. The remaining HIPCs would
also be eligible for relief upon reaching Completion Point. IMF debt relief would be
http://www.treas.gov/press/releases/js2491.htm
7/112005
JS-2491: Statement by Secretary John W. Snow<br>Pre G8 Summit Finance Ministers' ...
Page 2 of3
financed by existing IMF resources and would require no use of gold. The G-8 are
also committed that the IMF's financing capacity for low-income countries going
forward will not be diminished.
Our discussions this weekend also centered on the imperative to generate growth.
And, in fact, the importance of growth is not unrelated to the discussion of
development assistance. It is striking to note that if the developed economies had
grown as rapidly as the United States over the past ten years, up to $100 billion
more in development assistance would have been generated -- without countries
increasing the share of their GOP reserved for development.
Growth among all the G7 countries is also essential for citizens in the G7 countries
and to sustain and strengthen the global economic expansion.
The United States is doing its part. I reported on the recent performance of the U.S.
economy, which expanded by 3.5 percent in the first quarter. Growth is broadbased, with expanding business and residential investment and strong household
demand. The economy has added 3.5 million jobs in the last two years, and the
unemployment rate is at its lowest level since September 2001.
I also detailed for my colleagues our strong commitment to fiscal discipline - and
the results already being demonstrated in this area. With tax revenue showing
sizable increases this year, I was able to indicate that we now expect the Federal
budget balance to come in well below the $427 billion that had been projected for
fiscal year 2005. In fact, many private forecasters are projecting that the federal
deficit this fiscal year will come in under 3 percent of GOP. But I also reiterated that
we continue to press ahead to further enhance the conditions for strong growth well
into the future - by making the tax cuts permanent, reducing the burden of frivolous
lawsuits, passing a national energy policy, and strengthening social security.
I listened carefully to my colleagues about the prospects for their economies. Many
of them face modest forecasts at best and confront challenges in their efforts to
strengthen the prospects for growth.
All of us need to act to achieve strong growth. We all understood that global
adjustment is a shared responsibility. U.S. action alone cannot do this job. Vigorous
structural reforms are needed in Europe and Japan to lay the foundation for vibrant
growth, as well as increased exchange rate flexibility in emerging Asia.
I welcomed the opportunity to meet with Finance Ministers from key emerging
market countries - India, Brazil, South Africa, and China - a number of whom I also
met with bilaterally. We can learn a great deal from these countries' experiences.
Their Ministers brought an important perspective to our discussion. I look forward to
continuing to work with them going forward.
We also discussed the fundamental importance of free trade to the global economy.
I underscored the contribution that fully open financial services sectors can make to
growth. We discussed the importance of working together for an ambitious result at
the Hong Kong WTO Ministerial. Contributions by all countries is essential to
achieving wide-spread liberalization of trade in goods and services and a
successful conclusion to the Doha Development Round in 2006. I emphasized the
role free trade can play in solidifying the gains in democracy, such as in the
Administration's Middle East free trade agreements (e.g., Morocco, Bahrain) and
CAFTA, which is currently being considered by Congress. I will continue to stress
the importance of the financial services agenda with European finance ministries
and key EU regulators when I visit the Netherlands, Belgium, France and Germany
over the next few days.
Finally, ongoing work to combat terrorist financing was also a key item of
discussion. We took note of the progress made by Financial Experts to implement
their Action Plan to strengthen the process of multilateral asset freezing, improve
information sharing, and explore the possibility of broadening the application of new
financial tools to disrupt serious crime. In this context, I described for my colleagues
the tools that we, in the United States, have available to identify, block and freeze
http://www.treas.gov/press/reieases/js2491.htm
7/1/2005
JS-249 i: Statement by Secretary John W. Snow<br>Pre G8 Summit Finance Ministers' ...
Page 3 of3
the sources of terrorist financing. We believe that efforts to disrupt the financing of
terror are succeeding and must continue.
Thank you.
http://www.treas.gov/press/releases/j s2491.htm
7/1/2005
js-2492: Pte SummIt Statement by G8 Finance Ministers
Page 1 of 1
FROM THE OFFICE OF PUBLIC AFFAIRS
June 11, 2005
jS-2492
Pre Summit Statement by G8 Finance Ministers
We met to prepare the annual Summit of G8 Heads of Government and had
productive discussions with colleagues from key emerging economies on a range of
global economic issues.
Global growth in 2004 was strong, supported by robust growth in trade along with
increasing regional and global integration. Growth is expected to remain robust,
although at a more moderate pace, in 2005. Challenges remain, especially:
persistent global imbalances and high and volatile oil prices as well as a more
balanced distribution of the benefits of globalization. Vigorous action is required by
each country to support a smooth adjustment to more balanced growth. The key
priorities in achieving this remain: continued fiscal consolidation in the United
States; further structural reforms in Europe and Russia; and further structural
reforms, including fiscal consolidation, in Japan. An ambitious result at the Hong
Kong WTO Ministerial, including financial services, with a view to concluding the
Doha Development Round by end 2006, is crucial for global growth.
Sustained high energy prices are of significant concern since they hamper global
economic growth. We welcome efforts to reduce market volatility by improving data
to make it more transparent and timely. We call on relevant international institutions
to develop a global framework for reporting of oil reserves, which is essential for
better informed market decisions, and to undertake further analysis of the workings
of the oil market. We urge oil producing countries and companies and consumers to
recognize their common interest in ensuring investment in sufficient future supplies
of oil and refining capacity, and call on countries and international institutions to
work to remove barriers and create a climate conducive to investment throughout
the supply chain. We stress the importance of energy efficiency, technology and
innovation in ensuring energy security. To help meet the challenge of climate
change, we urge the World Bank and other multilateral development banks to
increase dialogue with major borrowers on energy issues and put forward specific
proposals at their Annual Meetings that encourage cost effective investments in
lower carbon energy infrastructure. We agree the IFls have a role in helping
address the impact of higher oil prices on adversely affected developing countries
and encourage the IMF to include oil prices in the development of facilities to
respond to shocks.
We discussed the continuing challenges of meeting the Millennium Development
Goals and have published an update to the Conclusions on Development we
published in February.
We committed to further action to enhance the effectiveness of international efforts
to counter terrorist financing by improving the process of freezing assets in line with
UN resolutions, improving information sharing, and exploring new financial tools to
disrupt serious crime.
http://www.treas.goy/press/releases/js2492.htm
7/1/2005
js-2493: 08 Finance Mmisters' Conclusions on Development
Page 1 of3
FROM THE OFFICE OF PUBLIC AFFAIRS
June 11, 2005
js-2493
G8 Finance Ministers' Conclusions on Development
1.
We reaffirm the commitments we made at our meeting in February this year
to help developing countries achieve the Millennium Development Goals by
2015, to make particular efforts in Africa, which on current rates of progress
will not meet any of the Millennium Development Goals by 2015, and to set
out for G8 Heads of Government and States the steps we believe can be
taken to further implement the Monterrey Consensus on an open world
trade system; increased aid effectiveness; absorptive capacity; increased
levels of aid; and debt relief.
2. We reaffirm our view that in order to make progress on social and economic
development, it is essential that developing countries put in place the
policies for economic growth, sustainable development and poverty
reduction: sound, accountable and transparent institutions and policies;
macroeconomic stability; the increased fiscal transparency essential to
tackle corruption, boost private sector development, and attract investment;
a credible legal framework; and the elimination of impediments to private
investment, both domestic and foreign.
3. We reaffirm our view of February that it is crucial that the international
community improves the effectiveness of aid. In particular bilateral and
multilateral donors need to: harmonize their operational procedures; align
aid behind country-owned priorities for growth and poverty reduction; and
provide for measurable results. Donors must also: focus their aid on poverty
reduction; enhance efforts to untie aid, based on DAC principles; and deliver
aid in a more predictable way. We welcome the progress made at the
Paris OECD DAC High Level Forum in March, and call on the OECD DAC
to set by September this year, ambitious and credible targets against all the
indicators of progress agreed at the March meeting.
4. A successful outcome for the Doha Development Agenda, our highest
common priority in trade policy for the year ahead, will bring real and
substantial benefits to poor countries. The Hong Kong Ministerial in
December will be a critical step towards a successful outcome of the DDA in
2006, which delivers substantial increases in market access for developing
countries; establishes a timetable for the elimination of all trade-distorting
export support in agriculture; and provides effective special and differential
treatment for developing countries.
5. However, not all countries will benefit in the short term from reductions in
trade barriers. Some countries lack the capacity to produce and deliver
goods to international markets competitively; for others, the transitional
costs of moving to more open markets may be substantial. We also
recognize that poor countries face particular problems and need the
flexibility to decide, plan and sequence reforms to their trade policies to fit
with country-owned development programs. We commit to provide support
to enable developing countries to benefit from trade opportunities. We call
on the IFls to submit proposals for the Annual Meetings for additional
assistance to countries to develop their capacity to trade and ease
adjustment in their economies, based on a systematic analysis of transition
costs, so they can take advantage of more open markets.
6. Tackling diseases that undermine growth and exacerbate poverty in
developing countries will require not only strengthened health systems, but
also improved treatment, including universal access for AIDS treatment by
2010 and development of vaccines, including for HIV and malaria. We
have made progress this year in implementing the Global HIV Vaccine
Enterprise agreed at Sea Island, and are committed both to taking this
http://www.treas.gov/press/reJeases/js2493.htm
7/1/2005
js-2493: 08 Finance Ministers' Conclusions on Development
Page 2 of3
further; and to scaling up our support for vaccines and medicines research
through the successful Public Private Partnerships model. We call for a
report on progress by the end of the year. We recognize also that advance
purchase commitments (APCs) are potentially a powerful mechanism to
incentivize research, development and the production of vaccines for HIV,
malaria and other diseases. We asked Minister Siniscalco to consult the
relevant institutions, governments and industry, with the aim of developing
concrete proposals by the end of this year.
7. The Enhanced HIPC Initiative has to date significantly reduced the debt of
27 countries, and we reaffirm our commitment to the full implementation and
financing of the Initiative. Moreover, individual G8 countries have gone
further, providing up to 100 per cent relief on bilateral debt. However, we
recognize that more still needs to be done and we have agreed the attached
proposal. We call upon all shareholders to support these proposals which
we will put to the Annual Meetings of the IMF, World Bank and African
Development Bank.
8. We also recognized at Monterrey that a substantial increase in ODA and
private capital flows will be required to assist developing countries to
achieve the Millennium Development Goals. We acknowledge the efforts of
all donors, especially those who have taken leading roles in providing and
increasing ODA and committing to further increases.
9. Specifically we welcome: the progress the EU has made towards the 0.39
per cent ODAIGNI target agreed at Barcelona; the announcements by
France and the UK of timetables to reach 0.7 per cent ODAIGNI by 2012
and 2013 respectively; and the recent EU agreement to reach 0.7 per cent
ODAIGNI by 2015 with an interim target of 0.56 per cent ODAIGNI by 2010
- a doubling of EU ODA between 2004 and 2010. In line with the EU
agreement, Germany (supported by innovative instruments) and Italy
undertake to reach 0.51 per cent ODAIGNI in 2010 and 0.7 per cent
ODAIGNI in 2015. We welcome the tripling of US ODA to Sub-Saharan
Africa and the near doubling of US ODA to all developing countries since
2000. The US now accounts for roughly 25% of all ODA to Sub-Saharan
Africa. In addition, we welcome the launch of the Millennium Challenge
Account and the President's Emergency Plan for AIDS Relief. We welcome
Japan's commitment to double its ODA to Africa over the next three years
and Canada's budget plans to finance its commitment to double aid levels
from 2001 to 2010, and to double aid to Africa by 2008. In addition, we
welcome Russia's $2.2 billion contribution to the HIPC Initiative.
10. As we prepare for decisions at the G8 Summit in Gleneagles we continue
our work program on: the IFF and its pilot, the IFF for Immunization; some
of the revenue proposals from the Landau Report, including a pilot project,
supported and led by France and Germany, for a contribution on air travel
tickets to support specific development projects and to refinance the IFF;
the Millennium Challenge Account; the Enhanced Private Sector Assistance
with the African Development Bank; and other financing measures; so that
decisions can be made on how to deliver and bring forward the financing
urgently needed to achieve the Millennium Development Goals.
11. Nigeria is key to the prosperity of the whole continent of Africa. We
welcomed Nigeria's progress in economic reform as assessed in the IMF's
intensified surveillance framework, noted its move to IDA-only status, and
encouraged them to continue to reform. We are prepared to provide a fair
and sustainable solution to Nigeria's debt problems in 2005, within the Paris
Club.
G8 Proposals for HIPC debt cancellation
Donors agree to complete the process of debt relief for the Heavily Indebted Poor
Countries by providing additional development resources which will provide
significant support for countries' efforts to reach the goals of the Millennium
Declaration (MDGs), while ensuring that the financing capacity of the IFls is not
reduced. This will lead to 100 per cent debt cancellation of outstanding obligations
of HIPCs to the IMF, World Bank and African Development Bank. Additional donor
contributions will be allocated to all IDA and AfDF recipients based on existing IDA
and AfDF performance-based allocation systems. Such action will further assist
their efforts to achieve the MDGs and ensure that assistance is based on country
performance. We ask the World Bank and IMF to report to us on improvements on
transparency on all sides and on the drive against corruption so as to ensure that all
http://www.treas.gov/presslreleases/js2493.htm
7/1/2005
js-2493: G8 Fillance Ministers' Conclusions on Development
Page 3 of3
resources are used for poverty reduction. We believe that good governance,
accountability and transparency are crucial to releasing the benefits of the debt
cancellation. We commit to ensure this is reaffirmed in future bilateral and
multilateral assistance to these countries.
Key elements:
•
•
•
•
•
•
Additional donor contributions will be allocated to all IDA and AfDF
recipients based on existing IDA and AfDF performance-based allocation
systems.
100 per cent IDA, AfDF and IMF debt stock relief for Completion Point
HIPCs.
For IDA and AfDF debt, 100 per cent stock cancellation will be delivered by
relieving post-Completion Point HIPCs that are on track with their programs
of repayment obligations and adjusting their gross assistance flows by the
amount forgiven. Donors would provide additional contributions to IDA and
AfDF, based on agreed burden shares, to offset dollar for dollar the
foregone principal and interest repayments of the debt cancelled. Additional
funds will be made available immediately to cover the full costs during the
IDA-14 and AfDF-10 period. For the period after this, donors will commit to
cover the full costs for the duration of the cancelled loans, by making
contributions additional to regular replenishments of IDA and AfDF.
The costs of fully covering IMF debt stock relief, without undermining the
Fund's financing capacity, should be met by the use of existing IMF
resources. In situations where other existing and projected debt relief
obligations cannot be met from the use of existing IMF resources (e.g.
Somalia, Liberia, and Sudan), donors commit to provide the extra resources
necessary. We will invite voluntary contributions, including from the oilproducing states, to a new trust fund to support poor countries facing
commodity price and other exogenous shocks.
Globally and on this basis we are committed to meeting the full costs to the
IMF, World Bank and African Development Bank. We will provide on a fair
burden share basis resources to cover difficult-to-forecast costs, in excess
of existing resources, to the IMF, IDA and AfDF over the next three years.
Subject to further analysis by the institutions we will provide up to $350-500
million for this purpose. We are also committed, on a fair burden share
basis, to cover the costs of countries that may enter the HIPC process
based on their end-2004 debt burdens. We will also seek equivalent
contributions from other donors to ensure all costs are covered and we will
not jeopardize the ability of these institutions to meet their obligations.
Utilize appropriate grant financing as agreed to ensure that countries do not
immediately re-accumulate unsustainable external debts, and are eased
into new borrowing.
We call upon all shareholders to support these proposals which would be put to the
Annual Meetings of the IMF, World Bank and African Development Bank by
September.
http://www.treas.gov/press/releases/j52493.htm
7/1/2005
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
June 13, 2005
2005-6-13-16-6-48-23414
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 $77,740 million as of the end of that week, compared to $78,027 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
TOTAL
1. Foreign Currency Reserves
1
a. Securities
Mall 27, 2005
June 3, 2005
78,027
77,740
Euro
Yen
TOTAL
Euro
Yen
TOTAL
11,652
14,581
26,233
11,363
14,586
25,949
0
0
Of which, issuer headquartered in the US.
b. Total deposits with:
11,353
b.i. Other central banks and BIS
2,931
14,284
2.932
11,050
13,982
b.ii. Banks headquartered in the US.
0
0
b.ii. Of which, banks located abroad
0
0
b.iii. Banks headquartered outside the US.
0
0
b.iii. Of which, banks located in the U.S.
0
0
15,100
15,393
11,368
11,464
11,041
11,041
0
0
2. IMF Reserve Position
2
3. Special Drawing Rights (SDRs)
4. Gold Stock
2
3
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
June 3, 2005
Mall 27, 2005
Euro
1. Foreign currency loans and securities
Yen
TOTAL
Euro
o
Yen
TOTAL
o
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a.-vis the U.S. dollar:
2.8. Short positions
0
2.b. Long positions
0
3. Other
0
o
o
o
III. Contingent Short-Term Net Drains on Foreign Currency Assets
May 27,2005
Euro
1. Contingent liabilities in foreign currency
Yen
June 3, 2005
TOTAL
Euro
Yen
TOTAL
o
o
2. Foreign currency securities with embedded options
o
o
3. Undrawn, unconditional credit lines
o
o
o
o
1.a. Collateral guarantees on debt due within 1 year
1.b. Other contingent liabilities
3.a. With other central banks
3.b. With banks and other financial institutions
Headquartered in the U. S.
3.c. With banks and other financial institutions
Headquartered outside the U. S.
4. Aggregate short and long positions of options in
foreign
Currencies vis-a-vis the U.S. dollar
4.a. Short positions
4.a.1. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.1. Bought calls
4.b.2. Written puts
Notes:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
2/ The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
js-24~4:
u.s. Tre:l£ury E~;,:~·.;,~d.ry John Snow<BR>at the <BR>Center for European Polic...
Page 1 of7
FROM THE OFFICE OF PUBLIC AFFAIRS
June 14. 2005
js-2494
U.S. Treasury Secretary John Snow
at the
Center for European Policy Studies
Brussels, Belgium
June 14, 2005
US-EU Cooperation for Growth
It is a pleasure to be in Brussels. As President Bush made clear during his visit in
February. the United States and the European Union share deep common interests.
For me, this visit comes in the middle of a five country tour of Europe - beginning in
London for the G8 finance ministers meeting, then the Netherlands; from here I will
travel to Paris and Frankfurt. As you can imagine, I have been asked a number of
times what America thinks of the recent votes on the constitution.
My view is that Europe will find its way forward, but it's crucial that it do so quickly.
America wants and needs a dynamic, vibrant Europe that is a strong partner in our
shared challenge to spread the fruits of freedom, democracy and economic
opportunity throughout the world. And a Europe that is economically weak is less
able to fulfill its role in that partnership.
As the world's two largest economies, the US and EU have a special responsibility
for the global economy. When we grow together, our economic leadership fosters
development around the world and serves as a good model for economic
cooperation.
Today, I would like to talk about my perspectives on US economic growth, global
adjustment. and how a more integrated EU financial system can contribute to
economic growth in Europe, the United States and the
world.
Economic Growth and the United States
If there is one word that sums up the Bush Administration's approach to economic
management. that word is "growth". Growth leads to higher living standards and
fosters individual freedom. The private sector drives growth. But for this to happen,
government must create the right climate with good macroeconomic and
microeconomic policies.
During my visit to Europe last November, I was reminded of these basic truths. In
Ireland, I met with a number of the leaders who laid the foundation for the creation
of the "Celtic Tiger" that has moved Ireland from one of Europe's lowest income
countries to one of its highest. In Warsaw, I met Finance Ministers from Poland,
Slovakia, Hungary and the Czech Republic. These countries are on the economic
move. adopting market-oriented polices and enjoying extraordinary growth. They
show that Europe can be a global leader on growth.
The United States is doing its part to foster good growth, both at home and
globally. Real GOP rose 4.4 percent last year. The first quarter came in at a strong
3.5 percent annual rate. Since the employment trough of May 2003 the economy
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has generated 3.5 million new jobs. Well-timed monetary and fiscal policies have
contributed to this improved outlook. More fundamentally, our higher growth and
productivity stem from the resilience and flexibility of our factor markets, highly
motivated workforce and investors, and open, competitive goods markets.
Let me say a word about our fiscal situation. Before joining government, I was not
a fan of large deficits. And I'm still not! Some things never change. The current
budget deficit is unwelcome but understandable given the extraordinary shocks we
endured: the bursting tech bubble, 9/11, and corporate scandals. This was a
"perfect economic storm." Since then, we have made strides to trim the budget
deficit. Our solution is not to raise taxes. Spending restraint, combined with
economic growth, is the key to a lower deficit.
Last fiscal year, the deficit came in at 3.6%, nearly a full percentage point lower
than initially projected. Due to good growth, many private forecasters are
estimating that the fiscal deficit this year will come in under 3%. Perhaps we will
meet the Maastricht target this year! Both personal income and corporate profits
are coming in well ahead of forecast. Labor's share of national income is rising and
should rise even further in the year ahead. From the budget perspective this is very
encouraging and suggests we are on a good path to halve the budget as a share of
GDP -- well below 2% in a few years.
This will not be easy. But let me assure you -- I am personally committed to make
fiscal consolidation a reality in the United States. Doing so is critical for the health
of the US economy and for reinforcing the continued stability of the international
monetary system. Longer term, we face serious issues with unfunded obligations
represented by Social Security and Medicare. That's why President Bush is
beginning to tackle them now.
WOI~jn9-Ioward
a Stronger Global Economy
The global economy is now stronger than in many decades. The outlook remains
solid, despite higher oil prices. But the aggregate strength of the world economy
masks large global imbalances. The international community recognizes that the
adjustment of these imbalances is a shared responsibility, requiring a three-part
strategy.
The first part is raising national saving in the United States. I have already stated
that we are fully cognizant of our responsibility and the deficit is being cut. But
there is no one-to-one correspondence between reductions in our fiscal and current
account deficits. Further, it is in no one's interest that US economic growth decline
sharply to reduce our current account deficit. We do not have a current account
deficit target, nor should we. The best contribution the US can make to the world
economy is to continue our record of good growth, predicated on sound
macroeconomic management, vibrant factor markets, and openness.
Another part of the strategy is greater flexibility in exchange rates in emerging Asia,
and especially in China. Constrained flexibility in Asian currencies should not shift
the burden of global adjustment to Europe. Because of great progress in improving
its financial sector, China is now ready to take immediate and significant action to
achieve currency flexibility.
The other part of the strategy is directly relevant to this audience - structural reform
in Europe, as well as Japan. Let us face reality: growth in the key continental
European economies has been, and continues to be, weak. European and
Japanese GDP together exceed that of the United States. Europe and Japan have
a critical role to play in maintaining global economic strength, but they have not
been doing their part of late. European and Japanese growth rates must
strengthen, first and foremost to improve the lives of their people, but also to help
address global imbalances.
That strengthened European growth requires deep structural reform is not news to
anyone in Brussels. European officials have long recognized this reality, as
reflected in the Stockholm Declaration and the Lisbon Agenda. Further, these
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officials have also long recognized that the EU was not living up to its potential for
growth and that structural reforms lag far behind well-publicized plans and
objectives.
The EU Heads of State and Governments renewed their commitment to growth in
their mid-term review of the Lisbon Agenda. The United States applauds this.
I appreciate that key structural reforms need to be taken by member states.
Throughout Europe, many good reforms have already been undertaken and further
plans are being developed. Many of the reforms being considered are similar to
those we face - pensions, taxes, over regulation of businesses. Some have
blamed the mobility of international capital itself for undermining economic
performance. I disagree. The growth of private international capital flows has
greatly increased the growth of countries with the policies to attract those flows on a
sustained basis. The empirical evidence shows that a key foundation for growth
and job creation is business-friendly policies that welcome and reward capital and
investment.
I am not here to tell you what to do. Through my discussions with the finance
ministers of Europe, it is clear that Europe knows what needs to be done. And
beyond knowing what needs to be done, through the G7 Agenda for Growth, they
have identified specific actions that are already underway. For instance, pension
reform in France, labor reform in Germany, tax reforms in Italy. For us in the United
States, it is clear we have a lot of things we need to work on. We are working hard
to get them done. I am here to encourage these positive steps that have already
been identified and to pledge our support for these initiatives.
I hope that when the member states submit their national action plans under the
renewed Lisbon agenda, they outline not only their reform intentions, but also
demonstrate the governments' resolve to muster the necessary support to make
those reforms a reality. What is needed is clear, concrete action.
The potential benefits for Europe's citizens are clear and quantifiable. A recent
OECD study determined that deregulating EU countries would raise EU GOP per
capita by 2.8%. Putting this in personal terms, this mean an average worker gets a
year's extra wages over a working life.
Given the strong trade interests of the United States and the EU, it is natural that
we work closely together in the Doha Development Agenda to promote free trade
that will help drive global economic growth. Completion of the Round before the
end of 2006 will be a challenge. We need to intensify the pace of negotiations and
commit to meeting key milestones along the way. Developed and developing
countries alike need to be prepared to reduce their trade barriers and subsidies.
We have worked closely with our EU counterparts on the financial services
negotiations. Together we have called for a "floor" level of liberalization to be
complemented by disciplines on regulatory transparency. Financial services
liberalization offers particular promise to be a key element to a successful
conclusion of the negotiations. In view of the fact that financial services has a
leveraging impact on growth and development and facilitates the flow of capital to
labor, it is essential that establishing open financial sectors be at the center of the
Doha Development Agenda, especially for the poorer nations.
US-EU Financial COQQeratiol]
The United States is committed to working with the EU on financial cooperation
across a number of fronts.
Financial Markets and Regulation
Further integration of EU financial markets is one structural reform that holds real
promise to promote growth. With the advent of the euro, bringing together national
capital markets into one is a natural way to promote efficiency. This is precisely the
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aim of the EU's Financial Sector Action Plan (FSAP). Studies suggest that a liberal
and integrated European financial market could increase EU GDP by as much as
one percent per annum over time. It is for this reason that the US Treasury has
long supported the FSAP.
Not surprisingly, in an era of global capital markets, legislation adopted by the
United States or EU may spill over into each of our markets. The EU's Financial
Conglomerates Directive required an assessment that large financial entities
operating in Europe were supervised soundly at the consolidated level by their
home supervisor.
Our Sarbanes-Oxley legislation sought to ensure that firms listed on U.S. stock
exchanges and their auditors adhere to strong corporate governance. I hear
complaints that the cost of doing business in the United States is now too high, and
there is no doubt we can do better. But we must remember that there were serious
corporate governance weaknesses in the United States that had to be tackled. We
are not unique. Investor confidence is crucial for growth. Sarbanes-Oxley was a
necessary response. We must adhere to the letter and spirit of the law, while
implementing it in a manner that is not overly onerous and costly. The U~Q®ital
markets are among the deepest and most dynamic and attractive in the world. I am
committed to make sure that remains the case.
To manage "spillover" issues, the US Treasury, joined by the SEC and Fed, and the
European Commission, established the US-EU financial markets regulatory
dialogue three years ago. When I met Charlie McCreevy in April, we agreed that
the dialogue had produced good results. Its informal nature -- with experts and
officials working together, identifying looming issues, and sharing perspectives -has led to confidence building and to problem solving. The talks have highlighted
that we share the same objective of sound financial markets, though we may have
different ways of achieving them.
The dialogue is moving from problem solving to a more forward looking agenda and
deepened cooperation. The US is discussing such issues as re-insurance,
solvency rules for insurance, clearing and settlement, retail banking, and corporate
governance issues in the EU. On the US side, the EU is raising such issues as
SEC de-registration, regulation of credit rating agencies, implementation of Basle II,
and re-insurance collateral. Both sides are reaching out to business and academic
communities.
The support of legislatures is critical for the Dialogue and for ensuring acceptance
of financial regulation. In the United States, the dialogue has benefited
tremendously from Congressional support, especially from Rep. Mike Oxley,
Chairman of the House Financial Services Committee, as well as from his
counterpart, Senator Richard Shelby. This afternoon, I look forward to meeting with
members of the European Parliament's Monetary Affairs Committee.
Much hard work remains for Europe to achieve the FSAP's promise. As
Commissioner McCreevy explained to me, his first priority is to ensure
implementation in a way that promotes efficient markets. He doesn't want to
overburden markets with regulation and wants to ensure that any new proposal
shows clear benefits. Implementation will be key. If 25 different supervisors
implement directives 25 different ways, the promise of a more integrated EU
financial market will not be realized and it will be hard for the US and the EU to
achieve convergence. I am meeting the heads of the Committee of European
Securities Regulators and Banking Supervisors to learn how implementation is
proceeding.
But the US-EU financial market dialogue is tapping into a deeper reservoir. The
recent IMF Global Financial Stability Report shows that the sum of stock market
capitalization, debt securities and bank assets in the EU and US was nearly twothirds of the world total.
All of us at times talk about the Transatlantic Financial Market. But what does that
mean? The last decades have witnessed enormous changes in financial markets.
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Page 5 of7
In the United States, interstate banking allowed tremendous consolidation in our
financial market, which enormously benefited the dynamism of our economy and
consumer welfare. Consolidation is happening now in Japan. And in Europe,
several major players now stand out.
Large consolidated financial institutions have become global players. They
increasingly see themselves as global firms, whose profits are linked to their
worldwide business, not just their activities at home. In contrast, regulation and
supervision have always been inherently national. But when global institutions -financial and commercial -- face different regulatory and supervisory regimes in
every country they operate, it is burdensome, costly, and simply an inefficient use of
resources.
Financial regulation must also continuously attune to market developments.
Markets are dynamic, innovative, and creative human endeavors that produce new
ways to deal with risk. They are to be encouraged. There is no doubt that over the
last few decades or so, derivative instruments playa much larger role in financial
markets than we could have ever anticipated. Derivatives disaggregate risks and
make markets more efficient. In the US, we have monitored these developments
closely, but taken a light regulatory approach, instead relying on counterparties.
Were the government to regulate derivatives, we are concerned that counterparty
due diligence could be diminished. If it were, it is hard to see how government
regulation could supplant it.
Another new development is the role of hedge funds. Here too, we have taken a
relatively light touch, avoiding financial regulation of the funds themselves, but
requiring registration.
In our view, regulators can use markets - and market discipline - to help produce
desired results. Markets are themselves self-policing mechanisms.
In talking with European regulators like Callum McCarthy and Charlie McCreevy, I
am impressed with the focus on risk-based regulation. To enable markets to
produce better results, regulators must always ask themselves where is our value
added; what are we doing; and why we are doing it. This is also a question that we
in the United States need to continually ask ourselves.
These trends and realities place an enormous responsibility on financial policymakers and regulators. Of course, it will always be the case that our foremost
responsibility is to our own citizens. But simply put, in protecting our investors, our
vision must not only be market-friendly, but it must be global. We must work
together responsibly to transcend national borders.
Thus, regulation and supervision should converge on high-quality global standards.
This process is proceeding well, though there is much work to be done. Let me cite
several factors and examples.
One fundamental change is the revolution in transparency. All of us now
acknowledge that disclosure and transparency are crucial for good rule-making.
Further, given the dynamism of financial markets, regulators are always behind and
must work with markets to get their job done. This means active consultation. In
the past years, the EU has done a good job in consulting market participants. I
have even heard of "consultation fatigue", but in my view better "consultation
fatigue" than "consultation deprivation." This is a case where more is better than
less.
Another area of progress has been in the evolution of standard setting.
Groups like the Basle Committee of Banking Supervisors, the International
Organization of Securities Commissions, and the International Association of
Insurance Supervisors are bringing authorities together to forge common best
practices for supervision.
Regulation is increasingly focused on the consolidated entity. This is mirrored
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js-2494: U.S. TIt::asury Secretary John Snow<BR>at the <BR>Center for European Polic...
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in Europe's Financial Conglomerates Directive, as well as in our legislation such as
the Gramm-Leach-Bliley Act and the SEC's recent Consolidated Supervised Entity
rule. It is also reflected in some ways in Basle II.
Accounting is another area where the trend toward convergence is firmly in
place. Several weeks ago, SEC Chairman Bill Donaldson and Charlie McCreevy
agreed on a "roadmap" for the United States to accept statements using
international accounting standards as a basis for listings in the US market as early
as 2007 and no later than 2009. This is an enormously positive development. In so
doing, the SEC set forth several markers, especially consistent implementation and
enforcement across the 25 European member states. The ball is in Europe's court
to make this a reality. I am confident Charlie McCreevy will make it happen.
Within a few years time, accounting in the US and Europe could become a similar
exercise.
The move toward "convergence" is also evident in the collaboration emerging
between US regulators and the new EU supervisory implementation bodies. The
Federal Reserve has established a dialogue with CEBS, the SEC a dialogue with
CESR, and the NAIC with CEIOPS.
Combating Terrorist Financing
Another example of cooperation is our work together on combating terrorist
financing. We have seen that terrorism does not discriminate against race or
religion and the threat of terrorist financing does not stop at borders or coastlines.
That is why the partnership between the United States and the EU in combating
terrorist financing is critical. We must continue to work together to financially isolate
terrorists and their financiers and shut down channels used to move money to al
Qaida, Hezbollah, Hamas and other deadly groups.
We are seeing the fruits of our labor. Intelligence reporting - although anecdotal speaks to the greater difficulty which terrorists encounter in raising, moving, and
storing money. We are seeing terrorist groups avoiding formal financing channels
and instead resorting to riskier and more cumbersome conduits like bulk cash
smuggling. Therefore, it is important that we continue to work together to address
terrorist financing vulnerabilities introduced by informal channels, such as
alternative remittance and underground banking systems.
We also know that the enemies we face are motivated, patient and ruthless.
Terrorist groups still want to attack us, and they are very focused on our economy
and financial systems in particular. An act of terrorism is perhaps the greatest
threat facing our economy today. 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.
There can be no doubt - the competitive forces blowing across the U.S. and
European financial landscape are global in nature. So, we need rules for the global
marketplace, not just for the US and Europe. Thus, in the final analysis, when we
talk about a Transatlantic Financial Market, what we are really talking about is the
reality of global financial markets, the EU creating a single financial market in place
of 25, and the US and EU converging on high-level global standards. The
Transatlantic Financial Market must fundamentally be anchored in the global
system and in best global practice. That is what the US-EU financial market
dialogue is all about - a new architecture for the global financial system.
Promoting economic growth and getting our financial houses in order at home while
pursuing structural reforms, trade liberalization, and more efficient cross-border
capital markets and regulation are part of a progressive US-EU economic agenda.
Together, the United States and the European Union must lead.
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js-2495: Treasury InternatIOnal Capital Data for April
Page 1 of2
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free AdoboCC{) /1clrgpJi/ff<)J?e?ci()r(R).
June 15, 2005
js-2495
Treasury International Capital Data for April
Treasury International Capital (TIC) data for April are released today and posted on
the U.S. Treasury web site (www.treas.govlliS-;). The next release date, which will
report on data for May, is scheduled for July 18, 2005.
Long-Term Domestic Securities
Gross purchases of domestic securities by foreigners were $1,413.8 billion in April,
exceeding gross sales of domestic securities by foreigners of $1 ,360.1 billion during
the same month.
Foreign purchases of domestic securities reached $53.6 billion on a net basis in
April, relative to $58.9 billion during the previous month. Private net flows reached
$42.1 billion in April. Net private purchases of Treasury Bonds and Notes
decreased to $10.7 billion from $42.8 billion the preceding month. Net private
purchases of Government Agency Bonds were $8.4 billion, up from $6.5 billion the
previous month. Net private purchases of Corporate Bonds were $18.1 billion,
down from $22.3 billion the previous month. Net private purchases of Equities rose
to $5.0 billion from $1.7 billion.
Official net purchases of U.S. securities were $11.5 billion in April, relative to minus
$14.4 billion in March. Official net purchases ofTreasury Bonds and Notes of $14.0
billion accounted for the bulk of official flows in April, up from a negative $15.0
billion the previous month.
Long-Term Foreign Securities
Gross purchases of foreign securities owned by U.S. residents were $286.3 billion
in April, relative to gross sales of foreign securities to U.S. residents of $292.5
billion during the same month.
Gross sales of foreign securities to U.S. residents exceeded purchases by $6.2
billion, highlighting a net U.S. acquisition of $1.6 billion in Foreign Equities and $4.6
billion in Foreign Bonds.
Net Long-Term Securities Flows
Net foreign purchases of both domestic and foreign long-term securities from U.S.
residents were $47.4 billion in April compared with $40.6 billion in March. Net
foreign purchases of long-term securities were $750.1 billion in the twelve months
through April 2005 as compared to $798.8 billion during the twelve months through
April 2004.
The full data set, including adjustments for repayments of principal on asset-backed
securities, as well as historical series, can be found on the TIC web site,
http://www.treas.gov/tic/.
http://www.treas.gov/pr~ss/releases/js2495.htm
7/1/2005
Page 2 0[2
js-2495: Tn::asury International Capital Data for April
-30-
REPORTS
•
Foreigners' Tran~C)ction~~n1on9--TerrrL Securities
http://www.treas.gov/press/reJeases/js2495.htm
vvithU .S. Residents
7/1/2005
DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
EMBARGOED UNTIL 9 a.m. EDT
June 15, 2005
Contact:
Brookly McLaughlin
(202) 622-2960
TREASURY INTERNATIONAL CAPITAL DATA FOR APRIL
Treasury International Capital (TIC) data for April 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 May,
is scheduled for July 18,2005.
Long-Term Domestic Securities
Gross purchases of domestic securities by foreigners were $1,413.8 billion in April, exceeding
gross sales of domestic securities by foreigners of $1 ,360.1 billion during the same month.
Foreign purchases of domestic securities reached $53.6 billion on a net basis in April, relative to
$58.9 billion during the previous month. Private net flows reached $42.1 billion in April. Net
private purchases of Treasury Bonds and Notes decreased to $10.7 billion from $42.8 billion the
preceding month. Net private purchases of Government Agency Bonds were $8.4 billion, up
from $6.5 billion the previous month. Net private purchases of Corporate Bonds were $18.1
billion, down from $22.3 billion the previous month. Net private purchases of Equities rose to
$5.0 billion from $1.7 billion.
Official net purchases of U.S. securities were $11.5 billion in April, relative to minus $14.4
billion in March. Official net purchases of Treasury Bonds and Notes of$14.0 billion accounted
for the bulk of official flows in April, up from a negative $15.0 billion the previous month.
Long-Term Foreign Securities
Gross purchases of foreign securities owned by U.S. residents were $286.3 billion in April,
relative to gross sales of foreign securities to U.S. residents of$292.5 billion during the same
month.
Gross sales of foreign securities to U.S. residents exceeded purchases by $6.2 billion,
highlighting a net U.S. acquisition of$1.6 billion in Foreign Equities and $4.6 billion in Foreign
Bonds.
Net Long-Term Securities Flows
Net foreign purchases of both domestic and foreign long-term securities from U.S. residents
were $47.4 billion in April compared with $40.6 billion in March. Net foreign purchases of
long-term securities were $750.1 billion in the twelve months through April 2005 as compared to
$798.8 billion during the twelve months through April 2004.
The full data set, including adjustments for repayments of principal on asset-backed securities, as
well as historical series, can be found on the TIC web site, http://www.treas.gov/tic/.
Foreigners' Transactions in Long-Term Securities with U.S. Residents
(Billions of dollars, not seasonally adjusted)
2004
12 Months Through
Apr-04
Apr-OS
Jan-OS
Feb-OS
Mar-OS
Apr-OS
14,383.6 15,270.2
13,6449 14,366.2
738.8
904.0
15,293.1 15,801.4
14,424.6 14,916.3
868.6
885.1
1,305.3
1,2135
91.8
1,376.3
1,278.2
98.1
1,5295
1,470.6
58.9
1,413.8
1,360.1
53.6
2003
I
2
3
Gross Purchases of Domestic Securities
Gross Sales of Domestic Secuntles
Domestic Securities Purchased, net (line I less line 2) II
4
5
6
7
8
Private, net 12
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate Bonds, net
Equities, net
595.7
163.2
135.1
261.5
35.9
669.9
150.9
206.1
286.5
26.4
632.5
208.0
1402
247.6
36.7
736.4
185.9
192.2
303.9
54.4
77.2
23.1
19.9
17.3
17.0
79.4
31.2
10.9
29.9
7.4
73.3
42.8
6.5
22.3
1.7
42.1
10.7
8.4
18.1
5.0
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
-03
234.2
2011
20.3
11.4
14
236.1
205.5
23.8
7.0
-02
148.7
118 I
18.7
118
0.1
14.5
7.6
6.1
1.3
-06
18.7
11.3
52
2.1
01
-14.4
-15.0
1.0
-0.4
0.0
11.5
14.0
-17
-0.1
-0.7
2,893.8
2,959.7
-65.9
3,1198
3,228.6
-108.9
3,174.8
3,244.6
-69.8
3,1328
3,267.8
-135.0
250.7
250.2
0.5
2812
295.2
-14.0
327.6
346.0
-18.3
286.3
292.5
-6.2
18.9
-84.8
·25.5
-834
25.1
-94.9
-38.6
-96.4
5.5
-5.0
1.4
-153
-3.9
-14.5
-4.6
-1.6
672.9
795.2
798.8
750.1
92.3
84.1
40.6
47.4
14
15
16
17
18
Gross Purchases of Foreign Securities
Gross Sales of Foreign Securities
Foreign Securities Purchased, net (hne 14 less line 15) 13
Foreign Bonds Purchased, net
Foreign EqUities Purchased, net
19
Net Long-Term Flows (hne 3 plus line 16)
/I
Net foreign purchases of U.S. securities (+)
Includes 1ntemational and Regional Organizations
Net U.S. acqUiSitions offoreign secunties (-)
12
13
Source. U.S Department of the Treasury
2
JS-2496: Deputy Assistant Secretary Iannicola Discusses U.S. <BR>Financial Literacy Ef... Page 1 of 1
FROM THE OFFICE OF PUBLIC AFFAIRS
June 10, 2005
JS-2496
Deputy Assistant Secretary lannicola Discusses U.S.
Financial Literacy Efforts with International Panel
Treasury's Deputy Assistant Secretary for Financial Education Dan lannicola Jr.
today spoke about American efforts to improve financial education at Canada's firstever National Symposium on Financial Capability in Ottawa. He discussed U.S.
financial education strategies and programs and commended the Financial
Consumer Agency of Canada for facilitating the international dialogue.
Also on the panel, which was entitled "Policies to Support Financial Capability:
International Perspectives," were representatives of the United Kingdom's Financial
Services Authority and the Organization for Economic Cooperation and
Development which represents thirty countries and has relationships with seventy
other countries.
lannicola said "America is making strides towards financial literacy, but we are not
alone on that path. Today shows us that Canada, the United Kingdom and many
other nations are also working to educate their people on managing their money."
Panel members discussed the experiences of their home countries in trying to
financially educate their citizens. They discussed what has been effective, what
hasn't worked, and what their countries plan to do in the future.
"When we engage in an international dialogue like this we receive as much as we
share, and learn as much as we teach. The lessons we take from today will help us
make more effective use of our financial education resources and do more for
Americans back home," said lannicola.
The Financial Consumer Agency of Canada, Policy Research Initiative and Social
and Enterprise Development Innovations worked in collaboration to establish the
National Symposium on Financial Capability. The two-day National Symposium
featured leading national and international experts and engaged government, nonprofit and business sector representatives in discussions regarding the current state
of policy and practice surrounding financial capability.
The Department of the Treasury is a leader in promoting financial education.
Treasury established the Office of Financial Education in May of 2002. The Office
works to promote access to the financial education tools that can help all Americans
make wiser choices in all areas of personal financial management, with a special
emphasis on saving, credit management, home ownership and retirement
planning. The Office also coordinates the efforts of the Financial Literacy and
Education Commission, a group chaired by the Secretary of Treasury and
composed of representatives from 20 federal departments, agencies and
commissions, which works to improve financial literacy and education for people
throughout the United States. For more information about the Office of Financial
Education visit: www.treas.gov/financiC1leducation.
http://www.treas.goy/press/releases/js2496.htm
7/1/2005
js-2497: Treasury Secretary John Snow<br>Remarks at Conclusion of Europe Trip<br>A ... Page 1 of3
FROM THE OFFICE OF PUBLIC AFFAIRS
June 16, 2005
js-2497
Treasury Secretary John Snow
Remarks at Conclusion of Europe Trip
Amerkia Haus, Frankfurt, Germany
June 16, 2004
As you know, I have been traveling throughout Europe for the past week - starting
with meetings in London for the G8 pre-Summit Finance Ministers meetings, then in
the Netherlands, Brussels, Paris, and today in Frankfurt.
In London last weekend we had the great pleasure to announce a landmark
agreement to eliminate the debt stock that highly indebted poor countries owe to
the IMF, IDA and African Development Fund. This historic agreement - which built
upon the discussions between President Bush and Prime Minister Blair last week,
will eliminate the debts of the poorest indebted countries. It had been more than a
year since we at the U.S. Treasury had developed the proposal for 100% debt
cancellation, so I was very pleased that the G8 agreed to support our plan. It is
also important that the agreement preserves the financial integrity of the
institutions. Going forward, we must all work together to provide these countries
with grants and ensure that they do not again build up unsustainable debts.
Today, I would like to focus on my visits this week in The Hague, Brussels, Paris
and Frankfurt to discuss European economic performance and the contribution that
US-EU cooperation on financial markets and regulation can make to global growth.
My message on this trip is clear: America wants our economic partnership to results
in an economically dynamic and vibrant Europe that contributes to the global
expansion. This is not a zero-sum game.
I was able to report this week that the US is doing its part to contribute to the global
expansion with real GOP rising 4.4 percent last year, first quarter growth this year at
3.5%, and an outlook for continued robust expansion. Our strong growth is also
working to boost revenues and the fiscal deficit is contracting sharply. Private
forecasters now project that the U.S. deficit this year will come in under 3% of GOP
-- even on a consolidated basis that includes federal, state and local fiscal budgets.
I am confident that in the coming years, we will bring our federal deficit much further
down to below 2 % of GOP. Reducing our fiscal deficit, along with efforts to
increase domestic savings, are integral to limiting US current account imbalances.
The best contribution the United States can make to the world economy is to keep
our house in order, to sustain strong growth, and to continue to maintain our
openness and the flexibility of our markets.
Unfortunately, economic growth in key continental European countries has been
persistently weak for too long. We discussed this topic at the G8 meetings, and I
was able to discuss it in further detail with European economic leaders this week.
On Tuesday I met with President Barroso and Commisioner Almunia in Brussels to
emphasize the need for Europe to implement vigorous structural reforms to boost
its potential growth, jobs and incomes. It is clear that adjustments of global
imbalances will be difficult when US rates of growth are substantially higher than
those in Europe. And it is in nobody's interest to see US growth decline, even
though this would be a quick way to cut global imbalances.
I know that European leaders know what is needed to get the job done so I came to
Europe to listen, not to lecture. How Europe chooses to reform is for Europe to
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7/1/2005
js-2497: Treasury Secretary John Snow<br>Remarks at Conclusion of Europe Trip<br>A... Page 2 of3
decide, and the plan outlined in the Lisbon Agenda is an appropriate roadmap. I
am encouraged that many good reforms steps are already being put in place
throughout the continent - pension reform in France, labor reform in Germany, and
tax reforms in Italy. But I do urge Europe to move steadily on its reform path.
Throughout my trip, I have focused my talks on one area of the European reform
program -- financial market and regulatory issues. We know that financial
liberalization is one of the most critical drivers of our countries' economic vitality.
Our Trans-Atlantic relationship is the nexus for the lion's share of the world's
financial market participation, so we have a unique and shared responsibility to
ensure for the efficient performance of markets and smooth adjustments in global
accounts. Europe is now working to converge twenty-five different financial
systems into one single market. This is an enormous challenge, and the topic was
a focal point in my talks with EU Commissioner Charlie McCreevy and financial
leaders across the continent this week. I believe that this is an area where Europe
is demonstrating that it is up to the challenge.
The Financial Services Action Plan is a major step forward in creating an integrated
European financial market, which the United States supports and welcomes. The
Treasury Department has worked closely with Europe on financial markets through
the US-EU Financial Markets Regulatory Dialogue. This will be good for global
growth, for anchoring European financial legislation in the evolving global financial
architecture and for furthering the globalization of markets. The challenge now
facing Europe is not new financial market legislation, but implementation.
I learned a great deal about these challenges at my meetings in Brussels, as well
with the Committee of European Banking Supervisors in London, and the
Committee for European Securities Regulators in Paris.
We know that when Europe puts forward financial measures such as the Financial
Conglomerates Directive, it affects US markets and firms. Similarly, when the US
puts implements legislation such as Sarbanes-Oxley, it can affect Europe. So we
have a wide range of issues to discuss between the US and Europe, and we are
doing so in an effective way and with a sincere spirit of cooperation.
In the last days, I also had the opportunity to exchange views with my counterparts
on important issues such as accounting convergence and the recent road map
agreed between the SEC and the EU, hedge funds, Basle II, and reinsurance.
These issues do not often find their way to the front-page of newspapers, but
progress on them is vital to our economic and financial relationship.
Our dialogue is working and it aims to look forward, identify issues, and build a
basis for the convergence of financial markets on both sides of the Atlantic on the
highest quality standards.
Financial markets in particular have gone global. But regulation has always been
an inherently national activity. It is too costly when increasingly global firms face
multiple, overlapping sets of national regulations. Policy-makers and regulators
need to provide their citizens with proper investor protection. In doing so, the
realities of the global financial marketplace dictate that they work together to
transcend national borders. This requires that we rely on markets and market
disciplines, and a regulatory light touch.
I leave Europe heartened by what I have learned and seen. I believe that Europe is
on the right track in its efforts to bring 25 financial markets into one, and that the US
and EU - working together through our Dialogue - can and will converge on best
global practices.
The benefits to all of us will be enormous. Various studies indicate that the
integration of European capital markets alone will boost European GOP by one
percentage point per year. Further, a recent OECD study concluded that
deregulating European economies would raise EU GOP per capita by 2.8%. This
means an average worker would get a year's extra wages over a working life.
