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Department of the Treasury
Ubrary

FEB 0 1 2006

Treas.
HJ
10

.A13
P4
v.426

Department of the Treasury

PRESS RELEASES

Page 1 of 1

July 1,2005
JS-2623

MEDIA ADVISORY
Treasury Secretary Snow Visits Omaha, Nebraska
to Discuss the Economy and Social Security Reform
U.S. Treasury Secretary John W. Snow will Travel to Omaha, Nebraska on July 7 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:

Thursday July 7, 2005
Roundtable at the Omaha Chamber of Commerce
1301 Harney SI.
Omaha, NE CST
8:30 a.m. - 9:30 a.m.
*** Media please contact Jim Anderson with any questions (202) 622-2591
*** Please arrive no later than 8:00 a.m.

8/11200S
http://www.treas.gov/pressfreleasesljf>2623 htm

Page 1 of2

July 6, 2005
2005-7 -6-10-39-58-1229
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 ,So reserve assets
totaled $76,427 million as of the end of that week, compared to $77 ,110 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)

June 24, 2005

11 ~reign Currency Reserves 1

a, Securities

IOf which, issuer headquartered in the US.

76,427

77,110

TOTAL

Euro

I
I

11,259

10,937

July 1, 2005

II
II
II

Yen

TOTAL

Euro

14,402

I
I

25,661

11,138

2,895

II
II

_Yen

I
I

14,085

TOTAL

25,223

I
I

b. Total deposits with:

Ib, i. Other central banks and BIS
Ib.ii. Banks headquartered in the US.
lb,ii. Of which, banks located abroad

Ib.iii. Banks headquartered outside the US.

13,832

I
I
I

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

10,822

0
15,282

'''' Position 2

II~ ~n~cial Drawing Rights (SDRs) 2
4. Gold Stock 3

I
I

15. Other Reserve Assets

13,653

2,831

0
15,270

11,293

11.240

11,041

TOTAL

I
I

II. Predetermined Short-Term Drains on Foreign Currency Assets
June 24, 2005
Euro
11. Foreign currency loans and securities

Yen

July 1,2005
TOTAL

Euro

I
I

Yen

2, Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U,S, dollar:
2.a, Short positions
2.b. Long positions
13. Other

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

I
I
\I

June 24, 2005
Euro

http://www.treas.gov/pressfreleasesljf>2005761 03q~R 1')')0 ht,......

Yen

I
I

TOTAL

I
I

July 1, 2005
Euro

I
I

Yen

TOTAL

I
I

Page 2 of2

1. Contingent liabilities in foreign currency

1.a. Collateral guarantees on debt due within 1
year
1.b. Other contingent liabilities

2. Foreign currency securities with embedded
options

13. Undrawn, unconditional credit lines

I
II

0
0

13.a. With other central banks
3.b. With banks and other financial institutions

I
II

IHeadquartered in the U. S.

I
I

3.c. With banks and other financial institutions

1Headquartered outside the US.

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

14.a. Short positions

II
II

II
0

II
II
II

II"
II

I
I

I
II
II

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

I
I

"
Notes:

11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency 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 fina\.
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.

http://www.treas.gov/pressfreleasesljf> 2005761 039,)~ 122q htn-o

8/11200S

Page 1 of 1

July 6,2005
js-2624

Treasury Secretary Snow Visits Calgary to Discuss National and Global
Economies
U.S. Treasury Secretary John W. Snow will be in Calgary, Alberta this week for
meetings with Canadian Minister of Finance Ralph Goodale. Snow and Goodale will
discuss a broad range of global economic issues on which their two governments
work closely together. Snow will discuss the health and strength of the U.S. and
Canadian economies, and the Bush Administration's commitment to economic
growth and prosperity through sound economic policies. Snow will also address
energy and its economic implications in the context of the U.S.-Canada bilateral
relationship.
The following events are open to credentialed media with photo identification:

Friday July 8, 2005
Photo Opportunity with Secretary Snow and Minister Goodale
11:00 AM
Ft. McMurray
** Media must pre-register for photo opportunity with Brenda Erskine (780) 7436480
** Media must arrive no later than 10: 15 AM
Joint Press Event
3:30 PM
Hyatt Regency Calgary
700 Centre Street SE
The Stephen Room
Calgary, Alberta
** Media please arrive no later than 2:45 PM
** Media please contact Natalie Gauthier with any questions (613) 293-4708

Saturday July 9, 2005
Bilateral Meetings
8:30 AM
Hyatt Regency Calgary
700 Centre Street SE
Calgary, Alberta
** Media please arrive no later than 7:45 AM for photo opportunity
Press Availability
11 :45 AM
Hyatt Regency Calgary
700 Centre Street SE
The Stephen Room
Calgary, Alberta
** Media must be in place by 11: 15 AM
-30-

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Page lof4

July 7,2005
JS-2625

Treasury Secretary John W, Snow
Prepared Remarks
Omaha, Nebraska Chamber of Commerce
Good morning. As we meet here in America's heartland, our hearts, our thoughts
and prayers are with the victims and their families in London.
I have spoken to my friend and colleague, Chancellor Gordon Brown, and
expressed these thoughts to him, and offered our help and assistance as they deal
with this tragic situation.
As the President remarked this morning, these horrific acts stand in stark contrast
to the compassionate work that is being done at the G8 summit in Gleneagles,
Scotland. He noted how vivid the distinction, that while world leaders work together
to alleviate poverty and improve the environment for all the world's people, others
are bent on killing and destruction.
At the Treasury Department we are monitoring global markets. I will stay in touch
with world financial leaders.
Like our allies in Britain, the strength of our country can be found in our people, our
beliefs in justice and the rule of law. In America, we embrace freedom and
entrepreneurship. And while there are brutal killers who hate us for these
humanitarian beliefs, the truth that freedom works is irrefutable.
Our freedom has led to a strong economy - the most dynamic and resilient in the
world. We intend to keep it that way, and that is what I came to talk about, with all of
you, today.
Right now, we have an historic opportunity and an obligation to strengthen the
nation's retirement security system. It is an obligation because the program does
impact our economy so profoundly, and because it would be irresponsible to burden
younger generations with the problems of the program when we have the ability to
deal with them now.
The President is showing real leadership in particular on Social Security. He is
providing our country with an unprecedented chance to save Social Security for
current and near retirees and improve it for younger generations. Conversations like
this are an important part of reaching decisions as to what, exactly, should be done.
But I'm sure you agree with me that the Social Security surpluses must be locked
away and not diverted to other purposes. That is the reason the President is
pressing so hard for
personal accounts. They represent a "personal lock box." They are the best way to
make sure that Social Security funds are dedicated to the Social Security system
and not used for other purposes.
Social Security and retirement security are such an important part of our economy and the reform choices that are made in Washington will have such an impact - that
I think it's important to start any discussion about Social Security with a look at our
economy. Furthermore, the strength of our economy is largely owed to businesses
like yours, so I want you to know just how much of a difference your hard work is
making.

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8/11200S

Page 2 of 4

We've seen amazing economic times in the last few years. Well-timed tax cuts,
combined with sound monetary policy set by the Federal Reserve Board, got our
economy moving when we needed it most. They gave business like yours 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.
So far this year, growth is better than expected - at 3.8 percent for the first quarter
of the 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.
We have had terrific news on jobs - 24 straight months of job growth. The economy
has created over 3.5 million new jobs since May 2003. That's great news - the best
news - for more than 3.5 million families.
The President has made clear his commitment to strengthen our economy further.
This includes reducing the budget deficit - as well as reforming Social Security and
the tax system, reducing the regulatory burden on business, and passing energy
legislation. As I mentioned already, tight controls on discretionary spending and
increased revenue as a result of economic expansion are expected to cut the deficit
to well under two percent of GOP, by fiscal year 2009.
The Treasury announced in May that we expect to pay down $42 billion in debt in
the second quarter of this year, which is very good news and is primarily the result
of higher individual tax receipts.
All of the strong economic indicators, and our ability to pay down debt, point to the
fact that reducing the tax burden proved to be a successful economic stimulus. And
when the economy is growing and spending is controlled, we can also reduce our
deficit.
But the job of keeping our economy unencumbered is a never-ending one, indeed.
From tax cuts to regulations and energy policy, we need to work on it every day,
and we need to work on keeping it strong for the future, for the long-term.
Reforming our Social Security and tax systems addresses some critical long-term
economic issues.
The President is providing important leadership on tax reform and of course his
leadership has made possible the national discussion on Social Security reform,
and more largely on retirement security.
The time to make meaningful and permanent change to the system is now, and
there are two important reasons why we should not delay.
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.
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.
As business owners and operators, no one understands that reality better than you.
If your business needs to undergo change, wouldn't you rather do it when you're
doing well, financially?

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8/11200S

Page 3 of 4

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.
This has to stop. We need to make sure that Social Security surpluses are not used
for other purposes. We need to lock away the surpluses for Social Security.
The best way to do that is to establish the personal accounts. Once money is in a
personal account it can't be used for other purposes. It becomes your money with
your name attached to it. Personal accounts lock the money away; they secure it for
the employee who has paid into the system. They make sure that money is there
for you when you retire. It puts integrity back into the system. It makes sure the
money is used only for its intended purposes.
This is the right way to save, protect and preserve Social Security. We need
Congress to act today to protect those surpluses and to make sure they are there to
fund your retirement and that of your children and grandchildren. Personal accounts
accomplish that objective. That is why the President is firmly committed to them.
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 Nelson, for example, has been 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!
Senator Hagel has come forward with ideas like raising the retirement age for
workers 44 or younger and establishing personal accounts, modeled after the
Federal Thrift Savings Plan, for workers under the age of 45.
Utah Senator Robert Bennett introduced a bill a few weeks 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 well-off grow more slowly, with protection from inflation.
The President has also welcomed plans from other Members like Senator DeMint
and Chairman Bill Thomas. Every time legislation is introduced, it advances this
issue - and that is what the President wants. Chairman Thomas has also
advocated including along with Social Security reform the President's proposed
pension reforms, along with incentives for greater retirement savings, like expanded
401 Ks. Congress needs to act on these pension reforms before the end of the
year. We need to make sure that when companies make pension promises to their
workers, those promises are kept.
This is fascinating time in government history. Enacting real retirement security
reforms this year - which I believe we will - holds great promise for generations of
American workers and retirees. If done right, Social Security reform will benefit our
economy and end the decades-long tradition of hiking payroll taxes every time the
Social Security formula is off-balance.

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8/11200S

Page 4 of 4

Most importantly it will assure that the Social Security surplus is locked away and
not diverted to other uses. Establishing personal accounts as the President has
suggested is the best way to accomplish this objective.
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.gov/pressfreleasesljf>2625.htm

8/11200S

Page 1 of

July 8,2005
JS-2626

Statement of Treasury Secretary John W. Snow on June Employment Report
"Today's strong employment numbers are a reminder that the American economy is
thriving. The unemployment rate is down to 5 percent and more than 3.7 million
jobs have been created since May 2003, with more than one million of those in the
past six months. This news, combined with a recent report showing that the
economy expanded at a 3.8 percent annual rate in the first quarter, illustrate that
the fundamentals of our economy are strong and that we are continuing on a
positive path of growth and prosperity.
"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."

http://www.treas.gov/pressfreleasesljf>2626.htm

R111200"

Page 1 of I

July 8,2005
js-2627

Secretary Snow Discusses Energy Security at Ft. McMurray Oil Sands Facility
in Canada

Secretary Snow and Canadian Finance Minister Ralph Goodale tour the oil sands
facility at Ft. McMurray, Canada.
"Our relationship with Canada is integral to America's energy security This
significantly benefits both of our economies," Secretary Snow said today.

Photo credit: Tony Fratto, U.S. Treasury

H IlJlt Resull ilion Image

http://www.treas.gov/pressfreleasesljf>2627.htm

8111200')

Page 1 of 1

July 8. 2005
js-2628
Secretary Snow Discusses Energy Security at Ft.
McMurray Oil Sands Facility in Canada
"Our relationship with Canada is integral to America's
energy security. This significantly benefits both of our
_
economies." Secretary Snow said Friday.
_

Secretary Snow and Canadian Finance Minister RalPh"
Goodale tour the oil sands facility at Ft. McMurray,
Canada.
,..
•

l
j

HIUI1 Resolution Photo

http://www.treas.gov/pressfreleasesljf>2h2R.htm

9/h/?OO"

Page 1 of2

July 12, 2005
2005-7 -12-11-39-7 -19966
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 $76,052 million as of the end of that week, compared to $76,427 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)

July 1, 2005

July 8, 2005

76,427

76,052

TOTAL

11. Foreign Currency Reserves 1

Euro

la. Securities

11,138

IOf which, issuer headquartered in the U. S.

I
I

Yen

14,085

TOTAL

Euro
11,113

25,223 _

13,653

I
I
I

Yen
14,023

TOTAL
25,136
0

lb. Total deposits with:
Ib.i. Other central banks and BIS

10,822

b.ii. Banks headquartered in the U.S.
b.ii. Of which, banks located abroad

2,831

10,805

"
1/

13,624

2,819

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

13. Special Drawing Rights (SDRs) 2
14. Gold Stock 3

I
I

11,240

15,120
11,130

11,041

15. Other Reserve Assets

15,270

b.iii. Banks headquartered outside the US.

12. IMF Reserve Position 2

I
I
I
I

11,041
0

II. Predetermined Short-Term Drains on Foreign Currency Assets

July 1, 2005
II
I

1. Foreign currency loans and securities

I
I

Euro

Yen

TOTAL

July 8, 2005
Euro

Yen

I
II

TOTAL
0

I
I
I

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

12.a. Short positions

12. b. Long positions
3. Other

I
I

0
0

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

July 1, 2005
Euro

I
1/

Yen

TOTAL

Euro

Yen

TOTAL

"
http://www.treas.gov/pressfreleasesljf>200571211197199()().htm

July 8,2005

8/11200S

Page 2 of2

1. Contingent liabilities in foreign currency

1.a. Collateral guarantees on debt due within 1
year

1. b. Other contingent liabilities

II~p~IOreign currency securities with embedded
ons

13.a. With other central banks

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

I~ ~~?regate short and long positions of options
orelgn

I
I

0
0

I
I

Currencies vis-a-vis the U.S. dollar

14.a. Short positions

13. Undrawn, unconditional credit lines
3.b. With banks and other financial institutions

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

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

I
I
I

I
I

Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency 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.

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Page 1 of2

July 12, 2005
JS-2005-07 -08
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 $76,052 million as of the end of that week, compared to $76,427 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)

II
TOTAL.!

11. Foreign Currency Reserves 1
a. Securities

t'£r which, issuer headquartered in the U. S.

Euro

I
I

11,138

I
I
I

10,822

II
II

July 1, 2005

July 8, 2005

76,427

76,052

Yen

TOTAL

Euro

Yen

TOTAL

14,085

I
I

25,223

11,113

14,023

25,136

13,624

b. Total deposits with:
b.i. Other central banks and BIS
b.ii. Banks headquartered in the U.S.

b.ii. Of which, banks located abroad

I
I
I

2,831

13,653

10,805

0
0

2,819

I
I
I

0
0

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

. ,_" which, banks located in the U.S.

15,270

15,120

11,240

11,130

IU'

12 IMF Reserve Position

13. Special Drawing Rights (SDRs)

14. Gold Stock

15. Other Reserve Assets

II
II
II

11,041

II
II

II. Predetermined Short-Term Drains on Foreign Currency Assets
July 1, 2005
Yen

Euro
~~oreign currency loans and securities

TOTAL

July 8, 2005
Euro

Yen

I
I

TOTAL
0

;2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
2.a. Short positions
12.b. Long positions

13. Other

I
I

0
0

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

I
I

http://www.treas.gov/pressfreleasesljf> ~OO'::;070R htm

July 1, 2005
Euro

I
II

Yen

TOTAL

July 8, 2005

II
Euro

Yen

TOTAL

8/11200S

Page 2 of2

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

1.b. Other contingent liabilities
,2. Foreign currency securities with embedded
options

I
I

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

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

14.a. Short positions

"
0

13. Undrawn, unconditional credit lines

IHeadquartered outside the U. S.

II
II

I
I

4.a.1. Bought puts
14.a.2. Written calls
4.b. Long positions
4.b.1. Bought calls
14.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/doliar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.

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Page 1 of7

July 13. 2005
JS-2629

Testimony of Stuart Levey, Under Secretary
Office of Terrorism and Financiallnte/ligence
U.S. Department of the Treasury
Before the Senate Committee on Banking, Housing, and
Urban Affairs
Chairman Shelby. Ranking Member Sarbanes and other distinguished members of
the Committee, thank you for the opportunity to speak before you today about
terrorist financing and money laundering in the Middle East. I welcome this
committee's ongoing focus on this pressing topic, and your dedication to help stop
the flow of funds to our nation's enemies.
This hearing comes less than a week after the terrible attacks in London and I
would like to express my sincerest condolences to the families of the victims. The
brave resolve that the British people have shown resonated around the world in
defiant response to cowards who seek to disrupt our very way of life. These acts of
terror serve as a tragic reminder that our resolve to combat terrorism and terrorist
financing must not waver.
As I approach the end of my first full year as Under Secretary of the Office of
Terrorism and Financial Intelligence at the Treasury Department, I am constantly
assessing our progress in the fight against the financing of terrorism. To be sure,
we have achieved some important successes in this fight. We can point to multiple
successes which reflect the excellent coordination and teamwork of all U.S.
Government agencies over the past year. Thanks to the State Department's
leadership and concerted work with us, we are witnessing a growing consensus in
the world about the need to address terrorist financing in tangible ways. We have
seen the culmination of a number of critical prosecutions investigated by the FBI-led
Joint Terrorism Task Forces and prosecuted by the Department of Justice, as I will
discuss later in this testimony. We at Treasury have designated numerous
supporters of terrorism - including particularly significant figures such as Adel
Batterjee - acting in close coordination with our interagency and international
counterparts. We have used Section 311 of the USA PATRIOT Act judiciously and
effectively against primary money laundering concerns, and we are seeing real
results. One of the most promising developments is the President's issuance of
Executive Order 13382, which applies the same methods we have used
successfully to block assets of terrorist supporters to those who aid in the spread of
weapons of mass destruction. Our other interagency partners - especially in the
intelligence community - are constantly working to stem the tide of terrorist
financing, with little glory or recognition for their tireless efforts. Our collective drive
to hold financial supporters of terror personally responsible as terrorists is creating
the desired pressure and deterrence. In the end, we are starting to see encouraging
results: terrorist groups like al Qaida and HAMAS are feeling the pinch and do not
have the same easy access to funds that they once did.
Our most significant progress has been in bringing about a change in mind-set.
There is now near-unanimous recognition among nations that terrorist financing and
money laundering pose threats that cannot be ignored and there is widespread
agreement upon a shared set of standards to combat these dangers. We will not
accept the protest that ideological differences or bureaucratic obstacles excuse
nations from the obligation to comply with global standards. As we were all brutally
reminded by the attacks in London last week, we are facing a global threat with
global implications. All civilized nations must meet their basic responsibilities to
prevent the financing and support of terrorism.

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At the same time, we recognize that the range of threats and institutional
frameworks across different countries necessitates flexibility and a range of
approaches. We cannot apply a "one size fits all" approach to terrorist financing,
nor can or should we try to force countries to adopt a "U.S. model." So long as
internationally-established principles are given real effect, in law and in practice,
there is room for a variety of approaches. - Indeed, we learn from the successes
and failures of others. Each country and institution presents unique challenges that
require nuanced solutions.
The Middle East rightfully captures our attention at Treasury, and in the interagency
community, as it is both a wellspring of and a target for terrorist financiers and those
who spread extremist ideologies that justify and fuel terrorism.
Terrorism is increasingly targeted at innocents in the Middle East. Recent terrorist
attacks in Turkey, Morocco, Saudi Arabia, Kuwait, and Qatar should be impetus to
drive change throughout the region. Where the threat of terrorism does not
generate the will to take effective action, however, my office, working in close
cooperation with all of our interagency counterparts, will push for action.
It would not be feasible to include a complete catalogue in this testimony of all of
our engagements in multilateral forums and bilateral discussions with respect to
terrorist financing in the Middle East. Instead, I would like to try give the Committee
a general description and some examples that show how we are simultaneously (1)
driving the adoption and implementation of common global standards to prevent
terrorist financing and money laundering, and (2) pressing individual countries and
the private sector to do more to combat the terrorist threat we all face.
COMMON APPROACHES
In our common approach to the Middle East, one important objective is to persuade
each country to attach the necessary priority to anti-money laundering and counterterrorist financing. This is not only important from an enforcement perspective, but
also a prerequisite for any country looking to attract international business and
investment. For the most part, countries are increasingly recognizing this and
looking to comply with global standards and reassure international businesses and
investors.
I made a trip to Libya last month, representing the highest level delegation to visit
that country since the lifting of sanctions eleven months ago. While there, I met with
Colonel Qadhafi, the Central Bank Governor, and the Minister of Finance and
pressed Libya to adopt anti-money laundering and counter-terrorist financing
reforms as it attempts to emerge from isolation and engage increasingly in the
world's financial community. The Libyan financial sector is in its infancy, but as it
develops, I conveyed that the United States expects anti-money laundering and
terrorist financing initiatives to be high on their agenda as part of an overall
counterterrorism strategy.
We are also seeing that countries are responsive to the type of pressure that comes
from international standard-setting bodies. The Financial Action Task Force (FATF)
sets the global standards for anti-money laundering and counter-terrorist financing,
and it is also through this venue that we promote results. Treasury, along with our
counterparts at State, Justice, and Homeland Security, has taken an active role in
this 33-member body which articulates international standards in the form of
recommendations, guidelines, and best practices to aid countries in developing
their own specific anti-money laundering and counter-terrorist financing laws and
regulations. FATF maintains the authority and has demonstrated its willingness to
take collective actions against jurisdictions that pose a threat to the financial
system. We do our part to promote the multilateral effect of FATF standards
through focused bilateral engagement.
As an example, I recently visited Turkey to speak with the Finance Minister, Justice
Minister and several other high-level members of the Turkish government. While
Turkey is not part of what we generally refer to as the Middle East, its geographic
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strategy when we think about the threat of terrorism emanating from the Middle
East. Turkey has been a key NATO ally and has a long and painful history of
fighting terrorism within its borders. I expressed our appreciation for the close
cooperation we have enjoyed with the Turkish government in combating terrorism
and in many other areas. However, as a FATF member since 1991, Turkey's
current anti-money laundering and counter-terrorist financing regimes need
significant improvement. Turkey is looking to address these issues, and I
encouraged Turkey to redouble its efforts to comply with FATF standards in
advance of its mutual evaluation scheduled for early next year. Turkey is too
important a partner to us, and too important a regional power to let its anti-money
laundering and counter-terrorist financing regimes fall out of step. We look forward
to seeing Turkey succeed in its reform efforts over the coming months.
Although not a member of FATF, Jordan, another regional ally, is working hard to
bring its anti-money laundering and counter-terrorist financing practices up to
international standards. The government has submitted a new AML law to the
Parliament, which may consider it in its extraordinary session this summer. I visited
Jordan this past February in large part to encourage them to pass this law and
implement it as quickly as possible. These steps will inure to their own economic
benefit - bolstering the health and attractiveness of their financial sector - while
also aiding in the global fight against terrorist financing. Given Jordan's prominent
role in the financial sector of the West Bank and Gaza, these improvements are
also important to reduce the potential for terrorist financing in those areas of
strategic concern.
The success and force of FATF lie not only in the mutual evaluation process to
which it holds its own members, but also in the emergence of FATF-style regional
bodies (FSRBs) that agree to adopt FATF standards and model themselves
accordingly on a regional level. The Middle East and North Africa body, or "MENA
FATF" is one of the newest and potentially most effective organizations to emerge.
Launched in November 2004, this 14-member body held its first plenary session in
Bahrain in April 2005 and is preparing for its second plenary session in September
of this year, currently scheduled to take place in Beirut. It remains too early to tell
how effective MENA FATF will be, but the indications so far demonstrate
considerable enthusiasm and energy. This body is already working on a process to
assess its members for compliance with international standards and have formed
working groups to address key issues like cash couriers, charities, and hawala. We
support this initiative and hope that it will succeed on the difficult road that lies
ahead of it.
The Egmont Group is an international body comprised of financial intelligence units
(FlUs) across the globe. It is another example of a body that demands that its
members comply with certain standards and maintain those standards over time.
Treasury's Financial Crimes Enforcement Network is currently working closely with
Saudi Arabia, Jordan, and Kuwait to develop their FlUs; we have seen some
progress to date and are eager to see it develop further.
Implementation

Adoption of legislation and regulations is meaningless without strong and effective
implementation. Some countries, eager to curry favor with their neighbors or the
international community, may believe that adopting an anti-money laundering and
counter-terrorist financing law will keep observers at bay. Such half-steps will
neither fool nor satisfy the United States and the international community. We will
continue to press for effective implementation, including investigations,
prosecutions, deSignations, and other demonstrable actions.
Private Sector

Collective pressure to implement international standards has been effective in the
drive to bring countries on board with anti-money laundering and counter-terrorist
financing efforts. At the same time that we are pressing at the government level,
though, we are also working with the international private sector. The potential, both
for information exchange and for combating the flow of illicit funds, is enormous. As
but one example, we have seen financial institutions in the Middle East and

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elsewhere voluntarily checking account holders and transactions against Treasury's
list of designated entities, as well as other lists, and using that information to
determine whether or not to take on business or process a transaction. This means
that the rigorous efforts by Treasury and the U.S. Government to identify and
isolate key sponsors of terrorism, as well as sponsors of weapons proliferation, are
being given wide effect in private banks in the Middle East and the world.
We have also solicited the cooperation of some of the larger and more responsible
financial institutions to advocate for reforms among their colleagues and in their
various host countries. These institutions typically exhibit diligent anti-money
laundering and terrorist financing practices even when their host countries do not
require it. This puts these institutions at a competitive disadvantage vis-a-vis
institutions that are less conscientious. Furthermore, these institutions are forced to
take measures to protect themselves when doing business with financial institutions
in countries with weak anti-money laundering and counter-terrorist financing
regimes. We therefore believe that it is in the interest of more responsible
institutions to create a momentum for reform among their colleagues, not just in the
Middle East but worldwide.
ALTERNATIVE FINANCING METHODS
One effect of U.S. and international action against terrorist financiers has been to
push supporters of terrorism out of the formal financial system and into riskier, more
expensive, and more cumbersome methods of raising and moving money, such as
cash couriers, charities, and hawala. While this hearing is not focused on
alternative financing methods, I wanted to give the Committee a brief overview of
our work in these areas.
Charities

Terrorist groups have long exploited charities for several key reasons, including the
following:
The "legitimate" activities of these charities, such as the operation of
schools, religious institutions, and hospitals, can - if abused - create fertile
recruitment grounds, allowing terrorists to generate support for their causes
and to propagate extremist ideologies.
• Charities attract large numbers of unwitting donors along with the witting,
thus increasing the amount of money available to terrorists.
• To the extent that these charities provide genuine relief, which nearly all of
them do, they benefit from public support and an attendant disinclination by
many governments to take enforcement action against them.
• Charitable funds are meant to move in one direction only; accordingly, large
purported charitable transfers can move without a corresponding return of
value and without arousing suspicion.
• International charities naturally focus their relief efforts on areas of conflict,
also prime locations for terrorist networks. Such charities provide excellent
cover for the movement of personnel and even military supplies to and from
high-risk areas.
•

The U.S. Government has confronted this problem head on in a coordinated
manner. We have thus far designated more than 40 charities worldwide as
supporters of terrorism. Two notable examples are our actions against the U.S.
branches of the AI Haramain Islamic Foundation and the Islamic African Relief
Agency (lARA), both al Qaida-linked charities that were operating in the United
States. In both cases, law enforcement agents executed search warrants while
Treasury's OFAC Simultaneously blocked the organizations' assets, stopping the
flow of money through these groups. Thanks to the work of the State Department,
we have persuaded other nations to join us in bringing these and other charities to
the United Nations Security Council for designation, and to shutter these dangerous
organizations in their respective countries.
Designations and law enforcement actions are making an impact and are serving
as a valuable deterrent. Anecdotal evidence suggests that once-willing donors are

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now thinking twice or balking altogether at sending money to terrorist groups. In this
regard, I would note that one advantage we enjoy in the terrorist financing arena is
the strength of deterrence - our targets have something to lose. In contrast to
terrorist operatives who may be willing to die for their hateful cause, terrorist
financiers typically live public lives with all that entails: property, occupation, family,
and social position. Being publicly identified as a financier and supporter of terror
threatens an end to all of this, lending our actions a real deterrent impact.

Hawala
Hawala, a relationship-based system of money remittances, plays a prominent role
in the financial systems of the Middle East. Domestically, we have worked with our
interagency partners to ensure that money service businesses like hawalas,
register with the Financial Crimes Enforcement Network and comply with applicable
anti-money laundering provisions. On the one hand, we are reaching out to this
sector to educate businesses about their legal obligations. Enforcement of the
Patriot Act's criminal provisions against operating an unlicensed money service
business also plays a key deterrent role. Just this week, an ICE investigation led to
a guilty plea by an unlicensed money service business, who had sent millions of
dollars to Syria and other countries. While we are making progress, the effective
regulation of money service businesses continues to present a significant
challenge. Internationally, Treasury leadership in the FATF has brought the issue of
hawala to the forefront, resulting in the implementation of FATF Special
Recommendation VI, which requires all FATF countries to ensure that individuals
and entities providing money transmission services must be licensed or registered,
and subjected to the international standards set out by FATF. Regionally, the UAE
is playing a key leadership role on this issue. We will continue to insist that hawala
be subjected to appropriate regulation and oversight.

Cash Couriers
As governments apply stricter oversight and controls to banks, wire transmitters,
and other traditional methods of moving money, we are witneSSing terrorists and
criminals resorting to bulk cash smuggling. FATF Special Recommendation IX was
issued in late 2004 to address this problem and it calls upon countries to monitor for
cross-border transportation of currency and to make sanctions available against
those who make false declarations or disclosures in this regard. This
recommendation has already prompted changes in legislation abroad. On the
domestic front, Treasury is working with the interagency community, particularly the
Department of Homeland Security's Immigration and Customs Enforcement (ICE)
and Customs and Border Protection (CBP), to deter, disrupt, and apprehend cash
smugglers. We are also looking into technologies that will allow us to detect
secreted concentrations of cash, as well as tools that will allow us to track the
movement of physical cash around the world.

CASE STUDIES
Syria
As a serious national security threat and a state sponsor of terrorism, Syria has
been the object of targeted Treasury action for some time. Syria continues to
meddle in Lebanon's affairs, allows the Iraqi insurgency to be partially funded and
fueled from within its borders, and allows terrorist organizations and supporters to
flourish there as well. At Treasury, we are addressing this threat with a spectrum of
targeted actions aimed at reversing this course.
On June 30, we designated Ghazi Kanaan, the current Syrian Minister of Interior,
and Rustum Ghazali, the Chief of Syrian Military Intelligence for Lebanon pursuant
to E.O. 13338 for their role in supporting Syria's military and security presence in
Lebanon and support for terrorism. This was a very important first step at identifying
high-level Syrian officials who are interfering in Lebanon's political developments
With respect to the Iraq insurgency, in January of this year, we designated the
Syria-based supporter of Abu Mus'ab al-Zarqawi, Sulayman Darwish, pursuant to
E.O. 13224 for acting as one of Zarqawi's operatives in Iraq and serving on his

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Advisory Council. The Syrian government joined us in cO-designating this individual
at the United Nations pursuant to UNSC 1267. On June 17, we designated
Muhammad Yunis Ahmad, pursuant to E.O. 13315, for providing funding,
leadership and support from his base in Syria to several insurgent groups that are
conducting attacks in Iraq. We also designated the Syria-based SES International
Corporation and two associated individuals, General Zuhayr Shalish and Asif
Shalish pursuant to E.O. 13315 for their support to senior officials of the former Iraqi
regime. SES acted as false end-user for the former Iraqi regime and facilitated
Iraq's procurement of illicit military goods in contravention of UN sanctions. Finally,
President Bush specifically designated Syria's Scientific Studies Research Center
(SSRC) as one of the eight entities (the others were in North Korea and Iran)
designated pursuant to the newly issued Executive Order 13382, which blocks the
property of proliferators of weapons of mass destruction and their supporters.
SSRC is the Syrian government agency responsible for developing and producing
non-conventional weapons and the missiles to deliver them. While it has a civilian
research function, SSRC's activities focus substantively on the acquisition of
biological and chemical weapons.
Separately, in May of last year, we issued a proposed rule, designating the
Commercial Bank of Syria (CBS) as a "primary money laundering concern,"
pursuant to Section 311 of the USA PATRIOT Act. The designation was premised
on concerns about financial wrongdoing at that bank, including terrorist financing. In
connection with the proposed rule, we presented a series of demands to Syrian
authorities, ranging from reform of their banking sector to immediate, effective
action to cut off the flow of funds across the Syrian border to the Iraqi insurgency.
We will continue to use the tools available to us to press Syria to take concrete
actions to address our concerns.
Saudi Arabia

We have pursued a strategy of sustained pressure and cooperation with Saudi
Arabia to address a number of challenges. This Committee is by now well aware
that Saudi Arabia has increased its counter-terrorism cooperation since the Riyadh
bombings in May 2003, marked by ever more intense Saudi efforts to confront
directly violent extremism in the Kingdom. The Committee is also well aware that
the challenges posed by terrorist financing from within Saudi Arabia are among the
most daunting we have faced. Wealthy Saudi financiers and charities have funded
terrorist organizations and causes that support terrorism and the ideology that fuels
the terrorists' agenda. Even today, we believe that Saudi donors may still be a
significant source of terrorist financing, including for the insurgency in Iraq.
Saudi Arabia-based and funded organizations remain a key source for the
promotion of ideologies used by terrorists and violent extremists around the world to
justify their hate-filled agenda. The Saudi government has taken seriously the
threats posed to both the Kingdom and the United States by all of these issues, and
we have worked with and offered guidance to help confront the real threat of
terrorist support. As a result, among other things, the Kingdom has made changes
to its charitable system and regulations to address certain vulnerabilities. This
progress is the result of focused interagency attention and cooperation, led by
Homeland Security and Counterterrorism Advisor Frances Fragos Townsend's
consistent and direct outreach.
However, Saudi Arabian charities, particularly the International Islamic Relief
Organization (IIRO), the World Association of Muslim Youth (WAMY), and the
Muslim World League (MWL) continue to cause us concern. The Kingdom of Saudi
Arabia announced that it would freeze all international transfers until it had
established an oversight commission to regulate its charitable sector. While that
would represent a satisfactory short-term solution if implemented fully, it is
important that the announced commission take shape. As we have stated
previously to our Saudi counterparts, these three charities must fall under the
commission's oversight. I recently conveyed my views on these issues to Saudi
officials, and was met with positive indications that they wish to redress these
lingering concerns. I will keep this Committee informed of progress in this area.

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At the same time. it must be noted that there have been real and tangible
improvements in Saudi Arabia's cooperation on terrorism financing issues. Through
the Joint Terrorist Financing Task Force (JTFTF), we have built the foundation for
consequential and timely information exchange as well as selected joint action. We
expect to continue building on the initial success of the JTFTF and look forward to
broadening the cooperation in that area, In fact. the preliminary success of the
JTFTF has prompted us to consider applying a similar model to our efforts
elsewhere in the Gulf.
Our work on cash couriers offers another example of the need for continuing work
with Saudi Arabia, Cash couriers present a serious danger. particularly because of
their use to fund the deadly insurgency in Iraq, It is critical that Saudi Arabia and
other Gulf countries lower reporting thresholds for cross-border transfers of cash
and enforce these provisions aggressively, We intend to work with Saudi Arabia
and others in the Gulf to pursue that goal.

Palestinian Territories
With respect to the Palestinian territories, we continue to grapple with the problem
of charities being abused to support terrorism, Groups such as HAMAS. Palestinian
Islamic Jihad (PIJ). and others have infiltrated the charitable sector in the territories
and have corrupted badly needed relief organizations, We have been very
aggressive in acting against such charities, Most recently, Treasury designated a
PIJ charitable front, the Elehssan Society on May 4, The Elehssan Society served
as the fund-raising arm of PIJ in Gaza and the West Bank and distributed funds to
the families of PIJ prisoners and suicide bombers, Just this February. PIJ claimed
responsibility for a terrorist attack in Tel-Aviv that killed five and wounded over 50,
We will continue to pursue this organization and any that rise up to take its place.
The Justice Department has played a vital role in this arena. In April, for example.
the Department of Justice secured the conviction of three brothers linked to the
Holy Land Foundation for their conduct in concealing the continuing ownership
interests of Hamas leader Mousa Abu Marzook in their closely-held private
company,
We recognize that enforcement actions have sometimes cut off sources of relief to
communities in need and inadvertently decreased the support of charities and
donors that deliver funds to legitimate causes, Our goal is not to deter charitable
giving but instead to protect the charitable sector such that donors' generosity is not
abused and they feel safe in providing their contributions, Therefore, there is
therefore a particularly urgent need in this region for safe channels of assistance
that donors can be assured will not be subverted by terrorists. When I traveled to
the region in February. I discussed this problem with both Israeli and Palestinian
officials, In speaking with President Abbas and in several follow-up meetings with
Finance Minister Fayyad, I noted serious commitment on their part to cutting off the
flow of funds to terrorism. and welcomed the message they expressed that
responsibility for accountable financial systems begins with the government. The
Israelis were also strongly of the view that it would be advantageous for all involved
to find a way to provide needed humanitarian aid. outside the control of HAMAS or
any other terrorist group. We are currently working with the Palestinian Authority to
develop options through which such aid could be provided in a safe and effective
manner.
CONCLUSION
To combat terrorist financing and money laundering over the long term. we are
vigorously and effectively promoting international standards and encouraging
countries in the Middle East to adopt appropriate legislation and to implement those
laws, We are also taking the necessary actions to build political will at the highest
levels of every government to combat the financing of terrorism, Still. we have a
long way to go in the battle against terrorist financing in the Middle East. both in
terms of robust implementation of those standards and in responding to specific
threats and circumstances, Thank you again for holding this hearing and for your
sustained commitment to this topic, I would be happy to take your questions,

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July 13, 2005
JS-2630
Testimony of Treasury Secretary John W. Snow
before Committee on Financial Services
U.S. House of Representatives
on the Terrorism Risk Reinsurance Program
Thank you, Chairman Oxley, Ranking Member Frank, and other members of the
Committee. I appreciate the opportunity to discuss the Treasury Department report
on the Terrorism Risk Insurance Act (TRIA).
As you know. President Bush signed TRIA into law in November of 2002 to help
safeguard America's economy following the terrorist attacks of September 11,
2001. The September 11 losses led the insurance industry to reduce its exposure to
future losses largely by excluding coverage of terrorism risk in many policies. The
pullbacks in terrorism coverage and the quotations of rapidly increasing premiums
raised concerns that this period of adjustment to the reality of global terrorism risk in
the insurance market could have a negative effect on the economy.
In response, TRIA was passed. It was meant to address any market disruptions and
ensure the continued widespread availability and affordability of property and
casualty insurance for terrorism risk, and to allow a transitional period for the private
markets to stabilize, resume pricing of such insurance, and build capacity to absorb
any future losses, while preserving State insurance regulation and consumer
protections.
TRIA required the Treasury Department to assess the effectiveness of the
Terrorism Risk Insurance Program. It also required Treasury to assess the likely
capacity of the property and casualty insurance industry to offer insurance for
terrorism risk after termination of the Program.
The report finds that TRIA has been effective in meeting its goals of supporting the
industry during a transitional period and stabilizing the private insurance market.
Consistent with TRIA's design to encourage the development of the private market,
the Administration opposes a straight extension of the program. Extending TRIA in
its current form is likely to discourage the private market development needed to
deal with the risk of terrorism. The Administration has outlined principles that any
extension should recognize and we look forward to discussions with the Congress
on them. Before I review the main findings of the report, however, I would like to
discuss the approach that the Treasury Department took in the course of evaluating
TRIA.
Treasury Approach to TRIA Evaluation
Treasury contracted with an outside survey research firm to conduct two
independent, nationally representative surveys. One survey sampled insurers in the
commercial property and casualty line, which is eligible for the federal reinsurance
provided under the Program. The other survey sampled policyholders, businesses
and other organizations that purchased commercial property and casualty
insurance in TRIA-eligible lines. Respondents were asked to provide information on
an annual basis from 2002 (prior to passage of TRIA), to the first two months of
2005. The data therefore give a unique, comprehensive overview of the availability
and affordability of terrorism risk insurance coverage in the private market.
From insurers, the surveys collected information on the amount of terrorism

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coverage written, the cost of terrorism coverage, terms and conditions on terrorism
coverage and the purchase of reinsurance. From policyholders, we collected
information on take-up and cost of terrorism coverage, the characteristics of firms
and other organizations that purchase terrorism coverage, special terms and
conditions associated with that coverage, reasons why the mandatory coverage
offer was declined, and loss-mitigation efforts.
To safeguard the confidentiality of the business information requested in these
surveys, Treasury took great care to ensure that the data were assembled at arm's
length from the government. All identifying information was removed or masked
prior to analysis by Treasury staff and officials.
I have been insistent throughout this process, consistent with Congress' direction to
us in TRIA, that we draw upon as many sources of information and input as
possible. Treasury has in fact consulted with a broad range of experts representing
the insurance industry, the National Association of Insurance Commissioners
(NAIC), policyholders, and taxpayer groups in developing the survey instruments.
Preliminary survey instruments were reviewed by insurance industry
representatives, NAIC representatives and others experts, including the American
Insurance Association (AlA), and the Alliance of American Insurers (AAI) after
consultation with its members. Members of the Coalition to Insure Against
Terrorism (CIAT) also met with Treasury staff to review the policyholder survey.
We are very pleased with the extensive collaborative process that Treasury
undertook to conduct this assessment, and believe that it reflects fully the extensive
input of the industry and other groups. The completed survey results, and
information derived from these other sources forms the basis of the Report to
Congress.
Structure of TRIA

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. TRIA represents a form of publicly-provided and
subsidized terrorism risk reinsurance, which essentially transfers risks associated
with terrorism losses from the private to the public sector (taxpayers).
Under TRIA, companies that provide commercial property and casualty insurance
are required to offer ("make available") terrorism coverage on the same terms and
conditions as offered in their non-TRIA coverage. To be eligible for TRIA
reinsurance, an act of terrorism must be certified by the Secretary of the Treasury,
with the concurrence of the Secretary of State and the Attorney General., and must
have resulted in aggregate property and casualty losses of $5 million or more. TRIA
defines an act of terrorism as (1) a violent act or act that is dangerous to human life,
property or infrastructure, that (2) has resulted in damage within the United States
or outside of the United States in the case of an air carrier or vessel (as defined by
TRIA) or on the premises of a United States mission, and (3) has been committed
by an individual or individuals acting on behalf of any foreign person or interest, (4)
as part of an effort to coerce the U.S. civilian population or influence the policy or
affect the conduct of the U.S. government by coercion.
The federal government would have to cover 90 percent of insured losses beyond
an insurer deductible, up to $100 billion per year. In the first full Program Year
(2003) the deductible was 7 percent of 2002 premiums, in 2004 the deductible was
10 percent of 2003 premiums, and in 2005 the deductible is 15 percent of 2004
premiums. The purpose of the graduated deductible amounts was to encourage
development of private market capacity over time. Insurers are also liable for 10
percent of losses above the deductible threshold.
In the event that the federal government provides compensation for insured losses
for an act of terrorism under the Program, TRIA requires recoupment of at least a
portion of the federal compensation through policyholder premium surcharges.
Recoupment is mandatory in cases where the aggregate industry insured terrorism
losses (deductibles and co-pays) are below a specified aggregate retention amount.

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The annual aggregate retention amount was $10 billion for 2003, $12.5 billion for
2004 and is $15 billion for 2005. The government is required to collect the
difference between these recoupment amounts and the aggregate industry insured
terrorism losses through an industry-wide surcharge, not to exceed 3 percent of the
premium paid on a policy. If the aggregate industry insured terrorism losses exceed
the aggregate retention amount, the federal government may require recoupment at
the discretion of the Secretary of the Treasury, but the statute does not require
recoupment.
To encourage the development of private market capacity over time, provisions in
TRIA have gradually shifted more of the risk to the private sector.

Impact of TRIA on Insurance Markets
The Treasury Department report finds that the Program provided support in a
transitional period, during which the capacity of the insurance industry to write
terrorism risk insurance has improved.
I will elaborate on four main findings in the report:
•
•
•
•

Industry capacity to provide coverage for terrorism risk has improved, as
has take-up of such coverage.
Insurers are increasingly pricing terrorism risk insurance, and the price of
coverage with an explicit charge has decreased.
Industry surplus has improved.
Many insurers reinsure a substantial portion of their retained risk under
TRIA, but overall reinsurance purchases have not increased substantially.

Availability and Take-up of Terrorism Coverage
Results from both the survey of insurers and the survey of policyholders show that
the availability and the take-up (purchase) of terrorism insurance increased while
TRIA has been in effect.
Insurers now provide terrorism coverage on a greater share of commercial property
and casualty insurance policies than in 2002 (the year before TRIA). While 60
percent of policies written in 2002 included terrorism insurance coverage, fully twothirds of such policies included such coverage in 2004. Terrorism insurance was
also more widely available in the market, as the share of insurers providing any
terrorism coverage rose from 73 percent to 91 percent over the period.
Policyholders as well are now more likely to purchase terrorism risk insurance than
in 2002. The data show a doubling in the take-up rate of terrorism risk coverage:
from 27 percent of policyholders in 2002 to 54 percent of policyholders by 2004.
The finding that just under half of policyholders do not take-up such coverage does
not necessarily reflect a problem in the market. The decision to purchase terrorism
insurance reflects a tradeoff between the benefits and cost of the coverage. Firms
that perceive a low risk of terrorism attacks or that have some form of self insurance
(for example, through diversified portfolios) may simply not place a high value on
terrorism insurance. It is useful to note that TRIA did not mandate the purchase of
terrorism insurance, but rather that such coverage be made available.
Pricing and Cost
Both insurer and policyholder surveys show that insurers increasingly began pricing
terrorism risk insurance during the time TRIA was in effect. More than 75 percent of
insurers providing coverage for terrorism risk in 2002 did not charge for it, but only
40 percent in 2004 provided coverage for free. These numbers are very similar to
those reported by policyholders.
The average cost of terrorism insurance (measured as the share of total premiums
paid for terrorism coverage) generally rose during this period. Overall, insurers
reported costs ranging from 0.9 percent of premiums in 2002 to 1.8 percent by

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2004. Among insurers who charged for terrorism insurance, the share of premiums
charged for terrorism coverage first declined from 3.7 to 2.4 percent of premiums
between 2002 and 2003, but then increased to 3.1 percent of premiums by 2004.
The average costs reported by policyholders increased from 1.2 percent of
premium in 2002 to 1.6 percent in 2003, and further to 1.7 percent of premium by
2004. Among policyholders who reported paying for terrorism coverage, cost
declined steadily over the period: from 4.0 percent of premium in 2002 to 2.8
percent in 2003 and further to 2.7 percent of premium in 2004.
Policyholders located in high-risk cities faced overall declining costs for terrorism
risk coverage that varied from 2.8 percent of premiums in 2002, 3 percent in 2003
and 1.9 percent in 2004.
Industry Surplus and Reinsurance
Industry surplus, a key source of insurer capacity, has returned to pre- September
11 th levels. Insurers are financially stronger and more able to bear unexpected
losses than they were prior to the enactment of TRIA. Reinsurance, another
important component of an insurer's capacity to absorb losses, has not increased
substantially, however. Seventy percent of insurers reported purchasing
reinsurance for terrorism risk in 2003, but only 65 percent in 2004 reported
purchasing reinsurance in 2004. Preliminary data from the first months of 2005 are
encouraging and suggest a rebound to 75 percent. Smaller and medium-sized
insurers generally reported greater use of reinsurance for terrorism risk exposure
(TRIA deductibles and co-payments) between 2003 and 2005. During this same
period, however, larger insurers reported less use of reinsurance for terrorism risk
exposure.
Summary
The findings from the surveys of insurers and policyholders point to the success of
TRIA in achieving its short term goals. TRIA effectively "addressed market
disruptions and ensur[ed) the continued widespread availability and affordability of
property and casualty insurance for terrorism risk." While we don't ascribe a direct
causal effect to TRIA, we note that insurer financial strength has improved
substantially over this period. More generally, TRIA allowed both insurers and
policyholders time to adjust to the post-September 11th view of terrorism risk.
TRIA provisions shifted an increasing share of expected terrorism losses back to
the private sector, as the deductible was increased from 7 percent of premiums in
2002 to 15 percent of premiums in 2004. Had there been no improvement in
capacity, we should observe a pullback of terrorism coverage in response to this
shift in cost. The expansion of terrorism risk coverage availability and take-up, and
the decline in cost even as the TRIA deductible has increased therefore highlights
the improvement in the industry's ability to cover terrorism risk.
Industry Capacity to Cover Terrorism Risk After TRIA
Congress also directed Treasury to assess the likely capacity of the property and
casualty insurance industry to offer insurance for terrorism risk after expiration of
the program. TRIA provided a federal backstop for terrorism losses that effectively
subsidized terrorism risk insurance. It is reasonable to expect that the removal of
the subsidy will result in adjustments in coverage and pricing. In the Treasury
report, we present a framework to evaluate the impact of a TRIA sunset in more
detail, and provide evidence from our surveys and from insurance industry
statistics, data, and discussions with industry and other experts. Two important
determinants of insurers' ability to effectively write coverage for terrorism in the
near-term are the ability to model terrorism risk and the industry's financial capacity
- including both surplus and access to reinsurance - to cover terrorism losses.
Modeling Terrorism Losses

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Financial Capacity
An insurer's capacity to write coverage is limited to the maximum coverage it could
provide, while retaining its ability to meet current and future obligations to its base
of policyholders. An important determinant of insurers' capacity to cover terrorism
losses is financial strength, which incorporates both balance sheet strength and
operating performance. The financial health of the insurance industry, especially
surplus, has improved greatly in the past three years. Among insurer groups
providing coverage in TRIA-eligible property and casualty lines, surplus was higher
in the third quarter of 2004 than it was in the third quarters of 2001, 2002 and 2003.
Between the 3rd quarter of 2001 and the 3rd quarter of 2004, surplus increased
from $256 billion to $341 billion. Measures of the industry's capacity to cover
terrorism risk, including the ratio of net premiums to surplus, the return on surplus,
and the capital adequacy ratio (accounts for underwriting, investment and credit
risk) have all improved since the losses following the September 11 attacks.
By purchasing reinsurance, insurers can write additional coverage without
increaSing their financial holdings. Our survey results show that reinsurance is
available, and purchased, for a sizable portion of the retained risk under TRIA.
Seventy percent of insurers purchased reinsurance for TRIA-eligible risks in 2003.
The results also indicate, however, that over the time period covered by our study,
purchases of reinsurance have not increased substantially.

Insurance Market Outcomes
The expiration of TRIA will change the business environment in which insurers
operate and will therefore change their behavior. Insurers will likely consider factors
such as the possibility of insolvency from terrorism losses given the levels of
surplus available and the effect on credit ratings. Experience with natural
catastrophe risk underwriting and assignment of agency ratings suggests that in
order to avoid ratings downgrades, insurers may significantly alter their approach to
terrorism risk insurance after TRIA's expiration. Among the changes insurers may
institute are increasing the use of private reinsurance, building surplus by tapping
into capital markets, and raising premiums or placing exclusions on some poliCies.
Our surveys included direct responses on the availability of coverage after the
expiration of TRIA. Responding to questions about policies written in early 2005
that continue into 2006, nearly 50 percent of insurers reported that they are not
writing coverage for terrorism risks in 2006 (after the scheduled expiration of TRIA)
that is similar to the coverage they write under TRIA. One-quarter of policyholders
with terrorism risk coverage indicated that their coverage excludes terrorism

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coverage after the expiration of TRIA.
TRIA's expiration will conclude the transitional assistance first provided to the
insurance markets in the uncertain economic environment of 2002. While the
immediate effect of the removal of the TRIA subsidy is likely to be less terrorism
insurance and, higher prices, we expect that over time the private market will
develop additional terrorism insurance capacity. We anticipate that the initial
response of premiums in the market will spur the buildup of surplus as insurers tap
into capital markets; and the development of additional private reinsurance and
other risk shifting mechanisms.

Macroeconomic Effects
We do not believe that the elimination of the federal terrorism risk reinsurance
subsidy is likely to have a discernable macroeconomic effect. In late 2001 and
2002, there was concern that there could be macroeconomic effects associated
with the transition between a world in which terrorism coverage was provided for a
negligible price and one where terrorism risk was considered a non-negligible risk.
The economic climate during the discussion of TRIA and its enactment was highly
uncertain. Industrial production had peaked in mid-2000, and by September 2001
had already fallen more than 5 percent. The terrorist attacks of September 11
created macroeconomic uncertainties that most analysts believed would translate
into a further sharp downturn in economic activity that would last at least two
additional quarters. Nonresidential building activity tumbled about 33 percent at an
annual rate in the fourth quarter of 2001 , and continued to experience declines well
in excess of 15 percent in the subsequent three quarters. It was difficult at the time
to assess whether the substantial declines in nonresidential building were due to
the chilling effect of terrorist activity, terrorism insurance issues or the result of a
cumulative unwinding of activity more typical of a recession and even the excesses
of the late 1990s.
Helped by tax cuts and monetary stimulus, the economy has since improved
substantially. GDP growth rose from just 2.3 percent in 2002 to 3.9 percent in 2004
(fourth quarter over fourth quarter). The unemployment rate, which was 6 percent in
December 2002, fell to 5.1 percent in May 2005. However, despite the riSing
economy and the enactment of TRIA, nonresidential building has rebounded only
slightly. Nonresidential building is currently 4.2 percent higher than the trough
reached in the first quarter of 2003, but remains substantially below the previous
peak. From our current perspective it appears that neither the potential lack of terror
risk insurance nor a general economic downturn were responsible for weakness in
nonresidential building activity.
Overall Assessment and Policy Recommendations
The risk of terrorism changed fundamentally and permanently after the events of
September 11, 2001. In the words of the President:

.. .Our country IS safer than it was on September the 11th, 2001, yet,
we're still not safe . ... We are a Nation in danger. We're doing
everything we can in our power to confront the danger. We're
making good progress in protecting our people and bringing our
enemies to account. But one thing is for certain: We'll keep our focus
and we'll keep our resolve and we will do our duty to best secure our
country. ..
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 TRIA's original purpose as a temporary program
scheduled to end on December 31,2005, and the need to encourage further
development of the private market, the Administration cannot support a straight
extension of TRIA.
Any reform of TRIA should be consistent with several principles. It IS the
Administration's view that extension of the program should recognize the temporary

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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.

The events of the past week in London have been an unwelcome reminder that the
risk of terrorism is real and that the war on terrorism is one that will be waged over
a long period of time on many fronts. Some believe the fact that terrorism risk is real
suggests the need for a permanent and obtrusive federal role in the market for
terrorism risk insurance. I agree that the risk of terrorism is likely to remain a part of
our lives for some time to come, but that is precisely why the federal government
needs to encourage the development of the most creative and cost effective means
of covering terrorism risks. The Administration looks forward to working with the
Congress to achieve this end.

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July 13, 2005
JS-2631
Treasury and IRS Issue Proposed Regulations for Electronic
Transmission of Employee Benefit Information
WASHINGTON, DC -- The Treasury Department and IRS issued proposed
regulations today regarding the use of electronic media to provide notices to
employee benefit plan participants and beneficiaries and to transmit elections or
consents from participants and beneficiaries to employee benefit plans.
These regulations coordinate the rules in existing guidance for using electronic
media for these purposes with the requirements of the E-SIGN statute (the
Electronic Signatures in Global and National Commerce Act, Public Law 106-229).
The regulations would allow a plan to use electronic media either under the E-SIGN
consumer consent rules or under an alternative that is similar to the retirement plan
rules for electronic transmission of plan information that were in effect before ESIGN and that are both less burdensome on employers and as least as protective
for participants.
The regulations would not go into effect until after they are adopted as final
regulations. A public hearing on the proposal is scheduled for November 2, 2005.

REPORTS
•

A c00Y of the pro0osed regulations

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R/l/?OO5

[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 35, and 54
[REG-138362-04]
RIN 1545-BD68
Use of Electronic Technologies for Providing Employee Benefit Notices and
Transmitting Employee Benefit Elections and Consents
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
SUMMARY: This document contains proposed regulations that would provide
guidance on the use of electronic media to provide certain notices to recipients or
to transmit partiCipant and beneficiary elections or consents with respect to
employee benefit arrangements. In general, these proposed regulations would
affect sponsors of, and partiCipants and beneficiaries in, certain employee benefit
arrangements. This document also provides a notice of public hearing on these
proposed regulations.
DATES: Written or electronic comments must be received by October 12, 2005.
Requests to speak (with outlines of oral comments to be discussed) at the public
hearing scheduled for November 2, 2005, must be received by October 12, 2005.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-138362-04), room
5203, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington
DC 20044. Submissions may be hand delivered Monday through Friday,
between the hours of 8 a.m. and 4 p.m. to CC:PALPD:PR (REG-138362-04),

Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW.,
Washington, DC. Alternatively, taxpayers may submit comments electronically
via the IRS Internet site at www.irs.gov/regs or via the Federal eRulemaking
Portal at www.regulations.gov (IRS--REG-138362-04). The public hearing will be
held in the Auditorium, Internal Revenue Building, 1111 Constitution Avenue
NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed
regulations, Pamela R. Kinard at (202) 622-6060; concerning submissions of
comments, the hearing, and/or to be placed on the building access list to attend
the hearing, Richard Hurst, (202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information referenced in this notice of proposed
rulemaking were previously reviewed and approved by the Office of Management
and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3507(d)) under control number 1545-1632, in conjunction with the Treasury
Decision (TO 8873), relating to New Technologies in Retirement Plans, published
on February 8, 2000 in the Federal Register (65 FR 6001), and control number
1545-1780, in conjunction with the Treasury Decision (TO 9052), relating to
Notice of Significant Reduction in the Rate of Future Benefit Accrual, published
on April 9, 2003 in the Federal Register (68 FR 17277). No substantive
changes to these collections of information are being proposed.

An agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless it displays a valid control number
assigned by the Office of Management and Budget.
Books or records relating to a collection of information must be retained as
long as their contents may become material in the administration of any internal
revenue law. Generally, tax returns and tax return information are confidential,
as required by 26 U.S.C. 6103.
Background
This document contains proposed amendments to the regulations under
section 401 of the Internal Revenue Code (Code) and to other sections of the
Code relating to employee benefit arrangements. These proposed amendments,
when finalized, will set forth rules regarding the use of electronic media to
provide notices to plan participants and beneficiaries or to transmit elections or
consents relating to employee benefit arrangements. These regulations also
reflect the provisions of the Electronic Signatures in Global and National
Commerce Act, Public Law 106-229 (114 Stat. 464 (2000)) (E-SIGN).
The Code and regulations thereunder, and the parallel provisions of the
Employee Retirement Income Security Act of 1974 (ERISA), include a number of
rules that require certain retirement plan notices, elections, or consents to be
written or in writing.1 Examples of these rules include the following:

I Pursuant to section 101(a) of the Reorganization Plan No.4 of 1978,29 U.S.c. 1001nt, the Secretary of
the Treasury has authority to issue regulations under parts 2 and 3 of subtitle B of title I of ERISA with
certain exceptions. Under section 104 of the Reorganization Plan No.4, the Secretary of Labor retains
enforcement authority with respects to parts 2 and 3 of subtitle B of title I of ERISA, but, in exercising that
authority, is bound by the regulations issued by the Secretary of Treasury.

•

Under sections 401 (k)(12)(O) and 401 (m)(11), a written notice is
required to be given to each employee eligible to participate in a cash
or deferred arrangement under section 401 (k) in order for the plan to
be permitted to use a safe harbor in lieu of the actual deferral
percentage test or actual contribution percentage test to ensure that
the plan satisfies certain nondiscrimination requirements.

•

Under section 402(f), a plan is required to provide a distributee, within
a reasonable period of time before an eligible rollover distribution is
made, a written explanation of the distributee's rollover rights and the
tax and other potential consequences of the distribution or rollover.

•

Under section 411 (a)(11) (and the parallel provision in section 203(e)
of ERISA) and §1.411 (a)-11 (f)(2), a partiCipant cannot be cashed out
of a plan before the later of normal retirement age or age 62 without
the participant's written consent if the value of the participant's
nonforfeitable accrued benefit exceeds $5,000.

•

Under section 417 (and the parallel provision in section 205 of ERISA)
and the regulations thereunder, a plan must provide to each participant
a written explanation of the terms and conditions of a qualified joint and
survivor annuity, the participant's right to make an election to waive the
qualified joint and survivor annuity, the right to revoke such an election,
and the rights of the participant's spouse. Under section 417(a)(2), an
election to waive a qualified joint and survivor annuity can generally go
into effect only if the participant's spouse consents to the election in

writing and that consent is witnessed by either a plan representative or
a notary public.
•

Under section 3405(e)(10)(8) and §34.3405-1, A-d-35, a payor is
required to provide written notice to a payee regarding the payee's
right to elect not to have Federal income tax withheld from a periodic
payment (as defined in section 3405(e)(2)).

•

Under section 4980F (and the parallel provision in section 204(h) of
ERISA) and §54.4980F-1, A-13, a plan must provide written notice
(section 204(h) notice) of an amendment to an applicable pension plan
that either provides for a significant reduction in the rate of future
benefit accrual or that eliminates or significantly reduces an early
retirement benefit or retirement-type subsidy.

Section 1510 of the Taxpayer Relief Act of 1997, Public Law 105-34 (111
Stat. 788, 1068) (TRA '97), provides for the Secretary of the Treasury to issue
guidance deSigned to interpret the notice, election, consent, disclosure, and
timing requirements (include related recordkeeping requirements) under the
Code and ERISA relating to retirement plans as applied to the use of new
technologies by plan sponsors and administrators. Section 1510 of TRA '97
further provides that the guidance should maintain the protection of the rights of
participants and beneficiaries. Pursuant to the mandate of section 1510 of TRA
'97, final regulations (TO 8873) relating to the use of electronic media for
transmissions of notices and consents under sections 402(f), 411 (a)(11), and
3405(e}(10}(B} were published in the Federal Register (65 FR 6001) on

February 8, 2000 (the 2000 regulations). These regulations are discussed in this
preamble under the heading Prior Guidance Related to New Technologies.
E-SIGN, signed into law on June 30, 2000, generally provides that
electronic documents and signatures are given the same legal effect as their
paper counterparts. Section 101 (a) of E-SIGN provides that, notwithstanding any
statute, regulation, or rule of law relating to a transaction in or affecting interstate
or foreign commerce, a signature, contract, or other record may not be denied
legal effect, validity, or enforceability solely because it is in electronic form.
Section 101 (b)(1) provides that E-SIGN does not limit, alter, or otherwise
affect any requirement imposed by a statute, regulation, or rule of law relating to
a person's rights or obligations under any statute, regulation, or rule of law
except with respect to a requirement that contracts be written, signed, or in nonelectronic form. Section 101 (b )(2) provides that E-SIGN does not require any
person to agree to use or accept electronic signatures or records, other than a
governmental agency with respect to a record other than a contract to which it is
a party.
Section 101(c) of E-SIGN sets forth special protections for consumers that
apply when a statute, regulation, or other rule of law requires that consumer
information relating to a transaction be provided or made available in writing. 2
Under those protections, before information can be transmitted electronically, a
consumer must first affirmatively consent to receiving the information

The rules of section 10 I of E-SIGN do not apply to certain consumer notices. These include consumer
notices that are necessary for the protection ofa consumer's health, safety, or shelter (e.g., cancellation of
health benefits or life insurance and foreclosure on a credit agreement secured by an individual's primary
residence). See section I03(b)(2)(8) and (C) ofE-SIGN.
2

electronically and the consent must be made in a manner that reasonably
demonstrates the consumer's ability to access the information in electronic form
(or if the consent is not provided in such a manner, that confirmation of the
consent be made electronically in a manner that reasonably demonstrates the
consumer's ability to access the information in electronic form). Prior to consent,
the consumer must receive certain specified disclosures. The disclosures must
include, among other items, the hardware or software requirements for access to
and retention of the electronic records, the consumer's right to withdraw his or
her consent to receive the information electronically (and the consequences that
follow the withdrawal of consent), the procedures for requesting a paper copy of
the electronic record, and the cost, if any, of obtaining a paper copy. Section
106(1) of E-SIGN generally defines a consumer as an individual who obtains
products or services used primarily for personal, family, or household purposes.
Section 104(b)(1) of E-SIGN generally provides that a Federal or state
agency that is responsible for rulemaking under a statute has interpretative
authority to issue guidance interpreting section 101 of E-SIGN with respect to
that other statute. However, as a limitation on that authority, section 104(b)(2) of
E-SIGN prohibits the issuance of any regulation that is not consistent with section
101 or that adds to the requirements of that section. Section 104(b)(2) of ESIGN also requires that any agency issuing the regulations find that the rules
selected to carry out the purpose of the relevant statute are substantially
equivalent to the requirements imposed on records that are not electronic, do not

impose unreasonable cost on the acceptance and use of electronic records, and
do not require or give greater legal status to a specific technology.
Section 104(d)(1) of E-SIGN authorizes a Federal regulatory agency to
exempt, without condition, a specified category or type of record from the
consent requirements in section 101(c). The exemption may be issued only if the
exemption is necessary to eliminate a substantial burden on electronic
commerce and will not increase the material risk of harm to consumers.
Subsequent to the enactment of E-SIGN, Congress amended section
204(h) of ERISA and enacted a corresponding proviSion in section 4980F of the
Code. Under ERISA section 204(h)(7) and Code section 4980F(g), the Secretary
of the Treasury may, by regulations, allow any section 204(h) notice to be
provided by using new technologies.
Prior Guidance Relating to New Technologies.
Following the enactment of section 1510 of TRA '97, the Treasury
Department and IRS issued several items of guidance relating to the use of
electronic media with respect to employee benefit arrangements. Notice 99-1
(1999-1 C.B. 269) provides guidance relating to qualified retirement plans
permitting the use of electronic media for plan participants or beneficiaries
conducting certain account transactions for which there is no specific writing
requirement, such as plan enrollments, direct rollover elections, beneficiary
designations, investment change allocations, elective and after-tax contribution
designations, and general plan or specific account inquiries. 3

3 The Treasury Department and IRS have also issued guidance regarding the use of electronic
media with respect to tax reporting and other tax requirements with respect to employee benefit

The 2000 regulations relating to the use of electronic media for
transmissions of notices and consents required to be in writing under sections
402(f), 411 (a)(11), and 3405(e)(1 0)(8) set forth standards for the electronic
transmission of certain notices and consents required in connection with
distributions from retirement plans. These regulations provide that a plan may
provide a notice required under section 402(f), 411 (a)(11), or 3405(e)(1 0)(8)
either on a written paper document or through an electronic medium that is
reasonably accessible to the participant. The system must be reasonably
designed to provide the notice in a manner no less understandable to the
participant than a written paper document. In addition, the partiCipant must be
advised of the right to request and receive a paper copy of the written paper
document at no charge, and, upon request, the document must be provided to
the participant without charge.
The 2000 regulations permit an electronic system to satisfy the requirement
that a participant provide written consent to a distribution if certain requirements
are satisfied. First, the electronic medium must be reasonably accessible to the
partiCipant. Second, the electronic system must be reasonably designed to
preclude anyone other than the participant from giving the consent. Third, the

plans. For example, Announcement 99-6 (1999-1 C.B. 352) authorizes payers of pensions,
annuities, and other employee benefits to establish a system for payees to submit electronically
Forms W-4P, "Withholding Certificate for Pension or Annuity Payments," W-4S, "Request for
Federal Income Tax Withholding from Sick Pay," and W-4V, "Voluntary Withholding Request,"
if certain requirements, including signature and recordkeeping requirements, are satisfied. In
addition, Notice 2004-10 (2004-6 l.R.B. 433) authorizes the electronic delivery of certain forms
relating to the reporting of contributions and distributions of pensions, simplified employee
pensions, traditional IRAs, Roth IRAs, qualified tuition programs, Coverdell education savings
accounts, and Archer Medical Savings Accounts. See also §§31.6051-1U) and 1.6039-1(f).

system must provide the participant with a reasonable opportunity to review and
to confirm, modify, or rescind the terms of the consent before it becomes
effective. Fourth, the system must provide the participant, within a reasonable
time after the consent is given, a confirmation of the terms (including the form) of
the distribution through either a written paper document or in an electronic format
that satisfies the requirements for providing applicable notices. Thus, the
participant must be advised of the right to request and to receive a confirmation
copy of the consent on a written paper document without charge.
Subsequent to the issuance of the 2000 regulations, the Treasury
Department and IRS have applied the standards set forth in those regulations in
other situations. For example, §1.7476-2(c)(2) provides that a notice to an
interested party4 is deemed to be provided in a manner that satisfies the delivery
requirements of §1.7476-2(c)(1) if the notice is delivered using an electronic
medium under a system that satisfies the requirements of §1.402(f)-1, Q&A-5.
Q&A-7 of Notice 2000-3 (2000-1 C.B. 413) provides that, until the issuance of
further guidance, a plan is permitted to use electronic media to provide notices
required under sections 401 (k)(12) and 401 (m)(11) if the employee receives the
notice through an electronic medium that is reasonably accessible, the system is
designed to provide the notice in a manner no less understandable to the
employee than a written paper document, and, at the time the notice is provided,
the employee is advised that the employee may request and receive the notice
on a written paper document at no charge. Similarly, regulations at §1.72(p)-1,
Under section 7476, in order to receive a determination letter on the qualified status of a retirement plan,
the applicant must provide evidence that individuals who qualifY as interested parties received notification
of the determination letter application.
4

Q&A-3(b), require a loan from a plan to a participant to be set forth in a written
paper document, in an electronic medium that satisfies standards that are the
same as the standards in the 2000 regulations, or in such other form as may be
approved by the Commissioner.
In 2003, final regulations (TO 9052) under section 4980F were published
in the Federal Register (68 FR 17277). Q&A-13 of §54.4980F-1 provides the
rules for the manner of delivering a section 204(h) notice. For a plan to deliver
electronically a section 204(h) notice, the following requirements must be
satisfied. First, the section 204(h) notice must actually be received by the
applicable individual or the plan administrator must take appropriate and
necessary measures reasonably calculated to ensure that the method for
providing the section 204(h) notice results in actual receipt. Second, the plan
administrator must provide the applicable individual with a clear and conspicuous
statement that the individual has a right to receive a paper version of the section
204(h) notice without the imposition of fees and, if the individual requests a paper
copy of the section 204(h) notice, the paper copy must be provided without
charge.
In addition, the regulations under section 4980F provide a safe harbor
method for delivering a section 204(h) notice electronically. Under the safe
harbor, which is substantially the same as the consumer consent rules of ESIGN, consent must be made electronically in a manner that reasonably
demonstrates the individual's ability to access the information in electronic form.
The applicable individual must also provide an address for the delivery of the

electronic section 204(h) notice and the plan administrator must provide the
applicable individual with certain disclosures regarding the section 204(h) notice,
including the right to withdraw consent.
The Department of Labor (DOL) and the Pension Benefit Guaranty
Corporation (PBGC) have also issued regulations relating to the use of electronic
media to furnish notices, reports, statements, disclosures, and other documents
to participants, beneficiaries, and other individuals under titles I and IV of ERISA.
See 29 CFR 2520.104b-1 and 29 CFR 4000.14.
Explanation of Provisions
Overview
The proposed regulations would coordinate the existing notice and
election rules under the Code and regulations relating to certain employee
benefit arrangements with the requirements of E-SIGN and set forth the
exclusive rules relating to the use of electronic media to satisfy any requirement
under the Code that a communication to or from a participant, with respect to the
participant's rights under the employee benefit arrangement be in writing or in
written form. The standards set forth in the proposed regulations would also
function as a safe harbor when an electronic medium is used for any
communication that is not required to be in writing or in written form.
The proposed regulations would apply to any notice, election, or similar
communication provided to or made by a participant or beneficiary under a
qualified plan, an annuity contract described in section 403(a) or 403(b), a
simplified employee pension (SEP) under section 408(k), a simple retirement

plan under section 408(p), or an eligible governmental plan under section 457(b).
Thus, for example, the proposed regulations would apply to a section 402(f)
notice, a section 411 (a)(11) notice, and a section 204(h) notice.
In addition, the proposed regulations would apply to any notice, election,
or similar communication provided to or made by a participant or beneficiary
under an accident and health plan or an arrangement under section 104(a)(3) or
105, a cafeteria plan under section 125, an educational assistance program
under section 127, a qualified transportation fringe program under section 132,
an Archer Medical Savings Account under section 220, or a health savings
account under section 223.
However, the proposed regulations would not apply to any notice, election,
consent, or disclosure required under the provisions of title I or IV of ERISA over
which the DOL or the P8GC has interpretative and regulatory authority. For
example, the rules in 29 C.F.R. 2520.104b-1 of the Labor Regulations apply with
respect to an employee benefit plan furnishing disclosure documents, such as a
summary plan description or a summary annual report. The proposed
regulations would also not apply to Code section 411 (a)(3)(8) (relating to
suspension of benefits), Code section 49808(f)(6) (relating to an individual's
C08RA rights), or any other Code provision over which DOL and the P8GC
have similar interpretative authority. In addition, the rules in these proposed
regulations apply only with respect to notices and elections relating to a
participant's rights under an employee benefit arrangement; thus they do not

apply with respect to other requirements under the Code, such as requirements
relating to tax reporting, tax records,s or substantiation of expenses.
Requirements for the Use of Electronic Media
These proposed regulations would require that any communication that is
provided using an electronic medium satisfy all the otherwise applicable
requirements (including the applicable timing and content rules) relating to that
communication. In addition, these regulations would require that the content of
the notice and the medium through which it is delivered be reasonably designed
to provide the information to a recipient in a manner no less understandable to
the recipient than if provided on a written paper document. For example, a plan
delivering a lengthy section 402(f) notice would not satisfy this requirement if the
plan chose to provide the notice through a pre-recorded message on an
automated phone system. 6 The regulations would also require that, at the time
the applicable notice is provided, the electronic transmission alert the recipient to
the significance of the transmittal (including the identification of the subject matter
of the notice), and provide any instructions needed to access the notice, in a
manner that is readily understandable and accessible.
The view of the Treasury Department and IRS is that a participant under
an employee benefit arrangement is generally a consumer within the meaning of
section 106( 1) of E-SIGN when receiving a notice in order to make a decision
about the participant's benefits or other rights under an employee benefit
5 See section 6001 of the Code and the regulations thereunder, and Rev. Proc. 98-25 (1998-1 e.B. 689)
(setting forth the basic requirements that the IRS treats as essential for satisfying the recordkeeping
requirements of section 6001 in cases where a taxpayer's records are maintained in electronic form).
6 Note that a section 204(h) notice cannot be provided using oral communication or a recording of an oral
communication. See §54.4980F-I, A-13(c)(l).

arrangement.? Accordingly, §1.401(a)-21(b) of these proposed regulations would
provide rules, reflecting the consumer consent requirements of section 101 (c) of
E-SIGN, under which an employee benefit arrangement may provide an
applicable notice through an electronic medium. However, the Treasury
Department and IRS also believe that, if an employee benefit arrangement could
provide these notices only by complying with the rules in §1.401(a)-21(b) of these
proposed regulations, it would impose a substantial burden on electronic
commerce. Furthermore, there is an alternative that is less burdensome and that
would not increase the material risk of harm to plan participants. Accordingly,
§1.401 (a)-21 (c) of these proposed regulations provides an alternative means of
providing notices electronically.
Section 1.401 (a)-21 (b) of these proposed regulations would generally
require that before a plan may provide an applicable notice using an electronic
medium, the participant must consent to receive the communication
electronically. The consent generally must be made in a manner that reasonably
demonstrates that the participant can access the notice in the electronic form that
will be used to provide the notice. Alternatively, the consent may be made using
a written paper document or through some other nonelectronic means, but only if
the participant confirms the consent in a manner that reasonably demonstrates
that the participant can access the notice in the electronic form to be provided.
Prior to consenting, the participant must receive a disclosure statement that
outlines the scope of the consent, the participant's right to withdraw his or her

7 See also 12 CFR 202.16, 205.17, 213.6, and 2226.36, treating electronic disclosures in connection with
certain credit transactions as consumer information for purposes ofE-SIGN.

consent to receive the communication electronically (including any conditions,
consequences, or fees in the event of the withdrawal), and the right to receive
the communication using paper. The disclosure must also specify the hardware
and software requirements for accessing the electronic media and the
procedures for updating information to contact the participant electronically. In
the event the hardware or software requirements change, new consent must be
obtained from the participant, generally following the rules of section 101 (c) of ESIGN.
Section 1.401 (a)-21 (c) of these proposed regulations provides alternate
conditions for providing notices electronically. The proposed regulations would
exempt applicable notices from the consumer consent requirements of E-SIGN
and would provide an alternative method of complying with the requirement that
a participant notice be in writing or in written form if the plan complies with those
conditions. This alternative method of compliance is based on the 2000
regulations previously issued under section 1510 of TRA '97 (which provides that
any guidance issued should maintain the protection of the rights of participants
and beneficiaries). This alternative method of compliance satisfies the
requirements of section 104(d)(1) of E-SIGN, including the requirement that any
exemption from the consumer consent requirements not increase the material
risk of harm to consumers.
The alternative method of compliance provides rules that are intended
generally to replicate the requirements in the 2000 regulations that apply to
notices required under sections 402(f), 411 (a)(11), and 3405 and thereby allow

plans to continue to provide these notices electronically using the rules in those
2000 regulations. As under the 2000 regulations, the proposed regulations
would retain the requirement that, at the time the applicable notice is provided,
the participant must be advised that he or she may request and must receive the
applicable notice in writing on paper at no charge. However, the requirement
that the electronic medium be reasonably accessible under the 2000 regulations
would be changed to require that the recipient of the notice be effectively able to
access the electronic medium. This is not intended to reflect a substantive
change in the rules, but rather to avoid confusion with Labor Regulations
interpreting the words reasonably accessible as used in section 101 (i)(2)(0) of
ERISA, as added by section 306 of the Sarbanes Oxley Act of 2002, Public Law
107-204 (116 Stat. 745).8
Proposed §1.401 (a)-21 (d) would set forth the requirements that apply if a
consent, election, request, agreement, or similar communication is made by or
from a participant, beneficiary, or alternate payee using an electronic medium.
(For simplicity, the proposed regulations refer to all of these types of actions as
participant elections.) The rules in proposed §1.401 (a)-21 (d), which are also
based on the standards in the 2000 regulations, would require that (1) the

Section 101 (i) of ERISA sets forth a requirement for a plan administrator to notify plan
participants and beneficiaries of a blackout period with respect to an individual account plan.
Section 101 (i)(2)(D) provides that the required blackout notice "shall be in writing, except that
such notice may be in electronic or other form to the extent that such form is reasonably
accessible to the recipient." Section 2520.101-3(b)(3) of the Labor Regulations interpreting this
requirement provides for this notice to be in writing and furnished in any manner consistent with
the requirements of section 2520.1 04b-1 of the Labor Regulations, including the provisions in that
section relating to the use of electronic media. Those regulations also deem a notice requirement
to be satisfied if certain measures are taken. Section 1.401 (a)-21 of these proposed regulations
only provides rules for satisfying, through the use of electronic media, a requirement that a notice
or election be in writing.
8

participant be effectively able to access to the electronic system in order to
transmit the participant election, (2) the electronic system be reasonably
designed to preclude any person other than the participant from making the
participant election (for example, through the use of a personal identification
number (PIN)), (3) the electronic system provide the participant making the
participant election with a reasonable opportunity to review, confirm, modify, or
rescind the terms of the election before it becomes effective, and (4) the
participant making the partiCipant election, within a reasonable time period,
receive a confirmation of the election through either a written paper document or
an electronic medium under a system that satisfies the applicable notice
requirements of proposed §1.401 (a)-21 (b) or (c).
These regulations require that a participant be effectively able to access
the electronic system that the plan provides for participant elections, but, like the
2000 regulations, do not require that a plan also permit the election to be
transmitted by paper as an alternative to using the electronic system available to
the participant. If a plan were to require participant elections to be provided
electronically, such as requiring that any consent to a distribution under section
411 (a)(11) be transmitted electronically through a particular medium (without an
option to make the election on paper), then these regulations would not apply
with respect to a participant who is not effectively able to access to the electronic
medium. In addition, such a participant would be effectively unable to provide
consent and would generally not be paid until the later of age 62 or normal
retirement age. Moreover, no form of distribution would be available to the

former employee and such a plan may have difficulties demonstrating
compliance with the qualification requirements. For example, the plan may not
be able to demonstrate that it satisfies the requirements of §1.401 (a)(4)-4 under
which benefits, rights, and features, such as a right to early distribution, must be
made available in a nondiscriminatory manner.9
Unlike the 2000 regulations, the rules in these proposed regulations would
extend the use of electronic media to the notice and election rules applicable to
plans subject to the QJSA requirements of section 417. Section 417 requires the
consent of a spouse to be witnessed by a plan representative or a notary public.
In accordance with section 101(g) of E-SIGN, the proposed regulations would
permit the use of an electronic acknowledgment or notarization of a signature (if
the standards of section 101 (g) of E-SIGN and State law applicable to notary
publics are satisfied). However, the proposed regulations would require that the
signature of the individual be witnessed in the physical presence of the plan
representative or notary public, regardless of whether the signature is provided
on paper or through an electronic medium.
As discussed above, these proposed regulations, which are consistent
with section 101 of E-SIGN and do not add to the requirements of that section,
are issued to set forth rules that coordinate section 101 of E-SIGN with the
sections of the Code relating to employee benefit arrangements. In accordance
with section 104(b)(2)(C) of E-SIGN, the Treasury Department and IRS find that
there is substantial justification for these proposed regulations, that the

9 Similar problems would arise under section 411 (d)( 6), assuming the plan previously permitted election of
early distribution to be made on paper.

requirements imposed on the use of electronic media under these regulations are
substantially equivalent to those imposed on non-electronic records, that the
requirements will not impose unreasonable costs on the acceptance and use of
electronic records, and that these regulations do not require (or accord greater
legal status or effect to) the use of any specific technology.
Conforming Amendments to Other Rules in Law
The proposed regulations would modify a number of existing regulations
(including the 2000 regulations and the other regulations described above) that
have previously provided rules relating to the use of new technology in providing
applicable notices that are required to be in writing or in written form. These
modifications, which merely add the consumer consent requirements of E-SIGN,
are not expected to adversely affect existing administrative practices of plan
sponsors designed to comply with the 2000 regulations.
As noted above, these proposed regulations would apply to categories of
applicable notices that were not previously addressed in the 2000 regulations
and subsequent regulations. As such, these regulations apply whenever there is
a requirement that an applicable notice under one of the covered sections be
provided in written form or in writing, without regard to whether that other
requirement specifically cross-references these regulations. Thus, safe harbor
notices under sections 401 (k)(12)(O) and 401 (m)(11), which are required to be in
writing, can be provided electronically if the requirements of §1.401 (a)-21 of this
chapter are satisfied.

Proposed Effective Date

These regulations are proposed to apply prospectively. Thus, these rules
will apply no earlier than the date of the publication of the Treasury decision
adopting these rules as final regulations in the Federal Register. These
regulations cannot be relied upon prior to their issuance as final regulations.

Special Analyses
It has been determined that this notice of proposed rulemaking is not a
significant regulatory action as defined in Executive Order 12866. Therefore a
regulatory assessment is not required. It has also been determined that section
553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to
these regulations, and because these regulations do not propose any new
collection of information, the provisions of the Regulatory Flexibility Act (5 U.S.C.
chapter 6) do not apply. These regulations only provide guidance on how to
satisfy existing collection of information requirements through the use of
electronic media. Pursuant to section 7805(f) of the Code, these proposed
regulations will be submitted to the Chief Counsel for Advocacy of the Small
Business Administration for comment on its impact on small business.

Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (a signed original and eight
(8) copies) or electronic comments that are submitted timely to the IRS. The
Treasury Department and IRS specifically request comments on the clarity of the
proposed rules and how they can be made easier to understand. All comments
will be available for public inspection and copying.

The proposed regulations have reserved the issue of whether there should
be any exceptions to the rule generally requiring the physical presence of the
spouse for a notarization of the spouse's consent. Comments are requested on
whether the reservation should be: (i) deleted in favor of a broad prohibition that
has no exception; (ii) filled in based on a general standard under which electronic
notarization of an electronic signature (without the spouse's presence) would be
permitted if the technology provides the same protections and assurance as the
requirement that a person's signature be executed in the presence of a notary
(e.g., that the spouse is actually the person signing); or (iii) filled in with a grant of
discretion to the Commissioner to determine in the future, after advance notice
and an opportunity for comment, that a particular form of electronic notarization
of an electronic signature (without the spouse's presence) provides the same
protections and assurance as the requirement that a person's signature be
executed in the presence of a notary.
A public hearing has been scheduled for November 2, 2005, beginning at
10 a.m. in the Auditorium, Internal Revenue Building, 1111 Constitution Avenue,
NW., Washington, DC. Due to building security procedures, visitors must enter
at the main entrance, located at 1111 Constitution Avenue, NW. In addition, all
visitors must present photo identification to enter the building. Because of
access restrictions, visitors will not be admitted beyond the immediate entrance
area more than 30 minutes before the hearing starts. For information about
having your name placed on the building access list to attend the hearing, see
the "FOR FURTHER INFORMATION CONTACT" portion of this preamble.

The rules of 26 CFR 601.601 (a)(3) apply to the hearing. Persons who
wish to present oral comments must submit written or electronic comments and
an outline of the topics to be discussed and time to be devoted to each topic (a
signed original and eight (8) copies) by October 12, 2005. A period of 10
minutes will be allotted to each person for making comments. An agenda
showing the scheduling of the speakers will be prepared after the deadline for
receiving comments has passed. Copies of the agenda will be available free of
charge at the hearing.
Drafting Information
The principal author of these proposed regulations is Pamela R. Kinard,
Office of Division Counsel/Associate Chief Counsel (Tax Exempt and
Government Entities), Internal Revenue Service. However, personnel from other
offices of the IRS and Treasury Department participated in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 35
Employment taxes, Income taxes, Reporting and record keeping
requirements.
26 CFR Part 54
Excise taxes, Pensions, Reporting and record keeping requirements.
Proposed Amendments to the Regulations

Accordingly, 26 CFR parts 1,35, and 54 are proposed to be amended as
follows:
PART1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding an
entry in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.401 (a)-21 also issued under 26 U.S.C. 401 and section 104(b)(1) and
(2) of the Electronic Signatures in Global and National Commerce Act, Public
Law 106-229 (114 Stat. 464). * * *
Par. 2. Section 1.72(p)-1, Q&A-3, is amended by revising the text of
paragraph (b) to read as follows:
§1.72(p)-1 Loans treated as distributions.
*****

A-3. * * *
(b) * * * A loan does not satisfy the requirements of this paragraph unless
the loan is evidenced by a legally enforceable agreement (which may include
more than one document) and the terms of the agreement demonstrate
compliance with the requirements of section 72(p)(2) and this section. Thus, the
agreement must specify the amount and date of the loan and the repayment
schedule. The agreement does not have to be signed if the agreement is
enforceable under applicable law without being signed. The agreement must be
set forth either-(1) In a written paper document; or

(2) In an electronic medium under a system that satisfies the participant
election requirements of §1.401 (a)-21 (d) of this chapter.
*****
Par. 3. Section 1.401 (a)-21 is added to read as follows:
§1.401 (a)-21 Rules relating to the use of electronic media to provide applicable
notices and to transmit participant elections.
(a) Introduction--(1) In general--(i) Permission to use electronic media.
This section provides rules relating to the use of electronic media to provide
applicable notices and to transmit participant elections as defined in paragraphs
(e)(1) and (2) of this section with respect to certain employee benefit
arrangements referenced in this section. The rules in this section reflect the
provisions of the Electronic Signatures in Global and National Commerce Act,
Public Law 106-229 (114 Stat. 464 (2000) (E-SIGN)).
(ii) Notices and elections required to be in writing or in written form--(A) In
general. The rules of this section must be satisfied in order to use electronic
media to provide an applicable notice or to transmit a partiCipant election if the
notice or election is required under the Internal Revenue Code or Department of
Treasury regulations to be in writing or in written form.
(8) Rules relating to applicable notices. An applicable notice that is
provided using electronic media is treated as being provided in writing or in
written form if and only if the consumer consent requirements of paragraph (b) of
this section are satisfied or the requirements for exemption from the consumer
consent requirements under paragraph (c) of this section are satisfied. For

example, in order to provide a section 402(f) notice electronically, a qualified plan
must satisfy either the consumer consent requirements of paragraph (b) of this
section or the requirements for exemption under paragraph (c) of this section. If
a plan fails to satisfy either of these requirements, the plan must provide the
section 402(f) notice using a written paper document in order to satisfy the
requirements of section 402(f).
(C) Rules relating to participant elections. A participant election that is
transmitted using electronic media is treated as being provided in writing or in
written form if and only if the requirements of paragraph (d) of this section are
satisfied.
(iii) Safe harbor method for applicable notices and participant elections
that are not required to be in writing or written form. For an applicable notice or a
participant election that is not required to be in writing or in written form, the rules
of this section provide a safe harbor method for using electronic media to provide
the applicable notice or to transmit the participant election.
(2) Application of rules--(i) Notices, elections, or consents under
retirement plans. The rules of this section apply to any applicable notice or any
participant election relating to a qualified retirement plan under section 401 (a) or
403(a). In addition, the rules of this section apply to any applicable notice and
any participant election relating to an annuity contract under section 403(b), a
simplified employee pension (SEP) under section 408(k), a simple retirement
plan under section 408(p), and an eligible governmental plan under section
4S7(b).

(ii) Notices. elections. or consents under other employee benefit
arrangements. The rules of this section also apply to any applicable notice or
any participant election relating to accident and health plans or arrangements
under sections 104( a )(3) and 105, cafeteria plans under section 125, qualified
education assistance programs under section 127, qualified transportation fringe
programs under section 132, Archer medical savings accounts under section
220, and health savings accounts under section 223.
(3) Limitation on application of rules--(i) In general. The rules of this
section do not apply to any notice, election, consent, or disclosure required under
the provisions of title I or IV of the Employee Retirement Income Security Act of
1974, as amended (ERISA), over which the Department of Labor or the Pension
Benefit Guaranty Corporation has interpretative and regulatory authority. For
example, the rules in 29 C.F.R. 2520.104b-1 of the Labor Regulations apply with
respect to an employee benefit plan providing disclosure documents, such as a
summary plan description or a summary annual report. The rules in this section
also do not apply to Internal Revenue Code section 411 (a)(3)(B) (relating to
suspension of benefits), Internal Revenue Code section 4980B(f)(6) (relating to
an individual's COBRA rights), or any other Internal Revenue Code provision
over which Department of Labor or the Pension Benefit Guaranty Corporation
has similar interpretative authority.
(ii) Other requirements under the Internal Revenue Code. Because the
rules in this section only apply with respect to applicable notices and participant
elections relating to a participant's rights under an employee benefit

arrangement; thus they do not apply with respect to other requirements under the
Internal Revenue Code, such as requirements relating to tax reporting, tax
records, or sUbstantiation of expenses.
(4) Additional requirements related to applicable notices and participant
elections. The rules of this section supplement the general requirements related
to each applicable notice and to each participant election. Thus, in addition to
satisfying the rules for delivery under this section, the timing, content, and other
general requirements (including recordkeeping requirements in guidance issued
by the Commissioner under section 6001) relating to the applicable notice or
participant election must be satisfied. With respect to the content of the notice,
the system of delivery must be reasonably designed to provide the applicable
notice to a recipient in a manner no less understandable to the recipient than a
written paper document. In addition, at the time the applicable notice is provided,
the electronic transmission must alert the recipient to the significance of the
transmittal (including identification of the subject matter of the notice) and provide
any instructions needed to access the notice, in a manner that is readily
understandable and accessible.
(b) Consumer consent requirements--(1) Requirements. The consumer
consent requirements of this paragraph (b) are satisfied if the requirements in
paragraphs (b)(2) through (5) of this section are satisfied.
(2) Consent--(i) In general. The recipient must affirmatively consent to
the delivery of the applicable notice using electronic media. This consent must
be either--

(A) Made electronically in a manner that reasonably demonstrates that
the recipient can access the applicable notice in the electronic form that will be
used to provide the notice; or
(8) Made using a written paper document (or using another form not
described in paragraph (b )(2)(i)(A) of this section), but only if the recipient
confirms the consent electronically in a manner that reasonably demonstrates
that the recipient can access the applicable notice in the electronic form that will
be used to provide the notice.
(ii) Withdrawal of consumer consent. The consent to receive electronic
delivery requirement of this paragraph (b )(2) is not satisfied if the recipient
withdraws his or her consent before the applicable notice is delivered.
(3) Required disclosure statement. The recipient, prior to consenting
under paragraph (b )(2)(i) of this section, must be provided with a clear and
conspicuous statement containing the disclosures described in paragraphs
(b)(3)(i) through (v) of this section:
(i) Right to receive paper document--(A) In general. The statement
informs the recipient of any right to have the applicable notice be provided using
a written paper document or other nonelectronic form.
(8) Post-consent request for paper copy. The statement informs the
recipient how, after having provided consent to receive the applicable notice
electronically, the recipient may, upon request, obtain a paper copy of the
applicable notice and whether any fee will be charged for such copy.

(ii) Right to withdraw consumer consent. The statement informs the
recipient of the right to withdraw consent to receive electronic delivery of an
applicable notice on a prospective basis at any time and explains the procedures
for withdrawing that consent and any conditions, consequences, or fees in the
event of the withdrawal.
(iii) Scope of the consumer consent. The statement informs the recipient
whether the consent to receive electronic delivery of an applicable notice applies
only to the particular transaction that gave rise to the applicable notice or to other
identified transactions that may be provided or made available during the course
of the parties' relationship. For example, the statement may provide that a
recipient's consent to receive electronic delivery will apply to all future applicable
notices of the recipient relating to the employee benefit arrangement until the
recipient is no longer a participant in the employee benefit arrangement (or
withdraws the consent).
(iv) Description of the contact procedures. The statement describes the
procedures to update information needed to contact the recipient electronically.
(v) Hardware or software requirements. The statement describes the
hardware and software requirements needed to access and retain the applicable
notice.
(4) Post-consent change in hardware or software requirements. If, after a
recipient provides consent to receive electronic delivery, there is a change in the
hardware or software requirements needed to access or retain the applicable

notice and such change creates a material risk that the recipient will not be able
to access or retain the applicable notice in electronic format-(i) The recipient must receive a statement of-(A) The revised hardware or software requirements for access to and
retention of the applicable notice; and
(8) The right to withdraw consent to receive electronic delivery without the
imposition of any fees for the withdrawal and without the imposition of any
condition or consequence that was not previously disclosed in paragraph (b)(3)
of this section.
(ii) The recipient must reaffirm consent to receive electronic delivery in
accordance with the requirements of paragraph (b )(2) of this section.
(5) Prohibition on oral communications. For purposes of this paragraph
(b), neither an oral communication nor a recording of an oral communication is
an electronic record.
(c) Exemption from consumer consent requirements--(1) In general. This
paragraph (c) is satisfied if the conditions in paragraphs (c)(2) and (3) of this
section are satisfied. This paragraph (c) constitutes an exemption from the
consumer consent requirements of section 101(c) of E-SIGN pursuant to the
authority granted in section 104(d)(1) of E-SIGN.
(2) Effective ability to access. For purposes of this paragraph (c), the
electronic medium used to provide an applicable notice must be a medium that
the reCipient has the effective ability to access.

(3) Free paper copy of applicable notice. At the time the applicable notice
is provided, the recipient must be advised that he or she may request and
receive the applicable notice in writing on paper at no charge, and, upon request,
that applicable notice must be provided to the recipient at no charge.
(d) Special rules for participant elections--(1) In general. This paragraph
(d) is satisfied if the conditions described in paragraphs (d)(2) through (6) of this
section are satisfied.
(2) Effective ability to access. The electronic medium under a system
used to make a participant election must be a medium that the individual who is
eligible to make the election is effectively able to access. If the individual is not
effectively able to access the electronic medium for making the participant
election, the participant election will not be treated as made available to that
individual. For example, the participant election will not be treated as made
available for purposes of the rules under section 401 (a)(4).
(3) Authentication. The electronic system used in delivering a participant
election is reasonably designed to preclude any person other than the
appropriate individual from making the election. For example, a system can
require that an account number and a personal identification number (PIN) be
entered into the system before a participant election can be transmitted.
(4) Opportunity to review. The electronic system provides the individual
making the participant election with a reasonable opportunity to review, confirm,
modify, or rescind the terms of the election before the election becomes effective.

(5) Confirmation of action. The person making the participant election,
within a reasonable time, receives a confirmation of the effect of the election
under the terms of the plan through either a written paper document or an
electronic medium under a system that satisfies the requirements of either
paragraph (b) or (c) of this section (as if the confirmation were an applicable
notice).
(6) Participant elections, including spousal consents, that are required to
be witnessed by a plan representative or a notary public. (i) Except as provided
in paragraph (d)(6)(ii) of this section, in the case of a participant election which is
required to be witnessed by a plan representative or a notary public (such as a
spousal consent under section 417), an electronic notarization acknowledging a
signature (in accordance with section 101 (g) of E-SIGN and state law applicable
to notary publics) will not be denied legal effect so long as the signature of the
individual is witnessed in the physical presence of the plan representative or
notary public.
(ii) [Reserved].
(e) Definitions. The following definitions apply to this section:
(1) Applicable notice. The term applicable notice includes any notice,
report, statement, or other document required to be provided to a recipient under
an arrangement described in paragraph (a)(2) of this section.
(2) Participant election. The term participant election includes any
consent, election, request, agreement, or similar communication made by or from

a participant, beneficiary, or alternate payee to which this section applies under
an arrangement described in paragraph (a)(2) of this section.
(3) Recipient. The term recipient means a plan participant, beneficiary,
employee, alternate payee, or any other person to whom an applicable notice is
to be provided.
(4) Electronic. The term electronic means technology having electrical,
digital, magnetic, wireless, optical, electromagnetic, voice-recording systems, or
similar capabilities.
(5) Electronic media. The term electronic media means an electronic
method of communication (e.g., websites, electronic mail, telephonic systems,
magnetic disks, and CD-ROMs).
(6) Electronic record. The term electronic record means an applicable
notice created, generated, sent, communicated, received, or stored by electronic
means.
(f) Examples. The following examples illustrate the rules of this section.
In all of these examples, with the exception of Example 4 and Example 5,
assume that the requirements of paragraph (a)(4) of this section are satisfied.
Example 1. (i) Facts. Plan A, a qualified plan, permits participants to
request benefit distributions from the plan on Plan A's Intranet website. Under
Plan A's system for such transactions, a participant must enter his or her account
number and personal identification number (PIN), and this information must
match the information in Plan A's records in order for the transaction to proceed.
If a participant requests a distribution from Plan A on Plan A's website, then, at
the time of the request for distribution, a disclosure statement appears on the
computer screen that explains that the participant can consent to receive the
section 402(f) notice electronically. In the disclosure statement, Plan A provides
information relating to the consent, including how to receive a paper copy of the
notice, how to withdraw the consent, the hardware and software requirements,
and the procedures for accessing the section 402(f) notice, which is in a file

format from a specific spreadsheet program. After reviewing the disclosure
statement, which satisfies the requirements of paragraph (b)(3) of this section,
the participant consents to receive the section 402(f) notice via e-mail by
selecting the consent button at the end of the disclosure statement. As a part of
the consent procedure, the participant must demonstrate that the participant can
access the spreadsheet program by answering a question from the spreadsheet
program, which is in an attachment to an e-mail. Once the participant correctly
answers the question, the section 402(f) notice is then delivered to the participant
via e-mail.
(ii) Conclusion. In this Example 1, Plan A's delivery of the section 402(f)
notice satisfies the requirements of paragraph (b) of this section.
Example 2. (i) Facts. Plan B, a qualified plan, permits participants to
request benefit distributions from the plan bye-mail. Under Plan 8's system for
such transactions, a participant must enter his or her account number and
personal identification number (PIN) and this information must match the
information in Plan 8's records in order for the transaction to proceed. If a
participant requests a distribution from Plan 8 bye-mail, the plan administrator
provides the participant with a section 411 (a)(11) notice in an attachment to an email. Plan 8 sends the e-mail with a request for a computer generated
notification that the message was received and opened. The e-mail instructs the
participant to read the attachment for important information regarding the request
for a distribution. In addition, the e-mail also provides that the participant may
request the section 411 (a)(11) notice on a written paper document and that, if the
participant requests the notice on a written paper document, it will be provided at
no charge. Plan 8 receives notification indicating that the e-mail was received
and opened by the participant. The participant is effectively able to access the email system used to make a participant election and consents to the distribution
bye-mail. Within a reasonable period of time after the participant's consent to
the distribution bye-mail, the plan administrator, bye-mail, sends confirmation of
the terms (including the form) of the distribution to the participant and advises the
participant that the participant may request the confirmation on a written paper
document that will be provided at no charge.
(ii) Conclusion. In this Example 2, Plan 8's delivery of the section
411 (a)(11) notice and the transmission of a participant's consent to a distribution
satisfy the requirements of paragraphs (c) and (d) of this section.
Example 3. (i) Facts. Plan C, a qualified pension plan, permits
participants to request plan loans through the Plan C's web site on the internet
with the notarized consent of the spouse in accordance with applicable State law.
Under Plan C's system for such transactions, a participant must enter his or her
account number, personal identification number (PIN), and his or her e-mail
address. The information entered by the participant must match the information
in Plan C's records in order for the transaction to proceed. A participant may

request a loan from Plan C by following the applicable instructions on Plan C's
web site. Participant M, a married participant, is effectively able to access the
web site available to apply for a loan and completes the forms on the web site for
obtaining the loan. The forms include attachments setting forth the terms of the
loan agreement and all other required information. Participant M is then
instructed to submit to the plan administrator a notarized spousal consent form.
Participant M and M's spouse go to a notary public and the notary witnesses
Participant M's spouse signing the spousal consent for the loan agreement. After
witnessing M's spouse signing the spousal consent, the notary public sends an
e-mail with an electronic acknowledgement that is attached to or logically
associated with the signature of M's spouse to the plan administrator. The
electronic acknowledgement is in accordance with section 101(g) of E-SIGN and
the relevant state law applicable to notary publics. After the plan receives the email, Plan C sends an e-mail to the participant, giving the participant a
reasonable period to review and confirm the loan application or to determine
whether the application should be modified or rescinded. In addition, the e-mail
to the participant also provides that the partiCipant may request the plan loan
application on a written paper document and that, if the participant requests the
written paper document, it will be provided at no charge.
(ii) Conclusion. In this Example 3, the transmissions of the loan
agreement and the spousal consent satisfy the requirements of paragraph (d) of
this section.
Example 4. (i) Facts. A qualified profit-sharing plan (Plan D) permits
participants to request distributions through an automated telephone system.
Under Plan D's system for such transactions, a participant must enter his or her
account number and personal identification number (PIN); this information must
match that in Plan D's records in order for the transaction to proceed. Plan D
provides only the following distribution options: single-sum payment; and annual
installments over 5, 10, or 20 years. A participant may request a distribution from
Plan D by following the applicable instructions on the automated telephone
system. After the participant has requested a distribution, the automated
telephone system recites the section 411 (a)( 11) notice to the partiCipant. The
automated telephone system also advises the participant that he or she may
request the notice on a written paper document and that, if the participant
requests the notice on a written paper document, it will be provided at no charge.
The participants are effectively able to access the automated telephone system
used to make a participant election. The automated telephone system requires a
participant to review and confirm the terms (including the form) of the distribution
before the transaction is completed. After the participant has given consent, the
automated telephone system confirms the distribution to the participant and
advises the participant that he or she may request the confirmation on a written
paper document that will be provided at no charge.

(ii) Conclusion. In this Example 4, because Plan D has relatively few and
simple distribution options, the provision of the section 411 (a)(11) notice through
the automated telephone system is no less understandable to the participant
than a written paper notice for purposes of paragraph (a)(4) of this section. In
addition, the automated telephone procedures of Plan D satisfy the requirements
of paragraphs (c) and (d) of this section.
Example 5. (i) Facts. Same facts as Example 4, except that, pursuant to
Plan D's system for processing such transactions, a participant who so requests
is transferred to a customer service representative whose conversation with the
participant is recorded. The customer service representative provides the
section 411 (a)(11) notice from a prepared text and processes the participant's
distribution in accordance with the predetermined instructions from the plan
administrator.
(ii) Conclusion. Like in Example 4, because Plan D has relatively few and
simple distribution options, the provision of the section 411 (a)(11) notice through
the automated telephone system is no less understandable to the participant
than a written paper notice for purposes of paragraph (a)(4) of this section.
Further, in this Example 5, the customer service telephone procedures of Plan D
satisfy the requirements of paragraphs (c) and (d) of this section.
Example 6. (i) Facts. Plan E, a qualified plan, permits participants to
request distributions bye-mail on the employer's e-mail system. Under this
system, a participant must enter his or her account number and personal
identification number (PIN). This information must match that in Plan E's records
in order for the transaction to proceed. If a participant requests a distribution by
e-mail, the plan administrator provides the participant with a section 411 (a)(11)
notice bye-mail. The plan administrator also advises the participant bye-mail
that he or she may request the section 411 (a)(11) notice on a written paper
document and that, if the participant requests the notice on a written paper
document, it will be provided at no charge. Participant N requests a distribution
and receives the section 411 (a)(11) notice from the plan administrator by reply email. However, before Participant N elects a distribution, N terminates
employment. Following termination of employment, Participant N no longer has
access to the employer's e-mail system.

(ii) Conclusion. In this Example 6, Plan E does not satisfy the participant
election requirements under paragraph (d) of this section because PartiCipant N
is not effectively able to access the electronic medium used to make the
participant election. Plan E must provide Participant N with the opportunity to
transmit the participant election through another system that Participant N is
effectively able to access, such as the automated telephone systems described
in Example 4 and Example 5 of this paragraph (f).
Par. 4. Section 1.402(f)-1 is amended by:

(1) Revising A-5.
(2) Removing Q&A-6.
The revision reads as follows:
§ 1.402(f)-1 Required explanation of eligible rollover distributions; questions and

answers.
*****
A-5. Yes. See §1.401 (a}-21 of this chapter for rules permitting the use of
electronic media to provide applicable notices to recipients with respect to
employee benefit arrangements.
Par. 5. Section 1.411 (a}-11 is amended by:
(1) Revising the text of paragraphs (f}(1) and (2).
(2) Removing paragraph (g).
The revisions read as follows.

§ 1.411(a)-11 Restriction and valuation of distributions.
*****
(f) * * *
(1) * * * The notice of a participant's rights described in paragraph (c){2)
of this section or the summary of that notice described in paragraph
(c)(2)(iii)(8)(2) of this section must be provided on a written paper document.
However, see §1.401 (a}-21 of this chapter for rules permitting the use of
electronic media to provide applicable notices to recipients with respect to
employee benefit arrangements.

(2) * * * The consent described in paragraphs (c)(2) and (3) of this
section must be given on a written paper document. However, see §1.401 (a)21(d) of this chapter for rules permitting the use of electronic media to transmit
participant elections with respect to employee benefit arrangements.
Par. 6. Section 1.417(a)(3)-1 is amended by revising the text of paragraph
(a)(3) to read as follows:
§1.417(a)(3)-1 Required explanation of qualified joint and survivor annuity and
qualified preretirement survivor annuity.
(a) * * *
(3) * * * A section 417(a)(3) explanation must be a written explanation.
First class mail to the last known address of the participant is an acceptable
delivery method for a section 417(a)(3) explanation. Likewise, hand delivery is
acceptable. However, posting of the explanation is not considered provision of
the section 417(a)(3) explanation. But see §1.401 (a)-21 of this chapter for rules
permitting the use of electronic media to provide applicable notices to recipients
with respect to employee benefit arrangements.
*****
Par. 7. Section 1.7476-2 is amended by revising paragraph (c)(2) to read
as follows:

§ 1. 7476-2 Notice to interested parties.
*****
(c) * * *

(2) If the notice to interested parties is delivered using an electronic
medium under a system that satisfies the applicable notice requirements of
§1.401 (a)-21 of this chapter, the notice is deemed to be provided in a manner
that satisfies the requirements of paragraph (c)(1) of this section.
*****
PART 35--EMPLOYMENT TAX AND COLLECTION OF INCOME TAX AT THE
SOURCE REGULATIONS UNDER THE TAX EQUITY AND FISCAL
RESPONSIBILITY ACT OF 1982
Par. 8. The authority citation for part 35 continues to read, in part, as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 9. Section 35.3405-1 is amended by:
(1) Revising d-35, A.
(2) Removing d-36, Q&A.
The revision reads as follows:
§35.3405-1 Questions and answers relating to withholding on pensions,
annuities, and certain other deferred income.
*****
d-35. * * *
A. A payor may provide the notice required under section 3405 (including
the abbreviated notice described in d-27 of §35.3405-1T and the annual notice
described in d-31 of §35.3405-1T) to a payee on a written paper document.
However, see § 1.401 (a)-21 of this chapter for rules permitting the use of

electronic media to provide applicable notices to recipients with respect to
employee benefit arrangements.
PART 54--PENSION EXCISE TAXES
Par. 10. The authority citation for part 54 continues to read, in part, as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 11. Section 54.4980F-1, Q&A-13, is amended as follows:
(1) Revising paragraph A-13 (c)(1)(ii).
(2) Removing paragraph A-13 (c)(1 )(iii) and (c)(3).
The revision reads as follows:
§54.4980F-1 Notice requirements for certain pension plan amendments
significantly reducing the rate of future benefit accrual.
*****
A-13. * * *
(c) * * *
(1) * * *
(ii) The section 204(h) notice is delivered using an electronic medium
under a

system that satisfies the applicable notice requirements of §1.401 (a)-21.
*****

Deputy Commissioner for Services and Enforcement.
Mark E. Matthews

Page 1 of2

July 14, 2005
JS-2632
Treasury Designates MIRA for Support to AI Qaida
The U.S Department of the Treasury today designated the Movement for Islamic
Reform in Arabia (MIRA), a UK-based Saudi oppositionist organization, for
providing material support to al Qaida. MIRA is run by al Qaida-affiliated Sa ad alFaqih, who was designated pursuant to E.O. 13224 by the Treasury on December
21, 2004 and is named on the United Nations 1267 Committee consolidated list of
terrorists tied to al Qaida, UBL and the Taliban.
"AI-Faqih uses MIRA to facilitate al Qaida's operations," said Stuart Levey, the
Treasury's Under Secretary for Terrorism and Financial Intelligence (TFI).
"Designating MIRA will help stem the flow of funds to the organization and put the
world on notice of its support for al Qaida."
Under his ideological and operational control, MIRA is the main vehicle al-Faqih
uses to propagate support for the al Qaida network. MIRA's 1995 founding
statement explicitly states that the organization is not limited to peaceful means in
the pursuit of its objectives. According to information available to the U.S.
Government, while head of MIRA, al-Faqih assumed the role of the al Qaida
spokesperson in London following the arrest of senior Egyptian Islamic Jihad
terrorist Yassir al-Sirri in 2001.
Information shows that statements on the MIRA website, including messages from
Usama bin Laden and Abu Mus'ab al Zarqawi, are intended to provide ideological
and operational support to al Qaida affiliated networks and potential recruits.
According to recent information available to the U.S. Government, a senior al Qaida
operative in Saudi Arabia sent articles to al-Faqih who then posted them to the
MIRA website under the al Qaida operative's pennames.
In 2003, MIRA and Faqih received approximately $1 million in funding through
Abdulrahman Alamoudi. According to information available to the U.S. Government,
the September 2003 arrest of Alamoudi was a severe blow to al Qaida, as
Alamoudi had a close relationship with al Qaida and had raised money for al Qaida
in the United States. In a 2004 plea agreement, Alamoudi admitted to his role in an
assassination plot targeting the Crown Prince of Saudi Arabia and is currently
serving a 23 year sentence.
AI-Faqih has maintained associations with the al Qaida network since the mid1990s, including with Khaled al Fawwaz, who acted as UBL's de facto
representative in the United Kingdom and was associated with the 1998 East Africa
embassy bombings. At the U.S. trial of the East African embassy bombers,
prosecutors provided evidence that MIRA and al-Faqih paid for a satellite phone
that al Fawwaz passed on to UBL, who allegedly used it to help carry out the
attacks.
MIRA was designated under Executive Order 13224 for providing financial and/or
material support to al Qaida
Identifying Information
Movement for Islamic Reform in Arabia
AKAs: AI-Harakat AI-Islamiyah lil-Islah
AI Islah (Reform)

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Islamic Movement for Reform
MIRA
Movement for Reform In Arabia
Address: BM Box: MIRA
london WC1N 3XX, United Kingdom
Alt. Address: Safiee Suite, EBC House, Townsend lane
london NW9 8ll, United Kingdom
Alt. Address: 21 Blackstone Road
london NW2 6DA, United Kingdom
Telephone: 020 8452 0303
Fax: 020 8452 0808.
Email: illfo@lsiclll ClICJ
U.K. Company Number: 03834450
For more information on the designation of al-Faqih, please visit:
11ttp ;'www

llC~ClSllly UOJ:prtcss:lele;1se~;'Js2il54

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July 14, 2005
js-2633

Testimony of Treasury Secretary John W. Snow
Committee on Banking
U.S. Senate
on the Terrorism Risk Reinsurance Program
Thank you, Chairman Shelby, Ranking Member Sarbanes, and other members of
the Committee. I appreciate the opportunity to discuss the Treasury Department
report on the Terrorism Risk Insurance Act (TRIA).
As you know, President Bush signed TRIA into law in November of 2002 to help
safeguard America's economy following the terrorist attacks of September 11,
2001. The September 11 losses led the insurance industry to reduce its exposure to
future losses largely by excluding coverage of terrorism risk in many policies. The
pullbacks in terrorism coverage and the quotations of rapidly increasing premiums
raised concerns that this period of adjustment to the reality of global terrorism risk in
the insurance market could have a negative effect on the economy.
In response, TRIA was passed. It was meant to address any market disruptions and
ensure the continued widespread availability and affordability of property and
casualty insurance for terrorism risk, and to allow a transitional period for the private
markets to stabilize, resume pricing of such insurance, and build capacity to absorb
any future losses, while preserving State insurance regulation and consumer
protections.
TRIA required the Treasury Department to assess the effectiveness of the
Terrorism Risk Insurance Program. It also required Treasury to assess the likely
capacity of the property and casualty insurance industry to offer insurance for
terrorism risk after termination of the Program.
The report finds that TRIA has been effective in meeting its goals of supporting the
industry during a transitional period and stabilizing the private insurance market.
Consistent with TRIA's design to encourage the development of the private market,
the Administration opposes extension of the program in its current form. Extending
TRIA in its current form is likely to discourage the private market development
needed to deal with the risk of terrorism. The Administration has outlined principles
that any extension should recognize and we look forward to discussions with the
Congress on them. Before I review the main findings of the report, however, I would
like to discuss the approach that the Treasury Department took in the course of
evaluating TRIA.

Treasury Approach to TRIA Evaluation
Treasury contracted with an outside survey research firm to conduct two
independent, nationally representative surveys. One survey sampled insurers in the
commercial property and casualty line, which is eligible for the federal reinsurance
provided under the Program. The other survey sampled policyholders, businesses
and other organizations that purchased commercial property and casualty
insurance in TRIA-eligible lines. Respondents were asked to provide information on
an annual basis from 2002 (prior to passage of TRIA), to the first two months of
2005. The data therefore give a unique, comprehensive overview of the availability
and affordability of terrorism risk insurance coverage in the private market.
From insurers, the surveys collected information on the amount of terrorism

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Structure of TRIA
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. TRIA represents a form of publicly-provided and
subsidized terrorism risk reinsurance, which essentially transfers risks associated
with terrorism losses from the private to the public sector (taxpayers).
Under TRIA, companies that provide commercial property and casualty insurance
are required to offer ("make available") terrorism coverage on the same terms and
conditions as offered in their non-TRIA coverage. To be eligible for TRIA
reinsurance, an act of terrorism must be certified by the Secretary of the Treasury,
with the concurrence of the Secretary of State and the Attorney General., and must
have resulted in aggregate property and casualty losses of $5 million or more. TRIA
defines an act of terrorism as (1) a violent act or act that is dangerous to human life,
property or infrastructure, that (2) has resulted in damage within the United States
or outside of the United States in the case of an air carrier or vessel (as defined by
TRIA) or on the premises of a United States mission, and (3) has been committed
by an individual or individuals acting on behalf of any foreign person or interest, (4)
as part of an effort to coerce the U.S. civilian population or influence the policy or
affect the conduct of the U.S. government by coercion.
The federal government would have to cover 90 percent of insured losses beyond
an insurer deductible, up to $100 billion per year. In the first full Program Year
(2003) the deductible was 7 percent of 2002 premiums, in 2004 the deductible was
10 percent of 2003 premiums, and in 2005 the deductible is 15 percent of 2004
premiums. The purpose of the graduated deductible amounts was to encourage
development of private market capacity over time. Insurers are also liable for 10
percent of losses above the deductible threshold.
In the event that the federal government provides compensation for insured losses
for an act of terrorism under the Program, TRIA requires recoupment of at least a
portion of the federal compensation through policyholder premium surcharges.
Recoupment is mandatory in cases where the aggregate industry insured terrorism
losses (deductibles and co-pays) are below a specified aggregate retention amount.