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js-2497~ TreasulY Secretary Jo'lm Snow<br>Remarks at Conclusion of Europe Trip<br>A... Page 3 of3
The gains from US-European cooperation on growth and financial markets are
potentially enormous. The US and Europe, as the world's two largest economies,
must seize this opportunity and lead.
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7/1/2005
s2498: Snow Concludes Europe Trip
Page 1 of 1
FROM THE OFFICE OF PUBLIC AFFAIRS
June 16, 2005
js2498
Snow Concludes Europe Trip
"The gains from US-European cooperation on
growth and financial markets are potentially
enormous. The US and Europe, as the world's
two largest economies, must seize this opportunity
and lead," Secretary Snow said today in Frankfurt.
•
Read Secretary Snow's Full Remal'ks
\.
http://www.tre;.s.gov/press/releasts;J32498.htm
7/6/2005
JS-24~l): Statc1"t"tCIlt of' Janice B. Gardner<br>Nominee to be Assistant Secretary for Intell...
Page 1 of 2
FROM THE OFFICE OF PUBLIC AFFAIRS
June 16, 2005
JS-2499
Statement of Janice B. Gardner
Nominee to be Assistant Secretary for Intelligence and Analysis
U.S. Department of the Treasury
Before the Senate Select Committee on Intelligence
Chairman Roberts, Ranking Member Rockefeller and distinguished members of this
committee, it is an honor for me to appear before you today. It is a privilege to have
been nominated by President Bush to be the first Assistant Secretary of the
Treasury for Intelligence and Analysis. I thank him, Secretary John Snow and DNI
Negroponte for their confidence in recommending me for this important position. If
confirmed, I look forward to working closely with this committee, the United States
Senate and your colleagues in the House of Representatives to disrupt financing for
terrorism and other national security threats.
I'd also like to thank my friends and colleagues who are here with me today. This
work is truly a team effort, and I greatly appreciate their support. Although my
parents are not here today, I'd also like to thank them for all their encouragement
and support over the years.
I am a career intelligence professional with over 20 years of experience. I first came
to the Department of the Treasury in November 2002 as the Secretary's intelligence
briefer and senior liaison officer. When the Office of Terrorism and Financial
Intelligence (TFI) was created last year, I became the Deputy Assistant Secretary
for the new Office of Intelligence and Analysis (OIA). Over the past year, I have
helped Under Secretary Levey lead the effort to stand up the new office.
I've been fortunate to have a variety of challenging analytical and managerial
assignments throughout my career. I started as an intelligence analyst working on
East Asia, primarily Japan and Korea. I served on a rotation to the State
Department as an economic officer in the U.S. Embassy in Tokyo. My first
management assignment came in 1993 as chief of the Persian Gulf Branch in the
Office of Near East and South Asian Analysis. I have also served in some key staff
positions, including the executive assistant in the Office of the Director of Central
Intelligence, the DCI representative to the National Security Council and staff officer
in the Vice President's office. Prior to being assigned to the Treasury Department, I
served as Deputy Director of the Foreign Broadcast Information Service, where I
oversaw roughly 1000 U.S. and foreign national staff and independent contractors.
Mr. Chairman, if confirmed, I would focus on five key strategic areas:
•
For the first time, the Department's intelligence office is producing all-source
intelligence analysis on terrorist financing and other national security
threats. Prior to the creation of OIA, the intelligence office served primarily
as a liaison office for senior policymakers in the Department The new office
is now working to provide insightful intelligence analysis that is focused on
supporting the full range of Treasury's authorities to cut off illicit financing.
While the office has already developed a current intelligence process, if
confirmed, I would build a capability to produce strategic intelligence
analysis that supports long-term policy development directed at national
security threats to the financial system.
• The Office is also working to enhance intelligence support to the
Department on the full range of political and economic issues. As a member
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7/1/2005
JS-2499: Statement of Janice B. Gardner<br>Nominee to be Assistant Secretary for Intell... Page 2 of2
of the National Security Council, Treasury needs timely intelligence on fastbreaking events, as well as in-depth analysis from experts from the
intelligence community. Thus, if confirmed, I would work to better integrate
intelligence into the policy process and improve support to all aspects of the
Departmenfs mission.
• As a member of the Intelligence Community, the Department needs to
reinvigorate its relationship with the rest of the community. The Secretary
has already met with the new Director of National Intelligence, and, if
confirmed, I plan to devote much of my focus and energy to reengage
Treasury in IC forums. As you know, our office is the smallest component in
the IC, but I believe that it can make a significant contribution to the
community on both collection and production issues.
• Under the Treasury Order that created the Office of Terrorism and Financial
Intelligence, the Office of Intelligence and Analysis was designated to
coordinate and oversee all intelligence analysis within the Department. The
Department houses the bulk of the financial information in the U.S.
Government, as well as expertise on the global financial system. OIA will
serve as the focal point that fuses financial data from the Office of Foreign
Assets Control (OFAC) and Financial Crimes Enforcement Network
(FinCEN), as well as the Intelligence Community.
• As a new office, OIA must make a significant investment in its future,
particularly in its human resources and information technology
infrastructure. I've been spending a large portion of my time as the Deputy
Assistant Secretary trying to ensure that we have the capability to produce
the kind of sophisticated analytical products that OIA is uniquely positioned
to provide. If confirmed, I will work closely with Under Secretary Levey, the
Assistant Secretary for Management and the Chief Information Officer to
ensure that the office has the tools necessary to get the job done.
Mr. Chairman, Senator Rockefeller, 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://www.treas.goy/press/releases/js2499.htm
7/1/2005
JS-2500. Treasury Designates Financial Supporter ofIraqi Insurgency
Page 1 of3
FROM THE OFFICE OF PUBLIC AFFAIRS
June 17, 2005
JS-2500
Treasury DeSignates Financial Supporter of Iraqi Insurgency
Muhammad Yunis Ahmad was designated today pursuant to Executive Order
13315, which is aimed at blocking property of the former Iraqi regime, its senior
officials and their family members and those who act for or on their behalf.
According to information available to the U.S. Government, Ahmad is currently a
financial facilitator and operational leader of the New Regional Command of the
reconstituted Ba'ath Party. He is instrumental in providing guidance, financial
support and coordination of insurgent attacks throughout Iraq.
"Ahmad was a party to the violence and oppression of the former Hussein regime,"
said Stuart Levey, Treasury's Under Secretary for Terrorism and Financial
Intelligence (TFI). "He still seeks to sabotage the hopes of the Iraqi people by
supporting the insurgents' brutal attacks against coalition forces and Iraqis alike.
DeSignations like today's help cut off the money supporting those efforts."
The Iraqi government has charged Ahmad with providing funding, leadership and
support to several insurgent groups conducting attacks against the Iraqi people, the
Interim Iraqi Government, Iraqi National Guard, the Iraqi Police and Coalition
Forces.
"Ahmad is first among the U.S. Central Command's list of key insurgent leaders,
and the Multi National Forces in Iraq are offering a reward of $1 million for
information leading to his capture," said Robert Werner, Director of Treasury's
Office of Foreign Assets Control (OFAC). "Today's deSignation is the result of the
strong support and coordination of Treasury's interagency partners in the U.S.
Government, notably the U.S. Central Command."
Information available to the U.S. Government indicates that Ahmad was a highranking member of the former Ba'ath Party in Iraq. Ahmad served as the Governor
of the AI-Muthana Governorate prior to the 1990 Gulf War. After the war, he was
promoted to a senior Ba'ath Party position in Northern Iraq.
Ahmad is described as a former Ba'ath Party regional command member
responsible for party activities in the Salah Ad Din, the AI-Ta'mim and the AISulaymaniyah Governorates. He held this position until the fall of the regime in
2003, when he allegedly fled to Syria and became a senior leader in the insurgency
against the Coalition Provisional Authority (CPA).
Ahmad also reportedly has relationships with other senior members of the former
Iraqi regime, including Izzat Ibrahim al-Duri, the former Vice Chairman of the
Revolutionary Command Council of Iraq. AI-Duri was previously listed in the Annex
to E.O. 13315 and named to the UN 1483 committee list.
Following the CPA's disestablishment of the Iraqi Ba'ath Party after Operation Iraqi
Freedom, the party began to reconstitute itself under new leadership. According to
information available to the U.S. Government, the reconstituted Iraqi Ba'ath Party
was allegedly operating with AI-Duri as the head of the party and Ahmad as his
deputy. Recently, Ahmad was reportedly elected General Secretary of this party.
http://www.trea..\_gov/press/releases/j52500.htm
7/1/2005
JS-2500: Trea~ury DesIgnates Financial Supporter oflraqi Insurgency
Page 2 of3
U.S. Government information also indicates that AI-Duri headed up the military wing
of an anti-Coalition group formed after the fall of the Saddam regime, while Ahmad
ran the political wing of the group.
Muhammad Yunis Ahmad
AKAs: AHMED, Muhammad Yunis
AL-AHMED, Muhammad Yunis
AL-BADRANI, Muhammad Yunis Ahmad
AL-MOALI, Mohammed Yunis Ahmed
DOB: 1949
POB: AI-Mowall, Mosul, Iraq
Nationality: Iraqi
Address: AI-Dawar Street
Bludan, Syria
Address: Damascus, Syria
Address: Mosul, Iraq
Address: Wadi AI-Hawi, Iraq
Address: Dubai, United Arab Emirates
Address: AI-Hasaka, Syria
Today's action is taken pursuant to Executive Order 13315 which blocks property
and interests in property of senior officials of the former Iraqi regime within the
possession or control of U.S. persons. The United States is also submitting the
name of this individual to the U.N. with the recommendation they be listed by the
1518 Committee under U.N. Security Council Resolution (UNSCR) 1483. UNSCR
1483 requires U.N. member states to identify, freeze and transfer to the
Development Fund for Iraq (DFI) assets of senior officials of the former Iraqi regime
and their immediate family members, including entities owned or controlled by them
or by persons acting on their behalf.
For more information on additional Treasury actions against the former Iraqi regime,
please visit the following links:
Syrian Company, Nationals Designated by Treasury for Support to Former Saddam
Hussein Regime
http://www.treasury.gov/press/releases/js2487.htm
Treasury Designates 16 Family Members of the Former Iraqi Regime, Submits 191
Iraqi Entities to United Nations
http://www.treas.gov/press/releases/js1242.htm
Treasury Designates Front Companies, Corrupt Officials Controlled by Saddam
Hussein's Regime
http://www.treas.gov/press/releases/js1331.htm
Uday Saddam Hussein's Inner Circle Designated by Treasury
http://www.tn;!as.gov/pressfreleases/is1600.htm
U.S., Iraq, U.K. Jointly Designate Ambassadors Intel Ops of the Former Hussein
Regime
http://www-treas.gov/press/releases/js1821.htm
http://www.treas.goy/press/releases/js2500.htm
7/1/2005
JS-250 I: Remarks ot <HR>Ocputy Assistant Secretary for Critical Infrastructure <BR>Pr... Page 1 of 3
FROM THE OFFICE OF PUBLIC AFFAIRS
June 17, 2005
JS-2501
Remarks of
Deputy Assistant Secretary for Critical Infrastructure
Protection D. Scott Parsons
Beating Identity Crime: How the Public and Private
Sectors are
Working Together to Help Consumers and Put Fraudsters
Behind Bars
FDIC Identity Theft Symposium
Los Angeles, California
Good morning, ladies 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 heart 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 essential to the
effectiveness of our financial system.
For example, record numbers of Americans have bought or refinanced a home in
the past few 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
identity theft. When fraud discourages Americans from taking advantage 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 the consumers' power of choice and enhance competition in
the industry. An erosion of trust can threaten the effectiveness of our financial
system.
Collectively, we understand the concern of our citizens, customers, and business
partners. We must communicate, though, that millions and millions of financial
transactions are processed daily without incident. Americans, as well as our trading
partners around the globe, should know that our financial system is the most
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JS-250 I: Remarks ot <BR>Deputy Assistant Secretary for Critical Infrastructure <BR>Pr... Page 2 of 3
reliable in the world.
There is no single solution to this challenge. Nor is there a "one size fits all"
solution. Fighting identity theft requires a 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 against this 21 st
century form of fraud.
President Bush recognized 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, anyone may obtain a free copy of his credit report
from each of the three nationwide credit bureaus by contacting a centralized
request system. You will find the information needed to do this at
wwyv.annualcreditreQQr:t.<::om. Reviewing one's credit record is one of the best ways
to catch identity theft early.
Every American can put fraud alerts on his or her credit files with the major credit
bureaus if you believe that you may be a victim of identity theft or become one.
Victims of identity theft can get additional free credit reports. And with proper
documentation, consumers can stop financial institutions and credit bureaus from
passing along information resulting from an identity theft incident.
The President also signed into law the Identity Theft Penalty Enhancement Act in
2004. This statute created 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 mail 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 banking 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 non-affiliated third parties. 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 Reporting Act (FCRA) can also have an impact on financial
institutions' disclosure of information to affiliated entities. And the FACT Act
amendments help consumers enhance the accuracy of information about them and
restrict its disclosure.
While regulation influences financial institutions' responses to identity theft, the
actions freely chosen by financial institutions are Significant. We appreciate the
financial sector's effort and investment to preserve confidence in the security of all
financial transactions, online 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 and
to assist customers who become victims.
Members of the Financial Services Roundtable and others developed the Identity
Theft Assistance Center (ITAC). Supported by about 50 of the largest financial
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JS-250l: Remarks of <BR>Deputy Assistant Secretary for Critical Infrastructure <BR>Pr... Page 3 of 3
services companies, IT AC offers individualized assistance to customers of the
member institutions and to victims who find that accounts have been opened at
those institutions due to an identity theft crime.
We have also seen an explosion of promising technological innovation. Antiphishing and anti-spyware software, software updates, and firewalls all exist to help
spot and detect crimeware before it gets to your computer.
Financial institutions also have developed sophisticated, automated anti-fraud
technologies that can spot unusual or risky transactions and stop them quickly.
From a legal perspective, there are federal criminal and civil statutes for
prosecuting identity thieves, including criminal penalties for computer, wire, and
mail fraud, as well as anti-spam penalties. Many states have anti-fraud statutes as
well.
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 law enforcement together to tackle some of the largest or most
complex cases. There are encouraging signs that other countries recognize the
problem of identity theft, and there has been significant progress in getting
international cooperation in the pursuit of these criminals.
Identity theft knows no borders. We've become a "connected world" and benefited
enormously from the Internet. 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. Fighting cybercrime in the global theatre is a daily challenge for law enforcement.
Some of you here today are financial services providers. 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 knowing what to do quickly if you become a victim is the most
critical defense. Informed, proactive consumers will enable us to win the war on
identity theft.
At the Treasury, we are passionate about fighting fraud. From partnership with the
private sector to direct consumer education we are 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.
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7/1/2005
JS-2502: Treasury and IRS Issue Guidance on Single Insurer Arrangements
Page 1 of 1
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free A.dQjJe@ Acropat',f;)F?QadgrrJ:),
June 17,2005
JS-2502
Treasury and IRS Issue Guidance on Single Insurer Arrangements
Today the Treasury Department and the IRS issued guidance on the qualification
of arrangements as "insurance" for federal income tax purposes,
Today's ruling does not call into question the vast majority of insurance contracts,
which are issued by commercial insurance companies in the ordinary course of
business, Instead, it reminds taxpayers who are parties to smaller one-on-one
arrangements that the requirement of risk distribution must be met for the
arrangements to qualify as insurance. The ruling was accompanied by a notice
soliciting comments from the public on other insurance-related topics.
Since the Supreme Court's 1941 decision in Helvering v, LeGierse, both risk
shifting and risk distribution have been required for an arrangement to constitute
insurance for Federal income tax purposes. Revenue Ruling 2005-40 concludes
that an arrangement with an entity that "insures" the risks of only one policyholder
does not qualify as insurance for tax purposes because the risks are not distributed
among other policyholders. The ruling also explains how this conclusion applies to
single-member limited liability companies, which in some cases are treated as
entities separate from their owners and in other cases are disregarded.
Qualification of an arrangement as insurance may effect whether the issuer is taxed
as an insurance company and whether or when amounts paid under the
arrangement may be deductible. If an arrangement does not qualify as insurance, it
may instead be characterized as a deposit, a loan, a contribution to capital, or an
indemnity arrangement other than an insurance contract.
A copy of the guidance is attached.
REPORTS
• Tax on insurance Companies other tha!l1-it~ tnsurance Companies
• Administrative, Procedural, and Miscellaneolls Qualification of certain
arrangements as insuLa_nc~
http://www.treas.gov/press/releases/js2502.htm
7/1/2005
Part I
Section 831.--Tax on Insurance Companies other than Life Insurance Companies
(Also § 162; 1.162-1.)
Rev. Rul. 2005-40
ISSUE
Do the arrangements described below constitute insurance for federal income tax
purposes? If so, are amounts paid to the issuer deductible as insurance premiums and
does the issuer qualify as an insurance company?
FACTS
Situation 1. X, a domestic corporation, operates a courier transport business
covering a large portion of the United States. X owns and operates a large fleet of
automotive vehicles representing a significant volume of independent, homogeneous
risks. For valid, non-tax business purposes, X entered into an arrangement with Y, an
2
unrelated domestic corporation, whereby in exchange for an agreed amount of
"premiums," Y "insures" X against the risk of loss arising out of the operation of its fleet
in the conduct of its courier business.
The amount of "premiums" under the arrangement is determined at arm's length
according to customary insurance industry rating formulas. Y possesses adequate
capital to fulfill its obligations to X under the agreement, and in all respects operates in
accordance with the applicable requirements of state law. There are no guarantees of
any kind in favor of Y with respect to the agreement, nor are any of the "premiums" paid
by X to Y in turn loaned back to X. X has no obligation to pay Y additional premiums if
~'s
actual losses during any period of coverage exceed the "premiums" paid by X. X
will not be entitled to any refund of "premiums" paid if ~'s actual losses are lower than
the "premiums" paid during any period. In all respects, the parties conduct themselves
consistent with the standards applicable to an insurance arrangement between
unrelated parties, except that Y does not "insure" any entity other than X.
Situation 2. The facts are the same as in Situation 1 except that, in addition to its
arrangement with X, Y enters into an arrangement with
~,
a domestic corporation
unrelated to X or Y, whereby in exchange for an agreed amount of "premiums," Y also
"insures" ~ against the risk of loss arising out of the operation of its own fleet in
connection with the conduct of a courier business substantially similar to that of X. The
amounts Yearns from its arrangements with ~ constitute 10% of Y's total amounts
earned during the taxable year on both a gross and net basis. The arrangement with ~
accounts for 10% of the total risks borne by Y.
3
Situation 3. X, a domestic corporation, operates a courier transport business
covering a large portion of the United States. ~ conducts the courier transport business
through 12 limited liability companies (LLCs) of which it is the single member. The
LLCs are disregarded as entities separate from ~ under the provisions of § 301.7701-3
of the Procedure and Administration Regulations. The LLCs own and operate a large
fleet of automotive vehicles, collectively representing a significant volume of
independent, homogeneous risks. For valid, non-tax business purposes, the LLCs
entered into arrangements with Y, an unrelated domestic corporation, whereby in
exchange for an agreed amount of "premiums," Y "insures" the LLCs against the risk of
loss arising out of the operation of the fleet in the conduct of their courier business.
None of the LLCs account for less than 5%, or more than 15%, of the total risk assumed
by Y under the agreements.
The amount of "premiums" under the arrangement is determined at arm's length
according to customary insurance industry rating formulas. Y possesses adequate
capital to fulfill its obligations to the LLCs under the agreement, and in all respects
operates in accordance with the licensing and other requirements of state law. There
are no guarantees of any kind in favor of Y with respect to the agreements, nor are any
of the "premiums" paid by the LLCs to Y in turn loaned back to X or to the LLCs. No
LLC has any obligation to pay Y additional premiums if that LLC's actual losses during
the arrangement exceed the "premiums" paid by that LLC. No LLC will be entitled to a
refund of "premiums" paid if that LLC's actual losses are lower than the "premiums" paid
during any period. Y retains the risks that it assumes under the agreement.
In all
4
respects, the parties conduct themselves consistent with the standards applicable to an
insurance arrangement between unrelated parties, except that Y does not "insure" any
entity other than the LLCs.
Situation 4. The facts are the same as in Situation 3, except that each of the 12
LLCs elects pursuant to § 301.7701-3(a) to be classified as an association.
LAW
Section 831 (a) of the Internal Revenue Code provides that taxes, computed as
provided in § 11, are imposed for each taxable year on the taxable income of each
insurance company other than a life insurance company. Section 831 (c) provides that,
for purposes of § 831, the term "insurance company" has the meaning given to such
term by § 816(a). Under § 816(a), the term "insurance company" means any company
more than half of the business of which during the taxable year is the issuing of
insurance or annuity contracts or the reinsuring of risks underwritten by insurance
companies.
Section 162(a) provides, in part, that there shall be allowed as a deduction all the
ordinary and necessary expenses paid or incurred during the taxable year in carrying on
any trade or business. Section 1.162-1 (a) of the Income Tax Regulations provides, in
part, that among the items included in business expenses are insurance premiums
against fire, storms, theft, accident, or other similar losses in the case of a business.
Neither the Code nor the regulations define the terms "insurance" or "insurance
contract." The United States Supreme Court, however, has explained that in order for
an arrangement to constitute insurance for federal income tax purposes, both risk
5
shifting and risk distribution must be present. Helvering v. Le Gierse, 312 U.S. 531
(1941 ).
The risk transferred must be risk of economic loss. Allied Fidelity Corp. v.
Commissioner, 572 F.2d 1190, 1193
(th Cir.),
cert. denied, 439 U.S. 835 (1978). The
risk must contemplate the fortuitous occurrence of a stated contingency, Commissioner
v. Treganowan, 183 F.2d 288, 290-91 (2d Cir.), cert. denied, 340 U.S. 853 (1950), and
must not be merely an investment or business risk.
Le Gierse, at 542; Rev. Rul. 89-96,
1989-2 C.B. 114.
Risk shifting occurs if a person facing the possibility of an economic loss
transfers some or all of the financial consequences of the potential loss to the insurer,
such that a loss by the insured does not affect the insured because the loss is offset by
a payment from the insurer. Risk distribution incorporates the statistical phenomenon
known as the law of large numbers. Distributing risk allows the insurer to reduce the
possibility that a single costly claim will exceed the amount taken in as premiums and
set aside for the payment of such a claim. By assuming numerous relatively small,
independent risks that occur randomly over time, the insurer smooths out losses to
match more closely its receipt of premiums. Clougherty Packing Co. v. Commissioner,
811 F .2d 1297, 1300 (9 th Cir. 1987).
Courts have recognized that risk distribution necessarily entails a pooling of
premiums, so that a potential insured is not in significant part paying for its own risks.
Humana, Inc. v. Commissioner, 881 F.2d 247, 257 (6th Cir. 1989). See also Ocean
Drilling & Exploration Co. v. United States, 988 F.2d 1135, 1153 (Fed. Cir. 1993) ("Risk
6
distribution involves spreading the risk of loss among policyholders."); Beech Aircraft
Corp. v. United States, 797 F.2d 920, 922 (10th Cir. 1986) (,"[R]isk distributing' means
that the party assuming the risk distributes his potential liability, in part, among others. ");
Treganowan, at 291 (quoting Note, The New York Stock Exchange Gratuity Fund:
Insurance that Isn't Insurance, 59 Yale L. J. 780, 784 (1950)) ('''By diffusing the risks
through a mass of separate risk shifting contracts, the insurer casts his lot with the law
of averages. The process of risk distribution, therefore, is the very essence of
insurance."'); Crawford Fitting Co. v. United States, 606 F. Supp. 136, 147 (N.D. Ohio
1985) ("[T]he court finds ... that various nonaffiliated persons or entities facing risks
similar but independent of those faced by plaintiff were named insureds under the
policy, enabling the distribution of the risk thereunder."); AMERCO and Subsidiaries v.
Commissioner, 96 T.C. 18,41 (1991), aff'd, 979 F.2d 162 (9 th Cir. 1992) ("The concept
of risk-distributing emphasizes the pooling aspect of insurance: that it is the nature of an
insurance contract to be part of a larger collection of coverages, combined to distribute
risk between insureds.").
ANALYSIS
In order to determine the nature of an arrangement for federal income tax
purposes, it is necessary to consider all the facts and circumstances in a particular
case, including not only the terms of the arrangement, but also the entire course of
conduct of the parties. Thus, an arrangement that purports to be an insurance contract
but lacks the requisite risk distribution may instead be characterized as a deposit
arrangement, a loan, a contribution to capital (to the extent of net value, if any), an
7
indemnity arrangement that is not an insurance contract, or otherwise, based on the
substance of the arrangement between the parties. The proper characterization of the
arrangement may determine whether the issuer qualifies as an insurance company and
whether amounts paid under the arrangement may be deductible.
In Situation 1, Y enters into an "insurance" arrangement with X. The
arrangement with X represents V's only such agreement. Although the arrangement
may shift the risks of X to
y:, those risks are not, in turn, distributed among other
insureds or policyholders. Therefore, the arrangement between X and Y does not
constitute insurance for federal income tax purposes.
In Situation 2, the fact that Y also enters into an arrangement with
~
does not
change the conclusion that the arrangement between X and Y lacks the requisite risk
distribution to constitute insurance. V's contract with
~
represents only 10% of the total
amounts earned by Y, and 10% of total risks assumed, under all its arrangements. This
creates an insufficient pool of other premiums to distribute X's risk. See Rev. Rul. 200289,2002-2 C.B. 984 (concluding that risks from unrelated parties representing 10% of
total risks borne by subsidiary are insufficient to qualify arrangement between parent
and subsidiary as insurance).
In Situation 3, Y contracts only with 12 single member LLCs through which ~
conducts a courier transport business. The LLCs are disregarded as entities separate
from ~ pursuant to § 301.7701-3. Section 301. 7701-2(a} provides that if an entity is
disregarded, its activities are treated in the same manner as a sole proprietorship,
branch or division of the owner. Applying this rule in Situation 3,
y: has entered into an
8
"insurance" arrangement only with X. Therefore, for the reasons set forth in Situation 1
above, the arrangement between X and Y does not constitute insurance for federal
income tax purposes.
In Situation 4, the 12 LLCs are not disregarded as entities separate from X, but
instead are classified as associations for federal income tax purposes. The
arrangements between Y and each LLC thus shift a risk of loss from each LLC to Y.
The risks of the LLCs are distributed among the various other LLCs that are insured
under similar arrangements. Therefore the arrangements between the 12 LLCs and Y
constitute insurance for federal income tax purposes. See Rev. Rul. 2002-90, 2002-2
C.B. 985 (similar arrangements between affiliated entities constituted insurance).
Because the arrangements with the 12 LLCs represent V's only business, and those
arrangements are insurance contracts for federal income tax purposes, Y is an
insurance company within the meaning of §§ 831 (c) and 816(a). In addition, the 12
LLCs may be entitled to deduct amounts paid under those arrangements as insurance
premiums under § 162 if the requirements for deduction are otherwise satisfied.
HOLDINGS
In Situations 1, 2 and 3, the arrangements do not constitute insurance for federal
income tax purposes.
In Situation 4, the arrangements constitute insurance for federal income tax
purposes and the issuer qualifies as an insurance company. The amounts paid to the
issuer may be deductible as insurance premiums under § 162 if the requirements for
deduction are otherwise satisfied.
9
DRAFTING INFORMATION
The principal author of this revenue ruling is John E. Glover of the Office of the
Associate Chief Counsel (Financial Institutions & Products). For further information
regarding this revenue ruling contact Mr. Glover at (202) 622-3970 (not a toll-free call).
Part III - Administrative, Procedural, and Miscellaneous
Qualification of certain arrangements as insurance
Notice 2005-49
This notice requests comments on additional guidance concerning the standards
for determining whether an arrangement constitutes insurance for federal income tax
purposes.
In Rev. Rul. 2001-31,2001-1 C.B. 1348, the Internal Revenue Service
announced that it would no longer raise the "economic family theory" set forth in Rev.
Rul. 77-316,1977-2 C.B. 53, in addressing whether captive insurance transactions
constitute insurance for federal income tax purposes. Since 2001, the Service and the
Treasury Department have published four revenue rulings providing guidance on the
standards to be used to determine whether a particular arrangement constitutes
insurance. Most recently, Rev. Rul. 2005-40, page_, this Bulletin, explains that (1) in
order for an arrangement to qualify as insurance, both risk shifting and risk distribution
must be present, and (2) the risk distribution requirement is not satisfied if the issuer of
an "insurance" contract enters into such a contract with only one policyholder. See also
Rev. Rul. 2002-89, 2002-2 C.B. 984 (setting forth circumstances under which
arrangements between a domestic parent corporation and its wholly owned subsidiary
constitute insurance); Rev. Rul. 2002-90, 2002-2 C.B. 985 (setting forth circumstances
under which payments for professional liability coverage by a number of operating
2
subsidiaries to an insurance subsidiary of a common parent constitute insurance); Rev.
Rul. 2002-91, 2002-2 C.B. 991 (setting forth circumstances under which amounts paid
to a group captive of unrelated insureds are deductible as insurance premiums and in
which the group captive qualifies as an insurance company).
The Service and the Treasury Department are aware that further guidance is
needed in this area and request comments on issues that should be addressed. In
particular, comments are requested regarding (1) the factors to be taken into account in
determining whether a cell captive arrangement constitutes insurance and, if so, the
mechanics of any applicable federal tax elections; (2) circumstances under which the
qualification of an arrangement between related parties as insurance may be affected
by a loan back of amounts paid as "premiums;" (3) the relevance of homogeneity in
determining whether risks are adequately distributed for an arrangement to qualify as
insurance, and (4) federal income tax issues raised by transactions involving finite risk.
Comments should be submitted in writing on or before October 3, 2005 and
should include a reference to Notice 2005-49. Comments may be submitted to
CC:PA:LPD:PR (Notice 2005-49), Room 5203, Internal Revenue Service, P.O. Box
7604, Ben Franklin Station, Washington, DC 20044. Alternatively, comments may be
submitted electronically via the following e-mail address:
Notice.Comments@irscounsel.treas.gov. Please include "Notice 2005-49" 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 2005-49), Courier's Desk, Internal
3
Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20224. All
comments will be available for public inspection and copying.
DRAFTING INFORMATION
For further information regarding this notice, contact William Sullivan or Thomas
Preston of the Office of Associate Chief Counsel (Financial Institutions & Products) at
(202) 622-3970 (not a toll-free call).
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
June 20, 2005
2005-6-20-17 -25-39-25359
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 $77,502 million as of the end of that week, compared to $77,460 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
TOTAL
1. Foreign Currency Reserves
1
a. Securities
June 10, 2005
June 17, 2005
77,460
77,502
Euro
Yen
TOTAL
Euro
Yen
TOTAL
11,278
13,490
24,768
11,369
14,454
25,823
Of which, issuer headquartered in the U. S.
0
0
b. Total deposits with:
b.i. Other central banks and BIS
10,963
3,930
14,893
11,070
2,905
13,975
b.ii. Banks headquartered in the U. S.
0
0
b.ii. Of which, banks located abroad
0
0
b.iii. Banks headquartered outside the U. S.
0
0
b.iii. Of which, banks located in the U.S.
0
0
15,387
15,332
11,371
11,330
11,041
11,041
0
0
2. IMF Reserve Position
2
3. Special Drawing Rights (SDRs)
4. Gold Stock
2
3
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
June 10, 2005
Euro
1. Foreign currency loans and securities
Yen
June 17, 2005
TOTAL
Euro
0
Yen
TOTAL
o
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
2.a. Short positions
0
2.b. Long positions
o
o
3. Other
o
o
o
III. Contingent Short-Term Net Drains on Foreign Currency Assets
June 10, 2005
Euro
Yen
June 17, 2005
TOTAL
Euro
Yen
TOTAL
o
o
2. Foreign currency securities with embedded options
o
o
3. Undrawn, unconditional credit lines
o
o
o
o
1. Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within 1 year
1.b. Other contingent liabilities
3.a. With other central banks
3.b. With banks and other financial institutions
Headquartered in the U.S.
3.c. With banks and other financial institutions
Headquartered outside the U. S.
4. Aggregate short and long positions of options in
foreign
Currencies vis-a-vis the U.S. dollar
4.a. Short positions
4.a.1. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.1. Bought calls
4.b.2. Written puts
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
21 The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDRldollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.
JS-2503: Treasury and IRS Clari fy Tax Treatment of <BR>USDA Tobacco Payments to ...
Page 1 of 1
FROM THE OFFICE OF PUBLIC AFFAIRS
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June 21. 2005
JS-2503
Treasury and IRS Clarify Tax Treatment of
USDA Tobacco Payments to Quota Holders
WASHINGTON -- Today the Treasury Department and IRS provided guidance that
explains how payments to tobacco quota holders (owners) under the Tobacco
Transition Payment Program (TTPP) are to be treated for federal income tax
purposes.
Under the American Jobs Creation Act of 2004. the Department of Agriculture
(USDA) will begin making payments to owners and in exchange for ending the
tobacco marketing quotas and related price support programs. The tax treatment of
these payments generally follows the precedent of the peanut program.
A tobacco quota is considered an interest in land. so payments for quotas generally
will be taxed at the capital gains rate. Payments to an owner will result in a gain if
the payments are more than the owner's adjusted basis in the quota. and will result
in a loss if the payments are less than the owner's adjusted basis. The guidance
explains how to determine the adjusted basis, how to determine whether a portion
of the payments is treated as interest. and how to determine whether the gain or
loss is ordinary or capital.
An owner may postpone reporting the gain or loss from the termination of a quota
by entering into a like-kind exchange if the owner complies with the requirements of
§ 1031 of the Internal Revenue Code.
The amount received by an owner under the TTPP in a taxable year will be
reported by the USDA on Form 1099-8, Proceeds From Real Estate Transactions,
if the amount is $600 or more. The amount representing interest paid in a taxable
year to an owner generally will be reported by the USDA on Form 1099-INT.
Interest Income, if the interest is $600 or more.
The TTPP also provides for payments to tobacco producers. The Treasury
Department and IRS expect to issue subsequent guidance regarding the treatment
of those payments for federal income tax purposes.
REPORTS
http://www.treas.gov/press/releases/js2503.htm
71112005
Part III - Administrative, Procedural, and Miscellaneous
Termination of Tobacco Quotas and Price Support Programs
Notice 2005-51
PURPOSE
This notice provides answers to frequently asked questions regarding the tax
treatment of federal payments made pursuant to § 622 of the Fair and Equitable
Tobacco Reform Act of 2004, Title VI of the American Jobs Creation Act of 2004, Pub.
L. No. 108-357, 118 Stat. 1418, 1521-36 (2004) (the Act).
BACKGROUND
Sections 611 and 612 of the Act terminate the tobacco marketing quota program and
the tobacco price support program. Section 622 of the Act provides that the United
States Department of Agriculture (USDA) will offer to enter into a contract with an
eligible tobacco quota holder (Owner) under which the Owner may receive total
payments of $7 per pound of quota in 10 equal annual payments in fiscal years 2005
through 2014 (Owner Payments) in exchange for the termination of the tobacco
marketing quotas and related price support. Section 622 does not provide for stated
interest on payments due under the contracts.
For federal income tax purposes, Owner Payments are the proceeds from a sale of
the Owner's tobacco quota as of the effective date applicable to the Owner. The
2
effective date applicable to an Owner is the earlier of (1) June 30, 2005, for flue-cured
tobacco and September 30, 2005, for all other types of tobacco, or (2) the date on which
an Owner and USDA enter into a contract for Owner Payments with respect to the
quota.
QUESTIONS AND ANSWERS
Q-1. Are Owner Payments received under the Act subject to federal income tax?
A-1. Yes, Owner Payments are subject to federal income tax. If the amounts
received by the Owner are more than the Owner's adjusted basis in the quota, the
Owner has a taxable gain; if the Owner receives less than the Owner's adjusted basis,
the Owner has a loss that may be deductible for tax purposes if the requirements for
deduction under § 165 of the Internal Revenue Code are satisfied. In determining an
Owner's gain or loss, the amount received for the quota does not include any amount
treated as interest for federal tax purposes. See Q & A-7 for help in determining
whether any portion of an Owner Payment is treated as interest for federal tax
purposes.
0-2. How does an Owner determine the adjusted basis of a quota?
A-2. The adjusted basis of a quota is determined differently depending upon how
the Owner acquired the quota.
•
An Owner who holds a quota that is derived from an original grant by the federal
government has a basis of zero in the quota.
•
The basis of a purchased quota is the price the Owner paid for it.
3
•
Generally an Owner who received a quota as a gift has the same basis in the
quota as the person who gave the quota to the Owner. Under certain
circumstances, the basis is increased by an amount related to the amount of gift
tax paid. If the basis is greater than the fair market value of the quota at the time
of the gift, the basis for determining loss is that fair market value.
•
The basis of a quota that an Owner inherited generally is the fair market value of
the quota at the time of the decedent's death.
The basis of a tobacco quota is not subject to adjustment through amortization,
depletion, or depreciation. However, if an Owner improperly has deducted any amount
for these purposes, the Owner must reduce the basis by the amount deducted before
determining the Owner's gain or loss. A similar reduction in the basis of a quota must
be made for any amount previously deducted as a loss because of a reduction in the
number of pounds of tobacco allowable under the quota. If an Owner purchased a
quota and deducted the entire cost in the year of purchase, then the Owner's basis in
the quota is zero.
0-3. If an Owner has a gain and reports Owner Payments under the installment
method, when must the gain be included in income?
A-3. The installment method may be used to report gain if an Owner receives at
least one Owner Payment after the close of the Owner's taxable year that includes the
effective date applicable to the Owner. The amount of the gain is the excess of the total
amount of Owner Payments to be received, reduced by any amount treated as interest,
over the Owner's adjusted basis in the quota. Under the installment method, a
4
proportionate amount of the gain is taken into account in each year in which an Owner
Payment is received. See the instructions for Form 6252, Installment Sale Income.
0-4. If an Owner has a gain and elects not to report Owner Payments under the
installment method, when must the gain be included in income?
A-4. The Owner must report the entire gain on the Owner's federal income tax
return for the taxable year that includes the effective date applicable to the Owner.
0-5. Is the gain or loss with respect to a quota ordinary or capital gain or loss?
A-5. Whether the gain or loss with respect to a quota is ordinary or capital depends
on how the Owner used the quota.
•
If an Owner used a quota in the trade or business of farming and, on the effective
date applicable to the Owner, the Owner's holding period for the quota was more
than one year, then the transaction is reported under § 1231 on Form 4797,
Sales of Business Property. If an Owner has no other § 1231 transactions
reportable on Form 4797, any gain is treated as long-term capital gain and any
loss is treated as ordinary loss. Even if an Owner has other reportable § 1231
transactions, the net result of all § 1231 transactions reported generally is either
long-term capital gain or ordinary loss. See the instructions for Form 4797 for
more detailed information.
•
If an Owner held a quota for investment purposes, or for the production of
income, but did not use the quota in a trade or business, any gain or loss is
capital gain or loss.
5
Under certain circumstances, some or all of the gain must be recharacterized and
reported as ordinary income. If an Owner previously deducted (1) the cost of acquiring
a quota, (2) amounts for amortization, depletion, or depreciation, or (3) amounts to
reflect a reduction in the quota pounds, any gain is taxed as ordinary income up to the
amount previously deducted. The Owner must report this amount of ordinary income on
the Owner's return for the taxable year that includes the effective date applicable to the
Owner, even if the Owner uses the installment method to report the remainder of the
gain.
0-6. Are Owner Payments received under the Act subject to Self-Employment
Contributions Act (SECA) tax (see § 1402)?
A-S. No.
0-7. Is any portion of an Owner Payment treated as interest for federal tax
purposes?
A-7. (a) If the total amount to be paid under a contract does not exceed $3,000, no
portion of an Owner Payment is treated as interest for federal tax purposes.
(b) If § 483 applies to a contract, a portion of each Owner Payment (other than an
Owner Payment due within six months of the effective date applicable to the Owner) is
treated as interest for federal tax purposes. For example, § 483 generally applies to a
contract if the total amount to be paid under the contract does not exceed $250,000 or if
a cash method election is made under §§ 1274A and 1.1274A-1 (c). A contract is
eligible for the cash method election only if the total amount to be paid under the
contract does not exceed the inflation-adjusted amount for a cash method debt
instrument ($3,202,100 for 2005).
6
(c) In all situations not described in (a) or (b) above, a portion of each Owner
Payment is treated as interest for federal tax purposes under § 1274.
(d) In general, to determine the amount of an Owner Payment that is treated as
interest, see § 483 or § 1274, whichever is applicable, and the regulations thereunder.
You may wish to consult a tax advisor for assistance in determining the portion of an
Owner Payment that is treated as interest and the taxable year in which the interest is
includible in income.
0-8. Does an individual Owner's gain or loss from Owner Payments qualify for farm
income averaging?
A-8. No. A tobacco quota is considered an interest in land, and farm income
averaging is not available for gain or loss arising from the sale or other disposition of
land.
0-9. Are Owner Payments subject to information reporting?
A-9. Yes. Because a tobacco quota is considered an interest in land, the total
amount received under a contract by an owner in a taxable year generally will be
reported by USDA on Form 1099-S, Proceeds From Real Estate Transactions, if the
amount is $600 or more. In addition, any portion of an Owner Payment treated as
interest for federal tax purposes generally will be reported by USDA on Form 1099-INT,
Interest Income, if the total amount of interest received in a taxable year is $600 or
more.
0-10. Is the termination of a tobacco quota under the Act an involuntary conversion
of the quota?
A-10. No.
7
0-11. Mayan Owner enter into a like-kind exchange of a quota?
A-11. Yes. An Owner may postpone reporting the gain or loss from the termination
of a quota by entering into a like-kind exchange if the Owner complies with the
requirements of § 1031 and the regulations thereunder. For purposes of § 1031, the
date on which an Owner is deemed to relinquish a quota is the effective date applicable
to the Owner.
SUBSEQUENT GUIDANCE
Section 623 of the Act provides that USDA will offer to enter into a contract with an
eligible tobacco producer (Grower) under which the Grower may receive total payments
of up to $3 per pound of quota in 10 equal annual payments in fiscal years 2005.through
2014 (Grower Payments) in exchange for the termination of the tobacco marketing
quotas and related price support. Grower Payments are determined by reference to the
amount of quota under which the Grower produced (or planted) tobacco during the
2002, 2003, and 2004 tobacco marketing years and are prorated based on the number
of years that the Grower produced (or planted) quota tobacco during those years. The
federal tax treatment of Grower Payments is expected to be addressed in subsequent
guidance.
DRAFTING INFORMATION
The principal author of this notice is Marnette M. Myers of the Office of Associate
Chief Counsel (Income Tax & Accounting). For further information regarding Q & A-7 of
this notice, contact Pamela Lew of the Office of Associate Chief Counsel (Financial
Institutions and Products) at (202) 622-3950 (not a toll-free call). For further information
8
regarding the remainder of this notice, contact Ms. Myers at (202) 622-4920 (not a tollfree call).
JS-2504: Treasurer to DisclIss Strengthening <br>Social Security in Portland, Maine
Page 1 of 1
FROM THE OFFICE OF PUBLIC AFFAIRS
June 22, 2005
JS-2504
Treasurer to Discuss Strengthening
Social Security in Portland, Maine
U.S. Treasurer Anna Escobedo Cabral will be in Portland, Maine this week to
discuss President Bush's efforts to ensure the permanent solvency of Social
Security and strengthen and preserve the system. The following event is open to
the media:
WHO U.S. Treasurer Cabral (http://www.tceasury.gOV/Organization/bJOi.?{Cabrale.html)
WHAT Panel on the Future of Social Security
Sponsored by the Portland Regional Chamber & U.S. Chamber of Commerce
WHERE Portland Marriott Hotel
200 Sable Oaks Drive
South Portland, Maine
WHEN Thursday, June 23
12:30 p.m. - 1:45 p.m. EDT
http://www.trea6.gov!pre.~s/releases/js2504.htm
7/1/2005
Page 1 of3
June 23, 2005
JS-2505
Testimony of Treasury Secretary John W. Snow
before the
Senate Committee on Finance
Chairman Grassley, ranking member Baucus, members of the Committee, it is a
pleasure to appear before you to testify on the matter of our economic relations with
China. This hearing could not be more timely. China is playing a larger and larger
role in the global economy and the Treasury Department has been intensely
engaged on a broad range of Chinese financial and economic issues over the
course of the last several years, particularly on the question of the yuan and flexible
exchange rates. It is important that China move to a more flexible exchange rate
regime, we have urged them to do so, and they have agreed that it is in their
interest to adopt greater exchange rate flexibility. While it is in China's interest that
they do so, it is also in the interest of the global adjustment process, which is a
shared responsibility.
I appreciate the chance to address the issue of our economic relations with China in
the context of this shared responsibility among major economic regions for tackling
imbalances in the global economy. I had the opportunity to address some of these
issues when I released my report last month on the foreign exchange practices of
America's major trading partners and I look forward to revisiting these issues today.
China's role in the global economy and its impact on this country are receiving a
great deal of attention here at home and among traders and investors in financial
markets around the world.
Although U.S. trade with China represents only about 10% of our overall trade,
China is beginning to playa more significant role in the global economy. For the
past decade China has pegged its currency to the value of the U.S. dollar. There
was a time when such a policy may have contributed to global economic stability,
but that is no longer the case today.
In my report to Congress, I determined that China did not meet the technical
requirements for designation under the statute. However, it would be wrong to
interpret this as acquiescence with China's currency regime. We have made it clear
to China's economic leadership that reform of its currency policy is in its own
interest, and in the interest of global financial system. After two years of intense
engagement, it is clear that China today is prepared to introduce greater currency
flexibility. China's currency regime contributes to distortions in its own economy and
blocks the smooth adjustment of global imbalances. Furthermore, 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.
Members of this Committee and many others in Congress have expressed to me
their own dissatisfaction with China's currency policy. I take these concerns very
seriously and I have enormous sympathy with these concerns. In addition, China,
like all trading partners of the United States, must play by the rules. China's
economy must be open to competition. Intellectual property rights have to be
honored and violations effectively prosecuted under Chinese law.
But I cannot overstate my firm belief that resorting to isolationist trade policies
would be ineffective, disruptive to markets and damaging to America's special role
as the world's leading advocate for open markets and fair trade.
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7/1/2005
Page 2 of3
Acting on any of the punitive legislative proposals before Congress now would be
counterproductive to our efforts at this time. The unintended consequence would
be to delay the concrete steps on currency reform that China should take for its own
sake and for the sake of the global economy.
In addition, implementation of trade sanctions would lead to retaliatory policies
against our exports, damaging the U.S. and the global economy. Walls will not
protect America's workers and industry. We succeed not with barriers, but with the
openness and dynamism which has always characterized our nation.
It is appropriate to consider China's role in the global adjustment process.
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; delay increases the risk that adjustments will occur
abruptly.
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 further improvement in our fiscal deficit position this
year. 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.
Our actions are important, but they 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. 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.
Greater flexibility in China is also a necessary component of the global adjustment
process. Concerns of competitiveness with China also constrain neighboring
economies in their adoption of more flexible exchange policies.
China's rigid currency regime has become highly distortionary. We know that 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, non-inflationary 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 in China. 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.
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.
http://www.treas.gov/press/releases/js2505.htm
7/1/2005
Page 30[3
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
sterilization of capital inflows has limited effectiveness and is 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 a period of strength, and not when economic weakness
compels reform.
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, China is prepared to introduce flexibility and should do so now.
China should take intermediate steps that reflect underlying market conditions and
allow for a smooth transition - when appropriate - to a full float. 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. Today, I believe that the risks
associated with delaying reform far outweigh any concerns with immediate action.
The current system poses a risk to China's economy, its trading partners, and
global economic growth.
It is critical that we address the issues of imbalances aggressively 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.
- 30 -
http://www.treas.go v/ press/releases/js2505.htm
7/1/2005
JS-2S0G: TreasUIY amI IRS Issue Draft Version of2005 Schedule M-3 and <BR>Instructi... Page 1 of 1
FROM THE OFFICE OF PUBLIC AFFAIRS
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June 23. 2005
JS-2506
Treasury and IRS Issue Draft Version of 2005 Schedule M·3 and
Instructions for Corporate Tax Returns
Today. the Treasury Department and Internal Revenue Service released a draft
version of the 2005 Schedule M-3. Net Income (Loss) Reconciliation for
Corporations with Total Assets of $10 Million or More. and related instructions for
use by certain corporate taxpayers filing Form 1120, U.S. Corporation Income Tax
Return. The 2005 Form 1120 Schedule M-3 is for use with Form 1120 returns filed
for calendar year 2005, fiscal years that begin in 2005 and end in 2006, and tax
years of less than twelve months that begin and end in 2006.
The draft 2005 Schedule M-3 includes two new line items - one line for the new
domestic production activities deduction and another line for interest expense. The
draft 2005 Schedule M-3 also reflects other minor modifications to the 2004
Schedule M-3 that are described in the "What's New" section of the draft 2005
Schedule M-3 instructions. The draft 2005 Schedule M-3 instructions reflect the
Schedule M-3 Frequently Asked Questions that are posted weekly on www.irs.gov.
The Treasury Department and IRS do not anticipate any further changes to the
draft 2005 Schedule M-3 and instructions and expect that the final version of the
form and instructions will be available this fall and posted on www.irs.gov.
Comments are requested regarding the draft 2005 Schedule M-3 and instructions.
Comments should be submitted by August 31.2005, to:
Judy McNamara
Internal Revenue Service
860 E. Algonquin Road
Schaumburg, IL 60173
Email address: PFTG2@irs.gov (Preferred)
Telephone number: 312-566-2001. Ext. 9380
The Schedule M-3 and related instructions are attached and may be accessed on
www.irs.gov or
http://www.irs.gov/businesses/comorations/article/0 .. id=11999Z.00.html.
REPORTS
•
•
Draft 2005 Schedule M-3
Draft 2005 Schedule M.::.3 instructions
http://www.treas.~ov/press/releases/js2506.htm
7/112005
2005
DRAFT
Net Income (Loss) Reconciliation for Corporations With Total Assets
of $10 Million or More
Section references are to the Internal Revenue Code unless otherwise noted.
General Instructions
Purpose of Schedule
Schedule M-3 Part I asks certain questions about the corporation's f1mincial~s~atements
and reconciles financial statement net income (loss) for the consolidatedjlnancial
statement group to income (loss) per the income statement for the U.S. consolidated tax
group.
Schedule M-3 Parts II and III reconcile financial statement nefincome (loss) for the U.S.
consolidated tax group (per Schedule M-3, Part I, line 11) to taxable income on Form
1120, page 1, line 28.
What's New
•
•
•
•
/' ~~
•
If the corporation does not prepare fin31).ciat statements, check Part I, line 1c
"No" and report the net income (Joss) peYthe books and records of the U.S.
corporation or the U.S. consolida~ tax group on Part I, line 4, Worldwide
consolidated net income (lo~s)Jrom:income statement source identified in Part
I, line 1. Instructions for 2004 Sc~hedule M-3 required that such amount be
.
reported on Part I, line 11 / .
Report on Part I, lines 5a through 10, all adjustment amounts required to
adjust worldwide net income (loss) reported on Part I, line 4 (whether taken
from financial statements or books and records), to net income (loss) of
includible corporatio!ls tnat must be reported on Part I, line 11.
Part I, line 10 andP,'¥"t II, lines 7 and 26 have been clarified with respect to the
reportingpfintercompany dividends in statutory income for insurance
companies. In addition instructions at Part I, line 11, clarify that, for
insurance companies included in consolidated Forms 1120, the amounts
report~clrn.column (a) of Parts II and III, must be reported on the same
accounting method as is used to report the amount of net income (loss) on Part
I, Irn~J 1, which for insurance companies is usually statutory accounting.
Indic~te on the line after the common parent's name on Part II and Part III,
,:~whether the Schedule M-3 is for the: (1) U.S. consolidated tax group; (2)
~Parent corporation; (3) Consolidation eliminations; or (4) Subsidiary
corporation, by checking the appropriate box.
The word "optional" has been removed from the caption at the top of columns
(a) and (d) in Part II and Part III. Columns (a) and (d) in Part II and Part III
were optional for all taxpayers in 2004. However, columns (a) and (d) may no
longer be optional for certain taxpayers beginning in 2005. See the
instructions below for "When To Complete Columns (a) and (d)".
•
•
•
•
•
•
•
On Part II, line 5, Gross foreign distributions previously taxed, column (d) is
now shaded.
The caption of the line item for Part II, line 17 has been changed to "Cost of
goods sold" from "Inventory valuation adjustments".
Part III, line 8, Interest expense, is new.
Part III, line 9, Stock option expense, is the combination of Part III, line 8,
Incentive stock options, and Part III, line 9, Nonqualified stock options, from
the 2004 Schedule M-3.
i
The caption of the line item for Part III, line 13 has been changedJto
"Judgments, damages, awards, similar cost" from "Punitive9am~~es~':
Part III, line 21, Charitable contribution limitationlcarryfofw:ard, is the
combination of Part III, line 21, Charitable contributionlimft~t)on, and Part
III, line 22, Charitable contribution carryforward used.{rOmthe 2004
Schedule M-3.
Part III, line 22, Domestic production activities deduction, is new.
Who Must File
Schedule M-3 is effective for any tax year ending on or after December 31,2004. For
purposes of determining whether a corporation with a 52-53~week tax year must file
Schedule M-3, such corporation's tax year is deemed end or close on the last day of the
calendar month nearest to the last day of the 5~:-53.week tax year. (For further guidance
on 52-53 week tax years, see Regulations sectiori'1.441-2(c)(l).) Any domestic
corporation (including a U.S. consolidated taigro~p consisting of a U.S. parent
corporation and additional includible corporations listed on Form 851, Affiliations
Schedule) required to file Form 1120, 1{.S: Corporation Income Tax Return, that reports
on Schedule L of Form 1120 total consoliOated assets at the end of the corporation's tax
year that equal or exceed $10 million must complete and file Schedule M-3 in lieu of
Schedule M-l, Reconciliation of Income (Loss) per Books With Income per Return. A
U.S. corporation filing Form 1120Jt~at is not required to file Schedule M-3 may
voluntarily file Schedule M-3 ill place of Schedule M-I. A corporation filing Schedule
M-3 must check the box pn Foffii 1120, page 1, item A, indicating that Schedule M-3 is
attached (whether required or voluntary). A corporation filing Schedule M-3 must not file
Schedule M-1.
to
If the parent corporation of a U.S. consolidated tax group files Form 1120 and files
Schedule M-~.:,Jill members of the group must file Schedule M-3. However, if the
parent cj?rp?ration of a U.S. consolidated tax group files Form 1120 and any member
of thegTpup ftI~s Form 1120-PC, U.S. Property and Casualty Insurance Company
IncomeTa~,Retum, or Form 1120-L, U.S. Life Insurance Company Income Tax
Return, thaf'tTIember must either (a) fully complete Schedule M-3 as if the member
filed Form 1120; or (b) complete Schedule M-3 by including the sum of all
differences between the member's income statement net income (or loss) and taxable
income (differences) (regardless of whether the difference would otherwise be
reported elsewhere on Part II or on Part III) on Part II, line 26, Other income (loss)
items with differences, and separately state and adequately disclose each difference in
a supporting schedule. Regardless of the option chosen, amounts reported in column
2
(a) of Parts II and III must be reported on the same accounting method as is used to
report the amount of net income (loss) per income statement of includible corporations
on Part I, line 11, which for insurance companies is usually statutory accounting. (For
insurance companies included in the consolidated u.s. federal income tax return, see
instructions for Part I, lines 10 and 11 and Part II, lines 7 and 26.) Any member of the
U.S. consolidated tax group that files Form 1120-PC or Form 1120-L and is required
to file Schedule M-3 (in accordance with the preceding sentence) may choose to either
classify all differences as permanent in column (c) or identify each differeqpe as
temporary or permanent, as appropriate.
If the parent company of a U.S. consolidated tax group files Form 112QatldIny member
of the group files Form 1120-PC or Form 1120-L and the consolidatec(S,ehedule L
reported in the return includes the assets of all of the insurance c9:rppani~~(as well as the
non-insurance companies in the U.S. consolidated tax group), in order. to determine if the
group meets the $10 million threshold test for the requiremenfto file;:Schedule M-3, use
the amount of total assets reported on Schedule L of the consolidated return. If the parent
company of a U.S. consolidated tax group files Form LI20 and any member of the group
files Form I 120-PC or Form 1120-L and the consolidated Schedule L reported in the
return does not include the assets of one or more of the im;~rance companies in the U.S.
consolidated tax group, in order to determine if tpe gro,!p rneets the $10 million threshold
test for the requirement to file Schedule M-3, usethe;s,um of the amount of total assets
reported on the consolidated Schedule L plus tl\~afuorints of all assets reported on Forms
I 120-PC and 1120-L that are included in the.cons'olidated return but not included on the
consolidated Schedule L.
Schedule M-3 is not required for any taxpayers other than those identified in the
preceding paragraphs including, for e$(arhple, taxpayers required to file Form 1065, U.S.
Return of Partnership Income, Form i 120S, U.S. Income Tax Return for an S
Corporation, Form 1120-REIT, U.S; Income Tax Return for Real Estate Investment
Trusts, Form 1120-F, U.S. IncomeTax
Return of a Foreign Corporation, Form 1120-H,
:d
Y/
U.S. Income Tax Return for.HomeOwners Associations, and Form 1120-SF, U.S. Income
Tax Return for Settlement Funds'. In addition, Schedule M-3 is not required for any
member of a U.S. consolidated tax group if the parent corporation of the group files Form
1120-PC or Form 1120-L.'/'/
'&'
Example 1.
A.
B.
U.S. corp~ra'tjon A owns U.S. subsidiary B and foreign subsidiary F. For its 2005
ta~ ye1r;:A, prepares consolidated financial statements with Band F that report
t6taHissetsof $12 million. A files a consolidated U.S. federal income tax return
J\VitQ B\~md reports total consolidated assets on Schedule L of $8 million. A's U.S.
corts611dated tax group is not required to file Schedule M-3 for the 2005 tax year.
U.S. corporation C owns U.S. subsidiary D. For its 2005 tax year, C prepares
consolidated financial statements with D but C and D file separate U.S. federal
income tax returns. The consolidated accrual basis financial statements for C and
D report total assets at the end of the taxable year of $12 million after
intercompany eliminations. C reports separate company total year-end assets on
its Schedule L of $7 million. D reports separate company total year-end assets on
3
its Schedule L of $6 million. Neither C nor D is required to file Schedule M-3 for
the 2005 tax year.
C.
Foreign corporation A owns 100 percent of both U.S. corporation B and U.S.
corporation C. C owns 100 percent of U.S. corporation D. For its 2005 tax year,
A prepares a consolidated worldwide financial statement for the ABCD
consolidated group. The ABCD consolidated financial statement reports total
year-end assets of $25 million. A is not required to file a U.S. federal income tax
return. B files a separate U.S. federal income tax return and reports ~~~~ate
company total year-end assets on its Schedule L of $12 million. C files a
consolidated U.S. federal income tax return with D and, after ellwil13;tjng:
intercompany transactions between C and D, reports consolidatel'tQtal year-end
assets on Schedule L of $8 million. B is required to file Sche4iil~M-3 because its
total year-end assets reported on Schedule L exceed $10milliort:The CD U.S.
consolidated tax group is not required to file Schedule M-3because its total yearend assets reported on Schedule L do not exceed $10 million:
If a corporation was required to file Schedule M-3 for,the preceding tax year but reports
on Schedule L of Form 1120 total consolidated assetsat"the end of the current tax year of
less than $10 million, the corporation is not required to filbSchedule M-3 for the current
tax year. The corporation may either (a) file Schedule M-3', or (b) file Schedule M-l, for
the current tax year. However, if the corporation'chooSes to file Schedule M-l for the
current tax year, and for a subsequent tax year the corporation is required to file Schedule
M-3, the corporation must complete Schedu]eM~3 in its entirety (Part I and all columns
in Parts II and III) for that subsequent tax year.
In the case of a U.S. consolidated tax group, total assets at the end of the tax year must be
determined based on the total year-end, assets of all includible corporations listed on
Form 851, net of eliminations for intercompany transactions and balances between the
includible corporations. In addition,for purposes of determining for Schedule M-3
whether the corporation (or U.~. c'onsolidated tax group) has total assets at the end of the
current tax year of $10 million'or more, the corporation's total consolidated assets must
be determined on an overall accrual method of accounting unless both of the following
apply: (a) the tax rerl.lrri'~'of all includible corporations in the U.S. consolidated tax group
are prepared using an overall cash method of accounting, and (b) no includible
corporation in the U:.,~.conso]idated tax group prepares or is included in financial
statements preparedJop'an accrual basis.
Other Form l1Z0 Schedules Affected by Schedule M-3 Requirements
Report,9n Sclied~les L, M-2, and Fonn 1120, page 1, amounts for the U.S. consolidated
tax group:
"
"/
Schedule L
Total assets shown on Schedule L, line 15, column (d), must equal the total assets of the
corporation (or, in the case of a U.S. consolidated tax group, the total assets of all
members of the group listed on Form 851) as of the last day of the tax year, and must be
the same total assets reported by the corporation (or by each member of the U.S.
consolidated tax group) in the financial statements, if any, used for Schedule M-3. If the
4
corporation prepares financial statements, Schedule L must equal the sum of the financial
statement total assets for each corporation listed on Form 851 and included in the
consolidated U.S. federal income tax return (includible corporation) net of eliminations
for intercompany transactions between includible corporations. If the corporation does
not prepare financial statements, Schedule L must be based on the corporation's books
and records. The Schedule L balance sheet may show tax-basis balance sheet amounts if
the corporation is allowed to use books and records for Schedule M-3 and the
corporation's books and records reflect only tax-basis amounts.
(~;;~/o/
Schedule M-2
The amount shown on Schedule M-2, line 2, Net income (loss) per booK~,miI:'§t equal the
amount shown on Schedule M-3, Part I, line 11. Schedule M-2 musttefl~6tactivity only
of corporations included in the consolidated U.S. federal incom~,tax'return.
/";
"'
;
;;
"
::i,f,j,
"/
Consolidated Return
(Form 1120, Page 1)
.
.'
Report on Form 1120, page I, each item of income, gain, loss, expense, or deduction net
of elimination entries for intercompany transactions between includible corporations.
The corporation must not report as dividends on Form 1120;;Schedule C, any amounts
received from an includible corporation. In general, dividends received from an
includible corporation must be eliminated in consoliclation rather than offset by the
"
dividends-received deduction.
Entity Considerations for Schedule M~3
For purposes of Schedule M-3, references'tOJhe classification of an entity (for example,
as a corporation, a partnership, or a trpst)are references to the treatment of the entity for
U.S. federal income tax purposes. Allentiry that generally is disregarded as separate
from its owner for U.S. federal income tax purposes (disregarded entity) must not be
separately reported on Schedul"eM~3! Instead, any item of income, gain, loss, deduction,
or credit of a disregarded entltYcl;r~ust be reported as an item of its owner.
Consolidated Schedule:;M-3 Versus Consolidating Schedules M-3
A U.S. consolidatedt;(lXgrbup must file a consolidated Schedule M-3. Parts I, II and III
of the consolidated Schedule M-3 must reflect the activity of the entire U.S. consolidated
tax group. The parent~c,orporation also must complete Parts II and III of a separate
Schedule M-3 to refl~t the parent's own activity. In addition, Parts II and III of a
separate Schedl11~Jvl-3 must be completed by each includible corporation to reflect the
activit){~bf th~~,includible corporation. Lastly, it generally will be necessary to complete
Parts rr~J:!.d IIVof a separate Schedule M-3 for consolidation eliminations. For example,
if a U.S. cdnsolidated tax group consists of four includible corporations (the parent and
three subsidiaries), the U.S. consolidated tax group must complete six Schedules M-3 as
follows: (a) one consolidated Schedule M-3 with Parts I, II, and III completed to reflect
the activity of the entire U.S. consolidated tax group; (b) Parts II and III of a separate
Schedule M-3 for each of the four includible corporations to reflect the activity of each
includible corporation; and (c) Parts II and III of a separate Schedule M-3 to eliminate
intercompany transactions between includible corporations and to include limitations on
5
deductions (e.g., charitable contribution limitations and capital loss limitations) and
carryover amounts (e.g., charitable contribution carryovers and capital loss carryovers).
Note. Indicate on the line after the common parent's name on Part II and Part III,
whether the Schedule M-3 is for the: (1) U.S. consolidated tax group; (2) Parent
corporation; (3) Consolidation eliminations; or (4) Subsidiary corporation, by checking
the appropriate box.
If an item attributable to an includible corporation is not shared by or allocate4 to the
appropriate member of the group but is retained in the parent corporation's fjnap.cial
statements (or books and records, if applicable), then the item must be report~d by the
parent corporation in its separate Schedule M-3. For example, if thep'acentof a U.S.
consolidated tax group prepares financial statements that include i,lll me.mbers of the U.S.
consolidated tax group and the parent does not allocate the group's.income tax expense as
reflected in the financial statements among the members of the groU:g~but retains it in the
parent corporation, the parent corporation must report on its separate Schedule M-3 the
U.S. consolidated tax group's income tax expense as reflected'in the financial statements.
Any adjustments made at the consolidated group level th~tare not attributable to any
specific member of the U.S. consolidated tax group (e;g., disallowance of net capital
losses, contribution deduction carryovers, and li ITlitiitiQI10f contribution deductions) must
not be reported on the separate consolidatinzpa,r~nt or subsidiary Schedules M-3 but
rather on the consolidated Schedule M-3 and on'the consolidating Schedule M-3 for
consolidation eliminations (see the second preceding paragraph).
If an includible corporation has no activity!for the tax year (e.g., because the corporation
is a dormant or inactive corporation),no amount for the corporation was included in Part
I, line 11, and the corporation has no amounts to report on Part II and Part III of Schedule
M-3 for the tax year, the parent corporation of the U.S. consolidated tax group may attach
to the consolidated ScheduleM:-3a statement that provides the name and EIN of the
includible corporation in lieu ~fflling a blank Part II and Part III of Schedule M-3 for
such entity.
'l'
~;:
/
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Completion of Schedule M-3
A corporation (oranYJPember of a U.S. consolidated tax group) required to file Schedule
M-3 must complete'tJle form in its entirety. At the time the Form 1120 is filed, all
applicable,ques~iqns must be answered on Part I (except that in the case of a U.S.
consolidah~d~x group, Part I need only be completed once, on the consolidated Schedule
M-3, by the parent corporation), all columns must be completed on Parts II and III, and
all numericaNfata required by Schedule M-3 must be provided at the time the Form 1120
is filed. Any schedule required to support a line item on Schedule M-3 must be attached
at the time Schedule M-3 is filed and must provide the information required for that line
item.
All required line item detailed schedules for Part II and Part III of Schedule M-3 must be
attached for each separate entity included in the Consolidated Part II and Part III,
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including those for the parent company and the eliminations entity, if applicable. It is not
required that the same supporting detailed information be presented on the separate
consolidated supporting schedules for Part II and Part III of the consolidated Schedule M3.
Specific Instructions for Part I
Part I. Financial Infonnation and Net Income (Loss) Reconciliation
When To Complete Part I
Part I must be completed for any tax year for which the corporation
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file$S{h~d~ie M..
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Line 1. Questions Regarding the Type of Income Statement Prepared'
For Schedule M-3, Part I, lines 1 through 11, use only the financial statements of the U.S.
corporation filing the U.S. federal income tax return (the consolidated financial
statements for the U.S. parent corporation of a U.S. consolid~te~nax group). If the U.S.
corporation filing a U.S. federal income tax return (or th<r U.S. parent corporation of a
U.S. consolidated tax group) prepares its own financials'tatements but is controlled by
another corporation (U.S. or foreign) that prepares fin~ncililstatements that include the
U.S. corporation, the U.S. corporation (or the U.S',I?arent corporation of a U.S.
consolidated tax group) must use for its Scheg!lle'M:3; Part I, its own financial
controlling corporation.
statements and not the financial statements ofthe::,i',
If a non-publicly traded U.S. parent corpo.r;ation of a U.S. consolidated tax group prepares
financial statements and that group inl;fI:y.d~~~publicly traded subsidiary that files
financial statements with the Securitie&~ntl Exchange Commission (SEC), the
consolidated financial statements of the'parent corporation are the appropriate financial
statements for purposes of compre~iAg Part I. Do not use any separate company financial
statements that might be preI?ared for publicly traded subsidiaries.
If no financial statements are prepared for a U.S. corporation (or, in the case of a U.S.
consolidated tax group;fqr the U.S. parent corporation's consolidated group) filing Form
1120 Schedule M-3,Jhe'U.S: corporation (or the U.S. parent corporation of a U.S.
consolidated tax gr<3HP)inust enter "No" on questions 1a, 1b, and 1c, skip Part I, lines 2a
through 3c, and en~er!the net income (loss) per the books and records of the U.S.
corporation (01:;U.S:'eonsolidated tax group) on Part I, line 4, Worldwide consolidated net
income (los~) f'fQ9}income statement source identified in Part I, line 1.
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If no fin~hcial;statements are prepared for a U.S. corporation (or, in the case of a U.S.
consolidated tax group, for the U.S. parent corporation's consolidated group) filing Form
1120 Schedule M-3, and the U.S. corporation is owned by a foreign corporation that
prepares financial statements that includes the U.S. corporation (or the U.S. parent
corporation's consolidated group), the U.S. corporation (or the U.S. parent corporation of
the U.S. consolidated tax group) must enter "No" on questions la, 1b, and Ie, skip Part I,
lines 2a through 3c, and enter the net income (loss) per the books and records of the U.S.
corporation (or U.S. consolidated tax group) on Part I, line 4, Worldwide consolidated net
7
income (loss) from income statement source identified in Part I, line 1.
If a U.S. corporation (a) has net income (loss) included on Part I, line 4, and removed on
Part I, line 6a or 6b, on another U.S. corporation's Schedule M-3, (b) files its own Form
1120 (separate or consolidated), (c) does not have a separate financial statement (certified
or otherwise) of its own, and (d) reports on Schedule L of its own Form 1120 total
consolidated assets that equal or exceed $10,000,000 at the end of the corporation's tax
year, the corporation must answer questions I a, 1b, and I c of Part I as apprOl?~iate for its
own Form 1120 and must report on Part J, line 4, the amount for the corpqradbn' s net
income (loss) that is removed on Part J, line 6a or 6b of the other corporation: s Schedule
M-3. However, if in the circumstances described immediately above..;~J:ie corPoration
does have separate financial statements (certified or otherwise) of it$9wn~ independent of
the amount of the corporation's net income included in Part J, lineA, the other U.S.
corporation, the corporation must answer questions 1a, 1b, and 1c ~fPart I, as
appropriate, for its own Form 1120, based on its own separ,ate Income statement, and
must report on Part I, line 4, the net income amounts shown on its separate income
statement.
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Line 2. Questions Regarding Income Statement Period/and Restatements
Enter the beginning and ending dates on line 2a fOJ;';illecorporation's annual income
statement period ending with or within this t~ yeaL'
The questions on Part I, lines 2b and 2c,/regardilIg income statement restatements refer to
the worldwide consolidated income statemelltissued by the corporation filing the U.S.
federal income tax return (the consolidated financial statements for the U.S. parent
corporation of a U.S. consolidated tax/group). Answer "Yes" on lines 2b and/or 2c if the
corporation's annual income statement has been restated for any reason. Attach a short
explanation of the reasons for theres~atement in net income for each annual income
statement period that is restated;.iI}cluding the original amount and restated amount of
each annual statement period's net income. The attached schedule is not required to
report restatements onl;lJ'lentity-by-entity basis.
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Line 3. Questions l{egarding Publicly Traded Voting Common Stock
The primary U.S.pu6(icly traded voting common stock class is the most widely held or
most heavily tnided "within the U.S. as determined by the corporation. If the corporation
has morefhanone/Class of publicly traded voting common stock, attach a list of the
classeSl'9~Pu6iicly traded voting common stock and the trading symbol and the nine-digit
CUSIP number of each class.
Line 4. Worldwide Consolidated Net Income (Loss) per Income Statement
Report on Part I, line 4, the worldwide consolidated net income (loss) per the income
statement (or books and records, if applicable) of the corporation.
In completing Schedule M-3, the corporation must use financial statement amounts from
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the financial statement type checked "Yes" on Part I, line I, or from its books and records
if Part 1, line 1c is checked "No". If Part I, line 1a, is checked "Yes," report on Part I, line
4, the net income amount reported in the income statement presented to the SEC on the
corporation's Form lO-K (the Form lO-K for the security identified on Part I, line 3b, if
applicable ).
If a corporation prepares financial statements, the amount on line 4 must equal the
financial statement net income (loss) for the income statement period ending 'Vith or
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within the tax year as indicated on line 2a.
If the corporation prepares financial statements and the income stateme~tpe;iod differs
from the corporation's tax year, the income statement period indicatedoui}ine 2a applies
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for purposes of Part I, lines 4 through 8 . ,
If the corporation does not prepare financial statements, check "No"6n Part I, line 1c,
and enter the net income (loss) per the books and records6ftbeU;S. corporation or the
U.S. consolidated tax group on Part I, line 4, Worldwide. consolidated net income (loss)
from income statement source identified in Part I, line I: , '..
Report on Part I, lines 5a through lO, as instructed below, all adjustment amounts
required to adjust worldwide net income (los,s)repOJ:tecton this Part I, line 4 (whether
from financial statements or books and reco(ds);,lO 'het income (loss) of includible
corporations that must be reported on Part I, 1it1~li.
If line 4 includes net income (loss) for a:borppration that files Form I 120-PC or Form
1120-L, see the instructions for Part I. litlf()O, for adjustments that may be necessary
to reconcile financial statement incorrietostatutory income.
Line 5. Net Income (Loss) of N~nincludible Foreign Entities
Remove the financial staternentnet income (line 5a) or loss (line 5b) of each foreign
entity that is included in the consOlidated financial statement group and is not an
includible corporatiol} in the U:S. consolidated tax group (nonincludible foreign entity).
In addition, on Part lird~8~.adjust for consolidation eliminations and correct for
minority interest and~hlterc~mpany dividends between any nonincludible foreign entity
and any includible cQrporation. Do not remove in Part I the financial statement net
income (loss) ofah~ponincludible foreign entity accounted for in the financial
statements on th~equity method.
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Attach<~i;Supporting schedule that provides the name, EIN (if applicable), and net income
(loss) per thtfinancial statement or books and records included on line 4 that is removed
on this line 5 for each separate nonincludible foreign entity. The amounts of income
(loss) detailed on the supporting schedule should be reported for each separate
nonincludible foreign entity without regard to the effect of consolidation or elimination
entries. If there are consolidation or elimination entries relating to nonincludible foreign
entities whose income (loss) is reported on the attached schedule that are not reportable
on Part I, line 8, the net amounts of all such consolidation and elimination entries must be
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reported on a separate line on the attached schedule, so that the separate financial
accounting income (loss) of each nonincludible foreign entity remains separately stated.
For example, if the net income (after consolidation and elimination entries) of a
nonincludible foreign sub-consolidated group is being reported on line Sa, the attached
supporting schedule should report the income (loss) of each separate nonincludible
foreign legal entity from each such entity's own financial accounting net income
statement or books and records, and any consolidation or elimination entries (for
intercompany dividends, minority interests, etc.) not reportable on Part I, line 8, should
be reported on the attached supporting schedule as a net amount on a line ;~p;u-ate and
apart from lines that report each nonincludible foreign entity's separate"netigcoJUe (loss).
Line 6. Net Income (Loss) of Nonincludible U.S. Entities
Remove the financial statement net income (line 6a) or loss (line6'Q) of each U.S. entity
that is included in the consolidated financial statement group and is /n6i an includible
corporation in the U.S. consolidated tax group (nonincludib}eU:S,. entity). In addition, on
Part I, line 8, adjust for consolidation eliminations and corrett'for minority interest and
intercompany dividends between any nonincludible U:S':;entityand any includible
corporation. Do not remove in Part I the financial statementnet income (loss) of any
nonincludible U.S. entity accounted for in the financialstatements on the equity method.
Attach a supporting schedule that provides the name, EIN, and net income (loss) per the
financial statement or books and recordsincludedon line 4 that is removed on this line 6
for each separate nonincludible U.S. entity. The amounts of income (loss) detailed on the
supporting schedule should be reported f6reach separate nonincludible U.S. entity
without regard to the effect of consolidafi<mor elimination entries. If there are
consolidation or elimination entries relating to nonincludible U.S. entities whose income
(loss) is reported on the attached s<;:p.edule that are not reportable on Part I, line 8, the net
amounts of all such consolidatiol{~h.d elimination entries must be reported on a separate
line on the attached schedule: ~o,that the separate financial accounting income (loss) of
each nonincludible U.S. entity remains separately stated. For example, if the net income
(after consolidation and elimination entries) of a nonincludible U.S. sub-consolidated
group is being reported orl'1ine 6a, the attached supporting schedule should report the
income (loss) of each separate nonincludible u.S. legal entity from each such entity's
own financial accoUlltirlg net income statement or books and records, and any
consolidation otelimination entries (for intercompany dividends, minority interests, etc.)
not reponabli)'on,E,art I, line 8, should be reported on the attached supporting schedule as
a net a.ni~~nt'on a/line separate and apart from lines that report each nonincludible U.S.
entity';/§epllrate net income (loss).
Line 7. Net Income (Loss) of Other Includible Corporations
Include the financial statement net income (line 7a) or loss (line 7b) of each corporation
includible in the U.S. consolidated tax group that is not included in the consolidated
financial statement group (other includible corporation). In addition, on Part I, line 8,
adjust for consolidation eliminations and correct for minority interest and intercompany
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dividends for such other includible corporations.
Attach a supporting schedule that provides the name, EIN, and net income (loss) per the
financial statement or books and records on this line 7 for each separate other includible
corporation. The amounts of income (loss) detailed on the supporting schedule should
be reported for each separate other includible corporation without regard to the effect of
consolidation or elimination entries solely between or among the entities listed. If there
are consolidation or elimination entries relating to such other includible corporations
whose income (loss) is reported on the attached schedule that are not report~~lef()n Part
I, line 8, the net amounts of all such consolidation and elimination entries'mUst.be
reported on a separate line on the attached schedule, so that the separatefin;{rici~l
accounting income (loss) of each other includible corporation remains'st}pitately stated.
For example, if the net income (after consolidation and elimination etltrie~ of a subconsolidated U.S. group of other includible corporations is beinft~ported on line 7a, the
attached supporting schedule should report the income (loss) of each;Beparate other
includible corporation from each corporation's own financial '!ccounting net income
statement or books and records, and any consolidation or eliminati'on entries (for
intercompany dividends, minority interests, etc.) not ~eportable on Part I, line 8, should
be reported on the attached supporting schedule as a net aiQ,gunt on a line separate and
apart from lines that report each other includible coqio,ration's separate net income
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(loss).
Line 8. Adjustment to Eliminations o(~TniJ1sa~tions Between Includible
Corporations and Nonincludible Entities
Adjustments on Part I, line 8, to consoli4afion or elimination entries are necessary to
ensure that transactions between includible corporations and noninc1udible U.S. or
foreign entities are not eliminated, in oroer to report the correct total amount on Part I,
line II. Also, additional consolidcttion entries and eliminations entries may be necessary
on Part I, line 8 to ensure that/~a.ri~a.ctions between includible corporations that are in the
consolidated financial statemeqirgroup and other includible corporations that are not in
the consolidated financial statement group but that are reported on Part I, line 7, in order
to report the correcvtotal:'amount on Part I, line II.
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Include on Part I, }ide 8, the total of the following: (i) amounts of any adjustments to
consolidation entries/and elimination entries that are contained in the amount reported on
Part I, lineAJ~quired as a result of removing amounts on Part I, line 5 or 6; and (ii)
amount~ ~(ay{y additional consolidation entries and elimination entries that are required
as a re~l1ltof including amounts on Part I, line 7. This is necessary in order that the
consolidati6" entries and intercompany eliminations entries included in the amount
reported on Part I, line II are only those applicable to the financial net income (loss) of
includible corporations for the financial statement period. For example, adjustments must
be reported on line 8 to remove minority interest and to reverse the elimination of
intercompany dividends included on Part I, line 4 that relate to the net income of entities
removed on Part I, line 5 or 6, because the income to which the consolidation or
elimination entries relate has been removed. Also, for example, consolidation or
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elimination entries must be reported on line 8 to reflect any minority interest ownership
in the net income of other includible corporations reported on Part I, line 7, and to
eliminate any intercompany dividends between corporations whose income is included on
Part I, line 7 and other corporations included in the consolidated U.S. federal income tax
return.
The attached supporting schedule for Part I, line 8, must identify the type (e.g., minority
interest, intercompany dividends, etc.) and amount of consolidation or elimination entries
reported, as well as the names of the entities to which they pertain. It is not necessary,
but it is permitted, to report intercompany eliminations that net to zero oriP~ I:1ine 8,
such as intercompany interest income and expense.
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Line 9. Adjustment to Reconcile Income Statement Period to}T~x Year
Include on line 9 any adjustments necessary to the income (loss) ofintludible
corporations to reconcile differences between the corporatioJ;l' s income statement
period reported on line 2a and the corporation's tax year. Attach schedule describing
the adjustment.
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Line 10. Other Adjustments Required To Reconcile to Amount on Line 11
Include on line 10 any other adjustments to reconcile ,net income (loss) on Part I, line 4,
with net income (loss) on Part I, line 11.
Note that, normally, all intercompany divide~ds will have been eliminated in financial
accounting consolidation eliminations included on Part I, line 4. However, an insurance
company may be required to include iI1Je;2()mpany dividends on Part I, Line 11, so that
the amount reported there agrees with statutory accounting net income (Annual
Statement). If the net income (loss) of a .corporation that files Form 1120-PC or Form
1120-L is included on Part I, line 4. pr line 7, and is computed on a basis other than
statutory accounting, include on line, 10 the adjustments necessary such that Part I, line
11, includes intercompany dividends in the net income (loss) for such corporation to the
extent required by statutory accounting principles. (For insurance companies included in
the consolidated U.S. federal income tax return, see instructions for Part I, line 11 and
Part II, lines 7 and 26.) " '.
For any adjustmerit~' reported on Part I, line 10, attach a supporting schedule that
provides, for e~ch corporation to which an adjustment relates: the name and ErN of the
corporation, th'ealllount of net income included in Part I before any adjustments on
line 10, the amount of net income included on Part I, line 11, the amount of the net
adjustrrie~tthai is attributable to intercompany dividends (in the case of insurance
companies), and the amount of the remainder of the net adjustment.
Line 11. Net Income (Loss) per Income Statement of Includible Corporations
Report on line 11 the net income (loss) per the income statement (or books and records, if
applicable) of the corporation. In the case of a U.S. consolidated tax group, report the
consolidated income statement net income (loss) of all corporations listed on Form 851
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and included in the consolidated U.S. federal income tax return for the tax year. Amounts
reported in column (a) of Parts II and III (see instructions below) must be reported on the
same accounting method as is used to report the amount of net income (loss) per income
statement of includible corporations on Part I, line 11, which for insurance companies is
usually statutory accounting. (For insurance companies included in the consolidated U.S.
federal income tax return, see instructions for Part I, line 10 and Part II, lines 7 and 26.)
Do not, in any event, report on this line 11 the net income of entities not listed on Form
851 and not included in the consolidated U.S. federal income tax return fort}leltaK year.
For example, it is not permissible to remove the income of non-includible entities on
lines 5 and/or 6, above, then to add back such income on lines 7 thrqugl1~'W:su~h that the
amount reported at line 11 includes the net income of entities not indudiblein the
consolidated U.S. federal income tax return. A principal purpo§eofS~l].~~ule M-3 is to
report on this Part I, line It, only the financial accounting net income of only the
corporations included in the consolidated U.S. federal income tax reuiin.
Whether or not the corporation prepares financial statements,'Pa,rt I, line 11, must include
all items that impact the net income (loss) of the corporation eyen if they are not recorded
in the profit and loss accounts in the corporation's generaI1¢ger, including, for example,
all post-closing adjusting entries (including workpaper adjustments) and dividend income
or other income received from non-includible corporati6ns.
tiad~cl'~nd
Example 2. U.S. corporation P is publicly
files Form lO-K with the SEC. P
owns 80% or more of the stock of75 V.S. corporations, DSI through DS75 (DSI-DS75),
between 51 % and 79% of the stock of 25V.S. corporations DS76 through DS 100 (DS76DS100), and 100% of the stock of 50 foreign subsi9iaries FSI through FS50 (FSI-FS50).
P eliminates all dividend income from DSI-DS100 and FSI-FS50 in financial statement
consolidation entries. Furthermore, P elIminates the minority interest ownership, if any,
of DS 1-DS 100 in financial statement consolidation entries. P's SEC Form 10-K includes
P, DSI-DS100 and FSI-FS500p a'f~lly consolidated basis. P files a consolidated U.S.
federal income tax return with OSl-DS75.
P must check "Yes" on Part I, line la. On Part I, line 4, P must report the consolidated net
income from the SEC Form 10-K for the consolidated financial statement group of P,
DSI-DS100, and FSt;,. FS50. P must remove the net income (loss) of FSI-FS50 on Part I,
lines 5a or 5b, (:lS applicable. P must remove the net income (loss) before minority
interests of DS76-DS t 00 on Part I, lines 6a or 6b, as applicable. P must reverse on Part I,
line 8: (i)theelirilination of dividends received by P and DS t -DS75 from DS76-DSI 00
and FS1=-FS50; and (ii) the recognition of minority interests' share of the net income
(loss) of DS76-DS 100. (Note: The minority interests' share, if any, of the income of
DSI-DS75 must be reported in Part II, line 8, Minority interest for includible
corporations.)
P reports on Part I, line 11, the consolidated financial statement net income (loss)
attributable to the includible corporations P and DSI-DS75. Intercompany transactions
between the includible corporations that had been eliminated in the net income amount
on line 4 remain eliminated in the net income amount on line 11. Transactions between
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the includible corporations and the nonincludible entities that are eliminated in the net
income amount on line 4 are included in the net income amount on line 11 since the
elimination of those transactions were reversed on line 8.
Example 3. Foreign corporation F owns 100% of the stock of U.S. corporation P. P
owns 100% of the stock of OS 1, 60% of the stock of OS2, and 100% of the stock of
FS 1. F prepares certified audited financial statements. P does not prepare any financial
statements. P files a consolidated U.S. federal income tax return with DS1.
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P must not complete Schedule M-3, Part I, with reference to the financial Q~atem!(tJts of
its foreign parent F. P must check "No" on Part I, lines I a, I b, and I c, skli{Unes2a
through 3c of Part I, and enter worldwide net income (loss) per the bOQkS:and'records of
the includible corporations (P and DSl) on Part I, line 4. P must enierany necessary
adjustments on lines 5a through lOin order for Part I, line 11, t<;rrepoItthe net income
(loss) of includible corporations P and OS I, net of eliminations forhansactions
between
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P and OSl.
Example 4.
A.
U.S. corporation P owns 60% of corpora~on DSI ~hich is fully consolidated in
P's financial statements. OS 1 has net incqIpeof $100 (before minority interests)
and pays dividends of $50, of whichP fe<.;eives $30. The dividend is eliminated
in the consolidated financial statem~nt$. in its financial statements, P
consolidates DS 1 and includes $69 of net income ($100 less the minority interest
of $40) on Part I, line 4.
P must remove the $100 net income of OS 1 on Part I, line 6a. P must reverse on
Part I, line 8, the eliminatiop of the $40 minority interest net income of DS 1. In
addition, P reverses its.elill1ination of the $30 intercompany dividend in its
financial statements line/8 .• ·The net result is that P includes the $30 dividend
from DS 1 at Part I, line 11.
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B.
U.S. corporati()nC owns 60% of the capital and profits interests in U.S. LLC N.
N has net incom~of $100 (before minority interests) and makes no distributions
during theyeaf:C treats N as a corporation for financial statement purposes and
as a partnership for U.S. federal income tax purposes. In its financial statements,
<:ycopspIidates N and includes $60 of net income ($100 less the minority interest
/0£$40);on Part I, line 4.
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C must remove the $100 net income of N on Part I, line 6a. C must reverse on
Part I, line 8, the elimination of the $40 minority interest net income of N. The
result is that C includes no income for N on Part I, line 11. C's taxable income
from N must be reported by C on Part II, line 9, Income (loss) from U.S.
partnerships.
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Example 5. U.S. corporation P owns 80% of the stock of corporation DS. DS is included
in P's consolidated federal income tax return, even though DS is not included in P's
consolidated financial statements on either a consolidated basis or on the equity method.
DS has current year net income of $100 after taking into account its $40 interest payment
to P. P has net income of $1,040 after recognition of the interest income from DS.
Because DS is an includible corporation, 100% of the net income of both P and DS must
be reported on Form 1120, page 1 of the PDS consolidated U.S. federal income tax
return, and the intercompany interest income and expense must be removed by
consolidation elimination entries.
P must report its financial statement net income of $1,040 on Part l,iin~4,:and reports
D's net income of $100 on Part I, line 7. Then, in order to refleclthe/furI'consolidation of
the financial accounting net income of P and DS at Part I, line li:Neti6come (loss) per
income statement of includible corporations, the following consolid~ti6n and elimination
entries are reported on Part I, line 8: (a) offsetting entries to/remove the $40 of interest
income received from DS included by P on line 4, and torem<'sve'the $40 of interest
expense of DS included in line 7 for a net change of ~ero; and (b) an entry to reflect the
$20 minority interest in the net income of DS (DS riet inci?u;te of $100 x 20% minority
interest). The result is that Part 1, line 11, report$ $1,120: $\040 from line 4, $100 from
line 7, and ($20) from line 8. Stated another way; PartJ; line 11, includes the entire
$1,000 net income of P, measured before recogpitlqnof the intercompany interest income
from DS and the consolidation of DS operatioJl~/plus the entire $140 net income of DS,
measured before interest expense to P, less thelninority interest ownership of $20 in
DS's separate net income ($100). The P.QS consolidated U.S. federal income tax group
is required to include on the attached supporting schedule for Part, line 8, the details of
the adjustment to the minority interest iIlftbe net income of DS, but is not required to
report the offsetting adjustment to the intercompany elimination of interest income and
interest expense (though it is permitted to do so).
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Specific Instructions for Parti, JI and III
For consolidated U.S. f,ederal iricome tax returns, file supporting schedules for each
includible corporatiO~. S'i5e/::onsolidated returns on page 4 of the Form 1120
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instructions.
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Indicate on the line after the common parent's name on Part II and Part III, whether the
Schedule M-3js'for f Ule: (1) U.S. consolidated tax group; (2) Parent corporation; (3)
Consolidation"eliminations;
or (4) Subsidiary corporation, by checking the appropriate
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General
F~~~at of Parts II and III
For each line item in Parts II and III, report in column (a) the amount of net income (loss)
included in Part I, line II, and report in column (d) the amount included in taxable
income on Form 1120, pagel, line 28.
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When To Complete Columns (a) and (d)
A corporation is not required to complete columns (a) and (d) of Parts II and III for the
first tax year the corporation is required to file Schedule M-3, and for all subsequent
years the corporation is required to file Schedule M-3, the corporation must complete
Schedule M-3 in its entirety. Accordingly, the corporation must complete columns (a)
and (d) of Parts II and III for all tax years subsequent to the first tax year the corporation
is required to file Schedule M-3. For example, if a corporation was required to file
Schedule M-3 as a member of a U.S. consolidated tax group and the corporatiS)I).leaves
the U.S. consolidated tax group, the corporation is required to complete Scfi¢uleM-3 in
its entirety in any succeeding tax year that the corporation is required tQce>:rp.plete
Schedule M-3. However, if the corporation joins in filing a differelJt consolidated U.S.
federal income tax return, then the corporation must complete its Schedule M-3 in its
entirety in any year that the U.S. consolidated tax group must complete its Schedule M-3
in its entirety.
If, for any tax year (or tax years) prior to the first tax year a corporatIon is required to file
Schedule M-3, a corporation voluntarily files Schedule M-3 in Heu of Schedule M-I, then
in those voluntary filing years the corporation is not required to/complete columns (a) and
(d) of Parts II and III. In addition, in the first tax year the corporation is required to file
Schedule M-3 the corporation is not required to complete ~o1umns (a) and (d) of Parts II
and III.
If a corporation chooses not to complete columns (a) .and (d) of Parts II and III in the first
tax year the corporation is required to file Schedule M-3 (or in any year in which the
corporation voluntarily files Schedule M-3), tlien Part II, line 30, is reconciled by the
corporation (or, in the case of a U.S. consolidated tax group, by the group's parent
corporation on Part II, line 30, of the ,grpup'sconsolidated Schedule M-3) in the
',v,
following manner:
I. Report the amount from Part I, line 11, on Part II, line 30, column (a);
2. Leave blank Part II, lines lti1rough 29, columns (a) and (d);
3. Leave blank Part III, coluqInS (a) and (d); and
4. Report on Part II, line 30~601umn (d), the sum of Part II, line 30, columns (a), (b),
and (c).
;j
Note. Part II, line 30, cohlrnn (d), must equal the amount on Form 1120, page 1, line 28.
When To Cowplete Columns (b) and (c)
Columns.(b) arid'(c) of Parts II and III must be completed for any tax year for which the
corponltjon files Schedule M-3.
/!.
For any item/if income, gain, loss, expense, or deduction for which there is a difference
between columns (a) and (d), the portion of the difference that is temporary must be
entered in column (b) and the portion of the difference that is permanent must be
entered in column (c).
If financial statements are prepared by the corporation in accordance with generally
accepted accounting principles (GAAP), differences that are treated as temporary for
GAAP must be reported in column (b) and differences that are permanent (that is, not
16
temporary for GAAP) must be reported in column (c). Generally. pursuant to GAAP, a
temporary difference affects (creates. increases, or decreases) a deferred tax asset or
liability.
If the corporation does not prepare financial statements, or the financial statements are
not prepared in accordance with GAAP, report in column (b) any difference that the
corporation believes will reverse in a future tax year (that is, have an opposite effect on
taxable income in a future tax year (or years) due to the difference in timing of
recognition for financial accounting and U.S. federal income tax purposes) or ist)1e
reversal of such a difference that arose in a prior tax year. Report in coluIlln;Ccr~ny
difference that the corporation believes will not reverse in a future tax Y$!at(~d"is not the
f/'%
"p
reversal of such a difference that arose in a prior tax year).
If the corporation is unable to determine whether a difference between column (a) and
column (d) for an item will reverse in a future tax year or is the te{r~rs~l of a difference
that arose in a prior tax year, report the difference for that itemin CQlQltlll (c).
Example 6. For the 2004, 2005, and 2006 tax years, corpprati()n A has total consolidated
assets on the last day of the tax year as reported on Scltedule L, line 15, column (d), of $8
million, $11 million, and $12 million, respectively. Ais 'required to file Schedule M-3 for
its 2005 and 2006 tax years.
For its 2004 tax year, A voluntarily files ScheduieM·j'in lieu of Schedule M-l and
does not complete columns (a) and (d) of Parts)fandUI.
;
'.<
/.
'
'~ ••
j
For A's 2005 tax year, the first tax year thaiA.is required to file Schedule M-3, A is only
required to complete Part I and columns {b) and: (c) of Parts II and
III.
"
For A's 2006 tax year, A is required t6complete Schedule M-3 in its entirety.
Example 7. Corporation B is a U.S. publitly traded corporation that files a
Consolidated U.S. federal income,.,tC;l-~ return and prepares consolidated GAAP financial
statements. In prior years, Bacqulied intellectual property (IP) and goodwill through
several corporate acquisitionsj'he IP is amortizable for both U.S. federal income tax and
financial statement purposes. In'the current year, B' s annual amortization expense for IP
is $9,000 for U.S. feder~lincome tax purposes and $6,000 for financial statement
purposes. In its finariCiru statements, B treats the difference in IP amortization as a
temporary difference. The goodwill is not amortizable for U.S. federal income tax
purposes and is~ubject'rto impairment for financial statement purposes. In the current
year, B record~~an irrlpairment charge on the goodwill of $5,000. In its financial
statemellts;,~Jreiits the goodwill impairment as a permanent difference. B must report the
amortdation'aitributable to the IP on Part III, line 28, Other amortization or impairment
write-off~;:'and report $6,000 in column (a), a temporary difference of $3,000 in column
(b), and $9,000 in column Cd). B must report the goodwill impairment on Part III, line 26,
Amortization/impairment of goodwill, and report $5,000 in column (a), a permanent
difference of ($5,000) in column (c), and $0 in column (d).
Reporting Requirements for Parts II and III
General Reporting Requirements
17
If an amount is attributable to a reportable transaction described in Regulations section
1.6011-4(b) (other than a transaction described in Regulations section 1.6011-(4)(b)(6)
relating to significant book-tax differences), the amount must be reported in columns (a),
(b), (c), and (d), as applicable, of Part II, line 12, Items relating to reportable transactions,
regardless of whether the amount would otherwise be reported on Part II or Part III of
Schedule M-3. Thus, if a taxpayer files Form 8886, Reportable Transaction Disclosure
Statement, the amounts attributable to that reportable transaction must be reported on Part
II, line 12.
///
A corporation is required to report in column (a) of Parts II and III the a1l10unti~fany
item specifically listed on Schedule M-3 that is in any manner included i~th~
corporation's current year financial statement net income (loss) or inaJ1fncome or
expense account maintained in the corporation's books and records.,evinifthere is no
difference between that amount and the amount included in taxable in2'ome unless (a)
otherwise provided in these instructions or (b) the amount is attribdtahle to a reportable
transaction described in Regulations section 1.60 11-4(b) otver than transaction
described in Regulations section 1.6011-(4)(b)(6) (relatitrgfopsigmficant book-tax
differences) and is therefore reported on Part II, line l:9t:for'~xample, with the exception
of interest income reflected on a Schedule K-l received by a corporation as a result of the
corporation's investment in a partnership or other pass-throtlgh entity, all interest income,
whether from unconsolidated affiliated companies, ..ti;1itdparties, banks, or other entities,
whether from foreign or domestic sources, whether taxable or exempt from tax and
regardless of how or where the income is claSSlfiedin the corporation's financial
statements, must be included on Part II, line f3:,it:5lumn (a). Likewise, all fines and
penalties paid to a government or othecauthority for the violation of any law for which
fines or penalties are assessed must be irich}ded on Part III, line 12, column (a),
regardless of the government authority that irhposed the fines or penalties, regardless of
whether the fines or penalties are civil Qr criminal, regardless of the classification,
nomenclature, or terminology attached to the fines or penalties by the imposing authority
in its actions or documents, and regru:dless of how or where the fines or penalties are
classified in the corporation'lf~andal income statement or the income and expense
books and records.
accounts maintained in the corpQration's
»
a
If a corporation woufdl?~required to report in column (a) of Parts II and III the amount
of any item speci~id:\ll'y)isted on Schedule M-3 in accordance with the preceding
paragraph, excepttharfhe corporation has capitalized the item of income or expense and
reports the amqu,nt i~ its financial statement balance sheet or in asset and liability
account(/ff),liiltaiffed in the corporation's books and records, the corporation must report
the Pf(1p~f,JaiJ'treatment of the item in columns (b), (c), and (d), as applicable.
Pj !;;~:
,;/
Furthermor6;in applying the two preceding paragraphs, a corporation is required to
report in column (a) of Parts II and III the amount of any item specifically listed on
Schedule M-3 that is included in the corporation's financial statements or exists in the
corporation's books and records, regardless of the nomenclature associated with that item
in the financial statements or books and records. Accurate completion of Schedule M-3
requires reporting amounts according to the substantive nature of the specific line items
included in Schedule M-3 and consistent reporting of all transactions of like substantive
18
nature that occUlTed during the tax year. For example, all expense amounts that are
included in the financial statements or exist in the books and records that represent some
form of "Bad debt expense," must be reported on Part III, line 32, in column (a),
regardless of whether the amounts are recorded or stated under different nomenclature in
the financial statements or the books and records such as: "Provision for doubtful
accounts"; "Expense for uncollectible notes receivable"; or "Impairment of trade
accounts receivable." Likewise, as stated in the preceding paragraph, all fines and
penalties must be included on Part III, line 12, column (a), regardless of the terminology
or nomenclature attached to them by the corporation in its books and recordsrorfinancial
statements.