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Industry capacity to provide coverage for terrorism risk has improved, as
has take-up of such coverage.
• Insurers are increasingly pricing terrorism risk insurance, and the price of
coverage with an explicit charge has decreased.
• Industry surplus has improved.
• Many insurers reinsure a substantial portion of their retained risk under
TRIA, but overall reinsurance purchases have not increased substantially.
Availability and Take-up of Terrorism Coverage
Results from both the survey of insurers and the survey of policyholders show that
the availability and the take-up (purchase) of terrorism insurance increased while
TRIA has been in effect.
Insurers now provide terrorism coverage on a greater share of commercial property
and casualty insurance policies than in 2002 (the year before TRIA). While 60
percent of policies written in 2002 included terrorism insurance coverage, fully twothirds of such policies included such coverage in 2004. Terrorism insurance was
also more widely available in the market, as the share of insurers providing any
terrorism coverage rose from 73 percent to 91 percent over the period.
Policyholders as well are now more likely to purchase terrorism risk insurance than
in 2002. The data show a doubling in the take-up rate of terrorism risk coverage:
from 27 percent of policyholders in 2002 to 54 percent of policyholders by 2004.
The finding that just under half of policyholders do not take-up such coverage does
not necessarily reflect a problem in the market. The decision to purchase terrorism
insurance reflects a tradeoff between the benefits and cost of the coverage. Firms
that perceive a low risk of terrorism attacks or that have some form of self insurance
(for example, through diversified portfoliOS) may simply not place a high value on
terrorism insurance. It is useful to note that TRIA did not mandate the purchase of
terrorism insurance, but rather that such coverage be made available.
Pricing and Cost
Both insurer and policyholder surveys show that insurers increasingly began pricing
terrorism risk insurance during the time TRIA was in effect. More than 75 percent of
insurers providing coverage for terrorism risk in 2002 did not charge for it. but only
40 percent in 2004 provided coverage for free. These numbers are very similar to
those reported by policyholders.
The average cost of terrorism insurance (measured as the share of total premiums
paid for terrorism coverage) generally rose during this period. Overall, insurers
reported costs ranging from 0.9 percent of premiums in 2002 to 1.8 percent by

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Industry Surplus and Reinsurance
Industry surplus. a key source of insurer capacity. has returned to pre- September
11 th levels. Insurers are financially stronger and more able to bear unexpected
losses than they were prior to the enactment of TRIA. Reinsurance, another
important component of an insurer's capacity to absorb losses, has not increased
substantially, however. Seventy percent of insurers reported purchasing
reinsurance for terrorism risk in 2003, but only 65 percent in 2004 reported
purchasing reinsurance in 2004. Preliminary data from the first months of 2005 are
encouraging and suggest a rebound to 75 percent. Smaller and medium-sized
insurers generally reported greater use of reinsurance for terrorism risk exposure
(TRIA deductibles and co-payments) between 2003 and 2005. During this same
period, however. larger insurers reported less use of reinsurance for terrorism risk
exposure.

Summary
The findings from the surveys of insurers and policyholders point to the success of
TRIA in achieving its short term goals. TRIA effectively "addressed market
disruptions and ensur[edJ the continued widespread availability and affordability of
property and casualty insurance for terrorism risk." While we don't ascribe a direct
causal effect to TRIA. we note that insurer financial strength has improved
substantially over this period. More generally, TRIA allowed both insurers and
policyholders time to adjust to the post-September 11 th view of terrorism risk.
TRIA provisions shifted an increasing share of expected terrorism losses back to
the private sector, as the deductible was increased from 7 percent of premiums in
2002 to 15 percent of premiums in 2004. Had there been no improvement in
capacity, we should observe a pullback of terrorism coverage in response to this
shift in cost. The expansion of terrorism risk coverage availability and take-up, and
the decline in cost even as the TRIA deductible has increased therefore highlights
the improvement in the industry's ability to cover terrorism risk
Industry Capacity to Cover Terrorism Risk After TRIA
Congress also directed Treasury to assess the likely capacity of the property and
casualty insurance industry to offer insurance for terrorism risk after expiration of
the program. TRIA provided a federal backstop for terrorism losses that effectively
subsidized terrorism risk insurance. It is reasonable to expect that the removal of
the subsidy will result in adjustments in coverage and pricing. In the Treasury
report, we present a framework to evaluate the impact of a TRIA sunset in more
detail, and provide evidence from our surveys and from insurance industry
statistics, data, and discussions with industry and other experts. Two important
determinants of insurers' ability to effectively write coverage for terrorism in the
near-term are the ability to model terrorism risk and the industry's financial capacity
- including both surplus and access to reinsurance - to cover terrorism losses.

Modeling Terrorism Losses

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To provide and price insurance efficiently, insurers should be able to quantify their
exposure to losses from terrorism risk. The primary tool available for quantifying
loss exposure is modeling terrorism risk. Our assessment of developments in risk
modeling over the past few years is positive, but we note that challenges do remain.
Modeling terrorism risk has two critical components: the ability to identify and
quantify the severity of an event in terms of insurers' losses, and the probability of
the loss occurring. Our study concludes that insurers' ability to identify and quantify
the severity of an event in terms of insurers' losses has improved greatly. In
particular, insurers are much better able to assess their exposures or
accumulations of risk for a given terrorist event on an overall and individual
customer basis. The industry - particularly the primary insurance industry - has
made great progress in tracking aggregate exposure by location to estimate
exposure to losses from physical damage and considerable progress in tracking
aggregates of employees down to the level of individual locations to estimate
exposure to workers' compensation losses. Modelers have created and
implemented sophisticated probabilistic loss estimates that are said to take account
of terrorists' shifting goals and strategies. Insurers writing coverage for high risk
exposures are able to use multiple methods of assessing terrorism risk. This is
important because it allows insurers to more effectively underwrite coverage. We
acknowledge that the industry faces some difficulty in assessing the probability of
the loss from terrorism. The uncertainty surrounding their predictions reduces the
usefulness of these models.
Financial Capacity
An insurer's capacity to write coverage is limited to the maximum coverage it could
provide, while retaining its ability to meet current and future obligations to its base
of policyholders. An important determinant of insurers' capacity to cover terrorism
losses is financial strength, which incorporates both balance sheet strength and
operating performance. The financial health of the insurance industry, especially
surplus, has improved greatly in the past three years. Among insurer groups
providing coverage in TRIA-eligible property and casualty lines, surplus was higher
in the third quarter of 2004 than it was in the third quarters of 2001, 2002 and 2003.
Between the 3rd quarter of 2001 and the 3rd quarter of 2004, surplus increased
from $256 billion to $341 billion. Measures of the industry's capacity to cover
terrorism risk, including the ratio of net premiums to surplus, the return on surplus,
and the capital adequacy ratio (accounts for underwriting, investment and credit
risk) have all improved since the losses following the September 11 attacks.
By purchasing reinsurance, insurers can write additional coverage without
increasing their financial holdings. Our survey results show that reinsurance is
available, and purchased, for a sizable portion of the retained risk under TRIA.
Seventy percent of insurers purchased reinsurance for TRIA-eligible risks in 2003.
The results also indicate, however, that over the time period covered by our study,
purchases of reinsurance have not increased substantially.
Insurance Market Outcomes
The expiration of TRIA will change the business environment in which insurers
operate and will therefore change their behavior. Insurers will likely consider factors
such as the possibility of insolvency from terrorism losses given the levels of
surplus available and the effect on credit ratings. Experience with natural
catastrophe risk underwriting and assignment of agency ratings suggests that in
order to avoid ratings downgrades, insurers may significantly alter their approach to
terrorism risk insurance after TRIA's expiration. Among the changes insurers may
institute are increasing the use of private reinsurance, building surplus by tapping
into capital markets, and raising premiums or placing exclusions on some policies.
Our surveys included direct responses on the availability of coverage after the
expiration of TRIA. Responding to questions about policies written in early 2005
that continue into 2006, nearly 50 percent of insurers reported that they are not
writing coverage for terrorism risks in 2006 (after the scheduled expiration of TRIA)
that is similar to the coverage they write under TRIA. One-quarter of policyholders
with terrorism risk coverage indicated that their coverage excludes terrorism

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Page 6 of7
coverage after the expiration of TRIA.
TRIA's expiration will conclude the transitional assistance first provided to the
insurance markets in the uncertain economic environment of 2002. While the
immediate effect of the removal of the TRIA subsidy is likely to be less terrorism
insurance and, higher prices, we expect that over time the private market will
develop additional terrorism insurance capacity. We anticipate that the initial
response of premiums in the market will spur the buildup of surplus as insurers tap
into capital markets: and the development of additional private reinsurance and
other risk shifting mechanisms.
Macroeconomic Effects
We do not believe that the elimination of the federal terrorism risk reinsurance
subsidy is likely to have a discernable macroeconomic effect. In late 2001 and
2002, there was concern that there could be macroeconomic effects associated
with the transition between a world in which terrorism coverage was provided for a
negligible price and one where terrorism risk was considered a non-negligible risk.
The economic climate during the discussion of TRIA and its enactment was highly
uncertain. Industrial production had peaked in mid-2000, and by September 2001
had already fallen more than 5 percent. The terrorist attacks of September 11
created macroeconomic uncertainties that most analysts believed would translate
into a further sharp downturn in economic activity that would last at least two
additional quarters. Nonresidential building activity tumbled about 33 percent at an
annual rate in the fourth quarter of 2001, and continued to experience declines well
in excess of 15 percent in the subsequent three quarters. It was difficult at the time
to assess whether the substantial declines in nonresidential building were due to
the chilling effect of terrorist activity, terrorism insurance issues or the result of a
cumulative unwinding of activity more typical of a recession and even the excesses
of the late 1990s.
Helped by tax cuts and monetary stimulus, the economy has since improved
substantially. GDP growth rose from just 2.3 percent in 2002 to 3.9 percent in 2004
(fourth quarter over fourth quarter). The unemployment rate, which was 6 percent in
December 2002, fell to 5.1 percent in May 2005. However, despite the rising
economy and the enactment of TRIA, nonresidential building has rebounded only
slightly. Nonresidential building is currently 4.2 percent higher than the trough
reached in the first quarter of 2003, but remains substantially below the previous
peak. From our current perspective it appears that neither the potential lack of terror
risk insurance nor a general economic downturn were responsible for weakness in
nonresidential building activity.

Overall Assessment and Policy Recommendations
The risk of terrorism changed fundamentally and permanently after the events of
September 11, 2001. In the words of the President:
.. .Our country is safer than it was on September the 11th, 2001, yet, we're still not
safe .... We are a Nation in danger. We're doing everything we can in our power to
confront the danger. We're making good progress in protecting our people and
bringing our enemies to account. But one thing is for certain: We'll keep our focus
and we'll keep our resolve and we will do our duty to best secure our country."
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 TRIA's original purpose as a temporary program
scheduled to end on December 31,2005, and the need to encourage further
development of the private market, the Administration cannot support a straight
extension of TRIA.
Any reform of TRIA should be consistent with several principles. It is the
Administration's view that extension of the program should recognize 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

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Page 7 of7

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.
The events of the past week in London have been an unwelcome reminder that the
risk of terrorism is real and that the war on terrorism is one that will be waged over
a long period of time on many fronts. Some believe the fact that terrorism risk is real
suggests the need for a permanent and obtrusive federal role in the market for
terrorism risk insurance. I agree that the risk of terrorism is likely to remain a part of
our lives for some time to come, but that is precisely why the federal government
needs to encourage the development of the most creative and cost effective means
of covering terrorism risks. The Administration looks forward to working with the
Congress to achieve this end.
-30-

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July 15, 2005
JS-2534

Fourth Round of New Markets Tax Credit Competition
Opens
$3.5 Billion in New Markets Tax Credits Available
The U.S. Department of the Treasury announced today the opening of the fourth
round of competition for the allocation of up to $3.5 billion in tax credits under the
New Markets Tax Credit (NMTC) Program. The NMTC Program attracts privatesector capital investment into the nation's urban and rural low-income areas to help
finance community development projects, stimulate economic growth and create
jobs.
"The New Markets Tax Credit program spurs development and creates jobs in
communities most in need," said Treasury Secretary John W. Snow. "By leveraging
private sector involvement, we're putting these communities on a path to continued
development and prosperity."
The NMTC program, established by Congress in December of 2000, permits
individual and corporate taxpayers to receive a credit against federal income taxes
for making qualified equity investments in investment vehicles known as
Community Development Entities (CDEs). The credit provided to the investor totals
39 percent of the cost of the investment and is claimed over a seven-year period.
Substantially all of the taxpayer's investment must in turn be used by the CDE to
make qualified investments in low-income communities. Successful applicants are
selected only after a competitive application and rigorous review process that is
administered by Treasury's Community Development Financial Institutions (CDFI)
Fund.
"The pace with which capital is being raised and its deployment into local projects is
impressive for such a new program," said CDFI Fund Director Arthur Garcia. "To
date, 87 of the allocatees from the first two rounds have already raised $2.2 billion
in equity from investors, and this capital is already starting to be put to use funding
deals in our nation's low-income communities." Through the first three rounds of
the NMTC Program, the CDFI Fund has made 170 awards totaling $8 billion in tax
credit allocation authority.
Guidance and application materials on the fourth round of the NMTC Program are
available on the CDFI Fund's website at www.ccififulld.gov. The allocation
application deadline is September 21, 2005.
The CDFI Fund is offering a free interactive video teleconference on Thursday,
August 4, 2005 at 1:00 p.m. EDT. The teleconference will be broadcast from
Washington. D.C. and down-linked via satellite to over 80 locations nation-wide. To
learn more about this training or to register. please visit the CDFI Fund's website at
www.ccJfiflJncJ.gOV.

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July 15. 2005
JS-2535

Remarks by Assistant Secretary for Economic
Policy Mark Warshawsky on Social
Security Reform and the Implications for
National Savings
The Urgency for Social Security Reform and
the Implications of Effective and Fair
Reform for National Saving
Remarks to the University of Chicago Graduate
School of Business Alumni Finance
Roundtable
Thank you for the kind introduction. It is both an
honor and a pleasure to speak with you today on
the important topic of Social Security reform. As
you are aware. Social Security reform is a major priority of this Administration and
we are working hard with members of Congress to get it done.
Today I will 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.
will also say a few words about the implications for national savings of making
Social Security permanently solvent in a fair manner.

The Size of Social Security's Financial Shortfall
For many years the Social Security Trustee Report has featured a 75-year measure
of Social Security's financial shortfall. which is now estimated at $4.3 trillion or 1.92
percent of taxable payroll. But that measure substantially understates the true size
of the funding gap because the short projection period excludes from the calculation
a larger share of program benefits than it does of program taxes. The Social
Security Actuary's estimate of the infinite horizon imbalance. which for the last 3
years has been reported in the Trustees' Report. is $11.1 trillion or 3.5 percent of
taxable payroll.
The Administration believes that reform should make Social Security permanently
solvent. The permanent solvency goal was recently unanimously endorsed by the
Senate in an amendment to the Senate Budget Resolution. That amendment
states that "the American people including seniors. workers, women, minorities. and
disabled persons should work together at the earliest opportunity to enact
legislation to achieve a solvent and permanently sustainable Social Security
system."

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 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.

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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, in particular because tax rate
increases result in lower incentives to work. 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. No
reasonable person would consider it as fair to leave taxes and benefits unchanged
for 35 years while asking future generations to pay such high tax rates to get the
same benefit replacement rates as people receive now. The same conclusion
would apply to a policy of cutting benefits on a pay-as-you-go basis. The
implication is that a fair reform would share the net benefits of Social Security with
near-term birth cohorts more equitably than would occur with pay-as-you-go
financing, which, in turn, implies that a fair reform would result in an accumulation of
either Trust Fund or PRA balances. Trust Fund and PRA balances of course
constitute pre-funding.
The Implications for National Saving of Effective and Fair Reform
A fair and permanent fix for Social Security would probably cause national saving to
increase. This is a result of the way reform would likely distribute Social Security's
net benefits across generations, a choice that should be made wholly on fairness
grounds. It is important to remember that fairness is the goal and increased
national saving is the implication, not the other way around.
Why would a fair Social Security reform cause national saving to increase? To
answer that question, I first note that Social Security is essentially a combination of
a forced savings program, a wealth transfer program within generations, and a
wealth transfer program between generations. This is apparent when you think
about how Social Security affects you personally: First, it either adds or subtracts
from your lifetime wealth, and second it takes income from you in your working
years and gives it back along with some additional accumulation in your retirement
years. The first part is a lifetime wealth transfer, that is a rate of return on
contributions either in excess of or less than the fair investment return, and the
second part is forced savings.
Primarily what matters for national saving is how Social Security transfers wealth
across generations. As you perhaps remember from Economics 101, taking wealth
from one 50-year-old and giving it to another 50-year-old has on average little or no
effect on national consumption, and hence has little or no effect on national saving.
Also, any undesired forced savings would rationally be undone by anyone with the
means, which is anyone with the ability to borrow money or to redirect their
discretionary savings. But intergenerational wealth transfers do affect national
saving: Taking from a 40-year-old to give to a 60-year-old can be expected to
reduce national saving because the consumption of a rational forward-looking 60year old is more responsive to a financial windfall than is the consumption of a
rational forward-looking 40-year-old. This is a generally accepted implication of
Franco Modigliani and Richard Brumberg's life-cycle theory of consumption. That
theory states that a financial windfall causes a person's consumption (including the

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services of consumer durables and not the initial purchase) to increase in a smooth
manner over their planning horizon. Because young people have longer planning
horizons than older people, their propensities to consume a windfall are smaller
than those of older people.
As I mentioned earlier, Social Security has made huge wealth transfers from current
and future workers to generations now either retired or dead. Our theory tells us
that those wealth transfers caused national saving and national wealth to decline
relative to the hypothetical of no Social Security. And indeed one of the motivating
factors behind the creation of a pay-as-you-go Social Security system in the Great
Depression years was to depress savings. But those wealth transfers cannot be
undone. All Social Security reform can do is divvy up the bill racked up by early
birth cohorts, and the way that bill is divvied up across generations affects national
saving. The more of the bill that is paid off early, the less that will be paid off later
and the better off will be future generations. And the mechanism by which paying
off the bill early increases the wellbeing of future generations is through additional
national saving.
With this as background, we can see that Social Security reform's effect on national
saving depends on how reform allocates Social Security's net benefits across
generations relative to what people currently expect. Expectations matter of course
because current consumption depends on peoples' projections of future disposable
income flows. I hazard to guess that most people expect that Social Security
reform will be delayed until the absolute last moment. If that is true, then producing
a permanent reform now, as I expect will occur, would result in more of Social
Security's net benefits being allocated to future generations than is currently
expected. Relative to current expectations, such a reform transfers wealth from
currently living generations to later generations and would cause national saving to
increase.
Personal Retirement Accounts Are Necessary to Ensure That Reform's
Intentions Are Realized
The Administration believes strongly in personal retirement accounts (PRAs).
PRAs provide individual control and ownership, and expand opportunities for
individuals to partake in the benefits of participating in private capital markets.
Individual control and ownership means that people would be free to pass the value
of accounts to their heirs through bequests.
But perhaps most importantly, PRAs are a necessary part of reform if the intended
allocation of Social Security's net benefits across generations is to be realized.
Imagine, for example, that a reform is implemented that is judged permanently
solvent but which relies on very large Trust Fund accumulations and no PRAs. In
order for the reform to work as intended, those Trust Fund accumulations must
represent real saving. 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. And I would note that
individuals would not be able to withdraw funds from their PRAs until retirement.
As many of you are aware, increased short- and medium-term public debt issuance
would be necessary to help fund PRAs. You might ask whether this debt would
neutralize the direct effect PRAs would have on national saving. The answer is no.
The incremental public debt would be very different than debt that we are familiar
with because it is countered by an approximately equal reduction in the
government's obligations to pay future defined benefits. That is, a comprehensive
aggregation of government liabilities would be about unchanged relative to the case
of no PRAs. Hence, unlike public debt issued to fund increased spending, public
debt issued to help fund PRAs would not reduce national saving and would not
significantly affect interest rates.

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CONCLUSION
To conclude, let me say that I am encouraged that Social Security reform is finally
being earnestly debated, and that all parties are motivated to make Social Security
fair and permanently solvent. Today, my small contribution to this debate consists
of four points:
1. Social Security as currently designed cannot be sustained. We know with
absolute certainty that Social Security will ultimately be reformed. The only
question is when and how.
2. Social Security reform is urgent. The longer reform is delayed, the more unfair
reform will be to future generations, and the more difficult it will be for individuals to
plan their financial futures.
3. Making Social Security permanently solvent in a fair manner requires that
retirement incomes be pre-funded to a large extent, and the pre-funding must be
done in PRAs rather than the Social Security Trust Fund. Any attempt to pre-fund
retirement incomes in the Trust Fund would be undone by excessive government
spending outside of Social Security.
4. An effective and fair Social Security reform would very likely cause national
saving to increase. Increased national saving is an implication of fairly distributing
Social Security's net benefits across generations.

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July 15, 2005
JS-2636

Statement of Assistant Secretary for Economic Policy
Mark J. Warshawsky on Economy
Economic data out this week showed an economy that continues to strengthen this is good news for American workers and their families. There was excellent
news on deficit reduction with revised budget forecasts showing that the President's
pro-growth policies, by stimulating economic growth, have increased Treasury
receipts and therefore decreased the budget deficit. By continuing to hold the line
on spending and growing the economy we're on a path to more than meet the
President's goals of cutting the federal budget deficit in half by 2009, which bodes
well for economic growth and stability.
Government data this week also shows that there was a sizable June increase in
retail sales. Combined with upward revisions to April and May retail sales numbers,
this points to a strong increase in consumer spending in the second quarter,
another sign of a healthy economy. This week's consumer price index report
showed that inflation remains low. And the Federal Reserve's report today on
industrial production showed solid growth in June. Altogether these numbers paint
the picture of a robust economy, and one that is on a favorable path for continued
growth.

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-2637 - Treasury International Capital Data for May

Page 1 of2

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

July 18, 2005
JS-2637
Treasury International Capital Data for May
Treasury International Capital (TIC) data for May are released today and posted on the U.S. Treasury web site (w'!!vvtreasgov!tlc). ThE
which will report on data for June, is scheduled for August 15, 2005.
Long-Term Domestic Securities
Gross purchases of domestic securities by foreigners were $1,499.9 billion in May, exceeding gross sales of domestic securities by forE
billion during the same month.
Foreign purchases of domestic securities reached $70.6 billion on a net basis in May, relative to $54.1 billion during the previous month
reached $57.4 billion in May. Net private purchases of Treasury Bonds and Notes increased to $20.8 billion from $10.8 billion the prece
purchases of Government Agency Bonds were $18.1 billion, up from $8.4 billion the previous month. Net private purchases of Corporat
billion, up from $18.1 billion the previous month. Net private purchases of Equities fell to $0.0 billion from $5.4 billion.
Official net purchases of U.S. securities were $13.2 billion in May, relative to $11.5 billion in April. Official net purchases of Treasury Bo
billion accounted for the majority of official flows in May, down from $13.9 billion the previous month.
Long-Term Foreign Securities
Gross purchases of foreign securities owned by U.S. residents were $287.8 billion in May, relative to gross sales of foreign securities to
$298.4 billion during the same month.
Gross sales of foreign securities to U.S. residents exceeded purchases by $10.6 billion, highlighting a net U.S. acquisition of $4.7 billior
and $5.8 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 $60.0 billion in May compared with $l
foreign purchases of long-term securities were $752.1 billion in the twelve months through May 2005 as compared to $737.2 billion duri
through May 2004.
The full data set, including adjustments for repayments of principal on asset-backed securities, as well as historical series, can be foune
http//www.treasgov/tici.

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

Foreigners' Transactions in Long-Term Securities with U.S. Residents
(Billions of dollars, not seasonally adjusted)
2004

12 Months Through
May-04 May-OS

Feb-OS

Mar-O.

13,535.4 15,288.2
12,813.6 14,371.6

14,675.1 15,961.3
13,855.8 15,067.5

1,366.2
1,272.7

1,522.:
1,463,j

2003
1 Gross Purchases of Domestic Securities
2 Gross Sales of Domestic Securities

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·2637 - Treasury International Capital Data for May

3 Domestic Securities Purchased, net (line 1 less line

Page 2 of2

721.9

916.7

819.3

893.8

93.5

58.1

5
6
7
8

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

587.0
161.7
129.9
260.4
35.0

681.1
150.9
205.6
298.9
25.6

594.1
196.4
131.9
243.4
22.4

738.3
186.0
188.8
310.7
52.7

74.9
31.2
10.9
29.9
2.8

73.1
42.:
6.:
22.:
1.,

9
10
11
12
13

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

134.9
103.8
25.9
5.4
-0.3

235.6
201.1
20.8
11.5
2.2

225.2
193.7
23.5
7.2
0.8

155.6
117.0
25.5
13.1
0.0

18.7
11.3
5.3
2.1
0.1

-14.-15.1

2,764.9
2,834.4

3,120.6
3,233.2

3,087.6
3,169.6

3,171.7
3,313.4

281.6
295.5

328:
346.:

-69.4

-112.6

-82.1

-141.8

-13.9

-18.

19.2
-88.6

-29.0
-83.6

11.2
-93.3

-46.9
-94.9

1.4
-15.3

-3.1
-14.:

652.4

804.1

737.2

752.1

79.6

40.!

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

17
18
19
II

12
13

1.1
-0.'
0.1

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

Source: U.S. Department of the Treasury

REPORTS
• (PDF) Foreigners' Transactions in Lon~J-Term Securities With US. Rpsloents (Billions of dollars, not seasonally adJlIsted)

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8/11200S

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

Contact:

Tony Fratto
202-622-2910

Treasury International Capital Data for May

Treasury International Capital (TIC) data for May 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 June,
is scheduled for August 15,2005.
Long-Term Domestic Securities

Gross purchases of domestic securities by foreigners were $1,499.9 billion in May, exceeding
gross sales of domestic securities by foreigners of $1 ,429.2 billion during the same month.
Foreign purchases of domestic securities reached $70.6 billion on a net basis in May, relative to
$54.1 billion during the previous month. Private net flows reached $57.4 billion in May. Net
private purchases of Treasury Bonds and Notes increased to $20.8 billion from $10.8 billion the
preceding month. Net private purchases of Government Agency Bonds were $18.1 billion, up
from $8.4 billion the previous month. Net private purchases of Corporate Bonds were $18.6
billion, up from $18.1 billion the previous month. Net private purchases of Equities fell to $0.0
billion from $5.4 billion.
Official net purchases of U.S. securities were $13.2 billion in May, relative to $11.5 billion in
April. Official net purchases of Treasury Bonds and Notes of$6.8 billion accounted for the
majority of official flows in May, down from $13.9 billion the previous month.
Long-Term Foreign Securities

Gross purchases of foreign securities owned by U.S. residents were $287.8 billion in May,
relative to gross sales of foreign securities to U.S. residents of $298.4 billion during the same
month.

Gross sales of foreign securities to U.S. residents exceeded purchases by $10.6 billion,
highlighting a net U.S. acquisition of$4.7 billion in Foreign Equities and $5.8 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 $60.0 billion in May compared with $47.8 billion in April. Net foreign purchases oflongterm securities were $752.1 billion in the twelve months through May 2005 as compared to
$737.2 billion during the twelve months through May 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
M"l':"04 M"l':"OS

Feb-OS

Mar-OS

Apr-05

May-05

13,535.4 15,288.2
12,813.6 14,371.6
721.9
916.7

14,675.1 15,961.3
13,855.8 15,067.5
819.3
893.8

1,366.2
1,272.7
93.5

1,522.5
1,463.9
58.6

1,409.0
1,354.9
54.1

1,499.9
1,429.2
70.6

2003
1 Gross Purchases of Domestic Securities
2 Gross Sales of Domestic Securities
3 Domestic Securities Purchased, net (line 1 less line 2) /l
4
5
6
7
8

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

587.0
161.7
129.9
260.4
35.0

681.1
150.9
205.6
298.9
25.6

594.1
196.4
131.9
243.4
22.4

738.3
186.0
188.8
310.7
52.7

74.9
31.2
10.9
29.9
2.8

73.0
42.8
6.5
22.3
1.4

42.6
10.8
8.4
18.1
5.4

57.4
20.8
18.1
18.6
0.0

9
10
11
12
13

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

134.9
103.8
25.9
S.4
-0.3

235.6
201.1
20.8
11.5
2.2

225.2
193.7
23.5
7.2
0.8

155.6
117.0
25.5
13.1
0.0

IS,7
11.3
5.3
2.1
0.1

-14.4
-15.0
1.0
-0.4
0.0

11,5
13.9
-1.7
-0.1
-0.7

13.2
6.8
4.6
1.8
0.0

2,764.9
2,834.4
-69.4

3,120.6
3,233.2
-112.6

3,087.6
3,169.6
-82.1

3,171.7
3,313.4
-141.S

281.6
295.5
-13.9

328.7
346.8
-IS.l

286.7
293.0
-6.3

287.8
298.4
-10.6

19.2
-88.6

-29.0
-83.6

11.2
-93.3

-46.9
-94.9

1.4
-15.3

-3.6
-14.5

-4.6
-1.7

-5.8
-4.7

652.4

S04.1

737.2

752.1

79.6

40.5

47.8

60.0

14 Gross Purchases of Foreign Securities
15 Gross Sales of Foreign Securities
16 Foreign Securities Purchased, net (line 14 less line 15) /3
17
18
19
11
12

Foreign Bonds Purchased, net
Foreign Equities Purchased, net
Net Lone-Term Flows (line 3 plus line 16)
Net foreign purchases of U.S. securities (+)
Includes International and Regional Organizations
Net U.S. acquisitions of foreign securities (-)

Source: U.S. Department of the Treasury

Page 1 of 1

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July 18, 2005
js-2638

Treasury and IRS Extend Time for Like-Kind Exchanges
Under Tobacco Program
The Treasury Department and IRS today announced a 60-day extension for
entering into a like-kind exchange agreement under the Tobacco Transition
Payment Program (TTPP). Under the American Jobs Creation Act of 2004, the
Department of Agriculture (USDA) will make payments to owners and growers in
exchange for ending the tobacco marketing quotas and related price support
programs.
The notice announced today will allow tobacco quota holders an additional sixty
days from today to enter into an agreement with a qualified intermediary for a likekind exchange under Section 1031 of the Internal Revenue Code.

REPORTS
•

Notice 2005-57

http://www.treas.gov/pressfreleasesljf>263R.htm

8/11200S

Part III - Administrative, Procedural, and Miscellaneous

Termination of Tobacco Quotas and Price Support Programs

Notice 2005-57
INTRODUCTION
This notice modifies and supersedes Notice 2005-51,2005-28 I.R.B. 74, dated July
11,2005. The modifications to Notice 2005-51 are effective as of June 21,2005, the
date Notice 2005-51 was released.
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

2
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
an Owner's tobacco quota as of the date on which the Owner and USDA enter into a
contract for Owner Payments with respect to the quota (Sale Date). See Q & A-12 for a
special rule regarding when a transfer of a quota is deemed to occur, under certain
circumstances, for purposes of § 1031 of the Internal Revenue Code.

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 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.

3
•

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.

•

Genera"y 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

4
Sale Date. 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 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 Sale Date.
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 Sale
Date, 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.

5
•

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.

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 Sale Date, 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-6. 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 Sale Date) 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

6
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).
(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.

7
0-10. Is the termination of a tobacco quota under the Act an involuntary conversion
of the quota?
A-10. No.

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 pursuant to § 1031 and the regulations
thereunder. The date on which an Owner and USDA enter into a contract for Owner
Payments with respect to a quota is treated as the date on which the quota is
transferred for purposes of § 1031. An intermediary is treated as satisfying the
requirements of § 1.1031(k)-1(g)(4)(iii)(8) (relating to the exchange agreement required
to be entered into by a qualified intermediary) if the intermediary enters into a written
agreement with the Owner (the exchange agreement) before the date on which the
quota is transferred and under the exchange agreement the intermediary-(a) is assigned the right to receive all Owner Payments under the contract
made after the date of the exchange agreement;
(b) acquires the replacement property; and
(c) transfers the replacement property to the Owner.
0-12. Is transitional relief available for purposes of § 1031 for an Owner who could
not make timely arrangements for a like-kind exchange under Notice 2005-51?
A-12. Yes, transitional relief is available to an Owner who applied by June 17,2005,
to enter into a contract with USDA for Owner Payments. In determining whether such
Owner has entered into a like-kind exchange pursuant to § 1031 and the regulations
thereunder, the date on which the Owner transfers a quota is deemed to be September

8
16,2005. To qualify for this transitional relief, an Owner who receives an Owner
Payment must remit the amount of the Owner Payment to the qualified intermediary
within 5 business days of the later of the date the exchange agreement is entered into
or the date the Owner Payment is received by the Owner; in such case the Owner
Payment is treated as being received by the qualified intermediary.
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.
EFFECT ON OTHER DOCUMENTS
Notice 2005-51 is modified and, as modified, is superseded.
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

9
Institutions and Products) at (202) 622-3950 (not a toll-free call). For further information
regarding the remainder of this notice, contact Ms. Myers at (202) 622-4920 (not a tollfree call).

Page 1 of2

July 19, 2005
2005-7 -19-11-16-20-15327
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 $76,408 million as of the end of that week, compared to $76,052 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)

July 8, 2005

76,052

TOTAL

11. Foreign Currency Reserves

Euro

11,113

la. Securities

IOf which, issuer headquartered in the US.

II
II

Yen

14,023

July 15, 2005

I
I
I

76,408

TOTAL

Euro

Yen

TOTAL

25,136

11,195

14,005

25,200

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

2,819

10,805

b.ii. Banks headquartered in the US.

b.ii. Of which, banks located abroad

Ib.iii. Banks headquartered outside the US.
Ib.iii. Of which, banks located in the U.S.
12. IMF Reserve Position 2
13. Special Drawing Rights (SDRs) 2

14. Gold Stock 3
15. Other Reserve Assets

10,904

13,624

2,815

13,719

II
II
II

15,120

0
0

11,130

11,214

11,041

15,234

II. Predetermined Short-Term Drains on Foreign Currency Assets

1. Foreign currency loans and securities

July 8,2005
Euro

Yen

July 15, 2005

II
II

TOTAL

Euro

Yen

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

2.b. Long positions

[3. Other

"
II

I
TOTAL

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

[

July 8, 2005
I

Euro

Yen

http://www.treas.gov/pressfreleasesljfi 20a57 19] 11620 1532Lh1m

July 15, 2005

II
TOTAL

Euro

Yen

I
TOTAL

I
I

8/11200S

Page 2 of2

1. Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within 1
year
1.b. Other contingent liabilities
2. Foreign currency securities with embedded
options

3. Undrawn, unconditional credit lines

0
0

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 institution
Headquartered outside the U. S.

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

4.a.1. Bought puts

I
0

I
I

i4.a.2. Written calls
4.b. Long positions

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

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

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

http://www.treas.gov/pressfreleasesljf>700571911162015327.htm

8/11200S

Page 1 of2

July 20, 2005
js-2639

Statement of Robert M. Kimmitt Nominee for Deputy Secretary
Mr. Chairman, Senator Baucus, Members of the Committee, thank you for the
opportunity to appear before you today. I am honored to be President Bush's
nominee to serve as Deputy Secretary of the Treasury Department, and I am
grateful to Secretary Snow for his confidence and support.
I am pleased to be joined today by my wife Holly and four of our five children:
Kathleen, Robert, William, and Mac - each of whom has served as either a page or
an intern in the Senate. Also here are my brother Jay and my sister Judy, who
together had over 45 years of service to the Senate. I only regret that my late
father, former Secretary of the Senate and Secretary for the Majority, Stan Kimmitt,
from the great state of Montana, is not with us today, for it was he who inspired all
seven of his children and now his grandchildren to the noble cause of public service
and a particular respect for the institution of the United States Senate.
It was twenty years ago this summer that I appeared before this Committee as
President Ronald Reagan's nominee for the position of General Counsel of the
Treasury Department under Secretary Jim Baker. I had previously served as an
Army paratrooper in combat in Vietnam and later as a senior member of the
National Security Council Staff at the White House. After my service at Treasury, I
was Undersecretary of State for Political Affairs and later American Ambassador to
Germany. In the twelve years since returning from Germany, I have served as a
banker, lawyer, and business executive. If confirmed by the Senate, I look forward
to bringing the perspectives of these decades of public and private sector
experience to my work at the Treasury.
The world and the Treasury Department are very different places than they were
during my service in the Department twenty years ago. But the central role played
by the Treasury Department as the Administration's senior economic and financial
department has been brought into even sharper relief in the ensuing decades. In
addition to its internal responsibilities for tax administration and enforcement,
financial management, and domestic finance, the Treasury Department plays a
critical role in all three major interagency bodies of the Executive Branch: the
National Security Council, the National Economic Council, and the Homeland
Security Council. Whether the issue is Social Security, economic policy, or tax
reform; international debt or foreign direct investment; terrorist financing or
economic sanctions, the Treasury Department has an essential responsibility to
ensure that these issues are carefully considered and coordinated within the
Department and interagency process prior to engagement with key external
counterparts, beginning with the Congress.
If confirmed by the Senate, I look forward to helping ensure that the Treasury
Department performs these essential tasks with the diligence and skill that are the
hallmarks of the Department. In that effort, Secretary Snow and I will be assisted
not only by strong Presidential appointees, represented by the colleagues who
appear with me today, but also by the dedicated and highly professional career civil
servants who are and always have been the backbone of the Department.
Mr. Chairman, Senator Baucus, Members of the Committee, thank you again for
this opportunity. If confirmed, I look forward to further such opportunities to interact
with you, and I would be pleased to answer any questions you may have.

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Page I oi2

July 20, 2005
js-2640
Statement of Randal K. Quarles Nominee for Under Secretary for Domestic
Finance U.S. Department of the Treasury before the Senate Finance
Committee
Chairman Grassley, Senator Baucus, members of the Committee, thank you for
giving me this opportunity to appear before you today. I am honored that President
Bush has nominated me to serve as Under Secretary of the Treasury for Domestic
Finance, and I am grateful to have the privilege of your consideration. I am also
very grateful for the support of my family here today -- my wife, Hope Eccles, and
my parents Ralph and Beverly Quarles - and even more so for three family
members whose attention spans are still a little short to attend a Senate hearing but
who have put up with a lot from their father's enthusiasm for public service: my
young sons Randal and Spencer, and our one-year-old daughter, Hope Jr.
The role of the Under Secretary of the Treasury for Domestic Finance is to advise
the Secretary on issues related to capital markets and financial institutions,
government fiscal policy and operations, governmental assets and liabilities, and
related economic and financial matters. The Treasury Department is currently
addressing some of the most crucial issues facing our country in each of these
areas, and, if confirmed for this post, I would look forward to working closely with
this Committee and the Congress across this full range of topics.
My professional career, over two decades in both the public and the private sector,
has given me in-depth experience with the issues facing the increasingly global
banking and capital markets and the challenges of sovereign finance. For nearly
four years, I have served as the Assistant Secretary of the Treasury for
International Affairs, where my responsibilities have included, among other things,
advising on the international aspects of financial regulation and the structure of
sovereign funding markets, as well as macroeconomic policy, exchange rate policy,
trade and investment, and our participation in the International Monetary Fund and
the World Bank. Before that, I began my service in this Administration as the U,S.
Executive Director at the IMF, representing the United States on the IMF's board
during a time of stress for the international financial system,
In the private sector, I was a practicing Wall Street lawyer for nearly seventeen
years, focusing on banking and financial matters, During that time, I helped some
of the world's premier financial institutions think through their approach to an
increasingly integrated financial system, to take practical steps to prepare for that
integration, and to create legal structures to increase the efficiency of financial
intermediation. Finally, this is not my first stint in Domestic Finance at the
Treasury, I was also privileged to serve at the Treasury Department from 1991 to
1993, during the Administration of the first President Bush, working with the team
that proposed the modern statutory framework for this ongoing transformation of the
financial system,
If confirmed for this position, I believe my service in the role of Under Secretary
would benefit from all of these experiences. I also want to note how much it will
benefit from the extremely able Treasury staff that it has been my great honor to
serve with now, in both the international and domestic areas, under three different
Treasury secretaries, I want to thank you again for the privilege of appearing
before this Committee, and I want to thank Secretary Snow for the confidence he
has displayed in me by supporting me for this position, I now look forward to
answering any questions you may have,

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July 20, 2005
js-2641

Statement of Sandra L. Pack Nominee for Assistant Secretary for
Management U.S. Department of the Treasury before the Senate Finance
Committee
Chairman Grassley, Ranking Member Baucus and members of the Senate Finance
Committee, thank you for taking the time to consider my nomination. I am honored
that President Bush has nominated me to serve in this position. I also thank
Secretary Snow for his leadership and support.
Mr. Chairman, I would like to introduce my husband, Randall, to you and to the
members of the Committee.
Now, I would like to tell you a little bit about my background and why I believe that I
am qualified for this position. I am a Certified Public Accountant. Throughout my
professional career, including twelve years in public accounting, two years as
Assistant Secretary of the Army for Financial Management and Comptroller, and
two terms as Chief Financial Officer for the Bush/Cheney presidential campaign
committees, I have demonstrated a commitment to the principles of sound financial
management. I understand the need for the principles and practices espoused by
my profession, such as, strong internal controls, segregation of duties, planning,
budgeting, and reliable accounting and financial reporting systems. These
principles enable sound management and resource decisions.
If confirmed, while I will be serving in a new environment with the U.S. Treasury
Department, I believe that my technical training and my previous work experience
will provide the foundation needed for the challenge. I look forward to learning
about the U.S. Treasury Department and determining how the principles with which
I am familiar may be applied.
Mr. Chairman, thank you again for bringing me before this Committee.

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Page 1 of2

July 20,2005
js-2642
Statement of Kevin I. Fromer Nominee for Assistant Secretary for Legislative
Affairs U.S. Department of the Treasury before the Senate Finance Committee
Chairman Grassley, Ranking Member Baucus and members of the Committee,
thank you for scheduling this hearing and for considering my nomination. It is an
honor to appear before you today.
I wish to thank President Bush for nominating me for the position of Assistant
Secretary of the Treasury and Secretary Snow for his support of this appointment.
also want to express my deepest appreciation and respect to Representative Hal
Rogers of Kentucky and the Speaker of the House, J. Dennis Hastert, for their
support and guidance throughout my career in Congress.
I have spent nearly twenty-three years understanding and supporting the work of
the legislative branch in a variety of positions. I believe these professional
experiences have prepared me for the appointment you are considering. My policy
work has focused on the budget and appropriations processes, both of which shape
or impact numerous other areas of policy and government activity. I have held
senior staff positions in personal, committee and leadership environments,
developing important relationships and an understanding of the workings of both
houses of Congress. I have developed managerial experience that, if confirmed,
will help me lead and support other individuals responsible for dealing with
Congress and others in the Department of the Treasury and the Administration.
If confirmed, I will apply the skills, knowledge and experiences I have gained to
faithfully representing the policies and views of the Department and the
Administration on matters before this Committee and others in the Congress. I also
will ensure that the views of the Congress are accurately conveyed and fully
understood within the Department and the Administration. I will strive to see that
timely and accurate responses are provided to Members of Congress with
questions and concerns.
As you know, the Department has broad and significant responsibilities upon which
the economic vitality and security of this country depends. It promotes policies to
achieve and maintain economic growth and job creation, it works to sever financial
lines of support to terrorists, it maintains trust and confidence in our banking and
financial systems, it carries out complex polices and programs to enhance the
economic performance of other regions of the world, consistent with U.S. interests.
In addition to these priorities, the Department is actively engaged in major policy
initiatives and reforms involving retirement security, housing finance, and the tax
system, among others.
These activities require the understanding and support of the Congress. This
Committee, in particular, has a daily need to work with the Department in carrying
out legislative and oversight responsibilities that overlap significantly with the
Department's portfolio. If confirmed, I look forward to making contributions to the
Committee's work.
Mr. Chairman and Senator Baucus, thank you again for permitting my appearance
before the Committee. It is a great privilege. I am further appreciative to the
majority and minority staffs, which have been courteous to me and generous with
their time in preparation for this process.
Thank you for your consideration. I look forward to responding to any questions

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Page 2 of2

you may have.
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July 21, 2005
JS-2643

MEDIA ADVISORY
Secretary Snow to Hold Press Conference
on Reform of China's Currency Regime
WASHINGTON, DC - Secretary of the Treasury John Snow will hold a press
conference at 10:00 am this morning on the reform of China's currency regime.
WHAT:

Press Conference on Reform of China's Currency Regime

WHEN:

10:00 AM today

WHERE:

U.S. Treasury Department
Room 4121

COVERAGE: Open Press
Please e-mail dates of birth and social security numbers for clearance to Treasury
to Frances Anderson at friclJ1CCSClTHh;rSOT)(@cJCJ.lreds ~J()V ASAP.

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July 21, 2005
js2644

Snow Statement on China's Currency Reform
I welcome China's announcement today that it is adopting a more
flexible exchange rate regime.
As we have said, reform of China's currency regime is important for
China and the international financial system.
I particularly noted China's objective of allowing the market to fully
play its role in resource allocation as well as "to put in place and
further strengthen the managed floating exchange regime based on
market supply and demand."
We will monitor China's managed float as their exchange rate moves
to alignment with underlying market conditions.
China's full implementation of its new currency regime will be a
significant contribution toward global financial stability.
The international economy performs best with free trade, the free
flow of capital, and flexible currencies.
-30-

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Page 10f3

July 21, 2005
JS-2645

Treasury Designates Saddam Hussein's Nephews
The U,S, Department of the Treasury today designated six sons of Saddam
Hussein's half brother and former presidential advisor, Sabawi Ibrahim Hasan AITikriti, This designation is part of an ongoing effort by the Treasury, U,S Central
Command and our partners in the U,S, Government to halt the flow of money and
resources to anti-Coalition forces,
"This action targets the money flows of former regime elements actively supporting
attacks against Coalition forces and the Iraqi people," said Stuart Levey, the
Treasury's Under Secretary for Terrorism and Financial Intelligence (TFI),
The following individuals were designated today under Executive Order 13315,
which is aimed at blocking the property of the former Iraqi regime, its senior officials
and their family members: Yasir Sabawi Ibrahim Hasan AI-Tikriti (Yasir), Omar
Sabawi Ibrahim Hasan AI-Tikriti (Omar), Ayman Sabawi Ibrahim Hasan AI-Tikriti
(Ayman), Ibrahim Sabawi Ibrahim Hasan AI-Tikriti (Ibrahim), Bashar Sabawi Ibrahim
Hasan AI-Tikriti (Bashar) and Sa'd Sabawi Ibrahim Hasan AI-Tikriti (Sa'd), In
addition, the U,S. Government is submitting the individuals to the United Nations for
listing by the 1518 Committee under U,N, Security Council Resolution 1483,
Information available to the U,S, Government indicates that after Operation Iraqi
Freedom, Yasir, Omar, Ayman and Bashar provided support to elements of the
former regime and to groups carrying out attacks against Iraqi and Coalition forces,
as well as against Iraqi civilians,
Yasir, Omar, and Bashar directed a number of anti-Coalition activities in Iraq and
maintained communication with several insurgent groups throughout northern and
central Iraq,
Yasir, who allegedly acted as a financier and bodyguard for Saddam Hussein prior
to Saddam's capture by U ,S, forces, provided financial support, weapons and
explosives to anti-Coalition elements. Notably, after Operation Iraqi Freedom, Yasir
transferred funds to regime loyalists, including a large sum of money to Saddam's
wife, Sajida Khayrallah Tilfah, on Saddam's behalf.
Omar supported former Iraqi Ba'ath Party members after Operation Iraqi Freedom,
according to information available to the U.S, Government. Omar provided financial
support and operational direction to anti-Coalition activities, including several
attacks in Mosul, Iraq,
Ayman helped finance anti-Coalition attacks in central Iraq carried by the Fedayeen
Saddam, an Iraqi paramilitary organization formerly headed by Saddam Hussein's
son Uday, Ayman also urged Ba'athist loyalists to attack Iraq's infrastructure,
notably oil pipelines, water and power facilities,

Identifier Information
Yasir
AKA:
AKA:
AKA:
AKA:
DOB:

Sabawi Ibrahim Hasan AI-Tikriti
AI-Tikriti, Yassir Sabawi Ibrahim Hasan
AI-Tikriti, Yasser Sabawi Ibrahim Hasan
AI-Tikriti, Yasir Sab'awi Ibrahim Hasan
AI-Tikriti, Yasir Sabawi Ibrahim Hassan
15MAY1968

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Page 2 of3

POB: AI-Owja, Iraq
Nationality: Iraq
Address: Mosul, Iraq
Address: Az Zabadani, Syria
Alias: Abdallah, Ali Thafir
DOB: 1970
POB: Baghdad, Iraq
Passport: 284158, expires 21 August 2005 (Iraq)

Omar Sabawi Ibrahim Hasan AI-Tikriti
AKA: AI-Tikriti, Umar Sabawi Ibrahim Hasan
AKA: AI-Tikriti, Omar Sab'awi Ibrahim Hasan
AKA: AI-Tikriti, Omar Sabawi Ibrahim Hassan
DOB: circa 1970
Nationality: Iraq
Address: Damascus, Syria
Address: AI-Shahid Street, AI-Mahata Neighborhood, Az Zabadani, Syria
Address: Yemen
Alias: AI-Alusi, Umar Ahmad Ali
DOB: 1970
POB: Baghdad, Iraq
Passport: 2863795S, expires 23 August 2005 (Iraq)

Ayman Sabawi Ibrahim Hasan AI-Tikriti
AKA: AI-Tikriti, Aiman Sabawi Ibrahim Hasan
AKA: AI-Tikriti, Ayman Sab'awi Ibrahim Hasan
AKA: AI-Tikriti, Ayman Sabawi Ibrahim Hassan
AKA: Salman, Qais Muhammad
DOB: 21 OCT 1971
POB: Baghdad, Iraq
POB: AI-Owja, Iraq
Nationality: Iraq
Address: Bludan, Syria
Address: Mutanabi Area, AI Monsur, Baghdad, Iraq
Ibrahim Sabawi Ibrahim Hasan AI-Tikriti
AKA: AI-Tikriti, Ibrahim Sab'awi Ibrahim Hasan
AKA: AI-Tikriti, Ibrahim Sabawi Ibrahim Hassan
AKA: AI-Tikriti, Ibrahim Sabawi Ibrahim ai-Hassan
DOB: 25 OCT 1983
POB: Baghdad, Iraq
Nationality: Iraq
Address: AI-Shahid Street, AI-Mahata Neighborhood, Az Zabadani, Syria
Address: Fuad Dawod Farm, Az Zabadani, Damascus, Syria
Address: Iraq
Alias: Salman, Muhammad Da'ud
DOB: 1977
POB: Baghdad, Iraq
Passport: 284173, expires 21 August 2005 (Iraq)

Bashar Sabawi Ibrahim Hasan AI-Tikriti
AKA: AI-Tikriti, Bashar Sab'awi Ibrahim Hasan
AKA: AI-Tikriti, Bashir Sab'awi Ibrahim AI-Hasan
AKA: AI-Tikriti, Bashir Sabawi Ibrahim AI-Hassan
AKA: AI-Bayjat, Bashar Sabawi Ibrahim Hasan
DOB: 17 JUL 1970
Nationality: Iraq
Address: Fuad Dawod Farm, Az Zabadani, Damascus, Syria
Address: Beirut, Lebanon
Alias:

'Abdullah, 'Ali Zafir

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Nationality: Iraq
POB: Baghdad, Iraq

Sa'd Sabawi Ibrahim Hasan AI-Tikriti
AKA: AI-Tikriti, Sa'ad Sabawi Ibrahim Hasan
AKA: AI-Tikriti, Sa'd Sab'awi Hasan
DOB: 19 SEP 1988
Nationality: Iraq
Address: AI-Shahid Street, AI-Mahata Neighborhood, Az Zabadani, Syria
Address: Yemen
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 these individuals 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:
Treasury Designates Financial Supporter of Iraqi Insurgency
http/lwww.treasury.gov/pressir-eleases/js2500_htm

Syrian Company, Nationals Designated by Treasury for Support to Former Saddam
Hussein Regime
http Ilwww_treasury_90v/piess/releases/js24El7_l1lm

Treasury Designates 16 Family Members of the Former Iraqi Regime, Submits 191
Iraqi Entities to United Nations
http.//www .lrcasgovipress/r-cle~1ses!Js 1242 _hIm

Treasury Designates Front Companies, Corrupt Officials Controlled by Saddam
Hussein's Regime
http/lwwwtrcasgov/press/releases/js1331 111m
Uday Saddam Hussein's Inner Circle Designated by Treasury
http.//wwwtrcasgov/press:relcoses!js 1600. him

U.S., Iraq, U.K. Jointly Designate Ambassadors Intel Ops of the Former Hussein
Regime
http/lwwwtreasgov/pr-css/releasesiJs1821hll11

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July 21,2005
JS-2646

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

Agropecuaria el Nilo SA (AGRONILO), NIT # 800099699-5;
Casa Grajales S.A., NIT # 891902138-1;
Frutas Exoticas Colombianas SA (FREXCO), NIT # 800183514-0;
Grajales SA, NIT # 891900090-8;
Los Vinedos de Getsemani SA (HOTEL LOS VINEDOS), NIT #
800108902-6;
Transportes del Espiritu Santo SA, NIT # 821002436-5.

The Government of Colombia took control of these companies in June 2005. By
establishing a licensing policy, OFAC is ensuring that these entities continue to
operate - and do so in a legitimate manner - under the control of the Colombian
government, thereby preserving the jobs of several thousand Colombians who were
unknowingly manipulated by leaders of the North Valle drug cartel. OFAC continues
to work closely with Colombian officials to monitor the situation.
U.S. persons seeking a license to engage in certain transactions with these six
companies should submit a written license application in accordance with 31 CFR §
501.801 (b) to the Office of Foreign Assets Control, Licensing Division, U.S.
Department of the Treasury, 1500 Pennsylvania Avenue, NW - Annex,
Washington, DC 20220.
In addition to the information required by 31 CFR § 501.801 (b)(3), the application
must include a detailed description of the proposed transactions, the source and
method of payment and a copy of a signed agreement from any of the
aforementioned companies regarding the type of activity for which a license is
sought. Non-press questions regarding this policy should be directed to OFAC's
Licensing Division at (202) 622-2480.

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July 21,2005
JS-2647

Statement by G7 Finance Ministers and Central Bank Governors regarding
China's Reform of its Currency Regime
"We welcome the decision by the Chinese authorities to move to a more flexible
exchange rate regime. This more flexible exchange rate regime will contribute
towards global growth and stability."

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July 21, 2005
JS-2648
Statement by Secretary Snow on Reform of China's Currency
I welcome China's announcement today that it is adopting a more flexible exchange
rate regime.
As we have said, reform of China's currency regime is important for China and
the international financial system.
I particularly noted China's objective of allowing the market to fully play its role in
resource allocation as well as "to put in place and further strengthen the managed
floating exchange regime based on market supply and demand."
We will monitor China's managed float as their exchange rate moves to alignment
with underlying market conditions.
China's full implementation of its new currency regime will be a significant
contribution toward global financial stability.
The international economy performs best with free trade, the free flow of capital,
and flexible currencies.
-30-

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8/112005

Page 1 of 1

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July 22, 2005
JS-2649

Air Transportation Stabilization Board Approves US
Airways-America West Merger
The Air Transportation Stabilization Board (ATSB) voted today to approve the
proposed merger of US Airways and America West. The business plan put forward
by the companies provides for a more competitive cost structure and increased
liquidity which should better both airlines' competitiveness in a challenging industry
environment. The A TSB has negotiated new loan terms that materially improve the
collateral position of the Board, reducing the risk to the taxpayers under the existing
loan guarantees.
The A TSB will continue to work closely with both airlines to see the transaction to
closing and to complete revisions to each airline's loan agreement.
REPORTS
•

Appmval Leller

•

Term Sileet

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8/11200S

AIR TRANSPORTATION STABILIZATION BOARD
1120 VeRMONT AVENUE, SUITE 970
WASHINGTON,

DC 20005

July 22, 2005
Derek J. Kerr
Senior Vice President and
Chief Financial Officer
America West Airlines, Inc.
400 East Sky Harbor Blvd.
Phoenix, AZ 85034
Ronald E. Stanley
Executive Vice President and
Chief Financial Officer
US Airways, Inc.
2345 Crystal Drive
Arlington, VA 22227
Re:

Proposed Merger of US Auways with America West

Airlines
Gentlemen:
This letter refers to (i) the request by America \Vest Holdings Corporation
("A WAil) that the Air Transportation Stabilization Board (the "Board") grant the waivers
under its ATSB·backed tenn loan which are necessary to allow A WA to consummate the
transactions contemplated by its May 19, 2005 Agreement and Plan of Merger with US
Airways Group, Inc. ("US Airways") and (ii) US Airways' corresponding request that the
Board consent to the reinstatement of its ATSB-backed term loan on terms necessary to
effect the merger and US Airways' Chapter 11 plan of reorganization.
The Board has carefully considered these requests based upon extensive

study and analysis of the proposed merger, with your assistance, by the Board's staff,
counsel, financial advisor and industry consultants as well as the Department of Justice,
The Board has also considered likely alternatives to the merger for both AWA and US
Airways and the potential consequences of such alternatives to the Board's credit
exposure under the two term loans.
The Board has voted unanimously to grant the necessary waivers under
the AWA loan and to consent to the reinstatement of the US Airways loan subject,

however, to the terms and conditions set out in the term sheet attached to this letter. As
you know, these tenns and conditions have been negotiated by Board staff with your
respective representatives. They are intended to facilitate the proposed merger while both
preserving the Board's collateral and other credit protections under the US Airways loan
and reducing the Board's credit exposure under the A WA loan by providing the benefit of
a second lien 011 the merged company's assets.
The Board and Board stafflook forward to working with you toward the
successful completion of the merger and are prepared to devote the necessary resources
to accomplish that end.
Very truly yourw-

Mar~n

Executive Director

cc: Edward M. Gramlich
Timothy Bitsberger
Jeffrey N. Shane

TERM SHEET FOR
US AIRWAYS AND AMERICA WEST AIRLINES
ATSB-BACKED LOANS

EAST

WEST

Borrower

US Airways, Inc. ("East")

America West Airlines, Inc.
("West")

Affiliate Guarantors

New Holding Company
("Holdings"), West and the
subsidiaries of East and West

Holdings, East and the subsidiaries
of East and West

Tranche A Lender

Govco Incorporated ("Govco"),
with Citibank as Alternate Tranche
A Lender

Citibank, N.A. ("Citibank")

Tranche A
Guarantor

Air Transportation Stabilization
Board ("ATSB")

ATSB

Tranche BLenders

Bank of America, N.A. ("BOA")
and Retirement Systems of
Alabama Holdings LLC

Citibank, guaranteed by AFS
Cayman Limited, General Electric
Capital Corporation and debis
AirFinance Leasing USA I, Inc.