With limited exceptions, Part II includes lines for specific items of incoilie,~ain, or loss
(income items). (See Part II, lines 1 through 25.) If an income item is described in Part II,
lines 1 through 25, report the amount of the item on the applicable"line/regardless of
whether there is a difference for the item. If there is a difference fo'rthe income item, or
only a portion of the income item has a difference and a portion of the item does not have
a difference, and the item is not described in Part II, lines 1 through 25, report and
describe the entire amount of the item on Part II, line~6~ Other income (loss) items with
differences.
h
With limited exceptions, Part III includes lines for specific, {iems of expense or deduction
(expense items). (See Part III, lines 1 through 34.) If an 'expense item is described on Part
III, lines 1 through 34, report the amount ofthe Jtem on the applicable line, regardless of
whether there is a difference for the item. If there',is a difference for the expense item, or
only a portion of the expense item has a difference and a portion of the item does not
have a difference and the item is not described in Part III, lines 1 through 34, report and
describe the entire amount of the item on Part III, line 35, Other expense/deduction items
with differences.
If there is no difference between the financial accounting amount and the taxable amount
of an entire item of income, loss;iexpense, or deduction and the item is not described or
included in Part II, lines 1 through 26, or Part III, lines I through 35, report the entire
amount of the item in column (~Yand (d) of Part II, line 29, Other income (loss) and
expense/deduction item,~with no differences.
Separately stated abdadequatelY disclosed. Each difference reported in Parts II and III
must be separatelystat~d and adequately disclosed. In general, a difference is adequately
disclosed if the d{ffe~ehce is labeled in a manner that clearly identifies the item or
transaction fr6m which the difference arises. For further guidance about adequate
disclosure,s~~~>R.~gulations section 1.6662-4(f). If a specific item of income, gain, loss,
expense; or deduction is described on Part II, lines 9 through 25, or Part III, lines 1
through 34;an'd the line does not indicate to "attach schedule" or "attach details," and the
specific instructions for the line do not call for an attachment of a schedule or statement,
then the item is considered separately stated and adequately disclosed if the item is
reported on the applicable line and the amount(s) of the item(s) are reported in the
applicable columns of the applicable line. See the instructions beginning on page 8 for
specific additional information required to be provided for amounts reported on Part II,
lines 1 through 8.
19
Except as otherwise provided, differences for the same item must be combined or netted
together and reported as one amount on the applicable line of Schedule M-3. However,
differences for separate items must not be combined or netted together and each item
(and corresponding amount attributable to that item) must be separately stated and
adequately disclosed on the applicable line of Schedule M-3. In addition, every item of
difference must be separately stated and adequately disclosed. Differences for dissimilar
items cannot be combined even if the amounts are below a certain dollar amount.
Example 8. Corporation C is a calendar year taxpayer that placed in service/J~rri
depreciable fixed assets in 2000. C was required to file Schedule M-3 for its,'iOQ4f tax
year and is required to file Schedule M-3 for its 2005 tax year. C's totald~ifeciation
expense for its 2005 tax year for five of the assets is $50,000 for income~st{itement
purposes and $70,000 for U.S. federal income tax purposes. C's;totalanp6al
depreciation expense for its 2005 tax year for the other five asset~is $40:000 for income
statement purposes and $30,000 for U.S. federal income tax purposes(In its financial
statements, C treats the differences between financial statement and U.S. federal income
tax depreciation expense as giving rise to temporary differen~esthat will reverse in
future years. C must combine all of its depreciation adjlistments. Accordingly, C must
report on Part III, line 31, Depreciation, for its 2005 tax yearincome statement
depreciation expense of $90,000 in column (a), a temPorary difference of $10,000 in
column (b), and U.S. federal income tax depreciali6n~expense of $100,000 in column
.
(d) .
/~
Example 9. Corporation D is a calendar year taxpayer that was required to file Schedule
M-3 for its 2004 tax year and is requiredtq file Schedule M-3 for its 2005 tax year. On
December 31, 2005, D establishes three reserve accounts in the amount of $100,000 for
each account. One reserve account is an allowance for accounts receivable that are
estimated to be uncollectible. The secoildreserve is an estimate of a settlement D may
have to pay as a result of pendinglit,igation. The third reserve is an estimate of future
warranty expenses. In its fin£Ulcialstatements, D treats the three reserve accounts as
giving rise to temporary differeil'ces that will reverse in future years. The three reserves
are expenses in D's 2005 finarl"cial statements but are not deductions for U.S. federal
income tax purposes~in '2005. D must not combine the Schedule M-3 differences for the
three reserve accourifs~ D must report the amounts attributable to the allowance for
uncollectible accounts receivable on Part III, line 32, Bad debt expense, and must
separately state, ~nd!~dequately disclose the amounts attributable to each of the two
reserves for pertding litigation and the warranty costs on a required, attached schedule
that supportMhe::amounts at Part III, line 35, Other expense/deduction items with
differences. "{,;;
/
~/
Example J(f'Corporation E is a calendar year taxpayer that was required to file
Schedule M-3 for its 2004 tax year and is required to file Schedule M-3 for its 2005
tax year. On January 2,2005, E establishes an allowance for uncollectible accounts
receivable (bad debt reserve) of $100,000. During 2005, E increased the reserve by
$250,000 for additional accounts receivable that may become uncollectible.
Additionally, during 2005 E decreases the reserve by $75,000 for accounts receivable
20
that were discharged in bankruptcy during 2005. The balance in the reserve account
on December 31, 2005, is $275,000. The $100,000 amount to establish the reserve
account and the $250,000 to increase the reserve account are expenses on E's 2005
financial statements but are not deductible for U.S. federal income tax purposes in
2005. However, the $75,000 decrease to the reserve is deductible for U.S. federal
income tax purposes in 2005. In its financial statements, E treats the reserve account
as giving rise to a temporary difference that will reverse in future tax years. E must
report on Part III, line 32, Bad debt expense, for its 2005 tax year income sf~tement
bad debt expense of $350,000 in column (a), a temporary difference of ($27~tOOO) in
column (b), and U.S. federal income tax bad debt expense of $75,000 in colUmnld).
/
/r,
:',;,
Example 11. Corporation F is a calendar year taxpayer that was requi'red,ci fil'e Schedule
M-3 for its 2004 tax year and is required to file Schedule M-3 for.its 2005 tax year.
During 2005, F incurs $200 of meals and entertainment expenses't'nat f deducts in
computing net income per the income statement. $50 of the $200 is 'subject to the $50%
limitation under section 274(n). In its financial statement~;~E treats the limitation on
deductions for meals and entertainment as a permanent differenc~: Because meals and
entertainment expenses are specifically described in Pa.ltHI, line 11, Meals and
entertainment, F must report all of its meals and ente.rtainin~nt expenses on this line,
regardless of whether there is a difference. Accordingly, F must report $200 in column
(a), $25 in column (c), and $175 in column (d). B must not report the $150 of meals and
entertainment expenses that are deducted inF'~Jlntmcjal statement net income and are
fully deductible for U.S. federal income tax puiPoses on Part II, line 29, Other income
(loss) and expense/deduction items witb no differences, and the $50 subject to the
limitation under section 274(n) on Part IlI,line 11, Meals and entertainment.
,
/
/
~~~~-
; "
Part II. Reconciliation of Net Income (Loss) per Income Statement of Includible
Corporations With Taxable I~come per Return
Lines 1 Through 8. Additional Information for Each Corporation
For any item reported OJ). Part II, lines 1, 3 through 6, or 8, attach a supporting schedule
that provides the name:oftl1e entity for which the item is reported, the type of entity
(corporation, partner~hip, etc.), the entity's EIN (if applicable), and the item amounts for
columns (a) througn (d). 'See the instructions for Part II, lines 2 and 7, for the specific
information requifedf6r those particular lines.
//'
Line 1.Incom~(.I,~oss) From Equity Method Foreign Corporations
Repor,t~9wI'in~./1, ~olumn (a), the income statement income (loss) included in Part I,
line 11 ,(otl:i)}Y foreign corporation accounted for on the equity method and remove
such amoun(in column (b) or (c), as applicable. Report the amount of dividends
received and other taxable amounts received or includible from foreign corporations on
Part II, lines 2 through 5, as applicable.
Line 2. Gross Foreign Dividends Not Previously Taxed
Except as otherwise provided in this paragraph, report on line 2, column (d), the amount
(before any withholding tax) of any foreign dividends included in current year taxable
21
income on Form 1120, page I, line 28, and report on line 2, column (a), the amount of
dividends from any foreign corporation included in Part I, line 11. Do not report on Part
I, line 2, any amounts that must be reported on Part II, lines 3 or 4, or dividends that were
previously taxed and must be reported on Part II, line 5. (See the instructions below for
Part II, lines 3,4 and 5.)
For any dividends reported on Part II, line 2, that are received on a class of voting stock
of which the corporation directly or indirectI y owned 10% or more of the ou~standing
shares of that class at any time during the tax year, report on an attached suppgning
schedule the name of the dividend payer, the class of voting stock on which the dividend
was paid, the payer's EIN (if applicable), and the item amounts for coluni"ris"(a)"through
( d ) . " ·
Line 3. Subpart F, QEF, and Similar Income Inclusions
Report on line 3, column (d), the amount included in taxable income\l,Ilder section 951
(relating to Subpart F), gains or other income inclusions resulting frbm elections under
sections 1291 (d)(2) and l298(b)(1), and any amount included.in taxable income pursuant
to section 1293 (relating to qualified electing funds). Tp~ amount of Subpart F income
corresponds to the total of the amounts reported by the corporation on line 6, Schedule I,
of all Forms 5471, Information Return of U.S. Persons With Respect to Certain Foreign
Corporations. The amount of qualified electing fund incpme corresponds to the total of
the amounts reported by the corporation on line 3(a), Part II, of all Forms 862 I, Return
by a Shareholder of a Passive Foreign Investriten!Company or Qualified Electing Fund.
Also include on line 3 PFIC mark-to-market gains and losses under section 1296. Do not
report such gains and losses on Part II, line 16, Mark-to-market income (loss).
Line 4. Section 78 Gross-Up
Report on line 4, column (d), the amount of any section 78 gross-up. The section 78
gross-up amount must correspond lothe total section 78 gross-up amounts reported by
the corporation on all Forms 1118, Foreign Tax Credit-Corporations.
Line 5. Gross Foreign Dis~ibutions Previously Taxed
Report on line 5, column (a), any distributions received from foreign corporations
that were includeditl Part I, line 11, and that were previously taxed for U.S. federal
income tax purposes. For example, include in column (a) amounts that are excluded
from taxable income under sections 959 and 1293(c). Remove such amount in
column .(b) or (c5:'as applicable. Report the full amount of the distribution before any
withholdi.ng tax. Since previously taxed foreign distributions are not currently
taxable, IIne,5, column (d) is shaded. (Also, see instructions above for Part II, line 2,
Gross foreign dividends not previously taxed.)
Line 6. Income (Loss) From Equity Method U.S. Corporations
Report on line 6, column (a), the income statement income (loss) included in Part I, line
11, for any u.S. corporation accounted for on the equity method and remove such amount
in column (b) or (c), as applicable. Report on Part II, line 7, dividends received from any
22
U.S. corporation accounted for on the equity method.
Line 7. U.S. Dividends Not Eliminated in Tax Consolidation
Report on line 7, column (a), the amount of dividends included in Part I, line! I that
were received from any U.S. corporation. Report on line 7, column (d), the amount of
any U.S. dividends included in taxable income on Form 1120, page 1, line 28.
Usually, the amounts included on line 7, columns (a) and (d) include only dividends
received from U.S. corporations that are not included in the U.S. consolidatea ~ group
because intercompany dividends received from includible corporations listecf6nForm
851 are eliminated for financial accounting purposes and for the calcul~tjoti:Qf U:S.
taxable income. However, in the case of an insurance company includ~dih th'e
consolidated U.S. federal income tax return that is required to repofti~r~t~ompany
dividends received as part of statutory accounting net income (anqis'fully completing
Parts II and III of Schedule M-3 (see instructions for Part II, line 26Jor alternative
reporting)), include such intercompany dividends on Part IJl line,7 column (a) and the
taxable amount of those dividends on Part II, line 7 column/(d)~(For insurance
companies included in the consolidated U.S. federal iU99me tax return, see instructions
for Part I, lines 10 and 11.)
/ '
For any dividends reported on Part II, line 7, that a~ere~eived on classes of voting stock
in which the corporation directly or indirectly oWtied~lO% or more of the outstanding
shares of that class at any time during the ta£yeM~report on an attached supporting
schedule for Part II, line 7, the name of tlIe diVidend payer, the class of voting stock on
which the dividend was paid, the payer's!EIN Of applicable), and the item amounts for
columns (a) through (d).
Line 8. Minority Interest for Includibiec,C~rporations
f
Report on line 8, column (a), the minorIty interest included in the income statement
income (loss) on Part I, line 11, fQr,,~y member of the U.S. consolidated tax group that is
;,
less than 100% owned.
Example 12. Corporatiq~ G is ,{calendar year taxpayer that was required to file
Schedule M-3 for it(2064.t~ year and is required to file Schedule M-3 for its 2005 tax
year. Gowns 90% ofthe stock of U.S. corporation DS 1. G files a consolidated U.S.
federal income taxretJ.lfIfwith DS 1 as the GDS 1 U.S. consolidated group. G prepares
certified GAA£.finaIlCial statements for the consolidated financial statement group
consisting of q;a,nd DS 1. G has no net income of its own, and G does not report its
equity intere,st)ilthe income of DS 1 on its separate financial statements. DS 1 has
financiitLlitate$ent net income (before minority interests) and taxable income of $1,000
($2,500'()f:tev~nue less $1,500 cost of goods sold).
On the consolidated Schedule M-3, Part I, line 4, Worldwide consolidated net income
(loss) per income statement, and on line 11, Net income (loss) per income statement of
includible corporations, the U.S. consolidated tax group GDS 1 must report $900 of
financial statement net income ($1,000 net income less $100 minority interest).
23
The GOS 1 group must prepare one consolidated Schedule M-3, Parts II and III and three
additional Schedules M-3, Parts II and III: one for G, one for OS 1, and one for
consolidation eliminations.
On the Schedule M -3, Parts II and III for OS 1, $1,000 is reported on Part II, line 29 and
line 30, in both columns (a) and (d). On G's Schedule M-3, Parts II and III, zero is
reported on Part II, line 30, in both columns (a) and (d). On the consolidation
eliminations Schedule M-3, Parts II and III, on Part II, line 8 and line 30, the minority
interest elimination for the U.S. consolidated tax group is reported as ($100).1ri'coJumn
(a), $100 in column (c), and $0 in column (d).
.. .
I'/{
On the Schedule M-3, Parts II and III for the U.S. consolidated tax ir6up,;dn~art II, line
8, Minority interest for includible corporations, ($100) is reported cQlumn (a), $100 in
column (c), and $0 in column (d). On Part II, line 29, Other inC9me>(lg~s5 and
expense/deduction items with no differences, the U.S. consolidated trut group reports
$1,000 in both columns (a) and (d). As a result, financial statement net income on Part II,
line 30, column (a), will total $900, net permanent differences on Part II, line 30, column
(c), will total $100, and taxable income on line 30, coJumn (d),.will total $1,000.
in
Line 9. Income (Loss) From
U.S. Partnerships and Line
f, .• .;.
10. Income (Loss) From Foreign Partnerships>;!,
For any interest owned by the corporation or ~~einber of the U.S. consolidated tax
group that is treated as an investment injapartnership for U.S. federal income tax
purposes (other than an interest in a disr~$arded entity), report the following on Part II,
line 9 or 10, as applicable:
,.
1. In column (a) the sum of th~corporation' s distributive share of income or loss from
a U.S. or foreign partnership thab.~inc1uded in Part I, line 11, Net income (loss) per
income statement of inc1udiblecoryorations;
2. In column (b) or (c), as applicable, the sum of all differences, if any, attributable to
the corporation's distributive share of income or loss from a U.S. or foreign partnership;
and
;,? ~/:
3. In column (d) the sum of all amounts of income, gain, loss, or deduction attributable
to the corporation'~distiibutive share of income or loss from a U.S. or foreign
partnership (i.e:,. the~§ti1n of all amounts reportable on the corporation's Schedule(s) K-l
received fromtl1e pa~tnership (if applicable», without regard to any limitations computed
at the parfiie~/!evel·(e.g., limitations on utilization of charitable contributions, capital
10sses;1rng. i~t~rest expense).
;;;;!l:>,
For each pa~~ership reported on line 9 or 10, attach a supporting schedule that provides
the name, EIN (if applicable), end of year profit-sharing percentage (if applicable), end of
year loss-sharing percentage (if applicable), and the amount reported in column (a), (b),
(c), or (d) of lines 9 or 10, as applicable.
Example 13. U.S. corporation H is a calendar year taxpayer that was required to file
Schedule M-3 for its 2004 tax year and is required to file Schedule M-3 for its 2005 tax
24
year. H has an investment in a U.S. partnership USP. H prepares financial statements in
accordance with GAAP. In its financial statements, H treats the difference between
financial statement net income and taxable income from its investment in USP as a
permanent difference. For its 2005 tax year, H's financial statement net income includes
$10,000 of income attributable to its share ofUSP's net income. H's Schedule K-I from
USP reports $5,000 of ordinary income, $7,000 of long-term capital gains, $4,000 of
charitable contributions, and $200 of section 179 expense. H must report on Part II, line
9, $10,000 in column (a), a permanent difference of ($2,200) in column (c), and $7,800 in
column (d).
Example 14. Same facts as Example 13 except that corporation H' s ch;it~bl~
contribution deduction is wholly attributable to its partnership interestii,(USP and is
limited to $90 pursuant to section 170(b)(2) due to other investment losse~ incurred by H.
In its financial statements, H treated this limitation as a temporary:.differerice. H must not
report the charitable contribution limitation of $3,910 ($4,000 -$90) on Part II, line 9. H
must report the limitation on Part III, line 21, Charitable contribution
limitation/carryforward, and report the disallowed charitable contributions of ($3,910) in
columns (b) and (d).
Line 11. Income (Loss) From Other Pass-Through Entities
For any interest in a pass-through entity (other that;laninterest in a partnership reportable
on Part II, line 9 or 10, as applicable) owned by a member of the U.S. consolidated tax
group (other than an interest in a disregarded ennty),Jreport the following on line 11:
1. In column (a) the sum of the corporation's ~jstributive share of income or loss from
the pass-through entity that is included inPart I, line 11, Net income (loss) per income
statement of includible corporations;
2. In column (b) or (c), as applicable, the sum of all differences, if any, attributable to
the pass-through entity; and
3. In column (d) the sum of allt<;lxable amounts of income, gain, loss, or deduction
reportable on the corporation'sSClledules K-l received from the pass-through entity (if
applicable).
.
For each pass-through, entity reported on line 11, attach a supporting schedule that
provides that entity's'name,EIN (if applicable), the corporation's end of year profitsharing percentage (ifapplicable), the corporation's end of year loss-sharing percentage
(if applicable), and the 'amounts reported by the corporation in column (a), (b), (c), or (d)
of line 11, as applicable.
Line 12~ Items Relating to Reportable Transactions
Any a~ounts attributable to any reportable transactions (as described in Regulations
section 1.601'1-4) other than transactions described in Regulations section 1.6011-4(b)(6)
relating to significant book-tax differences must be included on Part II, line 12, regardless
of whether the difference, or differences, would otherwise be reported elsewhere in Part
II or Part III. Thus, if a taxpayer files Form 8886 for any reportable transaction described
in Regulations section 1.6011-4 and the transaction is not described in Regulations
section 1.60 11-4(b )(6) relating to significant book-tax differences, the amounts
attributable to that reportable transaction must be reported on Part II, line 12. In addition,
25
all income and expense amounts attributable to a reportable transaction must be reported
on Part II, line 12, columns (a) and (d) even if there is no difference between the financial
statement amounts and the taxable amounts.
Each difference attributable to a reportable transaction must be separately stated and
adequately disclosed. A corporation will be considered to have separately stated and
adequately disclosed a reportable transaction on line 12 if the corporation sequentially
numbers each Form 8886 and lists by identifying number on the supporting'sc:hedule for
Part II, line 12, each sequentially numbered reportable transaction and the arltoul)ts
required for Part II, line 12, columns (a) through (d).
'?j/
i:(
In lieu of the requirements of the preceding paragraph, a corporatioI)wU1JJ~p considered
to have separately stated and adequately disclosed a reportable tra,nsclctiorr if the
corporation attaches a supporting schedule that provides the following f~r each
reportable transaction:
' '/
I. A description of the reportable transaction disclosedon.Fotm 8886 for which
amounts are reported on Part II, line 12;
........
2. The name and tax shelter registration number, W'pplicable, as reported on lines 1a
and Ib, respectively, of Form 8886; and
3. The type of reportable transaction (i.e., listed,fr~nsjction, confidential transaction,
transaction with contractual protection, etcfas,reported on line 2 of Form 8886.
/
.
::;/~
If a transaction is a listed transaction described in Regulations section 1.60 11-4(b)(2), the
description also must include the description provided on line 3 of Form 8886. In
addition, if the reportable transaction iuyolVes an investment in the transaction through
another entity such as a partnership, th~ description must include the name and EIN (if
applicable) of that entity as reported on line 5 of Form 8886.
,
.;.;
Example 15. Corporation J isa.calendar year taxpayer that was required to file Schedule
M-3 for its 2004 tax year andi~required to file Schedule M-3 for its 2005 tax year. J
incurred seven differen~,abandonment losses during its 2005 tax year. One loss of $12
million results frorr{a:l~portable transaction described in Regulations section 1.60114(b )(5), another loss!&f $S.rltillion results from a reportable transaction described in
Regulations secti()n/l~R9n -4(b )(4), and the remaining five abandonment losses are not
reportable trans,adions: J discloses the reportable transactions giving rise to the $12
million and $5;1ltillio~ losses on separate Forms 8886 and sequentially numbers them Xl
and X2{{e~p~stiV:ely. J must separately state and adequately disclose the $12 million and
$5 milIlon\osS"es on Part II, line 12. The $12 million loss and the $5 million loss will be
adequate{y;ajl~losed if J attaches a supporting schedule for line 12 that lists each of the
sequentially numbered forms, Form 8886-Xl and Form 8886-X2, and with respect to
each reportable transaction reports the appropriate amounts required for Part II, line 12,
columns (a) through (d). Alternatively, 1's disclosures will be adequate if the description
provided for each loss on the supporting schedule includes the names and tax shelter
registration numbers, if any, disclosed on the applicable Form 8886, identifies the type of
reportable transaction for the loss, and reports the appropriate amounts required for Part
26
II, line 12, columns (a) through (d). J must report the losses attributable to the other five
abandonment losses on Part II, line 23e, Abandonment losses, regardless of whether a
difference exists for any or all of those abandonment losses.
Example 16. Corporation K is a calendar year taxpayer that was required to file
Schedule M-3 for its 2004 tax year and is required to file Schedule M-3 for its 2005 tax
year. K enters into a transaction with contractual protection that is a reportai:l}e
transaction described in Regulations section 1.60 11-4(b)(4). This reportable/l;I.:ansaction
is the only reportable transaction for K's 2005 tax year and results in a S7:Jl1H1iolJ:
capital loss for both financial statement purposes and U.S. federal incort;l5! taXppu;.poses.
Although the transaction does not result in a difference, K is requiredtpreport on Part
II, line 12, the following amounts: ($7 million) in column (a), zero Ins~(timns (b) and
(c), and ($7 million) in column (d). The transaction will be adeqff~telydisclosed if K
attaches a supporting schedule for line 12 that (a) sequentially riumbers the Form 8886
and refers to the sequentially-numbered Form 8886-Xt a~4 (b) l:ep~rts the applicable
amounts required for line 12, columns (a) through (d). Alternatiyely, the transaction
will be adequately disclosed if the supporting statem~~t:for li~e 12 includes a
description of the transaction, the name and tax shelter registration number, if any, and
the type of reportable transaction disclosed on Form 8886.
Line 13. Interest income
/
-.~/
Report on Part II, line 13, column (a), the tota~ahl()unt of interest income included on
Part I, line 11, and report on Part II, line'~13, column (d), the total amount of interest
income included on Form 1120, page 1~ line 28, that is not required to be reported
elsewhere on Schedule M-3. In columns (bYor (c), as applicable, adjust for any amounts
treated for U.S. federal income tax purposes as interest income that are treated as some
other form of income in the financial statements, or vice versa. For example, adjustments
to interest income resulting frorn.'ad,justments made in accordance with instructions for
Part II, line 18, Sale versus lease' (fo(sellers and/or lessors), should be made in columns
//,
(b) and (c) of this line 13.
9..
///
Do not report on this "Iine,13 amounts reported in accordance with instructions for Part II,
lines 9, 10 and 11, Inc~me (loss) from U.S. partnerships, foreign partnerships and other
pass-through entities. 'p~rt II, line 12, Items relating to reportable transactions, and Part II
line 22, Originatlsstl~discount and other imputed interest.
',/f
///
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Line 14;'Total Accrual to Cash Adjustment
This lifl'~Yi~ ccifupleted by a corporation that prepares financial statements (or books and
records) tlslJ;lg an overall accrual method of accounting and uses an overall cash method
of accounting for U.S. federal income tax purposes (or vice-versa). With the exception of
amounts required to be reported on Part II, line 12, Items relating to reportable
transactions, the corporation must report on Part II, line 14, a single amount net of all
adjustments attributable solely to the use of the different overall methods of accounting
(e.g., adjustments related to accounts receivable, accounts payable, compensation,
accrued liabilities, etc.), regardless of whether a separate line on Schedule M-3
27
corresponds to an item within the accrual to cash reconciliation. Differences not
attributable to the use of the different overall methods of accounting must be reported on
the appropriate lines of Schedule M-3 (e.g., a depreciation difference must be reported on
Part III, line 31, Depreciation).
Example 17. Corporation L is a calendar year taxpayer that was required to file Schedule
M-3 for its 2004 tax year and is required to file Schedule M-3 for its 2005 tqX year. L
prepares financial statements in accordance with GAAP using an overall aciJ?}J~J.l1ethod
of accounting. L uses an overall cash method of accounting for U.S. feder~,'ftico:tPe tax
purposes. L's financial statements for the year ending December 31 , 200~,/ fe,port
accounts receivable of $35,000, an allowance for bad debts of $10,000. ana.accounts
payable of $17,000 related to current year acquisition and reorganiiati~I{legal and
accounting fees. In addition, for L's year ending December 31,2005, Ereported financial
statement depreciation expense of $15,000 and depreciation for U.S. federal income tax
purposes of $25,000. For L's 2005 tax year using an overal~ cash metbod of accounting,
L does not recognize the $35,000 of revenue attributable fO the accounts receivable,
cannot deduct the $10,000 allowance for bad debt, andcannotd,educt the $17,000 of
accounts payable. In its financial statements, L treats borntl1,'1 difference in overall
accounting methods used for financial statement and U.S.f~deral income tax purposes
and the difference in depreciation expense as temporciy,differences. L must combine all
adjustments attributable to the differences related to tlie overall accounting methods on
Part II, line 14. As a result, L must report ouPanJI, fine 14, $8,000 in column (a)
($35,000 -$10,000 - $17,000), ($8,000) in colu,mn(b), and zero in column (d). L must not
report the accrual to cash adjustment attJ;ibutable to the legal and accounting fees on Part
III, line 24, Current year acquisition orreorg'Vlization legal and accounting fees. Because
the difference in depreciation expens~d6e,s not relate to the use of the cash or accrual
method of accounting, L must report tnedepreciation difference on Part III, line 31,
Depreciation, and report $15,000'ill column (a), $10,000 in column (b), and $25,000 in
column ( d ) . / '
,
~"
Line 15. Hedging Transactions,
Report on line 15, column (a), (lie net gain or loss from hedging transactions included in
net income per the ih(;orn~~tatement. Report in column (d) the amount of taxable income
from hedging transactions as defined in section 1221 (b)(2). Use columns (b) and (c) to
report all differencis:9,aused by treating hedging transactions differently for financial
accounting purpo~~s;~rid for U.S. federal income tax purposes. For example, if a portion
of a hedge is cOI,1$idered ineffective under GAAP but still is a valid hedge under section
1221 (b )(,z5';:tQf1 difference must be reported on line 15. The hedge of a capital asset,
which/i$'1l9t valid hedge for U.S. federal income tax purposes but may be considered a
hedge for"'G.{\AP purposes, must also be reported here.
a
Report hedging gains and losses computed under the mark-to-market method of
accounting on line 15 and not on Part II, line 16, Mark-to-market income (loss).
Report any gain or loss from inventory hedging transactions on line 15 and not on Part
28
II, line 17, Cost of goods sold.
Line 16. Mark-to-Market Income (Loss)
Report on line 16 any amount representing the mark-to-market income or loss for any
securities held by a dealer in securities, a dealer in commodities having made a valid
election under section 47S(e), or a trader in securities or commodities having made a
valid election under section 475(f). "Securities" for these purposes are securities
described in section 47S(c)(2) and section 47S(e)(2). "Securities" do not inclll4e~~ny
items specifically excluded from sections 47S(c)(2) and 475(e)(2), such as <;,ertaiQ:
contracts to which section 1256(a) applies.
. ~:::~{f' /
Report hedging gains and losses computed under the mark-to-m~ket method of
accounting on Part II, line 15, Hedging transactions, and not online IG.
Line 17. Cost of Goods Sold
Report on line 17 any amounts deducted as part of cost of goods sold during the tax year,
including any amounts attributable to inventory valuation, for example, amounts
attributable to cost-flow assumptions, additional costsrequired to be capitalized to ending
inventory (including depreciation) such as section/263{\costs, inventory shrinkage
accruals, inventory obsolescence reserves, ¥Id lower pf cost or market write-downs.
Do not report the following on this line. 17 :
(a) any gain or loss from inventory'bedging transactions reportable on Part II,
line IS, Hedging transactions;~.·
/,
(b) mark-to-market income ot"(losS) associated with the inventories of dealers in
securities under section 475reportable on Part II, line 16, Mark-to-market income
(loss);
«f;'p
(c) section 481(a) adjustments related to cost of goods sold or inventory valuation
reportable on Part II, lirie 19, Section 481(a) adjustments;
(d) fines
and/pe~~fties
reportable on Part III, line 12, Fines and penalties; and
. .
/
(e) judgment~~/dainages, awards and similar costs, reportable on Part III, line 13,
Judgmen!srdainages,
awards, similar costs.
.:
"
/
/
j};<i,;<~~/
Line 18. SaleNersus Lease (for Sellers and/or Lessors)
/;"?~/;
~,!
(Also seet~eJhstructions at Part III, line 34, on page IS, for purchasers and/or lessees.)
Asset transfer transactions with periodic payments characterized for financial accounting
purposes as either a sale or a lease may, under some circumstances, be characterized as
the opposite for tax purposes. If the transaction is treated as a lease, the seller/lessor
reports the periodic payments as gross rental income and also reports depreciation
expense or deduction. If the transaction is treated as a sale, the seller/lessor reports gross
29
profit (sale price less cost of goods sold) from the sale of assets and reports the periodic
payments as payments of principal and interest income.
On Part II, line 18, column (a), report the gross profit or gross rental income for financial
income purposes for all sale or lease transactions that must be given the opposite
characterization for tax purposes. On Part II, line 18, column (d), report the gross profit
or gross rental income for federal income tax purposes. Interest income amounts for such
transactions must be reported on Part II, line 13, Interest income, in column (aJ,o!, (d), as
applicable. Depreciation expense for such transactions must be reported Ol1Part I}I, line
31, Depreciation, in column (a) or (d), as applicable. Use columns (b) and (c),ofPart II,
lines 13 and 18, and Part III, line 31, as applicable to report the differences between
column (a) and (d).
Example 18. Corporation M sells and leases property to customers. Mis a calendar year
taxpayer that was required to file Schedule M-3 for its 2004 tax year,and is required to
file Schedule M-3 for its 2005 tax year. For financial accounting purposes, M accounts
for each transaction as a sale. For U.S. federal income t,ax purposes, each of M' s
transactions must be treated as a lease. In its financial statements, M treats the difference
in the financial accounting and the U.S. federal income tax treatment of these transactions
as temporary. During 2005, M reports in its financial statements $1,000 of sales and $700
of cost of goods sold with respect to 2005 lease tran~adions. M receives periodic
payments of $500 in 2005 with respect to theSe2005 transactions and similar transactions
from prior years and treats $400 as principal and $100 as interest income. For financial
income purposes, M reports gross profifof $300 ($1,000 -$700) and interest income of
$100 from these transactions. For U.S. f~deral income tax purposes, M reports $500 of
gross rental income (the periodic pay,?entsfand (based on other facts) $200 of
depreciation deduction on the property: On its 2005 Schedule M-3, M must report on Part
II, line 13, Interest income, $100 in column (a), ($100) in column (b), and zero in column
(d). In addition, M must report ori.P:art II, line 18, $300 of gross profit in column (a),
$200 in column (b), and $500 of gross rental income in column (d). Lastly, M must report
on Part III, line 31, Depreciation; $200 in column (b) and (d).
Line 19. Section 481(a)Adjnstments
With the exception of a seCtion 481 (a) adjustment that is required to be reported on Part
II, line 12, Items relating to reportable transactions, any difference between an income or
expense item attributable to an authorized (or unauthorized) change in method of
accounting ma.4e fo; U.S. federal income tax purposes that results in a section 481 (a)
adjustmen(musfbe reported on Part II, line 19, regardless of whether a separate line for
that inc(),?e or,expense item exists in Part II or Part III.
Example 19. Corporation N is a calendar year taxpayer that was required to file Schedule
M-3 for its 2004 tax year and is required to file Schedule M-3 for its 2005 tax year. N
was depreciating certain fixed assets over an erroneous recovery period and, effective for
its 2005 tax year, N receives IRS consent to change its method of accounting for the
depreciable fixed assets and begins using the proper recovery period. The change in
method of accounting results in a positive section 481 (a) adjustment of $100,000 that is
30
required to be spread over four tax years, beginning with the 2005 tax year. In its
financial statements, N treats the section 481 (a) adjustment as a temporary difference. N
must report on Part II, line 19, $25,000 in columns (b) and (d) for its 2005 tax year and
each of the subsequent three tax years (unless N is otherwise required to recognize the
remainder of the 481 (a) adjustment earlier). N must not report the section 481 (a)
adjustment on Part III, line 31, Depreciation.
Line 20. UnearnedlDeferred Revenue
Report on line 20, column (a), amounts of revenues included in Part T, line ,1 l,that were
deferred from a prior financial accounting year. Report on line 20, column (d), amounts
of revenues recognizable for U.S. federal income tax purposes in the currerittax'year that
are recognized for financial accounting purposes in a different year. . Also report on line
20, column (d), any amount of revenues reported on line 20, column (a),that are
recognizable for U.S. federal income tax purposes in the current tax year. Use columns
(b) and (c) of line 20, as applicable, to report the differences between column (a) and (d).
Line 20 must not be used to report income recognized from long-term contracts. Instead,
use line 21, Income recognition from long-term contracts.
Line 21. Income Recognition From Long-Term Colltracts
Report on line 21 the amount of net income or loss for financial statement purposes (or
books and records, if applicable) or U.S. federal income tax purposes for any contract
accounted for under a long-term contract method oJ accounting.
Line 22. Original Issue Discount and Other Imputed Interest
Report on line 22 any amounts of original issue discount (OlD) and imputed interest.
The term' 'original issue discount and other imputed interest" includes, but is not
limited to:
1. The difference between issue price and the stated redemption price at maturity of a
debt instrument, which may b~ wholly or partially realized on the disposition of a debt
instrument under section 1273; ,
2. Amounts that are imputed interest on a deferred sales contract under section 483;
3. Amounts treqted as interest or OlD under the striped bond rules under Section
1286; and
4. Amounts treated as OlD under the below-market interest rate rules under Section
7872.
Line 23a••./Inc6meStatement Gainlloss on Sale, Exchange, Abandonment,
Worthle~~~ess, or Other Disposition of Assets Other Than Inventory and PassThrot.gh Eutities
Report on line 23a, column (a) all gains and losses on the disposition of assets except for
(a) gains and losses on the disposition of inventory, and (b) gains and losses allocated to
the corporation from a pass-through entity (e.g., on Schedule K-I) that are included in the
net income (loss) per income statement of includible corporations reported on Part T, line
11. Reverse the amount reported in column (a) in column (b) or (c), as applicable. The
corresponding gains and losses for U.S. federal income tax purposes are reported on Part
II, lines 23b through 23g, as applicable.
31
Line 23b. Gross Capital Gains From Schedule D, Excluding Amounts From PassThrough Entities
Report on line 23b, gross capital gains reported on Schedule D, excluding capital gains
from pass-through entities, which must be reported on Part II, lines 9, 10, or 11, as
applicable.
Line 23c. Gross Capital Losses From Schedule D, Excluding Amounts From PassThrough Entities, Abandonment Losses, and Worthless Stock Losses
Report on line 23c, gross capital losses reported on Schedule D, excluding.c,~pitallosses
from (a) pass-through entities, which must be reported on Part II, lines 9,jOQr 11, as
applicable; (b) abandonment losses, which must be reported on Partlr('li~e 23e; and (c)
worthless stock losses, which must be reported on Part II, line 2:?f. Do not report on line
23c capital losses carried over from a prior tax year and utilized in the current tax year.
See the instructions for Part II, line 25, regarding the reporting requirements for capital
loss carryovers utilized in the current tax year.
Line 23d. Net GainILoss Reported on Form 4797, Linel7, Excluding Amounts
From pass-Through Entities, Abandonment Losses, and Worthless Stock Losses
Report on line 23d the net gain or loss reported on line,17 of Form 4797, Sales of
Business Property, excluding amounts from (a) pass-through entities, which must be
reported on Part II, lines 9, 10, or 11, as appliqble; (b) abandonment losses, which must
be reported on Part II, line 23e; and (c) worthless stock losses, which must be reported on
Part II, line 23f.
Line 23e. Abandonment Losses
Report on line 23e any abandonment losses, regardless of whether the loss is
characterized as an ordinary loss or a capital loss.
Line 23f. Worthless Stock Losses
Report on line 23f any Worthless stock loss, regardless of whether the loss is
characterized as an ordinaryloss or a capital loss. Attach a schedule that separately states
and adequately discloses each transaction that gives rise to a worthless stock loss and the
amount of each loss. ,,'
Line 23g.:0th'r;GainILoss on Disposition of Assets Other Than Inventory
Report'Qn line;)3g any gains or losses from the sale or exchange of property other than
invento;/aIlqfhat are not reported on lines 23b through 23f.
Line 24. Disallowed Capital Loss in Excess of Capital Gains
Report as a positive amount on line 24, columns (b) or (c), as applicable, and (d) the
excess of the net capital losses over the net capital gains reported on Schedule D, Capital
Gains and Losses, by the corporation. For a U.S. consolidated tax group, the Schedule
M-3 adjustment for the amount of the consolidated net capital loss that is disallowed
32
should not be made on the separate consolidating Schedules M-3 of the includible
corporations, but on the separate Schedule M-3 for consolidated eliminations as described
in Consolidated Schedule M-3 Versus Consolidating Schedules M-3, on page 2.
Line 25. Utilization of Capital Loss Carryforward
If the corporation utilizes a capital loss carryforward on Schedule D in the current tax
year, report the carryforward utilized as a negative amount on Part II, line 25; columns
(b) or (c), as applicable, and column (d). For a U.S. consolidated tax group:thlSchedule
M-3 adjustment for the amount of the consolidated capital loss carryfoIwarq should not
be made on the separate consolidating Schedules M-3 of the includib.leoorpbfations, but
on the separate Schedule M-3 for consolidation eliminations as describciiin Consolidated
Schedule M-3 Versus Consolidating Schedules M-3, on page 2.
Line 26. Other Income (Loss) Items With Differences
Separately state and adequately disclose on Part II, line 26, aU itetns of income (loss)
with differences that are not otherwise listed on Part II,lines 1 through 25. Attach a
schedule that itemizes the type of income (loss) and th~amount of each item.
If the parent corporation of a U.S. consolidated taxgr9'uP files Form 1120 and any
member of the group files Form 1120-PC, U.S. froperty and Casualty Insurance
Company Income Tax Return, or Form 1120·L,/U.S. Life Insurance Company Income
Tax Return, that member must either (a) fully complete Schedule M-3 as if the
member filed Form 1120, or (b) complete Schedule M-3 by including the sum of all
differences between the member's incpme statement net income (or loss) and taxable
income (differences) (regardless of wl1ether the difference would otherwise be
reported elsewhere on Part II or on Partin) on this Part II, line 26, and separately state
and adequately disclose each di~ferepce in a supporting schedule. Regardless of the
option chosen, amounts reportediI1~Cblumn (a) of Parts II and III must be reported on
the same accounting method as is used to report the amount of net income (loss) per
income statement of in<;:ludiblecorporations on Part I, line 11, which for insurance
companies is usuallystiitutory accounting. (For insurance companies included in the
consolidated U .S. fe~e,al income tax return, see instructions for Part I, lines 10 and
11, and Part II, line 7) Any member of the U.S. consolidated tax group that files
Form 1120-PC or Form 1120-L and is required to file Schedule M-3 (in accordance
with the prece(j.ing sentence) may choose to either classify all differences as
permanentin column (c) or identify each difference as temporary or permanent, as
appropri~te.
If any "comprehensive income" as defined by Statement of Financial Accounting
Standards (SFAS) No. 130 is reported on this line, describe the item(s) in detail.
Examples of sufficiently detailed descriptions include "Foreign currency translation
adjustments" and "gains and losses on available-for-sale securities."
Whether an item of income (loss) is reported on this line 26, or is reported on Part II, line
33
29, Other income (loss) and expense/deduction items with no differences, is determined
separately by each member of the U.S. consolidated tax group and not at the U.S.
consolidated tax group level. For example, U.S. Corporation P has two subsidiaries,
Corporation A and B, that are included in pIS consolidated financial statements and in P's
consolidated U.S. federal income tax return. For financial statement purposes, P, A, and
B recognize revenue from the sale of inventory upon delivery to the customer. For U.S.
federal income tax purposes, P and A recognize such revenue consistent with the method
used for financial statement purposes, whereas B recognizes such revenue based upon
customer acceptance. P and A must report this revenue in column (a) and «(;l):6n i Part II,
line 29, Other income (loss) and expense/deduction items with no differeri~~§. J}1nust
report the following on Part II, line 26, Other income (loss) items with differences: in
column (a), B's revenue recognized in the financial statements basedtlponfaelivery to the
customer; in column (d), B's revenue recognized for U.S. federaljn~o~e;tax purposes
based upon customer acceptance; and in column (b) or (c), as applicable, the difference
between B' s revenue recognized in its financial statements and in it~.J:J.S. federal taxable
mcome.
Line 28. Total Expense/ Deduction Items
Report on Part II, line 28, columns (a) through (d), as apphc~ble, the negative of the
amounts reported on Part III, line 36, columns (a) through (d). For example, if Part III,
line 36, column (a), reflects an amount of $1 millic;mthen report on Part II, line 28,
column (a), ($1 million). Similarly, if Part III, line36, column (b), reflects an amount of
($50,000), then report on Part II, line 28,colU1JYl~~(b), $50,000.
Line 29. Other IncomelLoss and ExpenselDeduction Items With No Differences
If there is no difference between the figancia1 accounting amount and the taxable amount
of an entire item of income, gain, loss, expense, or deduction and the item is not
described or included in Part II, lines (through 26, or Part III, lines 1 through 35, report
the entire amount of the item in cqlumns (a) and (d) of line 29. If a portion of an item of
income, loss, expense, or ded.)lction has a difference and a portion of the item does not
have a difference, do not reportany portion of the item on line 29. Instead, report the
entire amount of the ite!ll (i.e., both the portion with a difference and the portion without
a difference) on the applicable line of Part II, lines 1 through 26, or Part III, lines 1
through 35. See Example 11 on page 7.
Line 30. Reconciliiltion Totals
Combine all the:arh(j9~s on lines 27 through 29 and enter the totals in columns (a),
(b), (c), alld (d),::/,.
Note. L'~'jo,'cofumn (a), must equal the amount on Part I, line 11, and line 30, column
(d), musteql1~1 Form 1120, page 1, line 28.
If a corporation chooses not to complete columns (a) and (d) of Parts II and III in the first
tax year the corporation is required to file Schedule M-3 (or for any year in which the
corporation voluntarily files Schedule M-3), Part II, line 30, is reconciled by the
corporation (or, in the case of a U.S. consolidated tax group, on the group's consolidated
Schedule M-3) in the following manner:
34
1. Report the amount from Part I, line 11, on Part II, line 30, column (a);
2. Leave blank Part II, lines 1 through 29, columns (a) and (d);
3. Leave blank Part III, columns (a) and (d); and
4. Report on Part II, line 30, column (d), the sum of Part II, line 30, columns (a), (b),
and (c).
Part III. Reconciliation of Net Income (Loss) per Income Statement of Includible
Corporations With Taxable Income per Return - Expense/ Deduction It~~s
"ft.;
;/;
Lines 1 Through 6. Income Tax Expense
If the corporation does not distinguish between cun'ent and deferredinc6we tax expense
in its financial statements (or its books and records, if applicable),J,"epart Income tax
expense as current income tax expense using lines 1, 3, and 5. as appli<;;able.
A U.S. consolidated tax group must complete lines 1 through 6in aceordance with the
allocation of tax expense among the members of the U.S. consolidated tax group in the
financial statements (or its books and records, if applic~ble). Ifthe current and deferred
U.S., state, and foreign income tax expense for the U.S. ~onsolidated tax group (income
tax expense) is allocated among the members of the ns. c9hsolidated tax group in the
group's financial statements (or its books and recorqs, if applicable), then each member
must report its allocated income tax expens~oA Pa~~ ill, lines 1 through 6, of that
member's separate Schedule M-3. However,jfthe,income tax expense is not shared or
allocated among members of the U.S. copsoliClated tax group but is retained in the
parent corporation's financial statements (or books and records, if applicable), then
amounts are reported only on Part III, lines(l through 6, of the parent's separate
Schedule M-3.
Line 7. Foreign Withholding Ta~es
',(:)(;/,,';
Report on line 7, column (a), Jl;lean;u)unt of foreign withholding taxes included in
financial accounting net incoDle on Part I, line 11. If the corporation is deducting foreign
tax, use column (b) or (c), as applicable, to correct for any difference between foreign
withholding tax inc1ud~d in financial accounting net income and the amount of foreign
withholding taxes being deducted in the return. If the corporation is crediting foreign
withholding taxes againstthe U.S. income tax liability, use column (b) or (c), as
applicable, to nygatefhe amount reported in column (a).
Line 8. Interest,Expense
/.fl/:j;:;, "~~;,
Par(:nr,
Repo~!J?»
line 8, column (a), the total amount of interest expense included on
Part I, lille~U/~md report on Part III, line 8, column (d), the total amount of interest
deduction iIkluded on Form 1120, page 1, line 28, that is not required to be reported
elsewhere on Schedule M-3. In columns (b) or (c), as applicable, include any
adjustments for any amounts treated for U.S. federal income tax purposes as interest
deduction that are treated as some other form of expense in the financial statements, or
vice versa. For example, adjustments to interest expense/deduction resulting from
adjustments made in accordance with the instructions for Part III, line 34, Purchase
35
versus lease (for purchasers and/or lessees), should be made in columns (b) and (c), as
applicable, on this line 8.
Do not report on this line 8 amounts reported in accordance with the instructions for (i)
Part II, lines 9,10, and 11, Income (loss) from U.S. partnerships, foreign partnerships,
and other pass-through entities, and (ii) Part II, line 12, Items relating to reportable
transactions.
Line 9. Stock Options Expense
Report on line 9, column (a), amounts expensed on Part I, line 11, net inC(Htl~ pet the
income statement, that are attributable to all stock options. Report on.line.Q. column (d),
deduction amounts attributable to all stock options.
' ./,
Line 10. Other Equity-Based Compensation
..
Report on line 10 any amounts for equity-based compensation or coflsideration that
are reflected as expense in the financial statements (column (a)) or deducted in the
U.S. federal income tax return (column (d» other than amounts reportable elsewhere
on Schedule M-3, Parts II and III (e.g., on Part III, line 9,Stock options expense).
Examples of amounts reportable on line 10 include payments attributable to
employee stock purchase plans (ESPPs), phantomstock options, phantom stock
units, stock warrants, stock appreciation rights,andrestricted stock, regardless of
whether such payments are made to employeesor;pon-employees, or as payment for
property or compensation for services.
Line 11. Meals and Entertainment
Report on line 11, column (a), any amounts paid or accrued by the corporation during the
tax year for meals, beverages, and entertainment that are accounted for in financial
accounting income, regardless of the classification, nomenclature, or terminology used
for such amounts, and regardJessofhow or where such amounts are classified in the
corporation's financial incomesnitement or the income and expense accounts maintained
in the corporation's books and records. Report only amounts not otherwise reportable
elsewhere on Schedule M-3,Parts II and III (e.g., Part II, line 17, Cost of goods sold).
'l/
,,'
Line 12. Fines ruitieerialties
Report on line·'I~.any fines or similar penalties paid to a government or other authority
for the YloTatipn any law for which fines or penalties are assessed. All fines and
penal(i~s.~xpeiised in financial accounting income (paid or accrued) must be included on
this line 12;fcolumn (a), regardless of the government or other authority that imposed the
fines or penalties, regardless of whether the fines and penalties are civil or criminal,
regardless of the classification, nomenclature, or terminology used for the fines or
penalties by the imposing authority in its actions or documents, and regardless of how or
where the fines or penalties are classified in the corporation's financial income statement
or the income and expense accounts maintained in the corporation's books and records.
Also report on line 12, column (a) the reversal of any overaccrual of any amount
or
36
described in this paragraph. See section 162(0 for additional guidance.
Report on line 12, column (d), any such amounts as are described in the preceding
paragraph that are includible in taxable income, regardless of the financial accounting
period in which such amounts were or are included in financial accounting net income.
Complete columns (b) and (c) as appropriate.
Do not report on this Part III, line 12, amounts required to be reported in ac~6f~'lnce with
instructions for Part III, line 13, Judgments, damages, awards, and similarccSst;;:0/;
f'
;/, lj%~
ff
Do not report on this Part III, line 12, amounts recovered from insurer~J)i!any'other
indemnitors for any fines and penalties described above.
/ /<";'h
Line 13. Judgments, Damages, Awards, and Similar Costs
Report on line 13, column (a), the amount of any estimated,or actual"judgments,
damages, awards, settlements, and similar costs, however named Or classified, included in
financial accounting income, regardless of whether the' amountdeducted was attributable
to an estimate of future anticipated payments or actua(p~ymerits. Also report on line 13,
column (a) the reversal of any overaccrual of any amount described in this paragraph.
Report on line 13, column (d), any such amo~gts~~)afe described in the preceding
paragraph that are includible in taxable income;fegardless of the financial accounting
period in which such amounts were or ~e included in financial accounting net income.
Complete columns (b) and (c) as appropriate.
f! /7
/: :1/
Do not report on this Part III, line 13:a"rllounts required to be reported in accordance with
instructions for Part III, line 12, Fines;andlpenalties.
I,.
Do not report on this Part III, linei3:~ amounts recovered from insurers or any other
indemnitors for any judgments;;,tl~ages, awards, or similar costs described above.
+j/"
/
Line 14. Parachute P~yments
Report on line 14, d:511,lrriii/(a), the total expense included in financial accounting net
income on Part I, gne n.Jhat is subject to section 280G. Report in column (b) or (c), as
applicable, the all}9urttpf nondeductible parachute payments pursuant to section 280G ,
and report in spJumW(d) the deductible amount of compensation after any excess
parachut~!p~~1«~9:~ limitations under section 280G. If a payment is subject to limitation
under b6th's€cti06s 162 (m) and 280G, report the total payment on this line 14.
/~l;;~;;;~,
Line 15. C6fupensation With Section 162(m) Limitation
Report on line 15, column (a), the total amount of non-performance-based current
compensation expense for the corporate officers to whom section 162 (m) applies.
Report the nondeductible amount of current compensation in excess of $1 million in
column (b) or (c), as applicable, and the deductible compensation in column (d). If a
payment is subject to limitation under both sections 162(m) and 280G, report the total
payment on Part III, line 14, Parachute payments. See Regulations section 1.162-27(g)
)I
37
for the interaction between sections 162(m) and 280G.
Line 16. Pension and Profit-Sharing
Report on line 16 any amounts attributable to the corporation's pension plans, profitsharing plans, and any other retirement plans.
Line 17. Other Post-Retirement Benefits
Report on line 17 any amounts attributable to other post-retirement benefits not
otherwise includible on Part nn, line 16, for example, retiree health and lifejnsurance
coverage, dental coverage, etc.
Line 18. Deferred Compensation
Report on line 18, column (a), any compensation expense included in the'net income
(loss) amount reported in Part I, line 11 that is not deductible forU.S. federal income tax
purposes in the current tax year and that was not reported elsewhere on Schedule M-3,
column (a). Report on line 18, column (d), any compensation deduCtible in the current
tax year that was not included in the net income (loss) amount reported in Part I, line 11
for the current tax year and that is not reportable elsewhere on Schedule M-3. For
example, report originations and reversals of deferred compensation subject to section
409A on line 18.
Line 20. Charitable Contribution of Intangible Property
Report on line 20 any charitable contribution Ofinjangible property, for example,
.
contributions of:
•
•
•
•
•
•
Intellectual property, patents (including any amounts of additional contributions
allowable by virtue of income eamedby donees subsequent to the year of
donation), copyrights, trademm;l\s';'
Securities (including stocks and their derivatives, stock options, and bonds);
Conservation easements (including scenic easements or air rights);
Railroad rights of way;,
Mineral rights; and
Other intangible property.
Line 21. Charitable Contribution Limitation/Carryforward
Report as a neg~tive <Unount on this line 21, columns (b), (c), and (d) as applicable, the
excess of chari~~ble contributions made during the tax year over the amount of the
charitablecontribt,ltion limitation amount.
If theco;PQt;~tion utilizes a contribution carryforward in the current tax year, report the
carryforward utilized as a positive amount on columns (b), (c), and (d), as applicable.
When a consolidated federal income tax return is being filed, Schedule M-3 adjustments
for the amount of charitable contributions in excess of the limitation, or for charitable
contribution carryforward utilized, should not be made on the separate consolidating
Schedules M-3 of the includible corporations, but on the separate consolidating Schedule
38
M-3 for consolidation eliminations as described in Consolidated Schedule M-3 Versus
Consolidating Schedules M-3, on page 2.
Line 22. Domestic Production Activities Deduction
Report on Part III, line 22, column (d) the amount of the domestic production activities
deduction included in taxable income on Form 1120, page 1, line 28. Complete columns
(b) and (c) as appropriate.
Line 23. Current Year Acquisition or Reorganization Investment Bankirig Fees
Report on line 23 any investment banking fees paid or incurred in connection with a
taxable or tax-free acquisition of property (e.g., stock or assets) or atax-fre~ '/,
reorganization. Report on this line any investment banking fees incurred at any stage of
the acquisition or reorganization process including, for example,,fces paid or incurred to
evaluate whether to investigate an acquisition, fees to conduct all actual investigation, and
fees to consummate the acquisition. Also include on this line 23 investment banking fees
incurred in connection with the liquidation of a subsidiary,a spin-off of a subsidiary, or
an initial public stock offering.
Line 24. Current Year Acquisition or Reorganization Legal and Accounting
Fees
Report on line 24 any legal and accounting fees paid or incurred in connection with a
taxable or tax-free acquisition of property (e.g,; stock or assets) or tax-free
reorganization. Report on this line any legal and'~ccounting fees incurred at any stage of
the acquisition or reorganization process including, for example, fees paid or incurred to
evaluate whether to investigate an acquisiti9n, fees to conduct an actual investigation, and
fees to consummate the acquisition. Also include on this line 24 legal and accounting fees
incurred in connection with the liquidation of a subsidiary, a spin-off of a subsidiary, or
an initial public stock offering.
,
"
Line 25. Current Year Acqt.tisitioDlReorganization Other Costs
Report on line 25 any other fees paid or incurred in connection with a taxable or tax-free
acquisition of property, (e.g. , st()ck or assets) or a tax-free reorganization not otherwise
reportable on ScheduleM-3(e.g., Part III, line 23 or 24). Report on this line any fees paid
or incurred at any stage of the acquisition or reorganization process including, for
example, fees paid'or;i,n,curred to evaluate whether to investigate an acquisition, fees to
conduct an actu~investigation, and fees to consummate the acquisition. Also include on
this line 25 other acquisition/reorganization costs incurred in connection with the
liquidationbfa~ubsidiary, a spin-off of a subsidiary, or an initial public stock offering.
/!/
';'
Line 26. Amottization/ Impairment of Goodwill
Report on fi~~ 26 amortization of goodwill or amounts attributable to the impairment of
goodwill.
Line 27. Amortization of Acquisition, Reorganization, and Start-Up Costs
Report on line 27 amortization of acquisition, reorganization, and start-up costs. For
purposes of column (b), (c), and (d), include amounts amortizable under section 167, 195,
or 248.
39
Line 28. Other Amortization or Impairment Write-Offs
Report on line 28 any amortization or impairment write-offs not otherwise includible
on Schedule M-3.
Line 29. Section 198 Environmental Remediation Costs
Report on line 29, column (a), any amounts attributable to environmental remediation
costs included in the net income per the income statement. Report in columns (b), (c), and
(d), as applicable, any deductible amounts attributable to environmental remediation costs
described in section 198 that are paid or incurred during the current tax year,}' .
~/ /
/
Y
Line 31. Depreciation
Report on line 31 any depreciation expense that is not required to b~ ie'ported elsewhere
on Schedule M-3 (e.g., on Part II, lines, 9, 10, 11, or 17).
Line 32. Bad Debt Expense
Report on line 32, column (a), any amounts attributable tQ"an allowance for uncollectible
accounts receivable or actual write-offs of accounts reqeiva1:i1eincluded in net income per
the income statement. Report in column (d) the amotirii}6f bad debt expense deductible
for federal income tax purposes in accordance with section·1'66.
Line 33. Corporate Owned Life Insurance Premiums
Report on line 33 all amounts of insurance premiims attributable to any life insurance
policy if the corporation is directly or indirectly fbeneficiary under the policy or if the
policy has a cash value. Report in column (d) the amount of the premiums that are
deductible for federal income tax purpose's:
Line 34. Purchase Versus Lease (fotPurchasers and/or Lessees)
/
/
.
,
(Also see the instructions at Part II, linelS, on page 11, for sellers and/or lessors.)
Asset transfer transactions v.:ith,l!eri6dic payments characterized for financial accounting
purposes as either a purchase or Ii lease may, under some circumstances, be characterized
as the opposite for tax purposes:
;: r /
If a transaction is treated as a lease, the purchaserllessee reports the periodic payments as
gross rental expense::rt:the transaction is treated as a purchase, the purchaser/lessee
reports the pet:iOtlicpayments as payments of principal and interest and also reports
depreciati9n.ixpense or deduction with respect to the purchased asset.
///, .. ,.,<;/:
d
',;VJ;
Reporta'~Par{I1I, line 34, column (a), gross rent expense for a transaction treated as a
lease for income statement purposes but as a sale for U.S. federal income tax purposes.
Report on Part III, line 34, column (d), gross rental deductions for a transaction treated as
a lease for U.S. federal income tax purposes but as a purchase for income statement
purposes. Report interest expense for such transactions on Part III, line 8, Interest
expense, in column (a) or (d), as applicable. Report depreciation expense or deductions
for such transactions on Part III, line 31, Depreciation, in column (a) or (d), as applicable.
40
Use columns (b) and (c) of Part ITT,lines 8, 31, and 34, as applicable, to report the
differences between column (a) and (d) for such recharacterized transactions.
Example 20. U.S. corporation X acquired property in a transaction that, for financial
accounting purposes, X treats as a lease. X is a calendar year taxpayer that was required
to file Schedule M-3 for its 2004 tax year and is required to file Schedule M-3 for its
2005 tax year. For U.S. federal income tax purposes, because of its terms, the .tr.ansaction
is treated for U.S. federal income tax purposes as a purchase and X must treatHl~
periodic payments it makes partially as payment of principal and partiallyas'payment of
interest. In its financial statements, X treats the difference between the financial
accounting and U.S. federal income tax treatment of this transaction~~'l:rtemporary
difference. During 2005, X reports in its financial statements $1,000 of gross rental
expense that, for U.S. federal income tax purposes, is recharacterizedas a $700 payment
of principal and a $300 payment of interest, accompanied by a depreciation deduction of
$1,200 (based on other facts). On its 2005 Schedule M-3, X Illust report the following on
Part III, line 34: column (a) $1,000, its financial accounting gross rental expense; column
(b), ($1,000); and column (d), zero. On Part III, line 8, Xreports zero in column (a) and
$300 in columns (b) and (d) for the interest deduction. On Part III, line 31, X reports zero
in column (a) and $1,200 in columns (b) and (d) for tnedepreciation deduction.
Line 35. Other Expense/ Deduction Items With Differences
Report on Part III, line 35, all items of expense/d~duction that are not otherwise listed
on Part III, lines 1 through 34.
;/
Whether an expense/deduction item isreported on this line 35, or reported on Part II,
line 29, Other income (loss) and expense/deduction items with no differences, is
determined separately by each member of the U.S. consolidated tax group and not at
the U.S. consolidated tax group level. For example, U.S. Corporation P has two
subsidiaries, A and B, that anHncluded in P's consolidated financial statements and in
P's consolidated U.S. federal income tax return. For financial statement purposes, P, A,
and B recognize reaL estate tax expense when accrued. For U.S. federal income tax
purposes, P and A n:~cogitizesuch expense consistent with the method used for
financial statement purp9ses, whereas B recognizes such deduction based on a method
different from that used for financial statement purposes. P and A must report this
expense/deduction III column (a) and (d) on Part II, line 29, Other income (loss) and
expense/deduction items with no differences. B must report the following on Part III,
exp~nse/deduction items with differences: in column (a), B's expense
line 350{her
1"
recogrij~jn the financial statements when accrued; in column (d), B's real estate tax
expense recognized for U.S. federal income tax purposes; and in column (b) or (c), as
applicable, the difference between B's real estate tax expense in its financial statements
and its real estate tax deduction recognized for U.S. federal taxable income purposes.
' f /-
Comprehensive income. If any "comprehensive income" as defined by SFAS No. 130 is
reported on this line, describe the item(s) in detail as, for example, "Foreign currency
translation adjustments" and "Gains and losses on available-for-sale securities."
41
Reserves and contingent liabilities.
Report on line 35 each reserve or contingent liability that is not reported elsewhere in
Schedule M-3. Report on line 35, column (a), expenses included in net income reported
on Part I, line 11, that are related to reserves and contingent liabilities. Report on line 35,
column (d), amounts related to liabilities for reserves and contingent liabilities that are
deductible in the current tax year for U.S. federal income tax purposes. Examples of
items that must be reported on line 35 include warranty reserves, restructuring reserves,
reserves for discontinued operations, reserves for legal proceedings, and resepresfor
acquisitions and dispositions. Only report on line 35 items that are not tequiied to be
reported elsewhere on Schedule M-3, Parts II and III. For example, the '6xpehse for a
reserve for inventory obsolescence must be reported on Part II, line 17'/C9"sts of goods
.
sold.
The schedule of details attached to the return for line 35 must separately state and
adequately disclose the nature and amount of the expense,.related to each reserve and/or
contingent liability. The appropriate level of disclosur~deperidsupon each taxpayer's
operational activity and the nature of its accounting re2ards. For example, if a
corporation's net income amount reported in the income statement includes anticipated
expenses for a discontinued operation as a singlt{ amoUnt, and its general ledger or other
books, records, and workpapers provide details f9rthe;.anticipated expenses under more
explanatory and defined categories such as emp~()y6e. termination costs, lease
cancellation costs, loss on sale of equipment; etc./a supporting schedule that lists those
categories of expenses and their details
s~tfSty the requirement to separately state
and adequately disclose. In order to separately state and adequately disclose the
employee termination costs, it is not reqqire"dthat an anticipated termination cost amount
be listed for each employee, or that each asset (or category of asset) be listed along with
the anticipated loss on disposition;
will
Example 21. Corporation P is a, calendar year taxpayer that was required to file Schedule
M-3 for its 2004 tax year and is required to file Schedule M-3 for its 2005 tax year. P has
been sued by its custOI1}~rs in ,r2lass action product liability lawsuit. The trial date is in
2006. In its 2005 financial statements, P establishes a reserve of $1 million for its
potential liability relateg/to the class action lawsuit and reports corresponding expenses in
the amounts of $~OO.OOOfor estimated product replacement and $600,000 for estimated
personal damag~s:E9ftJ.S. federal income tax purposes, the $1 million is not deductible
in 2005. In its-finanCial statements, P treats the difference between the financial statement
treatmendmdJhe?V.S. federal income tax treatment of the reserve for the lawsuit as a
tempofatydifference. P must report in its 2005 consolidated U.S. federal income tax
return on?'piirdII line 35, $1 million in column (a), ($1 million) in column (b), and zero
in column (c6. If'P attaches a supporting schedule to Part III, line 35, explaining that the
$1 million of difference is attributable to estimated product replacement cost in the
amount of $400,000 and estimated personal damages in the amount of $600,000, that
level of detail will be sufficient to separately state and adequately disclose the $1 million
adjustment.
42
Example 22. Same as Example 21 except that in 2006 P pays $1 million to settle the
lawsuit with the settlement documents stipulating that the product replacement amount is
$450,000 and the damage amount is $550,000. Both the $450,000 and $550,000
settlement amounts are deductible for U.S. federal income tax purposes in 2006. On its
2006 Schedule M-3, P must report on Part III, line 35, zero in column (a), $1 million in
column (b), and $1 million in column (d). If P attaches a supporting schedule to Part III,
line 35, explaining that the $1 million of difference is attributable to actual product
replacement cost in the amount of $450,000 and actual personal damages in the amount
of $550,000, that level of detail will be sufficient to separately state and adequately
disclose the $1 million deduction.
Various prepaid expenses. Report on Part III, line 35, the amortization of~ru;ous items
of prepaid expense, such as prepaid subscriptions and license fees, prepaid insurance, etc.
Example 23. Corporation Q is a calendar year taxpayer that was required to file Schedule
M-3 for its 2004 tax year and is required to file Schedule M-3 for its 2005 tax year. On
July I of each year, Q has a fixed liability for its annual insurance premiums that
provides a 12-month coverage period beginning July 1 through June 30. In addition, Q
historically prepays 12 months of advertising expense on July 1. On July 1, 2005, Q
prepays its insurance premium of $500,000 and advertising expenses of $800,000. For
financial statement purposes, Q capitalizes and amortizes the prepaid insurance and
advertising over 12 months. For U.S. federal income tax purposes, Q deducts the
insurance premium when paid and amortizes the advertising over the 12-month period. In
its financial statements, Q treats the differences attributable to the financial statement
treatment and U.S. federal income tax treatment of the prepaid insurance and advertising
as temporary differences. Q must separately state and adequately disclose on Part III, line
35, its prepaid insurance premium and report $250,000 in column (a) ($500,000112
months X 6 months), $250,000 in column (b), and $500,000 in column (d). Q must also
separately state and adequately disdose on Part II, line 29, Other income (loss) and
expense/ deduction items with no differences, its prepaid advertising and report $400,000
in column (a) and (d).
Line 36. Total Expense! Deduction Items
Report on Part II, line 28, columns (a) though (d), as applicable, the negative of the
amounts reported on Pait III, line 36, column (a) through (d), as applicable. For example,
if Part III, line 36, co.lumn (a), reflects an amount of $1 million, then report on Part II,
line 28, column (a), ($1 million). Similarly, if Part III, line 36, column (b), reflects an
amount/of ($?O,OOO), then report on Part II, line 28, column (b), $50,000.
43
SCHEDULE M-3
(Form 1120)
Net Income (Loss) Reconciliation for Corporations
With Total Assets of $10 Million or More
~@05
Attach to Form 1120.
See separate instructions.
~
Department of the Treasury
Internal Revenue Service
~
Name of corporation (common parent. if consolidated return)
lall
OMS No. 1545-0123
Employer identification number
Financial Information and Net Income (Loss) Reconciliation
1a Did the corporation file SEC Form 10-K for its income statement period ending with or within this tax year?
o
o
Yes. Skip lines 1band 1 c and complete lines 2a through 11 with respect to that SEC Form 10-K.
No. Go to line 1b.
b Did the corporation prepare a certified audited income statement for that period?
Yes. Skip line 1c and complete lines 2a through 11 with respect to that income statement.
No. Go to line 1c.
c Did the corporation prepare an income statement for that period?
Yes. Complete lines 2a through 11 with respect to that income statement.
"
No. Skip lines 2a through 3c and enter the corporation's net income (loss) per " its book;
and records on line 4.
/;
o
o
o
o
"
2a Enter the income statement period: Beginning
/
/
Ending, , .
/
/
b Has the corporation's income statement been restated for the income statement period'on line 2a?
Yes. (If "Yes," attach an explanation and the amount of each item restated~)
No.
c Has the corporation's income statement been restated for any of the five income statement periods preceding the period on
line 2a?
•
o
o
o
Yes. (If "Yes," attach an explanation and the amount of eacj1 item restated.)
No.
3a Is any of the corporation's voting common stock publicly traded,?
D Y e s . "
D No. If "No," go to line 4.
D
b Enter the symbol of the corporation's primary U.S. publicl/t'raded voting common
stock . . J . .
c Enter the nine-digit CUSIP number of the corporation',s primary publicly traded voting
common stock
4
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Schedule M-3 (Form 1120) 2005
Page
Schedule M-3 (Form 1120) 2005
Name of corporation (common parent, if consolidated return)
If consolidated return, check applicable box: (1)
0
2
Employer identification number
Consolidated group (2)
0
Parent corporation (3)
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Name of subsidiary (if consolidated return)
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Gross foreign dividends not previously taxed
Subpart F, QEF, and similar income inclusions
Section 78 gross-up.
Gross foreign distributions previously taxed .
Income (loss) from equity method U.S. corporations
U.S. dividends not eliminated in tax consolidation.
Minority interest for includible corporations
Income (loss) from U.S. partnerships (attach schedule)
Income (loss) from foreign partnerships (attach schedule)
11
Income (loss) from other pass-through entities
(attach schedule) .
Items relating to reportable transactions (attach details)
Interest income
Total accrual to cash adjustment
Hedging transactions
Mark-lo-market income (loss) .
Cost of goods sold
Sale versus lease (for sellers and/or lessors) .
Section 481 (a) adjustments
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23c Gross capital losses from S~hedllle OJ excluding
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27
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Other income (loss) and expense/deduction items
with no differences
Reconciliation totals. Combine lines 27 through 29.
26.
J
30
I
Note. Line 30, column (a), must equal the amount on Part I, line 11, and column (d) must equal Form 1120, page 1, line 28.
Schedule M-3 (Form 1120)2005
Page
Schedule M-3 (Form 1120) 2005
If consolidated return, check applicable box: (1)
0
3
Employer identification number
Name of corporation (common parent, if consolidated return)
Consolidated group (2)
0
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State and local current income tax expense.
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Foreign withholding taxes
Interest expense
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Other equity-based compensation
Meals and entertainment
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Schedule M-3 (Form 1120) 2005
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Page
1 of 1
June 24, 2005
JS-2607
UPDATED
MEDIA ADVISORY
Treasury Secretary Snow Visits Connecticut and New York
to Discuss the Economy and Social Security Reform
U.S. Treasury Secretary John W. Snow will Travel to Trumbull, Connecticut, and
New York, New York June 27-28 to discuss the economy and President Bush's
efforts to strengthen and preserve the U.S. Social Security system.
The following events are open to credentialed media with photo identification:
NASDAQ
NE Technology Center
Trumbull, CT
2:15 PM EST
** Media must RSVP to Angelic Valentino (212) 401-8949
** Media must arrive by 1:45 PM EST
Guest Host on CNBC
CNBC Studios
900 Sylvan Avenue
Englewood Cliffs, NJ
8:00 -10:00 AM EST
Remarks to Council of Foreign Relations
58 E. 68th Street
New York, NY
5:30 PM EST
** Media must RSVP to Marie Strauss (212) 434-9536
** Media must arrive by 5:30 PM EST
http://www.treas.gov/press/releases/js-2607.htm
7/1/2005
Page
1 of3
June 27, 2005
JS-2608
The Honorable John W. Snow
Prepared Remarks to NASDAQ employees
Trumbull, CT
Good afternoon; it's great to be here and I appreciate the chance to talk with you
about the historic effort that is going on in Washington, DC to save and strengthen
our nation's Social Security system.
The time to make meaning and permanent change to the system is now for two
important reasons.
First, waiting to fix the problem is terribly expensive, and I believe irresponsible
considering that younger generations will be left paying the bilL Every year we delay
permanently reforming the system, $600 billion is added to the shortfall - which,
according to the non-partisan Social Security actuaries is $11.1 trillion on a
permanent basis.
Second, our outstanding economic health presents us with an excellent opportunity
to move forward with meaningful reform.
We are enjoying terrific economic strength, with more Americans working today
than at any time in our history. Since 2002, America has added more than 3.5
million new jobs; the unemployment rate is 5.1 percent and real after-tax income is
up by more than 10 percent. More Americans own their homes than at any time in
our history. More Americans are going to college and own their own businesses
than at any time in our history -- and a recent economic report shows that inflation
is in check.
Saving and improving Social Security will mean a positive change, but a change of
enormous proportions nonetheless. And significant change is best done from a
position of economic strength like the one that we currently enjoy.
Because of your economic and financial expertise, as employees of NASDAQ, I
know you appreciate these points. You are especially informed, sharp observers
and participants in this national discussion.
Most of you are likely taking a smart, three part approach to your own retirement. I
know that NASDAQ has a pension plan and offers a 401 (k) with a match, so that's
one piece.
Depending on your age, you mayor may not be counting on Social Security as the
second piece. The younger folks, I'll bet, aren't counting on it - an interesting
cultural phenomenon that should not discourage young people from being involved
in this national dialogue, by the way. In fact, Social Security reform is primarily
about, and for, the youngest generations of workers.
The third piece of the retirement picture would be your own savings, investment and
IRAs.
You are probably among those Americans most prepared for their retirement years.
Many don't have all three pieces in place and rely heavily on Social Security. It was
with that fact in mind that the President took this issue to the public, and to
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7/1/2005
Page 20f3
Congress. He knew that we simply couldn't turn a blind eye to the looming
problems with a program this important.
Since the President raised this issue to the top of the nation's domestic policy
agenda, a lot of terrific ideas have been discussed - at lunch counters and dinner
tables, from college dining halls to the halls of Congress - and today we're getting
much closer to having significant legislation move on Capitol Hill.
The President has welcomed all ideas - other than raising the payroll tax rate or
changing benefits for those older than age 55 - to help solve the challenges facing
the Social Security system.
He is strongly committed to giving workers the option of a voluntary personal
account so they can save their own money in a nest egg - because it's the best
way to ensure that Social Security money is spent on Social Security. As you all
know, Social Security surplus funds are spent every day, by Congress, on
everything under the sun other than Social Security.
The President is encouraged, as I am, by the increasing pace of activity in
Congress on how to save and strengthen Social Security for future generations. He
appreciates the Members who have introduced legislation, and who have supported
his objectives in this effort.
Your own Senator Lieberman, for example, has been superbly open in his
acknowledgment that that Social Security has serious problems. There are still
plenty of Members of Congress who still won't face up to the plain mathematical
facts!
Joe has also pointed out to his Democratic colleagues that "It is not enough to
oppose the President's plan." He is encouraging those colleagues to come up with
a plan of their own to protect the program.
Senator Bennett introduced a bill a few days ago that contained progressive benefit
growth, which is one of the elements of reform that the President has been
promoting. Progressive benefit growth would mean that the lowest income seniors
would have the fastest-growing benefits while benefits for those who are more welloff grow more slowly, with protection from inflation.
The President has also welcomed plans from other Members like Senator DeMint
and Congressman Bill Thomas. Every time legislation is introduced, it advances this
issue - and that is what the President wants.
This is fascinating time in government history. Enacting real reform of Social
Security this year - which I believe we will - holds great promise for generations of
American workers and retirees. If done right, reform will benefit our economy and
end the decades-long tradition of hiking payroll taxes every time the Social Security
formula is off-balance.
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://www.treas.goy/press/releases/js2610.htm
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Page 1 of 1
June 28, 2005
JS-2609
Statement of Treasury Secretary John W. Snow
on the Passage of Energy Legislation in the U.S. Senate
"I'm encouraged to see that the Senate has now acted on a bi-partisan basis on
comprehensive energy legislation that reflects the priorities of the President's 2001
proposal. The passage of this bill is needed to address high energy prices,
decrease our dependence on foreign oil, and increase energy efficiency and
conservation. Now we need swift action by the House and Senate conference to
deliver a bill to the President before the August recess."
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June 28, 2005
JS-2610
The Honorable Mark W. Warshawsky
Prepared Remarks
American Bankers Association
June 28, 2005
Washington, DC
Thank you for such a welcome introduction. I appreciate the opportunity the
American Bankers Association has given me to discuss the Administration's
proposal to permanently fix Social Security and reform and strengthen the singleemployer defined benefit pension system against the background of the larger issue
of promoting national savings.
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 priority of his second
term. Today I'll explain why it is so important that responsible Social Security reform
occur now, and why one element of a successful reform plan must be personal
retirement accounts that give individuals more control over their financial futures.
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 actuarial imbalance, which is now estimated at $4.3 trillion 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
trillion. To put this in perspective, eliminating the permanent deficit could be
accomplished with an immediate and permanent 3.5 percentage point increase in
the payroll tax rate (to 15.9 percent), or with a 22 percent reduction in all current
and future benefits. In both cases, it would be worth noting, there would be massive
near-term Trust Fund accumulations.
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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 the permanent financing gap raises difficult questions over how the
net benefits of Social Security should be shared across generations. In this context,
it is important to recognize that the large unfunded obligations in the system are
primarily the consequence of the past system generosity to generations that are
now either dead or retired. Of course, those early generations are beyond reform's
reach, so the entitlement reforms needed to close the financing gap must fall
entirely on later generations.
Viewing Social Security from the perspective of how it affects generations and
individuals explains why it is imperative that Social Security be reformed now.
Delaying reform only reduces the options for fairly distributing the benefits of Social
Security across generations. Most people agree that it would not be fair to alter
Social Security's promises to retirees and near retirees. The longer reform is
delayed, the fewer generations that are left to participate in a reformed entitlement
system so as to close Social Security's funding gap, and the more severe those
reforms will be.
To make this point more concretely, consider a policy of closing Social Security's
permanent financing gap by immediately increasing the payroll tax rate by 3.5
percentage points. If the tax increase were instead delayed until 2041 when the
trust fund is depleted, the requisite tax increase would be 6.3 percentage points.
Clearly, I do not advocate any of these policies. My point is that there is no doubt
that fairness to future generations requires that action be taken now.
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 75-year projection period and would
continue to rise thereafter. No reasonable person would view that as a fair policy. I
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.
Administration Proposal: Permanently Fixing Social Security
The President supports Social Security reform that increases the power of the
individual, does not increase the tax burden, and provides economic opportunity for
more Americans. One important component of reform is the introduction of personal
retirement accounts (PRAs). PRAs provide individual control, ownership, and are
an effective vehicle for pre-funding more of our Social Security benefits. PRAs also
offer individuals the opportunity to build a nest-egg that the government cannot take
away. They allow individuals to partake in the benefits of investing in the financial
markets. Individual control and ownership means that people would be free to pass
any unused portion of accounts to their heirs.
Today I'll briefly discuss the Administration's proposals for how PRAs will be
phased in, how they interact with the traditional Social Security benefits, and then
I'll discuss the administrative structure, the investment choices, and the distribution
options in more detail.
Let me make two critical points up front. First, the system needs to be reformed to
make it permanently sustainable. The President is committed to doing this while
maintaining the progressivity of the system. The second critical point is that
personal retirement accounts will be voluntary. At any time a worker can "opt in" by
making a one-time election to put a portion of his or her payroll taxes into a
personal retirement account. A worker who chooses not to opt in will receive
traditional Social Security benefits, reformed to be permanently sustainable.
To ease the transition to a personal retirement account system, participation will be
phased in according to the age of the worker. In the first year of implementation,
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2009, workers currently between the age of 40 and 54 (born between 1950 and
1965) would have the option of establishing personal retirement accounts. In the
second year, 2010, workers currently between the age of 26 and 54 (born between
1950 and 1978) would be given the option and by the end of the third year, 2011, all
workers born in 1950 or later who want to participate in personal retirement
accounts would be able to do so.
Even after the initial implementation, personal retirement accounts will start
gradually. Although all participants will eventually be allowed to contribute 4
percentage points of their payroll taxes to a personal account, the annual
contributions to personal retirement accounts initially would be capped at $1,000
per year. The cap would rise gradually over time, growing $100 per year, plus
growth in average wages. Starting with the full 4 percentage point PRA contribution
ensures that low-income workers can get appreciable gains from the accounts. If
we started out with a lower percentage contribution, the potential dollar gains for
low-income workers would be much more limited.
There has been a great deal of discussion about how PRAs will interact with the
traditional Social Security benefit. The PRA structure that the President has
proposed is a "carve out" or "offset" PRA. An offset PRA simply means that workers
who choose to contribute payroll taxes to a PRA will have their defined Social
Security benefit adjusted by an actuarially fair amount. The government borrowing
rate is the appropriate and fair offset rate or assumed rate of return.
As proposed by the President, PRAs are designed to hold down administrative
costs, encourage careful and cautious investing, and provide a reliable income for
the full length of retirement.
Centralized administration and limited choice will hold down administrative
costs. The PRA administration and investment options will be modeled on the Thrift
Savings Plan (TSP). TSP is a voluntary retirement savings plan offered to federal
employees, including members of Congress. TSP offers comparable benefits and
features to those available to private sector employees in 401 (k) retirement
plans. The Social Security Administration's actuaries project that the ongoing
administrative costs for a TSP-style personal account structure would be roughly 30
basis points or 0.3 percentage points.
The PRAs will limit the risk of investments with low-risk, low-cost options like the
broad index funds available to federal employees in TSP. Similarly to TSP, the
index funds could include, for instance, a government securities fund; an
investment-grade corporate bond index fund; a small-cap stock index fund; a largecap stock index fund; and an international stock index fund. In addition to these
TSP-type funds, workers could choose a Treasury Inflation-Protected Securities
fund.
Workers will also be able to choose a "life cycle portfolio" that would automatically
adjust the level of risk of the investments as the worker aged. As the individual
neared retirement age, the life cycle fund automatically and gradually shifts the
allocation of investment funds so that it is weighted more heavily toward bonds. The
President's plan includes a mechanism that will protect near-retirees from sudden
market swings on the eve of retirement. PRA balances would be automatically
invested in the "life cycle portfolio" when a worker reaches age 47, unless the
worker and his or her spouse specifically opted out by signing a waiver form stating
they are aware of the risks involved.
Because these are specifically designed as retirement accounts, PRAs would not
be accessible prior to retirement. Workers who choose personal retirement
accounts would not be allowed to make withdrawals from, take loans from, or
borrow against their accounts prior to retirement.
The distribution options for PRAs will include restrictions on withdrawals to
discourage outliving ones assets. Procedures would be established to govern how
account balances would be withdrawn at retirement. This would involve some
combination of inflation indexed annuities to ensure a stream of monthly income
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7/1/2005
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over the worker's life expectancy, phased withdrawals indexed to life expectancy,
and lump sum withdrawals. Individuals would not be permitted to withdraw funds
from their personal retirement accounts as lump sums if doing so would result in
their moving below the poverty line. Account balances in excess of the povertyprotection threshold requirement could be withdrawn as a lump sum for any
purpose or left in the account to accumulate investment earnings.
Some have raised concerns about the public borrowing that might be needed to
help finance PRA contributions. Such an increase in public borrowing is often
referred to as a "transition cost," but I want to argue here that the term is a
misnomer; the increased public borrowing does not represent an increase in the
cost of paying retirement benefits and hence is not a cost in the sense that people
would normally believe. PRAs increase public debt in the short term, but ultimately
leave public debt unchanged when factoring in the outlay reductions deriving from
the reduction in defined benefits. Because long-term public debt is unchanged, the
policy is neutral with respect to the long-term cost of paying retirement benefits.
Most importantly, 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 and
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-funding belongs to individuals and does not appear on
the government balance sheet as budget surpluses.
In addition to addressing Social Security's solvency, this administration is also
proposing ways to encourage national savings and ensuring that the pensions
workers have earned will be honored.
Encouraging National Savings
As far back as 1776, Adam Smith identified capital accumulation as the key force in
promoting growth in the wealth of nations. Smith also identified the key force in
capital accumUlation: increasing national savings. Since Smith's time, almost all
economists have come to understand the vital nature of national saving, and
increasing saving has become a standard policy prescription for enhancing
economic growth and raising living standards.
We know the U.S. faces a challenge as the economy works through the
implications of the retirement of the Baby Boom generation. With the growth in the
workforce set to slow and the average age of the population rising, maintaining
steady growth in the standard of living will become more difficult. The Smith
prescription shows the way out. Increase our savings, which will increase our
accumulated capital, which will give each worker more and better tools to work with,
which will raise productivity and secure a growing standard of living.
Despite the fact that this prescription is well-known, the evidence suggests it is
exceptionally hard to follow. Net private saving (gross private saving less
depreciation on plant, equipment, and housing stock) as a share of national income
averaged about 11 percent from 1955 through 1985, but since then has trended
steadily down. Over the past ten years, it has averaged about 5-1/2 percent of
GOP, or about 5 percentage points below where it was during the decades of the
1950s, 60s, 70s, and most of the 80s.
One reason the saving prescription is difficult to follow is that incentives work
against it. Our tax system, for example, has, for a long time, encouraged Americans
to spend first and save second. To reverse, this, the Administration has worked
hard to set in place the incentives that encourage saving. The Economic Growth
and Tax Relief Reconciliation Act of 2001 (EGTRRA) cut the top tax rates which
raised the after-tax rate of return on capital income - encouraging savings. The
Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) cut taxes on
http://www.treas.goy/press/releases/js2610.htm
7/1/2005
Page 5 of7
capital income.
But even with these positive changes, the Federal income tax code still discourages
saving. To combat this, the President has proposed Retirement Savings Accounts,
which would replace the complex array of retirement saving incentives currently in
the tax code, such as IRAs, Roth IRAs, and similar saving vehicles. The President
has also proposed Employer Retirement Savings Accounts to simplify the saving
opportunities individuals have through their employers. The President's Lifetime
Savings Accounts would, for the first time, allow individuals to save on a taxpreferred basis for any purpose. This can be especially important to low-income
individuals and families who need to save, but cannot afford to lock up funds for
retirement that may be needed for an emergency in the near-term. The President
also proposed Individual Development Accounts that would give extra financial
incentive to certain low-income families to set aside funds for major purchases,
such as a first home.
Pensions also playa critical role in saving. Accumulating financial assets for future
retirement is one of the main reasons households save at all. If individuals and
households believe they will receive a pension in retirement, that influences their
saving and asset accumulation behavior. If, in fact, those promised benefits are not
available because of pension under funding, then the household's saving, and, in
aggregate, national saving, is less than it otherwise would have been had their
pension been adequately funded.
The single employer pension system is in serious financial trouble. Many plans are
badly under funded, jeopardizing the pensions of millions of American workers, and
the insurance system which protects those workers in the event that their own
pension plans fail has a substantial deficit.
Administration Proposal: Pension Reform
The primary goal of any pension reform effort should be to ensure that retirees and
workers receive the pension benefits they have earned. Clearly the current funding
rules have failed to meet this goal. As part of its reform proposal the Administration
has designed a new set of funding rules that we think will ensure that participants
receive the benefits they have earned from their pension plans.
For any set of funding rules to function well, assets and liabilities must be measured
accurately. The system of smoothing embodied in current law serves only to mask
the true financial condition of pension plans. Under our proposal, assets will be
marked to market. Liabilities will be measured using a current spot yield curve that
takes account of the timing of future benefit payments summed across all plan
participants. Discounting future benefit cash flows using the rates from the spot
yield curve is the most accurate way to measure a plan's liability. Liabilities
computed using the yield curve match the timing of obligations with discount rates
of appropriate maturities. Proper matching of discount rates and obligations is the
most accurate way to measure today's cost of meeting pension obligations.
The Administration recognizes that the current minimum funding rules have
contributed to funding volatility. Particular problem areas are the deficit reduction
contribution mechanism and the limits on tax deductibility of contributions. Our
proposal is designed to remedy these issues by giving plans the tools needed to
smooth contributions over the business cycle. These tools include:
•
•
•
Increasing the deductible contribution limit will give plan sponsors additional
ability to fund during good times.
Increasing the amortization period for funding deficits to seven years
compared to a period as short as four years under current law, and
The freedom plans already have to choose prudent pension fund
investments. Plan sponsors may choose to limit volatility by choosing an
asset allocation strategy or conservative funding level so that financial
market changes will not result in large increases in minimum contributions.
These are appropriate methods for dealing with risk; it is inappropriate to limit
http://www.treas.goy/press/releases/js2610.htm
7/1/2005
Page 60f7
contribution volatility by transferring risk to plan participants and the PBGC.
Under our proposal, plan funding targets for healthy plan sponsors will be
established at a level that reflects the full value of benefits earned to date under the
assumption than plan participant behavior remains largely consistent with the past
history of an on-going concern. Plans sponsored by firms with below investment
grade credit will be required to fund to a higher standard that reflects the increased
risk that these plans will terminate. Pension plans sponsored by firms with poor
credit ratings pose the greatest risk of default. It is only natural that pension plans
with sponsors that fall into this readily observable high risk category should have
more stringent funding standards. Credit ratings are used throughout the economy
and in many government regulations to measure the risk that a firm will default on
its financial obligations. A prudent system of pension regulation and insurance
would be lacking if it did not use this information.
Credit balances are created when a plan makes a contribution that is greater than
the required minimum. Under current law, a credit balance, plus an assumed rate of
return, can be used to offset future contributions. We see two problems with this
system. First, the assets that underlie credit balances may lose rather than gain
value. Second, and far more important, credit balances allow plans that are
seriously under funded to take funding holidays. In our view every under funded
plan should make minimum annual contributions.
Under our proposal, contributions in excess of the minimum still reduce future
minimum contributions. The value of these contributions is added to the plan's
assets and, all other things equal, reduces the amount of time that the sponsor
must make minimum contributions to the plan. In combination with the rest of the
proposal, there is more than adequate incentive for plan sponsors to fund above the
minimum. In fact here are four other reasons that employers might choose to
contribute more than the minimum: (1) The increased deductibility provisions allow
sponsors to accumUlate on a pre-tax basis; (2) Disclosure of funded status to
workers will encourage better funding; (3) A better funded status results in lower
PBGC premiums, and (4) A better funded status make benefit restrictions less
likely.
The current rules often fail to ensure adequate plan funding - recent history has
made this obvious. Formally we might say that the current set of rules has created a
partially pay-as-you-go private pension system by allowing some accrued liabilities
to be unfunded. That is, in general, when plans are not fully funded, the system
basically operates by transferring contributions associated with younger workers to
the current retired workers.
The funding rules proposed by the Administration, whereby sponsors that fall below
the accurately measured minimum funding levels are required to fund up towards
their target in a timely manner, move the system in the direction of being fu/lyfunded. In a fully-funded system the contributions associated with each generation
of workers are invested and fund their own retirements. A basic result in
macroeconomics is that a pay-as-you-go system results in less saving, a slower
rate of capital accumulation, and a lower steady state capital stock. Therefore the
Administration's proposal - through the move towards more fully funded private
defined benefit pensions - is consistent with the Administration goal of increasing
saving and greater capital accumulation.
Our lump-sum proposal would replace the use of 30-year Treasury rates for
purposes of determining lump sum settlements under qualified plans with a yield
curve approach. Current law use of the 30-year treasury rate to determine the
minimum lump sum amount often inflates the lump sums in comparison with the
value of the annuity that the employee would otherwise receive. Under our
proposal, lump sum settlements would be calculated using the same interest rates
that are used in discounting pension liabilities: interest rates that are drawn from a
zero-coupon corporate bond yield curve based on the interest rates for high quality
corporate bonds. This reform will include a transition period, so that employees who
are expecting to retire in the near future are not subject to an abrupt change in the
amount of their lump sums as a result of changes in law. The new basis would not
apply to distributions in 2005 and 2006 and would be phased in for distributions in
http://www.treas.gov/press/releases/js2610.htm
7/1/2005
Page 7 of7
2007 and 2008, with full implementation beginning only in 2009.
We also want to make improvements to defined contribution retirement
plans. Congress successfully passed two proposals originally set forth in the
President's Retirement Security Plan with the enactment of the Sarbanes-Oxley Act
of 2002. The Sarbanes-Oxley Act (1) guarantees that workers will now receive
notice 30 days prior to a pension plan blackout period and (2) prohibits corporate
officers from selling their own company stock during blackout periods.
The other components of the President's reform plan are to:
Improve choice by allowing participants to diversify their investments by selling their
company stock after three years. The use of employer stock allows companies to
be more generous with their matching contributions. Workers, however, should also
have the right to choose how they want to invest their retirement savings. The
President's plan would ensure that workers could sell company stock and diversify
into other investment options after three years of participation in the plan.
Enhance information by requiring quarterly benefit statements to be sent to
participants. A meaningful ability to change investments also depends on workers
receiving timely information about their 401 (k) accounts. The President's plan would
require companies to provide workers with quarterly benefit statements with
information about their accounts including the value of their assets, their rights to
diversify, and the importance of maintaining a diversified portfolio.
Increase confidence by providing participants with increased access to professional
investment advice. Current ERISA law raises barriers against employers and
investment firms providing individual investment advice to workers. The President's
plan would increase workers' access to professional investment advice. By relying
on expert advisers who assume full fiduciary responsibility for their counsel and
disclose relationships and fees associated with investment alternatives, American
workers will have the information to make better retirement decisions.
Conclusion
Defined benefit plans are a vital source of retirement income for millions of
Americans. The Administration is committed to ensuring that these plans remain a
viable retirement option for those firms that wish to offer them to their
employees. The long run viability of the system, however, depends on ensuring that
it is financially sound. The Administration's proposal is designed to put the system
on secure financial footing in order to safeguard the benefits that plan participants
have earned and will earn in the future. We are committed to working with
Congress to ensure that effective defined benefit pension reforms that protect
worker's pensions are enacted into law.
It has been my pleasure to provide this discussion of this administration's proposal
to permanently address Social Security's solvency; encourage national savings;
and protect workers' pensions.
- 30-
http://www.treas.gov/press/releases/js2610.htm
7/1/2005
June 28, 2005
2005-6-28-15-41-27 -9129
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 $77,110 million as of the end of that week, compared to $77,502 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
TOTAL
1. Foreign Currency Reserves
1
a. Securities
June 17, 2005
June 24, 2005
77,502
77,110
Euro
Yen
TOTAL
Euro
Yen
TOTAL
11,369
14,454
25,823
11,259
14,402
25,661
Of which, issuer headquartered in the US.
0
0
b. Total deposits with:
b.i. Other central banks and BIS
11,070
2,905
13,975
10,937
2,895
13,832
b.ii. Banks headquartered in the US.
0
0
b.ii. Of which, banks located abroad
0
0
b.iii. Banks headquartered outside the US.
0
0
b.iii. Of which, banks located in the U.S.
0
0
15,332
15,282
11,330
11,293
11,041
11,041
0
0
2. IMF Reserve Position
2
3. Special Drawing Rights (SDRs)
4. Gold Stock
2
3
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
June 17, 2005
Euro
1. Foreign currency loans and securities
Yen
June 24, 2005
TOTAL
Euro
o
Yen
TOTAL
o
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
2.a. Shott positions
0
2.b. Long positions
0
3. Other
0
III. Contingent Short-Term Net Drains on Foreign Currency Assets
o
o
o
June 24,2005
June 17, 2005
Euro
1. Contingent liabilities in foreign currency
Yen
TOTAL
Euro
Yen
TOTAL
o
o
o
o
o
o
o
o
1.a. Collateral guarantees on debt due within 1 year
1.b. Other contingent liabilities
2. Foreign currency securities with embedded options
3. Undrawn, unconditional credit lines
3.a. With other central banks
3.b. With banks and other financial institutions
Headquartered in the U. S.
3.c. With banks and other financial institutions
Headquartered outside the U. S.
4. Aggregate short and long positions of options in
foreign
Currencies vis-a-vis the U.S. dollar
4.a. Short positions
4.a.1. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.1. Bought calls
4.b.2. Written puts
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA). valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
21 The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDRldoliar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.
Page 1 of 4
June 28, 2005
js-2611
The Honorable John W. Snow
Prepared Remarks to
The Council on Foreign Relations
New York, NY
Good evening, and thank you so much for having me here tonight. It is an honor
and a pleasure to speak to this group; I look forward to our discussion.
The timing for this visit couldn't be better. I recently returned from the G8 Finance
Ministers meeting in London where we discussed some of the leading economic
challenges facing the global economy, including the challenges facing the
developing world - especially those in Africa.
The most notable achievement of our meetings was for the G8 nations to agree to
support President Bush's proposal for 100% debt stock cancellation. It was about a
year ago that we put this idea on the table, and there were many people along the
way who were skeptical of our motives, or not convinced that it could be achieved but, clearly, a year of hard work on this has paid off. When Prime Minister Blair met
with President Bush, the UK agreed to support the US principle of 100% debt stock
cancellation, and the US affirmed its commitment to preserve the financial integrity
of the development institutions. This important agreement between President Bush
and Prime Minister Blair paved the way for the historic achievement among the
entire G8 in London a week later. The G8 Leaders will build on this achievement in
Gleneagles next week.
To many people who have followed the G8 over the years, a focus on debt
cancellation and development in Africa may seem incongruous. The G8 has most
often been associated with issues related to currencies, or financial crises, and not
with development.
The role of the G8 is to monitor and address the key economic issues of the day.
Among the many issues we discuss, today there are two prominent challenges
confronting the world's economic leaders - what I call the two great "growth
deficits."
The first "growth deficit" has to do with uneven rates of growth between the United
States and its major trading partners. For some time now, the United States has
been growing at a far more rapid pace than our major trading partners in Europe
and Japan. Lagging growth in these two major economic areas contributes to
imbalances which should be addressed.
The second "growth deficit" has to do with lagging growth in the poorest nations of
the world - most starkly evidenced in Africa where living standards relative to the
rest of the world have actually declined.
The G8 has an important leadership role to play in addressing both of these major
challenges .
•*•
Let's look at the first challenge.
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Page 20f4
We know that the global economy is performing relatively well with the strongest
overall growth in decades, low inflation, low interest rates, and no apparent financial
crises. But the pace of growth is unbalanced, and this phenomenon can be
problematic.
The United States continues to demonstrate strong economic growth. Real GDP
rose 4.4 percent last year. The first quarter this year came in at a strong 3.5 percent
annual rate. Since the employment trough of May 2003 the economy has generated
3.5 million new jobs. Well-timed monetary and fiscal policies have contributed to
this improved outlook. More fundamentally, our higher growth and productivity stem
from the resilience and flexibility of our factor markets, highly motivated workforce
and investors, and open, competitive goods markets.
But this strong growth presents problems when our major trading partners are
growing slowly. Europe and Japan have posted chronically low levels of growth for
most of the past decade, so that Americans with more disposable income are
purchasing more goods and services from our trading partners than they purchase
from the U.S. When combined with lower savings rates in the United States (or a
savings glut elsewhere) and a lack of currency flexibility in the Asia region, the
result has been larger and growing current account imbalances.
The G8 - and in particular, the G7 finance ministers - have worked together to
execute plans to deal with these imbalances. Addressing imbalances in the global
economy is a shared responsibility among the major economic regions of the world.
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 further improvement in our fiscal deficit position this
year. Some private forecasters predict that our fiscal deficit will be below 3% of
GDP 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.