Administrative
Agent

BOA

Citibank

Collateral Agent

TBD

Loan Administrator

TBD

Principal Amount

$707,850,559 less the greater of
(i) the first $125,000,000 of
proceeds from specified asset sales
identified in connection with
East's Chapter 11 reorganization
(whether completed before or after
the paR effective date) as set forth

$300,300,000

243140lv3

on Schedule 1 attached hereto (the
"Designated Asset Sales") and
(ii) 60% of the net proceeds from
the Designated Asset Sales;
provided that any such asset sale
proceeds in excess of
$275,000,000 are to be applied pro
rata across all maturities in
accordance with the early
amortization provision below.
Scheduled
Amortization

Assuming $250,000,000 in asset
sales, yielding a principal payment
of $150,000,000, the amortization
schedule for the remaining
principal would be as set out
below. Any lesser amount of asset
sale proceeds would be amortized
on March 31, 2007.

September 30, 2005
March 31, 2006
September 30, 2006
March 31, 2007
$89,000,00 September 30, 2007
$64,000,00 March 31, 2008
$64,000,00 September 30, 2008
$85,000,00 $85,000,OC $85,000,0( $85,000,0( -

September 30, 2005
March 31, 2006
September 30,2006
March 31, 2007
September 30,2007
March 31, 2008
September 30, 2008
March 3 1, 2009
September 30, 2009
March 31,2010
September 30,2010
Early Mandatory
Amortization

Issuances
within Six
Months

As currently scheduled:

$42,900,000
$42,900,000
$42,900,000
$42,900,000
$42,900,000
$42,900,000
$42,900,000

East and West loans to be repaid
pro rata, except East to be paid
first in the case of debt secured by
Collateral, asset sales and
collateral value deficiencies.
Within each loan, funds to be
applied in all cases pro rata across
all remaining maturities:

East and West loans to be repaid
pro rata, except East to be paid first
in the case of asset sales and
collateral value deficiencies.
Within each loan, funds to be
applied in all cases pro rata across
all remaining maturities:

East loan's pro rata portion of 50%
of net proceeds from any
convertible note offering closed
within 180 days from POR
effective date (other than the

West loan's pro rata portion of
50% of net proceeds from any
convertible note offering closed
within 180 days from POR
effective date (other than the

Secured Debt
Issuances

Other Future
Issuances

Asset Sales

proposed rights offering,
refinancing of the GECAS $125
million Convertible Notes and the
existing West 7.25% and 7.5%
Convertible Notes).

proposed rights offering,
refinancing of the GECAS $125
million Convertible Notes and the
existing West 7.25% and 75%
Convertible Notes).

For each Collateral asset class, the
minimum dollar amount of net
loan or sale lease-back proceeds
set out in Schedule 2 (to be agreed)
for such asset class.

After payment in full of East, for
each Collateral asset class, the
minimum dollar amount of net
loan or sale lease-back proceeds set
out in Schedule 2 for such asset
class.

East loan's pro rata portion of 50%
of net proceeds from any sale
lease-back involving existing or
new Section 1110 eligible flight
equipment which is not part of the
Collateral.

West loan's pro rata portion of
50% of net proceeds from any sale
lease-back involving existing or
new Section 1110 eligible flight
equipment which is not part of the
Collateral.

East loan's pro rata portion of
100% of proceeds from unsecured
debt and hybrid issuances other
than permitted refinancings
(including refinancings of the
existing West 7~% and 7Yz%
Convertible Note Issues, the to-beissued GECAS $125 million
Convertible Notes, the $250
million Airbus Financing, and the
$175 million credit-card provider
financing) and aircraft-related
debt. Cumulative proceeds from
equity issuances to be used to
prepay as follows:

West loan's pro rata portion of
100% of proceeds from unsecured
debt and hybrid issuances other
than permitted refinancings
(including refinancings ofthe
existing West 7~% and 7Yz%
Convertible Note Issues, the to-beissued GECAS $125 million
Convertible Notes, the $250
million Airbus Financing, and the
$175 million credit-card provider
financing) and aircraft-related debt.
Cumulative proceeds from equity
issuances to be used to prepay as
follows:

1st $75,000,000 - 0%
2 nd $75,000,000 - 25%
> $150,000,000 - 50%

151 $75,000,000 - 0%
2nd $75,000,000 - 25%
> $150,000,000 - 50%

De minimus sales in the ordinary
course to be permitted without
prepayment. 100% of net cash
proceeds from asset sales, not to
exceed $10,000,000 per year,
applied to prepay East loan with
sales in excess of the annual cap to

De minimus sales in the ordinary
course to be permitted without
prepayment. After payment in full
of East, 100% of net cash proceeds
from asset sales applied to prepay
West loan. Non-cash sales to be

require A TSB/East lender consent.
Non-cash sales to be limited.

limited.

Change in
Control

Right to require prepayment of all
outstanding principal and interest.

Collateral
Value
Deficiency

OLV of pledged assets (excluding
cash) equal to 1.35 times the sum
of (x) outstanding principal and
accrued interest on the East and
West loans less (y) the required
minimum amount of Adjusted
Unrestricted Cash (as defined
below).

OL V of pledged assets (excluding
cash) equal to 1.35 times the sum
of (x) outstanding principal and
accrued interest on the East and
West loans less (y) the required
minimum amount of Adjusted
Unrestricted Cash (as defined
below).

Prepayment permitted at any time
without premium.

Prepayment permitted without
premium, except that the following
premiums apply to any remarketed
notes:

Optional
Prepayment

1sl year - 102%
2nd year - 101 %
Thereafter, no premium

Interest Rates and
Guarantee Fees:
Tranche A

Interest: Govco COF + 0.30%
payable quarterly in arrears, or 3month LIBOR + 0.40% if Govco
not the Tranche A lender;

-plus-

Tranche B

Interest: 3-month LIB OR + 0.40%
payable quarterly in arrears;

Guarantee Fee: 6.00% (as adjusted
to credit spreads at closing)
payable quarterly in advance.

Guarantee Fee: 8.00% currently
(increasing by 0.05% on January
18 of each year) payable quarterly
in advance (current is annually).

3-month LIBOR + 6.00% (as
adjusted to credit spreads at
closing) payable quarterly in
arrears.

Interest: 3-month LIB OR + 0.40%
payable quarterly in arrears;
-plusGuarantee Fee: 8.00% currently
(increasing by 0.05% on January

18 of each year) payable quarterly
in advance (current is annually).
Default Rate
Collateral

Additional 2.00%

Perfected, first-priority lien on all
unencumbered assets of East and
West, including facility leasehold
interests at DCA and LGA, and all
cash and cash equivalents (the
"Collateral"); subject, however, to
the following: (i) a modest amount
of funds may be maintained in
foreign and miscellaneous
accounts over which the lien is not
perfected, provided that all such
amounts will be considered
restricted cash for purposes of the
minimum cash covenant; and (ii)
in the event East's leasehold
interests in airport facilities at
DCA and/or LGA are not able to
be pledged and the liens perfected
despite the exercise of its best
efforts, additional amortization of
the East loan will be paid in the
amount of $10,000,000 on each
January I beginning January 1,
2006, such payment to be allocated
pro rata across the remaining
maturities.

Silent, perfected, second-priority
lien on the Collateral.

The consolidated unrestricted cash
and equivalents of Holdings and its
subsidiaries (as determined in
accordance with GAAP), less (i)
the amount of all outstanding
advances by credit card processors
and clearing houses in excess of
20% of ATL, (ii) $250,000,000
presumed necessary to fund a
subsequent tax trust (to the extent
not otherwise funded by the
company or though credit card

The consolidated unrestricted cash
and equivalents of Holdings and its
subsidiaries (as determined in
accordance with GAAP), less (i)
the amount of all outstanding
advances by credit card processors
and clearing houses in excess of
20% of A TL, (ii) $250,000,000
presumed necessary to fund a
subsequent tax trust (to the extent
not otherwise funded by the
company or through credit card

Financial Covenants
Minimum
Cash

holdbacks transferable to the
holdbacks transferable to the
company), (iii) $35,000,000
company), (iii) $35,000,000
presumed necessary to post
presumed necessary to post
collateral to clearing houses (to the collateral to clearing houses (to the
extent not posted), and (iv) any
extent not posted), and (iv) any
unrestricted cash or equivalents
unrestricted cash or equivalents
held in un perfected accounts
held in unperfected accounts
("Adjusted Unrestricted Cash") not ("Adjusted Unrestricted Cash") not
to be less than:
to be I ess than:
Through:
March 2006
September 2006
March 2007
September 2007
March 2008
September 2008
September 2010
EBITDAR to
Fixed
Charges

Through:
$525,000,000
$500,000,000
$475,000,000
$450,000,000
$400,000,000
$350,000,000
$300,000,000

March 2006
September 2006
March 2007
September 2007
March 2008
September 2008
September 2010

$525,000,00(
$500,000,00(
$475,000,00(
$450,000,00(
$400,000,00(
$350,000,00(
$300,000,00(

The ratio of EBITDAR to Fixed
Charges, tested quarterly
beginning year-end 2006, not to be
less than:

The ratio of EBITDAR to Fixed
Charges, tested quarterly beginning
year-end 2006, not to be less than:

For the four quarters ending:

For the four quarters ending:
0.900
0.929
0.958
0.986
1.015
1.061
1.108
1.154
1.200
1.225
1.250
1.275
1.300
1.325
1.350

December 31,2006
March 31, 2007
June 30, 2007
September 30, 2007
December 31, 2007
March 31, 2008
June 30, 2008
September 30, 2008
December 31, 2008
March 31, 2009
June 30, 2009
September 30, 2009
December 31, 2009
March 31, 2010
June 30, 2010

December 31, 2006
March 31, 2007
June 30, 2007
September 30, 2007
December 3 1, 2007
March 31, 2008
June 30, 2008
September 30, 2008
December 31, 2008
March 31, 2009
June 30, 2009
September 30, 2009
December 31, 2009
March 31, 2010
June 30, 2010

0.900
0.929
0.958
0.986
1.015
1.061
1.108
1.154
1.200
1.225
1.250
1.275
1.300
1.325
1.350

Additional cushion to be
considered for West covenant.

Reporting

To be reviewed and revised.

Warrants

None.

West warrants to be converted to
equivalent Holdings warrants.
ATSB lenders to have option of
participation in Holdings' stock
rights offering or antidilution
adjustments under the warrant
agreement.
Warrants to be exercisable either as
currently provided in the warrant
agreement, or at the holder's
option, in exchange for discharge
of West loan on a dollar-for-dollar
basis, with holder to select
maturities to be discharged.

Transferability

Tranche A note to be expressly
made transferable to QIBs without
benefit of the ATSB guarantee,
with interest to accrue at LIBOR
plus Guarantee Fee. Tranche B
note to be transferable to QIBs.

Tranche A and B notes to be
expressly made transferable to
QIBs without benefit of the
guarantees, with interest to accrue
at the Tranche A rate plus
Guarantee Fee.

Other

As in existing loan documents,
subject to a comprehensive review
including reconsideration of
negative covenants.

As in existing loan documents,
subject to a comprehensive review
including reconsideration of
negative covenants.
Restrictions under the West loan
and warrants on the issuance of
restricted stock grants under a
management compensation
program to be eliminated
(antidilution adjustments to be
further discussed), subject,
however, to ATSB lender review
of the proposed compensation
program.
As soon as practicable but in any
event prior to the America West
stockholders meeting, the ATSB

will enter into an agreement with
the appropriate TPG entities
providing for the termination as of
the effective time of the merger of
the Undertaking, dated as of
January 18, 2002, by and among
America West, the ATSB and the
TPG entities or otherwise waiving
any restrictions on transfer of the
Class A Shares contained in the
Undertaking, including those
contained in Sections 2, 4 and 5.2,
if and to the extent not otherwise
addressed by the terms of the
Undertaking.

Conditions to
Closing

Funded new equity investment in
Holdings of not less than
$565,000,000;
Minimum unrestricted liquidity of
$1.25 billion;
Closing on asset sales in a
minimum aggregate dollar amount
of $125,000,000 by the POR
effective date;
Closing on all material
agreements, including, without
limitation, GE, Airbus, and equity
investors;
East POR, including management
as discussed, to be as currently set
out in the Plan Disclosure
Statement and in the financial and
operating information provided to
the A TSB, or otherwise to be
acceptable to the ATSB lenders;
and POR to go effective;
No Material Adverse Change
consistent with the Merger
Agreement definition;
Documentation acceptable to the
A TSB in its sole discretion, and
perfection at closing of all liens on
Collateral, except as otherwise
provided above;
Receipt of all required regulatory
approvals (note that ATSB does
not bind any other governmental
agency or instrumentality);
Agreement with the ATSB in its
sole discretion on the conditions to
East's continued use of cash
collateral after August 19 through
the closing date; and
Payment at closing of all advisor
and attorneys fees and expenses,
and a restructuring fee in an
amount to be determined.

Same.

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July 21,2005
JS-2650

Deputy Assistant Secretary lannicola Discusses Social
Security Reform
Treasury's Deputy Assistant Secretary for Financial Education Dan lannicola Jr.
today spoke about the U.S. Treasury's work in financial literacy, the Financial
Literacy Education Commission and the President's efforts on Social Security
reform at the 2005 U.S.-UK Dialogue on Pensions in Washington, DC. lannicola
also shared ideas on how financial education can improve an individual's ability to
strengthen retirement security.
"Awareness is a prerequisite to action. As Americans become more aware of their
financial needs for retirement, they can take the actions to properly prepare for that
time in their lives," lannicola said. "This is also true for the nation. The President
has made us all aware of the need to strengthen Social Security now to assure all
Americans have the secure retirement they are working for."
lannicola also spoke about the importance of international discussions on financial
education topics, like pensions. "Conferences like this allow policymakers in both
countries to learn from each other so we can better serve the people of our
respective nations."
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.tI8i1sgov/financIZlleclucCltlon.

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PHLSS HOOM

July 25, 2005
JS-2651

U.S. Treasurer Cabral to Attend World's Fair of Money
in San Francisco
U.S. Treasurer Anna Escobedo Cabral will join the nation's security printer, the
Bureau of Engraving and Printing (BEP), at the American Numismatic
Associations' (ANA) World's Fair of Money Show Wednesday. Treasurer Cabral will
attend the World's Fair of Money Ribbon Cutting Ceremony as well as a Treasurer's
Forum to discuss various topics relating to Treasury initiatives and financial
education. Treasurer Cabral advises the Secretary of the Treasury on coin and
currency issues and serves as one of the Department's principal advisors and
spokespeople in the area of financial education.
For the first time ever, the BEP will exhibit currency face plates, dating back to
1934, which were used to manufacture the $500 and $10,000 currency
denominations with the San Francisco Federal Reserve Bank designation.
Additionally, the BEP will showcase its Billion Dollar Exhibit which features more
than a billion dollars of antique currency, Treasury bonds, and gold and silver
certificates.
Representatives from the BEP will be on hand to show and sell United States paper
currency in uncut sheets and other novelty forms. A technical expert on currency
production will be available to answer questions. One of the BEP's Plate Printers
will be demonstrating on the antique (more than 1OO-year old) Spider Press during
the convention.
In honor of this expo, the BEP is introducing the ANA - World's Fair of Money
Intaglio Print card which features the back of the Series 1882 $10 National
Currency Note and a vignette of Yosemite National Park.
The BEP will also showcase the Series 2003A $1 uncut sheets of currency which
bear the signatures of Treasury Secretary John W. Snow and Treasurer Cabral.
Series 2003 $2 sheets of uncut currency produced for the San Francisco Federal
Reserve Bank will also be displayed.
San Francisco Evolutions premium product will debut at this show and features the
Series 2004 $20 and $50 uncirculated notes with matching low serial numbers from
the Federal Reserve Bank of San Francisco (this is the first in a series of 12 - one
set from each of the Federal Reserve Banks will be offered in the near future).

Additional information regarding the BEP and its products may be found online at:
www.moneyfactory.conl.

Who U.S. Treasurer Anna Escobedo Cabral
What The American Numismatic Association - World's Fair of Money Show
Treasurer's Forum
When Wednesday, July 27,2005
11 :00 a.m. PDT
Where The Moscone West Convention Center

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800 Howard Street
San Francisco, CA

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July 26, 2005
JS-2652
Statement of John C, Dugan
Nominee for Comptroller of the Currency,
Bureau of the U.S. Department of the Treasury
before the
Senate Committee on Banking, Housing, and Urban Affairs
Mr. Chairman, Senator Sarbanes, members of the Committee, thank you for the
opportunity to appear before you today. I am honored that President Bush has
nominated me to serve as Comptroller of the Currency, and I am grateful to
Treasury Secretary Snow for his confidence and support. As a former staff member,
I am especially proud to appear before this Committee and in this room. I have
spent many hours here with able colleagues and good friends on some of the most
important issues confronting the banking industry over the last twenty years.
I am pleased to be joined today by my wife, Beth, and my son, Jack, whom we just
whisked away from a swim meet; my daughter, Claire, who is away at a sports
camp, is very much with me in spirit. Also with me are my mother Frances -- a 55year resident of Maryland, Senator Sarbanes -- and my brother Chris and his wife
Sue. Their patience and support have been critical throughout my career of both
public service and private practice.
The Comptroller of the Currency supervises about 1,900 national banks and about
50 federal branches and agencies of foreign banks in the United States, comprising
more than half of the assets of the commercial banking system. The Comptroller
also serves as a Director of the Federal Deposit Insurance Corporation, the Federal
Financial Institutions Examination Council, the Basel Committee on Banking
Supervision, and the Neighborhood Reinvestment Corporation. In these roles, the
Comptroller addresses a broad range of issues that are fundamentally important to
our nation's banking system, and, if confirmed for this post, I would look forward to
working on them with this Committee and Congress as a whole.
For the last 20 years, my career in both the government and private practice has
focused primarily on banking issues. As Minority General Counsel for this
Committee during the late 1980s -- which was a very active period -- I worked
extensively on legislative and regulatory proposals involving bank powers, bank
failures, safety and soundness supervision, and consumer protection, among
others. As Assistant Secretary and Deputy Assistant Secretary of Treasury during
the Administration of the first President Bush, that work expanded into financial
modernization, interstate banking and branching, deposit insurance reform,
regulatory burden relief, oversight of OCC regulations and legislative proposals,
and many other related issues. And during my 12 years of private law practice at
Covington & Burling, I have continued to work and advise on a wide range of
banking matters, including the Gramm-Leach-Bliley Act, financial privacy and
amendments to the Fair Credit Reporting Act, financial derivatives regulation,
enforcement matters, and national bank powers generally.
At many points in my career, I have worked closely with officials and staff of the
OCC. I believe I have developed a strong understanding of the key challenges that
confront the agency. I have also had frequent contact with officials and staff at the
Federal Reserve, Federal Deposit Insurance Corporation, Office of Thrift
Supervision, Securities and EXChange Commission, Treasury Department. National
Economic Council, and Office of Management and Budget. which are virtually all
the Executive branch agencies that have a significant impact on regulatory and
policy issues affecting banks. Given our unique banking system with its many
overlapping functions, I believe the Comptroller must have a fundamental

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understanding of how different regulators approach their jobs and work best
together, and I believe my experience has helped provide that understanding.

In sum, I believe that my experience and education are a strong foundation for this
position. If confirmed by the Senate, I would be honored to serve as the 29th
Comptroller of the Currency. I would now be pleased to answer any questions you
may have.
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July 26, 2005
JS-2653

Statement of John M. Reich
Nominee for Director, Office of Thrift Supervision,
Bureau of the U.S. Department of the Treasury
before the
Senate Committee on Banking, Housing, and Urban Affairs
Mr. Chairman, I want to thank you for scheduling this hearing today, as I know your
time is limited in the remaining days before the upcoming August recess. Chairman
Shelby, Senator Sarbanes, members of the Committee, I'm honored by the
President's nomination and the support of the Secretary of Treasury to be the
Director of the Office of the Thrift Supervision. I am privileged to be sitting at this
table this afternoon.
In the almost four and a half years I have served as a member of the FDIC Board of
Directors, we have witnessed significant change in the economy and the banking
industry. In fact, Mr. Chairman, you may recall that I was about to testify at this very
table on September 11 when the events of that day stopped the hearing and
triggered challenges and changes to our country's financial systems that no one
could have foreseen.
My nearly 25 years of experience as a community banker before I came to
Washington to work with my good friend, former Senator Connie Mack for nearly 12
years, has given me a perspective that recognizes the vital role that banks and
thrifts, and their customers play in the economic success of their communities.
Before my life in Washington, I was active for many years in a variety of community
service organizations, and the affect of all of these private, non-profit and public
service experiences causes me to evaluate issues in a manner that balances the
interests of financial institutions, consumers, and the nation's economy.
Under the leadership of Chairman Don Powell, the FDIC has been, and is, at the
forefront of many of the issues facing the financial industry today. We have brought
together leading thinkers on such key issues as corporate transparency, financial
institutions disclosure, and risk management, and, of course, our work on deposit
insurance reform. We have launched a major financial literacy effort called Money
Smart with the stated goal of establishing partnerships with 1,000 organizations and
institutions, in all 50 states, to distribute 100,000 copies of Money Smart in three
languages and expose one million consumers to our financial education program
over the next few years.
In addition, I have been privileged to lead a major effort to reduce unnecessary
regulatory burden and to tap the tremendous potential of technology to streamline
bank supervision - while not sacrificing our primary goal of ensuring the safety and
soundness and consumer compliance of the banking system.
While the FDIC has been aggressively moving forward on these developing issues,
we've not neglected our primary mission of protecting depositors in the event of
bank failures. In fact, I believe that the lessons I learned in the failure of a large
savings bank provide me with unique credentials to serve as the Director of OTS.
Following the reSignation of former Chairman Donna Tanoue in July 2001, I was
serving as the Acting Chairman of the FDIC when Superior Bank, FSB, failed on
July 27, 2001. It was not just the size of this failure - more than $2 billion in assets that was instructive. As this Committee knows from its oversight, this failure raised
a number of issues ranging from subprime lending, to residuals and accounting

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opinions, to regulator cooperation and access, to management liability, which
challenged the leadership and staff of the FDIC to modify established methods of
handling bank failures and to create some innovative new approaches. This
experience along with other experiences gained during the nearly 4 and a half
years I've served on the Board, including 3 years as Vice Chairman, combined with
my duties chairing of all of the standing committees of the FDIC Board help, I
believe, to enable me to serve effectively as Director of OTS.
Mr. Chairman, as the primary federal regulator of all saving associations and
savings and loan holding companies, the OTS oversees a vital segment of the
American economy. As of mid-May 2005, there were 886 savings associations with
approximately $1.4 trillion in assets. As of the end of 2004, there were 492 savings
and loan holding company structures with consolidated assets of approximately
$6.9 trillion. Savings associations originated $603 billion in single-family mortgages
in 2004, or approximately one in every four mortgages in the United States. The
industry serviced $1.3 trillion in loans for others. Savings associations operate over
9,000 branches throughout the United States and employ 217,000 people at yearend 2004.
Mr. Chairman, if confirmed, my main goals as Director of OTS would be to assure
the continued safety soundness of the industry; faithful adherence to consumer
protection laws; and the most efficient operation of OTS as an organization.
I am honored the President nominated me to this important position and I look
forward to the challenges that lie ahead. Again, I wish to thank you for holding this
hearing. I'll be happy to address any questions you may have.

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July 26. 2005
2005-7 -26-16-51-7 -168
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 $76,756 million as of the end of that week. compared to $76.408 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)

TOTAL
1. Foreign Currency Reserves

a. Securities

Of which. issuer headquat1ered in the U. S.

Euro
11.195

July 15, 2005

July 22, 2005

76,408

76,756

II
II
II

Yen
14.005

I
II

TOTAL

Euro

25.200

11.249

I
I

Yen

TOTAL

13.273

24.522

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

( 13,719

2,815

10.904

10,946

14,696

3,750

b.ii. Banks headquat1ered in the U. S.

Ib.ii. Of which. banks located abroad

'Ifii. Banks headquat1ered outside the U. S.

I
II
II
I

II
I

I
II

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

12. IMF Reserve Position 2
13. Special Drawing Rights (SDRs) 2

14. Gold Stock 3

(5. Other Reserve Assets

15,234

11,214

11.041
0

!
I
I

15,262 _
11,235
11,041
0

!
I

"
II. Predetermined Short-Term Drains on Foreign Currency Assets

I
1. Foreign currency loans and securities

July 15, 2005
Euro

TOTAL

Yen

July 22, 2005
Euro

Yen

I
I

TOTAL

JI
I

0
0

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

2.b. Long positions

[3. Other

I
I

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

July 15, 2005
Euro

Yen

I
II

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TOTAL

II
II

July 22, 2005
Euro

Yen

TOTAL

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1. Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within 1
year
[1.b. Other contingent liabilities
2. Foreign currency securities with embedded
options

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

I
1\

0
0

"
0

I
I

Headquartered in the U.S.

3.b. With banks and other financial institutions

I
I

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

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

14.a. Short positions

I
I

I
0

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

14.b. Long positions

4.b.1. Bought calls

4.b.2. Written puts

I
I

Notes:

11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
2IThe items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/doliar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.

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

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July 27,2005
JS-2654
Statement of Treasury Secretary John W. Snow on the election of
Luis Alberto Moreno to become President of the
Inter-American Development Bank
I strongly congratulate Ambassador Moreno on his election to the Presidency of the
Inter-American Development Bank. The United States looks forward to working
with him in continuing the lOB's important role in the region, and in the process of
improving the Bank's effectiveness in meeting the region's challenges.
The role of the Inter-American Development Bank is evolving, as economic stability
and strong growth become the norm in many important countries. The private
sector has emerged as the primary driver of economic growth, and the lOB needs
to help unleash the power of the region's entrepreneurs. We look forward to
working with President Moreno, and the member countries of the region and
beyond, to develop a focused and effective policy agenda, based on achieving
results and development effectiveness, to propel the Bank forward to meet the
region's critical need for economic development and prosperity.

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July 27, 2005
js-2655

Remarks of U.S. Treasurer Anna Escobedo Cabral
American Numismatic Association - World's Fair of Money Show
Treasurer's Forum
San Francisco, California
Good afternoon. It's wonderful to be with you today here in San Francisco, and to
be part of your celebration. It's wonderful to see so many people so excited about
coin and currency.
Alexander Hamilton, the first Treasury Secretary, knew that the establishment of a
sound coin and currency system was paramount to the growth and stability of the
U.S. economy. In his first year, he created a number of critical components of the
financial infrastructure for the nation, elements that continue to serve us today. In
his book, "Alexander Hamilton," Ron Chernow quotes from Hamilton's "Report on
the Mint" delivered to Congress on January 28, 1791:
"There is scarcely any point in the economy of national affairs of
greater moment than the uniform preservation of the intrinsic value
of the money unit," he intoned." On this, the security and steady
value of property essentially depend." He endorsed the dollar as the
basic currency, divided into smaller coins on a decimal basis.
Because many Americans still bartered, Hamilton wanted to
encourage the use of coins. As part of his campaign to foster a
market economy, Hamilton suggested introducing a wide variety of
coins, including gold and silver dollars, a ten-cent silver piece, and
copper coins of a cent or half cent. He wasn't just thinking of rich
people; small coins would benefit the poor "by enabling them to
purchase in small portions and at a more reasonable rate the
necessaries of which they stand in need." To spur patriotism, he
proposed that coins feature presidential heads or other emblematic
designs and display great beauty and workmanship: "It is a just
observation that 'The perfection of the coins is a great safeguard
against counterfeits.'" With customary attention to detail, Hamilton
recommended that coins should be small and thick instead of large
and thin, making it more difficult to rub away the metal.

The success of our great nation rested squarely on the ability of the founding
fathers to build institutions that embodied the ideas espoused in the Declaration of
Independence.
Each president, beginning with George Washington and continuing through modern
times, has been faced with the challenge of ensuring that our institutions remain
true to those ideals.
I'd like to speak to you today about President Bush's leadership on two such
matters of long-term importance to our economy: reforming the tax code and
strengthening Social Security.

Need for Comprehensive Tax Reform
While the American economy remains known for its flexibility, resiliency, and
dynamism, our tax code has grown longer, bulkier, and more burdensome every
year.

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The tax code is dreadful in its complexity. More than a million words long, the
Internal Revenue Code and regulations have more than doubled in terms of pagelength over the past twenty years. The code is so filled with exceptions and lengthy
explanations that individuals and businesses spend more than six billion hours
every year on paperwork and other tax headaches. Total compliance costs of the
income tax are estimated at roughly $125 billion annually.
Imagine, if you would, a tax system that was less complicated. Imagine what this
great country could do if we could get back a few billion hours, or a few billion
dollars, every year.
To help advance this worthwhile goal, the President created a bipartisan panel to
develop revenue neutral policy options. The President asked the panel to be guided
by a few core principles - he wants a tax code that is simpler, fairer and more progrowth. The panel is preparing recommendations that will be delivered to the
Secretary of the Treasury this fall.
In addition to achieving fundamental reform, taxes also need to remain low for our
continued economic growth. We know this from recent experience. Well-timed tax
cuts, combined with sound monetary policy set by the Federal Reserve Board, have
produced good economic growth and steady job creation. The economy has
created over 3.7 million jobs since May of 2003. We have seen steady job gains for
each of the last 25 months. Today more Americans are working than ever before.
Across the board, economic indicators show strong, sustained growth.
Our economy is dynamic and resilient - the envy of the world. We need to keep
taxes low and stay on this path of economic growth and job creation. We also need
to continue looking down the field and make sure that our economy is not disrupted
by things that we can avoid - things that we can fix today.

Need for Social Security Reform
Of course, in this regard, I'm talking about Social Security. Let me be clear: the
current Social Security system is financially unsustainable, and in need of
expeditious and lasting change. Earlier this year, the Social Security Board of
Trustees issued its annual report. This report showed that Social Security cash
flows will peak in 2008 and turn negative in 2017. The trust fund itself will be
exhausted in 2041. when today's younger workers are beginning to retire. The
unfunded obligation - that is, the difference between Social Security's income and
assets on the one hand, and its outflows on the other - is $11.1 trillion on a
permanent basis. and $4 trillion over the next 75 years.
President Bush has shown real leadership on this issue. For many years, the
conventional wisdom in Washington was that Social Security reform was a
conversation stopper, the "third rail" of politics. The President had the courage to
touch the "third rail," and now we're moving forward. People recognize there is a
problem in our Social Security system. The President has called on Congress to
help find a permanent fix.
Fixing it is quite simply our responsibility to our children and grandchildren. This is a
matter of simple arithmetic. Social Security has enough money now because for
decades we have had more than enough workers paying into the system and
supporting the retirees who draw benefits. But you know the demographic trends In
1950, there were 16 workers to support every beneficiary of Social Security. Today
there are only 3.3 workers per beneficiary. By the time one of today's youngest
workers turns 65, there will be just two workers to support his or her benefits.
For those who are 55 or older, the President has made clear that Social Security
benefits are solid. They will not change. But it's the children and grandchildren,
those young workers and future workers, who we need to worry about. They are the
ones for whom we need to save and strengthen this system.
The President would like younger workers and future generations to have the ability

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to save some of their payroll taxes they're already paying, to build a nest egg that
belongs to them, not to the government. With voluntary personal accounts, younger
workers would have the chance to learn about their financial choices, build a nest
egg and benefit from sound long-term investment in the free market system without
disrupting the system of benefits for today's retired beneficiaries.
Personal accounts would give young workers more options to invest and build a
better retirement for their future. They would give our children and grandchildren the
promise of a better retirement, and they would help our country create a larger pool
of savings.
The President has also called for reforms that will create progressive benefit growth
to help ensure solvency while strengthening benefits for those most in need. Under
the President's proposal, low- and middle-income workers would receive greater
benefits that increase faster than the rate of inflation. Higher earning individuals
would receive benefits that grow no faster than the rate of inflation. This would
provide greater benefits for those who need them most. For instance, a low-income
20-year-old who retires in 2050 would receive annual benefits of $12,900, or $3,500
more than the current system can pay. A middle income worker would receive
$17.300, or $1,800 more than the current system can pay. Adjusting how benefits
are calculated would eliminate approximately 70 percent of Social Security's
shortfalls.
Some have argued that we can save the system by increasing the payroll tax. But
this multi-trillion dollar shortfall cannot be reasonably fixed by raising taxes. The
recent Trustees' report showed that the payroll tax would have to be increased by
nearly 30 percent to achieve long-term balance. A 30 percent hike in the payroll tax
would of course have Significant, negative economic consequences. American
workers would be taking home less pay, and we mustn't forget that their employers
would shoulder half of that tax increase. For small businesses especially, a tax
increase of that size could require terrible choices, from lay-offs to cuts in health
benefits. And it would make hiring new people even more difficult. Quite simply,
increasing payroll taxes hurts the economy and it hurts job creation. That's why the
President is against it.
We're making progress. We believe that Social Security reform that doesn't raise
payroll tax rates, that protects benefits for today's seniors, and that permanently
improves the system for our children and grandchildren can be achieved. I
encourage you to become involved in this national discussion. If we make
responsible decisions now, we can make sure that Social Security and our broader
economy are on sound financial footing for our children and grandchildren.
Thanks again for giving me the opportunity to speak with you today.

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July 27,2005
js-2656
Statement of Treasury Secretary John W. Snow on the Energy Bill Conference
Report
I urge Congress to move quickly to pass the energy legislation that has now
emerged from the conference committee. The enactment of this bill is needed to
address high energy prices, which act like a tax on our economy. It will
help American workers, families and businesses. It will also decrease our
dependence on foreign sources of energy, and increase energy efficiency and
conservation. This is bi-partisan, comprehensive energy legislation that reflects the
priorities of the President's 2001 proposal. The American economy stands to
benefit from it. Congress should deliver it to the President before its August recess.

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July 28, 2005
js-2657

Statement of Secretary John W. Snow on Senate Banking Bill to Reform
Housing Government-Sponsored Enterprises
The Administration has long called for legislation to create a stronger, more
effective regulator with appropriate powers to improve oversight of Fannie Mae,
Freddie Mac, and the Federal Home Loan Banks.
Chairman Shelby and the Senate Banking Committee deserve strong praise for
reporting legislation that achieves real reform. Although the legislation differs in
some respects from the Administration's proposals, S. 190 advances the
Administration's key reform priorities.
The Committee's action represents an important milestone toward creating a
regulator with powers and authorities commensurate with that of other large,
complex financial institutions. The legislation also creates significantly enhanced
market discipline and capital requirements for Fannie Mae, Freddie Mac, and the
Federal Home Loan Banks. The legislation strikes a proper and prudent balance in
ensuring that the activities undertaken by these entities do not engender systemic
risk while providing broad access to housing finance.
The Administration looks forward to continuing to work with Congress to ensure that
the needed reforms are part of any final legislation.
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July 28, 2005
js-2658

Testimony of Acting A/S Glaser on Financing for the Iraqi Insurgency
Chairwoman Kelly, Chairman Saxton, Ranking Members Guiterrez and Meehan,
and distinguished Subcommittee members, thank you for inviting me to testify today
before both subcommittees on the important issue of Iraqi insurgency financing,
and the efforts of the Department of the Treasury, in conjunction with our
interagency colleagues, to combat it. This is obviously a critical and worrisome
matter, and I share with you, and with my counterparts at the Department of
Defense, a sense of urgency in doing our utmost to disrupt the flow of funds to
those seeking to attack our troops, coalition partners, and innocent civilians in Iraq.
I. OVERVIEW
The groups responsible for conducting the Iraqi insurgency, like other terrorist
organizations, require organization and logistical support. It has been said that
single acts of violence may not require extensive financial resources. For instance,
suicide bombers and those who plant improvised explosive devices (IEDs)
reportedly are paid only a few hundred dollars each. However, it takes much more
money to support the overarching insurgency/jihadist effort. Significant financing is
required to secure the loyalty of network members and pay for salaries,
coordination and organization, propaganda, housing, food, shelter, medical care,
and transportation of foreign insurgency fighters into and throughout Iraq.
Disrupting the flow of these funds provides an important means of combating the
entire insurgency effort. Following the money upstream and downstream can help
us identify, locate, and disrupt the insurgents themselves, as well as their financial
networks. It is for this reason that combating insurgency financing has become a
top priority of the Departments of the Treasury and Defense, and of the entire U.S.
Government.

A. Insurgency Groups
The Iraqi insurgency encompasses several distinct, but often overlapping groups:
* Sunni jihadists, such as al Qaida-endorsed Abu Mus AI-Zarqawi and the Zarqawi
network (aka Tanzim Qa'idat AI-Jihad Fi Bilad AI-Rafidayn or AI-Qaida of the Jihad
in the Land of the Two Rivers), and the Ansar AI-Sunnah/Ansar AI-Islam network;

* Former Regime Elements (FRE)/Ba'athists. This group includes senior officials of
the former Saddam regime (particularly former Iraqi Ba'ath Party officials and
members of the Iraqi military and security services), their family members, and
agents; and
* Indigenous tribal groups and local militias whose tribal loyalties, nationalist goals,
or Islamist ideologies have caused them to engage in acts of violence against
Coalition forces and the civilian population.

Despite their different motivations, it appears that these groups are capable of
tactical cooperation when it suits their purposes.
B. Sources of Insurgency Financing
The financing networks of the Iraqi insurgency are complex and diverse. Insurgents

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draw on both external financing and on internal Iraqi sources of funds and materiel.
For example, the Zarqawi Network and other jihadist groups use a variety of classic
al Qaida-type terrorist financing mechanisms, including:
* Funds provided by charities, Iraqi expatriates, and other deep pocket donors,
primarily in the Gulf, but also in Syria, Lebanon, Jordan, Iran, and Europe;
* Criminal activities, such as kidnapping for ransom, possible narcotics trafficking,
robbery, theft, extortion, smuggling, and counterfeiting (goods and currency).

Former Regime Elements fund their insurgency activities by using assets pilfered
by the former Iraqi regime and secret accounts in other countries. FRE still inside
Iraq, as well as indigenous tribes and local militias, also rely on local charities and
mosques, local sympathizers, legitimate businesses, donations from middle-class
Iraqi businessmen, and grassroots donors for support. Furthermore, Iranianbacked proxy groups transfer funds and materiel provided directly by Iran into Iraq.
While internal financing clearly provides significant support for the Iraqi insurgency,
the Treasury Department, and my testimony, focuses primarily on efforts to combat
external insurgency financing.
C. Efforts to Combat Insurgency Financing
The complexity of disrupting insurgency financing is clear, but can essentially be
divided into two components:
* Identifying and Disrupting Funding and Support Networks Globally. For example,
our efforts to disrupt the funding of the Zarqawi Network and of other Sunni jihadists
focus on the Gulf region and Europe, while our primary areas of concern for FRE
insurgency funding are Syria, Lebanon, and Jordan.
* Identifying and Disrupting the Mechanisms By Which Funds Are Transferred Into
and Disbursed Within Iraq. Once these groups raise the funds, they must be
transported into Iraq. Though we must of course be vigilant about all potential
financial mechanisms - e.g., formal financial systems, hawala, trade-based value
transfers, etc. - the mechanism of greatest concern is the physical transportation of
cash into Iraq, particularly across the Iraqi-Syrian border.

Addressing these challenges requires a comprehensive effort, relying on
contributions from the intelligence, law enforcement, diplomatic, military, and
financial communities within the U.S. Government. The Treasury Department is an
important component of this overall effort, and as described in detail below, we
have a range of financial tools that we have deployed vigorously to address both
the funding and transfer elements of Iraqi insurgency finance.
II. IDENTIFYING AND DISRUPTING FUNDING AND SUPPORT NETWORKS
GLOBALLY
As I have noted, the international components of the Iraqi insurgency can be
divided roughly into three groups: (i) Former Regime Elements; (ii) Sunni Jihadists;
and (iii) indigenous tribal groups.
A. Former Regime Elements: Return of Looted Iraqi Assets

Since March 2003, the U.S. Government has focused on the need to locate, freeze,
and repatriate Iraqi assets from around the world, as well as to find cash and other
assets within Iraq that were stolen and hidden by Former Regime Elements. From
the beginning, the Iraqi asset hunt was a top priority in order to return the money to
its rightful owners, the Iraqi people. It is also critically important, however, to locate
and repatriate these funds in order to prevent former regime assets from being
used to support the Iraqi insurgency. At this time, we are monitoring several
streams of money, some of which belong to FRE and some of which were caught

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up in old illicit trading accounts. We want to prevent the leakage of any of this
money into the hands of those supporting the insurgency.
In May 2003 the United Nations Security Council adopted UNSCR 1483, which
calls on 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. The President subsequently issued Executive Order
(E.O.) 13315, which authorizes the Secretary of the Treasury to freeze the assets of
former regime elements. To date, under E.O. 13315, the Department of the
Treasury has designated scores of Iraq-related entities and individuals (including 55
senior Iraqi officials who were named by the President in issuing E.O 13315, and 47
administrative or "derivative" designations.) The U.S. Government, in turn, submits
these names to the United Nations for listing by the UN 1518 Committee under
UNSCR 1483.
Only a week ago, the Department of the Treasury designated six of Sad dam
Hussein's nephews (sons of Saddam's half brother and former presidential advisor,
Sabawi Ibrahim Hasan AI-Tikriti), and we understand that their names have now
been accepted at the UN. Four of the designated individuals provided financial
support (and in some cases, weapons and explosives) to Iraqi insurgents.
Similarly, on June 17,2005, we designated, Muhammad Yunis Ahmad for providing
funding, leadership and support from his base in Syria to several insurgent groups
that are conducting attacks in Iraq.
On June 9, 2005, we also designated two associated Syrian individuals, General
Zuhayr Shalish and Asif Shalish and a related asset, the Syria-based SES
International Corporation for their support to senior officials of the former Iraqi
regime. SES also acted as false end-user for the former Iraqi regime and facilitated
Iraq's procurement of illicit military goods in contravention of UN sanctions.
The effect of our sanctions increases exponentially when they are applied
multilaterally. Therefore, it is absolutely vital for the countries around the world,
particularly those with assets of designees within their borders, to act in conjunction
with the U.S. and consistently with their obligations under UNSCR 1483. A
significant portion of FRE funds are in Syria or are controlled by individuals within
Syria, and we are convinced that the Syrian Government can do significantly more
to address it. Though there have been some encouraging recent steps on related
issues, including Syria's recent transfer of $117 million to the DFI, in addition to the
$3.8 million transferred in January, these steps are insufficient. At the beginning of
Operation Iraqi Freedom, there was an estimated $850 million in Iraqi accounts in
Syria. Of this amount, Treasury investigators found that the Syrian government had
paid out approximately $580 million in claims to Syrian businesses without the
authorization of SOMO, and that $262 million remained frozen in an account at the
Commercial Bank of Syria. This bank was subsequently deSignated by the
Treasury Department in May 2004 as a "primary money laundering concern" under
Section 311 of the USA PATRIOT Act. Syria should act immediately to bring itself
into compliance with its international obligations and transfer these funds back to
the people of Iraq. They should also work with the Iraqi government to review both
the pending and the previously-paid claims.
FRE assets clearly are not stashed in Syria alone. Large amounts of frozen Iraqi
assets are in Lebanon and Switzerland. We, together with the State Department,
are working with these countries to identify and isolate former regime assets where
we find them and to transfer these assets to the Development Fund for Iraq, as
required by resolution 1483.
B. Sunni Jihadists: Classic Terrorist Financing
Fund raising for the Sunni jihadist groups in Iraq - such as the al Qaida-affiliated
Zarqawi network - follows similar patterns as fund raising for Sunni jihadist terrorist
groups throughout the world, including deep-pocket donors and the abuse of
charities. Indeed, there is reason to believe that extremist networks throughout the
world that had been providing financial support to jihadist terrorist groups are
directing portions of their funds to Iraqi insurgency groups. It should therefore not

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be surprising that, as with other jihadist terrorist groups, our efforts to identify and
disrupt the fundraising of jihadistl insurgency groups is focused, though not limited
to, the Gulf region and Europe. It should also not be surprising that we have at our
disposal many of the same tools and authorities.
Just as there is a U.N. Security Council Resolution requiring countries to freeze the
assets of former Iraqi regime elements, so too are there U.N. Security Council
Resolutions requiring countries to freeze the assets of individuals and entities
related to al Qaida, Usama bin Laden, and the Taliban (UNSCR 1267) and other
global terrorist groups (UNSCR 1373). The U.S. implements its obligations under
these resolutions through E.O. 13224. To date, the Treasury Department has
designated over 400 individuals and entities under E.O. 13224. These actions
include individuals and entities tied to jihadist insurgency groups:
* Sulayman Khalid Darwish (January 25, 2005) (Syria-based Zarqawi
supporter/financier), also designated by the UN, pursuant to UNSCR 1267; Syria
joined the U.S. in co-designating Darwish at the UN.

Muhsin al-Fadhli (February 15, 2005) (Kuwait-based Zarqawi and AI Qaida
supporter, also designated by the UN, pursuant to UNSCR 1267); and

* Bilal Mansur AI-Hiyari (April 13,2005) (Jordan-based member of the Zarqawi
Network), whose name was also submitted to the UN for listing pursuant to UNSCR
1267.

While stand-alone designations by the U.S. are important, they do not carry the
same weight or effect as international actions. We need to act in concert with our
partners in the regions of greatest concern. It is for this reason that the
Departments of the Treasury and State have worked tirelessly both to improve the
effectiveness of national targeted financial sanctions regimes throughout the world,
and to encourage countries to use this tool proactively and aggressively.
In this respect, U.S. outreach efforts to countries in the Gulf region are manifold,
both bilaterally and multilaterally. For example, just this calendar year I have
personally traveled to Saudi Arabia, Bahrain, and Kuwait, and have led the U.S.
delegation to the Middle East/North Africa Financial Action Task Force (MENA
FATF) - a new multilateral body that works to ensure the implementation of
comprehensive anti-money laundering and counter-terrorist financing systems
throughout the region. Launched in November 2004, this 14-member body held its
first plenary session in Bahrain in April 2005 and is preparing for its second plenary
session in September of this year, currently scheduled to take place in Beirut. This
body has the potential to be effective in persuading its members to implement
systems to freeze assets in a timely and effective manner. It remains too early to
tell how effective MENA FATF will be, but the indications so far demonstrate
considerable enthusiasm and energy. We support this initiative and hope that it will
succeed on the difficult road that lies ahead of it.
We also have extensive outreach efforts to Europe - most prominently the US-EU
Counter-Terrorist Financing Working Group, chaired by Assistant Secretary of State
Anthony Wayne. Through this and other mechanisms, we are working to ensure
the effective and aggressive implementation of targeted financial sanctions
throughout Europe. Recently, British Chancellor Gordon Brown highlighted the
urgency of this task when he told EU finance ministers that they must improve
efforts to seize terrorist assets. While he recognized that some countries are taking
effective measures, he noted that the collective effort is "only as strong as your
weakest link." We are working with the UK as well as many other countries in
Europe to build on this momentum and strengthen efforts to track and seize terrorist
assets.
Of course, targeted financial sanctions are not the only tool we have in the fight
against terrorist financing. The full range of U.S. efforts against terrorist financing
are coordinated by the Terrorist Financing Policy Coordination Committee (PCC).
which is chaired by Deputy National Security Advisor Juan Zarate, and includes
representatives from the Departments of the Treasury, State, Justice, and Defense,

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as well as representatives from the law enforcement and intelligence communities.
III. IDENTIFYING AND DISRUPTING THE MECHANISMS BY WHICH FUNDS
ARE TRANSFERRED INTO AND DISBURSED WITHIN IRAO
As discussed above, once funds are raised for insurgent groups, they must be
transported into and disbursed within Iraq. Though we must of course be vigilant
about all potential financial mechanisms - such as, formal financial systems,
hawala, and trade-based value transfers, etc. - the mechanism of greatest concern
is the physical transportation of cash into Iraq.
A. Cash Couriers: Insurgency Transfer Mechanism of Choice

There are numerous reasons why cash couriers are the primary mechanism for the
transfer of insurgency funds into Iraq. These include (i) porous borders of
neighboring states; (il) the availability of long-established smuggling routes within
the region; and (iii) a formal financial system within Iraq that is still maturing.
1. Syria and others
The use of cash couriers is of particular concern with respect to those neighbors of
Iraq who continue to ignore the problem. Even if the governments of these
countries are not complicit in the transfer of cash across their borders, they are
certainly aware of it and can take steps to stop it. The biggest problem country is
Syria. Through various sanctions programs, the Treasury Department has targeted
Syrian individuals, entities, and officials for a range of issues, including harboring
assets of the former Iraqi regime, interfering in Lebanon, inadequately policing the
flow of cash across its borders, and failing to implement money laundering and
terrorist financing controls. Syria must take action to address all of these concerns,
which include securing its border with Iraq and cracking down on cash couriers.
2. Regional Systemic Reform
Porous borders, long-established smuggling routes, and informal financial systems
characterize much of the region. We are aware of the regional vulnerabilities and
are working with all of these countries to take this matter very seriously. Because
cash couriers are a region-wide problem, we are working through regional bodies to
address it. I previously mentioned the MENA FATF, which we expect to playa
leadership role in ensuring regional compliance with global standards. One of
these standards, articulated by the global FATF (Financial Action Task Force) is the
enforcement of measures taken to stop the illegal smuggling of cash by couriers.
We know that this issue already tops MENA FATF's agenda, and look forward to
working with all of the organization's members to underscore the importance of their
efforts and implement the appropriate measures.
The Treasury Department and other agencies are also working bilaterally with
countries in the region to address cash couriers. For example, the Department of
Homeland Security's Immigration and Customs Enforcement (ICE) Office of
Investigations, in concert with Customs and Border Protection (CBP) is currently
providing bulk cash smuggling training in the region as part of the State
Department-chaired Terrorist Finance Working Group (TFWG). To date, ICE and
CBP have conducted this training in two countries in the Middle East and plans are
currently underway to provide this training to Iraq.
3. Assisting Iraq's Establishment of an Effective Payment System
At present, nearly all payments in Iraq are made in cash; dollars for bigger-ticket
(imported) items and real estate transactions, and dinars for other payments. For
example, the U.S. military pays its contractors in U.S. dollars, and almost all Iraqi
salaries, including the salaries of Iraq government employees, are also paid in cash
dollars. Reliance on currency for transactions not only leads to very large
inefficiencies in terms of the operation of the financial system; it also carries
significant risks with respect to insurgency financing. Since Iraq and its neighboring

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countries are flooded with U.S. dollars, insurgents can move funds into the country
by cash courier without raising attention. Insurgency flows blend into the movement
of legitimate funds.
The Department of the Treasury has been engaged in a major effort to help develop
a modern payment system for Iraq that follows international best practices.
The Iraq Payment System, as the project is called, is being coordinated by Raleigh
Tozer, Senior Vice President, Federal Reserve Bank of New York, and involves
various parties, including the Central Bank of Iraq, Iraqi Telephone and Post
Company, the U.S. Embassy in Baghdad, the IMF, and the World Bank, as well as
the Department of the Treasury. Once implemented, the Iraq Payment System will
be able to process Instantaneous, electronic large value payments (real time gross
settlements (RTGS) and smaller recurring salary and other payments (automated
clearing house (ACH)). The system will be internal to Iraq, but will be capable of
linking to international payment systems to make or receive payments from outside
Iraq.
The Iraq Payment System should begin providing widespread benefits shortly after
its implementation. The targeted date for implementing RTGS is January 2006,
with ACH a month later, though delays are possible. The Kurdish region has not
participated in preparations for the new payment system; however, Kurdish officials
have recently expressed interest in taking part.
Establishing a modern payments system could significantly help combat the use of
cash couriers by insurgents. Moving from a largely cash economy to a functioning
banking and payment system will make it easier to monitor and control financial
flows, thereby improving the ability of U.S. and Iraqi financial and law enforcement
officials to detect the movement of insurgency funds into and within Iraq.
B. Investigations, Analysis and Asset-Tracking on the Ground in Iraq
In addition to working to identify and disrupt insurgency fund raising and transfers
into Iraq, the Treasury Department has worked closely with our interagency
counterparts on the ground in Iraq to investigate insurgency funding methods, trace
the disbursement of insurgency funds, and enhance the financial investigative
capability of the Iraqis. The following provides a sense of the diverse and
important missions undertaken by Treasury personnel in Iraq:
1. Currency Tracing
A notable initiative is our on-going currency tracing efforts. Treasury personnel in
Iraq work closely with the military to trace the flow and sources of U.S. currency
found in Iraq that may be used to fund the insurgency. In this regard, the IRS
attache routinely obtains serial numbers from bulk currency seized by the military
from suspected insurgents and transmits this information through Treasury to the
Federal Reserve Board of Governors and the Bureau of Engraving and Printing
(BEP) to trace its origin and distribution. At present, we are able to trace U.S.
currency only into Iraq. However, we are in the process of working with the military
to establish a currency tracking program that would trace large-value movements of
U.S. currency into, through, and back out of Iraq. If fully implemented, this system
should enable us to trace the movement of U.S. currency seized from insurgents
into the country, all the way to the insurgents themselves, so that we can both cut
off the flow of future funds and also better target insurgency operatives.
2. IRS-Criminal Investigation Agents Assigned to Iraq
From March 2004 through March 2005, IRS-CI deployed seven Special Agents to
Iraq to assist in targeting insurgency financing. The IRS-CI agents were
embedded with the U.S. military in Iraq, and participated in the Joint Interagency
Task Force on the Insurgency ("Insurgency Task Force"). The IRS-CI agents
worked closely with the military, the FBI, and the Intelligence Community to identify,
trace, and secure assets inside and outside Iraq that might be used to fund
insurgent activities. In particular, IRS-CI agents in Iraq helped:

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* Interrogate/interview high value targets detained in Iraq, as well as other
detainees, money couriers, and a currency exchange dealer, to try to determine the
methods used to finance insurgency operations and terrorism in Iraq and uncover
front companies and agents;
* Exploit documents recovered in insurgency strongholds and elsewhere in Iraq in
order to identify and trace insurgency-related funds, including FRE funds;
* Provide standardized questions on insurgency financing for use by military
interrogators;

* Execute search warrants on insurgency targets, including assisting the military
with financial and technical advice regarding which items were most relevant for
seizure and evidence exploitation. For example, one search warrant targeted a
hawaladar (currency exchanger) in the Baghdad area;
* Conduct investigations in which the military believed the subjects were involved in
financing some forms of terrorist activity, including assassination; and
* Query Treasury's Financial Crimes and Enforcement Network (FinCEN) to track a
number of the insurgents and the individuals believed to be involved in funding the
insurgency, where there may be a U.S. nexus.

As new task forces and financial investigative mechanisms are being developed
within Iraq, the Treasury Department is working closely with our interagency
counterparts to determine the most effective deployment of IRS-CI agents,
including exploring the possibility of sending IRS-CI agents back to Iraq.
3. IRS-Attache in Iraq
As of November 2004, Treasury has stationed an additional IRS-CI agent to serve
as the IRS attache at the U.S. Embassy in Baghdad - one of only eight IRS
attaches in the world. The IRS attacM works closely with the Insurgency Task
Force. Among other things, the attache:
* Follows up on FRE designations;
* Coordinates U.S. and Iraqi Government efforts to identify and recover Iraqi assets

in and outside Iraq:
* Helps uncover new front companies and agents:
* Facilitates efforts to trace U.S. currency seized from insurgents in Iraq (see
discussion above):

* Established and heads an interagency Asset Recovery and Containment of

Terrorist and Insurgent Capitalization Task Force (ARCTIC), with a mission to
identify and freeze FRE assets in Iraq and identify and freeze funds financing
terrorists and insurgents;
* Works with the Chief Judge of the Iraqi Special Tribunal to develop Iraq's capacity
to freeze FRE and other insurgency assets seized by Iraqi law enforcement or
military forces in Iraq;

* Otherwise helps pursue all possible financial leads involving the insurgency,

including conducting interviews of detainees and other persons with possible
knowledge of insurgency financing methods and flows; and
* In general assists the U. S. mission in Iraq with issues of financial compliance,
including efforts to battle insurgency financing by establishing a formal financial
system with proper compliance measures.

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4. Treasury Attache
In addition to the IRS attache, Treasury has assigned a separate Treasury attache
to the U.S. Embassy in Baghdad. The Treasury attache:
* Works with the Iraqis to establish the payments system discussed in greater detail
above, which will help combat the use of cash couriers to move insurgency funds;

• Assists the Iraqis in crafting a legal regime that can facilitate confiscating FRE
assets, which will improve our ability to keep these funds out of the hands of
insurgents; and,
* Along with the IRS attache, coordinates activities with Iraqi counterparts to find
hidden FRE assets that may still be in the country and may be used to fuel the
Insurgency.

C. Treasury Department/Defense Department Cooperation
Given the prominent role of the military in Iraq, the Treasury Department also has
taken steps to ensure maximum cooperation between the Departments of Treasury
and Defense in the area of insurgency financing:
* Treasury has posted a fUll-time Foreign Terrorist Analyst to the U.S. Central
Command (CENTCOM) Joint Inter-Agency Coordination Group in Tampa, Florida,
which has greatly facilitated interagency information sharing and operational
coordination. Very recently, CENTCOM placed a representative in Treasury's
Office of Terrorism and Financial Intelligence to further our collaborative counterinsurgency financing efforts .