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 GDP together exceeds that in the United States.
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.
Greater flexibility in China is also a necessary component of the global adjustment
process - especially as concerns of competitiveness with China also constrain
neighboring economies in Asia from adopting more flexible exchange pOlicies.
During my recent visit to Brussels we discussed ways in which Europe could raise
growth, including through the EU's efforts to integrate its capital markets.
The potential benefits for Europe's citizens of implementing structural reforms are
clear and quantifiable. A recent OECD study determined that deregulating EU
countries would raise EU GDP per capita by 2.8%.
The G8 nations have taken an active role in addreSSing the issue of imbalances.
The G7 Agenda for Growth calls on each of the nations to make structural reforms
to increase growth - especially in Europe and Japan. The U.S., as I mentioned, is
working to reduce deficits and raise savings. And we have called on major
economies to increase currency flexibility.
* ...
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7/1/2005
Page 3 of 4
The second growth deficit confronting economic leaders in the G8 involves the
conditions of improving living standards for the billions of poor people today who
live on less than $2 a day.
U.K. Prime Minister Tony Blair has put development - with a particular emphasis on
Africa - at the forefront of this year's G8. We applaud this effort as it has been
President Bush's view that more can and should be done to assist less developed
nations raise living standards. Africa's struggles are particularly poignant, as
countries on the continent deal with disease, conflict, insufficient investment in
health and education, lack of economic freedom, and unstable or unaccountable
governments.
Many people are focusing this week on how wealthy nations can direct more
development assistance to countries in Africa. This is an important discussion, and
it's not a discussion in which the United States is shy to participate, because we are
very proud of our record. I will have more to say in a minute about the dramatic
increases in assistance to sub-Saharan Africa by the Bush Administration.
But the role of the G8 today, following the mixed results of 50 years of development
assistance, is not just to do more, but to do better - to continue to improve how
development assistance is both delivered and received in order to ensure the
biggest bang for each buck of development assistance.
While headline writers and advocacy campaigns and rock concerts tend to focus on
numerical targets for assistance, there is, unfortunately not sufficient attention paid
to the conditions in which development assistance is delivered. And yet, this is not
for lack of study and analysis - the World Bank has a library full of research papers
citing the importance of good governance and sound economic policies. It is easy
for people to focus on simple dollar targets, rather than the specific goals and
results of assistance.
Increased development assistance is vitally important. During this Administration,
development assistance overall has nearly doubled and assistance to sub-Saharan
Africa has tripled. Today, nearly a quarter of every dollar of official assistance in the
region comes from America.
In key sectors, America's commitment is unparalleled. The U.S. is the world's
recognized leader in vaccine research and development and immunization funding.
In 2004, the U.S. provided roughly 70% of total HIV vaccine research funding $450 million out of $650 million total. U.S. funding will increase to $510 million in
2005 and $600 million in 2006. In addition, the U.S. accounts for approximately
45% of all government contributions to the Global Alliances for Vaccines and
Immunizations. As of February 2005, the U.S. government had contributed roughly
$220 million.
Notably, America's dramatic increase in development assistance in recent years
has come before disbursements from the President's Millennium Challenge
Corporation (MCC) program. The program, while a model for how development
assistance should be delivered, is only this year beginning to make disbursements
and has billions of dollars in the pipeline. More importantly, this program is setting a
standard in delivering assistant to those countries that are helping themselves - by
investing in the health and needs of its people, fighting corruption, and
demonstrating a commitment to economic freedom.
Less than 18 months following the establishment of the MCC, four compacts have
been approved valued at over $600 million and several more are expected in the
coming months. Moreover, evidence indicates countries are already taking action to
improve policies so they can become eligible for MCC funds.
This fiscal year the America has committed $2.8 billion to the President's
Emergency Plan for HIV/AIDS Relief. As of March 31 of this year, the program has
supported anti-retroviral drug treatment for approximately 235,000 men, women
and children in 15 of the most afflicted countries in Africa, Asia and the Caribbean exceeding the treatment target for the year months ahead of schedule.
http://www.treas.goy/press/releases/js2611.htm
7/1/2005
Page 4 of4
But even with these dramatic increases in development funding, we have tried to
change the focus both with our bilateral assistance and multilateral assistance away
from simplistic numeric targets, and toward a greater focus on ensuring that
assistance is well spent and goes into environments where it can have a great
impact in lifting people out of poverty. Money alone is not the answer.
One way we have worked to reform the way that assistance was to encourage the
greater use of grants instead of loans at the multilateral development banks. As
President Bush recognized, it is counterproductive to continually add to the already
unsustainable debt burdens of poor countries. Combined with our landmark
agreement to cancel debt, the increased use of grants within a clear debtsustainability framework will ensure that poor countries do not find themselves
again in the lend-forgive-Iend trap.
Sometimes the test for determining where to deliver assistance is aided by the use
of non-traditional measures of government effectiveness. For example, one of the
tests now utilized by both the World Bank and MCC measures how long it takes to
start a business in a country. This simple measure tells a donor a great deal about
a country's commitment to economic freedom and relative absence of corruption. If
it takes 32 days to start a business in Benin, and 146 days to start a business in
Angola, then you can clearly presume that Benin encourages entrepreneurial
activity and has stripped away cumbersome levels of bureaucracy where corruption
is often entrenched. (Of course we would like to see all countries improve to levels
of developed nations - like Australia's 2 days, or Canada's 3 days.)
By working through the G8 we are also trying to focus more attention on other
factors in growth-enhancing development - especially through a greater focus on
private sector development. Here is an area that frequently sends many aid
advocates scurrying for the exits, yet we know that the quickest way to lift someone
out of poverty is to create a job. So we have focused greater attention on microlending programs for small and medium enterprises.
Private sector resources also have a role to play and these resources dwarf
traditional development assistance - specifically trade and remittances. President
Bush considers it crucial that we complete the Doha Development Round to
increase economic opportunity for all trading nations, especially developing nations.
But even without global trade liberalization, America's Africa Growth and
Opportunity Act trade preference system has generated a striking increase in trade
flows between the United States and participating African nations. The U.S.
purchased 24 percent of all sub-Saharan African exports in 2003, more than any
other country; in 2004, African exports to the U.S. increased to almost $36 billion.
President Bush extended the AGOA program to 2015 in order to further increase
the U.S.-Africa trade relationship.
Through the G8 we are also working to reduce the costs associated when workers
send remittance back to their families in their home countries. This instant source of
assistance from the United States alone exceeds the combined aid contributions of
all donor nations every year. Until the United States pointed to remittance flows,
most nations failed to measure the flows, let alone encourage reforms to reduce the
costs of transmitting them.
My predecessor in this job, Secretary Paul O'Neill often pointed out that the funding
we provide for overseas aid came from the taxes of plumbers and carpenters in
America. If we want to go back to those plumbers and carpenters for more money
for development, we need to demonstrate that we're putting it to the best uses and
producing real results for the people we intend to help.
I'm encouraged that as the leaders convene in Gleneagles next week for the G8
Summit that real progress is being made to address these important imbalances in
the global economy. By working in concert we all stand to benefit.
- 30 -
http://www.treas.gov/press/releases/js2611.htm
7/1/2005
Page 1 of 1
10 vIew or pnnt Che /-,UI- content on ChIS page, download Che tree AdOOe(gJ AcrooaN!! f<eaOertBJ.
June 29, 2005
JS-2612
Treasury Issues Final Regulations on
State and Local Government Series Securities
The Treasury Department today released final regulations on State and Local
Government Series (SLGS) securities. The regulations will be published in the
Federal Register on June 30, 2005, and will be effective 45 days after publication.
SLGS securities are non-marketable Treasury securities that are only available for
purchase by issuers of tax-exempt securities.
The final regulations address certain aspects of the existing SLGS program that
provide SLGS investors cost-free options or arbitrage opportunities that are not
available in marketable securities. These features of the existing SLGS program are
costly for taxpayers as they impose substantial costs on the federal government.
The final regulations will make investments in SLGS securities more closely
resemble investment opportunities available in Treasury marketable securities,
while maintaining simplicity and flexibility for the users of the SLGS program.
The final regulations are substantially similar to proposed regulations that were
published on September 30, 2004. In addition, the new regulations increase the
interest rates on SLGS securities to rates 1 basis point below current Treasury
borrowing rates. SLGS securities rates currently are 5 basis points below current
Treasury borrowing rates.
The final regulations also will require the use of SLGSafe
(~w.publicdeJ.?Ltr~~s.g.o.yhQE3Lspe.htr:n), a web-based application, for all SLGS
securities transactions.
REPORTS
•
The text of the regulations
http://treas.gov/press/reieaseslis 2612 .htm
7/1/2005
1
4810-39W
DEPARTMENT OF THE TREASURY
Fiscal Service
31 CFR Part 344
(Department
of
the
Treasury
Circular,
Public
Debt
Series
No. 3-72)
U.S. Treasury Securities--State and Local Government Series
AGENCY:
Bureau of the Public Debt, Fiscal Service,
Treasury.
ACTION:
SUMMARY:
Final rule.
The Department of the Treasury (Treasury) is
issuing this final rule to revise the regulations governing
State and Local Government Series (SLGS) securities.
SLGS
securities are non-marketable Treasury securities that are
only available for purchase by issuers of tax-exempt
securities.
The changes in the final rule prohibit issuers
of tax-exempt securities from engaging in certain practices
2
that in effect use the SLGS program as a cost-free option.
The final rule also makes other changes that are designed
to improve the administration of the SLGS program.
DATES:
This final rule is effective [INSERT DATE 45 DAYS
AFTER DATE OF PUBLICATION IN THE FEDERAL REGISTER].
FOR FURTHER INFORMATION CONTACT:
Keith Rake, Deputy Assistant Commissioner, Office of
the Assistant Commissioner for Public Debt Accounting,
Bureau of the Public Debt, 200 3rd St., P.O. Box 396,
Parkersburg, WV 26106-0396,
(304)
480-5101
(not a toll-free
number), or bye-mail at <opda-sib@bpd.treas.gov> or Edward
Gronseth, Deputy Chief Counsel, Elizabeth Spears, Senior
Attorney, or Brian Metz, Attorney-Adviser, Office of the
Chief Counsel, Bureau of the Public Debt, Department of the
Treasury, P.O. Box 1328, Parkersburg, WV 26106-1328,
480-8692
(not a toll-free number) .
SUPPLEMENTARY INFORMATION:
I.
Overview of Rulemaking
(304)
3
On September 30, 2004, Treasury published a notice of
proposed rulemaking (NPRM) with request for comments (69 FR
58756, September 30, 2004), proposing changes to the
regulations governing U.S. Treasury securities of the State
and Local Government Series
(SLGS).
Treasury intended
those changes to address certain practices of investors in
SLGS securities that Treasury considered to be an
inappropriate use of the SLGS securities program.
The
comment period was extended to November 16, 2004
(69 FR
62229, October 25,
2004).
Treasury received 20 comments by
the end of the comment period.
After careful consideration
of the comments, Treasury is now issuing a final rule that
will be effective on [INSERT DATE 45 DAYS AFTER PUBLICATION
IN THE FEDERAL REGISTER] .
In the NPRM, Treasury proposed three main changes to
the SLGS program:
that it would be impermissible to invest
an amount received from the redemption before maturity of a
SLGS Time Deposit security at a higher yield, or to use an
amount received from the sale of a marketable security to
purchase a SLGS security at a higher yield; that
subscriptions for purchase of SLGS securities, once
submitted, could not be canceled; and that investors in
SLGS securities would be required to use the SLGSafe
4
service, Treasury's Internet site for SLGS securities
transactions.
In the final rule, Treasury is adopting these proposed
changes, but has made some modifications in response to the
concerns raised in the comments.
In addition, Treasury is
changing how the SLGS rates are set.
Currently, the SLGS
rates are 5 basis points below the current Treasury
borrowing rates, as shown in the daily SLGS rate table.
In
the final rule, SLGS securities rates are defined as 1
basis point below current Treasury borrowing rates, as
released daily by Treasury in the SLGS rate table.
The following discussion provides background on the
rulemaking, including a more detailed explanation of the
specific proposals, addresses most of the comments on those
proposals, and describes the changes in the final rule.
II.
Background
SLGS securities are a type of non-marketable Treasury
security that is available for purchase by state and local
governments and other issuers of tax-exempt bonds.
securities have been issued by Treasury since 1972.
SLGS
The
purpose of the SLGS program is to assist state and local
government issuers in complying with yield restriction and
5
rebate requirements applicable to tax-exempt bonds under
the Internal Revenue Code.
Generally, the arbitrage requirements under the
Internal Revenue Code provide that with certain exceptions,
the proceeds of a tax-exempt bond may not be invested at a
yield that is materially higher than the yield on the bond.
In the limited circumstances in which bond proceeds may be
invested above the bond yield, the bond issuer generally is
required to rebate to the Federal Government any earnings
in excess of the bond yield.
SLGS securities may only be purchased with eligible
funds.
Purchasers of SLGS Time Deposit securities that
bear interest may generally select any maturity period from
30 days to 40 years, and any interest rate that does not
exceed the applicable SLGS rate for that maturity published
in the daily SLGS rate table.
Since 1996, the maximum SLGS
rates have been set at the current Treasury borrowing rate
less 5 basis points.
Purchasers of SLGS securities have
the flexibility to structure the securities with specified
payment dates and yields.
In 1996, Treasury revised the regulations governing
SLGS securities to eliminate certain requirements that had
been introduced at various times since 1972, and to make
the program a more flexible and competitive investment
6
vehicle for issuers
(61 FR 55690, October 28, 1996).
Under
the 1996 regulations, Treasury also made a change to permit
issuers to subscribe for SLGS securities and subsequently
cancel the subscription, without a penalty, under certain
circumstances.
In 1997, Treasury amended the regulations to prohibit
the use of the SLGS program to create a cost-free option in
certain circumstances (62 FR 46444, September 3, 1997).
Treasury stated that it was inappropriate to use the SLGS
securities program as an option and provided examples of
unacceptable practices.
These practices included, among
others, subscribing for SLGS securities for an advance
refunding escrow and simultaneously purchasing marketable
securities for the same escrow, with the plan that the
marketable securities would be sold if interest rates
declined or the SLGS subscription would be canceled if
interest rates did not decline.
In the proposed rule published on September 30, 2004
at 69 FR 58756, we indicated that we had become aware of
several other practices involving SLGS securities that are
also inappropriate uses of the securities and contrary to
the purpose of the program.
A number of regulatory changes
were proposed to address these practices and other
miscellaneous items.
7
One type of practice the NPRM addressed involves the
redemption before maturity or sale of securities to
reinvest at a higher yield.
The "current Treasury
borrowing rates" and corresponding SLGS rates are set once
a day, whereas market interest rates may change throughout
the day.
In addition, although the SLGS rate table is
released at 10:00 a.m. each day, SLGS rates have been set
based on a Treasury yield curve determined the previous
day.
Some market participants have noted that the
combination of a constant Treasury borrowing rate and
fluctuating market interest rates creates arbitrage
opportunities.
SLGS investors have utilized these
arbitrage opportunities by redeeming SLGS securities before
maturity and investing the redemption proceeds in higheryielding SLGS or marketable securities, and by selling
marketable securities and investing the sale proceeds in
higher-yielding SLGS securities.
Another type of practice the NPRM addressed involves
the cancellation of subscriptions for the purchase of SLGS
securities.
A purchaser of SLGS securities may submit a
subscription for purchase up to 60 days before the issue
date.
The subscriber locks in an interest rate based on
the daily SLGS rate table on the day the subscription for
purchase is submitted.
If interest rates rise, subscribers
8
often cancel their subscriptions in accordance with the
current regulations and re-subscribe at a higher yield.
The NPRM and this final rule address these and other
practices that provide to SLGS investors cost-free options
or arbitrage opportunities that are not available in
marketable securities.
These practices impose substantial
costs on the Federal Government.
The changes in this final
rule will make investments in SLGS securities more closely
resemble investment opportunities available in Treasury
marketable securities.
III.
Proposals, Comments, and Final Rule
As noted above, by the close of the comment period,
Treasury had received 20 comment letters on the NPRM.
Commenters included state and local issuers, industry
associations, financial advisors, and bond counsel.
In
general, most commenters disagreed with Treasury's
proposals to limit the yield on reinvestments and to
prohibit cancellation of subscriptions for purchase.
A
number of commenters made suggestions for modification of
those requirements.
Some commenters expressed approval of
Treasury's proposal to require the use of the SLGSafe®
9
Service ("SLGSafe")
Most of the comments are described in
more detail below.
A.
Proposals to Address Sale/Redemption Before Maturity
and Reinvestment and Related Practices.
The current regulations do not prohibit the redemption
before maturity of SLGS securities for the purpose of
reinvestment at a higher yield.
In the NPRM, Treasury
stated that it had concluded that the practice of
requesting redemption of SLGS securities before maturity to
take advantage of relatively infrequent SLGS pricing was an
inappropriate use of SLGS securities.
Even if undertaken
to eliminate negative arbitrage (where bond proceeds have
been invested at a yield that is less than the yield on the
issuer's bond), Treasury considered the practice to be a
cost-free option and inconsistent with the purpose of the
program.
Treasury stated that there is a direct cost to
Treasury because Treasury is not being compensated for the
value of the option; that the practice results in
volatility in Treasury's cash balances and increases the
difficulty of cash balance forecasting and thereby
increases Treasury's borrowing costs; and that there are
10
administrative costs.
These same concerns apply to
transactions in which an issuer sells marketable securities
to acquire higher-yielding SLGS securities.
To eliminate these practices, the NPRM proposed several
changes.
First, the NPRM proposed several changes referred
to below as "yield restrictions."
Second, the NPRM
proposed reducing the number of hours during which
subscriptions and certain other transactions could be
received in SLGSafe.
Third, Treasury indicated that it
planned to implement a non-regulatory change to make the
rates specified in the daily SLGS rate table more current.
Fourth, the NPRM proposed a new provision making it
impermissible to purchase a SLGS security with a maturity
longer than is reasonably necessary to accomplish a
governmental purpose of the issuer.
1.
Yield Restrictions.
The proposed rule stated that for SLGS securities
subscribed for on or after the date of publication of the
final rule, it would be impermissible to invest any amount
received from the redemption before maturity of a SLGS Time
Deposit security at a yield that exceeds the yield used to
11
determine the amount of redemption proceeds for such Time
Deposit security.
It would also be impermissible to
purchase a SLGS security with any amount received from the
sale or redemption (at the option of the holder) before
maturity of any marketable security, if the yield on such
SLGS security being purchased exceeds the yield at which
such marketable security is sold or redeemed.
In addition, upon starting a subscription for a SLGS
security, a subscriber would be required to certify that
(A)
if the issuer is purchasing a SLGS security with the
proceeds of the sale or redemption (at the option of the
holder) before maturity of any marketable security, the
yield on such SLGS security does not exceed the yield at
which such marketable security was sold or redeemed; and
(B) if the issuer is purchasing a SLGS security with
proceeds of the redemption before maturity of a Time
Deposit security, the yield on the SLGS security being
purchased does not exceed the yield used to determine the
amount of redemption proceeds for such redeemed security.
Upon submission of a request for redemption before maturity
of a Time Deposit security subscribed for on or after the
date of publication of the final rule, the issuer would be
required to certify that no amount received from the
redemption would be invested at a yield that exceeds the
12
yield used to determine the amount of redemption proceeds
for such Time Deposit security.
Treasury also proposed a
definition of "yield" that would apply to the
certifications and would require that, in comparing the
yield of a SLGS security to the yield of a marketable debt
instrument, the yield of the marketable debt instrument
would be computed using the same compounding intervals and
financial conventions used to compute interest on the SLGS
security.
The majority of the commenters addressed this
proposal.
Thirteen commenters suggested that the proposed
yield restrictions were unnecessary, given the other
changes.
One comment, for example, stated that
municipalities should be able to redeem SLGS securities for
the mitigation of negative arbitrage.
The commenters also
stated that the yield restriction provisions would have the
unintended consequence of making the SLGS program less
attractive for issuers.
Several commenters expressed
concerns that the proposed changes would prevent issuers
from restructuring escrows.
One commenter asked for clarification of the
prohibition on the sale of marketable securities to
purchase higher-yielding SLGS securities and suggested that
it is a common practice for issuers to liquidate sinking
13
fund and debt service reserve fund investments for refunded
bonds for use in a refunding escrow, a practice that is
recognized in the current Income Tax Regulations.
Another
commenter noted that 26 CFR 1.148-5 (d) (6) (iii) provides a
safe harbor for the purchase of open market securities for
a yield-restricted investment only if the lowest cost bona
fide bid is not greater than the cost of the most efficient
portfolio comprised exclusively of SLGS securities at the
time bids are received.
This commenter stated that the
interplay between the SLGS regulations and the safe harbor
bidding rules could, under certain market conditions, force
an issuer to invest in SLGS securities with negative
arbitrage with no prospect of being able to recoup any of
the negative arbitrage (as a result of the yield
restrictions on redemption of the SLGS securities before
maturity) .
In addition to these general concerns, several
commenters offered suggestions for specific modifications
to the yield restriction proposals.
Four commenters
suggested that the yield restrictions on reinvestment
should expire after the original maturity date of the
investment that is sold or redeemed before maturity.
Some
commenters proposed excluding zero interest Time Deposit
securities from the yield restriction provisions.
Two
14
commenters also suggested substituting the definition of
"yield" in 26 CFR 1.148-5 for the definition proposed in
the NPRM.
Treasury also received comments that certain
provisions, including the provisions on yield
certifications, should have a delayed effective date to
allow subscribers time to adjust their practices and
systems.
After consideration of these comments, Treasury has
decided to retain the NPRM provisions on yield restrictions
and corresponding certifications, with some modifications.
In Treasury's view, these restrictions are necessary to
curb the use of the SLGS program as a cost-free option.
Other alternatives do not achieve this goal or may be
unworkable for other reasons.
The final rule does not provide that the yield
restrictions expire after the original maturity date of the
investment that is sold or redeemed.
Such an approach
could be difficult to administer in the case of multiple
sales or redemptions and re-investments, and in some cases
could be overly-restrictive.
However, the final rule
contains two new examples that clarify that if amounts
received from the sale or redemption of an investment (the
first investment) are invested in a second investment with
a maturity date that precedes the maturity date of the
15
first investment, and the investor holds the second
investment to maturity, then the yield restrictions expire
at the maturity of the second investment if the other
requirements of the final rule are met (including the
requirement that the SLGS program not be used to create a
cost-free option).
Thus, an issuer that invests tax-exempt
bond proceeds in SLGS securities that produce negative
arbitrage is not precluded from subsequently investing
those proceeds in higher-yielding marketable securities
(for example, marketable securities that have a lower
credit rating than Treasury securities) if the requirements
of the final rule are met.
In addition, the final rule does not preclude issuers
from restructuring escrows, provided that the yield
restrictions are met.
Under the final rule, marketable
securities in a sinking fund or debt service reserve fund
for refunded bonds are subject to the same yield
restrictions that apply to other marketable securities.
The final rule also specifically excludes zero
interest Time Deposit securities from the yield
certification provisions in § 344.2 (e) (2) (i) (B) and
(e) (2) (ii) and the yield restrictions in the impermissible
practice provision in § 344.2(f).
Thus, under the final
rule, the yield restriction provisions will not apply to
amounts received from the redemption of zero interest Time
Deposit securities.
In response to comments about the definition of yield,
the final regulations incorporate the definition of "yield H
in 26 CFR 1.148-5.
As noted above, given the number of changes that the
final rule encompasses, Treasury has decided to make the
final rule effective on [INSERT DATE 45 DAYS AFTER DATE OF
PUBLICATION IN THE FEDERAL REGISTER].
This delayed
effective date is intended to provide investors with
sufficient time to review the final rule and make any
necessary adjustments to their systems or processes.
2.
SLGSafe Hours.
Under the current rule, the SLGSafe service
lS
available for most transactions from 8:00 a.m., Eastern
time until 10:00 p.m., Eastern time.
(Subscribers
currently may submit subscriptions by facsimile at any
time.)
The NPRM proposed that SLGSafe subscriptions,
requests for early redemption of Time Deposit securities,
and requests for redemption of Demand Deposit securities
would only be received from 10:00 a.m. to 6:00 p.m.,
17
Eastern time on business days.
This proposal, combined
with the proposal to make SLGSafe mandatory, shortened the
window during which transactions could be effected.
Treasury received 12 comments expressing concern that
the reduction in hours would not allow enough time for
subscribers to complete their verification processes.
Some
commenters also indicated that West coast issuers would be
at some disadvantage with narrower trading hours.
In response to these concerns, Treasury has revised §
344.3(g) of the final rule to extend the amount of time in
which the SLGSafe window will be open.
All SLGSafe
subscriptions, requests for early redemption of Time
Deposit securities, and requests for redemption of Demand
Deposit securities must be received on business days no
earlier than 10:00 a.m. and no later than 10:00 p.m.,
Eastern time.
3.
SLGS Rates More Current.
Under the current rule, the SLGS rate table is
released to the public by 10:00 a.m., Eastern time, each
business day.
Treasury did not propose any change to this
18
rule but indicated in the NPRM that it intended to make the
rates specified in the daily SLGS rate table more current.
Although most commenters did not disagree with the
administrative proposal to make the SLGS rates more
current, several commenters suggested that such a change
was sufficient to address Treasury's concerns in the
rulemaking and that other proposed changes were therefore
unnecessary.
These commenters suggested that the
establishment of more current SLGS rates would minimize
opportunities to take advantage of differences between SLGS
rates and market rates.
However, the potential to take
advantage of these differences will still exist even after
the administrative change to make SLGS rates more current
is effected, because SLGS rates will be held constant for
twelve hours, from 10 a.m. to 10 p.m., Eastern time.
Therefore, the administrative change will not address these
issues entirely.
4.
Maturity Longer than Necessary.
The NPRM proposed a new provision making it
impermissible to purchase a SLGS security with a maturity
longer than is reasonably necessary to accomplish a
19
governmental purpose of the issuer.
Treasury received 2
comments stating that the provision was vague or would be
difficult to administer.
The NPRM was intended to address a practice where an
issuer, apparently acting on the basis of its view on the
direction of interest rates, would purchase a SLGS security
with a maturity much longer than necessary for its
governmental purpose, and then redeem the security before
maturity.
After further consideration, we have deleted
this provision from the final rule, particularly in light
of the risk to the issuer of purchasing a SLGS security
with a maturity longer than reasonably necessary to
accomplish a governmental purpose.
B.
Proposals
to Address
Cancellations
of
SLGS
Securities
Subscriptions and Related Practices.
Under the current rule, SLGS investors may subscribe
for SLGS securities up to 60 days in advance of the issue
date and lock in the SLGS rate on the subscription date.
Subscriptions may be canceled, up to 5 or 7 days prior to
issuance
penalty.
(depending on the amount involved), without
20
In the NPRM, Treasury noted that a large volume of
cancellations of SLGS subscriptions had been submitted for
the apparent purpose of re-subscribing at a higher yield.
Treasury also noted that issuers had also submitted
multiple initial subscriptions for a single issue date and
had later canceled some of those subscriptions, apparently
because of reductions in the size of advance refunding
transactions due to changes in market conditions.
Other
investors had subscribed for SLGS securities, later
canceling the subscription or amending the size when rates
moved favorably or unfavorably.
In other cases,
subscriptions were canceled because agents had subscribed
for SLGS securities even though the issuer had not
authorized the issuance of tax-exempt bonds.
Currently, nearly half of all SLGS subscriptions are
canceled.
Between October 1, 2003, and September 30, 2004,
48 percent of the 14,317 subscriptions were canceled; the
dollar volume of cancellations was $309 billion.
This
compares to about $160 billion in total SLGS securities
outstanding.
(By way of comparison as to volume, the
federal deficit in fiscal year 2004 was $413 billion.)
The NPRM proposed several changes to address
cancellations.
First, cancellations would be prohibited
unless the subscriber established, to the satisfaction of
21
Treasury, that the cancellation was required for reasons
unrelated to the use of the SLGS program to create a costfree option.
Second,
for all subscriptions submitted for
SLGS securities on or after the date of publication of the
final rule, a change in the aggregate principal amount
originally specified in the subscription could not exceed
ten percent.
Third, the NPRM proposed that once an issuer
selects an issue date for SLGS securities, it cannot be
changed.
Fourth, the NPRM proposed that a subscriber be
required to certify, upon starting a SLGS subscription,
that the issuer has authorized the issuance of the state or
local bonds.
The subscriber would also be required to
enter a description of the tax-exempt bond issue in
SLGSafe.
1.
Prohibition on Cancellations.
Treasury received 15 comments addressing the proposed
prohibition on cancellations.
All of these comments
disagreed with this change and most expressed a desire to
retain some form of the current cancellation option, even
if more limited than under the current provisions.
Treasury received comments to the effect that an
implicit option is an incentive for investment in SLGS
22
securities, and that issuers will be forced to purchase
marketable securities.
The commenters pointed out that
this is a potentially undesirable outcome for Treasury
because Treasury has an interest in preventing yieldburning and other unacceptable practices involving
marketable securities.
In other words, if investors are
not encouraged to use the SLGS program, the IRS may be
required to devote additional resources to compliance and
enforcement.
Treasury also received comments suggesting that the
SLGS program reduces Treasury's borrowing costs by virtue
of the 5 basis point differential that exists between SLGS
rates and Treasury borrowing rates.
One commenter
estimated that Treasury's cost savings from the SLGS
program was about $80 million per year, based on current
rates and SLGS outstanding.
The commenter stated that
eliminating the cancellation option might reduce SLGS
program participation and impact that cost savings.
The commenters also suggested a variety of
alternatives to the prohibition on cancellations, including
allowing cancellations up to a maximum dollar amount and
prohibiting multiple subscriptions for the same bond issue;
limiting the number of cancellations that can be submitted
with respect to a given bond issue; allowing the use of the
23
highest of the daily SLGS rates within a specified number
of days; and providing for one or a certain number of
allowable cancellations.
In addition, one comment asked
for clarification as to how issuers would satisfy the
requirement that a cancellation is not related to the use
of the program to create a cost-free option.
After consideration of these comments, Treasury
remains concerned that the current option to cancel a
subscription imposes substantial costs on Treasury and u.s.
taxpayers.
These costs include not only the costs of the
option and administrative costs, but also the costs to
Treasury as an issuer of marketable securities.
In Fiscal Year 2004, Treasury held 215 auctions of
marketable Treasury securities and issued $4.6 trillion in
securities.
Because of the size of its issuance, Treasury
accomplishes its goal of financing government borrowing
needs at the lowest cost over time by issuing debt in a
regular and predictable pattern.
Treasury seeks to
minimize uncertainty about the supply of a security being
issued.
uncertainty in supply causes bidders in Treasury
auctions to demand a risk premium, which Treasury pays in
the form of higher interest rates on the securities it
issues.
Given the size of Treasury's issuance of
marketable Treasury securities, even small risk premiums
2
can create large additional interest costs.
For this
reason, volatility in cash balances is undesirable.
Cancellations of SLGS subscriptions increase cash balance
volatility, which has an adverse impact on the certainty of
the supply of marketable securities, and which in turn
results in increased borrowing costs for marketable
securities.
We note that the submission of subscriptions on or
shortly before the subscription deadline (5 or 7 days
before the issue date)
results in Treasury having the same
notice of subscriptions as it currently does for
cancellations.
However, the impact of an unexpected
increase in cash balances from SLGS subscriptions that
settle within five to seven days is significantly less than
the impact of unexpected cancellations, particularly since
the cancellations are rate sensitive and tend to come in
clusters when rates move dramatically over a short period
of time.
In the case of unexpected cancellations,
additional unexpected marketable securities have to be
issued to make up for the decline in expected SLGS
securities.
This additional issuance generally increases
Treasury's borrowing costs.
With respect to the 5 basis point differential between
SLGS rates and Treasury borrowing rates, that is only one
25
portion of the entire cost structure that must be
considered in evaluating the potential impact of the
cancellation option on the SLGS program. Other costs
include the option costs, the impact on marketable
borrowing, and administrative costs.
The 5 basis point differential does not represent an
option price.
As Treasury stated in the 1997 revision to
the regulations, the prices established by Treasury for the
SLGS securities do not include the cost of an option (62 FR
46444, September 3, 1997).
was 12.5 basis points.
Prior to 1996, the differential
As the costs of administering the
program have decreased, Treasury has decreased the amount
of the differential.
points.
In 1996, it was reduced to 5 basis
As noted above, in the final rule, Treasury is
reducing the basis point differential to 1 basis point
below current Treasury borrowing rates.
This change
reflects increased efficiencies in the program, primarily
through the use of SLGSafe, and will make SLGS investments
more closely resemble marketable securities.
Treasury is
making a comparable change reducing the amount of
Treasury's administrative costs for administering demand
deposit SLGS securities in a Federal Register notice that
will be published before the effective date of this final
rule.
Concerning the various suggestions in the comments for
alternatives to the prohibition on cancellations, Treasury
has considered these alternatives, but has concluded that
even a limited use of the option can have significant
adverse effects on cash balances and cash balance
forecasts.
This is because, as explained above, large
numbers of SLGS investors often tend to use the option at
the same time, in reaction to interest rate movements.
Treasury has also examined the possibility of pricing the
option and has determined that establishing a pricing
structure would not be feasible.
For all of the above reasons, Treasury is adopting the
proposed rule prohibiting cancellations.
The final rule
provides that a subscriber cannot cancel unless it is
established, to the satisfaction of Treasury, that the
cancellation is required for reasons unrelated to the use
of the SLGS program to create a cost-free option.
2. Changing Principal Amounts.
Under the current rule, a subscriber may change the
aggregate principal amount specified in the initial
subscription up to $10 million or ten percent, whichever is
27
greater.
The NPRM proposed that subscribers could only
change the principal amount by 10 percent above or below
the amount originally specified.
Treasury received 10 comments disagreeing with the
proposed change.
Many commenters indicated they did not
understand the reason Treasury was considering this change.
Many commenters also expressed concern that on the
subscription date,
issuers can estimate, but may not be
able to precisely identify, the exact dollar amount of the
SLGS securities needed to fund a transaction.
Some
commenters also suggested that the proposed rule would
disproportionately and adversely impact the activities of
smaller issuers, who typically issue small amounts.
After careful consideration of these comments, Treasury
has decided to adopt the size amendment provision set forth
in the proposed rule.
The proposal was intended to
preclude a practice by some investors who used the dollar
amount limits on amendment of subscriptions to structure
option transactions designed to capitalize on interest rate
movements during the subscription period.
In addition, by
limiting the amount of possible change of subscriptions to
10 percent of the principal, Treasury is able to ensure
that its cash balance forecasting will not be adversely
28
impacted by more than a certain, predetermined percentage.
Furthermore, a set dollar amount limit, as opposed to a
percentage limit, would leave open the possibility for
subscribers to break up their subscriptions into mUltiple
smaller subscriptions in order to avoid the cap on changes
to the aggregate principal amount.
3.
Issue Date Changes.
Under the current rule, investors are allowed to amend
a Time Deposit subscription by extending the issue date up
to seven days after the issue date originally specified.
Investors are asked to notify Treasury by 3:00 p.m.,
Eastern time, one business day before the original issue
date of any changes.
The proposed rule would no longer
permit a change to the issue date.
Treasury received 15 comments disagreeing with this
change.
Commenters were concerned about having a 6-month
penalty imposed upon them for not taking delivery on the
issue date and pointed out that the issue date must
sometimes be delayed due to circumstances beyond their
control.
The final rule permits a change to the issue date up to
2~
seven days after the original issue date if it is
established to the satisfaction of Treasury that the change
is required as a result of circumstances that were
unforeseen at the time of the subscription and are beyond
the issuer's control (for example, a natural disaster).
4.
Mandatory Certification that Municipal Bonds have
been Authorized.
The NPRM proposed a new requirement that a subscriber
certify, upon starting a SLGS subscription, that the issuer
had authorized the issuance of the state or local bonds.
Treasury received 2 comments in favor of this proposal and
2 comments disagreeing with this proposal.
Some commenters
suggested that the term "authorization" has different
meanings in various jurisdictions and that applying the
term uniformly across the jurisdictions was problematic.
Because Treasury has retained in the final rule the
provision prohibiting cancellations of subscriptions, we
have determined that this certification is unnecessary.
are therefore eliminating it from the final rule.
We
Treasury
is adopting the requirement proposed in the NPRM that
issuers briefly describe the underlying bond transaction
30
when beginning a subscription in SLGSafe.
C.
Administrative Changes.
In the NPRM, Treasury also noted that it had reviewed
other aspects of the SLGS program and proposed several
changes to better administer the program.
1.
Pricing Longer-Dated SLGS Securities.
Onder the current rule, SLGS rates are determined based
upon the current Treasury borrowing rate.
Because the
current Treasury borrowing rate is based on the prevailing
market rate for a Treasury security with the specified
period to maturity and SLGS securities are offered for
terms in excess of the currently issued Treasury
securities, Treasury examined whether it needed to alter
the manner in which it sets the SLGS rate for these longerdated securities.
In the proposed rule, Treasury proposed broadening the
definition of "current Treasury borrowing rate" to allow
Treasury to use suitable proxies and/or a different rate-
31
setting methodology where SLGS rates are needed for
maturities which are not currently being issued by
Treasury.
Two comments were received on this change, both
of which supported Treasury's proposal.
In the final rule,
Treasury is adopting the provision for pricing longer-dated
SLGS securities as it was set forth in the NPRM.
We
contemplate no changes in methodology at this time.
2.
Notices of Redemption.
In the current rule, a notice of redemption must be
received by Treasury no less than 10 days and no more than
60 days before the requested redemption date.
In the
proposed rule, Treasury proposed changing the 10-day
advance notice requirement for early redemption of Time
Deposit securities to a 14-day advance notice requirement.
Treasury received one comment, which agreed that a 14-day
notice period is beneficial for Treasury.
In the final
rule, Treasury adopts the provision as it was set forth in
the NPRM.
The existing rule prohibits cancellation of redemption
notices.
provision.
The proposed rule made no change to that
Treasury received one comment suggesting that
32
cancellation of redemption notices should be allowed,
provided sufficient notice is given to Treasury.
This
suggestion, if adopted, would create a cost-free option.
Accordingly, we have made no changes to the final rule in
this regard.
Furthermore, Treasury is also clarifying § 344.6(c) to
explicitly provide that Treasury will not accept a request
for early redemption for a security that has not yet been
issued.
3.
Mandating SLGSafe Transactions.
Under the current rule, subscribers are able to submit
their subscriptions to Treasury either via SLGSafe or
through the use of paper forms that are either faxed or
mailed in.
The proposed rule stated that the use of the
SLGSafe service would be mandatory as of the effective date
of the final rule.
Treasury received 5 favorable comments agreeing that
use of the SLGSafe service should be mandatory and that it
will improve efficiency in the SLGS program.
One comment
characterized this change as constructive and workable;
another said that it would streamline operations and would
not impair local governments' access to the program.
33
Another current SLGSafe user commented that it is
convenient and easy to use.
Treasury also received 5
comments inquiring about SLGSafe implementation, which are
described below.
Two comments stated that owners of SLGS securities
issued before the effective date of the final rule should
be allowed to administer these securities via fax or mail.
By introducing SLGSafe, Treasury fulfilled the requirement
under the Government Paperwork Elimination Act, Sec. 17011710, Pub. L. 105-277, 112 Stat. 2681-749 to 2681-751 (44
U.S.C. 3504 note) that executive agencies provide for the
option of electronic submissions instead of paper. We note
that SLGS securities may be issued for periods of up to 40
years.
To allow all current owners of outstanding SLGS
securities to continue to use fax and mail instead of
SLGSafe for those securities could prevent full
implementation of the SLGSafe program for up to 40 years.
One comment expressed a concern that certain technical
issues must be addressed before making SLGSafe mandatory.
Although the exact nature of the access issues was not
identified, we note that BPD has successfully enrolled
1,100 current users of SLGSafe.
Any specific access issues
should be addressed directly to BPD.
34
Another comment stated that there should be a "good
cause" exception that allows users to perform transactions
via fax or mail when a valid reason for the exception
exists.
One comment stated that individual users and one-
time agents should not be required to use the SLGSafe
service.
The NPRM and the final rule contemplate in
§
344.3(f) (3) that Treasury will permit SLGS program users to
submit fax and mail transactions if you establish that good
cause exists for not using SLGSafe.
However, given the
ease of becoming a SLGSafe user, we do not anticipate
granting waivers based on a user's status as a small firm
or infrequent subscriber.
One comment stated that SLGSafe should not become
mandatory for at least 180 days so that users can learn how
the SLGSafe service operates.
Because the SLGSafe service
was introduced in 2000, we do not believe that a delayed
implementation date of 180 days is necessary (65 FR 55399,
September 13, 2000).
Moreover, in the NPRM, we encouraged
subscribers to seek SLGSafe access as soon as possible (69
FR 58756, September 30, 2004).
Treasury therefore adopts
the provision of the proposed rule that makes SLGSafe
mandatory. However, in order to mitigate any access
concerns, SLGSafe will not become mandatory until [INSERT
DATE 45 DAYS AFTER DATE OF PUBLICATION IN THE FEDERAL
35
REGISTER].
We encourage potential users to contact BPD
about any access or training difficulties as soon as
possible so that they can be addressed before the effective
date.
4.
Miscellaneous Changes.
Eligible source of funds for purchasing SLGS
securities.
Under the current rule, SLGS securities are
offered for sale to provide issuers of tax-exempt
securities with investments from any amounts that
(1)
constitute gross proceeds of an issue (within the meaning
of 26 CFR 1.148-1) or (2) assist in complying with
applicable provisions of the Internal Revenue Code relating
to the tax exemption.
In the NPRM, Treasury proposed
deleting the language relating to amounts that assist in
complying with applicable provisions of the Internal
Revenue Code relating to the tax exemption because this
language proved to be difficult to administer.
Treasury
received 13 comments stating that the permissible sources
of funds allowable to purchase SLGS securities should not
be altered or should be amended to accommodate certain
transactions.
The comments noted, for example, that
36
certain amounts that are not "gross proceeds u at the time
of subscription may be characterized as gross proceeds at a
later time, and that certain funds may not be gross
proceeds at all times as a result of the "universal capu on
the maximum amount treated as gross proceeds under 26 CFR
1.148-6 (b) (2) .
In response to these comments, the final
regulations provide that issuers may purchase SLGS
securities using any of the following "eligible sources of
funds U
:
(1) any amounts that constitute gross proceeds of
a tax-exempt bond issue or are reasonably expected to
become gross proceeds of a tax-exempt bond issue;
(2) any
amounts that formerly were gross proceeds of a tax-exempt
bond issue, but no longer are treated as gross proceeds of
such issue as a result of the operation of the universal
cap on the maximum amount treated as gross proceeds under
26 CFR 1.148-6(b) (2);
(3) amounts held or to be held
together with gross proceeds of one or more tax-exempt bond
issues in a refunding escrow, defeasance escrow, parity
debt service reserve fund, or commingled fund (as defined
in 26 CFR 1.148-1 (b));
(4) proceeds of a taxable bond issue
that refunds a tax-exempt bond issue or is refunded by a
tax-exempt bond issue; or (5) any other amounts that are
subject to yield limitations under the rules applicable to
tax-exempt bonds under the Internal Revenue Code.
37
Definition of Issuer.
Only issuers of tax-exempt
securities are eligible to purchase SLGS securities.
Under
the current rule, an issuer is defined as the Governmental
body that issues state or local government bonds described
in section 103 of the Internal Revenue Code.
not propose any alteration to this definition.
The NPRM did
However,
one commenter raised a concern that a nonprofit entity that
issues bonds on behalf of a state or local government in
compliance with Revenue Ruling 63-20, 1963-1 C.B. 24, and
Revenue Procedure 82-26, 1982-1 C.B. 476, might not qualify
as an "issuer."
In response to this comment, Treasury is
amending the definition of "issuer" in the final rule to
mean the Government body or other entity that issues state
or local government bonds described in section 103 of the
Internal Revenue Code.
Thus, under the final rule, an
"issuer" includes not only a state or local government that
issues tax-exempt bonds, but also an entity that issues
tax-exempt bonds on behalf of a state or local government.
Debt Limit.
Although the NPRM did not address debt
limit issues, several commenters suggested that Treasury
should provide advance notice before suspending the
issuance of SLGS securities during a period when Treasury
determines that the issuance of obligations sufficient to
conduct the orderly financing operations of the United
38
States cannot be made without exceeding the statutory debt
limit.
While Treasury notes these concerns, and
appreciates the difficulties issuers may face in these
circumstances, Treasury must retain the flexibility that
the current rules provide to deal with the various issues
that arise during periods when sales are suspended because
of debt limit constraints.
Accordingly, we have made no
change to the final rule in this regard.
If feasible under
the circumstances, however, we will attempt to provide SLGS
purchasers with advance notice of a suspension in sales.
Subscriptions for Zero-Interest SLGS Securities.
The
current regulations provide that an issue date cannot be
more than 60 days after the date that the subscription is
received.
Two commenters suggested that subscribers be
permitted to submit subscriptions for zero-interest SLGS
securities more than 60 days before the issue date.
These
commenters indicated that such a change would assist in tax
compliance because issuers' agents would be able to avoid
an inadvertent failure to invest, at some future date, the
proceeds of maturing securities in an escrow in zerointerest SLGS securities.
This suggestion is beyond the
scope of this rulemaking, but Treasury is studying this
matter.
39
Sanctions for Erroneous Certifications.
The existing
rule requires an agent of the issuer to certify that it is
acting under the issuer's specific authorization when
subscribing for SLGS securities.
The proposed rule made no
change to this provision, but required other certifications
discussed above.
One commenter raised a concern that the proposed rule
was not clear on whether an agent would be subject to
sanctions for improper certifications.
The concern is that
subscribers for SLGS securities, who frequently are escrow
agents operating under the authority of issuers, may be
required to make the certifications.
The final rule clarifies that under § 344.2(m) (4),
Treasury reserves the right to declare either a subscriber
or issuer ineligible to subscribe for securities under the
offering if deemed to be in the public interest and a
security is issued on the basis of an improper
certification or other misrepresentation (other than as the
result of an inadvertent error).
The final rule also clarifies the language of the
certification in § 344.2(e) (1) to cover an agent's
performance related to other transactions in addition to
the submission of subscriptions on the issuer's behalf.
40
Significance of Rule.
In the preamble to the proposed
rule, Treasury stated that the rulemaking is not a
significant regulatory action under Executive Order 12866,
dated September 30, 1993, and is not a major rule under 5
U.S.C. 804.
Treasury received several comments disagreeing
with these conclusions.
The rulemaking is not a
significant regulatory action or major rule because the
SLGS program is a voluntary program to assist state and
local government issuers in complying with yield
restriction and rebate requirements applicable to taxexempt securities under the Internal Revenue Code.
The
SLGS rule sets the terms and conditions for the SLGS
program.
Treasury received no comments on the other proposed
changes affecting
§§
344.0(b), 344.2(d), 344.2(h) (2),
344.2(i), 344.2(m), 344.3(d), 344.3(f), 344.3(g), 344.4(a),
344.5, 344.6(a), 344.6(c), 344.6(£), 344.7(a), 344.9(a),
344.9(c), and 344.11.
Treasury is implementing all of
these administrative revisions as they appeared in the
NPRM.
IV.
Procedural Requirements.
41
A.
Executive Order 12866.
This final rule is not a significant regulatory action
for purposes of Executive Order 12866, dated September 30,
1993.
B.
Regulatory Flexibility Act.
This final rule relates to matters of public contract
and procedures for United States securities.
Therefore,
under 5 U.S.C. 553(a) (2), the notice and public procedure
requirements of the Administrative Procedure Act are
inapplicable.
Because a notice of proposed rulemaking is
not required, the provisions of the Regulatory Flexibility
Act, 5 U.S.C. 601 et seq., do not apply.
C.
Paperwork Reduction Act.
Collections of Information on SLGSafe and
Cancellations.
The collections of information in the
proposed regulation were submitted to the Office of
Management and Budget for review in accordance with the
42
Paperwork Reduction Act (44 U.S.C. 3501 et seq.).
In the
preamble to the proposed regulation, we explained that the
collections of information, which are in §§ 344.3(f) (3),
355.5(c), and 344.8, are required (1) to determine whether
there is good cause for an investor to submit subscriptions
by fax or mail rather than electronically in SLGSafe and
(2)
to establish that a cancellation of a subscription
lS
required for reasons unrelated to the use of the SLGS
program to create a cost-free option.
The estimated annual
burden per respondent/recordkeeper is .25 hours, depending
on individual circumstances, with an estimated total annual
burden of 250 hours.
No comments were received concerning
the collections of information.
The final rule contains the same information collection
requirements that Treasury proposed in the NPRM.
They have
been approved by OMB under OMB control numbers 1535-0091
(the collection of information to establish a valid reason
for a waiver of the requirements of the SLGS regulations)
and 1535-0092 (the collection of information taken from
subscribers on the forms associated with the SLGS program)
Comments on the accuracy of our burden estimate, and
suggestions on how this burden may be reduced, may be sent
to BPD, attention Keith Rake, Deputy Assistant
Commissioner, Office of the Assistant Commissioner, Bureau
43
of the Public Debt, 200 3rd St., P.O. Box 396, Parkersburg,
WV 26106-0396.
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.
Collection of Information on a Change of Issue Date.
The final rule also contains a new collection of
information that was not in the proposed rule.
This new
collection has been reviewed and, pending the receipt of
public comments, approved by OMB under control number 15350091.
The current rule permits issuers to select the issue
date of SLGS securities.
The issuer may change the issue
date up to seven days after the original issue date
initially requested, provided that BPD is notified one
business day before the original issue date.
The proposed
rule stated that issue dates could not be changed.
The
final rule retains some flexibility for an issuer to change
the issue date up to seven days after the original issue
date if it is established to the satisfaction of Treasury
that the change is required as a result of circumstances
that were unforeseen at the time of the subscription and
44
which are beyond the issuer's control (for example, a
natural disaster) .
The new collections of information in the final rule
are in
§§
344.5(d) and 344.8(a).
By collecting information
about these circumstances, BPD will be able to evaluate if
the regulatory standard of unforeseen circumstances has
been met.
The likely respondents are state or local
governments.
Because of the limited number of instances when a
change in issue date may be sought, Treasury estimates that
500 investors will each make one request annually for a
total of 500 requests.
The information required by Treasury in connection with
a change in issue date is similar to the type of
information contemplated in the proposed rule in
344.3(f) (3), 344.5(c), and 344.8(c).
§§
Because of the
familiarity of SLGS investors with the current procedures
and the infrequency of the instances in which a change in
issue date will be sought, the burden associated with
compiling and submitting such information to Treasury is
relatively modest.
Estimated
total
burden: 125 hours.
annual
reporting
and/or
recordkeeping
45
Estimated
average
and/or recordkeeper:
Estimated
annual
burden
hours
per
respondent
.250 hours.
number
of
respondents
and/or
recordkeepers:
500.
Organizations and individuals desiring to submit
comments concerning the collection of information in the
final rule should direct them to the Desk Officer for the
Department of the Treasury, Office of Information and
Regulatory Affairs, Office of Management and Budget,
Washington, DC 20503 (preferably by FAX to 202-395-6974, or
by email to <Alexander_T. Hunt@omb.eop.gov».
A copy of
the comments should also be sent to the Bureau of the
Public Debt at the addresses previously specified.
Comments on the collection of information should be
received by [INSERT 30 DAYS AFTER DATE OF PUBLICATION IN
THE FEDERAL REGISTER] .
Treasury specifically invites comments on:
(a) whether
the new collection of information is necessary for the
proper performance of the mission of Treasury, and whether
the information will have practical utility;
(b) the
accuracy of the estimate of the burden of the collections
of information;
(c) ways to enhance the quality, utility,
and clarity of the information collection;
(d) ways to
46
minimize the burden of the information collection,
including through the use of automated collection
techniques or other forms of information technology; and
(e) estimates of capital or start-up costs and costs of
operation, maintenance, and purchase of services to
maintain the information.
List of Subjects in 31 CFR Part 344.
Bonds, Government Securities, Securities.
For the reasons set forth in the preamble,
part
344
follows
by
revising
subparts
A
through
we amend 31 CFR
D
to
read
(Appendixes A and B to part 344 remain unchanged)
PART 344--U.S. TREASURY SECURITIES--STATE AND LOCAL
GOVERNMENT SERIES.
Subpart A--General Information
Sec.
344.0
What does this part cover?
344.1 What special terms do I need to know to understand
this part?
344.2
What general provisions apply to SLGS securities?
SLGSafe® Service
344.3
What provisions apply to the SLGSafe Service?
Subpart B--Time Deposit Securities
Sec.
as
47
344.4
What are Time Deposit securities?
344.5 What other provisions apply to subscriptions for
Time Deposit securities?
344.6 How do I redeem a Time Deposit security before
maturity?
Subpart C--Demand Deposit Securities
Sec.
344.7
What are Demand Deposit securities?
344.8 What other provisions apply to subscriptions for
Demand Deposit securities?
344.9
How do I redeem a Demand Deposit security?
Subpart D--Special Zero Interest Securities
Sec.
344.10
What are Special Zero Interest securities?
344.11 How do I redeem a Special Zero Interest security
before maturity?
Appendix A to Part 344--Early Redemption Market Charge
Formulas and Examples for Subscriptions from December 28,
1976, through October 27, 1996.
Appendix B to Part 344--Formula for Determining Redemption
Value for Securities Subscribed for and Early-Redeemed on
or after October 28, 1996.
Authority:
and 3121.
26 U.S.C. 141 note; 31 U.S.C. 3102, 3103, 3104,
Subpart A--General Information
§
344.0
(a)
offering?
What does this part cover?
What is the purpose of the SLGS securities
The Secretary of the Treasury (the Secretary)
48
offers for sale non-marketable State and Local Government
Series
(SLGS) securities to provide issuers of tax-exempt
securities with investments from any eligible source of
funds
(as defined in § 344.1).
(b)
part?
What types of SLGS securities are governed by this
This part governs the following SLGS securities:
(1)
Time Deposit securities--may be issued as:
(i)
Certificates of indebtedness;
(ii)
(iii)
(2)
Notes; or
Bonds.
Demand Deposit securities--may be issued as
certificates of indebtedness.
(3)
Special Zero Interest securities.
Special Zero
Interest securities, which were discontinued on October 28,
1996, were issued as:
(i)
(ii)
(c)
Certificates of indebtedness; or
Notes.
In what denominations are SLGS securities issued?
SLGS securities are issued in the following denominations:
(1)
Time Deposit securities--a minimum amount of
$1,000, or in any larger whole dollar amount; and
49
(2)
Demand Deposit securities--a minimum amount of
$1,000, or in any larger amount, in any increment.
(d)
How long is the offering in effect?
The offering
continues until terminated by the Secretary.
§
344.1
What special terms do I need to know to understand
this part?
As appropriate, the definitions of terms used in this
part are those found in the relevant portions of the
Internal Revenue Code and the Income Tax Regulations.
BPD's website refers to <http://www.slgs.gov>.
Business day(s) means Federal business day(s).
Current Treasury borrowing rate means the prevailing
market rate, as determined by Treasury, for a Treasury
security with the specified period to maturity.
In the
case where SLGS rates are needed for maturities currently
not issued by Treasury, at our discretion, suitable proxies
for Treasury securities and/or a rate setting methodology,
as determined by the Secretary, may be used to derive a
current Treasury borrowing rate.
At any time that the
Secretary establishes such proxies or a rate-setting method
or determines that the methodology should be revised, we
will make an announcement.
Day(s) means calendar day(s)
50
Eligible source of funds means:
(1) Any amounts that constitute gross proceeds of a taxexempt bond issue or are reasonably expected to become gross
proceeds of a tax-exempt bond issue;
(2) Any amounts that formerly were gross proceeds of a
tax-exempt bond issue, but no longer are treated as gross
proceeds of such issue as a result of the operation of the
universal cap on the maximum amount treated as gross
proceeds under 26 CFR 1.148-6(b) (2);
(3) Amounts held or to be held together with gross
proceeds of one or more tax-exempt bond issues in a
refunding escrow, defeasance escrow, parity debt service
reserve fund,
or commingled fund (as defined in 26 CFR
1.148-1(b)) ;
(4)
Proceeds of a taxable bond issue that refunds a tax-
exempt bond issue or is refunded by a tax-exempt bond issue;
or
(5) Any other amounts that are subject to yield
limitations under the rules applicable to tax-exempt bonds
under the Internal Revenue Code.
Issuer refers to the Government body or other entity
that issues state or local government bonds described in
section 103 of the Internal Revenue Code.
51
SLGS rate means the current Treasury borrowing rate,
less one basis point, as released daily by Treasury in a
SLGS rate table.
SLGS rate table means a compilation of SLGS rates
available for a given day.
"We," "us," or "the Secretary" refers to the Secretary
and the Secretary's delegates at the Department of the
Treasury (Treasury), Bureau of the Public Debt
(BPD).
The
term also extends to any fiscal or financial agent acting on
behalf of the United States when designated to act by the
Secretary or the Secretary's delegates.
Yield on an investment means "yield" as computed under
26 CFR 1.148-5.
You or your refers to a SLGS program user or a potential
SLGS program user.
§
344.2
(a)
What general provisions apply to SLGS securities?
What other regulations apply to SLGS securities?
SLGS securities are subject to:
(1) The electronic transactions and funds transfers
provisions for United States securities, part 370 of this
52
subchapter, "Electronic Transactions and Funds Transfers
Related to U.S. Securities"; and
(2) The Appendix to subpart E to part 306 of this
subchapter, for rules regarding computation of interest.
(b)
Where are SLGS securities held?
SLGS securities
are issued in book-entry form on the books of BPD.
(c)
Besides BPD, do any other entities administer SLGS
securities?
The Secretary may designate selected Federal
Reserve Banks and Branches, as fiscal agents of the United
States, to perform services relating to SLGS securities.
(d)
Can SLGS securities be transferred?
No.
SLGS
securities issued as anyone type, i.e., Time Deposit,
Demand Deposit, or Special Zero Interest, cannot be
transferred for other securities of that type or any other
type.
Transfer of securities by sale, exchange, assignment,
pledge, or otherwise is not permitted.
(e) What certifications must the issuer or its agent
provide?
(1) Agent Certification.
When a commercial bank or
other agent submits a subscription, or performs any other
transaction, on behalf of the issuer, it must certify that
it is acting under the issuer's specific authorization.
Ordinarily, evidence of such authority is not required.
53
(2) Yield Certifications.
(i)
Purchase of SLGS Securities.
Upon submitting a
subscription for a SLGS security, a subscriber must certify
that:
(A) Marketable Securities to SLGS Securities.
If the
issuer is purchasing a SLGS security with any amount
received from the sale or redemption (at the option of the
holder) before maturity of any marketable security, the
yield on such SLGS security does not exceed the yield at
which such marketable security was sold or redeemed; and
(B) Time Deposit Securities to SLGS Securities.
If the
issuer is purchasing a SLGS security with any amount
received from the redemption before maturity of a Time
Deposit security (other than a zero interest Time Deposit
security), the yield on the SLGS security being purchased
does not exceed the yield that was used to determine the
amount of redemption proceeds for such redeemed Time Deposit
security.
(ii) Early Redemption of SLGS Securities.
Upon
submission of a request for redemption before maturity of a
Time Deposit security (other than a zero interest Time
Deposit security)
subscribed for on or after [INSERT DATE 45
DAYS AFTER DATE OF PUBLICATION IN THE FEDERAL REGISTER], the
54
subscriber must certify that no amount received from the
redemption will be invested at a yield that exceeds the
yield that is used to determine the amount of redemption
proceeds for
(f)
SUCh
redeemed Time Deposit security.
What are some practices involving SLGS securities that
are not permitted?
(1)
In General.
For SLGS securities subscribed for on
or after [INSERT DATE 45 DAYS AFTER DATE OF PUBLICATION IN
THE FEDERAL REGISTER], it is impermissible:
(i) To use the SLGS program to create a cost-free
option;
(ii) To purchase a SLGS security with any amount
received from the sale or redemption (at the option of the
holder) before maturity of any marketable security, if the
yield on such SLGS security exceeds the yield at which such
marketable security is sold or redeemed; or
(iii) To invest any amount received from the redemption
before maturity of a Time Deposit security (other than a
Zero Percent Time Deposit security) at a yield that exceeds
the yield that is used to determine the amount of redemption
proceeds for such Time Deposit security.
(2) Examples.
55
(i) Simultaneous Purchase of Marketable and SLGS
Securities.
In order to fund an escrow for an advance
refunding, the issuer simultaneously enters into a purchase
contract for marketable securities and subscribes for SLGS
securities, such that either purchase is sufficient to pay
the cash flows on the outstanding bonds to be refunded, but
together, the purchases are greatly in excess of the amount
necessary to pay the cash flows.
The issuer plans that, if
interest rates decline during the period between the date of
starting a SLGS subscription and the requested date of
issuance of SLGS securities, the issuer will enter into an
offsetting agreement to sell the marketable securities and
use the bond proceeds to purchase SLGS securities to fund
the escrow.
If, however, interest rates do not decline in
that period, the issuer plans to use the bond proceeds to
purchase the marketable securities to fund the escrow and
cancel the SLGS securities subscription.
This practice
violates the prohibition on cancellation under § 344.S(c) or
§
344.8(c), and no exception or waiver would be granted
under this part because the ability to cancel in these
circumstances would result in the SLGS program being used to
create a cost-free option.
In addition, this practice is
prohibi ted under paragraph (f) (1) (i) of this section.
56
(ii) Sale of Marketable Securities Conditioned on
Interest Rates.
The existing escrow for an advance
refunding contains marketable securities which produce a
negative arbitrage.
In order to reduce or eliminate this
negative arbitrage, the issuer subscribes for SLGS
securities at a yield higher than the yield on the existing
escrow, but less than the permitted yield.
At the same
time, the issuer agrees to sell the marketable securities in
the existing escrow to a third party and use the proceeds to
purchase SLGS securities if interest rates decline between
the date of subscribing for SLGS securities and the
requested date of issuance of SLGS securities.
The
marketable securities would be sold at a yield which is less
than the yield on the SLGS securities purchased.
The issuer
and the third party further agree that if interest rates
increase during this period, the issuer will cancel the SLGS
securities subscription.
This practice violates the
prohibition on cancellation under § 344.S(c) or § 344.8(c),
and no exception or waiver would be granted under this part
because the ability to cancel in these circumstances would
result in the SLGS program being used to create a cost-free
option.
In addition, this practice is prohibited under
paragraphs
(f) (1) (i) and (ii) of this section.
57
(iii)
Sale of Marketable Securities Not Conditioned on
Interest Rates.
The facts are the same as in paragraph
(f) (2) (ii) of this section, except that in this case, the
agreement entered into by the issuer with a third party to
sell the marketable securities in order to obtain funds to
purchase SLGS securities is not conditioned upon changes ln
interest rates on Treasury securities.
This practice
violates the yield gain prohibition in paragraph (f) (1) (ii)
of this section and is prohibited.
(iv) Simultaneous Subscription for SLGS Securities and
Sale of Option to Purchase Marketable Securities.
The
issuer holds a portfolio of marketable securities in an
account that produces negative arbitrage.
In order to
reduce or eliminate this negative arbitrage, the issuer
subscribes for SLGS securities for purchase in sixty days.
At the same time, the issuer sells an option to purchase the
portfolio of marketable securities.
If interest rates
increase, the holder of the option will not exercise its
option and the issuer will cancel the SLGS securities
subscription.
On the other hand, if interest rates decline,
the option holder will exercise the option and the issuer
will use the proceeds to purchase SLGS securities.
This
practice violates the prohibition on cancellation under §
344.5(c) or § 344.8(c), and no exception or waiver would be
58
granted under this part because the ability to cancel in
these circumstances would result in the SLGS program being
used to create a cost-free option.
In addition, this
practice is prohibited under paragraph (f) (1) (i) of this
section.
(v) Early Redemption of Time Deposit Security and
Subsequent Purchase of Marketable Security.
On February 6,
2006, an issuer purchases a Time Deposit security using taxexempt bond proceeds in a debt service reserve fund.
The
Time Deposit security has a principal amount of $7 million,
an interest rate of 3.63 percent, and a maturity date of
February 6, 2009.
On March 1, 2007, the issuer submits a
request to redeem the Time Deposit security on March 15,
2007.
The yield used to determine the amount of redemption
proceeds is 3.21 percent.
On March 5, 2007, the issuer
subscribes for the purchase, on March 15, 2007, of a second
Time Deposit security.
The issuer pays for the second Time
Deposit security on March 15, 2007, with the redemption
proceeds of the first Time Deposit security.
The second
Time Deposit security has an interest rate of 2.77 percent
and a maturity date of April 16, 2007.
On April 9, 2007,
the issuer enters into a contract to purchase, on April 16,
2007, a ten-year, marketable Treasury security using the
principal and interest to be received at the maturity of the
59
second Time Deposit security.
The marketable Treasury
security has a yield of 4.02 percent.
This transaction
satisfies the yield limitation in paragraph (f) (1) (iii) of
this section because:
(A) The yield on the second Time Deposit security does
not exceed the yield that is used to determine the amount of
redemption proceeds for the first Time Deposit security; and
(B) The second Time Deposit security is not redeemed
before maturity and therefore the re-investment of the
principal and interest received on the second Time Deposit
security is not subject to the yield limitation in paragraph
(f) (1) (iii) of this section.
This transaction constitutes a
permissible use of the SLGS program.
(vi) Early Redemption of Time Deposit Security and
Simultaneous Purchase of Marketable Security.
The facts are
the same as in paragraph (f) (2) (v) of this section, except
that the issuer subscribes for the second Time Deposit
security on March I, 2007, and enters into the contract to
purchase the marketable Treasury security on March 1, 2007.
This transaction, if permitted, would enable the issuer to
redeem the first Time Deposit security at a yield that is
held constant for 12 hours based on the "current Treasury
borrowing rate" for March 1, 2007, and to re-invest the
60
redemption proceeds based on a market yield that may
fluctuate during that 12-hour period.
The use of the SLGS
program in this manner would create a cost-free option.
Accordingly, this transaction is impermissible under
paragraph (f) (1) (i) of this section.
(g)
When and how do I pay for SLGS securities?
You
must submit full payment for each subscription to BPD no
later than 4:00 p.m., Eastern time, on the issue date.
Submit payments by the Fedwire funds transfer system with
credit directed to the Treasury's General Account.
For
these transactions, BPD's ABA Routing Number is 051036476.
(h)
What happens if I need to make an untimely change
or do not settle on a subscription?
An untimely change to a
subscription can only be made in accordance with
of this part.
§
344.2(n)
The penalty imposed for failure to make
settlement on a subscription that you submit will be to
render you ineligible to subscribe for SLGS securities for
six months beginning on the date the subscription is
withdrawn, or the proposed issue date, whichever occurs
first.
(1)
Upon whom is the penalty imposed?
If you are the
issuer, the penalty is imposed on you unless you provide the
Taxpayer Identification Number of the conduit borrower that
is the actual party failing to make settlement of a
61
subscription.
If you provide the Taxpayer Identification
Number for the conduit borrower, the six-month penalty will
be imposed on the conduit borrower.
(2)
What occurs if Treasury exercises the option to
waive the penalty?
If you settle after the proposed issue
date and we determine that settlement is acceptable on an
exception basis, we will waive, under § 344.2(n), the sixmonth penalty under paragraph (h) of this section.
shall be charged a late payment assessment.
You
The late
payment assessment equals the amount of interest that would
have accrued on the SLGS securities from the proposed issue
date to the date of settlement plus an administrative fee of
$100 per subscription, or such other amount as we may
publish in the Federal Register.
We will not issue SLGS
securities until we receive the late payment assessment,
which is due on demand.
(i)
What happens at maturity?
Upon the maturity of a
security, we will pay the owner the principal amount and
interest due.
A security scheduled for maturity on a non-
business day will be redeemed on the next business day.
(j)
How will I receive payment?
We will make payment
by the Automated Clearing House (ACH) method for the owner's
account at a financial institution as designated by the
62
owner.
We may use substitute payment procedures, instead of
ACH, if we consider it to be necessary.
Any such action is
final.
(k) How do I contact BPD?
BPD's contact information is
posted on BPD's website.
(1)
Will the offering be changed during a debt limit or
disaster contingency?
We reserve the right to change or
suspend the terms and conditions of the offering (including
provisions relating to subscriptions for, and issuance of,
SLGS securities; interest payments; early redemptions; and
rollovers) at any time the Secretary determines that the
issuance of obligations sufficient to conduct the orderly
financing operations of the United States cannot be made
without exceeding the statutory debt limit, or that a
disaster situation exists.
We will announce such changes by
any means that the Secretary deems appropriate.
(m)
What are some of the rights that Treasury reserves
in administering the SLGS program?
We may decide, in our
sole discretion, to take any of the following actions.
actions are final.
Specifically, Treasury reserves the
right:
(1)
Access;
To reject any SLGSafe Application for Internet
Such
63
(2)
To reject any electronic message or other message
or request, including requests for subscription and
redemption, that is inappropriately completed or untimely
submitted;
(3)
To refuse to issue any SLGS securities In any case
or class of cases;
(4)
To revoke the issuance of any SLGS securities and
to declare the subscriber or the issuer ineligible
thereafter to subscribe for securities under the offering if
the Secretary deems that such action is in the public
interest and any security is issued on the basis of an
improper certification or other misrepresentation (other
than as the result of an inadvertent error) or there is an
impermissible transaction under § 344.2(f); or
(5)
To review any transaction for compliance with this
part, including requiring a subscriber or the issuer to
provide additional information, and to determine an
appropriate remedy under the circumstances.
(n)
Are there any situations in which Treasury may
waive these regulations?
We reserve the right, at our
discretion, to waive or modify any provision of these
regulations in any case or class of cases.
We may do so if
such action is not inconsistent with law and will not
64
subject the United States to substantial expense or
liability.
Are SLGS securities callable by Treasury?
(0)
No.
Treasury cannot call a SLGS security for redemption before
maturity.
SLGSafe® Service
§
344.3
(a)
What provisions apply to the SLGSafe Service?
What is the SLGSafe Service?
SLGSafe is a secure
Internet site on the World Wide Web through which
subscribers submit SLGS securities transactions.
SLGSafe
Internet transactions constitute electronic messages under
31 CFR part 370.
(b)
Is SLGSafe use mandatory?
Yes.
Except as provided
in paragraph (f) (3) or (f) (4) of this section, you must
submit all transactions through SLGSafe.
(c)
What terms and conditions apply to SLGSafe?
The
terms and conditions contained in the following documents,
which may be downloaded from BPD's website and which may
change from time to time, apply to SLGSafe transactions:
(1) SLGSafe Application for Internet Access and SLGSafe
User Acknowledgment; and
65
(2) SLGSafe User's Manual.
(d)
Who can apply for SLGSafe access?
If you are an
owner or a potential owner of SLGS securities, or act as a
trustee or other agent of the owner, you can apply to BPO
for SLGSafe access.
Other potential users of SLGSafe
include, but are not limited to, underwriters, financial
advisors, and bond counsel.
(e)
How do I apply for SLGSafe access?
Submit to BPO a
completed SLGSafe Application for Internet Access.
The form
is found on BPO's website.
(f)
What are the conditions of SLGSafe use?
If you are
designated as an authorized user, on a SLGSafe application
that we've approved, you must:
(1) Assume the sole responsibility and the entire risk
of use and operation of your electronic connection;
(2) Agree that we may act on any electronic message to
the same extent as if we had received a written instruction
bearing the signature of your duly authorized officer;
(3) Submit electronic messages and other transaction
requests exclusively through SLGSafe, except to the extent
you establish to the satisfaction of BPO that good cause
exists for you to submit such subscriptions and requests by
other means; and
66
(4) Agree to submit transactions manually if we notify
you that due to problems with hardware, software, data
transmission, or any other reason, we are unable to send or
receive electronic messages through SLGSafe.
(g) When is the SLGSafe window open?
All SLGSafe
subscriptions, requests for early redemption of Time Deposit
securities, and requests for redemption of Demand Deposit
securities must be received by BPD on business days no
earlier than 10:00 a.m. and no later than 10:00 p.m.,
Eastern time.
The official time is the date and time as
shown on BPD's application server.
provided in
§
344.5(d) and
§
Except as otherwise
344.8(d), all other functions
may be performed during the extended SLGSafe hours, from
8:00 a.m. until 10:00 p.m., Eastern time.
Subpart B--Time Deposit Securities
§
344.4
What are Time Deposit securities?
Time Deposit securities are issued as certificates of
indebtedness, notes, or bonds.
(a) What are the maturity periods?
The issuer must fix
the maturity periods for Time Deposit securities, which are
issued as follows:
67
(1) Certificates of indebtedness that do not bear
interest.
For certificates of indebtedness that do not bear
interest, the issuer can fix a maturity period of not less
than fifteen days and not more than one year.
(2) Certificates of indebtedness that bear interest.
For certificates of indebtedness that bear interest, the
issuer can fix a maturity period of not less than thirty
days and not more than one year.
(3) Notes.
For notes, the issuer can fix a maturity
period of not less than one year and one day, and not more
than ten years.
(4) Bonds. For bonds, the issuer can fix a maturity
period of not less than ten years and one day, and not more
than forty years.
(b)
How do I select the SLGS rate?
For each security,
the issuer shall designate an interest rate that does not
exceed the maximum interest rate shown in the daily SLGS
rate table as defined in
(1)
§
344.1.
When is the SLGS rate table released?
We release
the SLGS rate table to the public by 10:00 a.m., Eastern
time, each business day.
If the SLGS rate table is not
available at that time on any given business day, the SLGS
rate table for the preceding business day applies.
68
(2)
How do I lock-in a SLGS rate?
The applicable daily
SLGS rate table for a SLGSafe subscription is the one in
effect on the business day that you start the subscription
process.
(3)
This table is shown on BPO's Application server.
Where can I find the SLGS rate table?
The SLGS
rate table can be obtained at BPO's website.
(c)
How are interest computation and payment dates
determined?
Interest on a certificate of indebtedness is
computed on an annual basis and is paid at maturity with the
principal.
annually.
Interest on a note or bond is paid semiThe issuer specifies the first interest payment
date, which must be at least thirty days and less than or
equal to one year from the date of issue.
The final
interest payment date must coincide with the maturity date
of the security.
Interest for other than a full interest
period is computed on the basis of a 365-day or 366-day year
(for certificates of indebtedness) and on the basis of the
exact number of days in the half-year (for notes and bonds)
See the appendix to subpart E to part 306 of this subchapter
for rules regarding computation of interest.
§
344.5 What other provisions apply to subscriptions for
Time Deposit securities?
69
(a)
When is my subscription due?
The subscriber must
fix the issue date of each security in the subscription.
The issue date must be a business day.
The issue date
cannot be more than sixty days after the date BPD receives
the subscription.
If the subscription is for $10 million or
less, BPD must receive a subscription at least five days
before the issue date.
If the subscription is for over $10
million, BPD must receive the subscription at least seven
days before the issue date.
EXAMPLE to paragraph (a):
If SLGS securities totaling $10
million or less will be issued on November 16 th , BPD must
receive the subscription no later than November 11th.
If
SLGS securities totaling more than $10 million will be
issued on November 16 th , BPD must receive the subscription no
later than November 9 th .
In all cases, if SLGS securities
will be issued on November 16 th , BPD will not accept the
subscription before September 17th.
(b) How do I start the subscription process?
A
subscriber starts the subscription process by entering into
SLGSafe the following information:
(1) The issue date;
(2) The total principal amount;
70
(3) The issuer's name and Taxpayer Identification
Number;
(4) The title of an official authorized to purchase SLGS
securities;
(5) A description of the tax-exempt bond issue; and
(6) The certification required by
§
344.2(e) (1), if the
subscription is submitted by an agent of the issuer.
(c) Under what circumstances can I cancel a
subscription?
You cannot cancel a subscription unless you
establish, to the satisfaction of Treasury, that the
cancellation is required for reasons unrelated to the use of
the SLGS program to create a cost-free option.
(d) How do I change a subscription?
You can change a
subscription on or before 3:00 p.m., Eastern time, on the
issue date.
Changes to a subscription are acceptable with
the following exceptions:
(1) You cannot change the issue date to require issuance
earlier or later than the issue date originally specified;
provided, however, you may change the issue date up to seven
days after the original issue date if you establish to the
satisfaction of Treasury that such change is required as a
result of circumstances that were unforeseen at the time of
71
the subscription and are beyond the issuer's control (for
example, a natural disaster);
(2) You cannot change the aggregate principal amount
originally specified in the subscription by more than ten
percent; and
(3) You cannot change an interest rate to exceed the
maximum interest rate in the SLGS rate table that was in
effect for a security of comparable maturity on the business
day that you began the subscription process.
(e) How do I complete the subscription process?
The
completed subscription must:
(1) Be dated and submitted electronically by an official
authorized to make the purchase;
(2) Separately itemize securities by the various
maturities, interest rates, and first interest payment dates
(in the case of notes and bonds);
(3)
Not be more than ten percent above or below the
aggregate principal amount originally specified in the
subscription;
(4)
Not be paid with proceeds that are derived,
directly or indirectly, from the redemption before maturity
of SLGS securities subscribed for on or before December 27,
1976;
72
(5)
Include the certifications required by §
344.2(e) (2) (i)
(6)
(relating to yield); and
Include the information required under paragraph
(b), if not already provided.
(f)
When must I complete the subscription?
BPD must
receive a completed subscription on or before 3:00 p.m.,
Eastern time, on the issue date.
§
344.6
How do I redeem a Time Deposit security before
maturity?
(a)
What is the minimum time a security must be held?
(1) Zero percent certificates of indebtedness of 16 to
29 days.
A zero percent certificate of indebtedness of 16
to 29 days can be redeemed, at the owner's option, no
earlier than 15 days after the issue date.
(2) Certificates of indebtedness of 30 days or more.
A
certificate of indebtedness of 30 days or more can be
redeemed, at the owner's option, no earlier than 25 days
after the issue date.
(3) Notes or bonds.
A note or bond can be redeemed, at
the owner's option, no earlier than 30 days after the issue
date.
73
(b)
Can I request partial redemption of a security
balance?
You may request partial redemptions in any whole
dollar amount; however, a security balance of less than
$1,000 must be redeemed in total.
(c)
Yes.
Do I have to submit a request for early redemption?
An official authorized to redeem the securities before
maturity must submit an electronic request in SLGSafe.
The
request must show the Taxpayer Identification Number of the
issuer, the security number, and the dollar amount of the
securities to be redeemed.
Upon submission of a request for
redemption before maturity of a security subscribed for on
or after [INSERT DATE 45 DAYS AFTER DATE OF PUBLICATION IN
THE FEDERAL REGISTER], the request must include a yield
certification under
§
344.2 (e) (2) (ii).
BPD must receive the
request no less than 14 days and no more than 60 days before
the requested redemption date.
You cannot submit a request
for early redemption for a security which has not yet been
issued and you cannot cancel a request once it has been
submitted.
(d)
How do I calculate the amount of redemption
proceeds for subscriptions on or after October 28, 1996?
For securities subscribed for on or after October 28, 1996,
the amount of the redemption proceeds is calculated as
follows:
74
(1 )
Interest.
If a security is redeemed before
maturity on a date other than a scheduled interest payment
date, Treasury pays interest for the fractional interest
period since the last interest payment date.
(2) Redemption value.
The remaining interest and
principal payments are discounted by the current Treasury
borrowing rate for the remaining term to maturity of the
security redeemed.
This may result in a premium or discount
to the issuer depending on whether the current Treasury
borrowing rate is unchanged, lower, or higher than the
stated interest rate of the early-redeemed SLGS securities.
There is no market charge for the redemption of zero
interest Time Deposit securities subscribed for on or after
October 28, 1996.
Redemption proceeds in the case of a
zero-interest security are a return of the principal
invested.
The formulas for calculating the redemption value
under this paragraph, including examples of the
determination of premiums and discounts, are set forth in
appendix B of this part.
(e)
How do I calculate the amount of redemption
proceeds for subscriptions from September 1, 1989, through
October 27, 1996?
For securities subscribed for from
September 1, 1989, through October 27, 1996, the amount of
the redemption proceeds is calculated as follows:
75
(1 )
Interest.
If a security is redeemed before
maturity on a date other than a scheduled interest payment
date, Treasury pays interest for the fractional interest
period since the last interest payment date.
(2)
Market charge.
An amount shall be deducted from
the redemption proceeds if the current Treasury borrowing
rate for the remaining period to original maturity exceeds
the rate of interest originally fixed for such security.
The amount shall be the present value of the future
increased borrowing cost to the Treasury.
The annual
increased borrowing cost for each interest period is
determined by mUltiplying the principal by the difference
between the two rates.
For notes and bonds, the increased
borrowing cost for each remaining interest period to
original maturity is determined by dividing the annual cost
by two.
Present value is determined by using the current
Treasury borrowing rate as the discount factor.
When you
request a redemption date that is less than thirty days
before the original maturity date, we will apply the rate of
a one month security as listed on the SLGS rate table issued
on the day you make a redemption request.
The market charge
under this paragraph can be computed by using the formulas
in appendix A of this part.
76
(f)
How do I calculate the amount of redemption
proceeds for subscriptions from December 28, 1976, through
August 31, 1989?
For securities subscribed for from
December 28, 1976, through August 31, 1989, the amount of
the redemption proceeds is calculated as follows:
(1)
Interest.
Interest for the entire period the
security was outstanding shall be recalculated if the
original interest rate of the security is higher than the
interest rate that would have been set at the time of the
initial subscription had the term of the security been for
the shorter period.
If this results in an overpayment of
interest, we will deduct from the redemption proceeds the
aggregate amount of such overpayments, plus interest,
compounded semi-annually thereon, from the date of each
overpayment to the date of redemption.
The rate used in
calculating the interest on the overpayment will be oneeighth of one percent above the maximum rate that would have
applied to the initial subscription had the term of the
security been for the shorter period.
If a bond
lS
redeemed
before maturity on a date other than a scheduled interest
payment date, no interest is paid for the fractional
interest period since the last interest payment date.
(2)
Market charge.
An amount shall be deducted from
the redemption proceeds in all cases where the current
77
Treasury borrowing rate for the remaining period to original
maturity of the security prematurely redeemed exceeds the
rate of interest originally fixed for such security.
You
can compute the market charge under this paragraph by using
the formulas in appendix A of this part.
(g)
How do I calculate the amount of redemption
proceeds for subscriptions on or before December 27, 1976?
For bonds subscribed for on or before December 27, 1976, the
amount of the redemption proceeds is calculated as follows:
(1)
Interest.
The interest for the entire period the
bond was outstanding shall be recalculated if the original
interest rate at which the bond was issued is higher than an
adjusted interest rate reflecting both the shorter period
during which the bond was actually outstanding and a
penalty.
The adjusted interest rate is the Treasury rate
which would have been in effect on the date of issue for a
marketable Treasury bond maturing on the semi-annual
maturity period before redemption reduced by a penalty which
must be the lesser of:
(i)
One-eighth of one percent times the number of
months from the date of issuance to original maturity,
divided by the number of full months elapsed from the date
of issue to redemption; or
78
(ii)
(2)
One-fourth of one percent.
Deduction.
We will deduct from the redemption
proceeds, if necessary, any overpayment of interest
resulting from previous payments made at a higher rate based
on the original longer period to maturity.
Subpart C--Demand Deposit Securities
§
344.7
What are Demand Deposit securities?
Demand Deposit securities are one-day certificates of
indebtedness that are automatically rolled over each day
until you request redemption.
(a) How are the SLGS rates for Demand Deposit
securities determined?
Each security shall bear a variable
rate of interest based on an adjustment of the average
yield for three-month Treasury bills at the most recent
auction.
A new rate is effective on the first business day
following the regular auction of three-month Treasury bills
and is shown in the SLGS rate table.
and added to the principal daily.
Interest is accrued
Interest is computed on
the balance of the principal, plus interest accrued
through the preceding day.
(1)
How is the interest rate calculated?
79
(i)
First, you calculate the annualized effective
Demand Deposit rate in decimals, designated "I" in Equation
1, as follows:
1 _- [( I OO)Y /U1M
p
-1]
x{I-MTR)-TAC
(Equation 1)
where:
I =Annualized effective Demand Deposit rate in decimals.
P =Average auction price for the most recently auctioned
13-week Treasury bill, per hundred, to six decimals.
Y =365
(if the year following issue date does not contain a
leap year day) or 366 (if the year following issue date
does contain a leap year day) .
DTM =The number of days from date of issue to maturity for
the most recently auctioned 13-week Treasury bill.
MTR =Estimated marginal tax rate, in decimals, of
purchasers of tax-exempt bonds.
TAC =Treasury administrative costs, in decimals.
(ii)
Then, you calculate the daily factor for the
Demand Deposit rate as follows:
80
DDR=(I+!
t
y
-I
(Equation 2)
(2)
Where can I find additional information?
Information on the estimated average marginal tax rate and
Treasury administrative costs for administering Demand
Deposit securities, both to be determined by Treasury from
time to time, will be published in the Federal Register.
(b)
What happens to Demand Deposit securities during a
Debt Limit Contingency?
At any time the Secretary
determines that issuance of obligations sufficient to
conduct the orderly financing operations of the United
States cannot be made without exceeding the statutory debt
limit, we will invest any unredeemed Demand Deposit
securities in special ninety-day certificates of
indebtedness.
Funds invested in the ninety-day
certificates of indebtedness earn simple interest equal to
the daily factor in effect at the time Demand Deposit
security issuance is suspended, multiplied by the number of
days outstanding.
When regular Treasury borrowing
operations resume, the ninety-day certificates of
indebtedness, at the owner's option, are:
(1)
Payable at maturity;
81
(2)
Redeemable before maturity, provided funds are
available for redemption; or
(3)
§
Reinvested in Demand Deposit securities.
344.8 What other provisions apply to subscriptions for
Demand Deposit securities?
(a) When is my subscription due?
The subscriber must
fix the issue date of each security in the subscription.
You cannot change the issue date to require issuance
earlier or later than the issue date originally specified;
provided, however, you may change the issue date up to
seven days after the original issue date if you establish
to the satisfaction of Treasury that such change is
required as a result of circumstances that were unforeseen
at the time of the subscription and are beyond the issuer's
control (for example, a natural disaster) .
must be a business day.
The issue date
The issue date cannot be more than
sixty days after the date BPD receives the subscription.
If the subscription is for $10 million or less, BPD must
receive the subscription at least five days before the
issue date.
If the subscription is for more than $10
million, BPD must receive the subscription at least seven
days before the issue date.
82
(b) How do I start the subscription process?
A
subscriber starts the subscription process by entering into
SLGSafe the following information:
(1) The issue date;
(2) The total principal amount;
(3) The issuer's name and Taxpayer Identification
Number;
(4) The title of an official authorized to purchase
SLGS securities;
(5) A description of the tax-exempt bond issue; and
(6) The certification required by
§
344.2(e) (1), if the
subscription is submitted by an agent of the issuer.
(c) Under what circumstances can I cancel a
subscription?
You cannot cancel a subscription unless you
establish, to the satisfaction of Treasury, that the
cancellation is required for reasons unrelated to the use
of the SLGS program to create a cost-free option.
(d)
How do I change a subscription?
You can change a
subscription on or before 3:00 p.m., Eastern time, on the
issue date.
You may change the aggregate principal amount
specified in the subscription by no more than ten percent,
83
above or below the amount originally specified in the
subscription.
(e) How do I complete the subscription process?
The
subscription must:
(1) Be dated and submitted electronically by an
official authorized to make the purchase;
(2)
Include the certifications required by
344.2 (e) (2) (i)
(3)
§
(relating to yield); and
Include the information required under paragraph
(b) of this section, if not already provided.
§
344.9
(a)
How do I redeem a Demand Deposit security?
When must I notify BPD to redeem a security?
A
Demand Deposit security can be redeemed at the owner's
option, if BPD receives a request for redemption not less
than:
(1) One business day before the requested redemption
date for redemptions of $10 million or less; and
(2) Three business days before the requested redemption
date for redemptions of more than $10 million.
(b)
balance?
Can I request partial redemption of a security
You may request partial redemptions in any
84
amount.
If your account balance is less than $1,000, it
must be redeemed in total.
(c)
Yes.
Do I have to submit a request for redemption?
An official authorized to redeem the securities must
submit an electronic request through SLGSafe.
The request
must show the Taxpayer Identification Number of the issuer,
the security number, and the dollar amount of the
securities to be redeemed.
BPD must receive the request by
3:00 p.m., Eastern time on the required day.
You cannot
cancel the request.
Subpart D--Special Zero Interest Securities
§
344.10
What are Special Zero Interest securities?
Special zero interest securities were issued as
certificates of indebtedness and notes.
The provisions of
subpart B of this part (Time Deposit securities) apply
except as specified in Subpart D of this part.
Special
Zero Interest securities were discontinued on October 28,
1996.
The only zero interest securities available after
October 28, 1996, are zero interest Time Deposit securities
that are subject to subpart B of this part.
85
§
344.11
How do I redeem a Special Zero Interest Security
before maturity?
Follow the provisions of
§
344.6(a) through (g) except
that no market charge or penalty will apply when you redeem
a special zero interest security before maturity.
Donald V. Hammond,
Fiscal Assistant Secretary.
Page 1 of 2
June 29, 2005
JS-2613
Statement of Secretary Snow on WMD Proliferation Financing Executive
Order
U.S. Treasury Secretary John Snow made the following remarks today in response
to President George W. Bush's issuance of the WMD Proliferation Financing
Executive Order:
"I applaud President Bush for today issuing the WMD Proliferation Financing
Executive Order, aimed at freezing the assets of proliferators of weapons of mass
destruction (WMD) and the missiles that carry them.
'This Order sends a clear message: if you deal in weapons of mass destruction,
you're not going to use the U.S. financial system to bankroll or facilitate your
activities.
"The Treasury's unique authorities allow us to target the financial underpinnings of
a range of national security threats, from terrorism to narcotics traffickers to rogue
regimes. By applying these powers against weapons of mass destruction, we deny
proliferators and their supporters access to the U.S. financial system and starve
them of funds needed to build deadly weapons and threaten innocents around the
globe.
"Today's Order carries with it an annex that deSignates eight organizations in North
Korea, Iran and Syria responsible for WMD and missile programs. The designation
freezes any property the organizations may have under U.S. jurisdiction and
prohibits U.S. persons from doing business with them. Today's action is just the first
step in our efforts to dismantle the financial and support networks that facilitate
WMD proliferation, and we will continue to designate individuals and entities under
this Order found to be playing a role in the proliferation of WMD.
"The effectiveness of economic sanctions grows exponentially when they are
applied multilaterally. I urge our partners around the globe to put into place similar
systems that allow for the freezing of proliferators' assets. We must do all we can to
financially isolate those threatening peace and security through the proliferation of
WMD," said Snow.
Note: Click here for a list of the eight organizations named in the annex:
bttpj/~ww,tr.eas,g9-",lgffjce~/enforcementjofac/<3ctio~si20050629.shtrnl.
The WMD Proliferation Financing Executive Order builds on E.O. 12938
(bllQ :flwl/fW. treas~gov/Qffices/eniorcem~Otlofac/legal!eo/12938.QQf)) issued
November 14, 1994, and implements an important recommendation outlined by the
Silberman-Robb WMD Commission.
-30WMD Proliferation FinanCing Executive Order
Today's Presidential Action
President Bush has signed an Executive Order to combat trafficking of weapons of
mass destruction (WMD) and related materials by cutting off financing and other
http://www.treas.gov/press/releases/js2613.htm
7/1/2005
Page 2 0[2
support for proliferation networks.
The Executive Order:
•
Provides a new tool to defeat WMD proliferation by authorizing the freezing
of assets of WMD proliferators and their supporters, thereby prohibiting U.S.
persons from engaging in transactions with them;
• Lays the foundation for expanded international cooperation against WMD
networks, including through the Proliferation Security Initiative; and
• Implements a key recommendation of the Silberman-Robb WMD
Commission.
The EO Disrupts WMD Proliferation Networks by:
•
Blocking WMD proliferators access to U.S. commercial and financial
systems;
• Allowing the Treasury Department to freeze U.S. assets and block U.S.
transactions of proliferators and persons who provide support or services to
such proliferators;
• Establishing the ability to block U.S. assets of, and deny U.S. market access
to, those foreign banks that refuse to freeze assets of designated WMD
proliferators; and
• Complementing existing authorities related to WMD proliferation that
prohibit certain economic transactions and assistance
The EO Advances International Cooperative Efforts to Defeat WMD Trafficking
by:
•
Taking new steps to shut down illicit WMD financial flows, as called for by
G-8 Leaders at Sea Island in 2004;
• Establishing a basis for further efforts in the G-8 and among Proliferation
Security Initiative partners to identify, track, and freeze assets of WMD
proliferators and their supporters; and
• Providing a model for other nations to follow in adopting laws to cut off the
funds and services that enable WMD proliferation, as required by United
Nations Security Council Resolution 1540.
The EO Establishes Targets for U.S. Action by:
•
Designating eight organizations in North Korea, Iran, and Syria responsible
for WMD and missile programs;
• Prohibiting U.S. transactions with designated entities; and
• Authorizing the Secretary of State and the Secretary of the Treasury to
designate additional WMD proliferators and persons that provide support or
services to those entities.
LINKS
http://www.treas.gov/press/releases/js2613.htm
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Executive Order: Blocking Prvpcrty of Weapons of Mass Destruction Proliferators and T...
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this document tJ~
President George W. Bush
For Immediate Release
Office of the Press Secretary
June 29,2005
Executive Order: Blocking Property of Weapons of Mass Destruction Proliferators and
Their Supporters
By the authority vested in me as President by the Constitution and the laws of the United States of America,
including the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.) (IEEPA), the National
Emergencies Act (50 U.S.C. 1601 et seq.), and section 301 of title 3, United States Code,
I, George W. Bush, President of the United States of America, in order to take additional steps with respect to the
national emergency described and declared in Executive Order 12938 of November 14,1994, regarding the
proliferation of weapons of mass destruction and the means of delivering them, and the measures imposed by
that order, as expanded by Executive Order 13094 of July 28, 1998, hereby order:
Section 1. (a) Except to the extent provided in section 203(b)(1), (3), and (4) of IEEPA (50 U.S.C. 1702(b)(1), (3),
and (4», or in regulations, orders, directives, or licenses that may be issued pursuant to this order, and
notwithstanding any contract entered into or any license or permit granted prior to the effective date of this order,
all property and interests in property of the following persons, that are in the United States, that hereafter come
within the United States, or that are or hereafter come within the posseSSion or control of United States persons,
are blocked and may not be transferred, paid, exported, withdrawn, or otherwise dealt in:
(i) the persons listed in the Annex to this order;
(ii) any foreign person determined by the Secretary of State, in consultation with the Secretary of the Treasury,
the Attorney General, and other relevant agencies, to have engaged, or attempted to engage, in activities or
transactions that have materially contributed to, or pose a risk of materially contributing to, the proliferation of
weapons of mass destruction or their means of delivery (including missiles capable of delivering such weapons),
including any efforts to manufacture, acquire, possess, develop, transport, transfer or use such items, by any
person or foreign country of proliferation concern;
(iii) any person determined by the Secretary of the Treasury, in consultation with the Secretary of State, the
Attorney General, and other relevant agencies, to have provided, or attempted to provide, financial, material,
technological or other support for, or goods or services in support of, any activity or transaction described in
paragraph (a)(ii) of this section, or any person whose property and interests in property are blocked pursuant to
this order; and
(iv) any person determined by the Secretary of the Treasury, in consultation with the Secretary of State, the
Attorney General, and other relevant agencies, to be owned or controlled by, or acting or purporting to act for or
on behalf of, directly or indirectly, any person whose property and interests in property are blocked pursuant to
this order.
(b) Any transaction or dealing by a United States person or within the United States in property or interests in
property blocked pursuant to this order is prohibited, including, but not limited to, (i) the making of any contribution
or provision of funds, goods, or services by, to, or for the benefit of, any person whose property and interests in
property are blocked pursuant to this order, and (ii) the receipt of any contribution or provision of funds, goods, or
services from any such person.
(c) Any transaction by a United States person or within the United States that evades or avoids, has the purpose
of evading or avoiding, or attempts to violate any of the prohibitions set forth in this order is prohibited.
(d) Any conspiracy formed to violate the prohibitions set forth in this order is prohibited.
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Sec. 2. For purposes of this order:
(a) the term "person" means an individual or entity;
(b) the term "entity" means a partnership, association, trust, joint venture, corporation, group, subgroup, or other
organization; and
(c) the term "United States person" means any United States citizen, permanent resident alien, entity organized
under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any
person in the United States.
Sec. 3. I hereby determine that the making of donations of the type of articles specified in section 203(b)(2) of
IEEPA (SO U.S.C. 1702(b)(2» by, to, or for the benefit of, any person whose property and interests in property are
blocked pursuant to this order would seriously impair my ability to deal with the national emergency declared in
Executive Order 12938, and I hereby prohibit such donations as provided by section 1 of this order.
Sec. 4. Section 4(a) of Executive Order 12938, as amended, is further amended to read as follows:
"Sec. 4. Measures Against Foreign Persons.
(a) Determination by Secretary of State; Imposition of Measures. Except to the extent provided in section 203(b)
of the International Emergency Economic Powers Act (50 U.S.C. 1702(b», where applicable, if the Secretary of
State, in consultation with the Secretary of the Treasury, determines that a foreign person, on or after November
16,1990, the effective date of Executive Order 12735, the predecessor order to Executive Order 12938, has
engaged, or attempted to engage, in activities or transactions that have materially contributed to, or pose a risk of
materially contributing to, the proliferation of weapons of mass destruction or their means of delivery (including
missiles capable of delivering such weapons), including any efforts to manufacture, acquire, possess, develop,
transport, transfer, or use such items, by any person or foreign country of proliferation concern, the measures set
forth in subsections (b), (c), and (d) of this section shall be imposed on that foreign person to the extent
determined by the Secretary of State, in consultation with the implementing agency and other relevant agencies.
Nothing in this section is intended to preclude the imposition on that foreign person of other measures or
sanctions available under this order or under other authorities."
Sec. S. For those persons whose property and interests in property are blocked pursuant to section 1 of this order
who might have a constitutional presence in the United States, I find that because of the ability to transfer funds or
other assets instantaneously, prior notice to such persons of measures to be taken pursuant to this order would
render these measures ineffectual. I therefore determine that for these measures to be effective in addressing the
national emergency declared in Executive Order 12938, as amended, there need be no prior notice of a listing or
determination made pursuant to section 1 of this order.
Sec. 6. The Secretary of the Treasury, in consultation with the Secretary of State, is hereby authorized to take
such actions, including the promulgation of rules and regulations, and to employ all powers granted to the
President by IEEPA as may be
necessary to carry out the purposes of this order. The Secretary of the Treasury may redelegate any of these
functions to other officers and agencies of the United States Government, consistent with applicable law. All
agencies of the United States Government are hereby directed to take all appropriate measures within their
authority to carry out the provisions of this order and, where appropriate, to advise the Secretary of the Treasury
in a timely manner of the measures taken.
Sec. 7. The Secretary of the Treasury, in consultation with the Secretary of State, is hereby authorized to
determine, subsequent to the issuance of this order, that circumstances no longer warrant the inclusion of a
person in the Annex to this order and that the property and interests in property of that person are therefore no
longer blocked pursuant to section 1 of this order.
Sec. 8. This order is not intended to, and does not, create any right or benefit, substantive or procedural,
enforceable at law or in equity by any party against the United States, its departments, agencies,
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instrumentalities, or entities, its officers or employees, or any other person.
Sec. 9. (a) This order is effective at 12:01 a.m. eastern daylight time on June 29,2005.
(b) This order shall be transmitted to the Congress and published in the Federal Register.
GEORGE W. BUSH
THE WHITE HOUSE,
June 28, 2005.