• Treasury works closely with the Threat Financing Exploitation Unit (TFEU) and
other collaborative efforts between CENTCOM and other U.S. government
agencies. TFEU is designed to consolidate and share financial intelligence on
terrorist and insurgency financial networks in Iraq.
IV. CONCLUSION
The insurgency in Iraq will not be defeated simply by attacking its financial support
structure. This effort, however, is an important component of a comprehensive
attack on the insurgency that employs all tools of national power. Identifying and
disrupting the insurgency's financial networks can degrade its capabilities, limit its
effectiveness, and reveal valuable information on its operations. We have already
achieved some success. U.S. and UN efforts to freeze and repatriate FRE assets
worldwide have removed billions of dollars in potential sources of insurgency
support. Designations and targeted financial sanctions under various Executive
orders have isolated financing networks. And our overall efforts to systemically
safeguard the international financial system from abuse have increased the risks
and costs of doing business for terrorist financiers. Much remains to be done. But
we are learning more about the insurgency and its funding mechanisms every day,
and we will continue to do all that we can to support our military and coalition
partners who are in harms way, and to contribute to our collective efforts to bring
peace and security to the people of Iraq.
Thank you again for holding this hearing and for your sustained commitment to this
topic. I would be happy to take your questions.

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July 29, 2005
JS-2659
Secretary's Snow's Statement on Second Quarter GDP Growth
"Today's announcement that our economy grew at a strong pace of 3.4 percent
confirms the fact that America's economy is on the right path with 3.7 million jobs
created since May of 2003, industrial production up 4 percent since last year, the
stock market hitting a four year high, mortgage rates still lower than any time in the
1980s and 1990s and a rapidly declining federal deficit.
"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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July 29, 2005
js-2660

Gardner Confirmed as First A/S for the Office of Intelligence and Analysis
Janice Gardner was confirmed by the Senate on Thursday to serve as the U.S.
Department of the Treasury's Assistant Secretary for the Office of Intelligence and
Analysis (OIA).
"I congratulate Janice on being confirmed as the Treasury's first Assistant Secretary
for the Office of Intelligence and Analysis. Janice brings to the Treasury an
expertise garnered over the 20 plus years she worked in the Intelligence
Community," said Treasury Secretary John W. Snow.
"Janice's know-how will further advance the Treasury's role in attacking the financial
underpinnings of national security threats," Snow continued.
Gardner was serving as the Deputy Assistant Secretary for OIA when she was
nominated for the Assistant Secretary position by President George W. Bush on
May 13, 2005. She previously served as the Senior Intelligence Liaison Officer at
the Department of the Treasury.
"Under Janice's leadership and capability, the Treasury Department will make a
significant contribution to the U.S. Government's overall efforts to combat the
financial webs of those threatening our national security," said Stuart Levey,
Treasury's Under Secretary for the Office of Terrorism and Financial Intelligence
(TFI).
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July 29, 2005
JS-2661
U.S. Treasurer Meets with Local Business Leaders in Pasadena and Veterans
in Anaheim
U.S. Treasurer Anna Escobedo Cabral met with Los Angeles area veterans and
business leaders today to discuss President Bush's efforts to strengthen and
preserve Social Security and ensure sustained economic growth and job creation.
At a roundtable with local business leaders in Pasadena this morning Cabral
discussed the need for Social Security reform to ensure the continued strength of
our economy and President Bush's proposals to address the funding problems
facing the system.
"The economic leadership of President Bush has produced a growing economy and
steady job creation. A government report out this morning showed continued
strength with GOP growing at a strong pace of 3.4 percent in the second quarter.
We've seen 25 straight months of job creation totaling in more than 3.7 million new
jobs since May of 2003. Today, more Americans are working than ever before,"
said Treasurer Cabral. "We need to continue looking down the field to make sure
that the upward path we're on is not disrupted. An essential piece in that effort is
fixing Social Security now."
Cabral further discussed the need to preserve Social Security in an address to the
American GI Forum in Anaheim this afternoon.
"Fixing it is quite simply our responsibility to our children and grandchildren. If we
make responsible decisions now, we can make sure that Social Security and our
broader economy are on sound financial footing for future generations," said
Treasurer Cabral. "President Bush is committed to preserving the system for
today's seniors while providing a better opportunity for younger workers."
The American GI Forum is the nation's largest Hispanic veterans' organization,
representing over 250,000 members across the country.
-30-

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July 29, 2005
js-2662

OFAC Confirms Permissible Practices Under Cash in Advance for CommerceLicensed Agricultural Shipments to Cuba
The U.S. Department of the Treasury today confirmed that under the Cuban Assets
Control Regulations, U.S. sellers or their agents are permitted to settle accounts for
overpayment by the buyer, in accordance with standard shipping tolerances.
Treasury also confirmed that under cash in advance, goods may be shipped once
the seller or the seller's agent receives payment from Cuba. The agent may be
anyone legally designated by the seller to receive payment for the seller's goods,
including a third country financial institution.
This confirms to exporters that the above-mentioned practices are presently
permissible under existing regulations.
For more information on the February 22, 2005 clarification of cash in advance,
please visit: http://www treasurygov!press!releases!Js2268htl1l.
-30-

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8J1I20Q5

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July 29, 2005
js-2663
Secretary Snow to Visit Brazil to Promote Economic Growth
U.S. Treasury Secretary John W. Snow will be in Brazil next week to meet with
government officials and representatives of the business and banking communities.
Secretary Snow will take the opportunity to highlight the progress Brazil's economy
has made in recent years. The visit will include a meeting of the U.S.-Brazil Group
for Growth. This forum between the U.S. Treasury and Brazil economic officials was
created at the direction of President Bush and Brazil President Lula in order for both
countries to promote economic strategies that will spur economic growth.
Secretary Snow will be in Brasilia Monday to meet with President Lula, Central
Bank President Henrique Meirelles, and Finance Minister Antonio Palocci. On
Tuesday, the Secretary will join Minister Palocci at a breakfast meeting with local
business leaders in Rio de Janeiro and deliver remarks at a forum sponsored by the
Council of Foreign Relations. The Secretary will also join Minister Palocci at the
Group for Growth luncheon. On Wednesday the Secretary will travel to the State of
Espirito Santo to visit a port in Vitoria, attend a luncheon hosted by Governor Paulo
Hartung, and take a tour of the Favela Project hosted by the Inter-American
Development Bank.
The following events are open to credentialed media with photo identification:
MONDAY, AUGUST 1
Photo Opportunity at Start of Meeting with Finance Minister Antonio Palocci
2:45 p.m.
Ministerio da Fazenda, Brasilia
Photo Opportunity at Start of Meeting with President Luis Inacio Lula da Silva
5:00 p.m.
Palacio do Plana Ito, Brasilia
TUESDAY, AUGUST 2
Council of Foreign Relations Speech
11 :00 a.m.
National Confederation of Commerce
General 9th Floor
Justo 307
Rio de Janeiro
Joint Press Conference with Minister Palocci Following Group for Growth Meeting
2:45 p.m.
Meridien Hotel
Elysee Room A & B, 2nd Floor
Rio de Janeiro
Additional media availabilities will be offered during the visit to Vitoria. For details,
please contact John Wilcock, Assistant Information Officer/Adido de Imprensa
Adjunto, (55) 61-312-7353.
-30-

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July 29, 2005
JS-2664

Statement of Secretary John W. Snow on Senate Confirmation of Treasury
Nominees
Treasury Secretary John W. Snow issued the following statement today on Senate
confirmation of Treasury nominees:
Robert Kimmitt, Deputy Secretary
Tim Adams, Under Secretary for International Affairs
Randal Quarles, Under Secretary for Domestic Finance
Janice Gardner, Assistant Secretary for Intelligence and Analysis
Kevin Fromer, Assistant Secretary for Legislative Affairs
Sandra Pack, Assistant Secretary for Management
John Dugan, Comptroller of the Currency
John Reich, Director of the Office of Thrift Supervision
"I'm grateful the Senate acted today to put in place at Treasury a team of superb
individuals to carry out the critical issues before the Department. Priorities ranging
from preserving and strengthening Social Security for future generations, to
reforming the tax code, to disrupting the financial underpinnings of terrorist
networks and other national security threats, are critical to keeping our country on
the current upward path of economic growth and job creation. I look forward to
working with them to ensure economic security and prosperity for the American
people, and I commend the tremendous staff at the Treasury Department for their
hard work over the past months."
-30-

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July 29, 2005
JS-2665

Statement of Treasury Secretary John W. Snow on the
Confirmation of Henrietta Holsman Fore as
Under Secretary of State for Management
On behalf of the Treasury Department, and in particular the terrific employees of the
U.S. Mint, I offer heartfelt congratulations to Henrietta Fore on her confirmation as
Under Secretary of State for Management.
Henrietta assumes this prestigious new position after four outstanding years as
Director of the U.S. Mint, where she was very successful at implementing the
President's vision for effective management and results in government. While at the
Mint, she took an interest in each and every job that employees performed to run
the United States Mint, as she would say, "in mint condition," and that is, indeed,
how things ran under her leadership.
I know that Henrietta is looking forward to working closely with Secretary Rice to
assure that the men and women of the State Department have the tools they need
to pursue the President's foreign policy goals. While she will be missed at the U.S.
Mint and by the broader Treasury team, we all wish her luck and know that she will
excel in her new position.
-30-

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UPDATED MEDIA ADVISORY
Secretary Snow to Visit Brazil to Promote Economic Growth

U.S. Treasury Secretary John W. Snow will be in Brazil next week to meet with
government officials and representatives of the business and banking communities.
Secretary Snow will take the opportunity to highlight the progress Brazil's economy
has made in recent years. The visit will include a meeting of the U.S.-Brazil Group
for Growth. This forum between the U.S. Treasury and Brazil economic officials
was created at the direction of President Bush and Brazil President Lula in order for
both countries to promote economic strategies that will spur economic growth.
Secretary Snow will be in Brasilia Monday to meet with President Lula, Central
Bank President Henrique Meirelles, and Finance Minister Antonio Palocci. On
Tuesday, the Secretary will join Minister Palocci at a breakfast meeting with local
business leaders in Rio de Janeiro and deliver remarks at a forum sponsored by the
Council of Foreign Relations. The Secretary will also join Minister Palocci at the
Group for Growth luncheon. On Wednesday the Secretary will travel to the State of
Espirito Santo to visit a port in Vitoria, attend a luncheon hosted by Governor Paulo
Hartung, and take a tour of the Favela Project hosted by the Inter-American
Development Bank.
The following events are open to credentialed media with photo identification:
MONDAY, AUGUST 1

Photo Opportunity at Start of Meeting with Finance Minister Antonio Palocci
2:30 p.m.
Ministerio da Fazenda, Brasf/ia
Photo Opportunity at Start of Meeting with President Luis Inacio Lula da Silva
5:00 p.m.
Palacio do Planalto, Brasilia
TUESDAY, AUGUST 2

Council of Foreign Relations Speech
11 :00 a.m.
National Confederation of Commerce
General 9th Floor
Justo 307
Rio de Janeiro
Joint Press Conference with Minister Palocci Following Group for Growth Meeting
2:45 p.m.
Meridien Hotel
Elysee Room A & B, 2nd Floor
Rio de Janeiro
Additional media availabilities will be offered during the visit to Vitoria. For details,
please contact John Wilcock, Assistant Information Officer/Adido de Imprensa
Adjunto, (55) 61- 3312-7353.

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August 1, 2005
JS-2667

Treasury Hails Passage of UN Resolution
Tightening Sanctions
Against the Taliban, UBL and AI Qaida
The U.S. Department of the Treasury today praised the passage of a UN Security
Counsel Resolution (UNSCR) further tightening global sanctions against the
Taliban, al Qaida and Usama bin Laden.
"The strengthened resolution is vital to further impede - both financially and
logistically - Usama bin Laden and his followers," said Stuart Levey, Treasury's
Under Secretary for the Office of Terrorism and Financial Intelligence (TFI).
The resolution renews and strengthens UNSCR 1267 against the Taliban, and
carries with it the consolidated list of terrorists tied to the Taliban, UBL and al
Qaida. Inclusion on the 1267 Committee's list triggers international obligations on
all UN member countries, requiring them to freeze the assets and prevent the travel
of listed individuals and to block the sale of arms and military equipment.
"This vote is a result of the U.S. Government's determination and dedication to
disrupting the financial networks fueling terrorism. The State Department should be
praised for its extraordinary diplomatic efforts and engagement with our
international partners to help get the resolution passed at the UN," Levey
continued.
The Resolution sets forth a vigorous global campaign against terrorist financing by
bolstering the targeted financial sanctions against terrorists and their support
networks, notably by:
•
•

•

Clearly defining "association" for purposes of aggressively targeting the
networks supporting the Taliban, UBL and al Qaida;
Reauthorizing the 1267 Committee's Monitoring Team, which has done
important work in both advising the Committee and monitoring member
states' implementation of the resolution.
Endorsing standards by the Financial Action Task Force (FATF), which
provide a framework and operational guidance for states to develop
effective targeted financial sanctions regimes; and
Obliging states to report on specific actions taken to implement designations
through the adoption of an Annex reporting form capturing the effects of
prospective designations.

In addition, the resolution clearly addressed due process concerns while upholding
the sanctions by:
•
•
•

Urging states to adopt national delisting procedures in accordance with the
Committee's guidelines;
Calling on states to implement effective licensing procedures in accordance
with UNSCR 1452; and
Calling on states to notify designees, to the extent possible, of the measures
imposed on them and on the delisting and licensing procedures available to
them.
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August 1, 2005
JS-2668

Treasury Designates Three Individuals linked to AI Qaida Terror
Cell in Italy
The U.S. Department of the Treasury today designated three individuals residing in
Italy pursuant to Executive Order 13224 for providing financial and/or material
support to the Moroccan Islamic Combatant Group, a group tied to al Qaida.
"Today's action targets individuals operating an al Qaida-linked terrorist cell in Italy
that recruited combatants, raised funds for terrorist activities and even planned
terrorist attacks," said Stuart Levey, the Treasury's Under Secretary for Terrorism
and Financial Intelligence (TFI). "We will continue to stand with Italy and our other
allies around the world to attack the financing of terrorism."
Ahmed EI Bouhali, Faycal Boughanemi and Abdelkader Laagoub are members of a
fundamentalist Islamic terrorist organization established in Cremona, Italy in 1998
with the aim of committing terrorist attacks in Italy and other countries, including
Morocco and Tunisia.
Information available to the U.S. Government shows the Cremona organization has
contacts with al Qaida and Ansar AI Islam cells operating in Italy and abroad.
Additionally, the group has ties to the extremist organization, Moroccan Islamic
Combatant Group, which was designated by the United States on November 22,
2002 under E.O. 13224.
Mourad Trabelsi and Noureddine Drissi are members of the Cremona terrorist cell
and have been designated by the United States. Notably Trabelsi headed the
group until April 2003, when both he and Drissi were arrested.
Investigations by Italian authorities have produced evidence that the Cremona
terrorist organization recruited volunteers for paramilitary training, collected funds
for terrorism, and planned terrorist attacks.

Identifying Information
Ahmed EI Bouhali
AKA: EI Bouhali
DOB: 31 May 1963
POB: Sidi Kacem, Morocco
Nationality: Moroccan
Address: vicolo S. Rocco, n. 10 - Casalbuttano
Cremona - Italy
EI Bouhali was investigated and prosecuted by Italian authorities for participating in
a criminal conspiracy to commit terrorist activities. EI Bouhali formed the Cremona
cell in 1998 and headed it until summer 2001, together with Mourad Trabelsi and
Abdelkader Laagoub.
Italian investigators confiscated instruction manuals on paramilitary activities
belonging to EI Bouhali, which included information on con?tru.cting weapo~~,
bombs and instruments for detecting government communications. In addition,
leaflets on clandestine Islamic organizations and videotapes containing Bin Laden's
and other terrorist leaders' messages inciting violence were found. These materials
were used by EI Bouhali to recruit people for terrorist activities in Iraq.

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Page 2 0[2

Faycal Boughanemi
AKA: Faical Boughanemi
OOB: 28 October 1966
POB: Tunis, Tunisia
Nationality: Tunisian
Address: viale Cambonino, 5/B
Cremona - Italy
Boughanemi was investigated and prosecuted by Italian authorities for participating
in a criminal conspiracy to commit terrorist activities; he is in Italian custody. He
was a member of the Cremona cell from minimally 2002 - 2004.
Bouganemi helped to plan and recruit individuals for terrorist attacks in Tunisia. In
addition, he conspired to carry out terrorist attacks in Italy, namely in Cremona's
Cathedral and Milan's Underground, in response to "Italy's foreign policy."
In addition, Boughanemi provided legal assistance to Trabelsi Mourad and his
family.

Abdelkader Laagoub
OOB: 23 April 1966
POB: Casablanca, Morocco
Nationality: Moroccan
Address: via Europe, 4 - Paderno Ponchielli
Cremona - Italy
Laagoub was investigated and prosecuted by Italian authorities for participating in a
criminal conspiracy to commit terrorist activities; he is in Italian custody. Laagoub
helped form the Cremona cell in 1998, and headed it until February 2004, together
with EI Bouhali and Trabelsi Mourad.
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10 vIew or pnnt the put- content on thIS page, download the tree f1CjOOe(~)/-1crooaffoU'iea(jef1B-).

August 1 , 2005
js-2669
Treasury Announces Market Financing Estimates
The Treasury Department announced today that it expects net borrowing of
marketable debt to total $59 billion in the July - September 2005 quarter. The
estimated cash balance on September 30 is $30 billion. Adjusting for differences in
the cash balance, the current borrowing estimate is $31 billion lower than
announced on May 2. The decrease in borrowing is primarily the result of higher
receipts and higher net issuances of State and Local Government Series securities.
Treasury also announced that it expects net borrowing of marketable debt to total
$97 billion in the October - December 2005 quarter. The estimated cash balance
on December 31 is $25 billion.
Treasury realized a net paydown in marketable debt of $79 billion in the April June 2005 quarter. The cash balance on June 30 was $33 billion. Adjusting for
differences in the actual cash balance, the paydown was $49 billion greater than
assumed on May 2. The improvement was primarily the result of higher receipts.
Additional financing details relating to Treasury's Quarterly Refunding will be
released at 9:00 A.M. on Wednesday, August 3. The following link provides access
to Treasury documents related to this Quarterly Refunding.
(http://www.trei:1s.gov!offices/domestic-finance/debt-mallagementlquarterlyreft,mding/)
-30REPORTS

http://treas.gmr/pre.~s/releas;:e.s;:/js26f:i9.htm

9/1/2005

TREASURY ANNOUNCES MARKET FINANCING ESTIMATES

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

Quarter
Jul-Sep 2005
Oct-Dec 2005

Estimated
Borrowing
($ billion)
$59
$97

Estimated
End-of-Quarter
Cash Balance
($ billion)
$30
$25

Since 1997, the average absolute forecast error in net borrowing of
marketable debt for the current quarter is $10 billion and the average
absolute forecast error for the end-of-quarter cash balance is $9 billion.
Similarly, the average absolute forecast error for the following quarter is $31
billion and the average absolute forecast error for the end-of-quarter cash
balance is $11 billion.
The following tables reconcile the variation between forecasted and actual
net borrowing of marketable debt in the April - June 2005 quarter.

Quarter
Apr - Jun 2005

Estimated
Borrowing
1$ billions)
($42)

Actual
Borrowing
($ billions)
($79)

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

Estimated
End-of-Quarter
Cash Balance
($ billions)
$20

Actual
End-of-Quarter
Cash Balance
($ billions)
$33

Chg from
Nov Estimate
+$37
+3
+9
(13)

Additional financing details relating to Treasury's Quarterly Refunding will
be released at 9:00 A.M. on Wednesday, August 3. The following link
provides access to Treasury documents related to this Quarterly Refunding.
(http://www.treas.gov/offices/domestic-finance/debt-management/quarterly-refunding/)

Page 1 of2

August 1, 2005
JS-2670
Assistant Secretary of the Office of Economic Policy
Mark J. Warshawsky
Statement for the Treasury Borrowing Advisory Committee
of the Bond Market Association
August 1, 2005

The economy continued to expand at a favorable pace in the second quarter of this
year. Real GOP rose at a 3.4 percent annual rate, but would have been stronger
were it not for a sharp decline in private inventory investment. Real final sales
surged at a 5.8 percent rate, the biggest increase since the third quarter of 2003,
reflecting particular strength in business and residential investment, and a sizable
narrowing in the foreign trade deficit.
Personal consumption expenditures expanded at a solid 3.3 percent pace in the
second quarter, lifted by purchases of motor vehicles as consumers took advantage
of employee discounts on many vehicles. Personal income growth is solid and real
household net worth has reached a record high. With consumer balance sheets in
good shape and further expansion in payroll jobs likely, consumer spending is
primed to continue to bolster the economy going forward.
Real residential investment remained strong in the second quarter, growing at a
9.8 percent annual rate, in line with the 9.5 percent pace posted in the first quarter.
Indicators of housing activity, such as a 4 percent jump in new single-family home
sales to a record level in June, continue to signal strength. Rising employment and
income and low mortgage rates will likely support housing demand in the near term.
Business confidence remains firmly positive as well. The latest survey of the
National Association for Business Economics found that the share of respondents
reporting that capital spending was rising in the second quarter reached it highest
reading in more than seven years, and gains in capital spending are expected to
continue over the next year.
The expectation of second-quarter gains in investment was borne out as actual
capital spending for equipment and software accelerated to an 11.0 percent annual
rate in that quarter from an upwardly-revised 8.3 percent pace in the first quarter.
Investment in business structures rose at a 3.1 percent rate in the second quarter,
more than reversing a decline in the first quarter. Falling vacancy rates for both
offices and industrial buildings suggest investment in structures may be poised to
strengthen further.
The narrowing of the foreign trade deficit made a positive contribution to growth in
the second quarter for the first time since the fall of 2003. Imports declined by 2.0
percent, while export growth accelerated to a 12.6 percent pace. The resulting $44
billion decrease in the net export deficit added 1.6 percentage points to secondquarter growth.
The largest drag on real GOP growth in the second quarter came from a decline in
private inventories. The inventory drawdown slashed 2.3 percentage points from
the real GOP growth rate, the sharpest negative contribution in more than five
years. The latest drop in inventories combined with strong growth of final demand
may set the stage for a lift to real GOP from a rebound in inventory accumulation in
the third quarter.
An improving labor market with large job gains and low unemployment has

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contributed to the economy's strength, helping to support consumer spending.
Since the employment trough in May 2003, the economy has created 3.7 million
payroll jobs. Through the first half of this year payroll increases have averaged
181,000 per month, similar to last year's 183,000 monthly pace. The
unemployment rate dropped to 5.0 percent in June, its lowest level since
September 2001. The employment-population ratio moved up from 62.4 percent in
the first quarter to 62.7 percent in the second; the number of people unemployed for
15 weeks or more has been declining and dropped 9.5 percent in the second
quarter.
The expanding economy has been accompanied by benign inflation. Consumer
prices in June were just 2.5 percent higher than a year earlier, having decelerated
from the recent high for twelve-month growth of 3.5 percent reached last
November. Much of the improvement can be traced to a slowing in the year-to-year
increase in energy costs from just over 19 percent in November to 7.3 percent in
June. Core inflation (excluding energy and food) slowed to a moderate 2.0 percent
over the twelve months ending in June from 2.2 percent in November.
One of the important features of recent economic activity is the strong growth of the
income side of the national accounts. Not only have corporate profits been rising
rapidly but data on wages and salaries have been revised much higher. Wages
and salaries rose by 7.5 percent in nominal terms over the past four quarters,
equivalent to nearly a 5 percent increase in real terms. These developments
represent the reward of a stronger economy that resulted from the tax relief
measures enacted from 2001 through 2004.
The buoyant income growth that has accompanied the expanding economy has
generated a fiscal dividend. Federal tax receipts have improved dramatically,
sharply reducing the budget deficit. Tax receipts in FY2005 are on track to grow 14
percent--the largest such year-over-year increase in nearly 25 years. As a result,
the budget deficit is forecast to fall from $412 billion or 3.6 percent of GOP in
FY2004 to $333 billion or 2.7 percent of GOP in FY2005. That is $94 billion lower
than the Administration's February forecast.
The ongoing strength of economic growth will continue to generate the tax receipts
necessary to reduce the deficit, resulting in lower outlays for debt service than
previously anticipated. The Mid-Session Review of the Budget now projects net
interest costs to be $122.8 billion lower over the 5-year forecast period than
expected in the February Budget, with roughly half of the reduction resulting from
the lower debt levels and half from lower assumed interest rates. Under
Administration policies, including tight controls on growth in discretionary spending
unrelated to defense and homeland security, the budget deficit is forecast to
continue to fall to $162 billion in 2009 or 1.1 percent of GOP. That would be less
than the 1.5 percent projected in February and well below the 40-year average of
2.3 percent of GOP.
Over the long term, the greatest fiscal threats stem from the unfunded obligations in
major entitlement programs -- Social Security, Medicare, and Medicaid -- as the
population ages and the use and cost of health care grows. The President has
proposed reforms to Social Security that would include voluntary personal
retirement accounts to protect the system's surplus and to ensure that the
necessary prefunding of our future retirement incomes is not spent in excessive
government expenditures. His proposal would also address long-term insolvency
by slowing the rate of benefit growth in a progressive manner so that low-income
workers would be unaffected. We are encouraged by the work ongoing in
Congress on the design of personal retirement accounts and on the long-term
solvency issues.

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9/1/2005

August 2, 2005
2005-8-2-14-7 -2-1819

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 $76,588 million as of the end of that week, compared to $76,756 million as of the end of the prior week.

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

TOTAL
1. Foreign Currency Reserves

a. Securities

22, 2005

Jul~

76,756

29, 2005

76,588

Euro

Yen

TOTAL

Euro

Yen

TOTAL

11,249

13,273

24,522

11,291

13,122

24,413

Of which, issuer headquartered in the U. S.

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

10,946

3,750

14,696

10,996

3,708

14,704

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

b.ii. Of which, banks located abroad

b.iii. Banks headquartered outside the U. S

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

15,262

15,224

11,235

11,206

11,041

2. IMF Reserve Position

3. Special Drawing Rights (SDRs)
4. Gold Stock

5. Other Reserve Assets

II. Predetermined Short-Term Drains on Foreign Currency Assets
Jul~

Euro
1. Foreign currency loans and securities

22, 2005
Yen

Jul~

TOTAL

Euro

29, 2005
Yen

TOTAL

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

2.b. Long positions

o
o

3. Other

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

July 22, 2005
Euro
1. Contingent liabilities in foreign currency

Yen

July 29, 2005

TOTAL

Euro

Yen

TOTAL

o
o

1.a. Collateral guarantees on debt due within 1 year
1.b. Other contingent liabilities
2. Foreign currency securities with embedded options
3. Undrawn, unconditional credit lines

3.a. With other central banks
3.b. With banks and other financial institutions
Headquartered in the U. S.
3.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
4.8. Short positions

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

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

Notes:

11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
2IThe items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official 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 of2

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August 3, 2005
js-2671
Assistant Secretary for Financial Markets Timothy S. Bitsberger
August 2005 Quarterly Refunding Statement
We are offering $44.0 billion of notes to refund approximately $18.6 billion of
privately held securities and government account holdings maturing or called on
August 15, raising approximately $25.4 billion. The securities are:
• A new 3-year note in the amount of $18.0 billion, maturing August 15, 2008;
• A new 5-year note in the amount of $13.0 billion, maturing August 15,2010;
• A new 10-year note in the amount of $13.0 billion, maturing August 15,
2015.
These securities will be auctioned on a yield basis at 1:00 PM EDT on Monday,
August 8, Wednesday, August 10, and Thursday, August 11, respectively. All of
these auctions will settle on Monday, August 15. The balance of our financing
requirements will be met with weekly bills, monthly 2-year and 5-year notes, the
September10-year note reopening, and the October 1O-year TI PS reopening and 5year TIPS reopening. Treasury also is likely to issue cash management bills in early
September.
Thirty-Year Nominal Issuance
Treasury is re-introducing regular semi-annual auctions of the 30-year nominal
security beginning with a bond that will mature on February 15, 2036.
Changes to TreasuryDirect
Beginning with the 13-week and 26-week Treasury bill auctions scheduled for
October 3, 2005, marketable Treasury securities purchased in the auctions will be
eligible to be held in the new TreasuryDirect system. The new system will provide
the ability to hold both marketable and non-marketable securities in the same
account and to manage those investments online. The new system, however, will
not permit TreasuryDirect investors to bid competitively in Treasury marketable
securities auctions. At the same time, investors purchasing securities to be held in
the Legacy Treasury Direct system will also be prohibited from bidding
competitively. Competitive bidding will be limited to the commercial book-entry
system.
State and Local Government Series (SLGS) Regulatory Changes and Data
The new regulatory changes for SLGS, issued on June 30, 2005, become effective
on August 15, 2005. We encourage SLGS investors to obtain a free SLGSafe
account immediately since no transactions will be accepted without this account
and to also familiarize themselves with the provisions contained in the new SLGS
regulations. See httQj!www.publicdebUreas.gQvlspe/sR_~htm for more information.
On Monday August, 22, 2005, Treasury will begin releasing daily SLGS activity and
balances, with historical data back to 1999. Data for SLGS new subscriptions,
cancelled subscriptions, new issues, summary of redemptions by type, and SLGS
balances by maturity range will be released on Bureau of the Public Debt's website
at the following link: h!t!2l!'N~·publicdebt.treas.qov/opd/QJ2<.l.htm

9/112005

Page 2 of2

Calendar Adjustment
In our tentative calendar released on May 3, 2005, the August 3-year note auction
was tentatively scheduled for August 9, 2005. As stated above, the auction will
actually be held on August 8, 2005 to avoid overlap with the release of the FOMC
statement.

Other Policy Matters Under Consideration
Treasury 30-Year Bond and Auction Calendar
The re-introduction of the 30-year nominal bond means we must reexamine the
current security offering calendar. We seek advice from market participants on how
to fit the 30-year bond into the auction calendar and welcome any comments and
suggestions. We will provide a calendar decision at the November 2005 refunding.

Treasury Securities Lending Facility
Having received sufficient positive feedback on the concept of a backstop securities
lending facility, we believe the idea warrants further consideration. In the coming
months we will develop a preliminary proposal for a backstop Treasury securities
lending facility. Before determining whether to proceed, we will seek advice from
market participants over the next several quarters on critical components of such a
facility that will determine the appropriate pricing mechanism and operational
design.
Please send comments and suggestions on these subjects or others relating to
Treasury debt management to debt.managemE;3nt@do.tre_8s.99X
The next quarterly refunding announcement will take place on Wednesday,
November 2,2005.
- 30-

REPORTS
•
•

TBAC_Recol11mensied FinC:!.nciillLlables:
TBAC_ Recommended FinallcLng Tables:

http://treas.gov/press/re leases/js2671.htm

9/1/2005

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

ISSUE

4-WEEKAND
3&6 MONTH BILLS

4-WK

OFFERED
AMOUNT
3-MO

6-MO

12.00
15.00
14.00
13.00
15.00
15.00
15.00
15.00
15.00
13.00
11.00
9.00
8.00

16.00
17.00
18.00
19.00
18.00
17.00
16.00
16.00
16.00
16.00
16.00
16.00
16.00

14.00
15.00
16.00
17.00
16.00
15.00
14.00
14.00
14.00
14.00
14.00
14.00
14.00

ANNOUNCEMENT AUCTION SETILEMENT
DATE
DATE
DATE

6/30
7/7
7/14
7/21
7/28
7/7
8/11
7/7
8/25
7/7
9/8
7/7
9/22

CASH MANAGEMENT BILLS
14-DAY BILL
6/27
Matures 7/15
14-DAY BILL
8/26
Matures 9/15
9/2
8-DAY BILL
Matures 9/15

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

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

MATURING
AMOUNT

NEW
MONEY

47.37

-5.37
6.52
8.56

40.48

39.44
39.91

9.09

4.98

44.02
45.00
45.00
46.00
48.00
48.00
48.00
47.00
46.00

2.00
0.00
-1.00
-3.00
-5.00
-7.00
-8.00
-8.00

578.00

584.22

-6.22

6/29

7/1

18.00

0.00

8/31

9/1

25.00

0.00

9/6

9/7

15.00

0.00
0.00

COUPONS

CHANGE
IN SIZE
-1.00

5-Year Note
10-Year TIPS

7/11
7/11

7/13
7/14

7/15
7/15

13.00
9.00

20-Year TIPS (R)
2-Year Note

7/21
7/25

7/26
7/27

7/29
8/1

6.00
20.00

-2.00

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

8/3
8/3
8/3

8/8
8/10
8/11

8/15
8/15
8/15

20.00
13.00
14.00

-2.00

2-Year Note

8/22

8/24

8/31

20.00

5-year Note
10-Year Note (R)

9/6
9/6

9/7
9/8

9/15
9/15

13.00
8.00

2-Year Note

9/26

9/28

9/30

20.00

24.95

-4.95

156.00

90.80

65.20

*Includes $6.67 billion of maturing 30-year bonds
R =Reopening
Treasury announced a Q3
A =Announced
borrowing need of $59
Actual Amounts in Italics
billion on August 1st

13.00
9.00
6.00

24.13

-4.13

18.55*

20.00
13.00
-4.55

23.17

-3.17
13.00
8.00

NET CASH RAISED THIS QUARTER:

58.98

US TREASURY FINANCING SCHEDULE FOR 4th QUARTER 2005
BILLIONS OF DOLLARS

ISSUE

4-WEEKAND
3&6 MONTH BILLS

9/29
10/6
10/13
10/20
10/27
11/3
11/10
11/17
11/23
12/1
12/8
12/15
12/22

CASH MANAGEMENT BILLS
12-DAY BILL
11/16
Matures 11/30
9-DAY BILL
12/2
Matures 12/15

10/3
10/11
10/17
10/24
10/31
11/7
11/14
11/21
11/28
12/5
12/12
12/19
12/27

10/5
10/12
10/19
10/26
11/2
11/9
11/16
11/23
11/30
12/7
12/14
12/21
12/28

MATURING
AMOUNT

NEW
MONEY

45.00
43.00
41.00
41.00
45.00
46.00
48.00
47.00
47.00
51.00
51.00
48.00
48.00

1.00
7.00
11.00
9.00
7.00
10.00
8.00
7.00
7.00
-1.00
-8.00
-4.00
0.00

655.00

601.00

54.00

4-WK

OFFERED
AMOUNT
3-MO

6-MO

16.00
18.00
20.00
18.00
18.00
22.00
22.00
20.00
20.00
18.00
13.00
14.00
16.00

16.00
17.00
17.00
17.00
18.00
18.00
18.00
18.00
18.00
17.00
16.00
16.00
17.00

14.00
15.00
15.00
15.00
16.00
16.00
16.00
16.00
16.00
15.00
14.00
14.00
15.00

ANNOUNCEMENT AUCTION SETILEMENT
DATE
DATE
DATE

11/17

11/18

10.00

0.00

12/5

12/6

25.00

0.00
0.00

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

10/11
10/11

10/12
10/13

10/15
10/15

13.00
9.00

5-Year TIPS (R)
2-Year Note

10/20
10/24

10/25
10/26

10/31
10/31

9.00
20.00

25.82

9.00
-5.82

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

11/2
11/2
11/2

11/8
11/9
11/10

11/15
11/15
11/15

20.00
13.00
14.00

23.22
15.51-

20.00
-10.22
-1.51

2-Year Note

11/21

11/23

11/30

20.00

25.35

-5.35

5-year Note
10-Year Note (R)

12/5
12/5

12/7
12/8

12/15
12/15

13.00
8.00

12/26

12/28

12/30

20.00

26.01

-6.01

159.00

115.91

43.09

2-Year Note

-Includes $2.8 billion of maturing 25-year bonds
Treasury announced a Q4
R Reopening
borrowing need of $97
A Announced
billion on August 1st
Actual Amounts in Italics

=
=

13.00
9.00

13.00
8.00

NET CASH RAISED THIS QUARTER:

97.09

Page 1 of3

10 vIew or pnnt me put- content on tms page, download me tree AdOOIjJ'[!) AcroOqlCS) f"<f}aae(lp).

August 3, 2005
JS-2672
Report to The Secretary of The Treasury
from The Treasury Borrowing Advisory Committee of The Bond Market
Association

August2,2005
Dear Mr. Secretary:
Since the Committee's last meeting in May, the economic expansion has continued
at a moderate pace as second quarter GOP expanded at an annual rate of 3.4%.
Despite high and rising energy costs and continued Fed rate hikes, consumers
have buoyed the expansion and manufacturing has revived now that an overhang
of auto inventories has been worked down. Housing activity remains brisk,
reflecting still accommodative credit conditions. The supportive financial backdrop
together with solid income and employment gains points to another year of slightly
above trend growth in 2005.
Record high oil prices are a concern for the economy, draining consumer spending
power and weighing on business confidence. Energy-sensitive areas, especially the
more competitive manufacturing industries, have borne a disproportionate share of
this burden. Nonetheless, strength in construction and a wide array of service
industries has been more than offsetting. Despite the continued loss of factory jobs,
overall payroll employment growth has remained solid with monthly gains averaging
nearly 180,000 in the second quarter, while the unemployment rate has dipped from
5.2% in March to a cycle low of 5%. Corporate profits continued to rise in the
second quarter. As of Thursday, July 28, 2005, 69% (market capitalization) of the
S&P 500 companies had reported earnings and 86% had met or beaten analysts'
expectations, while only 14% fell short.
Both headline and core inflation have moderated in recent months, but the cyclical
backdrop suggests that risks of modest price pressures still lie ahead, while recent
annual revisions bumped core PCE inflation from 1.6% to 1.9% for the past year.
Productivity gains are slowing as the recovery matures, and as labor slack erodes
unit labor costs have begun to rise. While inflation expectations have held steady,
consumer resilience in the face of sharply higher energy costs underscores firms'
stepped up pricing power. Moreover, risks here are enhanced in an environment of
renewed upward pressures on energy and potentially on import prices in the wake
of dollar declines.
Notwithstanding the relative stability of long-term Treasury yields, information of late
has tended to reinforce market expectations of continued Fed tightening. Increases
in market rates have been concentrated in short- to intermediate-term maturities,
resulting in marked further flattening in the yield curve. Forward markets are pricing
in a 100% probability that the FOMC will raise rates by 25 basis points at its August
meeting and by another half percent to 4% by year-end.
The Federal budget performance on a 12-month rolling basis has been on an
improving trend, largely reflecting the cyclical recovery in tax receipts as income
growth revives. Both the Congressional Budget Office and the Bush administration
have acknowledged this improvement, with current deficit projections approaching
historical averages near 2.5% of GOP. Strong tax receipts led the Treasury to pay
down debt in 02 for the first time since 2001.

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Page 20f3

Against this economic and financial backdrop, Committee members considered
Treasury's charge in four parts.
In the first section of the charge, Treasury asked the Committee to comment on its
consideration of the reintroduction of the 3D-year bond. Treasury presented the
Committee with slides and tables which highlighted several desirable outcomes
from the reintroduction of bonds, namely, that issuing bonds would stabilize the
average maturity of outstanding debt at 57 months, while remaining the smallest
issuance tenor in their debt portfolio. Treasury felt that the incremental expense of
issuing bonds would be de minimis in light of the flexibility gained with a stabilizing
average maturity of debt, mitigation of rollover risk, and the attraction of new
investors to their offerings.
A committee member suggested that Treasury should issue one bond per year, an
initial auction and a later reopening. Members felt Treasury should consider
adjusting auction dates to allow for efficient stripping of bonds. A member
encouraged Treasury to clarify whether its consideration of 30-year bond offerings
implied similar consideration of even longer term bonds such as recent offerings of
50-year bonds abroad. The member thought the market would benefit from
definitive guidance on this point. Other members emphasized the importance of
Treasury having the flexibility to maintain 30-year bond issuance prospectively. The
Committee concluded its discussion of bond reintroduction noting generally that it
would be a favorable development.
In the next section of the charge, Treasury asked for the Committee's preliminary
views on the establishment of a backstop securities lending facility and whether the
idea warranted further study or not. Treasury expressed concerns that large and
persistent fails may raise their cost of borrowing and stated that they hold valuable
the liquidity premium they receive in the marketplace. SystemiC fails have occurred
more frequently as trading volumes have grown in relation to supply. Treasury
presented the Committee with a number of slides depicting the frequency and
severity of fails and increasing open interest in ten-year futures contracts. Treasury
discussed risks and imbalances associated with systemic fails which may lead to
higher borrowing costs over time. Citing challenges to the clearing mechanism from
the zero interest rate bound, buy-in rule limitations and market customs, Treasury
described a possible approach to the alleviation of systemic fails through a
backstop lending facility. Treasury envisions a lending facility offering unlimited
quantities of specific securities and onerous borrowing rates for fixed term repo
finanCing.
Members offered numerous and varied opinions as to the merits of such a program.
Several members stated favorable views of the proposal particularly if enacted in
concert with other steps such as enforcement of buy-in rules, industry cooperation,
and encouraging futures exchanges to cash settle or re-coupon contracts.
Additionally, members noted that the proposed facility could alleviate embedded
credit risk between counterparties that increases during protracted fails. Members
were generally in agreement that volumes of activity in specific securities tends to
decline or become more expensive to transact in periods of chronic fails and as
such could raise borrowing costs for Treasury over time.
Members expressed reservations about the implementation of penalty borrowing
rates below the zero bound for a number of reasons. Some felt that back office
limitations would present obstacles, others felt that negative rates may encourage
speculation exacerbating chronic fail situations. Members encouraged Treasury to
further study these periods so that they could articulate precisely when they would
employ a backstop lending facility. While Committee members generally viewed the
proposed facility in a favorable manner, most believed that further analysis is
necessary to ensure that cosUbenefit analysis is robust and favorable to Treasury,
liquidity in Treasury securities is protected and enhanced, undue market
interference is avoided and that policy, operational, and regulatory issues are
thoroughly addressed.
In the third section of the charge, a Committee member led a discussion on the
impact of foreign ownership of U.S. debt securities on the Treasury's cost of
borrowing. Specifically, the charge queried as to whether foreign investors, or other

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9/1/2005

Page 3 of3

forces, were responsible for the limited increases seen in U.S. yields. The member
presented charts highlighting the relationship between the trade-weighted dollar
index and U.S. 10-year yields and core CPI changes. In addition, numerous slides
depicting net portfolio flows, both official and private, and the increased demand for
longer-term maturity assets have served to underscore that currency movements
and foreign investor buying have created downward pressure on U.S. interest rates.
The member went on to describe other factors such as the increase in global
savings rates, the decrease in risk premiums, corporate financing gaps, and
structural changes in the bond market which also explain current interest rate
levels. This member concluded his presentation opining that these other factors at
work, while currently significant, will likely wane in the intermediate term with
respect to their impact on rates.
In the last section of the charge, the Committee considered the composition of
marketable financing for the July-September quarter to refund $18.6 billion of
privately held notes and bonds maturing on August 15, 2005, as well as the
composition of Treasury marketable financing for the remainder of the JulySeptember quarter and the October-December quarter. To refund $18.6 billion of
privately held notes and bonds maturing August 15, 2005, the Committee
recommended a $20 billion 3-year note maturing August 15, 2008, a $13 billion 5year note due August 16, 2010, and a $14 billion 10-year note due August 17,
2015. For the remainder of the quarter, the Committee recommended a $20 billion
2-year note issued in August, a $20 billion 2-year note issued in September, a $13
billion 5-year note issued in September and a $8 billion reopening of the 10-year
note in September. The Committee also recommended a $25 billion 14-day cash
management bill issued September 1, 2005 and maturing September 15, 2005 and
a $15 billion 8-day cash management bill issued September 7,2005 and maturing
on September 15, 2005. For the October-December quarter, the Committee
recommended financing as contained in the attached table. Relevant features
include three $20 billion 2-year notes, a $20 billion 3-year note, three $13 billion 5year notes, a $14 billion 10-year note in November followed by a $8 billion
reopening of that 1O-year note in December. The Committee further recommended
a $9 billion reopening of the 1O-year TIPS in October as well as a $9 billion
reopening of the 5-year TIPS in October.
Respectfully submitted,
Ian G. Banwell
Chairman
Thomas G. Maheras
Vice Chairman

Attachments (2)
- 30-

REPORTS
• TBAC Reco.mmended Financing Tables: 03
• TBAC Recommendeg Financing Tables: 04

http://treas.gov/pl"e-~releasesLjs2.~htm

9/1/2005

Page 1 of 4

August 3. 2005
JS-2673
Minutes Of The Meeting Of The
Treasury Borrowing Advisory Committee
Of The Bond Market Association
August 2, 2005

August 2. 2005
The Committee convened in closed session at the Hay-Adams Hotel at 11 :30 a.m.
One member of the Committee. Ina Drew, was not present. Assistant Secretary for
Financial Markets Timothy Bitsberger welcomed the Committee and gave them the
charge.
Assistant Secretary Bitsberger highlighted a few of the quarterly refunding charts
released on August 1, noting that Treasury's borrowing this fiscal year is less than
was projected earlier in the year and that this is largely due to increased tax
receipts and higher-than-expected SLGS issuance. He noted the sizeable net pay
down in bills last quarter. He also noted the volatility in Treasury's borrowing needs
in the next couple of fiscal years, with estimated borrowing needs rising in FY2006.
The Committee then addressed the first question in the Committee charge
(attached) on issues that Treasury should consider when making its decision on
whether or not to re-introduce the 30-year bond. Assistant Secretary Bitsberger
presented a series of charts highlighting the impact of 3D-year issuance on
Treasury's financing needs, the flexibility of its portfolio and cost. He emphasized
that the 3D-year bond is not necessary to meet expected finanCing needs, and that
modest issuance does not adversely impact Treasury's debt portfolio flexibility.
Assistant Secretary Bitsberger also noted that re-introduction of the 30-year bond
diversifies funding and increases the investor base. The charts show that reintroduction of the bond would halt the decline in average maturity of debt
outstanding and modestly lower Treasury's rollover need.
The Committee was asked if there are other issues Treasury should consider.
Several Committee members raised calendar and auction-schedule issues. One
Committee member suggested that if Treasury plans to issue the first 30-year bond
in February 2006 on a February/August cycle, that Treasury should have the
August issue be a reopening of the February issue. The Committee member also
suggested that, if this is Treasury's intention, Treasury should make this explicit
when they announce the re-introduction. Another Committee member brought up
the issue of stripping and making the new 30-year issues fungible with currently
outstanding 30-year bonds. Another Committee member asked about the timing of
a bond auction in the refunding, noting that it would mean four coupon auctions in
one week. Assistant Secretary Bitsberger said that Treasury is open to ideas on
what to do with the issuance calendar and that Treasury would come back to the
market in the next quarter to solicit comments on this issue.
One Committee member asked what would happen to Treasury's debt portfolio
flexibility if bonds are added and deficits come in lower than expected several years
from now. Treasury officials pointed to the table highlighting that with modest bond
issuance, Treasury will still have the flexibility to meet changes in financing needs.
Next the Committee turned to the second question on the need for a backstop
securities lending facility. The Treasury asked for the Committee's preliminary
views on whether this idea provides sufficient benefits to the Treasury and the
market to warrant further study. Assistant Secretary Bitsberger presented slides on

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Page 2 of 4

the factors that led Treasury to consider such a facility and the initial thoughts on a
potential structure of a facility. The first slides highlighted the growth of trading
volumes in Treasuries compared to supply, the increasing fails, and the potential
risks of large scale fails. The following slides noted potential sources for additional
supply, including the Federal Reserve Bank of New York's securities lending facility,
large holders of securities, and the development of a backstop Treasury securities
lending facility. The next set of slides highlighted Treasury's desired outcomes including facilitating settlement of cash market transactions, improved functioning of
the specials market, and strengthening of the specials market - while continuing to
provide certainty of supply and encouraging market-driven solutions to supplydemand imbalances.
Assistant Secretary Bitsberger then described some of the desired attributes of a
backstop securities lending facility and how such a facility might work. Desired
attributes include a non-discretionary, standing facility with unlimited supply on
renewable terms. The price would be set at a penalty rate to discourage use unless
the market was severely stressed. The facility would not be designed to address
temporary needs, so the term would be greater than overnight.
Assistant Secretary Bitsberger highlighted that there are lots of questions to be
answered, including policy issues, regulatory issues, and operational issues, and
that a project like this would take some time. He emphasized that Treasury really
wants the Committee's ongoing advice on this issue in the future.
One Committee member commented that the supply-demand dynamic in
Treasuries is changing, that Treasury should look at ideas to help maintain market
liquidity, and that this idea is worth pursuing. Another Committee member said that
a backstop securities lending facility is just one of a series of things that Treasury
should look at in order to maintain liquidity in the Treasury marketplace. At least
one Committee member commented that a securities lending facility was not a
good idea. Two other Committee members commented that the recent episodes of
increased fails were related to increased hedging and speculative activity in the
Treasury market rather than any systemic issues. Another Committee member
noted that the level of fed funds, and the fact that it has been steadily rising, may
also be impacting activity in the repo market.
Several Committee members discussed the structure of the Treasury futures
contract in the context of the recent issues surrounding the cheapest-to-deliver
issue into the 10-year notes futures contract. One Committee member encouraged
the Chicago Board of Trade (CBOT) to change the coupon on the futures contract,
while another commented that there are other fixes that the CBOT could consider.
One Committee member reminded the group that the futures contract was the
purview of the CBOT, not Treasury.
One Committee member asked if Treasury had considered offering an exchange
program, exchanging older off-the-run securities for new securities (ex. exchanging
an old 10-year note with 5 years left to maturity for a current 5-year note). A
Treasury official noted that Treasury sells certainty of supply and that the only way
that supply would change is if there is a possible systemic problem. He noted that
the current buy-in rule does not work in its current form, thereby allowing contracts
not to be fulfilled.
One Committee member questioned whether it was the role of Treasury to enforce
contracts, commenting that maybe it should be the market or the counterparties'
role to enforce the contracts. Other Committee members commented that this was
the role of the SEC or the NASD.
A Committee member commented that Treasury needs to better establish the link
between increased levels of fails and increased cost of issuing a new security.
One Committee member asked at what level of fails is Treasury concerned about
efficient market functioning. Another member noted that it is probably very difficult
to say what this level is.

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A Committee member asked about negative repo rates, commenting that if the rate
on a facility is set below zero, that this will encourage market participants to
continue to short the market, increasing the incentive for speculative activity.
Another Committee member noted that this may also encourage participants to
lend. Another Committee member commented that there is currently no established
negative rate trading in the repo market. Another member noted that there is no
standard guaranteed delivery in the repo market, and if there was, there would be
trading at negative rates. One Committee member noted that a barrier to negative
rate trading was the fact that many market participants' trading systems currently
can not process negative rates.
One Committee member asked if this type of facility would be available only to
broker/dealers or to a wider audience. Assistant Secretary Bitsberger said that this
was one of the issues to be discussed, and that Treasury would come back to the
Committee for further input on this type of question. Another Committee member
commented that the calculation of the penalty rate on the facility would have to be
considered very carefully.
Next, the Committee turned to the third question of the charge which asked for the
Committee's views on foreign ownership of Treasury securities and whether sizable
foreign ownership has contributed to lower domestic interest rates. One Committee
member presented a series of slides showing that currency movements can impact
Treasury's cost of borrowing through a lower exchange rate creating more
stimulative financial conditions, and that foreign official investors exert downward
pressure on Treasury's cost of borrowing through the funding of the current account
deficit. Other factors limiting the increase in yields include a decrease in risk
premiums, an increase in the global savings rate, and structural changes in the
bond market. However, the Committee member argued that the impact of some of
the factors could wane. One of the slides showed the maturity structure of dollardenominated assets held by foreigners, and the Committee member noted that
foreigners have increased their holdings of longer duration debt.
Finally, the Committee discussed its borrowing recommendations for the August
refunding and the remaining financing for this quarter as well as the October December quarter. Charts containing the Committee's recommendations are
attached. One Committee member asked about the date of the 3-year auction and
a Treasury official said the date of the auction is Monday, August 8, due to the
FOMC meeting on August 9.
The meeting adjourned at 1:15 p.m.
The Committee reconvened at the Hay-Adams Hotel at 6:00p.m. Ina Drew and
Richard Axilrod were not present. The Chairman presented the Committee report to
Assistant Secretary Bitsberger. A brief discussion followed the Chairman's
presentation but did not raise significant questions regarding the report's content.
The meeting adjourned at 6:30 p.m.

Jeff Huther
Director
Office of Debt Management
August 2,2005
Certified by:

Ian Banwell, Chairman
Treasury Borrowing Advisory Committee
of The Bond Market Association
August 2, 2005
Attachments: Link to the Treasury Borrowing Advisory Committee discussion

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charts U.S. Tr~9swy -_Office of Dom~stic Finance

Treasury Borrowing Advisory Committee Quarterly Meeting
Committee Charge - August 2, 2005
Reintroduction of the 30-Year Bond
In the accompanying charts, we present the reasons for why Treasury is
considering reintroducing 3D-year bonds. Are there other issues that Treasury
should consider regarding the decision to reintroduce the 3D-year?
Treasury Securities Lending Facility
The growth of trading volumes in Treasury securities, relative to supply, has led us
to consider the need for a backstop securities lending facility to mitigate the risk of
systemic fails. A risk that we believe could impair liquidity and raise our cost of
borrowing. In the accompanying slides we present the factors that prompted this
consideration and our initial thoughts on a potential structure of a facility. We seek
the Committee's preliminary views on whether this idea provides sufficient benefits
to the Treasury and the markets to warrant further study.
The Impact of Foreign Ownership on Interest Rates
Please discuss the impact of currency movements on the Treasury's cost of
borrowing. Are foreign investors exerting significant downward pressures on the
Treasury's financing costs or are other forces at work which have limited increases
in yields?
Financing this Quarter
We would like the Committee's advice on the following:
• The composition of Treasury notes to refund approximately $18.6 billion of
privately held notes and bonds maturing on August 15. 2005.
• The composition of Treasury marketable financing for the remainder of the
July- September quarter, including cash management bills.
• The composition of Treasury marketable financing for the OctoberDecember quarter.

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August 3, 2005
JS-2674
Statement of Treasury Under Secretary for Domestic Finance Randal K.
Quarles on Quarterly Refunding Announcement
The Treasury has determined that we have the flexibility to issue 30-year bonds
cost-effectively while maintaining deep and liquid markets in our other securities.
We believe this is a prudent debt management step that will continue to allow
Treasury to finance the government's borrowing needs at the lowest cost over time.
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August2,2005
2005-8-2-16-8-57 -12254
PHOTO RELEASE: Secretary Snow in Rio de Janeiro Today

Treasury Secretary John Snow and Brazil's Finance Minister Antonio Palocci
address reporters following the US-Brazil Group for Growth meetings in Rio de
Janeiro, Brazil. Snow complemented Brazil's recent economic performance and
both officials discussed plans to generate more growth in their own economies.
PHOTO CREDIT: Tony Fratto, U.S. Treasury

•

• Click here to read Secretary Snow~s remarks.
Other photos available on request for members of the press. Contact Taylor
Griffin 202-622-2960.

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August 2,2005
js-2675
The U.S. and Brazil: Partners in Growth
The Honorable John W. Snow
Prepared Remarks
Rio de Janeiro, Brazil
August 2, 2005

Thank you, it's a great pleasure to be here. I would like to thank Ambassador
Botafogo and Cebri for hosting me today, and CNC for providing this venue. I'm
happy to be visiting Brazil at this time of productive economic partnership between
our countries.

The United States celebrates the good economic progress that Brazil has made in
recent years. Your country is a leader of South American economies and a global
example of how good policy leads to growth and economic stability - two things that
have the power to, ultimately, change millions of lives.

Only economic growth raises living standards over the long-term. Only growth
creates jobs. By increasing opportunity and decreasing struggle, growth improves
the human condition and alleviates poverty.

President Lula and his team are doing a superb job, and my relationship with
Minister Palocci is one that I value very much. He has an inspiring long-term vision
for this country's economic health, and I enjoyed the chance to see him in Brasilia
yesterday.
Minister Palocci and I feel honored to work with each another on behalf of the
people of both our countries. As I'm sure you know, we have consulted regularly on
policies that promote economic growth through the U.S.-Brazil Group for Growth,
which was established at the first summit between President's Bush and Lula in
1993 with the purpose of advancing pro-growth policies in both countries.
Today Minister Palocci and I will sit down to hold the 4th meetings of the U.S.-Brazil
Group for Growth. We will talk about our economies and the global outlook, the
benefits of trade for growth, infrastructure, and research and innovation.

Because of my previous experience with a global transportation company, I have a

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special interest in the subject of infrastructure. I understand how important it is for
enabling growth and job creation. We have come to Brazil with some ideas for
facilitating the development of high-quality infrastructure projects, especially by
catalyzing private investment. It is my hope that we can work together to advance
some productive initiatives to benefit Brazil and the rest of the Hemisphere.

I had the pleasure of meeting with President Lula yesterday as well, and we had a
good conversation about the good economic pOlicies that the government has put in
place.

I can't help but to be optimistic about your future. There is a clear record of
achievement in stabilizing the economy, withstanding considerable market
turbulence and igniting growth.

You know the facts, but they bear repeating: Brazil's growth rate last year was
4.9%--the largest growth rate in 10 years. Your current account surplus reached
1.9% of GOP in 2004, driven by a record trade surplus of $33 billion (5% of GOP).
Your export performance is continuing in 2005: in the 12-month period leading to
June 2005, Brazil's exports totaled $107 billion--an historic peak.

Your central bank has taken strong action to reign in inflation. After peaking at
17.2% in early 2003, trailing 12-month inflation has been brought down to 7.3% as
of June.

In 2004, Brazil's net public debt/GOP ratio registered the first annual decline since
1994, ending the year at 52%, down from 57% at end-2003. The ratio declined
further this year to 51 % in June.

These economic indicators are positive, but of course they do not tell the whole
story. The most important story is the one about the improvement in the lives of the
Brazilian people.

More people in Brazil are working. The unemployment rate is 9.4%, down from
11.7% a year ago and stands at the lowest level since October 2001. And over the
past 12 months, 1.45 million jobs have been created.

Credit reforms passed last year by congress helped lead to credit growth to
individuals of 30% last year--the highest growth rate since the 1996 when the data
was first published.

Real wages in the manufacturing sector rose 10.5% in end-2004 compared to end2003--highest rate since 1995.

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Consumption growth last year was a strong 4%.

And these are the numbers that illustrate the improving human condition for the
people of Brazil. Brazil's policies have met the most important tests: they are
producing results, their benefits are widely shared, and they build a foundation for
the long term.

Brazil today is clearly steering its own course. Brazil made the sensible decision
not to pursue another IMF program which was not needed. And they are repaying
the IMF early - an unmistakable sign of strength.

The Brazilian example is a counterpoint to those who argue that market-oriented
reform is too hard, reform doesn't work, or that reform is part of the problem.

With lackluster growth in some of the largest economies in the world - in Europe
and Japan - Brazil's contribution to growth is welcome. It is important. And it is an
example to other countries.

One of the highlights of my visit was a meeting I had with venture capital investors
and recipients yesterday. They hold the promise of injecting a lot of dynamism and
energy into the economy in creating jobs and growth well into the future. Venture
capitalists are people who are risking their assets on Brazil's future, so I was
pleased to see that they are betting on success.