###
ANNEX
Korea Mining Development Trading Corporation
Tanchon Commercial Bank
Korea Ryonbong General Corporation
Aerospace Industries Organization
Shahid Hemmat Industrial Group
Shahid Bakeri Industrial Group
Atomic Energy Organization of Iran
Scientific Studies and Research Center
Return to this article at:
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June 29, 2005
js-2614
U.S. and Guatemala Launch Summit of the Americas Remittance Partnership
The U.S. Treasury Department and the Guatemalan government today announced
the launch of a remittance partnership to facilitate the reduction of the cost of
sending remittances and create an environment where their potential contribution to
economic and financial-sector development is maximized.
"Our bilateral work will be focused on concrete actions designed to foster the
realization of this commitment and will help create a template for future bilateral
remittance work in the region," said U.S. Treasury Secretary John W. Snow. "This
initiative will focus on fostering competition, efficiency and accessibility in the
remittance market. Financial literacy programs, payment system modernization,
and appropriate modifications to the regulatory environment are expected to be
important elements of the work. We will aim to modernize the Guatemalan payment
system while laying the groundwork for eventual harmonization with the U.S.
system. Our governments will address relevant policy issues and seek to eliminate
unnecessary regulatory obstacles to competition in the remittance market."
Guatemalan Vice-President Eduardo Stein and U.S. Ambassador John R. Hamilton
will hold a press conference in Guatemala today to launch this initiative.
Guatemala has been selected as the first pilot country in this broad regional
initiative. The Administration joined Western Hemisphere counterparts in
committing to this goal at the Special Summit of the Americas in January of 2004 as
an avenue to foster growth throughout the Hemisphere. The specific goal of the
Summit of the Americas is to take concrete actions to create the conditions to bring
down the cost of sending remittances by 50 percent by 2008.
-30-
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May 19, 2005
js-2615
Statement by Bobby Pittman Deputy Assistant Secretary of the U.S. Treasury
At the Annual Meeting of the African Development Bank Group
President Kabbaj, ladies and gentlemen, it is an honor for me to be here in Abuja
for the Annual Meeting of the African Development Bank and I extend my deepest
thanks to our Nigerian hosts.
Prospects for Africa
We meet in Abuja at a very positive point in Africa's history. Sub-Saharan Africa's
economic growth reached 5% in 2004, an 8-year high, and inflation is at historical
lows, finishing the year in the single digits for the first time in over a quarter of a
century. Improved fiscal policies in many African countries played an important role
in this welcome economic performance. A favorable external environment as well
as higher commodity prices also helped. For example, several net oil exporters,
applying fiscal rules, saved a significant portion of their oil revenues, marking a
break with past practices of running pro-cyclical fiscal policies during times of high
oil prices. At the same time, many net oil importers allowed increases in
international oil prices to flow through to domestic oil prices rather than increasing
generalized government subsidies, while others also allowed their exchange rates
to absorb the oil price shock.
Looking ahead, those policies, combined with more sustainable debt burdens,
mean that many African countries are probably in a better position than before to
weather economic downturns. In fact, many oil exporters could further increase
their ability to withstand future negative shocks by using oil savings to repay debt.
It is also desirable for central banks to nip in the bud inflationary pressures that may
be building from recent supply-side price shocks. Quick action would serve to limit
inflation volatility and build central bank credibility; thereby supporting the
confidence of private-sector investors and consumers, the main economic agents
for achieving long run growth and poverty reduction in Africa.
The U.S. as Partner
The U.S. is helping to stimulate Africa's growth and increase economic resilience,
particularly in those countries that are pursuing good policies. The Millennium
Challenge Account is a prime example of our commitment. The MCA's goal is to
reduce poverty through growth. But even outside of MCA, the US has tripled its
assistance to Africa since 2000 to more than $3 billion last year. As a result, the
US share of Africa's total assistance from donor countries has doubled over this
same period, now reaching more than 20%. African countries have also been the
primary beneficiaries of the President's $15 billion program to fight HIV/AIDS. We
also believe 100% forgiveness of both bilateral and IDA and ADF debt for the
poorest countries - as well as grants going forward - are needed to end the cycle of
"lend and forgive" once and for all.
In addition, the Africa Growth and Opportunity Act (AGOA) - which is designed to
spur economic development and expedite the integration of African economies into
the world trading system - has led to significant increases in trade volumes
between the United States and AGOA-eligible countries. The AGOA Forum in
Dakar, Senegal, this July, will allow the U.S. and African officials as well as
members of the private sector and civil society to discuss how African countries can
further tap the benefits of AGOA.
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The Next Era for the African Development Bank
The African Bank has a critical role to play to help countries grow faster and
become more flexible through greater private sector investment. We see many
opportunities for the Bank to enhance its effectiveness as the leading development
finance institution in Africa.
First, the recently concluded AfDF-1 0 agreement recognizes that private sector
development is critical for accelerating economic growth and urges the Fund to
place a high priority in this area. Thus, we ask the Bank's next President to be
creative and aggressive in identifying opportunities to support and advance Africa's
private sector, including through increasing the availability of finance to the
unbanked. In that vein, we very much look forward to conSidering the Bank's
updated micro-finance strategy and any other initiatives the Bank can undertake to
strengthen Africa's financial sector.
In addition, the AfDF-10 agreement acknowledged that excessive debt burdens
only harm growth prospect and as a result, the AfDF will only extend grants to
those countries already facing such debt burdens, namely two-thirds of the AfDF
countries. We trust that the AfDF will work closely with IDA in implementing this
new debt sustainability framework.
We are also pleased by the Bank's recent steps to fight corruption and enhance
transparency. The Bank must be a role model to its clients in this arena,
particularly by proactively sharing the Bank's proposals, decisions, and progress
toward achieving results. We are pleased by the Bank's proposal to establish an
Anti-Fraud and Corruption Unit and Whistleblower system, and urge that it be fully
operational by the end of 2005.
We all agree that the African Bank is uniquely placed to support regional
integration in Africa and NEPAD. Project development facilities - like the NEPAD
Infrastructure Project Preparation Special Fund under consideration at the Bank can fill a large void in helping to guide potential projects through the critical
preparation stage. That said, such facilities are necessary, but not sufficient.
African countries themselves need to prioritize their infrastructure needs to ensure
that limited capacity, time, and financing are put toward projects that have the
greatest impact.
More broadly, we would like to see the Bank become an institution truly driven by
results. While the Bank has made some progress, it has not been nearly as timely
or as demonstrable as it should be. The Bank needs to proceed with results-based
country strategies and implement its internal results management system to ensure
that staff and management are working toward the same measure of success,
rather than on approval volumes or internal processes and procedures.
Conclusion
In conclusion, I would like to thank President Kabbaj for his steady and firm
leadership through the most difficult era ever to face a multilateral development
institution. Thanks to his tireless efforts to regain the Bank's financial strength, the
Bank stands ready to move ahead in ways that we could not have imagined ten
years ago. We look forward to working closely with the Bank's new President and
our fellow shareholders to ensure that the Bank can better meet the needs and
aspirations of the African people
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June 29, 2005
JS-2616
Statement of Treasury Secretary John W. Snow on
Revised First Quarter GOP Growth
"I am delighted - but not surprised - by today's GOP announcement, which showed
that the American economy grew at a rate of 3.8 percent in the first quarter of this
year. This number illustrates that U.S. workers and businesses are producing more
goods and services every day, and that is a terrific sign of economic health. This
type of expansion means more opportunity for more American workers, particularly
those who need jobs.
"President Bush is committed to keeping the economy on the path of healthy
growth by making his tax cuts permanent, reducing the burden of frivolous lawsuits,
passing a national energy policy and saving and strengthening Social Security. His
economic agenda seeks to achieve an economy that will continue to be resilient
and productive for generations to come."
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June 30, 2005
JS-2617
Treasury Designation Targets Individuals
Leading Syria's Military Presence in Lebanon
The U.S. Department of the Treasury today named Ghazi Kanaan and Rustum
Ghazali Specially Designated Nationals (SONs) of Syria pursuant to Executive
Order 13338, which is aimed at financially isolating individuals and entities
contributing to the Government of Syria's problematic behavior.
"Actions like today's are intended to financially isolate bad actors supporting Syria's
efforts to destabilize its neighbors," said Treasury Secretary John W. Snow.
"We are seeing democracy take hold in Lebanon and other places in the Middle
East, yet Syria continues to support violent groups and political strife. Syria needs
to join its neighbors in embracing the progress towards liberty," Snow continued.
Information available to the U.S. Government indicates that Kanaan and Ghazali
have directed the Syrian Arab Republic Government's (SARG) military and security
presence in Lebanon and/or contributed to the SARG's support for terrorism. Both
Ghazali and Kanaan allegedly engaged in a variety of corrupt activities and were
reportedly the beneficiaries of corrupt business deals during their respective
tenures in Lebanon.
Today's designation freezes any assets the designees may have located in the
United States, and prohibits U.S. persons from engaging in transactions with these
individuals.
Identifying Information
Ghazi Kanaan
DOB: circa 1943
POB: Near Qerdaha, Syria
Nationality: Syria
Address: Damascus, Syria
Position: Minister of Interior
According to information available to the U.S. Government, prior to his brief
appointment as Chief of the Syrian Political Security Directorate and his current
position as SARG Interior Minister, Ghazi Kanaan served as Syrian Military
Intelligence (SMI) Chief for Lebanon for approximately 20 years. He was replaced
by Ghazali in late 2002. During his command of SMI in Lebanon, Kanaan ensured
that Syrian military intelligence officers remained deeply involved in Lebanese
political and economic affairs.
Information available to the U.S. Government indicates that as an SMI commander
in Lebanon, Kanaan contributed to the SARG's provision of support to Specially
Designated Global Terrorist groups (SDGT), such as Hizballah. In 2002, three
rockets in a convoy allegedly escorted by Kanaan were personally delivered across
the Syrian-Lebanese border to Hizballah in Lebanon. In May 2001, in a meeting
between Kanaan and Hizballah security leaders, Hizballah agreed to Syria's
request that Hizballah refrain from executing any military operations without first
notifying Syria, according to information available to the U.S. Government.
However, in the same meeting, Hizballah also agreed to continue its casing and
reconnaissance operations.
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Information available to the U.S. Government indicates that Kanaan also enjoyed
extensive influence over Lebanon's military and security services. In late
December 2001, a Lebanese Armed Forces (LAF) commander reportedly declared
that effective January 2002, weapons permits and security passes issued by Syrian
institutions would no longer be valid except for those passes and permits issued by
Kanaan. Only those passes and permits issued by Kanaan would continue to allow
the holder to carry weapons and to pass through LAF and Syrian military
checkpoints in Lebanon without being questioned or searched.
Allegedly, in August 2001, the SARG believed that the Lebanese prime minister,
the speaker of the Lebanese parliament, and a sectarian leader had created a new
alliance that was, in Syria's assessment, a violation of Syria's long-standing policy
to prevent anyone political party or bloc from dominating Lebanese politics.
Furthermore, Syria believed that the new alliance could weaken Lebanese political
parties' dependence on Damascus and diminish SARG influence within Lebanese
politics. In response to this alliance, Kanaan met with the speaker of parliament to
remind him that his best interests lay with the Syrians and that he should impress
that fact upon others within parliament with whom the speaker had influence.
Additionally, press accounts observed that during the 2000 Lebanese parliamentary
elections, Kanaan appeared to oversee the entire electoral process.
Rustum Ghazali
DOB: circa 1949
Nationality: Syria
Address: Syria
Position: Chief of Syrian Military Intelligence for Lebanon
Ghazali assumed command of Syrian Military Intelligence in Lebanon after
replacing Ghazi Kanaan, his mentor, in late 2002. U.S. Government information
reports that Ghazali was the implementing agent of Syrian policies in Lebanon until
Syria's withdrawal from Lebanon in April 2005. During his command, Ghazali
directed and significantly contributed to the SARG's military and security presence
in Lebanon. Information available to the U.S. Government indicates that Ghazali, in
his responsibilities for Lebanese affairs, reported directly to President Asad and
then-SMI Director Hasan Khalil.
Information available to the U.S. Government indicates that Ghazali manipulated
Lebanese politics to ensure that Lebanese officials and public policy remained
committed to the SARG's goals and interests. In late 2004, Ghazali reportedly
warned that Syria was determined to physically harm anyone who interfered with
Lebanon's economic situation and caused a crisis of confidence. Also, as of late
2004, Lebanese President Lahoud allegedly consulted with Ghazali before
selecting positions within his cabinet.
Reportedly, Ghazali could influence a number of the Lebanese members of
parliament, and did so notably on the renewal of Lebanese President Lahoud's term
in office. After the Lebanese constitution was amended to allow President Lahoud
to renew his term, some commentators noted that this appeared to be the second
time that Damascus had imposed a president on Beirut. Press reports indicate that
in 1995, the presidential term of Elias Hrawi was also extended for three years at
the urging of Syria.
Information available to the U.S. Government indicates that Ghazali also has
exerted considerable control over the Lebanese military. As of mid-2003, SMI did
not need to maintain as large a presence among the mid-levels of each of the
Lebanese security services, because Ghazali allegedly required the heads of the
LAF Directorate of Intelligence, the Internal Security Forces and the Directorate of
General Security to report to him on a daily, and at times hourly, basis. In a further
indication of his influence over security and political issues in Lebanon, as of late
2003, Ghazali had significant input into all internal matters in the LAF, including
promotions and assignments to key positions.
Allegedly, in November 2003, senior LAF Intelligence Directorate officers continued
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to stress to their subordinates the importance of strengthening ties between LAF
and SM!. Furthermore, they encouraged subordinates to coordinate even more
closely than previously with SMI on all issues.
Background on Executive Order 13338
President George W. Bush signed E.O. 13338 on May 11, 2004 in response to the
Syrian government's continued support of international terrorism, sustained
occupation of Lebanon, pursuit of weapons of mass destruction and missile
programs and undermining of U.S. and international efforts in Iraq. Syria's acts
threaten the national security, foreign policy and economy of the United States.
The Order declared a national emergency with respect to Syria, and authorized the
Secretary of the Treasury to block the property of certain persons and directing
other U.S. Government agencies to impose a ban on exports to Syria.
The Treasury may designate individuals and entities found to be or to have been:
•
•
•
•
•
Directing or otherwise significantly contributing to the Government of Syria's
provision of safe haven to or other support for any person whose property or
interests in property are blocked under United States law for terrorismrelated reasons, including, but not limited to, Hamas, Hizballah, Palestinian
Islamic Jihad, the Popular Front for the Liberation of Palestine, the Popular
Front for the Liberation of Palestine-General Command, and any persons
designated pursuant to Executive Order 13224 of September 23, 2001;
Directing or otherwise significantly contributing to the Government of Syria's
military or security presence in Lebanon;
Directing or otherwise significantly contributing to the Government of Syria's
pursuit of the development and production of chemical, biological, or nuclear
weapons and medium- and long-range surface-to-surface missiles;
Directing or otherwise significantly contributing to any steps taken by the
Government of Syria to undermine United States and international efforts
with respect to the stabilization and reconstruction of Iraq; or
Owned or controlled by, or acting or purporting to act for or on behalf of,
directly or indirectly, any person whose property or interests in property are
blocked pursuant to this order.
Click the following link for the full text of E. O. 13338:
bJiQ'/lwww. whitehouse. govlnewslreleasesI2004105120040511-6. hlml
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Executive Order
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For Immediate Release
Office of the Press Secretary
May 11, 2004
Executive Order
Blocking Property of Certain Persons and Prohibiting the Export of Certain Goods to Syria
By the authority vested in me as President by the Constitution and the laws of the United States of America,
including the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.) (IEEPA), the National
Emergencies Act (50 U.S.C. 1601 et seq.) (NEA), the Syria Accountability and Lebanese Sovereignty Restoration
Act of 2003, Public Law 108-175 (SAA), and section 301 of title 3, United States Code,
I, GEORGE W. BUSH, President of the United States of America, hereby determine that the actions of the
Government of Syria in supporting terrorism, continuing its occupation of Lebanon, pursuing weapons of mass
destruction and missile programs, and undermining United States and international efforts with respect to the
stabilization and reconstruction of Iraq constitute an unusual and extraordinary threat to the national security,
foreign policy, and economy of the United States and hereby declare a national emergency to deal with that
threat. To address that threat, and to implement the SAA, I hereby order the following:
Section 1. (a) The Secretary of State shall not permit the exportation or reexportation to Syria of any item on the
United States Munitions List (22 C.F.R. part 121).
(b) Except to the extent provided in regulations, orders, directives, or licenses that may be issued pursuant to the
provisions of this order in a manner consistent with the SAA, and notwithstanding any license, permit, or
authorization granted prior to the effective date of this order, (i) the Secretary of Commerce shall not permit the
exportation or reexportation to Syria of any item on the Commerce Control List (15 C.F.R. part 774); and (ii) with
the exception of food and medicine, the Secretary of Commerce shall not permit the exportation or reexportation
to Syria of any product of the United States not included in section 1(b )(i) of this order.
(c) No other agency of the United States Government shall permit the exportation or reexportation to Syria of any
product of the United States, except to the extent provided in regulations, orders, directives, or licenses that may
be issued pursuant to this order in a manner consistent with the SAA, and notwithstanding any license, permit, or
authorization granted prior to the effective date of this order.
Sec. 2. The Secretary of Transportation shall not permit any air carrier owned or controlled by Syria to provide
foreign air transportation as defined in 49 U.S.C. 401 02(a)(23), except that he may, to the extent consistent with
Department of Transportation regulations, permit such carriers to charter aircraft to the Government of Syria for
the transport of Syrian government officials to and from the United States on official Syrian government business.
In addition, the Secretary of Transportation shall prohibit all takeoffs and landings in the United States, other than
those associated with an emergency, by any such air carrier when engaged in scheduled international air
services.
Sec. 3. (a) Except to the extent provided in section 203(b)(1), (3), and (4) of the IEEPA (50 U.S.C. 1702(b)(1), (3),
and (4)), and the Trade Sanctions Reform and Export Enhancement Act of 2000 (title IX, Public Law 106387)
(TSRA), or regulations, orders, directives, or licenses that may be issued pursuant to this order, and
notwithstanding any contract entered into or any license or permit granted prior to the effective date of this order,
all property and interests in property of the following persons, that are in the United States, that hereafter come
within the United States, or that are or hereafter come within the posseSSion or control of United States persons,
including their overseas branches, are blocked and may not be transferred, paid, exported, withdrawn, or
otherwise dealt in: persons who are determined by the Secretary of the Treasury, in consultation with the
Secretary of State,
(i) to be or to have been directing or otherwise significantly
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EXt'L"utive Urder
Page 2 of 4
contributing to the Government of Syria's provision of safe haven to
or other support for any person whose property or interests in
property are blocked under United States law for terrorism-related
reasons, including, but not limited to, Hamas, Hizballah, Palestinian
Islamic Jihad, the Popular Front for the Liberation of Palestine, the
Popular Front for the Liberation of Palestine-General Command, and
any persons designated pursuant to Executive Order 13224 of September
23,2001 ;
(ii) to be or to have been directing or otherwise significantly
contributing to the Government of Syria's military or security
presence in Lebanon;
(iii) to be or to have been directing or otherwise significantly
contributing to the Government of Syria's pursuit of the development
and production of chemical, biological, or nuclear weapons and
medium- and long-range surface-to-surface missiles;
(iv) to be or to have been directing or otherwise significantly
contributing to any steps taken by the Government of Syria to
undermine United States and
international efforts with respect to the stabilization and
reconstruction of Iraq; or
(v) to be owned or controlled by, or acting or purporting to act for
or on behalf of, directly or indirectly, any
person whose property or interests in property are blocked pursuant
to this order.
(b) The prohibitions in paragraph (a) of this section include, but are not limited to, (i) the making of any
contribution of funds, goods, or services by, to, or for the benefit of any person whose property or interests in
property are blocked pursuant to this order; and (ii) the receipt of any contribution or provision of funds, goods, or
services from any such person.
Sec. 4. (a) Any transaction by a United States person or within the United States that evades or avoids, has the
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E:\:ecutive Order
Page 3 of 4
purpose of evading or avoiding, or attempts to violate any of the prohibitions set forth in this order is prohibited.
(b) Any conspiracy formed to violate the prohibitions set forth in this order is prohibited.
Sec. 5. I hereby determine that the making of donations of the type of articles specified in section 203(b)(2) of the
IEEPA (50 U.S.C. 1702(b )(2)) would seriously impair the ability to deal with the national emergency declared in
this order, and hereby prohibit, (i) the exportation or reexportation of such donated articles to Syria as provided in
section 1(b) of this order; and (ii) the making of such donations by, to, or for the benefit of any person whose
property and interests in property are blocked pursuant to section 3 of this order.
Sec. 6. For purposes of this order:
(a) the term "person" means an individual or entity;
(b) the term "entity" means a partnership, association, trust, joint venture, corporation, group, subgroup, or other
organ ization;
(c) the term "United States person" means any United States citizen, permanent resident alien, entity organized
under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any
person in the United States;
(d) the term "Government of Syria" means the Government of the Syrian Arab Republic, its agencies,
instrumentalities, and controlled entities; and
(e) the term "product of the United States" means: for the purposes of subsection 1(b), any item subject to the
Export Administration Regulations (15 C.F.R. parts 730-774); and for the purposes of subsection 1(c), any item
subject to the export licensing jurisdiction of any other United States Government agency.
Sec. 7. With respect to the prohibitions contained in section 1 of this order, consistent with subsection 5(b) of the
SM, I hereby determine that it is in the national security interest of the United States to waive, and hereby waive
application of subsection 5(a)(1) and subsection 5(a)(2)(A) of the SM so as to permit the exportation or
reexportation of certain items as specified in the Department of Commerce's General Order No.2 to Supplement
No.1, 15 C.F.R. part 736, as issued consistent with this order and as may be amended pursuant to the provisions
of this order and in a manner consistent with the SM. This waiver is made pursuant to the SAA only to the extent
that regulation of such exports or reexports would not otherwise fall within my constitutional authority to conduct
the Nation's foreign affairs and protect national security.
Sec. 8. With respect to the prohibitions contained in section 2 of this order, consistent with subsection 5(b) of the
SM, I hereby determine that it is in the national security interest of the United States to waive, and hereby waive,
application of subsection 5(a)(2)(D) of the SAA insofar as it pertains to: aircraft of any air carrier owned or
controlled by Syria chartered by the Syrian government for the transport of Syrian government officials to and
from the United States on official Syrian government business, to the extent consistent with Department of
Transportation regulations; takeoffs or landings for non-traffic stops of aircraft of any such air carrier that is not
engaged in scheduled international air services; takeoffs and landings associated with an emergency; and
overflights of United States territory.
Sec. 9. I hereby direct the Secretary of State to take such actions, including the promulgation of rules and
regulations, as may be necessary to carry out subsection 1(a) of this order. I hereby direct the Secretary of
Commerce, in consultation with the Secretary of State, to take such actions, including the promulgation of rules
and regulations, as may be necessary to carry out subsection 1(b) of this order. I direct the Secretary of
Transportation, in conSUltation with the Secretary of State, to take such actions, including the promulgation of
rules and regulations, as may be necessary to carry out section 2 of this order. The Secretary of the Treasury, in
consultation with the Secretary of State, is hereby authorized to take such actions, including the promulgation of
rules and regulations, and to employ all powers granted to the President by the IEEPA as may be necessary to
carry out sections 3, 4, and 5 of this order. The Secretaries of State, Commerce, Transportation, and the Treasury
may redelegate any of these functions to other officers and agencies of the United States Government consistent
with applicable law. The Secretary of State, in consultation with the Secretaries of Commerce, Transportation,
and the Treasury, as appropriate, is authorized to exercise the functions and authorities conferred upon the
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Page 4 of 4
Exceuti VI:: Order
President in subsection 5(b) of the SAA and to redelegate these functions and authorities consistent with
applicable law. All agencies of the United States Government are hereby directed to take all appropriate
measures within their authority to carry out the provisions of this order and, where appropriate, to advise the
Secretaries of State, Commerce, Transportation, and the Treasury in a timely manner of the measures taken.
Sec. 10. This order is not intended to create, and does not create, any right or benefit, substantive or procedural,
enforceable at law or in equity by any party against the United States, its departments, agencies,
instrumentalities, or entities, its officers or employees, or any other person.
Sec. 11. For those persons whose property or interests in property are blocked pursuant to section 3 of this order
who might have a constitutional presence in the United States, I find that because of the ability to transfer funds or
assets instantaneously, prior notice to such persons of measures to be taken pursuant to this order would render
these measures ineffectual. I therefore determine that for these measures to be effective in addressing the
national emergency declared in this order, there need be no prior notice of a listing or determination made
pursuant to this order.
Sec. 12. The Secretary of the Treasury, in consultation with the Secretary of State, is authorized to submit the
recurring and final reports to the Congress on the national emergency declared in this order, consistent with
section 401 (c) of the NEA, 50 U.S.C. 1641 (c), and section 204(c) of the IEEPA, 50 U.S.C. 1703(c).
Sec. 13. (a) This order is effective at 12:01 eastern daylight time on May 12, 2004.
(b) This order shall be transmitted to the Congress and published in the Federal Register.
GEORGE W. BUSH
THE WHITE HOUSE,
May 11,2004.
###
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June 30,2005
JS-2618
Treasury Releases Report on Terrorism Risk Insurance Act of 2002
The Treasury Department today released a report on the Terrorism Risk Insurance
Act of 2002, as required by Congress. The text of the letter sent by Treasury
Secretary John W. Snow to Senate Banking Committee Chairman Richard Shelby
and Ranking Member Paul Sarbanes and House Financial Services Committee
Chairman Michael Oxley and Ranking Member Barney Frank follows. The full report
is attached.
June 30, 2005
The Honorable Michael G. Oxley
House of Representatives
Washington, DC 20515
Dear Chairman Oxley:
The Terrorism Risk Insurance Act of 2002 (TRIA) required the Treasury
Department, as administrator of the Terrorism Risk Insurance Program, to assess
features of the program and its environment, and report to Congress on its findings
by June 30, 2005. As required by law, I am submitting to you an assessment of
TRIA.
President Bush signed TRIA into law to help safeguard America's economy in the
wake of the terrorist attacks of September 11, 2001. TRIA established a temporary
federal program of shared public and private compensation for insured commercial
property and casualty losses resulting from foreign acts of terrorism.
The Treasury Department was required by TRIA to specifically assess the
effectiveness of the program, the availability and affordability of such insurance for
various policyholders, and the likely capacity of the property and casualty insurance
industry to offer insurance for terrorism risk after the expiration of the program. The
attached report, based in part on surveys of the insurers and policyholders that
were developed after extensive consultations with the National Association of
Insurance Commissioners, policyholders, the insurance industry, and other experts
in the insurance field, evaluates the effectiveness of TRIA in the context of the
purpose of the legislation. The report finds that TRIA has achieved its goals of
supporting the industry during a transitional period and stabilizing the private
insurance market.
While TRIA has been effective in achieving its temporary objectives, the economy is
more robust today than when TRIA was enacted. GOP growth is up from 2.3
percent in 2002 to 3.9 percent in 2004 (fourth quarter over fourth quarter).
Unemployment, which reached 6.0 percent in December 2002, is down to 5.1
percent in May 2005. Construction jobs, taking residential and nonresidential
together, now stand at a record high 7.2 million. Extending TRIA would have little
impact on the economy given its current strength.
It is our view that continuation of the program in its current form is likely to hinder
the further development of the insurance market by crowding out innovation and
capacity building. Consistent with its original purpose as a temporary program
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Page 2 of2
scheduled to end on December 31,2005, and the need to encourage further
development of the private market, the Administration opposes extension of TRIA in
its current form.
Any extension of the program should recognize several key principles, including the
temporary nature of the program, the rapid expansion of private market
development (particularly for insurers and reinsurers to grow capacity), and the
need to significantly reduce taxpayer exposure. The Administration would accept an
extension only if it includes a significant increase to $500 million of the event size
that triggers coverage, increases the dollar deductibles and percentage copayments, and eliminates from the program certain lines of insurance, such as
Commercial Auto, General Liability, and other smaller lines, that are far less subject
to aggregation risks and should be left to the private market.
It is also important to keep in mind that the program would cover damages awarded
in litigation against policyholders following a terrorist attack. Current litigation rules
would allow unscrupulous trial lawyers to profit from a terrorist attack and would
expose the American taxpayer to excessive and inappropriate costs. The
Administration supports reasonable reforms to ensure that injured plaintiffs can
recover against negligent defendants, but that no person is able to exploit the
litigation system.
We look forward to further discussions with the Congress on this very important
issue.
Sincerely,
John W. Snow
REPORTS
•
Assessment Terrorism Risk Insljrance Act of 2002
http://www.treas.gov/press/releases/js2618.htm
7/1/2005
REPORT
TO
CONGRESS
Assesstnent:
The Terrorism Risk Insurance
Act of 2002
THE UNITED STATES DEPARTMENT OF THE TREASURY
June 3 0 ,
2005
REPORT TO CONGRESS
ASSESSMENT:
THE TERRORISM RISK INSURANCE ACT OF
2002
JUNE 30, 2005
THE UNITED STATES DEPARTMENT OF THE TREASURY
OFFICE OF ECONOMIC POLICY
WASHINGTON D.C.
June 30, 2005
JS-2005-06-24
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 $77,110 million as of the end of that week, compared to $77,502 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
TOTAL
1. Foreign Currency Reserves
1
a. Securities
June 17, 2005
June 24, 2005
77,502
77,110
Euro
Yen
TOTAL
Euro
Yen
TOTAL
11,369
14,454
25,823
11,259
14,402
25,661
Of which, issuer headquartered in the US.
0
0
b. Total deposits with:
b.i. Other central banks and BIS
11,070
2,905
13,975
10,937
2,895
13,832
b.ii. Banks headquartered in the US.
0
0
b.ii. Of which, banks located abroad
0
0
b.iii. Banks headquartered outside the US.
0
0
b.iii. Of which, banks located in the U.S.
0
0
15,332
15,282
11,330
11,293
11,041
11,041
0
0
2. IMF Reserve Position
2
3. Special Drawing Rights (SDRs)
4. Gold Stock
2
3
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
June 17, 2005
Euro
1. Foreign currency loans and securities
Yen
June 24, 2005
TOTAL
Euro
0
Yen
TOTAL
o
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
2.a. Short positions
0
o
2.b. Long positions
o
o
3. Other
o
o
III. Contingent Short-Term Net Drains on Foreign Currency Assets
June 17, 2005
Euro
Yen
June 24,2005
TOTAL
Euro
Yen
TOTAL
o
o
2. Foreign currency securities with embedded options
o
o
3. Undrawn, unconditional credit lines
o
o
o
o
1. Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within 1 year
1.b. Other contingent liabilities
3.a. With other central banks
3.b. With banks and other financial institutions
Headquartered in the U. S.
3.c. With banks and other financial institutions
Headquartered outside the U. S.
4. Aggregate short and long positions of options in
foreign
Currencies vis-a-vis the US. dollar
4.a. Short positions
4.a.1. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.1. Bought calls
4.b.2. Written puts
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
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.
Page 1 of5
June 30, 2005
JS-2619
Statement of
Bobby Pittman, Jr., Deputy Assistant Secretary of the Treasury
for International Development Finance and Debt
House Committee on International Relations
Subcommittee on Africa, Global Human Rights and International
Operations
Thank you Chairman Smith, Ranking Member Payne, and other members of the
Subcommittee. I am very pleased to be here today to talk about the G8 Summit and
Africa's Development from the perspective of the Treasury Department. I am
particularly excited to brief you on the G8's decision to support the President's
proposal for 100 percent debt cancellation for the poorest countries.
Before getting into the details, I would like to put this proposal into perspective.
Since the beginning of President Bush's time in office he has pushed an aggressive
agenda on development. This was first defined in the lead up to Monterrey, when
the President proposed a New Compact for Development. This Compact was a
proposal to increase aid, but with a clear purpose and in countries where it could be
most effectively used to stimulate growth and reduce poverty. It was recognition
that it's not enough to give more aid; we also needed to improve the way we deliver
aid.
Historic Increases in Assistance ...
Since Monterrey, we've seen an amazing evolution of U.S. official development
assistance. While others are delivering promises, the U.S. has been delivering
substantial increases. For some thirty years prior to this Administration, the U.S.
provided roughly 15 percent of all official aid to Africa. Over the past two years the
U.S. represented nearly a quarter of all official assistance to the continent. The
increase has been dramatic, both in absolute terms and in terms of the U.S. share.
I should note that this dramatic increase in development assistance in recent years
has come prior to disbursements from the President's Millennium Challenge
Corporation (MCC) program. This year, the program is beginning to make
disbursements and has billions of dollars in the pipeline. More importantly, this
program is setting a new standard for delivering assistance to those countries that
are helping themselves - by investing in the health and education needs of their
people, fighting corruption, and demonstrating a commitment to economic freedom.
These increases also do not include the full implementation of the President's
Emergency Plan for HIV/AIDS Relief. As of March 31 st of this year, the Plan had
already supported anti-retroviral drug treatment for approximately 230,000 men,
women and children through bilateral programs in the most afflicted countries in
Sub-Saharan Africa. This is a great start, but the goal is to treat some 2 million
afflicted people in Africa, Asia and the Caribbean by 2008 .
... with More Effective Delivery.
The manner in which aid is delivered is also changing dramatically. America has
tried to change the focus of both our bilateral assistance and multilateral assistance
away from simplistic numeric targets, and toward a greater focus on ensuring that
assistance is well spent and channeled to environments where it can have the
greatest possible impact in lifting people out of poverty.
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For the Treasury Department, this has meant reforming the Multilateral
Development Banks (MDBs) and the way in which they deliver assistance. As a
result, the MDBs now deliver significantly more assistance to countries that are well
governed and enact pro-growth policies. For example, the World Bank's
International Development Association (IDA) now has one of the most selective
systems for providing assistance of any donor, bilateral or multilateral, in the world.
The Bank's strategy for FY06-08 envisions providing the top 10% of country
performers with nearly 7 times as much assistance on a per capita basis as the
lowest 10%, reflecting the heavy weight of governance in the allocation system. All
of the MDBs with concessional windows -- with the exception of the GEF --have put
similar systems in place as a result of strong U.S. leadership.
We have also been working to change the culture and standards by which the
MDBs judge the effectiveness of their assistance. For many of these institutions,
success was measured in the volume of loans going out the door. We are working
to ensure that success is instead measured by measurable results on the ground.
These efforts have already begun to pay dividends. For example the World Bank
has now committed to have measurable targets for all country assistance
strategies, all African Development Fund projects will have results-based
frameworks, and the Asian Development Bank has begun instituting a performance
review system that judges staff on project results. Also, as a result of strong U.S.
leadership all of the MDBs now have independent evaluation units that are charged
with examining the impact and effectiveness of their institutions' work and making
the results publicly available.
Finally, we've worked to make sure that more assistance is given in the form of
grants. It would be unwise, if not counter-productive, to continue to add to already
unsustainable debt burdens in the poorest countries. Combined with our landmark
agreement to cancel debt, the increased use of grants in the World Bank's IDA,
Asian Development Fund (AsDF) and African Development Fund (AfDF) will ensure
that poor countries do not find themselves again in the lend-forgive-Iend trap. Due
to strong U.S. leadership during the IDA-14 and AfDF-10 negotiations, there will be
significantly more grants given to the poorest and most debt- vulnerable countries,
including most Heavily Indebted Poor Countries (HIPCs).
A Bold Proposal - 100 Percent Debt Cancellation
For some forty years, many of the poorest countries have been getting loans for
projects to support health, education and other basic development needs. Although
the U.S. and most other countries now provide nearly all of their assistance to the
MDBs in the form of grants, the banks continued to provide loans to the poorest
countries in desperate need of development assistance. The result is that for many
important projects without near-term financial returns, such as building schools,
these poor countries were burdened with additional debt that needs to be repaid by
future generations. Shifting to grants going forward ends this cycle. However, this
alone would not have been enough. There also needed to be a correction of
history, a cleaning of the balance sheets for future generations.
For many of the poorest countries, there has been a history of lend and forgive
cycles. The HIPCs alone have accounted for nearly 250 debt relief treatments in
the Paris Club over the last 25 years. This means that many countries have been
getting debt reschedulings, or partial debt reduction, every two or three years. At
the same time the MDBs have been increasing their lending volumes to fill up any
space created by the temporary debt treatments. Between 1989 and 2002, debt
relief to HIPC countries totaled $40 billion while new loans totaled more than twice
that - $93 billion.
The international community has been pursuing a series of well intentioned, but
ultimately stop-gap measures to address debt in the poorest countries. This started
in 1979 with small amounts of relief, about $6 billion. In 1987, there was the
establishment of "Venice terms" in the Paris Club whereby some countries would
qualify for interest rate relief. This was followed by numerous rounds in the Paris
Club of increasingly generous treatments (Toronto, London and Naples terms).
Then in 1996, the HIPC Initiative, which for the first time incorporated debt relief
from the international financial institutions, was announced. This was followed by
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7/1/2005
Page 3 of5
the "Enhanced HIPC Initiative" in 1999. All of these initiatives helped to reduce the
burden of debt in the poorest countries, yet the cycle of lend and forgive was still
churning.
To end the cycle once and for all, the U.S. proposed a complete write-off of all
official debt to the poorest countries. This included as much as $60 billion in HIPC
countries' debt owed to the World Bank's IDA, the AfDF and the IMF.
I want to stress that many Members of Congress, including Members sitting in this
subcommittee, along with representatives of civil society, have been extremely
supportive and helpful in this campaign from the start. The U.S. has presented a
very united front to the world on this issue, and that has been critical in convincing
other countries to join us.
The Mechanics
The key to the U.S. proposal was to focus on the net flows from the institutions to
the countries. As with our bilateral aid flows, the payments from the recipients are
netted out from the new aid flows. Focusing on net transfers allows the proposal to
maintain equity among the poorest countries. Under the HIPC initiative, HIPC
countries received large increases in net transfers while non-HIPCs saw their net
transfers decline. Focusing on the net flows was also important for cleaning the
balance sheets of the MOBs. The International Financial Institutions were often
giving loans to help ensure payment on old existing loans. This contributed to a
lack of transparency and an exacerbation of the lend and forgive cycle.
When our ideas were first proposed nearly one year ago, they were met with
considerable skepticism. This was primarily because they did not involve additional
funding requests. With respect to the MOBs, we pointed out that the concessional
windows are structured and funded such that they could forgive the debt of the
HIPCs without impairing their ability to provide the same amount of net new funding
for ongoing projects. Using 2003 as an example, we showed that the scale of
reflows is small compared to disbursements. This is primarily because of the
concessionality of IDA's financing and the significant nominal growth in
disbursements over history. In 2003, the reflows from the HIPCs to IDA were
roughly $200 million, compared to $3.4 billion in new disbursements. In fact, HIPC
reflows accounted for only 3% of IDA's total new disbursements in 2003.
Though IDA lending represents the bulk of the remaining debt stock for HIPC
countries, it was also important to have a strategy for IMF debt, which represents a
significant portion of debt service in the short term given its much shorter
repayment terms. In the IMF, many were calling for gold sales or off-market
transactions. Significant work by our staff uncovered that there were existing
resources within the Fund that could be used to effect debt relief. Moreover, this
approach allows the fund to continue to engage effectively in low income countries
while preserving its financial strength.
While the U.S. proposal ensured that net transfers to poor countries would not
decline, many shareholders were worried about the long-term financial strength of
the institutions. At the meeting between President Bush and Prime Minister Blair
early this month, the United Kingdom agreed to support the U.S. proposal for 100
percent debt cancellation and the U.S. affirmed its commitment to the financial
strength of the institutions. We will be able to do this by utilizing flexibility in the
timing of payments of previously planned funding requests. Additional contributions
will ensure the financial strength of the institutions, while being delivered based on
performance, not historic debt obligations. This means that net transfers will in fact
increase for countries that are performing well and using aid effectively.
The Historic Agreement
The agreement between Prime Minister Blair and President Bush was a critical
breakthrough in the fight to cancel the debt for the poorest countries. This led to an
agreement on June 11 by G8 Finance Ministers to a debt relief plan that largely
reflects the one we began to discuss one year ago. As Treasury Secretary John
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7/1/2005
Page 4 of5
Snow stated, "President Bush's commitment to lift the crushing debt burden on the
world's poorest countries has been achieved. This is an achievement of historic
proportions." The G8 Agreement calls for 100 percent cancellation of debt
obligati~ns owed to the World Bank (IDA), African Development Bank (AfDF), and
International Monetary Fund by countries eligible for the HIPC Initiative.
The key elements of the G-B agreement include:
•
100 percent IDA, AfDF, and IMF Debt Stock Relief. For IDA and AfDF
debt, 100 percent stock cancellation will be delivered by offsetting gross
assistance flows by the amount forgiven. IMF debt relief will be financed
from existing IMF resources.
•
Additional Donor Contributions to IDA and AfDF. Donors will provide
additional contributions, based on agreed burden shares, to offset foregone
debt repayments (principal and interest) to IDA and AfDF. Additional funds
will be made available immediately to cover the IDA-14 and AfDF-10 period
and through regular replenishments for subsequent periods.
• Focus on Strong Performance. The additional donor contributions will be
allocated to all IDA-only countries based upon the existing IDA and AfDF
performance-based allocation systems. This approach ensures equity
between HIPCs and non-HIPCs - since all countries receive additional
assistance commensurate with performance - and creates an incentive for
countries to pursue responsible, pro-growth policies. Based upon existing
performance levels, we estimate that roughly half of the additional
contributions will be allocated to non-HIPC countries.
• Utilize grant financing from IDA and AfDF to ensure that countries do
not immediately re-accumulate unsustainable external debts. During
this time period, HIPCs will gradually be eased into new borrowing based
upon their capacity to repay. This transition period will enable countries to
focus on developing the necessary environment for promoting economic
growth and poverty reduction.
Under the plan, eighteen countries will be immediately eligible for IDA, AfDF, and
IMF debt forgiveness: Benin, Bolivia, Burkina Faso, Ethiopia, Ghana, Guyana,
Honduras, Madagascar, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda,
Senegal, Tanzania, Uganda, and Zambia. The remaining HIPCs will also become
eligible as they reach their HIPC Completion Point.
The total amount forgiven for the eighteen HIPC completion point countries will be
$40.4 billion in nominal terms, of which IDA accounts for $32.9 billion, the AfDF
$3.2 billion and the IMF $4.3 billion. The full application of the cancellation of
existing debt repayments could amount to as much as $60 billion as countries
complete the process.
Going Forward
The agreement by the G8 Finance Ministers this month was truly a historic
occasion. That said, we still have significant work ahead. We will be presenting the
proposal to the broader shareholders of the World Bank, AfDB and the IMF this fall
to seek their agreement. We also need the support of Congress. The
commitments to the financial strength of the institutions come first and foremost
through our current and future appropriations requests. I would like to take this
opportunity to thank the House of Representatives, following the lead of
Subcommittee Chairman Kolbe and Ranking Member Lowey, for fully funding these
requests for FY2006. This, however, is the first of many steps. It is my both my
plea and my hope that we continue this close coordination among the
Administration, Congress and civil society as we move forward in implementing this
truly historic agreement.
I want to once again thank the subcommittee for giving me this opportunity to testify
and for all the support for debt cancellation in the context of helping the poorest
countries that are committed to pro-growth policies and poverty reduction.
http://www.treas.gov/press/releases/js2619.htm
7/1/2005
Page 1 of2
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June 30, 2005
JS-2620
Procedures Released for Examining OFAC
Compliance
The Federal Financial Institutions Examination Council (FFIEC) today released a
Bank Secrecy AcUAnti-Money Laundering Manual (FFIEC BSAlAML Examination
Manual). The manual includes audit procedures for use when examining financial
institutions for compliance with the sanctions programs administered by the
Treasury Department's Office of Foreign Assets Control (OFAC). The manual is
expected to serve as an OFAC model for federal and state regulators in other
areas, such as the securities industry.
"The publication of this guidance will further ensure consistency and provide
additional clarity in relation to OFAC compliance," said Robert Werner, the Director
of OFAC. "This is one more step in our continuing efforts to assist U.S. Banks and
other U.S. Industries in complying with those economic sanctions programs that are
so critical to furthering our country's national security and foreign policy interests."
As outlined in the manual, OFAC emphasizes that financial institutions should take
a risk-based approach when considering the likelihood of encountering a "match" or
"hit" to the list of Specially Designated Nationals and Blocked Persons (SDN List), a
targeted country or other OFAC sanctions.
The manual recognizes that a fundamental element of sound OFAC compliance is
a bank's assessment of its product lines, its customer base, its geographic location,
the nature of its transactions and the identification of high-risk areas for OFAC
transactions. It states that banks should establish and maintain an effective, written
OFAC program commensurate with their OFAC risk profile. Programs should:
•
•
•
•
Identify high-risk areas;
Provide for appropriate internal controls for screening and reporting;
Establish independent testing for compliance;
Designate a bank employee or employees as responsible for OFAC
compliance and
• Create training programs for appropriate personnel in all relevant areas of
the bank.
The manual also notes that "an effective risk assessment should be a composite of
multiple factors, and depending upon the circumstances, certain factors may be
weighed more heavily than others."
The functional regulators will be examining financial institutions to determine the
adequacy of each institution's OFAC program and the effectiveness of its risk
management.
Recognizing that the primary goal of OFAC's enforcement actions is remediation,
OFAC is working toward an updated version of its own Enforcement Guidelines
which will be published in the Federal Register. The new Guidelines will incorporate
risk-based compliance. OFAC will implement an institutional- rather than only a
transactional - approach into its enforcement calculus, which will take into account
the efforts of financial institutions to assure OFAC compliance, as well as any
violations that might occur.
http://www.treas.goy/press/releases/js2620.htm
7/1/2005
Page 2 of2
OF AC realizes that every violation does not rise to the same level of
egregiousness. It is committed to and will be involved in an ongoing dialogue with
the functional regulators about institutions and violations. It will actively seek their
opinion about OFAC compliance programs at institutions under enforcement review
and will also be participating in numerous training sessions, including
teleconferences, with financial institutions.
The BSAIAML Examination Manual material is accessible via the following link:
IJttp.//www.lreas.govlofticeslenforcemenUofaclcivpenlofac__ sec_.Jrb.pdf.
Also available on OFAC's website are expanded risk matrices for banks to consider
as they review their compliance procedures:
http.//www Irea 5. govloffice s/enforcernentJofac/faqlma trix. pdf.
http://www.treas.gov/pr~ss/releases/js2620.htm
7/1/2005
Page 1 of 1
June 30, 2005
JS-2621
Statement by Treasury Secretary John Snow following meeting
with Senators Lindsay Graham and Chuck Schumer
"I appreciate the accommodation shown by Senators Graham and Schumer in
agreeing to postpone a vote on the China tariff legislation. It is important that China
move to a more flexible exchange rate regime, we have urged them to do so, and
they have agreed that it is in their interest to adopt greater exchange rate flexibility.
While it is in China's interest that they do so, it is also in the interest of the global
adjustment process. I believe that our longstanding efforts are beginning to come
to fruition and we are making progress toward achieving this goal. I appreciate the
strong interest of Senators Graham and Schumer on this issue. Our cooperation
with Congress can be constructive and I hope to continue to work with both
Senators, and other Members, as we move forward."
http://www.treas.gov/press/reJeases/js2621.htm
7/1/2005
Page 1 0[2
June 30, 2005
JS-2622
Report On Foreign Portfolio Holdings Of U.S. Securities At End-June 2004
The final results from the annual survey of foreign portfolio holdings of U.S.
securities at end-June 2004 are released today and posted on the U.S. Treasury
web site at (httpJ/wwwtreas.gov/tic/fpi~.html).
The survey was undertaken jointly by the U.S. Treasury, the Federal Reserve Bank
of New York, and the Board of Governors of the Federal Reserve System. The
most recent report covered the survey for end-June 2003. Surveys are carried out
annually, and the next survey will be for end-June 2005.
Complementary surveys measuring U.S. portfolio holdings of foreign securities are
also carried out annually. Data from the most recent such survey, which reports on
securities held at year-end 2004, are currently being processed. Preliminary results
are expected to be reported by September 30,2005.
Overall Results
The survey measured foreign holdings as of June 30, 2004, of $6,006 billion, with
$1.904 billion held in U.S. equities, $3,515 billion in U.S. long-term debt securities
(securities with an original term-to-maturity in excess of one year), and $588 billion
in U.S. short-term debt securities. The previous such survey, conducted as of June
30,2003, measured foreign holdings of $4,979 billion, with $1,564 billion in U.S.
equities, $2,939 billion in U.S. long-term debt securities, and $475 billion in shortterm U.S. debt securities.
Table 1. Foreign holdings of U.S. securities, by type of security, as of survey
dates
(Billions of dollars, except as noted)
Type of Security
June 30, 2003
June 30, 2004
Long-term Securities
4,503
5,418
Equity
Long-term Debt
1,564
2,939
3,515
Short-term Debt Securities
Total
1,904
475
588
4,979
6,006
Table 2. Foreign holdings of U.S. securities, by economy and type of security,
for the economies having major portfolio investment in the U.S., as of June
30,2004
(Billions of dollars)
Total
Equities Long-term Short-term
1,019 162
2 United Kingdom
488
250
736
221
3 Luxembourg
392
130
230
31
4 Cayman Islands
376
115
230
31
5 China, Mainland
341
3
320
18
1 Japan
http://www.treas.gov/press/releases/js2622.htm
121
16
7/1/2005
Page 2 of2
6 Belgium
308
7 Canada
291
8 Netherlands
203
9 Switzerland
18
210
285
67
5
15
70
6
11
199
127
120
10 Germany
190
76
11 Bermuda
12 Ireland
180
164
52
52
13 Taiwan
14 Middle East Oilexporters 11
15 Singapore
16 France
17 South Korea
124
121
9
69
120
117
90
89
74
18 Hong Kong
19 Australia
20 Sweden
21 British Virgin Islands
22 Mexico
23 Norway
24 Italy
25 Russia
Country Unknown
Rest of world
Total
73
65
65
59
58
48
224
528
6,006
72
62
1
22
47
46
36
9
29
35
0
3
149
1,904
68
107
113
66
113
34
42
41
81
43
21
26
27
30
29
20
8
218
269
3,515
8
15
46
2
18
6
15
8
23
6
1
3
25
2
3
40
3
110
588
11 Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab
Emirates.
http://www.treas.goy/press/releases/js2622.htm
7/1/2005
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