The city of Vitoria in Espirto Santo is another example of progress in Brazil. That's
why I am going to visit there during my time here in Brazil. I want to see the
remarkable results of Governor Paulo Hertung's reforms. His fight against
corruption, tax and budget reforms, and other improvements to the investment
climate have turned that city around. I want to go there to highlight what is possible
if there is determined leadership committed to letting entrepreneurs create
opportunities and jobs.

Our economic relationship, in pursuit of growth, has evolved over time. Trade
between our two nations has expanded significantly. For example, remember that
trade between Brazil and the U.S. was $13 billion back in 1990, but totaled $35
billion last year.

The investment flows between our economies go in both directions, which is so
important. U.S. FDI in Brazil totals $33 billion (up from an accumulated U.S. direct
investment in 1990 of $14 billion) and Brazilian companies have direct investment
positions in the U.S. totaling $1.3 billion (compared to total Brazilian direct
investment in the U.S. in 1990 of $377 million.)

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In some sectors, U.S. investment has made a major contribution to Brazil's
productive capacity. U.S. accumulated investment in manufacturing is $12 billion
(including $3.5 billion in the chemical industry) and $7 billion in the financial sector.

Trade and investment ties have built a strong partnership between our two nations,
and the potential for the future is great.

It is also important that we work together to maintain the integrity of the global
financial system by keeping dirty money out of the financial sector. Brazil is a
member of the Financial Action Task Force, which is the premier international body
that sets global standards to combat money laundering and terrorist financing,
and has taken a very active role in the organization.

With the foundation laid by good economic policies, Brazil can become a sustained
growth engine for the region and for the world, and I am convinced that closer
integration between our economies and within the Hemisphere is key to boosting
both Brazil's growth and our growth.

Integration goes beyond merchandise trade and investment. Some of the most
important connections between our societies encompass exchanges and
educational opportunities that benefit our young people. There are 7,800 Brazilian
students currently studying in U.S. universities.

Our connections help both our societies become more productive through R&D
flows in both directions.

One of the most important connections is the flow of remittances to supplement the
earnings of Brazilian families. Last year, Brazilian workers living abroad sent home
$5.6 billion--much of it coming from the U.S.--to relatives and friends here. This can
be an important stimulus for consumption and investment in this country, and
ultimately leads to growth and job creation.

Thank you so much for having me here today. I hope the Brazilian people know
how much confidence we have in you, and that the United States will be a partner
in facing the challenges and risks ahead.

When I return home, and whenever I meet with economic leaders from around the
globe, my message will be clear: Those who question the benefits of marketoriented reforms should come to Brazil.

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Thank you.

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August 3,2005
js-2676

Treasury Designates Twenty.Six Entities Tied to the Mugabe Regime
The U.S. Department of the Treasury today designated twenty-six Zimbabwean
entities - 24 commercial farms and two businesses - controlled by key members of
the Mugabe regime. This designation is pursuant to Executive Order 13288, which
is aimed at blocking the property of persons undermining democratic processes in
Zimbabwe.
"The Mugabe regime rules through pOlitically motivated violence and intimidation
and has triggered the collapse of the rule of law in Zimbabwe," said Robert Werner,
Director of the Treasury's Office of Foreign Assets Control (OFAC). "By denying
the Mugabe regime access to the U.S. financial system and U.S. persons, we're
cutting off the flow of support they could use to further destabilize Zimbabwe."
The commercial farms are among those handed to favored members of
Zimbabwean President Robert Gabrial Mugabe's regime following his chaotic land
redistribution scheme. The two other businesses designated today include: Cold
Comfort Farm Trust Co-Operative, an agricultural cooperative controlled by
Didymus Noel Mutasa, Minister of National Security; and Ndlovu Motorways, which
is controlled by Sikhanyiso Ndlovu. Both Mutasa and Ndlovu were listed in the
Annex of E.O. 13288.
E.O. 13288 imposes economic sanctions on persons who undermine democratic
processes and institutions in Zimbabwe. Included in the Annex are President
Mugabe, and 76 other Zimbabwean government officials and persons of influence.
Executive Order 13288 provides for the blocking of properties within U.S.
jurisdiction or the possession or control of U.S. persons in which the SONs have an
interest, and it also denies them access to the U.S. financial system.
Today's designation is the result of close cooperation between OFAC and the U.S.
State Department. The Departments of Treasury and State will continue to utilize
the authorities under E.O. 13288 to financially isolate those disrupting democracy in
Zimbabwe. Today's action brings the total number of designations under E.O.
13288 to 110 individuals and entities.
Doing business with an SON of Zimbabwe may carry criminal penalties of up to
$500,000, twice the monetary gain or loss per violation for an organization.
Individual criminal penalties may be up to $250,000 or twice the monetary gain or
loss per violation. Individuals may also face imprisonment for up to ten years for a
criminal violation. In addition, civil penalties of up to $11,000 per violation may be
imposed administratively.
Click here for a complete list of the entities designated today:
http://www.trf:}8s.gov/offices/enforcementiof(3c/actionsI
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August 3, 2005
js-2677

Treasury and the IRS Issue Guidance on Employee-Owned Tools
WASHINGTON, DC -- Today the Treasury Department and the IRS issued a
revenue ruling and a notice concerning the application of the accountable plan rules
to employee-owned tools. In a number of industries, employees provide their own
tools to perform services and are reimbursed for the cost of the tools by their
employers. Previously, the Treasury and the IRS clarified that such reimbursements
must satisfy the accountable plan rules - expenses reimbursed under an
accountable plan are excluded from income and wages; expenses that are
reimbursed under a non-accountable plan are taxable.
The new revenue ruling clarifies that employers using accountable plans to
reimburse employees for the cost of providing tools must substantiate the expenses
reimbursed and, to the extent the plan provides payments before expenses are
incurred, the plan requires the employee to return amounts in excess of the
substantiated expenses. In particular, the ruling clarifies that an accountable plan
may not use estimates to SUbstantiate the amount of the expenses.
In addition to the ruling, Treasury and the IRS are issuing a notice regarding criteria
for considering proposals involving employer reimbursements of equipment
expenses for the Service's Industry Issue Resolution (IIR) program. The notice
identifies factors that would be considered in determining that the existing
accountable plan rules are unworkable for an industry and thus relief may be
appropriate. The notice also states that the mere cost of col/ecting records,
substantiating expenses, and reconciling the expenses against reimbursements
would not constitute grounds for relief from the requirements of the accountable
plan rules.
The revenue ruling and the notice are attached.

####

REPORTS
•
•

Reve~Ruling

Notice

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Part I
Section 62.-Adjusted Gross Income Defined

26 CFR 1.62-2: Reimbursement and other expense allowance arrangements

Rev. Rul. 2005-52

ISSUE
In the following situation, is the tool allowance paid by the employer to the
employees paid under an accountable plan such that the payments are excluded from
the employees' gross income and exempt from the withholding and payment of
employment taxes?
FACTS
Employer operates an automobile repair and maintenance business. Employer
hires service technicians to work in the business as employees. Employer requires
these employees, as a condition of employment, to provide and maintain various tools
needed for use in performing repair and maintenance services. Employer pays each
employee an hourly wage. In addition, Employer pays each employee a set amount for
each hour worked as a "tool allowance" to cover costs the employee incurs for acquiring
and maintaining his tools.
Employer sets each employee's tool allowance annually by using a combination
of data from a national survey of average tool expenses for automobile service
technicians and specific information concerning tool-related expenses provided by the
employee in response to an annual questionnaire completed by all service technicians
who work for Employer. Employer does not reimburse expenses paid or incurred for
listed property, as defined by § 2BOF(d) of the Internal Revenue Code (the Code), or
depreciation expenses; thus, these expenses are not taken into account in calculating

the amount of the annual tool allowance. Employer uses the data to project the
employee's total annual tool expenses. Employer then uses a projection of the total
number of hours the employee is expected to work during the year that will require the
use of tools to convert the employee's estimated annual tool expenses into an hourly
rate for the tool allowance. Thus, the hourly tool allowance is an estimate of the tool
expense projected to be incurred per hour by the employee over the course of the
coming year.
At the end of each pay period, each employee reports to Employer his hours
worked requiring the use of tools. Employer multiplies the number of hours reported as
worked requiring the use of tools by the employee's hourly rate for the tool allowance
and pays the resulting amount to the employee in addition to compensation for services
performed during the pay period. On a quarterly statement furnished to each employee,
Employer reports: (1) the amount paid to the employee as a tool allowance during the
quarter, and (2) the tool expenses estimated to be incurred in the quarter (i.e., the
hours reported worked requiring the use of tools times the tool allowance). Employees
are not required to provide any SUbstantiation of expenses actually incurred for tools
either before or after the quarterly reports are issued. Employer does not require
employees to return any portion of the tool allowances that exceeds the expenses they
actually incur either before or after the quarterly reports are issued.

LAW
Section 61 of the Code provides that gross income means all income from
whatever source derived, including compensation for services, fees, commissions,
fringe benefits, and similar items.
Section 62(a)(2)(A) of the Code and § 1.62-2(b) of the Income Tax Regulations
provide that, for purposes of determining adjusted gross income, an employee may
deduct certain business expenses paid by the employee in connection with the
performance of services as an employee under a reimbursement or other expense
allowance arrangement with his employer.
Section 62(c) provides that, for purposes of § 62(a)(2)(A), an arrangement will
not be treated as a reimbursement or other expense allowance arrangement if (1) the
arrangement does not require the employee to substantiate the expenses covered by
the arrangement to the payor, or (2) the arrangement provides the employee the right to
retain any amount in excess of the substantiated expenses covered under the
arrangement.
Section 1.62-2(c)(1) of the regulations provides that a reimbursement or other
expense allowance arrangement satisfies the requirements of § 62(c) if it meets the

requirements of business connection, substantiation, and returning amounts in excess
of substantiated expenses. If an arrangement meets these requirements, all amounts
paid under the arrangement are treated as paid under an accountable plan. § 1.622(c)(2)(i). Amounts treated as paid under an accountable plan are excluded from the
employee's gross income, are not required to be reported on the employee's Form W-2,
and are exempt from the withholding and payment of income and employment taxes.
§ 1.62-2(c)(4).
If an arrangement does not satisfy one or more of these requirements, all
amounts paid under the arrangement are treated as paid under a "nonaccountable
plan." § 1.62-2(c)(3). Amounts treated as paid under a nonaccountable plan are
included in the employee's gross income, must be reported as wages or other
compensation of the employee's on Form W-2, and are subject to withholding and
payment of income and employment taxes. § 1.62-2(c)(5).
Section 1.62-2(d)(1) provides that an arrangement meets the business
connection requirements if it provides advances, allowances, or reimbursements only
for business expenses that are allowable as deductions and are paid or incurred by the
employee in connection with the performance of services as an employee of the
employer. If, however, a payor arranges to pay an amount to an employee regardless
of whether the employee incurs (or is reasonably expected to incur) bona fide employee
business expenses, the arrangement does not satisfy the business connection
requirements and all amounts paid under the arrangement are treated as paid under a
nonaccountable plan. § 1.62-2(d)(3)(i).
Section 1.62-2(e)(1) provides that an arrangement meets the substantiation
requirements if the arrangement requires each business expense to be substantiated to
the payor in accordance with paragraph (e)(3), within a reasonable period of time. An
arrangement for those expenses meets the substantiation requirements of § 1.622(e)(3) if information submitted to the payor is sufficient to enable the payor to identify
the specific nature of each expense and to conclude that the expense is attributable to
the payor's business activity. Generally the employee must submit an expense account
or other written statement to the employer showing the business nature and amount of
the employee's expenses. See § 1.162-17(b)(4).
Revenue Procedure 2002-41, 2002-1 C.B. 1098, provides an optional expense
substantiation rule applicable only to certain employers in the pipeline construction
industry. If an eligible employer's arrangement to pay employee business expenses
otherwise satisfies the business connection and return of excess requirements, and
amounts paid under the arrangement do not exceed $13.00 per hour, adjusted for
inflation, an employee is deemed to have substantiated the expenses, and amounts
paid under the arrangement are treated as paid under an accountable plan.

Section 1.62-2(f)(1) provides that an arrangement meets the return of excess
requirements if the arrangement requires the employee to return to the payor within a
reasonable period of time any amount paid under the arrangement in excess of
substantiated expenses. Section 1.62-2(f)(2) provides authority for the Commissioner
to issue rules, for per diem or mileage allowances only, under which an arrangement
will be treated as satisfying the return of excess requirement even though the
arrangement does not require the employee to return the portion of the allowance
related to days or miles of travel substantiated but that exceeds the amount of the
employee's expenses deemed substantiated pursuant to rules prescribed under
§ 274(d).
Section 1.62-2(g)(2)(ii) provides that if a payor provides employees with a
periodic statement, no less frequently than quarterly, stating the amount, if any, paid
under the arrangement that exceeds the expenses the employee has substantiated as
required by the arrangement, and requesting the employee to substantiate any
additional business expenses that have not yet been substantiated (whether or not such
expenses relate to the expenses to which the original advance was paid) and/or to
return any amounts remaining unSUbstantiated within 120 days of the statement, an
expense substantiated or an amount returned within that period will be treated as being
substantiated or returned within a reasonable period of time.
Additionally, § 1.62-2(k) provides that if a payor's reimbursement or other
expense allowance arrangement evidences a pattern of abuse of the rules of § 62(c)
and the regulations thereunder, all payments made under the arrangement will be
treated as made under a nonaccountable plan.

ANALYSIS
An amount paid by an employer to an employee to cover expenses incurred by
the employee in the course of employment can be excluded from the employee's
income and wages only if a particular Code section provides an exclusion for such
amount or if the amount is paid under an accountable plan. No specific section of the
Code excludes from wages amounts paid to employees for acquiring and maintaining
tools used in the performance of services as employees. Thus, to be excluded from
wages, amounts paid to employees to cover expenses incurred to acquire or maintain
such tools must be paid under a reimbursement or other expense allowance
arrangement that meets the requirements of § 62(c).
An arrangement qualifies as an accountable plan only if it satisfies all three
requirements set forth in the statute and regulations. An arrangement that fails to meet
one or more of the three requirements will be treated as a nonaccountable plan.

The arrangement described in this revenue ruling fails to meet both the
substantiation and the return of excess requirements and thus does not qualify as an
accountable plan.
Although reasonable expectations for expenses can be used to establish that a
plan meets the business connection requirement, satisfaction of the sUbstantiation and
return of excess requirements must be based on expenses actually incurred. The
arrangement in the facts of this ruling does not require employees to sUbstantiate the
actual expenses they are incurring; rather the employees report their time worked
requiring the use of tools, and Employer converts the hours into an amount treated as
expenses incurred based on statistical data. Reporting hours worked requiring the use
of tools is not the equivalent of substantiating actual expenses incurred. Employers
may not substitute a reasonable estimate of expenses to be incurred based on
statistical data and hours worked for the substantiation of actual expenses that is
required by § 1.62-2(e)(3) absent explicit guidance permitting the use of such deemed
sUbstantiation. See,~, Rev. Proc. 2002-41.
Employer does not cure the absence of substantiation or return of excess by
providing employees with the quarterly statement described in this revenue ruling.
Employer does not require employees to provide substantiation of expenses actually
incurred nor does Employer require employees to return any excess received within a
reasonable period of time after receiving the quarterly statement. Thus, Employer is not
providing a periodic statement within the meaning of § 1.62-2(g)(2)(ii).
Each of the accountable plan requirements must be independently satisfied.
Thus, even if Employer required the employees to substantiate the actual amount of the
expenses, and Employer treated any portion of the tool allowances they receive that
exceeded substantiated expenses as additional wages, the arrangement would still not
be an accountable plan. With the exception of circumstances where employee
expenses are covered through a mileage or per diem allowance pursuant to § 1.622(f)(2), an arrangement is not an accountable plan if it includes amounts paid in excess
of substantiated expenses in wages rather than requiring that they be returned. See §
1.62-2(f)(1); Rev. Proc. 2004-64, 2004-49 I.R.B. 898, (mileage allowances), or Rev.
Proc. 2005-10, 2005-3 I.R.B. 341, (per diem allowances), or any successors.
HOLDING
The arrangement described in this revenue ruling is not an accountable plan.
Therefore, the arrangement is a nonaccountable plan and all tool allowances paid under
the arrangement must be included in the employees' gross income, reported as wages
on the employees' Forms W-2, and are subject to withholding and payment of federal
employment taxes.

DRAFTING INFORMATION
The principal author of this revenue ruling is Joe Spires of the Office of Associate
Chief Counsel (Tax Exempt & Government Entities). For further information regarding
this revenue ruling, contact Jeanne Royal Singley at (202) 622-0047 (not a toll-free call).

Part III - Administrative, Procedural, and Miscellaneous

Information about additional criteria that will be applied in selecting proposals for the
Internal Revenue Service's Industry Issue Resolution (IIR) program.

Notice 2005-59
This notice provides information about additional criteria that will be applied in
considering proposals regarding accountable plans for the Internal Revenue Service's
Industry Issue Resolution (IIR) program. The objective of the IIR Program is to identify
frequently disputed or burdensome tax issues that are common to a Significant number
of business taxpayers that may be resolved through published or other administrative
guidance. See Rev. Proc. 2003-36, 2003-1.C.B. 859.
During the IIR Pilot Program, the Service initiated a project involving the tax
treatment of employer reimbursements of various equipment-related expenses to
employees in a segment of the pipeline construction industry. Whether or not such
expenses are included in the employee's income and wages is governed generally by
whether or not the employer makes payments to the employee under an accountable
plan in accordance with the requirements of § 62(c) of the Internal Revenue Code. 1
The industry representatives maintained that their industry practice made compliance
with the accountable plan requirements unworkable. As a result of the project, the
Service published two pieces of guidance: Rev. Rul. 2002-35, 202-1 C.B. 1067, making
clear that expense reimbursement in the industry is excluded from income and wages
only if made in accordance with the accountable plan requirements, and Rev. Proc.
2002-41, providing for deemed substantiation of expenses at a specified rate to make it
possible for employers in the industry to comply with the accountable plan
requirements.

1 Whether a payment of this type is a rental payment rather than the reimbursement of
an employee expense may involve the question whether the worker is serving as an
independent contractor or employee. Although these payments in almost every case
would not qualify as actual rental payments, it is a highly factual question. See,!Uk,
Eliseo v. Commissioner, T.C. Memo. 2000-176. Further, in this context, the Service is
restricted from addressing classification of workers by section 530(b) of the Revenue
Act of 1978.

Since the completion of the IIR pilot program, several submissions to the IIR
program have asserted that compliance with various aspects of the accountable plan
rules set forth under § 62(c) are unduly burdensome for businesses in certain other
industries and have asked for published guidance providing administrative relief similar
to that provided in Rev. Proc. 2002-41.
The Service provided guidance as part of the IIR pilot project for a segment of
the pipeline construction industry because the industry had successfully demonstrated
that employers could not comply with the existing accountable plan rules given certain
fundamental aspects of their industry practice that could not readily be changed, if
changed at all. For purposes of evaluating future IIR submissions raising similar
concerns about application of the accountable plan rules in specific industries, the
Service will make a comparable assessment as to whether the accountable plan rules
are unworkable given aspects of industry practice that cannot be changed at all or
cannot be changed without great difficulty. In addition to the requirements of Rev. Proc.
2003-36, factors to be considered in determining whether there is need for relief as to
this issue would include, but not be limited to the following:
(a) an established industry history showing that high turnover in the labor force or
short-term employment with multiple employers is typical;
(b) large expenses for maintenance, although infrequent, are predictable relative to the
compensation paid to the employees for their services;
(c) individual employers are unwilling to reimburse in full for sporadic expenses for
equipment maintenance because a significant portion of the reimbursement will accrue
to the benefit of a later employer/competitor;
(d) there is a uniformity of expenses across the workforce or the existence of a uniform
objective predictive proxy for measuring the expense, and
(e) existing methods of substantiating expenses, such as Rev. Proc. 2004-64, 2004-49
I.R.S. 898 (mileage allowances), do not accurately reflect the expenses incurred by the
employees on behalf of the employer.
The mere cost of collecting records, substantiating expenses and reconciling the
amount of expenses with the amount of reimbursements paid does not support a claim
of burden meriting relief from the requirements of the accountable plan rules.

DRAFTING INFORMATION
The principal author of this notice is Joe Spires of the Office of Associate Chief
Counsel (Tax Exempt & Government Entities). For further information regarding this
notice contact Jeanne Royal Singley at (202) 622-0047 (not a toll-free call).

Page 1 of 1

August 5, 2005
JS-2678

Statement of Treasury Secretary John W. Snow on July Employment Report
"Today's announcement that 207,000 jobs were created in July is another
significant indicator that America's economy is expanding, Now, nearly 4 million
new jobs have been created since May 2003 and the unemployment rate remains
at 5 percent. Combined with several recent reports indicating steady noninflationary increases in economic activity, this shows that the fundamentals of our
economy are strong and that we are continuing on a positive path of growth and
prosperity,
This coming Tuesday, the President will be meeting with his economic advisers to
discuss the robust growth we are seeing in the economy, and talk about the path
forward to enact policies that will ensure this growth continues.
President Bush is committed to keeping the economy healthy by strengthening
Social Security, making his tax cuts permanent, reforming the tax code, enacting
pension reform, reducing the cost of health care and the burden of frivolous
lawsuits."
- 30 -

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PRESS ROOM

August 5, 2005
JS-2679
U.S. Treasurer to Discuss Strengthening Social Security and Financial
Education in San Antonio
U.S. Treasurer Anna Escobedo Cabral will be in San Antonio next week to hold a
roundtable discussion with members of the San Antonio business community on
President Bush's efforts to strengthen and preserve Social Security.
Next week marks the 70th anniversary of the creation of Social Security, one of the
great successes of 20th century American government. Since President Roosevelt
founded the program in 1935, Social Security has reduced poverty among the
elderly and provided retirement security to millions of American families.
"Social Security's 70th anniversary reminds us not only of how far we have come,
but also that we have the opportunity and obligation to strengthen the system for
our children and grandchildren ," said Treasurer Cabral. "Refusing to offer solutions
is not an option . Social Security is too important not to act. The future of our
children and grandchildren depends on it."
While in San Antonio , the Treasurer will also participate in a Girl Scout forum on the
importance of saving . Cabral will teach a lesson from the Girl Scouts "CentsAbility"
financial education program which educates Scouts on managing money,
investment options, career choices, and financial lifestyles.
The following events are open to the media:
• WHAT
Roundtable Discussion on the 70th Anniversary of Social Security hosted by
The Greater San Antonio Chamber of Commerce and The San Antonio
Hispanic Chamber of Commerce Media availability will follow roundtable
• WHEN
Tuesday, August 9
9:30 - 10:30 a.m. COT
• WHERE
The Greater Chamber
The McDermott Briefing Center
602 E. Commerce Street
San Antonio, Texas
***

• WHAT
Girl Scouts "CentsAbility" Financial Education Program
• WHEN
Tuesday, August 9
1:00 p.m. EDT
• WHERE
The Avenida
Guadalupe Street, Suite 102
San Antonio , TX

•

Treasurer Cabral's bio: http://www . treasu ry.&ov/QIga ni~<?!Lon/Qlos/~aJ;l@I-=

http://treas .gO" IDress/r~!f.."~~p~ /i'l?h 79J1 tm

9/1/2005

Page 20[2

•

e.htrnl
History of the Treasurer's Office:
http://www.treas.gov/officcs/treasurer/office-history.shl.rnl
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Page 1 of 1

PRESS ROOM

August5,2005
JS-2680

Deputy Assistant Secretary lannicola Speaks to Educators at Teacher
Training Institute in Madison, Wisconsin
Treasury's Deputy Assistant Secretary for Financial Education Dan lannicola Jr.
today addressed high school teachers and education leaders at the 2005 National
Institute of Financial and Economic Literacy hosted at Edgewood College in
Madison, Wisconsin. lannicola commended the educators for their interest in
bringing financial education to their classrooms .
lannicola discussed the unique position of teachers to help students make the most
of their financial future by providing personal financial lessons in their classrooms .
He also applauded the 2005 National Institute of Financial and Economic Literacy
for continuing to provide teachers with the ability and skills they need to improve the
financial literacy of their students .
''Teachers understand better than most the power of knowledge to change lives,"
lannicola said . "The teachers I've met with today understand that financial
knowledge is an essential life skill for young people to master. By bringing financial
education into their classrooms , these educators are empowering their students to
make the most of their money and their lives."
The 2005 National Institute of Financial and Economic Literacy, formerly known as
the Wisconsin Institute of Financial and Economic Education, is a program offered
to educators that teach personal finance or seek the ability to teach personal
finance in their classrooms. Educators may earn three graduate credits by attending
the 2005 National Institute of Financial and Economic Literacy . The 2005 National
Institute of Financial and Economic Literacy is presented by the Wisconsin
Jump$tart Coalition and sponsored by the CBM Credit Education Foundation , a
nonprofit corporation focused on increasing financial literacy.
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: WWIJI[. Ireas-,90v/financialed uc<;l.tLQIJ.
-30-

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9/1/2005

u.s, Treasury

Bfflgt"aphy of Anna Escobedo Cabral, Treasurer

Page 1 of 1

Anna Escobedo Cabral
Treasurer

Anna Escobedo Cabral was nominated on July 22,2004, by President Bush to
serve as Treasurer of the United States. She was confirmed by the United States
Senate on November 20,2004.
Immediately prior to taking this office, Ms. Cabral served as Director of the
Smithsonian Institution's Center for Latino Initiatives, where she led a paninstitutional effort to improve Latino representation in exhibits, and public
programming among the Institution's 19 museums, five research centers, and the
National Zoo. From 1999 to 2003, Ms. Cabral served as President and CEO of the
Hispanic Association on Corporate Responsibility, a non-profit organization
headquartered in Washington, DC, which partners with Fortune 500 companies to
increase Hispanic representation in employment, procurement, philanthropy and
governance. Under her leadership, the organization published a best practices
series, and instituted a partnership with Harvard Business School to provide
executive training programs in Corporate Governance Best Practices to community
leaders.
From 1993 to 1999, Ms. Cabral served as Deputy Staff Director for the United
States Senate Judiciary Committee under Chairman Orrin G. Hatch. The
Committee's jurisdiction ranges from oversight of the Department of Justice and our
nation's criminal and drug enforcement laws to approving federal judicial
nominations, and it includes review of immigration. antitrust, patents and trademark,
and technology-related legislation. In addition, she simultaneously served as
Executive Staff Director of the U.S. Senate Republican Conference Task Force on
Hispanic Affairs, a position she held since 1991. Ms. Cabral managed this task
force of 25 senators dedicated to ensuring that the concerns and needs of the
Hispanic community are addressed by Congress through legislation.
A native of California, Ms. Cabral majored in Political Science from the University of
California, Davis, and earned a Master's degree in Public Administration with an
emphasis in international trade and finance from the John F. Kennedy School of
Government at Harvard University.
Ms. Cabral and her husband Victor have four children, Raquel, Viana, Catalina, and
Victor Christopher.

http://www.tredrury.gov/(:)rg8njz?.-~rn1/bios/cabral-p.html

9/1/2005

'A[SS ROOM

August 8, 2005
2005-8-8-17 -7 -41 -657

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 $75,430 million as of the end of that week , compared to $76.588 million as of the end of the prior week.

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

TOTAL
1. Foreign Currency Reserves

a. Securities

29, 2005

August 5, 2005

76,588

75,430

Euro

Yen

TOTAL

Euro

Yen

TOTAL

11 .291

13,122

24,413

11,460

12,695

24 ,155

Of which. issuer headquartered in the US.

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

10,996

3. 708

14,704

11 ,180

4,159

15,339

b.ii. Banks headquartered in the US

b.ii. Of which . banks located abroad

b.iii. Banks headquartered outside the US.

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

15,224

13,575

11 ,206

11 ,321

11 ,041

2. IMF Reserve Position

3. Special Drawing Rights (SDRs)
4. Gold Stock

5. Other Reserve Assets

II. Predetermined Short-Term Drains on Foreign Currency Assets
Jul~

Euro
1. Foreign currency loans and securities

29, 2005

Yen

August 5, 2005
TOTAL

Euro

Yen

TOTAL

2. Aggregate short and long positions in forwards and futures in fore ign currencies vis-a -vis the U.S dollar:
2.a. Short positions

2.b. Long positions

o
o

3. Other

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

o
o
o

July 29, 2005
Euro

1. Contingent liabilities in foreign currency

Yen

August 5, 2005

TOTAL

Euro

Yen

TOTAL

2. Foreign currency securities with embedded oplions

3. Undrawn, unconditional credit lines

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 finanCla/lllstitutlOns
Headquartered in the US.
3.c. With banks and other flllancial institutIOns
Headqualtered outSide the US

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

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

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

Notes:

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

Page 1 of 1

PRESS ROOM

August 8,2005
js-2681

Deputy Assistant Secretary lannicola Speaks at the Federal Reserve Bank of
Chicago on Private Sector Involvement in Financial Education
Treasury's Deputy Assistant Secretary for Financial Education Dan lannicola Jr.
today spoke to representatives from non-profits, academic institutions and lenders
on the role of the private sector in improving the nation's financial literacy. lannicola
spoke about recent developments in financial education and advised those in
attendance on best practices in the field. Meeting participants described the efforts
of their organizations to spread financial literacy in the Chicago area.
lannicola thanked the Federal Reserve Bank for hosting the event and commended
those attending for the good work of their organizations in making Americans more
financially literate.
"Chicago's approach presents a good model for private sector involvement in
financial education," said lannicola. "Here, private sector groups including nonprofits, academic institutions and financial service providers work to improve
financial education in their own ways, but yet they all come together under the
coordination of the Federal Reserve Bank of Chicago to learn from each other and
coordinate their efforts. This arrangement allows each private sector group to
concentrate on its area, constituency and topic of choice while remaining connected
to the larger effort on financial literacy."
Each year, the Federal Reserve Bank of Chicago holds "Money Smart Week,"
which is led by the Money Smart Advisory Council, to help consumers better
manage their finances and provide pubic awareness of financial education
programs available on topics such as budgeting and using credit wisely.
In addition to lannicola's address at the Federal Reserve Bank, he also taught
children at the James Jordan Boys and Girls Club in Chicago a lesson from the
"Money Matters: Make it Count program," which is a financial education program
created by the Charles Schwab Foundation and the Boys & Girls Club of America .
Through the Money Matters program, more than 4 million young people have been
afforded access to additional financial education through a national network of
3,700 neighborhood-based facilities.
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: wV'{w.treas.qov/ftnCl nci<;lleJiJlcation .
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Page 1 of2

August 9, 2005
JS-2682

MEDIA ADVISORY: Snow to Visit Pittsburgh to discuss U,S. Economy and
Social Security Reform
U.S. Treasury Secretary John W. Snow will visit Pittsburgh, PA, to discuss the
economy and President Bush's efforts to strengthen and preserve the U.S. Social
Security system in conjunction with the commemoration of the 70 th anniversary of
the creation of Social Security this Sunday, August 14.
Secretary Snow will participate in a tour of the Sony Technology Center as well as a
roundtable lunch on Thursday.
The following events are open to credentialed media with photo identification:

Thursday, August 11, 2005
Tour of Sony Technology Center
American Video Glass Company
777 Technology Drive
Mount Pleasant, PA
10:00 AM EDT
** Media must arrive by 9:15 AM EDT

Roundtable Lunch
Sony Technology Center
1001 Technology Drive
Mount Pleasant, PA
11:30 AM EDT
** Media must arrive by 10:45 AM EDT

**Press Availability immediately following roundtable lunch

911/2005

Page 2 of2

** Media must RSVP for both events by 4:00 PM EDT, August 10, to Jenny
Szmed at (724)696-7942 or (724) 984-2223

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9/1/2005

Page 1 of 4

August 11, 2005
JS-2683
The Honorable John W. Snow
Prepared Remarks
Mount Pleasant, Pennsylvania
Thank you; it's great to be here in Mount Pleasant. I'm really pleased to have the
chance to visit the Sony Technology Center and see the terrific work you're doing
here.
It's always a pleasure to be in Pennsylvania, and I am glad to see that your state
has added so many jobs in the past year. Pennsylvania payrolls have increased by
almost 62,000 since last spring and your unemployment rate is down half a percent
to just 5 percent, the same as the national rate. That's great news for Pennsylvania
workers.
This facility represents so many jobs and so many skilled employees. And this goes
far beyond the 2,300 jobs that are actually here in the Center. The Sony
Technology Center represents the jobs of all its suppliers, all their employees, and I
think that's fantastic. Using local suppliers has been good for the region, and it's
been good for your business.
You've been recognized for your positive impact on the Pittsburgh area because of
the employment you've generated, and you've also been singled out by
environmental agencies - state and federal - for your initiatives that protect the
environment. From every perspective, you have a record to be proud of, and one
that speaks to the outstanding quality of your employees The thousands of workers
that contnbute to the success of this Center are highly trained; they are the best at
what they do. The President believes that American workers, especially when given
the right education and training opportunities, are the best in the world and can
compete with anyone. The success of businesses like yours is proof-positive that
he's right.
Companies like those represented here today, the suppliers for this larger
company, are a tangible, visible example of the health of the American economy. I
appreciate the work you do to grow this great economy and create jobs, and I know
how much the President appreciates it, too.
Our economy was the subject of a meeting that President Bush held, two days ago,
at his ranch in Crawford, Texas. I went down to Crawford with other key members
of the President's economic team to have an in-depth discussion about what is
going right with our economy, and what areas still need work. We talked a lot about
the cost of energy and health care, and how those costs can make the difference,
for a family, between feeling financially secure or financially stressed.
Reforming Social Security is also a critically important part of a healthy American
economy for future generations, it's something we talked about in Crawford. and I
want to talk more about that with all of you in a minute. This weekend is Social
Security's 70 th anniversary, and I can't think of a better way to mark this milestone
th
than by saving the program - one of the great successes of 20 century American
government - for our children and grandchildren.
Overall, I'm very pleased to tell you, the American economy is really thriving. We've
seen amazing economic times in the last few years. Well-timed tax cuts, combined
with sound monetary policy set by the Federal Reserve Board, got our economy

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Page 2 of 4

moving when we needed it most. They gave individuals more control over their own
money, and business like yours the room you needed to grow, and you took over
from there.
The President was just saying , in Texas this week, that his economic agenda is
based on the fundamental trust that the American people make good decisions for
themselves, for their families, and for their businesses. That's why his policies allow
people to keep more of what they earn and have more control over their daily lives
from health care to education to retirement. As the President puts it, "It makes
sense to trust people with their own money."
Policies that encourage open markets and trade have helped your businesses, and
our economy, too . The President just signed CAFTA legislation , which was
important because it opened up new markets, with 44 million new consumers for
American products, which is terrific news for our farmers and small-business
owners.
Good policies have led to visible results. It's worthwhile to take a look at the
numbers. Today, GOP growth is very strong - a solid 3.4 percent in the second
quarter of this year - and job creation is robust and steady, with 207,000 new jobs
created last month and nearly four million jobs created since May of 2003.
The unemployment rate is five percent, which is below the average of the 1970s,
1980s and 1990s. Americans have more money in their pockets, and they're buying
the things their families need. The most recent data - from June - show consumer
spending up by a strong 0.8 percent, the biggest increase since October 2004, and
retail sales grew at a higher-than-expected 1.7 percent. Sales of both new and
existing homes are at all-time highs.
The most important thing , economically, for anyone is to have a job, and we're
seeing that happen. An improving economy also leads to higher real wages and
income. More jobs leads to more people being covered by health insurance and
retirement plans as well.
The rising cost of health care is a burden for individuals and families, and it has a
huge impact on our economy. The President and I feel strongly that medical liability
reform will help reduce those costs. Frivolous, baseless lawsuits are driving up
costs for doctors and insurance companies ... and it's consumers who pay higher
bills as a result.
Association Health Plans would be another big step toward tempering the cost of
health care . They would allow small firms to pool risk and pay lower premiums,
increasing their ability to cover their employees, which can be very tough for small
businesses to afford.
The price of energy has also been frustrating to consumers and business owners; I
know that the cost of gas impacts everything you do, acting almost like a tax on
your business or your income. The energy bill that the President signed this week
should help to reduce our dependence on foreign oil, as well as encourage energy
innovation and conservation, and that will be good for our economy over the long
term.
The President has made clear his commitment to strengthen our economy further,
and the energy bill was part of that. This commitment to continued economic
strength also includes making his tax cuts permanent and reducing the budget
deficit - as well as reforming Social Security and the tax system and reducing the
burden of lawsuits and heavy-handed regulations on business. It's also important
that we make health care more affordable for all Americans.
This agenda is ongoing, and we see results every day. For example, tight controls
on discretionary spending and increased Treasury receipts - which are a result of
economic expansion - have kept the government on track to cut the budget deficit
in half by 2009. In fact, a mid-year budget report recently showed that we are ahead

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9/1/2005

Page 3 of 4

of schedule on that goal.
All of the strong economic indicators, and our ability to pay down debt, point to the
fact that reducing the tax burden proved to be a successful economic stimulus. And
when the economy is growing and spending is controlled, we can also reduce our
deficit.
But the job of keeping our economy unencumbered is a never-ending one, indeed.
From tax cuts to regulations, we need to work on it every day, and we need to work
on keeping it strong for the future, for the long-term.
Reforming our Social Security and tax systems will address some critical long-term
economic issues, and I believe that the strength of our economy puts us in a terrific
position to achieve these long-term goals that are so important.
I'm excited about the President's leadership on simplifying our tax code. Because
life - especially when you run a business like all of you do - is complicated enough
without a tax code that is more than a million words long.
The President's initiative to study and re-vamp the tax code offers great hope for
increasing economic growth and decreasing taxpayer headaches. The President's
Advisory Panel on Tax Reform is working right now to come up with some options
that will encourage growth and save Americans much of the time and headache
that they currently spend complying with the tax code.
A few raw facts illustrate well the problems of our current code: American taxpayers
and businesses spend an estimated $130 billion dollars in lost time and money
trying to comply with our increasingly unwieldy tax code. That's $130 billion in
resources that could be used to create jobs, invest in new business, or spur
consumer spending. The $130 billion burden our tax code places on the American
people is a drag on economic growth and an unnecessary weight for Americans to
bear.
The President has asked that the fine people on the advisory panel be guided by
the goals of increased fairness, simplicity and ease of understanding, and economic
growth and job creation. He has also asserted that any reform proposal should
carry on the good traditions of recognizing the importance of homeownership and
charity in our society.
I look forward to receiving a report from the Tax Reform Panel in September, and
sharing their recommendations with the President after that.
I'm also looking forward to the movement of legislation, on Capitol Hill, to
strengthen and save our Social Security system. For those Americans 55 and older,
the system won't change - it doesn't need to. It is solvent for current and nearretirees. It is the younger generations that need our action when it comes to Social
Security.
I hope to see reform of the system that stops the practice of the government writing
itself IOUs while spending your money on unrelated programs. The total amount of
Social Security surpluses that have been spent on other programs is at $1.7 trillion
today. I think it's time to put a stop to that, don't you?
That's why the President wants to let younger workers put their Social Security
dollars in personal accounts - the ultimate "lock box" for their hard-earned
retirement dollars.
We also need to make the program solvent. Progressive benefit growth, which
would bring the program about 70 percent of the way to solvency, is another
important element of the President's proposed changes. It would mean that the
lowest income seniors would have the fastest-growing benefits while benefits for
those who are more well-off grow more slowly, with protection from inflation.

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Page 4 of 4

Right now, we have an historic opportunity and an obligation to do these things , to
save and strengthen the nation's retirement security system . The President's
leadership, combined with our economic health, gives us the opportunity. The
expense of waiting to act reminds us why this opportunity must be seized, of why
we are obligated to do so. 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.
This is fascinating time in government history. Enacting real retirement security
reforms this year - which I believe we will - holds great promise for generations of
American workers and retirees . And simplifying our tax code could bring an
enormous relief to every American who pays taxes . If done right , it should stimulate
and strengthen our economy as well.
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.

-30-

httD :IItre;:I <;,

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9/1/2005

JS-2684> .. TIei.WTy Intermrtiuna(Capital Data for June

Page 1 of2

PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
We recommend printing this release using the PDF file below.
To view or print the PDF content on this page. download the free Acio/)()(') Acrobat'':'' RCiJder@

August 15, 2005
JS-2884
Treasury International Capital Data for June
Treasury International Capital (TIC) data for June are released today and posted on the US Treasury web site (wwvv
which will report on data for July, is scheduled for September 16, 2005.
Net foreign purchases of long-term securities were $71.2 billion.
•
•

Net foreign purchases of long-term domestic securities were $79.1 billion. $17.2 billion of which were net purc
$61.9 billion of which were net purchases by private foreign investors .
U.S. residents purchased a net $7.9 billion in foreign securities.

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

Foreigners' Transactions in Long-Term Securities with U.S. Residents
(Billions of dollars, not seasonally adjusted)
2004

2003
1 Gross Purchases of Domestic Securities
2 Gross Sales of Domestic Securities
3 Domestic Securities Purchased, net (line 1 less line 2) 1

Private, net 12
Treasury Bonds & Notes, net

12 Months Through
June-04 June-05

13.535.415.288.2
12,813.6 14,371.6
721.9
916.7

14,611916,189.7
13,780.0 15,305.8

1,5'
1,4(

831.9

883.8

59.~

587.0

681.1

608.2

150.9

201.7

726.8
153.7

73.~

6
7

Gov't Agency Bonds, net

161.7
129.9

139.6
249.3

6.5

Corporate Bonds, net

205.6
298.9

189.8

260.4

334.7

22.~

Equities, net

35.0

25.6

17.5

48.6

1.6

134.9

235.6

223.7

-14.

103.8
25.9
5.4

201.1
20.8

194.1

157.0
111.9
29.6
14.6

1.0

11.5

21.6
7.7

-0.3

2.2

0.2

1.0

2,764.9

3,120.6

3,228.5

328

2.834.4

3,233.2

3.085.8
3,172.8

3,375.1

-69.4

-112.6

-87.0

-1466

346
-18.

9
10

Official, net
Treasury Bonds & Notes, net

11
12

Gov'! Agency Bonds, net

Equities, net

Corporate Bonds, net

14 Gross Purchases of Foreign Securities
15 Gross Sales of Foreign Securities
16 Foreign Securities Purchased, net (line 141es5 line 15)

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-15.
-0.4
0.0

9/112005

Page 2 of2

JS-2684 . Treasury Int¢lIIaiional Capital Data for ./une

Foreign Bonds Purchased, net

Foreign Equities Purchased , net

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

11
12
/3

19.2

-29 .0

8.3

-88.6

-83 .6

-95.3

-50.4
-96.2

-3.6
-14.

652.4

804 .1

744 .9

737.2

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

Source: U.S. Department of the Treasury

REPORTS

http ://treas .£:ov/oress/reieases/ js2884.htm

9/1/2005

DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
EMBARGOED UNTIL 9:00 a.m. EDT
August 15,2005

Contact:

Brookly McLaughlin
202-622-1996

Treasury International Capital Data for June
Treasury International Capital (TIC) data for June are released today and posted on the u.s.
Treasury web site (www.treas.gov/tic).Thenextreleasedate.whichwillreportondataforJuly.is
scheduled for September 16, 2005.
Net foreign purchases of long-term securities were $71.2 billion.
•

Net foreign purchases of long-term domestic securities were $79.1 billion, $17.2 billion of
which were net purchases by foreign official institutions and $61.9 billion of which were net
purchases by private foreign investors.

•

U.S. residents purchased a net $7.9 billion in foreign securities.

Foreigners' Transactions in Long-Term Securities with U.S. Residents
(Billions of dollars, not seasonally adjusted)
2004

12 Months Through
June·04 June·05

r..·(ar·05

Apr·05

May·05

.lIm·05

13,535.4 15,2882
12,813.6 14.3716
9\6.7
721.9

14,6119 16,1897
13,7800 15,305 8
831.9
883.8

1.510 2
1,4508
59.4

1,396 I
1,341 6
54,5

1,4880
1,4172
70.8

1,507.6
1,4285
79.1

2003
1 Gross Purchases of Domestic Securities

2 Gross Sales of Domestlc Securltles
3

Domestic Securities Purchased, net (hl1e I less Ime 2) /I

7
8

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

587.0
161 7
1299
2604
35.0

681.1
1509
2056
1999
25.6

608,2
201 7
1396
2493
175

726,8
153 7
189.8
3347
486

73.8
428
6.5
229
16

43.0
10.8
84
18.3
56

57.6
20.8
18.1
186
02

61.9
·3.3
157
499
·04

9
10
II
12
13

Official, net
Treasury Bonds & NotO', net
Gov't Agency Bonds, net
Corporate Bonds, net
Equ!tles. net

134.9
1038
25.9
54
·03

235.6
201 I
208
11.5
22

223.7
194 I
216
77
02

157,0
III 9
296
146
1.0

·(4.4
·150
10
·04
00

(1.5
139
·1 7
·0 I
·07

13.2
68
4.6
1.8
00

17.2
112
3 I
23
05

2,764.9
2,8344
-69.4

3,120.6
3,233 2
·112.6

3.085 8
3,172 8
·87.0

3,228.5
3.375 I
·1~6.6

328.7
3468
·18.1

2867
2930
·6.3

2K78
3028
·14.9

306.9
3147
·7.9

192
-886

·290
-836

83
·953

·504
·96.2

·36
·145

·4.6
·17

·102
·4.7

18
·96

652.4

804.1

744.9

737.2

41.3

48.2

55.8

71.2

4
5
6

14
15
16
17
18

Gross Purchases of Fore!l,'" Securities
Gross Sales of Forelgn Secuntles
Foreign Securities Purchased, net (lrne 14 less Irne 15) 13
Fore!gn Bonds Purchased, net
Foreign Eqllltles Purchased, net

Net Lone· Term Flows (line 3 plus Ilne J 6)

Net foreign purchases of U.S. securities (I)
Includes Intemauonal and ReglOnal Organrzatlons
Net U S acquisitions of foreign secuntles [.)

12
13

PRESS rWO M

August 16, 2005
2005-8-16-13-47-53-9027

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 $76,230 million as of the end of that week , compared to $75,430 million as of the end of the prior week .

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

TOTAL
1. Foreign Currency Reserves

a. Securities

August 5, 2005

August 12, 2005

75,430

76,230

Euro

Yen

TOTAL

Euro

Yen

TOTAL

11,460

12,695

24 ,155

11 ,572

12,988

24,560
0

Of which, issuer headquartered in the U. S.

b. Total deposits with :

11 ,180

b.i. Other central banks and BIS

4,159

15,339

11 ,276

15,531

4,255

b.ii. Banks headquartered in th e U. S.

b.ii. Of which , banks located abroad

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

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

13,575

13,685

11 ,32 1

11,413

11 ,041

2. IMF Reserve Position

3. Special Drawing Rights (SDRs)
4. Gold Stock

5. Other Reserve Assets

II. Predetermined Short-Term Drains on Foreign Currency Assets
August 12, 2005

August 5, 2005
Euro
1. Foreign currency loans and securities

Yen

TOTAL

Euro

Yen

TOTAL

2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
2.a. Short positions
2.b. Long positions

3. Other

o
o

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

o
o
o

August 5, 2005
Euro
1 Contingent liabilities In foreign currency

Yen

August 12, 2005

TOTAL

Euro

Yen

TOTAL

o
o

1.a. Collateral guarantees on debt due within 1 year
1.b. Other contillgent liabilities
2. Foreign currency seCUrities

Wltll

embedded options

3. Undrawn, unconditional credit lines
3.a With other central banks
3.b. With banks and other {manclal institutions
Headquartered ill the US
3.c. With banks and other {manCial IIlslitutions
Headquar1ered outside the US

4. Aggregate short and long posillons 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 holdlllgs 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 pnor week are final.
2/ The items, "2. IMF Reserve Position" and "3. Special DrawlIlg 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 reportlllg date. The entries for the latest week reflect any
necessary adjustments, Including revaluation, by the US Treasury to IMF data for the prior month end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce

[S-2684 - Treasury International Capital Data for June

Page 1 of2

PRESS fWOM

FROM THE OFFICE OF PUBLIC AFFAIRS
We recommend printing this release using the PDF file below.
To view or print the PDF content on this page, download the free

/1(/, I/U' ....

ACr( >/ldl"'" R' .' dl /{ :I f,.,.

August 15,2005
JS-2884
Treasury International Capital Data for June
Treasury International Capital (TIC) data for June are released today and posted on the U.S. Treasury web site (www.treas .gov/tic) . Th.
which will report on data for July, is scheduled for September 16, 2005.
Net foreign purchases of long-term securities were $71 .2 billion .
• Net foreign purchases of long-term domestic securities were $79 .1 billion, $17.2 billion of which were net purchases by foreign (
$61 .9 billion of which were net purchases by private foreign investors.
• U.S. residents purchased a net $7.9 billion in foreign securities.
Foreigners ' Transactions in Long-Term Securities with U.S. Residents
(Billions of dollars, not seasonally adjusted)

Foreigners' Transactions in Long-Term Securities with U.S. Residents
(Billions of dollars, not seasonally adjusted)
2003
1 Gross Purchases of Domestic Securities
2 Gross Sales of Domestic Securities
3 Domestic Securities Purchased , net (line 1 less line 2) 1
4
5
6
7
8
9
10
11
12
13

2004

13,535.415 ,288.2
12,813.6 14,37 1.6
721 .9
916.7

12 Months Through
June-04 Ju ne-05
14,611.916,189.7
13,780.0 15,305 .8
831 .9
883 .8

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

587.0
161 .7
129.9
260.4
35.0

681.1
150.9
205 .6
298 .9
25 .6

608.2
201 .7
139.6
249.3
17.5

726.8
153.7
189.8
334 .7
48.6

Official, net
Treasury Bonds & Notes, net

134.9
103.8
25.9
5.4
-0.3

235 .6
201.1
20.8
11 .5
2.2

223 .7
194.1
21.6
7.7
0.2

157.0
111.9

2,764 .9
2,834.4
-69.4

3,120 .6
3,233.2
-112.6

3,085 .8
3,172 .8
-87 .0

Gov't Agency Bonds . net
Corporate Bonds, net
Equities , net

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

Mar-05

Apr-05

1,510.2
1,450.8
59.4

1,396 .1
1,341 .6
54 ,5

73 .8
42.8
6.5
22 .9
1.6

43 .0
10.8
8.4
18.3
5.6

1
7
5
2
1
0

-14.4

11 .5

29 .6
14.6
1.0

-15.0
1.0
-0.4
0.0

13.9
-1.7
-0 .1
-0.7

6
4
1
0

3,228 .5
3,375 .1
-146 .6

328.7
346.8
-18 .1

286.7
293 .0
-6.3

2
3

9161200')

S-2684 - Treasury illternational Capital Data for June

Foreign Bonds Purchased, net

Foreign Equities Purchased, net

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

Net foreign purchases of U.S. securities (+)

/2
/3

Net U.S. acquisitions of foreign securities (-)

Page 2 of2

19.2

-29.0

8.3

-50.4

-3.6

-4.6

-88.6

-83.6

-95.3

-96.2

-14.5

-1.7

652.4

804.1

744.9

737.2

41.3

48.2

Includes International and Regional Organizations

Source: U.S. Department of the Treasury

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

>:i/www.treas ..c.ov/nress/releases/is2ggLJ htm

9/6j)()()'::;

Page 1 of 1

,PRESS ROOM

August 17, 2005
JS-2684
Treasury Statement on Civil Penalty Imposed Against the
New York Branch of Arab Bank, pic
"The U,S. Department of the Treasury's Financial Crimes Enforcement Network and
the Office of the Comptroller of the Currency today imposed a $24 million civil
penalty on the New York branch of Arab Bank, pic, for systemic Bank Secrecy Act
failures .
"The Bank Secrecy Act requires financial institutions doing business in the Unites
States to implement robust anti-money laundering systems and controls tailored to
their operations and the risks associated with them, Such regimes are critical to
protecting our financial system from the abuses of money laundering and terrorist
financing .
"Financial institutions are critical partners in our efforts to ensure the integrity of the
global financial system. Today's action reflects the Department of the Treasury's
resolve to ensure that this partnership is effective."

http://treas.gr.Ylprc~~/rclea3eD/js2~~4.htm

9/1/2005

Page 1 of 1

August 17, 2005
JS-2685

Deputy Assistant Secretary Ianni cola Recognizes Program
Teaching Credit Management to College Students
Treasury's Deputy Assistant Secretary for Financial Education Dan lannicola, Jr.
today congratulated the Society for Financial Education and Professional
Development at a grant announcement ceremony at the National Press Club in
Washington, DC. The Society received a $750,000 private grant to provide credit
management and personal money management training to more than 20,000
college students over the next three years.
lannicola applauded the Society for reaching out to college students at a very
crucial stage of their lives, when financial education can make a real difference.
lannicola also encouraged financial institutions to support financial education by
working with nonprofit organizations committed to spreading financial literacy.
"The relationship between credit and college students is a challenging one. For
many students credit, in the form of student loans, makes a higher education
possible. For other students the mismanagement of credit, sometimes through
credit cards, can cause students to drop out of college," lannicola said. "The
answer is financial education. Through programs like the one we honor here today,
finanCially educated students can derive the benefits of credit while avoiding its
pitfalls, and go on to accomplish their goals."
A nonprofit organization established in 1998, the Society's primary mission is to
enhance the level of financial and economic literacy of individuals in the United
States and promote professional development at the initial stage of career
development and mid-level management. The Society offers credit management
and personal money management seminars to college students to expose them to
the fundamentals, strategies and the intricacies of personal financial management
that they may not get elsewhere. Since its inception, the Society has presented
personal financial management seminars on over 51 college campuses, many of
which are Historically Black Colleges and Universities. During the 2003-2004 school
year, it reached over 8,000 students nationwide. HSBC provided the grant to
support the program.
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.lroas.govlflnancialoducatlon.
-30-

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9/112005

Page 1 of2

PRESS ROOM

/0 vIew or pnnt the PUr content on thIS page, aown/oaa me tree B.®pe~~) 8S;r.olJatQj) t<eaa~f\~,l.

August 18, 2005
JS-2686
Treasury Targets Front Companies and Individuals Tied to Mexican Drug
Cartels
The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC)
today identified 30 companies and individuals associated with two Mexican drug
trafficking organizations pursuant to the Foreign Narcotics Kingpin Designation Act
("Kingpin Act").
"Today's action deals another blow to the notorious Mexican drug cartels by
targeting their financial webs," said Robert Werner, Director of OFAC. "In addition,
we're utilizing critical authorities that allow us to freeze assets while we further
investigate their potential ties to Mexican drug kingpins."
This action identifies nine companies and eight individuals associated with the
Arriola Marquez Organization and three companies and four individuals associated
with the Arellano Felix Organization.
OFAC has also blocked pending investigation an additional six Mexican individuals
associated with Mexican drug kingpins Oscar Arturo Arriola Marquez and Miguel
Angel Arriola Marquez, leaders of the Arriola Marquez Organization.
These actions prohibit U.S. persons from engaging in financial and commercial
transactions with the designees and freeze any assets the designees may have
located in the United States or in the possession or control of U.S. persons.
Signed into law on December 3, 1999 and administered by OFAC, the Kingpin Act
applies economic sanctions against narcotics traffickers on a worldwide basis.

Oscar Arturo Arriola Marquez, Miguel Angel Arriola Marquez and the Arriola
Marquez Organization were all identified by President Bush as drug kingpins on
June 1,2005. The Arriola Marquez Organization, based in Saucillo, Chihuahua,
Mexico is linked to Mexican drug kingpin Joaquin Guzman Loera ("Chapo
Guzman") and the Carrillo Fuentes Organization, previously named as drug
kingpins by the President. The Arriola Marquez Organization controls a significant
flow of marijuana and cocaine from Mexico into the United States. Oscar and
Miguel Arriola Marquez are indicted in the District of Colorado for drug trafficking
and money laundering violations.
Today's action targets eight individuals and nine companies that are part of the
money laundering network owned or controlled by the Arriola Marquez
Organization . Two additional Arriola Marquez brothers, Luis Raul and Edgar
Fernando Arriola Marquez, are named, as well as other key front individuals. In
Chihuahua, Mexico, the front companies consist of two large cattle businesses Corrales San Ignacio SPR. de R.L. de C. V. and Del Nolte Carnes Finas San
Ignacio S.A. de C. V., two real estate firms - Inmobiliaria EI E~corpion del Nolte S.A.
de C. V. and Inmobiliaria EI Preson S.A. de C. V., an automotive sales company Auto Express Dorados S.A. de C. V., a gasoline distributor - Gasolineras San
Fernando S.A. de C. V., and a food processing/distribution conglomerate Chihuahua Foods S.A. de C. V. and Indio Viloria S. de PR. de R.L. de C. V. A

http://treas.p'oy/prcss/rclcZl:5c3/j :1:2 t Sf} . h tm

9/1/2005

Page 2 of2

Mexican currency exchange house, Camblos Palmilla SA de C V, which serves
as a major financial front for the Arriola Marquez Organization, is also designated.
All of these front companies launder U.S. currency illicitly earned through narcotics
sales in the United States and bulk smuggled back to Mexico.
OFAC has blocked pending investigation six additional Mexican individuals
associated with Oscar Arturo Arriola Marquez and Miguel Angel Arriola Marquez. A
U.S. company, Corrales San Ignacio L.L.C., in Presidio, Texas, has been blocked.

Arellano Felix Organization
The Arellano Felix Organization was identified as a drug kingpin by President Bush
on June 1,2004. Based in Tijuana, Baja California, Mexico, the Arellano Felix
Organization orchestrates the transportation, importation and distribution of multiton quantities of cocaine, marijuana and large quantities of heroin and
methamphetamine into the United States from Mexico.
The three companies and four individuals targeted today are associated with an
Arellano Felix Organization financial network centered on the Mexican drugstore
chain Farmacia Vida Suprema S.A. de C. V., which was deSignated by OFAC on
January 31,2002. Farmacia Vida SA de C. V. formed the core of a group of front
companies and individuals tied to Mexican drug kingpins Benjamin and Ramon
Arellano Felix, named as drug kingpins by the President on June 1, 2000. The front
companies include Comercia/izadora Amia SA de C V., Servicios Administrativos
y de Organizacion S.C., and Kontroles E/ectronicos de Baja California SA de C. V.,
all located in Tijuana, Baja California, Mexico.
"OFAC continues to work closely with the Drug Enforcement Administration in its
narcotics sanctions investigations to expose front companies and corrupt
individuals controlled by the drug cartels in Mexico," Werner continued.
The action taken today adds 30 new names bringing the total number of Tier I and
Tier 1\ Kingpins under the Kingpin Act to 197: 57 drug kingpins worldwide, 46
companies in Mexico, Peru, and the Caribbean, and 94 other individuals in Mexico,
Colombia, Peru, Jamaica and St. Kitts.
This action is part of the ongoing interagency effort by the Departments of Treasury,
Justice, State, Defense and Homeland Security, the Central Intelligence Agency,
the Federal Bureau of Investigation and the Drug Enforcement Administration to
carry out the Kingpin Act.

-30-

REPORTS
•

Chart Iliustr8tingJty~ ArrioiEiMarquez Orgallization

• 0j)date-(j-Cllart IlIust[i3tiD9 the_Ar~lIanoh::lixQrganizat[Qn

http://treas.goY/presslrelettse:Jfjfl2g~6.htm

9/1/2005

Department of the Treasury
Office of Foreign Assets Control

Foreign Narcotics Kingpin Designation Act
Tier II Designations
August 2005

All persons shown on this chart are Mexican.

er I Kingpins (June 1, 2005)

1·1
ARRIOLA MARQUEZ ORGANIZATION

[( - - - t - - -

----+--~
Arrested
(2004)

DEA fugitive

Oscar Arturo ARRIOLA MARQUEZ

Miguel Angel ARRIOLA MARQUEZ

DOB 6 Nov 1968
C.U.R.P. AIM0681106HCHRRS01

DOB 15 Dec 1967
C.U .R.P. AIMM671215HCHRRG06

er II Associates

...

,.....

Luis Raul ARRIOLA MARQUEZ

Beatriz Raquel LOPEZ POBLANO

Edgar Fernando ARRIOLA MARQUEZ

Abigail TAPIA ORTEGA

DOB 09 May 1971
C.U.R.P. AIML710509HCHRRS09

DOB 11 Apr 1968

DOB 23 Sep 1974

....

Carlos Mario MARTINEZ CASAS

....

DOB 23 Nov 1973
R.F.C. AIME-731123-115

Arturo HERNANDEZ MORENO

Mario Alberto PEREZ CASTANON

Marisela CARRERA YLLADES

DOB 23 Apr 1969
C.U,R.P. MACC690423HCHRSR08

DOB 27 Nov 1962
R.F.C. HEMA-621127

DOB 25 Jun 1966
C.U .R.P. PECM660625HCHRSR07

DOB 02 Feb 1968
C.U.R.P, CAYM680202MCHRLR06

.~
..

CORRALES SAN IGNACIO
S.P.R. DE R.L. DE C.V.

INMOBILIARIA EL PRESON
S.A. DE C.V.

Saucillo, Chihuahua, Mexico
R.F.C. CSI-000516-2U3

Chihuahua, Chihuahua, Mexico

W'f

Wife

(,
GASOLINERAS SAN FERNANDO
S.A. DE C.V.

~
CAM BIOS PALMILLA S.A. DE C.V.

Saucillo, Chihuahua, Mexico

DEL NORTES CARNES FINAS
SAN IGNACIO S.A. DE C.V.

INMOBILIARIA EL ESCORPION
DEL NORTE S.A. DE C.V.

AUTO EXPRESS DORADOS
S.A. DEC.V.

Chihuahua, Chihuahua, Mexico

Saucillo, Chihuahua, Mexico

Chihuahua, Chihuahua, Mexico

....

r II Companies

Hidalgo del Parral, Chihuahua, Mexico

...

...n
(,

INDIO VITORIO S. DE P.R.
DE R.L. DE C.V.
Saucillo, Chihuahua, Mexico

R.F.C. M-030311-1L6

CHIHUAHUA FOODS S.A. DE C.V.
Cuauhtemoc, Chihuahua, Mexico

Department of the Treasury
Office of Foreign Assets Control

Foreign Narcotics Kingpin Designation Act
Tier II Designations
August 2005

All persons shown on this chart are Mexican.

Tier I Kingpins

Black: Previously named as Tier I or Tier II designees
pursuant to the Kingpin Act.

ARELLANO FELIX ORGANIZATION

Red: Newly named as Tier II designees
pursuant to the Kingpin Act.

]
Tier II Associates

:h~

(f{,(~.
Sergio Humberto
RAMIREZ AGUIRRE
DOB 22 Nov 1951

Luis Ignacio
MORENO MEDINA
DOB 26 May 1953
R.F.C. MOML-53D526·ED4

W,le

rt:~f'~

•

~.I:>-

...

Luis Raul
TOLEDO CARREJO
DOB 3D Jan 1959

Enedina
ARELLANO FELIX
DOB 12 Apr 1961
C.U.R.P. AEFE61D412MSLRLND5

Jose Alejandro
GILCARCIA
DOB 22 Jan 1952
R.F.C. GIGA-520122
C.U.R.P. GIGA520122HSLLRLDO

Tier II Companies
ITijuana, Baja California, Mexico)

ACCESOS ELECTRONICOS SA de CV
R.F.C. AEL-980417-S51

ADP S.C.

()

FORPRES

s.c.

~
M

()

ld~J

ADMINISTRADORA DE
INMUEBLES VIDA SA de CV

!
;

DISTRIBUIDORA IMPERIAL
DE BAJA CALIFORNIA SA de CV
R.F.C.DIB-771110-HQ1

FARMACIA VIDA SUPREMA SA de CV
R.F.C. FVS-870610-LX3

Tier II Associates

"":'

New Tier II Companies and Associates
!

~ -------.~ (~~/

~J~~

Julio Cesar

FLORES MONROY
DOB 13 Jul1944

,./
/./

KONTROLES ELECTRONICOS
DE BAJA CALIFORNIA SA de CV
(2002)
R.F.C. KEB-020222-380

~1~

Hector

ALTAMIRANO LDPEZ
DOB 18 Feb 1975
CUR.P AALH750218HBCLPC02

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Page 1 of 1

August 18, 2005
js-2687
Donald L. Kohn Appointed to Chair Air Transportation Stabilization Board
Federal Reserve Board Chairman Alan Greenspan named Governor Donald L.
Kohn to serve as the Federal Reserve designee, and Chair. of the Air
Transportation Stabilization Board, effective September 1, 2005. Kohn will replace
Governor Edward M. Gramlich who is resigning from the Board of Governors of the
Federal Reserve System, effective August 31.2005.

http://www.treas.gov/pressfreleasesljf>.?li87.htm

9/1/2005

Page 1 of 1

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August 19, 2005
JS-2688

Treasury and IRS Announce Repatriation Guidance
Under Sec. 965
The Treasury Department and IRS announced today the third in a series of notices
that provide detailed guidance for U.S. companies that elect to repatriate earnings
from foreign subsidiaries subject to the temporary reduced tax rate available under
the American Jobs Creation Act (AJCA). The notice released today provides
guidance to companies on various issues arising under section 965, including
issues relating to the identification of dividends, foreign tax credit and minimum tax
credit, expense allocation and apportionment, and currency translation.
Contemporaneous with the issuance of this notice, the IRS is releasing the final
Form 8895 (One-Time Dividends Received Deduction for Certain Cash Dividends
from Controlled Foreign Corporations) and its instructions.
Internal Revenue Code section 965, enacted as part of the AJCA in October of
2004, is a temporary provision that allows a U.S. company to repatriate earnings
from its foreign subsidiaries at a reduced effective tax rate provided that specified
conditions and restrictions are satisfied. Section 965 provides that a U.S. company
may elect, for one taxable year, an 85 percent dividends received deduction for
eligible dividends from its foreign subsidiaries, giving it an effective 5.25 percent tax
rate on qualifying dividends.
In January of 2005, the Treasury Department and IRS issued a notice (Notice 200510) that provided guidance to companies on the domestic reinvestment plan
requirement under the new provision. In May of 2005, the Treasury Department
and IRS issued a notice (Notice 2005-38) that provided guidance on the amount of
dividends that qualify for the dividends received deduction. This third notice
provides detailed guidance on several additional aspects of section 965, including
more detailed guidance on certain issues raised in the two prior notices.

REPORTS
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FQfeigD Tax.~redit andQthfrGui£l?nQf2 Unger Sectjon96l)

http://www.treas.gov/pressfreleases!jbi~g8.htm

9/1/2005

Part III - Administrative, Procedural, and Miscellaneous

Foreign tax credit and other guidance under section 965

Notice 2005-64

SECTION 1. OVERVIEW
This notice is the third in a series of items of published guidance regarding new
section 965 of the Internal Revenue Code (Code). This notice supplements the
guidance set forth in Notice 2005-10,2005-6 I.R.S. 474, which primarily addressed the
requirements for a domestic reinvestment plan described in section 965(b)( 4), and
Notice 2005-38, 2005-22 I.R.S. 1100, which primarily addressed the limitations
described in section 965(b)(1), (2), and (3) on the amount of dividends eligible for the
dividends received deduction under section 965(a), including the effects of certain
acquisitions, dispositions, and similar transactions on those limitations. This notice sets
forth guidance on various issues arising under section 965, including issues relating to
the foreign tax credit and minimum tax credit, expense allocation and apportionment,
and currency translation. The Treasury Department and the Internal Revenue Service
(IRS) expect to issue regulations that incorporate the guidance provided in Notice 200510, Notice 2005-38, this notice, and any subsequent guidance that may be issued
addressing section 965.

The remainder of this notice is divided into 14 sections. Section 2 provides
background with respect to the issues discussed in this notice. Section 3 provides
guidance on the identification of cash dividends and qualifying dividends and foreign
currency translation rules for certain cash dividends. Section 4 provides guidance on
the disallowance of a credit or deduction under section 965(d)(1) for foreign taxes paid
or accrued with respect to the deductible portion of section 965 dividends and related
issues arising under section 78. Section 5 provides guidance on the disallowance of
deductions for certain expenses under section 965(d)(2). Section 6 provides rules for
the treatment of deductions related to section 904(d) separate categories containing
qualifying dividends. Section 7 then provides guidance on the limitation under section
965(e)(2) that prevents the reduction of taxable income below the amount of
nondeductible CFC dividends. Section 8 addresses the application of the overall foreign
loss and separate limitation loss allocation and recapture rules of section 904(f) to
taxpayers with nondeductible CFC dividends. Section 9 provides rules for implementing
the restrictions under section 965(e)(1) on the use of credits to offset U.S. tax on
nondeductible CFC dividends, in part through the application of an additional foreign tax
credit limitation that is applied after expenses and losses are allocated and the regular
section 904(d) limitation is calculated, and provides rules relating to the computation of
alternative minimum tax and the credit for prior year minimum tax in the election year.
Section 10 then addresses other issues arising under section 965, including the
treatment of dividends paid to certain intermediary pass-through entities for purposes of
determining base period inclusions under section 965(b )(2)(8)(i). Section 11 sets forth

transition rules that apply to certain taxpayers that approved a domestic reinvestment
plan or filed a tax return for a taxable year to which section 965 applies prior to the
issuance of this notice. Section 12 describes the effect of this notice on other
documents. Section 13 provides the effective date of this notice, and section 14
provides information required under the Paperwork Reduction Act of 1995. Finally,
section 15 provides drafting information.

SECTION 2. BACKGROUND

.01 Section 965-ln General
The American Jobs Creation Act of 2004 (P.L. 108-357) (the Act), enacted on
October 22, 2004, added new section 965 to the Code. In general, and subject to
limitations discussed below, section 965(a) provides that a corporation that is a U.S.
shareholder 1 of a controlled foreign corporation (CFC) may elect, for one taxable year,
an 85 percent dividends received deduction (ORO) with respect to certain cash
dividends it receives from its CFCs. 2 For this purpose, all U.S. shareholders that are
members of an affiliated group filing a consolidated return under section 1501 are
treated as one U.S. shareholder. Section 965(c)(5)(A).
For purposes of section 965, the term "cash dividends" includes cash
amounts included

1 The term U.S. shareholder means, with respect to any foreign corporation, a U.S. person who owns
(within the meaning of section 958(a)), or is considered as owning by applying the rules of ownership of
section 958(b), 10 percent or more of the total combined voting power of all classes of stock entitled to
vote of such foreign corporation. Section 951 (b).

in gross income as dividends under sections 302,304, and 356(a){2), but does not
include subpart F inclusions or amounts treated as dividends under section 78 or 1248
or, except in certain cases, section 367. H.R. Cont. Rep. No. 108-755, at 314-15; see
Notice 2005-10, sections 2 and 3. For this purpose, a cash dividend also includes a
cash distribution from a CFC to a U.S. shareholder that is excluded from gross income
under section 959(a) to the extent of amounts included in income by such U.S.
shareholder under section 951 (a)(1 )(A) as a result of a cash dividend during the election
year to: (1) such CFC from another CFC in a section 958(a) chain of ownership; or (2)
any other CFC in such chain of ownership from another CFC in such chain of
ownership, but only to the extent of cash distributions described in section 959(b) made
during such year to the CFC from which such U.S. shareholder received such
distribution. Section 965(a){2).
The amount of cash dividends eligible for the section 965(a) ORO (qualifying
dividends) is determined after applying certain limitations. Notice 2005-38 addressed
the rules limiting qualifying dividends to certain dollar threshold amounts determined
with reference to the greater of $500 million or the amount of earnings permanently
reinvested outside the United States, the amount of dividends received in excess of
certain base period average amounts, and certain increases in related-party
indebtedness. See sections 965(b)(1) through (3) and 965(c). Notice 2005-10
addressed the requirement in section 965(b)(4) that the amount of the dividends be

2 Section 965(c)(4) provides that no deduction is allowed under section 243 or 245 for any dividend for
which a deduction is allowed under section 965.

invested in the United States pursuant to a domestic reinvestment plan that meets
specified criteria. Notice 2005-10 also provided rules for electing the application of
section 965 for a taxable year by filing Form 8895 with a timely-filed tax return. See
section 965(b )(4) and (f). The taxable year for which a taxpayer elects section 965 to
apply is referred to in this notice as the "election year."
.02 Disallowance of Credit or Deduction for Certain Expenses Related to Deductible
Portion of Qualifying Dividends and Related Matters
Section 965(d)(1) provides that no credit or deduction is allowed for certain
foreign taxes paid or accrued (or treated as paid or accrued) with respect to the
deductible portion of any qualifying dividend. Section 965(d)(2) further provides that no
deduction shall be allowed for certain other expenses. Section 9.01 of Notice 2005-38
confirmed that section 78 does not apply to any tax which is not allowable as a credit
under section 901 by reason of section 965(d) and that the disallowance of deductions
in section 965(d)(2) applies only to deductions for expenses that are directly allocable to
the deductible portion described in section 965(d)(1).
Section 965(d)(3) provides that, unless the taxpayer otherwise specifies, the
deductible portion of any qualifying dividend is the amount which bears the same ratio
to the amount of such dividend as the amount allowed as a deduction under section
965(a) for the election year bears to the total amount of dividends the taxpayer received
from its CFCs during the election year, as described in section 965(b )(2)(A). For
purposes of determining which dividends are subject to the foreign tax credit and
expense disallowance, the taxpayer may specifically identify which cash dividends are

treated as carrying the ORO (and thus entail proportionate disallowance of any
associated deductions and foreign tax credits) and which are not. H.R. Conf. Rep. No.
108-755, at 316. In the absence of such a specification, a pro rata amount of foreign
tax credits and deductions will be disallowed with respect to every cash dividend
repatriated during the election year. See H.R. Conf. Rep. No.1 08-755, at 316 n. 112.

.03 Limitation on Use of Credits and Deductions Related to Nondeductible Portion of
Qualifying Dividends
For purposes of this notice, the term "nondeductible CFC dividends" refers to the
excess of the amount of qualifying dividends over the 85 percent deduction allowed for
such dividends under section 965(a). See section 965(e)(3). Section 965(e) provides
limitations on the extent to which credits may offset the U.S. tax on nondeductible CFC
dividends, and also provides that allowable deductions may not reduce taxable income
below the amount of nondeductible CFC dividends. Specifically, section 965(e)(1)
provides that the U.S. tax on nondeductible CFC dividends may not be offset by tax
credits, other than a foreign tax credit under section 27 for taxes attributable to such
dividends and the credit for prior year minimum tax under section 53.
Section 965(e)(1) further provides that the U.S. tax on nondeductible CFC
dividends is not treated as tax imposed by chapter 1 for purposes of computing the
alternative minimum tax imposed by section 55 (AMT). Accordingly, the tax on
nondeductible CFC dividends cannot reduce the AMT that otherwise would be owed by

the taxpayer. H.R. Conf. Rep. No. 108-755, at 316. 3 Section 9.01 of Notice 2005-38
provided that for purposes of calculating AMT for the election year in accordance with
section 965(e)(1 )(8), the taxpayer's regular tax described in section 55(c) and tentative
minimum tax determined under section 55(b)(1 )(8) do not include tax attributable to
nondeductible CFC dividends.
Section 965(e)(2)(A) provides that taxable income shall in no event be less than
the amount of nondeductible CFC dividends received during the election year. While
the income attributable to nondeductible CFC dividends may not be offset by expenses,
losses, or deductions, such amounts may have the effect of reducing the taxpayer's
other income. H.R. Conf. Rep. No.1 08-755, at 316 n. 113. Section 965(e)(2)(8)
provides that the nondeductible CFC dividends are not taken into account in
determining the amount of any net operating loss (NOL) for the election year, or in
determining taxable income for the election year for purposes of the second sentence of
section 172(b )(2), which applies in determining the allowable NOL carryover or
carryback to that year.

SECTION 3. IDENTIFICATION OF CASH DIVIDENDS, QUALIFYING DIVIDENDS,
AND SEPARATE CATEGORIES; FOREIGN CURRENCY TRANSLATION RULES
.01 Identification of Cash Dividends
In order for cash dividends that are paid to a partnership or a disregarded entity

3 However, the DRD is not treated as a preference item for purposes of computing the AMT. Section
56(g)(4)(C)(vi). Thus, the deduction is allowed in computing alternative minimum taxable income

that is owned by a U.S. shareholder to qualify as cash dividends described in section
965(a), cash in the amount of the dividend must be received by the U.S. shareholder in
the election year from the partnership or disregarded entity. See section 3.02 of Notice
2005-10. In the case of a disregarded entity, cash may be received in a form other than
a distribution. See section 9.06 of Notice 2005-38 and section 10.09 of this notice. In
addition, as described in section 2.01 of this notice, under section 965(a)(2) a cash
distribution from a CFC of previously-taxed earnings and profits attributable to amounts
which are or have been included in income of the U.S. shareholder and are excluded
from gross income under section 959(a) (previously-taxed income or PTI) is treated as a
cash dividend only to the extent of amounts included in income by the U.S. shareholder
under subpart F in the election year as a result of cash dividends that are both paid and
distributed through a chain of CFCs to the U.S. shareholder in the election year. Finally,
a deemed liquidation effected through an election under §301.7701-3(c) results in a
cash dividend only to the extent the shareholder receives cash as part of the liquidation
in the election year. Section 965(c)(3); see section 2, footnote 2, of Notice 2005-10.
This section 3.01 provides rules for identifying the amounts treated as cash dividends if
a U.S. shareholder receives cash from a partnership or disregarded entity or cash
distributions of PTI from a CFC that exceed the cash dividends paid to such partnership,
disregarded entity, or CFC (or the cash deemed received in a deemed liquidation) in the
election year. See section 3.02 of this notice for rules for identifying specific cash

notwithstanding the fact that it may not be deductible in computing earnings and profits. H.R. Conf. Rep.
No. 108-755, at 316-317.

dividends (including both cash dividends described in this section 3.01 and cash
dividends described in section 965(a)(1) that are paid directly by a CFC to a U.S.
shareholder) as qualifying dividends eligible for the section 965(a) ORO.
For purposes of this section 3, the term "eligible cash amount" refers to (a) cash
received by the U.S. shareholder on any day in the election year from a partnership or
disregarded entity in a form that satisfies the requirements of section 3.02 of Notice
2005-10 and section 9.06 of Notice 2005-38, and (b) cash distributions of PTI to the
U.S. shareholder on any day in the election year from a CFC. A taxpayer that receives
eligible cash amounts from a disregarded entity or partnership that in the aggregate
exceed the total amount of cash dividends paid to (or the amount of cash deemed
received in a deemed liquidation from) such disregarded entity or the taxpayer's
distributive share of cash dividends paid to such partnership during the election year,
respectively, may specifically identify which eligible cash amounts are treated as
attributable to the underlying cash dividends (and therefore considered to be a cash
dividend described in section 965(a)(1) or (2)). Similarly, a taxpayer that receives
eligible cash amounts of PTI from a CFC in excess of the amount eligible to be treated
as a cash dividend under section 965(a)(2) may specifically identify which cash PTI
distributions from that CFC are treated as attributable to the underlying subpart F
inclusions (and therefore considered to be a cash dividend described in section
965(a)(2)).
Taxpayers make this identification by including the cash dividends and identifying

information on Part V of Form 8895. 4 Taxpayers may identify all or a portion of any
specific eligible cash amount received by the U.S. shareholder from a disregarded
entity, partnership or CFC in the election year as the cash dividend. To the extent a
taxpayer fails to identify specific eligible cash amounts in an amount equal to the full
amount of the taxpayer's share of cash dividends received by the disregarded entity,
partnership or CFC, a pro rata portion of each eligible cash amount received but not
otherwise identified by the taxpayer as a cash dividend will be treated as a cash
dividend. The pro rata portion is the amount which bears the same ratio to the eligible
cash amount as the unidentified portion of the taxpayer's share of the cash dividends
paid to the disregarded entity, partnership or CFC bears to the total amount of eligible
cash amounts received during the election year but not otherwise identified as cash
dividends.
If a U.S. shareholder receives eligible cash amounts from a disregarded entity
owned by the U.S. shareholder in an amount less than or equal to the total amount of
cash dividends paid to the disregarded entity during the election year, then 100 percent
of each eligible cash amount received from such disregarded entity is a cash dividend
described in section 965(a). Similarly, if a U.S. shareholder receives eligible cash
amounts from a partnership in an amount less than or equal to the total amount of the
U.S. shareholder's distributive share of cash dividends paid to the partnership during
the election year, then 100 percent of each eligible cash amount received from such

Any taxpayer that had filed its return for the election year before Form 8895 was made available to the
public in final form need not file Form 8895 to identify the cash dividends, but should retain the information

partnership is a cash dividend described in section 965(a). Finally, if a U.S. shareholder
(or a disregarded entity or partnership owned by the U.S. shareholder) receives cash

distributions of PTI from a CFC in an amount less than or equal to the amount of
earnings and profits included in income by the U.S. shareholder under section
951 (a)(1 )(A) as a result of one or more cash dividends paid to the distributing CFC or
another CFC in the same chain of ownership described in section 958(a), then 100
percent of each cash distribution of PTI from that CFC is a cash dividend described in
section 965(a){2).
The taxpayer may choose to associate each cash dividend received from a
disregarded entity or partnership with one or more of the cash dividends paid to that
disregarded entity or partnership during the election year. Similarly, the taxpayer may
choose to associate each cash dividend described in section 965(a)(2) that is received
from a CFC with the earnings and profits attributable to the taxpayer's subpart F
inclusion from one or more of the CFCs in the ownership chain. Taxpayers make this
identification by including the identifying information required by Part V of Form 8895
and consistently calculating the tax consequences under section 965 and this notice for
those cash dividends that are qualifying dividends, determined as provided in section
3.02 of this notice. 5
.02 Identification of Qualifying Dividends and Separate Categories
In addition to other limitations, the amount of cash dividends eligible for the ORO

requested on the Form to be made available to the IRS on request.
See footnote 4.

is limited to the excess of the cash dividends received by the taxpayer from its CFCs
during the election year over the taxpayer's base period amount. See section 965(b )(2)
and sections 2 and 3 of Notice 2005-38. A taxpayer may specifically identify which cash
dividends are treated as qualifying dividends carrying the ORO and which cash
dividends are treated as meeting the base-period repatriation level or are otherwise
ineligible for the ORO. H.R. Conf. Rep. No. 108-755, at 316. Taxpayers identify the
qualifying dividends by completing Form 8895, Part V, column (e).6
A taxpayer generally must identify each cash dividend received during the
election year as either a qualifying dividend or a non-qualifying dividend in its entirety,
but may identify a portion of one dividend as a qualifying dividend to the extent
necessary to prevent the total amount identified in Part V, column (e) of Form 8895 from
exceeding the total amount of qualifying dividends. To the extent a taxpayer fails to
identify specific cash dividends equal to the full amount of qualifying dividends, a pro
rata portion of each cash dividend received by the taxpayer during the election year that
is not otherwise identified by the taxpayer as a qualifying dividend will be treated as a
qualifying dividend. The pro rata portion is the amount which bears the same ratio to
the amount of the dividend as the total amount of qualifying dividends not otherwise
identified bears to the total amount of cash dividends received during the election year
described in section 965(b )(2)(A) that are not otherwise identified as qualifying

6 Section 7.06 of Notice 2005-38 provides that an increase in a CFC's related party indebtedness is
allocated among U.S. shareholders that are related persons with respect to the CFC in the order that cash
dividends are received. The provision of Notice 2005-38 allocates among the U.S. shareholders the
reduction in the amount of cash dividends eligible for the section 965(a) ORO, but does not preclude a
U.S. shareholder from identifying any specific cash dividend as a qualifying dividend.

dividends. See Example 3 of section 3.05 of this notice.
Qualifying dividends described in section 965(a)(1) will be considered paid pro
rata out of the non-previously-taxed earnings and profits in the CFC's separate
categories from which the dividend was paid, in accordance with the look-through rules
of section 904(d)(3)(0). Subpart F inclusions attributable to dividends paid to a CFC
from another CFC in the same chain of ownership (including CFCs engaged in section
304 transactions described in section 9.04 of Notice 2005-38) are treated as income in
the same separate categories to which the dividend is assigned, under the look-through
rules of section 904(d)(3)(B) and (0). See Treas. Reg. §1.904-5. Cash dividends
described in section 965(a)(2), whether or not identified by the U.S. shareholder as
qualifying dividends, will be considered paid first out of the previously-taxed earnings
and profits described in section 959(c)(2) that are attributable to the amount included in
the United States shareholder's income under section 951 (a)(1 )(A) in the election year
as a result of the CFC-to-CFC cash dividend described in section 965(a)(2), to the
extent thereof.
.03 Allocation of Dividends Received Deduction
The ORO allowed under section 965(a) is definitely related to and allocated to
reduce gross income in the U.S. shareholder's separate categories to which the
qualifying dividends described in section 965(a)(1) and the subpart F inclusions
underlying qualifying dividends described in section 965(a)(2) are assigned. See Treas.
Reg. §1.861-8(a)(2) and (b)(2) .
.04 Foreign Currency Exchange Rate Conventions

(a) Cash dividends described in section 965(a)(1 ). Cash dividends described in
section 965(a)(1) that are paid directly to the U.S. shareholder are translated into U.S.
dollars at the spot rate on the date of distribution as provided in section 989(b)( 1). 7 A
cash dividend paid by a CFC to a pass-through entity that is owned by a U.S.
shareholder is treated as received by such U.S. shareholder for purposes of section
965(a) only if and to the extent that such shareholder receives cash in the amount of the
CFC dividend during the election year. See Notice 2005-10, section 3.02, Notice 200538, section 9.06, and section 10.09 of this notice. Such cash dividends are translated
from the functional currency of the payor CFC into U.S. dollars at the spot rate on the
date the amount of the cash dividend is received by the U.S. shareholder, rather than at
the spot rate on the date the dividend is received by the partnership or disregarded
entity. Accordingly, the receipt of cash itself will not result in currency gain or loss to the
U.S. shareholder.
(b) Cash dividends described in section 965(a)(2). Cash dividends described in
section 965(a)(2) are distributions of PTI to the U.S. shareholder in an amount that does
not exceed the subpart F inclusions in the election year that result from cash dividends
that are paid by lower-tier CFCs and that are distributed as PTI through a chain of CFCs
and received by the U.S. shareholder during the election year. The subpart F inclusions
that result in cash dividends will be translated from the functional currency of the CFC
receiving the dividend into U.S. dollars at the spot rate on the date the PTI is distributed

In the case of cash received as part of a deemed liquidation resulting from an election under Treas.
Reg. §301.7701-3(c), the date of distribution is the date the cash is received, not the date of the deemed

to the U.S. shareholder, rather than at the average rate generally used to translate
subpart F inclusions under section 989(b)(3), and the PTI distribution will not result in
currency gain or loss under section 986(c) .

.05 Examples

The following examples illustrate the application of section 965(d)(3) and this
section 3. Unless otherwise indicated, the following facts are assumed for purposes of
these examples. All corporations use calendar taxable years for U.S. tax purposes.
USP is a domestic corporation that elects to apply section 965 to its 2005 taxable year
and meets all applicable requirements to claim the section 965(a) ORO with respect to
the qualifying dividends described in the examples.
Example 1. Identification of cash dividends where PTI distributions exceed
subpart F inclusions attributable to cash dividends. (i) Facts. USP owns all the stock
of CFC1, which owns all the stock of CFC2. CFC1 and CFC2 are organized under the
laws of different foreign countries and each uses the "u" as its functional currency. On
September 1,2005, CFC2 pays a cash dividend of 200u to CFC1 that is subpart F
income of CFC1 under sections 952(a) and 954(c)(1 )(A), resulting in a 200u income
inclusion to USP under section 951 (a)(1 )(A). On each of March 1, 2005, when the spot
exchange rate is 1u $1, and November 1, 2005, when the spot exchange rate is 1u
$1.25, CFC1 distributes 200u to USP. Each of the 200u distributions is a distribution of
previously-taxed earnings and profits of CFC1 that is excluded from USP's gross
income under section 959(a).

(ii) Result. USP received cash distributions of PTI from CFC1 in the election
year in an amount (400u) that exceeds the amount included in income by USP under
section 951 (a)(1 )(A) as a result of cash dividends during the election year to CFC1 from
CFC2, another CFC in a chain of ownership described in section 958(a) (200u).
Pursuant to section 3.01 of this notice, USP may identify either the March 1,2005 PTI
distribution of 200u $200 or the November 1, 2005 PTI distribution of 200u $250 as
the cash dividend described in section 965(a)(2) of previously-taxed earnings

liquidation.

attributable to the subpart F inclusion resulting from the cash dividend paid by CFC2 to
CFC1. Pursuant to section 3.04 of this notice, USP's subpart F inclusion of 200u is
translated into U.S. dollars at the spot exchange rate on the date of the associated PTI
distribution, and that PTI distribution does not result in currency gain or loss under
section 986(c). The other PTI distribution may result in currency gain or loss under
section 986(c).
Example 2. Identification of amounts underlying cash dividends where multiple
subpart F inclusions exceed PTI distributions. (i) Facts. USP owns all the stock of
CFC1, which owns all the stock of CFC2 and CFC3. CFC2 owns all the stock of CFC4.
The four CFCs are each organized under the laws of a different foreign country and
each uses the U.S. dollar as its functional currency. In 2005, CFC3 pays a $100 cash
dividend to CFC1 that, after taking into account $10 of allocable foreign taxes and $5 of
other expenses, is subpart F income of CFC1 under sections 952(a) and 954(c)(1 )(A)
that results in an $85 income inclusion to USP with respect to CFC1 under section
951 (a)( 1)(A). Also in 2005, CFC4 pays a $100 cash dividend to CFC2 that, after taking
into account $30 of allocable taxes and $10 of other expenses, is subpart F income of
CFC2 under sections 952(a) and 954(c)(1 )(A) that results in a $60 income inclusion to
USP under section 951 (a)(1 )(A). CFC2 distributes $60 of cash to CFC1 and CFC1
distributes $60 of cash to USP in 2005.
(ii) Result. USP received cash distributions of PTI from CFC1 in the election
year in an amount ($60) that is less than $145, the total of amounts included in income
by USP under section 951 (a)(1 )(A) as a result of cash dividends during the election year
from CFC3 to CFC1 ($85), and cash dividends during the election year from CFC4 to
CFC2 that were distributed in cash to CFC1 ($60). Accordingly, pursuant to section
3.01 of this notice, the entire $60 cash PTI distribution is a cash dividend described in
section 965(a)(2). Furthermore, also pursuant to section 3.01 of this notice, USP may
associate the $60 cash dividend with either the $60 cash PTI distribution to CFC1 that is
attributable to the subpart F inclusion from CFC2 or a ratable portion of the $85 subpart
F inclusion from CFC1.
Example 3. Identification of qualifying dividends. (i) Facts. USP owns all the
stock of CFC1 and CFC2, and CFC1 owns all the stock of CFC3. CFC1, CFC2, and
CFC3 are organized under the laws of different foreign countries, and each uses the "u"
as its functional currency. In 2005, CFC3 pays an 80u cash dividend to CFC1. The
dividend is subpart F income of CFC1 under sections 952(a) and 954(c)(1 )(A), resulting
in an income inclusion to USP under section 951 (a)(1 )(A). Also in 2005, CFC1
distributes to USP 160u with a value of $200 at the 0.8u $1 spot exchange rate on the
date of distribution, all of which constitutes previously-taxed earnings of CFC1 described
in section 959(c)(2). In addition, USP receives a 100u cash dividend, equal to $100 at
the spot rate on the date of distribution, from each of CFC1 and CFC2 in 2005. USP's
base period amount described in section 965(b)(2)(8) is $100, and, taking into account

the other limitations under section 965(b), USP's total amount of qualifying dividends is
$150.
(ii) Result. Under section 3.04 of this notice, USP's subpart F inclusion
attributable to the 80u cash dividend paid by CFC3 to CFC1 is translated into dollars at
the spot rate on the date an equivalent amount of cash is distributed to USP, rather than
at the average exchange rate for the year. Accordingly, USP includes $100 in income
under section 951 (a)(1 )(A), and 80u of the PTI distribution, which has a value of $100
on the date of distribution, is excluded from USP's gross income under section 959(a)
and results in no currency gain or loss under section 986(c). The remaining 80u of the
160u PTI distribution, which also has a value of $100 on the date of distribution, is
excluded from USP's gross income under section 959(a) and may result in currency
gain or loss under section 986(c).
USP received three $100 cash dividends described in section 965(b)(2)(A) during
2005, of which $150 are eligible to be taken into account under section 965(a): the
$100 dividend from CFC2, the $100 dividend from CFC1, and $100 of the $200 PTI
distribution received from CFC1. The remaining $100 of the PTI distribution received
from CFC1 is not a cash dividend described in section 965(a)(2) because it exceeds the
amount included in income by USP under section 951 (a)(1 )(A) as a result of the cash
dividend paid by CFC3 to CFC1. Pursuant to section 3.02 of this notice, USP may
identify anyone of the three distributions in its entirety, and one-half of either of the
remaining two distributions, as qualifying dividends on Form 8895. If USP does not
identify specific distributions as the qualifying dividends, $50 ($150 total qualifying
dividends not otherwise identified divided by $300 total cash dividends received during
the election year, multiplied by $100 cash dividend) of each of the three $100 cash
dividends will be treated as a qualifying dividend.
Example 4. Cash dividend equivalent to cash received in actual inbound
liquidation. (i) Facts. USP owns all the stock of CFC1, which owns all the stock of
CFC2. CFC1 and CFC2 are organized in Country X and each uses the "u" as its
functional currency. On June 30, 2005, in an inbound liquidation of CFC1 described in
sections 332 and 367(b), CFC1 legally dissolves and, in connection with such
dissolution, USP acquires all the assets of CFC1, consisting of 100u of cash in a
Country X bank account and certain other noncash assets (including all of the stock of
CFC2). In connection with the liquidation USP includes in income as a dividend an all
earnings and profits amount of 300u equal to $600 on June 30, 2005, when the spot
exchange rate is 1u = $2. After the liquidation USP continues to operate the business
of CFC1 in Country X with the Country X bank account.
(ii) Result. Pursuant to section 3.02 of this notice, USP may identify as a
qualifying dividend described in section 965(a)(1) the 100u of cash received by USP in
the liquidation of CFC1 that is taxed as a dividend under section 367(b). Pursuant to

section 3.04 of this notice, the amount of the cash dividend from CFC1 is $200 (100u of
cash received by USP in the liquidation of CFC1, translated at the spot rate of 1u $2
on the date of the liquidating dividend).

Example 5. Cash dividends less than cash received in check-the-box liquidation
plus cash dividend received by disregarded entity. (i) Facts. The facts are the same as
in Example 4, except that, instead of actually liquidating CFC1, USP elects to treat
CFC1 as a disregarded entity by filing an entity classification election under Treas. Reg.
§301.7701-3, effective July 1,2005, CFC2 pays a dividend of 100u to the disregarded
entity CFC 1 on September 1, 2005, when the spot exchange rate is 1u $1 .50, and the
disregarded entity CFC1 distributes 100u of cash to USP on October 1, 2005, when the
spot exchange rate is 1u $1.75.

(ii) Result. USP's check-the-box election with respect to CFC1 does not give
rise to an eligible dividend under section 965(c)(3) because the resulting deemed
liquidation in and of itself does not result in an actual receipt by USP of the 100u of cash
owned by CFC1. In addition, the cash dividend paid from CFC2 to CFC1, at that time a
disregarded entity, is treated as a cash dividend received by USP in the election year
only to the extent USP receives cash from the disregarded entity during the election
year. See Notice 2005-10, section 3.02. Because the disregarded entity CFC1
distributed 100u of cash to USP in the year of the liquidation, the 100u cash distribution
is a cash dividend within the meaning of section 965(d)(3). Pursuant to section 3.01 of
this notice, USP may identify the October 1, 2005 100u cash dividend as attributable to
either the deemed dividend resulting from the check-the-box election or the cash
dividend paid by CFC2. If USP treats the cash dividend as attributable to cash actually
received by USP in connection with the deemed liquidation, the deemed dividend
constitutes a dividend described in section 965(c)(3) to the extent of 100u.
Alternatively, USP may treat the 100u cash dividend as attributable to the cash dividend
paid from CFC2 to CFC1, a disregarded entity, which is eligible to be treated as a cash
dividend because USP received 100u of cash from CFC1 during the election year.
If USP chooses to treat the dividend from CFC2 as the cash dividend underlying
the 100u cash dividend on October 1, 2005, then pursuant to section 3.04 of this notice
the dollar amount of the 100u dividend from CFC2 is $175, the spot value of 100u on
October 1, 2005, the date CFC1 distributes an amount of cash equal to the CFC2
dividend to USP, and CFC1 's distribution of 100u to USP does not give rise to currency
gain or loss. As in Example 4, the entire 300u all earnings and profits amount is $600,
translated into dollars at the 1u $2 exchange rate, the spot rate on the date of the
deemed dividend.

If, instead, USP chooses to treat the 100u cash dividend as cash received in
connection with the deemed liquidation, pursuant to section 3.04 of this notice the dollar
amount of 100u of the 300u deemed dividend from CFC1 is $175, the spot value of

100u on October 1, 2005, the date USP receives that amount of cash in connection with
the deemed liquidation. The dollar amount of the 200u remainder of the deemed
dividend is $400, translated into dollars at the 1u $2 exchange rate, the spot rate on
the date of the deemed dividend. The dollar amount of the 100u dividend from CFC2 is
$150, the spot value of 100u on September 1,2005, the date CFC2 paid the dividend to
the disregarded entity CFC1.

Example 6. CFC-to-CFC dividend and equivalent PTI distribution. (i) Facts.
USP owns all the stock of CFC1, which owns all the stock of CFC2. CFC1 is organized
in Country X and uses the "u" as its functional currency. CFC2 is organized in Country
Y and uses the euro as its functional currency. On June 30, 2005, when the spot
exchange rate is 1u €2, CFC2 pays a cash dividend of €200 to CFC1. CFC1 has no
other items of income or expense in 2005. The dividend from CFC2 is subpart F
income of CFC1 under sections 952(a)(2) and 954(c)(1 )(A) that is included in income by
USP under section 951 (a)(1 )(A)(i). On September 1,2005, when the spot exchange
rate is 1u $1, CFC1 distributes 100u in cash to USP. The 100u cash distribution is
PTI of CFC1 that is excluded from USP's income under section 959(a). The average
exchange rate determined under section 989(b )(3) for 2005 is 1u =$.90.

(ii) Result. Pursuant to section 989(b)( 1), the "u" amount of CFC 1's subpart F
income attributable to the €200 dividend from CFC2 is 100u, the spot value of €200 on
the date CFC1 includes the CFC2 dividend in income. The 100u cash distribution from
CFC1 to USP is a cash dividend described in section 965(a)(2) because it is PTI in an
amount not in excess of the 100u subpart F income of CFC1 that results from a cash
dividend paid during the election year by CFC2, another CFC in the chain of ownership
described in section 958(a). Regardless of whether USP identifies the PTI distribution
from CFC1 as a qualifying dividend, pursuant to section 3.04 of this notice the dollar
amount of USP's subpart F inclusion with respect to CFC1 under section 951 (a)(1 )(A)
attributable to the CFC2 dividend is $100, the spot rate on the date CFC1 distributes an
amount of cash equal to the CFC2 dividend to USP. The PTI distribution does not
result in currency gain or loss under section 986(c).
Example 7. CFC-to-CFC dividend and smaller PTI distribution. (i) Facts. The
facts are the same as in Example 6, except that CFC2's dividend to CFC1 is €400
rather than €200.
(ii) Result. The €400 dividend, translated at the spot rate on the date of
distribution from CFC2 to CFC1, results in 200u of subpart F income of CFC1 that is
included in USP's income in the election year. The result with respect to the 100u of the
subpart F inclusion and resulting PTI that CFC1 distributes to USP in the election year
are the same as in Example 6. USP's subpart F inclusion with respect to the remaining
100u of CFC1's subpart F income that is not distributed is $90 (100u translated at the
average exchange rate of 1u $.90). CFC1 's distribution of the remaining 100u of PTI

to USP after the election year is not subject to the rules of this notice and may give rise
to currency gain or loss under section 986(c).

SECTION 4. DISALLOWANCE OF CREDIT OR DEDUCTION FOR FOREIGN TAXES
ON DEDUCTIBLE PORTION OF QUALIFYING DIVIDENDS
.01 Identification of Foreign Income Taxes Paid or Accrued with Respect to the
Deductible Portion of Qualifying Dividends
Under section 965(d)(1), no credit or deduction is allowed for foreign taxes
described in section 901 that are paid or accrued (or treated as paid or accrued) with
respect to the deductible portion of each qualifying dividend, including distributions of
PTI that are treated as cash dividends under section 965(a)(2). This disallowance
applies to 85 percent of the U.S. dollar amount of (1) foreign taxes paid or accrued by
the U.S. shareholder with respect to the qualifying dividend (including the U.S.
shareholder's distributive share of foreign taxes that are paid or accrued by a
partnership with respect to the dividend and that are properly allocated to the U.S.
shareholder-partner under the rules of sections 702 and 704 and the regulations
thereunder and separately stated to the partner under Treas. Reg. §1.702-1 (a)(6)); (2)
foreign taxes deemed paid under section 902 with respect to a qualifying dividend
described in section 965(a)(1); and (3) foreign taxes deemed paid under section 960,
including taxes described in section 960(a)(3), with respect to a subpart F inclusion
resulting from a CFC-to-CFC dividend and the associated PTI distribution described in
section 965(a)(2).
Section 965 does not modify the computation of foreign taxes deemed paid

under sections 902 and 960. As a result, for purposes of section 902 the post-1986
undistributed earnings, post-1986 foreign income taxes, pre-1987 accumulated profits,
pre-1987 foreign income taxes, and previously-taxed earnings and profits and tax
accounts of CFCs paying qualifying dividends are reduced by the full amount of
earnings distributed and the full amount of foreign taxes attributable to the distributed
earnings, without regard to the amount of the ORO or the amount of foreign tax for
which section 965(d)(1) disallows a credit or deduction .

.02 Section 78 Gross-Up
Under section 78, an amount equal to the taxes deemed paid under section
902(a) or section 960(a)(1) by a domestic corporation generally is included in income as
a dividend if the domestic corporation chooses the benefits of the foreign tax credit for
the taxable year. Section 78 does not apply to any tax which is not allowable as a credit
under section 901 by reason of section 965(d). See also section 9.01 of Notice 2005-

38 .
.03 Examples
The following examples illustrate the application of section 965(d)(1) and this
section 4. Unless otherwise indicated, the following facts are assumed for purposes of
these examples. All corporations use calendar taxable years for U.S. tax purposes.
USP is a domestic corporation that elects to apply section 965 to its 2005 taxable year
and meets all applicable requirements to claim the section 965(a) ORO with respect to
the qualifying dividends described in the examples. All the earnings and profits and
creditable foreign taxes of each CFC constitute general limitation post-1986

undistributed earnings and general limitation post-1986 foreign income taxes, and no
exceptions apply to prevent USP from including in income its pro rata share of any
CFC's subpart F income in the election year. Except as specifically provided, a CFC
has no other items of gross income or expense for the election year, has no previouslytaxed earnings and profits described in section 959(c)(1) or (2), and makes no
distributions in the election year.
Example 1. Qualifying dividend under section 965(a)(1) from first-tier CFC. (i)
Facts. USP owns all the stock of CFC1, a foreign corporation that uses the "u" as its
functional currency. On June 30, 2005, CFC1 pays a cash dividend of 80u, equal to
$100 translated at the spot rate on that date of 0.8u $1, out of its post-1986
undistributed earnings to USP. The dividend is subject to a 10 percent withholding tax
of 8u $10, so USP receives cash of $90. USP has a base period amount of $0 and its
total amount of qualifying dividends is $100. As of the close of 2005, computed without
regard to the June 30 distribution to USP, CFC1 has post-1986 undistributed earnings
of 800u and post-1986 foreign income taxes of $200.

(ii) Result. Under section 902(a), $20 ((80u/800u) x $200) of foreign income
taxes are deemed paid by USP with respect to the $100 dividend from CFC 1. Subject
to other applicable limitations, USP may claim a foreign tax credit or deduction for $1.50
(15 percent of the $10 withholding tax), and may also claim a credit for $3 (15 percent of
the $20 of deemed-paid taxes). Under section 965(d)(1}, no credit or deduction is
allowed for the remaining $8.50 of withholding tax or $17 of deemed-paid tax, which
represent the taxes paid or deemed paid with respect to the 85 percent deductible
portion of the $100 dividend. USP includes $100 in gross income and claims an $85
ORO under section 965(a} with respect to the qualifying dividend of $100 described in
section 965(a)(1). If USP elects to credit foreign taxes in 2005, USP also includes $3 in
income under section 78. No gross-up is required under section 78 for the $17 of
deemed-paid tax which is not allowed as a credit. CFC1 's post-1986 undistributed
earnings and post-1986 foreign income taxes are reduced by the full amount of
earnings distributed and foreign taxes deemed paid in 2005, without regard to the
amount of the ORD under section 965(a) or the disallowance under section 965(d)(1} of
a credit for taxes deemed paid with respect to the deductible portion of the qualifying
dividend. Accordingly, CFC1's post-1986 undistributed earnings and post-1986 foreign
income taxes, computed as of January 1, 2006, are 720u (800u - 80u) and $180 ($200 $20), respectively.
Example 2. Qualifying dividend under section 965(a)(1) from first-tier CFC to

disregarded entity. (i) Facts. USP is the sole owner of DE, a disregarded entity
organized in Country X. DE owns all the stock of CFC1, which is incorporated in
Country Y. Each of DE and CFC1 uses the U.S. dollar as its functional currency. On
June 30,2005, CFC1 pays a cash dividend of $135 to DE, with respect to which USP is
deemed under section 902(a) to pay $20 of foreign income tax paid by CFC1. DE pays
Country Y withholding tax of $20 and Country X net income tax of $15 with respect to
the dividend from CFC1. Also on June 30,2005, DE distributes $135 to USP. The
distribution from DE is not subject to Country X withholding tax. USP has a base period
amount of $0 and qualifying dividends of $135.
(ii) Result. USP is entitled to a ORO of $114.75 (.85 x $135) under section
965(a) with respect to the $135 dividend paid by CFC1 to DE and distributed in cash to
USP in 2005. Subject to other applicable limitations, USP may claim a foreign tax credit
or deduction for $5.25 (15 percent of the $35 of foreign tax paid by DE), and may also
claim a credit for $3 (15 percent of the $20 of foreign taxes paid by CFC1 that are
deemed paid by USP with respect to the dividend paid by CFC1). If USP elects to
credit foreign taxes in 2005, USP includes $3 in income under section 78. No gross-up
is required under section 78 for the $17 of deemed-paid tax which is not allowed as a
credit. Under section 965(d)(1), no credit or deduction is allowed for the remaining
$29.75 of tax paid under section 901 or $17 of tax deemed paid under section 902,
which represent the taxes paid or deemed paid with respect to the 85 percent
deductible portion of the $135 qualifying dividend. CFC1 's post-1986 undistributed
earnings and post-1986 foreign income taxes, computed as of January 1,2006, are
reduced by $135 and $20, respectively.
Example 3. Qualifying dividend under section 965(a)(2) attributable to dividend
from second-tier CFC, subpart F inclusion, and PTI distribution from first-tier CFC to
USP. (i) Facts. USP owns all the stock of CFC1, which owns all the stock of CFC2.
CFC1 is incorporated in Country X, and CFC2 is incorporated in Country Y. Each of
CFC1 and CFC2 uses the U.S. dollar as its functional currency. On June 30, 2005,
CFC2 pays a cash dividend of $135 to CFC1. CFC1 pays Country Y withholding tax of
$20 and Country X net income tax of $15 with respect to the dividend from CFC2.
CFC1 has no other items of income or expense in 2005, so its subpart F income and
earnings and profits for 2005 are $100, all attributable to the dividend from CFC2, and
USP includes $100 in income under section 951 (a)(1 )(A) with respect to CFC1 for 2005.
Also on June 30,2005, CFC1 distributes $100 of cash to USP. The PTI distribution is
subject to Country X withholding tax of $10. As of the close of 2005, including taxes
paid and deemed paid under section 902(b) by CFC1 with respect to the distribution
from CFC2 but before accounting for the effect of the subpart F inclusion or distribution
to USP, CFC1 has post-1986 undistributed earnings of $1 ,000 and post-1986 foreign
income taxes of $200. USP has a base period amount of $0 and qualifying dividends of
$100.

(ii) Result. Under sections 960(a)(1) and 902(a), $20 (($1001$1,000) x $200) of
foreign income taxes are deemed paid by USP with respect to the $100 subpart F
inclusion attributable to CFC1. Under section 965(a)(2), the cash distribution of PTI
from CFC1 is a qualifying dividend to the extent of $100, the amount USP included in
income under section 951 (a)(1 )(A) in 2005 as a result of the cash dividend paid from
CFC2 to CFC1 in 2005. USP is entitled to a ORO of $85 under section 965(a) with
respect to the $100 subpart F inclusion and associated PTI distribution. Subject to
other applicable limitations, USP may claim a foreign tax credit or deduction for 15
percent of the $10 withholding tax, or $1.50, and may claim a credit for 15 percent of the
$20 of deemed-paid taxes, or $3. If USP elects to credit foreign taxes in 2005, USP
includes $3 in income under section 78. No gross-up is required under section 78 for
the $17 of deemed-paid tax which is not allowed as a credit. Under section 965(d)(1),
no credit or deduction is allowed for the remaining $8.50 of withholding tax or $17 of
deemed-paid tax, which represent the taxes paid or deemed paid with respect to the 85
percent deductible portion of the $100 qualifying dividend. CFC1's post-1986
undistributed earnings and post-1986 foreign income taxes, computed as of January 1,
2006, are $900 ($1,000 - $100) and $180 ($200 - $20), respectively.
Example 4. Qualifying dividend under section 965(a)(2) attributable to multiple
dividends from second-tier CFCs, subpart F inclusion, and distribution from first-tier
CFC to USP. (i) Facts. USP owns all the stock of CFC1, which owns all the stock of
CFC2 and CFC3. CFC1, CFC2, and CFC3 are organized under the laws of different
foreign countries, and each uses the "u" as its functional currency. In 2005, CFC2 and
CFC3 each pays an 80u cash dividend to CFC1 that is subpart F income of CFC1 under
sections 952(a) and 954(c)(1 )(A) that results in an income inclusion to USP under
section 951 (a)(1 )(A). Under section 902(b)(1), CFC1 is deemed to pay foreign taxes of
$8 with respect to the 80u dividend from CFC2, and CFC1 is deemed to pay foreign
taxes of $40 with respect to the 80u dividend from CFC3.
Also in 2005, CFC1 makes two distributions of 80u, totaling 160u, to USP, all of
which constitutes previously-taxed earnings and profits of CFC1 described in section
959(c)(2). The first 80u distribution has a value of $100 at the 0.8u = $1 spot exchange
rate on the date of distribution, and the second 80u distribution has a value of $80 at the
1u $1 spot exchange rate on the date of distribution. Under section 3.04 of this
notice, USP's subpart F inclusion attributable to CFC1 's 160u of foreign personal
holding company income attributable to cash dividends paid by CFC2 and CFC3 is
translated into dollars at the spot rate on the dates an equivalent amount of cash is
distributed to USP, rather than at the average exchange rate for the year. Accordingly,
USP includes $180 ($100 + $80) in income under section 951 (a)(1 )(A), and neither of
the 80u PTI distributions results in exchange gain or loss under section 986(c). USP's
total cash dividends are $180. USP has a base period amount of $80 and qualifying
dividends of $100.

As of the close of 2005, taking into account the dividends received from CFC2
and CFC3 and the associated deemed-paid taxes but before giving effect to the subpart
F inclusion to USP, CFC1 has post-1986 undistributed earnings of 1,600u and post1986 foreign income taxes of $400.
(ii) Result. Under sections 960(a)(1) and 902(a), $40 ((160u/1 ,600u) x $400) of
foreign income taxes are deemed paid by USP with respect to the 160u subpart F
inclusion attributable to CFC 1. Of this amount, $20 is attributable to the first cash
dividend of 80u $100, and $20 is attributable to the second cash dividend of 80u
$80. If USP identifies the first distribution in its entirety as the qualifying dividend, USP
is entitled to a ORO of $85 under section 965(a) with respect to the $100 subpart F
inclusion and associated PTI distribution. Subject to other applicable limitations, USP
may claim a foreign tax credit for $23, equal to the sum of $3 (.15 x $20) of deemedpaid taxes attributable to the qualifying dividend and $20 of deemed-paid taxes
attributable to the remaining $80 of the subpart F inclusion. If USP elects to credit
foreign taxes in 2005, USP includes $23 in income under section 78. Under section
965(d)(1), no credit is allowed for the remaining $17 of deemed-paid taxes, which are
attributable to the 85 percent deductible portion of the $100 qualifying dividend. No
gross-up is required under section 78 for the $17 of deemed-paid tax which is not
allowed as a credit.

If, instead, USP identifies $20 of the $100 first cash dividend and the entire $80
of the second cash dividend as the qualifying dividends, USP is entitled to a ORO of $17
(.85 x $20) with respect to the first qualifying dividend and $68 (.85 x $80) with respect
to the second qualifying dividend, for a total ORO of $85. Subject to other applicable
limitations, USP may claim a foreign tax credit for $19.60, equal to the sum of $0.60 (.15
x ($20/$100) x $20) of deemed-paid taxes attributable to the $20 qualifying dividend,
$16 (($80/$100) x $20) of deemed-paid taxes attributable to the remaining $80 of the
subpart F inclusion associated with the first cash dividend, and $3 (.15 x $20) of
deemed-paid taxes attributable to the $80 qualifying dividend. If USP elects to credit
foreign taxes in 2005, USP includes $19.60 in income under section 78. Under section
965(d)(1), no credit is allowed for the remaining $20.40 ($3.40 + $17) of deemed-paid
taxes, which are attributable to the 85 percent deductible portion of the $20 and $80
qualifying dividends. No gross-up is required under section 78 for the $20.40 of
deemed-paid tax which is not allowed as a credit.
Because under sections 960(a)(1) and 902(a) USP's foreign taxes deemed paid
with respect to the subpart F inclusion underlying the qualifying dividends described in
section 965(a)(2) are computed on the basis of CFC1 's year-end post-1986
undistributed earnings and post-1986 foreign income taxes, a ratable portion of CFC 1's
post-1986 foreign income taxes, and not the specific taxes associated with the
underlying dividends from CFC2 and CFC3, are considered attributable to the qualifying
dividends.

Example 5. Qualifying dividend under section 965(a)(2) attributable to dividend
from third-tier CFC, subpart F inclusion from second-tier CFC, and distribution through
first-tier CFC to USP. (i) Facts. USP owns all the stock of CFC1, which owns all the
stock of CFC2, which owns all the stock of CFC3. CFC1 is incorporated in Country X,
CFC2 is incorporated in Country Y, and CFC3 is incorporated in Country Z. Each of
CFC1, CFC2, and CFC3 uses the U.S. dollar as its functional currency. On June 30,
2005, CFC3 pays a dividend of $150 to CFC2. CFC2 pays Country Z withholding tax of
$20 and Country Y net income tax of $15 with respect to the dividend from CFC3.
CFC2 has no other items of income or expense in 2005, so its subpart F income and
earnings and profits for 2005 are $115, all attributable to the dividend from CFC3, and
USP includes $115 in income under section 951 (a)(1 )(A) with respect to CFC2 for 2005.
Also on June 30, 2005, CFC2 distributes $115 of cash to CFC1 that is PTI excluded
from CFC 1's gross income under section 959(b). The distribution is subject to $10 of
Country Y withholding tax and $5 of Country X income tax in the hands of CFC1, which
are taxes on PTI excluded from CFC1's post-1986 foreign income taxes and accounted
for under section 960(a)(3). Later in 2005, CFC1 distributes $100 of PTI to USP. USP
pays $10 of withholding tax to Country X with respect to the $100 PTI distribution,
receiving cash of $90. As of the close of 2005, including taxes paid and deemed paid
under section 902(b) by CFC2 with respect to the distribution from CFC3 but before
accounting for the effect of the subpart F inclusion or distribution to CFC1, CFC2 has
post-1986 undistributed earnings of $1,150 and post-1986 foreign income taxes of
$200. USP has a base period amount of $0.
(ii) Result. Under sections 960(a)(1) and 902(a), $20 (($115/$1,150) x $200) of
foreign income taxes paid by CFC2 are deemed paid by USP with respect to the $115
subpart F inclusion attributable to CFC2. Under section 960(a)(3), $15 of foreign taxes
($10 of withholding tax and $5 of income tax) paid by CFC1 with respect to the $115
distribution of PTI from CFC2 are deemed paid by USP with respect to the $100 of
remaining PTI distributed from CFC1 to USP. However, under section 965(a)(2), the
$100 PTI distribution from CFC1 is a cash dividend and, therefore, a qualifying dividend
only to the extent of $100, the lesser of the amount USP included in income under
section 951 (a)(1 )(A) in 2005 as a result of the cash dividend paid from CFC3 to CFC2 in
2005 ($115) or the amount of the PTI distribution from CFC1 to USP ($100). The
amount of foreign taxes deemed paid under section 960( a)( 1) with respect to the $100
section 965(a)(2) dividend is $17.39 (($1001$115) x $20), and the amount of foreign
taxes deemed paid under section 960(a)(3) with respect to the $100 PTI distribution is
$15.
USP is entitled to a ORO of $85 under section 965(a) with respect to $100 of the
$115 subpart F inclusion and associated PTI distribution. Subject to other applicable
limitations, USP may claim a foreign tax credit or deduction for $1.50 (15 percent of the
$10 withholding tax imposed on the $100 PTI distribution), and may claim a credit for

$2.61 (15 percent of the $17.39 of taxes deemed paid under section 960(a)(1) with
respect to the $100 qualifying portion of the subpart F inclusion from CFC2), plus $2.25
(15 percent of the $15 of tax deemed paid under section 960(a)(3) with respect to the
$100 PTI distribution). USP may also claim a credit for the $2.61 of foreign tax deemed
paid under section 960(a)(1) with respect to the $15 of USP's subpart F inclusion that
does not result in a qualifying dividend. If USP elects to credit foreign taxes in 2005,
USP includes $5.22 in income under section 78 with respect to the $2.61 of foreign tax
deemed paid under section 902 with respect to the $15 nondeductible CFC dividend
and the $2.61 of foreign tax deemed paid under section 960(a)(1) with respect to the
$15 of USP's subpart F inclusion that does not result in a qualifying dividend. No grossup is required under section 78 with respect to the $2.25 of taxes deemed paid under
section 960(a)(3), equal to 15 percent of the $15 of the taxes paid by CFC1 on the $115
PTI distribution from CFC2, which was included in USP's income under section
951 (a)(1 )(A). Under section 965(d)(1), no credit or deduction is allowed for the
remaining $8.50 of withholding tax, $14.78 of tax deemed paid under section 960(a)(1),
or $12.75 of tax deemed paid under section 960(a)(3), which represent the taxes paid or
deemed paid with respect to the 85 percent deductible portion of the $100 qualifying
dividend. No gross-up is required under section 78 for the $14.78 of tax deemed paid
under section 960(a)(1) which is not allowed as a credit or for any portion of the taxes
deemed paid under section 960(a)(3). CFC2's post-1986 undistributed earnings and
post-1986 foreign income taxes, computed as of January 1, 2006, are $1,035 ($1,150 $115) and $180 ($200 - $20), respectively.
Example 6. Qualifying dividend under section 965(a)(2) attributable to dividend
from third-tier CFC, subpart F inclusion from second-tier CFC, distribution through firsttier CFC to USP, and additional PTI distribution. (i) Facts. The facts are the same as
Example 5, except that CFC1 distributes an additional $15 of PTI described in section
959(c)(2) to USP in the election year, subject to Country X withholding tax of $1.50.
The additional $15 of PTI is attributable to subpart F income of CFC1 that was included
in USP's income in a year prior to the election year.
(ii) Result. The additional $15 of PTI distributed is a cash dividend that is eligible
to be treated as a qualifying dividend described in section 965(a)(2) because during the
election year USP included $115 in income under section 951 (a)(1 )(A) attributable to
the cash dividend paid from CFC3 to CFC2, and CFC2 made cash distributions
described in section 959(b) of $115 to CFC 1. USP may identify the additional $15 PTI
distribution as a qualifying dividend and claim an 85 percent DRD of $12.75 with respect
to the remaining $15 of the subpart F inclusion resulting from the dividend paid by CFC3
to CFC2. The amount of foreign taxes deemed paid under section 960(a)(1) with
respect to the $115 of section 965(a)(2) dividends is $20 (($115/$115) x $20), and the
amount of foreign taxes deemed paid under section 960(a)(3) with respect to the $115
of PTI distributions is $15 ($15 of foreign taxes paid by CFC1 with respect to the $115
distribution of PTI from CFC2). Subject to other applicable limitations, USP may claim a

foreign tax credit or deduction for $1.73 (15 percent of the $11.50 withholding tax
imposed on the $115 PTI distribution), and may claim a credit for $3 (15 percent of the
$20 of taxes deemed paid under section 960{a){1) with respect to the $115 subpart F
inclusion from CFC2), plus $2.25 (15 percent of the $15 of tax deemed paid under
section 960(a)(3) with respect to the $115 PTI distribution). If USP elects to credit
foreign taxes in 2005, USP includes $3 in income under section 78. Under section
965(d){1), no credit or deduction is allowed for the remaining $9.77 of withholding tax,
$17 of tax deemed paid under section 960(a)(1), or $12.75 of tax deemed paid under
section 960(a){3), which represent the taxes paid or deemed paid with respect to the 85
percent deductible portion of the $115 qualifying dividend. No gross-up is required
under section 78 for the $17 of tax deemed paid under section 960(a){1) which is not
allowed as a credit or for any portion of the taxes deemed paid under section 960(a){3).
The adjustments to CFC2's post-1986 undistributed earnings and post-1986 foreign
income taxes are the same as in Example 5.

SECTION 5. DISALLOWANCE OF DEDUCTIONS FOR CERTAIN EXPENSES
RELATED TO DEDUCTIBLE PORTION OF QUALIFYING DIVIDENDS

.01 Expenses Incurred by Taxpayer
The disallowance of deductions for expenses under section 965{d)(2) applies
only to expenses that are directly allocable to the deductible portion of qualifying
dividends. See section 9.01 of Notice 2005-38. Therefore, section 965(d)(2) disallows
a deduction for 85 percent of directly allocable expenses, which are those expenses
that relate directly to generating qualifying dividends. These expenses are:
(a) Stewardship expenses described in Treas. Reg. §1.861-8(e)(4) that are
definitely related and allocable to qualifying dividends;
(b) Legal, tax, accounting, consulting and similar fees and expenses, including
expenses for employee compensation, for the rendering of advice and the preparation
of documents directly related to (i) plans to repatriate earnings in the election year,

including the determination of the potentially eligible amount of qualifying dividends, the
decision to repatriate earnings from particular CFCs, and the identification of particular
distributions as cash dividends, qualifying dividends, or other amounts, (ii) the adoption
and approval of a domestic reinvestment plan, and (iii) the declaration and payment of
qualifying dividends;
(c) Fees and expenses related to tax accounting and reporting for qualifying
dividends in the election year; and
(d) Wire transfer, currency exchange, and similar fees incurred in connection with
the payment of qualifying dividends.
For purposes of this section 5.01, only a pro rata portion of stewardship
expenses accrued in the election year with respect to each CFC in which the taxpayer is
a U.S. shareholder is considered definitely related and allocable to qualifying dividends.
The pro rata portion is the amount that bears the same ratio to the stewardship
expenses as the qualifying dividends paid by a CFC bear to the total amount of
dividends and subpart F inclusions included in the U.S. shareholder's income with
respect to that CFC and subpart F inclusions attributable to stock of any other CFCs
held indirectly by the U.S. shareholder in the same chain of ownership described in
section 958(a) in the election year. Deductions for other directly allocable expenses
described in the preceding paragraph are subject to disallowance in the year paid or
accrued, whether that year is the election year or a different taxable year.
Deductions for the allowable 15 percent portion of expenses that are directly
allocable to qualifying dividends are allocated and apportioned in accordance with the

generally applicable rules of sections 861 through 865 and the regulations thereunder.
See section 6 of this notice.
The disallowance of deductions under section 965(d)(2) does not extend to
expenses that, while treated as definitely related to the production of income in a
category that includes qualifying dividends, do not relate directly to generating qualifying
dividends. Expenses described in the preceding sentence include interest expense,
research and experimental expenses, general and administrative expenses,
depreciation and amortization, sales and marketing expenses, state and local taxes,
and any other expenses not described in the first paragraph of this section 5.01. In
addition, legal, tax, accounting, consulting, and similar fees and expenses related to the
implementation of investments in the United States contemplated by a domestic
reinvestment plan are not considered directly allocable to qualifying dividends .
.02 Expenses Incurred by CFCs

Deductions for expenses properly incurred by CFCs that are otherwise deductible
in computing subpart F income and earnings and profits are not limited by section
965(d)(2).

SECTION 6. ALLOCATION AND APPORTIONMENT OF EXPENSES TO SEPARATE
CATEGORIES WITH QUALIFYING DIVIDENDS
.01 No New Separate Category

Section 965 does not provide for qualifying dividends to be assigned to a special
separate category or otherwise modify the generally applicable look-through rules of

section 904(d)(3) for determining the separate category to which dividends and subpart
F inclusions from CFCs are assigned. For purposes of allocating expenses on the basis
of assets in the election year, stock of CFCs paying qualifying dividends is
characterized under the generally applicable rules of Treas. Reg. §1.861-12T(c)(3) .
.02 Treatment of CFC Stock and Qualifying Dividends under Section 864(e)
The first sentence of section 864(e)(3) (section 864(e)(3)(A) for transactions
before January 1, 2005) provides that, for purposes of allocating and apportioning any
deductible expense, any tax-exempt asset (and any income from such an asset) shall
not be taken into account. The second sentence of section 864(e)(3) provides that a
similar rule applies in the case of the portion of certain dividends equal to the deduction
allowable under section 243 or 245(a) with respect to such dividend, and in the case of
a like portion of any stock the dividends on which would be so deductible. A qualifying
dividend is not exempt income, and the CFC stock on which qualifying dividends are
paid is not an exempt asset, within the meaning of the first sentence of section

864(e)(3). In addition, the similar rule in the second sentence of section 864(e)(3) does
not apply to qualifying dividends or the CFC stock on which qualifying dividends are
paid, since no deduction is allowed under section 243 or 245 for any dividend for which
a deduction is allowed under section 965. Section 965(c)(4). Accordingly, gross
income attributable to a qualifying dividend is not considered exempt income, and no
portion of the stock of a CFC paying a qualifying dividend is considered an exempt
asset, for purposes of allocating and apportioning interest and other expenses in the
election year.

.03 Expenses Allocated and Apportioned to Separate Categories that Include
Qualifying Dividends
Section 965 does not modify the generally applicable rules of sections 861
through 865 and the regulations thereunder for allocating and apportioning expenses
and losses to separate categories described in section 904(d)(1) and Treas. Reg.
§1.904-5(m) (separate categories) that include nondeductible CFC dividends. However,
the amount of nondeductible CFC dividends in a separate category must be determined
for purposes of applying the limitations on the allowable foreign tax credit for the
election year under section 904 and section 965(e)(1) and related computations under
sections 53 and 55. See sections 7, 8, and 9 of this notice. For this purpose, expenses
that are allocated and apportioned to a separate category that includes qualifying
dividends will be considered to reduce other foreign source gross income in the
separate category before reducing foreign source income attributable to nondeductible
CFC dividends. Except as provided in section 7.01 of this notice (relating to the taxable
income limitation of section 965(e)(2)(A)), if expenses and other deductions properly
allocated and apportioned to foreign source gross income in a separate category
exceed the amount of foreign source gross income exclusive of nondeductible CFC
dividends in that separate category, such excess will reduce foreign source income
attributable to nondeductible CFC dividends in the separate category to the extent
thereof, and any excess deductions will constitute a separate limitation loss described in
section 904(f)(5). See section 8 of this notice for rules relating to the allocation and
recapture of separate limitation losses in the election year and subsequent years.

The amount of qualifying dividends eligible for the ORO, the amount of
nondeductible CFC dividends described in section 965(e)(3), and the amount of taxable
income for the election year are determined without regard to the manner in which
deductible expenses are allocated and apportioned in the election year. Therefore, the
amount of the section 965(a) ORO, the amount of foreign taxes and expenses for which
credit or deduction is disallowed under section 965(d), the amount of taxable income
determined under section 965(e)(2)(A), and the allowable NOL deduction determined
under section 965(e)(2)(8) are not affected if nondeductible CFC dividends in a
separate category are reduced or eliminated by reason of the allocation and
apportionment of expenses pursuant to sections 861 through 865 and the regulations
thereunder and this section 6 .

.04 Examples
The following examples illustrate the application of this section 6. Expenses
described in the examples do not include any expenses for which a deduction is
disallowed under section 965(d)(2) or any other applicable Code provision.
Example 1. Separate limitation income exceeds nondeductible CFC dividends.
(i) Facts. USP has the following items of gross income and expense for the election
year: $1,200 of foreign source general limitation gross income, including $1,000 of
qualifying dividends, $1,000 of expenses allocated and apportioned to general limitation
income (including the 85 percent ORO of $850, which pursuant to section 3.03 of this
notice is allocated to reduce general limitation income), $300 of u.S. source gross
income, and $100 of expenses allocated and apportioned to U.S. source income.
Accordingly, USP has $400 of taxable income and $150 of nondeductible CFC
dividends in the election year, and the taxable income limitation of section 965(e)(2)(A)
does not apply.
(ii) Result. Under section 6.03 of this notice, general limitation expenses are
considered to reduce other general limitation income before reducing nondeductible

CFC dividends. Accordingly, USP has $200 of foreign source general limitation taxable
income, of which $150 is attributable to nondeductible CFC dividends, and $200 of U.S.
source taxable income.
Example 2. Nondeductible CFC dividends exceed separate limitation income;
nondeductible CFC dividends reduced. (i) Facts. The facts are the same as in
Example 1, except that USP has an additional $100 of deductible expenses allocated
and apportioned to general limitation income. Accordingly, USP has $300 of taxable
income and $150 of nondeductible CFC dividends in the election year, and the taxable
income limitation of section 965(e)(2)(A) does not apply.
(ii) Result. Under section 6.03 of this notice, general limitation expenses reduce
nondeductible CFC dividends after reducing other general limitation income.
Accordingly, USP has $100 of foreign source general limitation income, all attributable
to nondeductible CFC dividends, and $200 of U.S. source taxable income.
Example 3. Nondeductible CFC dividends exceed separate limitation income;
separate limitation loss with U.S. source taxable income. (i) Facts. The facts are the
same as in Example 1, except that USP has an additional $250 of deductible expenses
allocated and apportioned to general limitation income. Accordingly, USP has $150 of
taxable income and $150 of nondeductible CFC dividends in the election year, and the
taxable income limitation of section 965(e)(2)(A) does not apply.
(ii) Result. Under section 6.03 of this notice, general limitation expenses reduce
nondeductible CFC dividends after reducing other general limitation income, and the
excess deductions constitute a separate limitation loss. Accordingly, prior to the
application of section 904(f) USP has a ($50) foreign source general limitation separate
limitation loss, no general limitation nondeductible CFC dividends, and $200 of U.S.
source taxable income.
Example 4. Nondeductible CFC dividends exceed separate limitation income;
separate limitation loss with U.S. and foreign source taxable income. (i) Facts. The
facts are the same as in Example 3, except that instead of $300 of U.S. source gross
income USP has $200 of U.S. source gross income and $100 of foreign source passive
gross income. Accordingly, USP has $150 of taxable income and $150 of
nondeductible CFC dividends in the election year, and the taxable income limitation of
section 965(e)(2)(A) does not apply.
(ii) Result. Under section 6.03 of this notice, general limitation expenses reduce
nondeductible CFC dividends after reducing other general limitation income, and the
excess deductions constitute a separate limitation loss. Accordingly, prior to the
application of section 904(f) USP has a ($50) foreign source general limitation separate
limitation loss, no general limitation nondeductible CFC dividends, $100 of foreign

source passive taxable income, no passive limitation nondeductible CFC dividends, and
$100 of U.S. source taxable income.

SECTION 7. LIMITATION ON REDUCTION IN TAXABLE INCOME BELOW AMOUNT
OF NONDEDUCTIBLE CFC DIVIDENDS PURSUANT TO SECTION 965(e)(2)
.01 In General

Under section 965(e)(2)(A), taxable income for the election year cannot be less
than the amount of nondeductible CFC dividends received during such year. In
addition, section 965(e)(2)(B)(i) provides that nondeductible CFC dividends are not
taken into account under section 172 in determining the amount of any NOL for the
election year. Accordingly, if deductible expenses and losses for the election year
(including the ORO allowed under section 965(a) but not including expenses for which
section 965(d)(2) disallows a deduction) exceed the taxpayer's gross income exclusive
of the amount of nondeductible CFC dividends, taxable income will be equal to the
amount of nondeductible CFC dividends, and the excess deductions will constitute an
NOL for the taxable year. If, determined without regard to section 965(e)(2)(A), taxable
income for the election year would be less than the amount of nondeductible CFC
dividends received during such year, the excess of the deductions allocated and
apportioned to a separate category over the amount of gross income in the separate
category exclusive of the nondeductible CFC dividends will constitute a separate
limitation loss with respect to that separate category for the election year. Such
separate limitation loss is allocated in accordance with section 904(f) and section 8 of

this notice.
Section 965(e)(2)(B)(ii) provides that nondeductible CFC dividends are not taken
into account in determining taxable income for the election year for purposes of the
second sentence of section 172(b )(2), which applies in determining the allowable NOL
carryover or carryback to that year. Therefore, the amount of the allowable NOL
deduction for the election year is limited to the excess of taxable income over the
amount of nondeductible CFC dividends. However, taxable income attributable to
nondeductible CFC dividends is taken into account in determining the source and
allocation of NOL deductions taken into account in the election year under paragraph 1
of Notice 89-3, 1989-1 C.B. 623 .
.02 Examples
The following examples illustrate the application of section 965(e)(2) and this
section 7.
Example 1. Taxable income limitation; one income category. (i) Facts. USP
has the following items of gross income and expense for the election year: $1,000 of
foreign source general limitation gross income, including $100 of qualifying dividends,
and $1,000 of deductible expenses allocated and apportioned to general limitation
income (computed after the disallowance of expenses directly allocable to the
deductible portion of the qualifying dividends), including the $85 DRD allowed under
section 965(a) and $20 of expenses relating to nondeductible CFC dividends.
(ii) Result. Under section 965(e)(2)(A), USP's taxable income for the election
year cannot be less than $15, the amount of nondeductible CFC dividends received
during such year. Because taxable income computed without regard to section
965(e)(2)(A) ($0) is less than the amount of nondeductible CFC dividends ($15), under
section 7.01 of this notice the $1,000 of general limitation expenses reduce general
limitation income only to the extent of $985 ($1,000 - $15), the excess of general
limitation gross income over general limitation nondeductible CFC dividends.
Accordingly, USP has $15 of general limitation taxable income, all attributable to
nondeductible CFC dividends.

Under section 965(e)(2)(B)(i), the amount of USP's NOL for the election year is
computed without regard to the $15 of nondeductible CFC dividends. Accordingly, USP
has general limitation taxable income of $15 and a general limitation loss of ($15) that
constitutes a net operating loss of ($15) for the election year.
Example 2. Taxable income limitation; U.S. and foreign source income. (i)
Facts. The facts are the same as in Example 1, except that USP has $1,500 rather
than $1,000 of deductible expenses allocated and apportioned to general limitation
income, and also has $1,000 of U.S. source gross income and $500 of deductible
expenses allocated and apportioned to U.S. source income.
(ii) Result. Under section 965(e)(2)(A), USP's taxable income for the election
year cannot be less than $15, the amount of nondeductible CFC dividends received
during such year. Because taxable income computed without regard to section
965(e)(2)(A) ($0) is less than the amount of nondeductible CFC dividends ($15), under
section 7.01 of this notice the $1,500 of general limitation expenses reduce general
limitation income only to the extent of $985 ($1,000 - $15), the excess of general
limitation gross income over general limitation nondeductible CFC dividends, and the
$515 ($1,500 - $985) excess of general limitation deductions over that amount
constitutes a separate limitation loss. Accordingly, prior to the application of section
904(f) USP has $15 of general limitation taxable income, all attributable to
nondeductible CFC dividends, a general limitation separate limitation loss of ($515), and
U.S. source taxable income of $500 ($1,000 - $500).
Under section 965(e)(2)(A), the amount of USP's NOL for the election year is
computed without regard to the $15 of nondeductible CFC dividends. Accordingly, USP
has taxable income of $15 and a net operating loss of ($15) for the election year.
Example 3. Taxable income limitation; U.S. loss and foreign source income. (i)
Facts. The facts are the same as in Example 2, except that instead of $1,000 of U.S.
source gross income USP has $400 of U.S. source gross income and $600 of foreign
source passive gross income.
(ii) Result. Under section 965(e)(2)(A), USP's taxable income for the election
year cannot be less than $15, the amount of nondeductible CFC dividends received
during such year. Because taxable income computed without regard to section
965(e)(2)(A) ($0) is less than the amount of nondeductible CFC dividends ($15), under
section 7.01 of this notice the $1,500 of general limitation expenses reduce general
limitation income only to the extent of $985 ($1,000 - $15), the excess of general
limitation gross income over general limitation nondeductible CFC dividends, and the
$515 ($1,500 - $985) excess of general limitation deductions over that amount
constitutes a separate limitation loss. Accordingly, prior to the application of section

904(f) USP has $15 of general limitation taxable income, all attributable to
nondeductible CFC dividends, a general limitation separate limitation loss of ($515),
foreign source passive income of $600, and U.S. source loss of ($100) ($400 - $500).
Under section 965(e)(2)(A), the amount of USP's NOL for the election year is
computed without regard to the $15 of nondeductible CFC dividends. Accordingly, USP
has taxable income of $15 and a net operating loss of ($15) for the election year.
Example 4. Net operating loss absorption. (i) Facts. Before taking into account
the NOL deduction or applying section 904(f) in the election year, USP has $100 of
general limitation taxable income, all attributable to nondeductible CFC dividends, $200
of passive limitation taxable income, and a $100 NOL from prior years, all attributable to
general limitation income.
(ii) Result. Because USP's available NOL ($100) does not exceed the amount
of taxable income exclusive of nondeductible CFC dividends for the election year
($200), the net operating loss limitation of section 965(e)(2)(B)(ii) does not apply to limit
USP's NOL deduction for the election year. Under section 965(e)(2)(B)(i) and section
7.01 of this notice, USP's $100 of nondeductible CFC dividends is not taken into
account in determining USP's allowable NOL deduction for the election year, but is
taken into account in determining the source and allocation of NOL deductions
absorbed in the election year. Accordingly, under paragraph (1 )(b )(ii) of Notice 89-3,
the $100 general limitation NOL deduction reduces USP's $100 of general limitation
income to zero. After allocation of the NOL deduction but before application of section
904(f), USP has $200 of passive limitation taxable income and no general limitation or
passive limitation nondeductible CFC dividends in the election year.
Example 5. Net operating loss limitation. (i) Facts. Before taking into account
the NOL deduction or applying section 904(f), USP has $500 of general limitation
foreign source taxable income, including $15 of nondeductible CFC dividends, $500 of
passive limitation foreign source taxable income, and $1,000 of U.S. source taxable
income for the election year. USP also has a net operating loss carryover of $2,000,
consisting of $1,000 of U.S. loss, $600 of general limitation loss, and $400 of passive
limitation loss.
(ii) Result. Under section 965(e)(2)(B)(ii), USP's NOL deduction for the election
year is limited to $1,985, the amount of USP's taxable income exclusive of
nondeductible CFC dividends. Under paragraph (1 )(b)(i) of Notice 89-3, the $1,000
U.S. loss component of the NOL carryover is absorbed first, and $985 of the NOL
carryover is available to offset foreign source income. Under paragraph (1 )(b)(ii) of
Notice 89-3, separate limitation losses that are part of the NOL carryover are tentatively
carried over to the extent of separate limitation income in the same category. Pursuant
to section 965(e)(2)(B)(ii) and section 7.01 of this notice, the $15 of nondeductible CFC

dividends is not taken into account in determining the amount of the allowable NOL
deduction, but is taken into account in determining the amount of general limitation
income available to be absorbed by the allowable NOL. Accordingly, $500 of the $600
general limitation component of the NOL and $400 of the passive limitation component
of the NOL are tentatively carried over to the election year, eliminating the $500 of
general limitation income (including the $15 of nondeductible CFC dividends) and $400
of the $500 of passive income.
Under paragraph (1)(b )(iii) of Notice 89-3, a proportionate part of the remaining
loss from each separate limitation category is next carried over, to the extent of the
remaining NOL carryover amount of $85, and allocated in accordance with section
904(f)(5). Accordingly, an additional $85 of the general limitation component of the NOL
is carried over to the election year and allocated to passive income in accordance with
section 904(f)(5). At the conclusion of these steps, USP has $15 of passive income in
the election year and a remaining NOL carryover to other years of ($15), all attributable
to general limitation loss .

.03 Other Deduction Limitations
For purposes of applying other Code provisions that contain limitations based on
the amount of the taxpayer's gross income or taxable income for the taxable year, gross
income includes qualifying dividends, and taxable income includes nondeductible CFC
dividends .

.04 Examples
The following examples illustrate the application of section 7.03 of this notice.
Example 1. No taxable income limitation under section 965(e)(2)(A). (i) Facts.
Before calculating its allowable charitable contribution deduction under section 170,
USP has the following items of gross income and expense for the election year: $1,000
of foreign source general limitation gross income, including $200 of qualifying dividends,
$500 of deductible expenses allocated and apportioned to general limitation income
(computed after the disallowance of expenses directly allocable to the deductible portion
of the qualifying dividends), including the $170 DRD allowed under section 965(a) and
$20 of expenses relating to nondeductible CFC dividends, $1,000 of U.S. source gross
income, and $500 of deductible expenses allocated and apportioned to U.S. source
income. Under section 7.01 of this notice, without regard to the charitable deduction
USP has $500 of general limitation taxable income, including $30 of nondeductible CFC
dividends, and $500 of U.S. source taxable income for the election year.

(ii) Result. Section 170(b )(2), which limits a corporation's charitable contribution
deduction to 10 percent of taxable income computed without regard to section 170 and
certain other provisions not relevant on these facts, limits USP's allowable deduction to
$100, 10 percent of USP's taxable income of $1000 for the election year. If USP claims
the $100 deduction, USP has $900 of taxable income for the election year.
Example 2. Section 965(e)(2)(A) taxable income limitation. (i) Facts. Before
calculating its allowable charitable contribution deduction under section 170, USP has
the following items of gross income and expense for the election year: $1,000 of foreign
source general limitation gross income, including $200 of qualifying dividends, and
$1,000 of deductible expenses allocated and apportioned to general limitation income
(computed after the disallowance of expenses directly allocable to the deductible portion
of the qualifying dividends), including the $170 ORO allowed under section 965(a) and
$20 of expenses relating to nondeductible CFC dividends. Under sections 965(e)(2)(A)
and 965(e)(2)(B)(i) and section 7.01 of this notice, without regard to the charitable
contribution deduction, USP's current year deductions are limited to $970 and USP has
$30 of general limitation taxable income, all attributable to nondeductible CFC
dividends. Under section 965(e)(2)(B)(i) and section 7.01 of this notice, USP has a
general limitation loss of $30 that constitutes a net operating loss of $30 for the election
year.
(ii) Result. Section 170(b )(2), which limits a corporation's charitable contribution
deduction to 10 percent of taxable income computed without regard to section 170 and
certain other provisions not relevant on these facts, limits USP's allowable deduction to
$3, 10 percent of USP's taxable income of $30 for the election year. If USP claims the
$3 deduction, USP has $30 of taxable income and a $33 NOL for the election year .

.05 No Other Limits on Use of Deductions to Reduce Taxable Income
Section 965(e)(2) limits the use of deductions to reduce taxable income below
the amount of nondeductible CFC dividends, but does not restrict the use of deductions
to offset income in excess of the amount of nondeductible CFC dividends. Therefore,
deductions may offset income in excess of the amount of nondeductible CFC dividends,
including income attributable to the section 78 gross-up that is required with respect to
foreign taxes deemed paid with respect to nondeductible CFC dividends.

SECTION 8. OVERALL FOREIGN LOSS AND SEPARATE LIMITATION LOSS RULES

.01 In General
Section 965 does not modify the operation of the overall foreign loss and
separate limitation loss allocation and recapture rules or the U.S. loss allocation rules of
section 904(f). Accordingly, except in situations where the taxable income limitation of
section 965(e)(2)(A) applies, as provided in paragraph .02 of this section, section 904(f)
may operate to reduce amounts of foreign source income, which may include
nondeductible CFC dividends in a separate category, or recharacterize such amount as
U.S. source income or foreign source income in a different separate category for
purposes of applying the limitations on the allowable foreign tax credit under sections
904(d) and 965(e)(1).
The amount of taxable income and the amount of the allowable NOL deduction
for the election year are determined prior to the application of section 904(f). Therefore,
the amount of the section 965(a) ORO, the amount of foreign taxes and expenses for
which a credit or deduction is disallowed under section 965(d), the amount of taxable
income determined under section 965(e)(2)(A), and the allowable NOL deduction
determined under section 965(e)(2)(8) are not affected if nondeductible CFC dividends
are reduced or recharacterized as U.S. source income or foreign source income in
another separate category pursuant to section 904(f) .
.02 Loss Allocation
To the extent a separate limitation loss or U.S. loss is allocated under section
904(f)(5)(8) or 904(f)(5)(O) to reduce foreign source taxable income in a separate

category that includes nondeductible CFC dividends, such loss will be considered first to
reduce other foreign source income in the separate category before foreign source
income attributable to nondeductible CFC dividends is reduced. Even if nondeductible
CFC dividends are reduced as a result of a separate limitation loss or U.S. loss
allocation, income in a later year in the separate category that is recharacterized under
section 904(f)(5)(C) or section 904(f)(1) as income in the loss category or as U.S.
source income, as the case may be, will not be considered nondeductible CFC
dividends.
If the taxable income limitation of section 965(e)(2)(A) applies in the election
year, taxable income equals the amount of nondeductible CFC dividends. In this case,
after the allocation and apportionment of expenses and the determination and allocation
of the allowable NOL deduction for the election year described in sections 6 and 7 of
this notice, but prior to the application of section 904(f), a taxpayer may have separate
limitation income attributable to nondeductible CFC dividends with or without a separate
limitation loss in the same separate category, and may have separate limitation income
or separate limitation losses in other separate categories as well as U.S. source taxable
income or loss. Because separate limitation losses and U.S. losses in the aggregate
may not reduce the sum of separate limitation income and U.S. source income below
the amount of nondeductible CFC dividends in the election year, the excess of such
losses over the amount of such income exclusive of the amount of nondeductible CFC
dividends will constitute a net operating loss for the election year. For purposes of
determining which losses are absorbed in the election year and which losses make up

the net operating loss in the election year if the taxable income limitation of section

965(e)(2) applies, separate limitation losses and U.S. losses are allocated under section
904(f)(5)(8) and (0) without regard to nondeductible CFC dividends. See Examples 3
and

1. in section 8.05 of this notice .

.03 Loss Recapture
After separate limitation losses for the taxable year are allocated to reduce
separate limitation income in other separate categories, any remaining separate
limitation income may be recharacterized as income in another separate category or as
U.S. source income, if the taxpayer had separate limitation losses in that same separate
category in a prior taxable year that were allocated to reduce separate limitation income
in that other separate category or U.S. source income. This recharacterization of
income operates to recapture the prior year separate limitation loss or overall foreign
loss. See section 904(f)(1), section 904(f)(5)(C), and Notice 89-3. Separate limitation
losses and overall foreign losses may be recaptured in the election year out of income
in any separate category with separate limitation income, including income attributable
to nondeductible CFC dividends, whether or not the taxable income limitation of section
965(e)(2)(A) applies in the election year.
Separate limitation losses and overall foreign losses with respect to a separate
category that includes nondeductible CFC dividends will be considered recaptured first
out of other income in the separate category before any income attributable to
nondeductible CFC dividends is recharacterized. See Example 5 in section 8.05 of this
notice. If nondeductible CFC dividends are recharacterized as U.S. source income or

income in a different separate category, the recharacterized income is not treated as
nondeductible CFC dividends. See Examples 6 and

in section 8.05 of this notice .

.04 Treatment of Foreign Taxes Imposed with Respect to Nondeductible CFC
Dividends
The recharacterization of income under the overall foreign loss or separate
limitation loss recapture rules does not result in the recharacterization of any tax.
Section 904(f)(5)(C). Accordingly, foreign tax attributable to nondeductible CFC
dividends in a separate category remains in that separate category even if the income
attributable to the nondeductible CFC dividends is recharacterized. See section 9.02 of
this notice for rules relating to the application of section 965(e)(1) to foreign taxes
attributable to nondeductible CFC dividends when a portion of nondeductible CFC
dividends is recharacterized under section 904(f) and this section 8 .

.05 Examples
The following examples illustrate the application of the rules of section 904(f) and
this section 8.
Example 1. No taxable income limitation; allocation of separate limitation loss.
(i) Facts. After the allocation and apportionment of expenses but before the application
of section 904(f), USP has the following items of taxable income for the election year:
$100 of general limitation income, all attributable to nondeductible CFC dividends,
($100) of passive limitation loss, and $200 of U.S. source taxable income.
(ii) Result. Because USP's taxable income in the election year ($200) exceeds
the amount of nondeductible CFC dividends ($100), the taxable income limitation of
section 965(e)(2)(A) does not apply. Under section 904(f)(5)(B), paragraph (2) of Notice
89-3, and section 8.02 of this notice, USP's $100 passive limitation loss is allocated to
reduce the $100 of general limitation income to zero. After allocation of the separate
limitation loss, USP has no general limitation or passive income, no general limitation or
passive limitation nondeductible CFC dividends, and $200 of U.S. source taxable

income. USP has a passive limitation loss recapture account of $100 with respect to
general limitation income.
Example 2. Taxable income limitation; allocation of separate limitation loss. (i)
Facts. The facts are the same as in Example 1, except that USP has $40, rather than
$200, of U.S. source taxable income in the election year.
(ii) Result. Because USP's taxable income computed without regard to section
965(e )(2)(A) ($40) is less than the amount of nondeductible CFC dividends ($100), the
taxable income limitation of section 965(e)(2)(A) applies. Therefore, under section 8.02
of this notice the loss allocation rules of section 904(f)(5) and Notice 89-3 are applied
without regard to the nondeductible CFC dividends. Accordingly, under section
904(f)(5)(A) and section 8.02 of this notice $40 of USP's $100 passive limitation loss is
allocated to reduce U.S. source taxable income to zero, and the remaining $60 passive
loss constitutes an NOL for the election year. After allocation of the separate limitation
loss, USP has $100 of general limitation income, all attributable to nondeductible CFC
dividends, a $60 passive limitation loss that constitutes an NOL, and no U.S. source
taxable income. USP has a $40 overall foreign loss account in the passive category.
Example 3. Taxable income limitation; allocation of U.S. loss. (i) Facts. After
the allocation and apportionment of expenses but before the application of section
904(f), USP has the following items of taxable income for the election year: $750 of
general limitation income, of which $500 is attributable to nondeductible CFC dividends,
and $750 of U.S. source loss.
(ii) Result. Because USP's taxable income computed without regard to section
965(e)(2)(A) ($0) is less than the amount of nondeductible CFC dividends ($500), the
taxable income limitation of section 965(e)(2)(A) applies. Therefore, under section 8.02
of this notice the loss allocation rules of section 904(f)(5) and Notice 89-3 are applied
without regard to the nondeductible CFC dividends. Accordingly, under section
904(f)(5)(D) and section 8.02 of this notice $250 of USP's $750 U.S. loss is allocated to
reduce general limitation income to $500, and the remaining $500 U.S. loss constitutes
an NOL for the election year. After allocation of the U.S. loss, USP has $500 of general
limitation income, all attributable to nondeductible CFC dividends, and a $500 U.S. loss
that constitutes an NOL.
Example 4. Taxable income limitation; allocation of separate limitation loss and
U.S. loss. (i) Facts. After the allocation and apportionment of expenses but before the
application of section 904(f), USP has the following items of taxable income for the
election year: $100 of general limitation income attributable to nondeductible CFC
dividends, ($100) of general limitation loss, $100 of passive income, and ($100) of U.S.
source loss.

(ii) Result. Because USP's taxable income computed without regard to section
965(e)(2)(A) ($0) is less than the amount of nondeductible CFC dividends ($100), the
taxable income limitation of section 965(e)(2)(A) applies. Therefore, under section 8.02
of this notice the loss allocation rules of section 904(f)(5) and Notice 89-3 are applied
without regard to the nondeductible CFC dividends. Accordingly, under section
904(f)(5)(B) and section 8.02 of this notice USP's $100 general limitation loss is
allocated to reduce passive income to zero, and the $100 U.S. loss constitutes an NOL
for the election year. After allocation of the separate limitation loss, USP has $100 of
general limitation income, all attributable to nondeductible CFC dividends, and a $100
U.S. loss that constitutes an NOL. USP has a $100 general limitation loss recapture
account with respect to passive income.
Example 5. OFL recapture from other income. (i) Facts. After the allocation
and apportionment of expenses but before the application of section 904(f), USP has
the following items of taxable income for the election year: $150 of general limitation
income attributable to nondeductible CFC dividends and $190 of other general limitation
income. USP has a pre-2005 general limitation OFL account of $400.
(ii) Result. Under section 904(f)(1), 50 percent or $170 of USP's general
limitation income is recharacterized as U.S. source income. Since the recapture
amount does not exceed USP's foreign source general limitation income exclusive of
nondeductible CFC dividends, after OFL recapture USP has $150 of nondeductible CFC
dividends and $20 of other income in the general limitation category, and $170 of U.S.
source income. USP's general limitation OFL recapture account is reduced by $170.
Example 6. OFL recapture from nondeductible CFC dividends. (i) Facts. After
the allocation and apportionment of expenses but before the application of section
904(f), USP has the following items of taxable income for the election year: $150 of
general limitation income, all attributable to nondeductible CFC dividends. USP has a
pre-2005 general limitation OFL account of $200.
(ii) Result. Under section 904(f)(1), unless USP elects to recapture a larger
percentage of the OFL account, 50 percent or $75 of USP's general limitation income is
recharacterized as U.S. source income. After OFL recapture USP has $75 of
nondeductible CFC dividends in the general limitation category, and $75 of U.S. source
income. USP's OFL recapture account is reduced by $75.
Example 7. Separate limitation loss recapture from nondeductible CFC
dividends. (i) Facts. After the allocation and apportionment of expenses but before the
application of section 904(f), USP has the following items of taxable income for the
election year: $240 of general limitation income, of which $150 is attributable to
nondeductible CFC dividends. USP has a general limitation separate limitation loss
recapture account with respect to passive income of $200.

(ii) Result. Since the $200 recapture amount exceeds $90, USP's foreign
source general limitation income exclusive of nondeductible CFC dividends ($240 $150), a portion of the nondeductible CFC dividends is recaptured after all other general
limitation income is recaptured under section 904(f)(5)(C). Accordingly, $200 of USP's
general limitation income, equal to $90 of other income plus $110 of nondeductible CFC
dividends, is recharacterized as passive income. After recapture of the separate
limitation loss, USP has $40 of general limitation income, all attributable to
nondeductible CFC dividends, and $200 of passive income. USP's general limitation
separate limitation loss recapture account with respect to passive income is reduced by
$200 to O.

SECTION 9. RESTRICTION ON USE OF CREDITS TO OFFSET TAX ON
NONDEDUCTIBLE CFC DIVIDENDS AND COMPUTATION OF ALTERNATIVE
MINIMUM TAX PURSUANT TO SECTION 965(e)(1)

.01 In General
Section 965(e)(1) provides that tax on nondeductible CFC dividends is not
treated as a tax when determining the amount of any allowable credit or the amount of
alternative minimum tax imposed by section 55. However, this rule does not apply to
the credit under section 53 for prior year minimum tax, or to the credit under section
27(a) for foreign taxes attributable to nondeductible CFC dividends. Therefore, the
portion of the pre-credit U.S. tax that is attributable to the nondeductible CFC dividends
may not be offset by any credit other than prior year minimum tax credits and a foreign
tax credit for foreign taxes attributable to the nondeductible CFC dividends .

.02 Additional Limitation on Foreign Tax Credits
(a) In general. The limitation under section 965(e) on the use of foreign tax
credits against the U.S. tax on nondeductible CFC dividends (the section 965(e)

limitation) is implemented through an additional foreign tax credit limitation for each
separate category that includes nondeductible CFC dividends. Section 965 does not
provide for a distinct separate category for qualifying dividends. Instead, qualifying
dividends are characterized as income in separate categories under the generally
applicable look-through rules of sections 904(d)(3)(8) and 904(d)(3)(O). See sections
3.02 and 6.01 of this notice. The section 965(e) limitation is applied after gross income
and deductible expenses, including the NOL deduction, are allocated and apportioned
to determine U.S. source taxable income and foreign source taxable income in the
separate categories, as described in sections 6 and 7 of this notice, after the allocation
of separate limitation losses, overall foreign losses, and U.S. losses and the recapture
of overall foreign losses and separate limitation losses pursuant to section 904(f), as
described in section 8 of this notice, and after computing the regular section 904
limitation for each separate category that contains nondeductible CFC dividends.
The section 965(e) limitation for any separate category equals the sum of (i) the
creditable foreign taxes paid or accrued with respect to the nondeductible CFC
dividends in the separate category and (ii) the modified section 904 limitation for that
separate category. The modified section 904 limitation for a separate category is
calculated by subtracting the amount of nondeductible CFC dividends in the separate
category from both the numerator and denominator of the regular section 904 limitation
fraction and subtracting the pre-credit U.S. tax attributable to the nondeductible CFC
dividends in the separate category from the pre-credit U.S. tax used in the regular
section 904 limitation calculation. See Examples 1 through

1. of section 9.02(c) of this

notice. For this purpose, the pre-credit U.S. tax attributable to the nondeductible CFC
dividends in the separate category equals 35 percent (20 percent for alternative
minimum tax purposes) of the amount of nondeductible CFC dividends in the separate
category.
For purposes of applying the section 965(e) limitation to a separate category that
included nondeductible CFC dividends that were reduced by deductions or
recharacterized as U.S. source income or income in a different separate category
pursuant to sections 6 and 8 of this notice and section 904(f), the amount of
nondeductible CFC dividends in the separate category is the portion, if any, of the
nondeductible CFC dividends that was not reduced by deductions or recharacterized,
and the amount of foreign tax attributable to the nondeductible CFC dividends is the
portion of the foreign taxes paid with respect to nondeductible CFC dividends that are
attributable to such reduced amount.
The applicable foreign tax credit limitation for each separate category is the
smaller of the regular section 904 limitation or the section 965(e) limitation, and the
allowable foreign tax credit for each separate category is the smaller of the foreign taxes
in the separate category or the applicable foreign tax credit limitation. In effect, the
section 965(e) limitation will reduce the otherwise allowable foreign tax credit only if
nondeductible CFC dividends are considered to bear a lower effective rate of foreign tax
than other income in the same separate category and the other income is effectively
taxed in excess of the U.S. rate. In this situation, section 965(e)(1) is intended to
prevent the excess credits associated with the other income from reducing the U.S. tax

on the nondeductible CFC dividends. See Example 4 in section 9.02(c) of this notice.
(b) No Limitation on Use of Foreign Tax Credits against US. Tax on Income

Other than Nondeductible CFC Dividends. Section 965(e)(1) does not restrict the use
of foreign tax credits, including credits for foreign taxes paid or deemed paid with
respect to nondeductible CFC dividends, to reduce the U.S. tax on income other than
nondeductible CFC dividends. Therefore, to the extent otherwise allowable, foreign tax
credits for foreign taxes paid with respect to nondeductible CFC dividends or other
income may reduce the U.S. tax on other foreign source taxable income, including
income attributable to the section 78 gross-up for foreign taxes deemed paid with
respect to nondeductible CFC dividends.
(c) Examples. The following examples illustrate the application of section

965(e)(1) and this section 9.02.
Example 1. All Low-Taxed Income. (i) Facts. USP wholly owns CFC1 and
CFC2 and elects to apply section 965 to its 2005 calendar tax year. As of the close of
2005, CFC1 has post-1986 undistributed earnings and post-1986 foreign income taxes
of $1 ,000x and $100x, respectively, and CFC2 has post-1986 undistributed earnings
and post-1986 foreign income taxes of $1 ,000x and $200x, respectively. All post-1986
undistributed earnings of CFC1 and CFC2 are general limitation earnings and profits,
and neither CFC1 nor CFC2 has any previously-taxed earnings and profits described in
sections 959(c)(1) or 959(c)(2). USP's base period amount is $1 OOx, and the
requirements of section 965 are met for the election year. CFC1 distributes a cash
dividend of $1 ,000x resulting in deemed-paid taxes of $100x (($1 ,000x/$1 ,000x) x
$100x), CFC2 distributes a cash dividend of $100x resulting in deemed-paid taxes of
$20x (($1 00x/$1 ,000x) x $200x), and USP accrues no other items of income or expense
in the election year. USP identifies the lower-taxed cash dividend from CFC1 as the
qualifying dividend.
(ii) Result. Step 1. Determine creditable foreign taxes. USP is entitled to an
$850x DRD under section 965(a) with respect to the $1 ,000x qualifying dividend from
CFC1, and has $150x of nondeductible CFC dividends. Under section 965(d)(1) and
section 4.01 of this notice, USP may claim a credit for $15x (.15 x $1 OOx) of deemed-

paid foreign tax attributable to the nondeductible CFC dividend. Because no section
965 ORO is allowed with respect to the $100x dividend from CFC2, all $100x is taxed,
and all $20x of deemed-paid tax attributable to the CFC2 dividend is creditable. Thus,
USP's creditable foreign taxes, prior to the application of the limitation rules, are $35x
($15x + $20x), and USP includes $35x in income under section 78.
Step 2. Determine regular section 904 limitation. Total foreign source taxable
income (FSTI) equals $285x ($1 ,000x CFC1 dividend - $850x ORO + $100x CFC2
dividend + $35x gross-up). Because USP has no other income, worldwide taxable
income (WWTI) is also $285x. USP's pre-credit U.S. tax is $99.75x (.35 x $285x). The
regular section 904 limitation is $99.75x (($285x FSTI/$285x WWTI) x $99.75x). Thus,
all $35 of foreign taxes are eligible for the credit under the regular section 904
limitation.
Step 3. Determine section 965(e) limitation. Pursuant to this section 9.02, the
section 965( e) limitation is the sum of the creditable foreign taxes paid or accrued with
respect to the nondeductible CFC dividends and the modified section 904 limitation that
results from subtracting the amount of the nondeductible CFC dividends from the
numerator and denominator of the regular section 904 limitation fraction and subtracting
the pre-credit U.S. tax on the nondeductible CFC dividends from the pre-credit U.S. tax
in the regular section 904 limitation. The foreign taxes on the $150x of nondeductible
CFC dividends are $15x. Subtracting the $150 of nondeductible CFC dividends from
the numerator and denominator of the regular section 904 limitation fraction, USP has
$135x of other FSTI and WWTI ($100x CFC2 dividend plus $35x of gross-up income)
and a pre-credit U.S. tax on this amount of $47.25x ($99.75x - (.35 x $150x)). The
modified section 904 limitation equals $47.25x (($135x FSTII$135x WWTI) x $47.25x).
The section 965(e) limitation equals $62.25x ($15x + $47.25x). Because the total
amount of creditable foreign taxes is less than both the section 965(e) limitation and the
regular section 904 limitation, USP may credit all $35x of foreign tax in the election
year.
Example 2. All High-Taxed Income. (i) Facts. The facts are the same as in
Example 1, except that CFC1 has post-1986 undistributed earnings and post-1986
foreign income taxes of $1 ,000x and $600x, respectively, and CFC2 has post-1986
undistributed earnings and post-1986 foreign income taxes of $1 ,000x and $750x,
respectively. Accordingly, the $1 ,000x dividend from CFC1 results in foreign taxes
deemed paid of $600x (($1 ,000xl$1 ,000x) x $600x), and the $1 OOx dividend from CFC2
results in foreign taxes deemed paid of $75x (($1 00xl$1 ,000x) x $750x).
(ii) Result. Step 1. Determine creditable foreign taxes. USP is entitled to an
$850x ORO under section 965(a) with respect to the $1 ,000x qualifying dividend from
CFC1, and has $150 of nondeductible CFC dividends. Under section 965(d)(1) and
section 4.01 of this notice, USP may claim a credit for $90x (.15 x $600x) of deemed-

paid foreign tax attributable to the nondeductible CFC dividend. Because no section
965 ORO is allowed with respect to the $1 OOx dividend from CFC2, all $100x is taxed,
and all $75x of deemed-paid tax attributable to the CFC2 dividend is creditable. Thus,
USP's creditable foreign taxes, prior to the application of the limitation rules, are $165x
($90x + $75x), and USP includes $165x in income under section 78.
Step 2. Determine regular section 904 limitation. USP's FSTI equals $415x
($1 ,000x qualifying dividend from CFC1 - $850x ORO + $1 OOx dividend from CFC2 +
$165x gross-up). Because USP has no other income, WWTI is also $415x. USP's precredit U.S. tax is $145.25x (.35 x $415x). Thus, the limitation equals $145.25x (($415x
FSTI/$415x WWTI) x $145.25x). Because the limitation is less than the total creditable
taxes of $165x, the regular section 904 limitation prevents the excess $19.75x from
being credited in the current year.
Step 3. Determine section 965(e) limitation. The foreign taxes on the $150x of
nondeductible CFC dividends are $90x. Subtracting the $150x of nondeductible CFC
dividends from the numerator and denominator of the regular section 904 limitation
fraction, USP has $265x of other FSTI and WWTI ($415x - $150x) and a pre-credit U.S.
tax on this amount of $92.75x ($145.25x - (.35 x $150x)). The modified section 904
limitation equals $92.75x (($265x FSTI/$265x WWTI) x $92.75x). The section 965(e)
limitation equals $182.75x ($90x + $92.75x). Because the section 965(e) limitation is
higher than the regular section 904 limitation, the total amount of creditable foreign
taxes are subject to the regular section 904 limitation of $145.25x.
Example 3. High-Taxed Nondeductible CFC Dividend/Low-Taxed Other Income.
(i) Facts. The facts are the same as in Example 1, except that CFC1 has post-1986
undistributed earnings and post-1986 foreign income taxes of $1 ,000x and $400x,
respectively, CFC2 does not pay a dividend in the election year, and USP has an
additional $1 OOx of general limitation income subject to no foreign tax. Accordingly, the
$1 ,000x dividend from CFC1 results in foreign taxes deemed paid of $400x
(($1 ,000xl$1 ,000x) x $400x), and no foreign taxes of CFC2 are deemed paid in the
election year.
(ii) Result. Step 1. Determine creditable foreign taxes. USP is entitled to an
$850x ORO under section 965(a) with respect to the $1 ,000x qualifying dividend from
CFC1, and has $150x of nondeductible CFC dividends. Under section 965(d)(1) and
section 4.01 of this notice, USP may claim a credit for $60x (.15 x $400x) of deemedpaid foreign tax attributable to the nondeductible CFC dividend. Thus, USP's creditable
foreign taxes, prior to the application of the limitation rules, are $60x, and USP includes
$60x in income under section 78.
Step 2. Determine regular section 904 limitation. USP's FSTI equals $31 Ox
($1 ,000x qualifying dividend from CFC1 - $850x ORO + $60x gross-up + $1 OOx of other

income). Because USP has no other income, WWTI is also $31 Ox. USP's pre-credit
U.S. tax is $108.50x (.35 x $310x). Thus, the regular section 904 limitation equals
$108.50x «$31 Ox FSTI/$31Ox WWTI) x $108.50x). All $60x of foreign tax would be
creditable, because the foreign taxes paid in excess of the U.S. tax on the
nondeductible CFC dividend can reduce the U.S. tax on the gross-up income and the
other foreign source income.
Step 3. Determine section 965(e) limitation. The foreign taxes on the $150x of
nondeductible CFC dividends are $60x. Subtracting the $150x of nondeductible CFC
dividends from the numerator and denominator of the regular section 904 limitation
fraction, USP has $160x of other FSTI and WWTI ($310x - $150x) and a pre-credit U.S.
tax on this amount of $56x ($108.50x - (.35 x $150x)). The modified section 904
limitation equals $56x «$160x FSTI/$160x WWTI) x $56x). The section 965(e)
limitation equals $116x ($60x + $56x). Because the section 965(e) limitation is higher
than the regular section 904 limitation, the $60x total amount of creditable foreign taxes
are subject to the regular section 904 limitation of $1 08.50x, and the excess foreign
taxes on the nondeductible CFC dividend can reduce the U.S. tax on USP's other
foreign source income.
Example 4. Low-Taxed Nondeductible CFC Dividend/High-Taxed Other Income.
(i) Facts. The facts are the same as in Example 1, except that CFC2 has post-1986
undistributed earnings and post-1986 foreign income taxes of $1 ,000x and $750x,
respectively. Accordingly, the $1 ,000x dividend from CFC1 results in foreign taxes
deemed paid of $100x «$1 ,000xl$1 ,000x) x $100x), and the $100x dividend from CFC2
results in foreign taxes deemed paid of $75x «$100xl$1 ,000x) x $750x).
(ii) Result. Step 1. Determine creditable foreign taxes. USP is entitled to an
$850x ORO under section 965(a) with respect to the $1 ,000x qualifying dividend from
CFC1, and has $150x of nondeductible CFC dividends. Under section 965(d)(1) and
section 4.01 of this notice, USP may claim a credit for $15x (.15 x $100x) of deemedpaid foreign tax attributable to the nondeductible CFC dividend. Because no section
965 ORO is allowed with respect to the $100x dividend from CFC2, all $100x is taxed,
and all $75x of deemed-paid tax attributable to the CFC2 dividend is creditable. Thus,
USP's creditable foreign taxes, prior to the application of the limitation rules, are $90x
($15x + $75x), and USP includes $90x in income under section 78.
Step 2. Determine regular section 904 limitation. USP's FSTI equals $340x
($1 ,000x qualifying dividend from CFC1 - $850x ORO + $100x dividend from CFC2 +
$90x gross-up). Because USP has no other income, WWTI is also $340x. USP's precredit U.S. tax is $119x (.35 x $340x). Thus, the regular section 904 limitation equals
$119x «$340x FSTI/$340x WWTI) x $119x). The regular section 904 limitation would
allow all $90x of foreign tax to be credited, because the foreign taxes paid in excess of
the U.S. tax on the CFC2 dividend could reduce the U.S. tax on the low-taxed

nondeductible CFC dividend from CFC1.
Step 3. Determine section 965(e) limitation. The foreign taxes on the $150x of
nondeductible CFC dividends are $15x. Subtracting the $150x of nondeductible CFC
dividends from the numerator and denominator of the regular section 904 limitation
fraction, USP has $190x of other FSTI and WWTI ($340x - $150x) and a pre-credit U.S.
tax on this amount of $66.50x ($119x - (.35 x $150x)). The modified section 904
limitation equals $66.50x (($160x FSTI/$160x WWTI) x $66.50x). The section 965(e)
limitation equals $81.50x ($15x + $66.50x). Because the section 965(e) limitation is
less than the regular section 904 limitation of $119x, the section 965(e) limitation
applies and prevents USP from crediting $8.50x of the $90x of potentially creditable
taxes. The $8.50x of tax which is not creditable under the section 965(e) limitation
equals the excess foreign taxes on the other foreign source income that would have
been creditable against the U.S. tax on the nondeductible CFC dividend under the
regular section 904 limitation (i.e., the excess of the $75x of foreign tax on the CFC2
dividend over $66.50x, the pre-credit U.S. tax on $190x of other foreign source income
($100x CFC2 dividend + $75x gross-up attributable to tax deemed paid on the CFC2
dividend + $15x gross-up attributable to the nondeductible CFC dividend from CFC1 )).
The excess taxes may be carried over and used as a credit in other years to the extent
allowed under section 904(c) .

.03 No Use of Credits Other than Credit for Prior Year Minimum Tax to Offset U.S. Tax
on Nondeductible CFC Dividends
Section 965(e)(1) provides that no credit other than a foreign tax credit for foreign
taxes attributable to nondeductible CFC dividends and the credit for prior year minimum
tax under section 53 may offset the U.S. tax on nondeductible CFC dividends.
However, section 965 does not limit the application of credits against the U.S. tax on
income other than nondeductible CFC dividends. Because other credits, including the
possessions tax credit allowed under sections 27(b) and 30A, the nonconventional
source fuel credit allowed under section 29, the qualified electric vehicle credit allowed
under section 30, and the general business credit allowed under section 38, as well as
the credit for prior year minimum tax that is allowed under section 53, are applied after

the foreign tax credit, taxpayers must identify the portion of their pre-credit U.S. tax and
allowable foreign tax credit for the election year that is attributable to nondeductible
CFC dividends and the portion that is attributable to other income in order to determine
the amount of their other allowable credits.
For purposes of this determination and section 9.05 of this notice, the portion of a
taxpayer's pre-credit U.S. tax that is attributable to nondeductible CFC dividends equals
the smaller of the taxpayer's total pre-credit U.S. tax or 35 percent of the amount of
nondeductible CFC dividends. For this purpose, the amount of nondeductible CFC
dividends is the amount determined under section 965(e)(3), without regard to any
reduction or recharacterization of nondeductible CFC dividends in a separate category
for purposes of determining the foreign tax credit limitation as provided in sections 6
through 8 of this notice. The portion of the taxpayer's pre-credit U.S. tax that is
attributable to other income equals the excess, if any, of the taxpayer's total pre-credit
U.S. tax over the pre-credit U.S. tax attributable to nondeductible CFC dividends. To
determine the total allowable foreign tax credit for the election year, the taxpayer must
first compute the allowable credit for each separate category, applying the section
965(e) limitation described in section 9.02 of this notice. The portion of the taxpayer's
allowable foreign tax credit in each separate category that is attributable to
nondeductible CFC dividends equals the smaller of 35 percent of the amount of
nondeductible CFC dividends in the separate category, determined after applying
sections 6 through 8 of this notice, or the foreign taxes paid or accrued with respect to
the nondeductible CFC dividends in that separate category, determined in accordance

with section 9.02(a) of this notice. The portion of the allowable foreign tax credit that is
attributable to nondeductible CFC dividends is the sum of the amounts determined
under the preceding sentence in all of the taxpayer's separate categories. The
remainder, if any, of the allowable foreign tax credit is considered attributable to other
income.
The taxpayer's residual U.S. tax on nondeductible CFC dividends, as reduced by
the portion of the allowable foreign tax credit that is attributable to that income, may not
be reduced by any credit other than the prior year minimum tax credit. The taxpayer's
residual U.S. tax on other income, as reduced by the balance of the allowable foreign
tax credit, may be reduced by other credits in accordance with the rules generally
applicable to such credits .

.04 Computation of Section 53 Credit in Election Year
Under section 965(e)(1). the U.S. tax on nondeductible CFC dividends is taken
into account in determining the allowable amount of prior year minimum tax credits
under section 53 for the election year. Accordingly, for purposes of section 53 the
taxpayer's regular tax and tentative minimum tax are computed taking into account the
regular tax and tentative minimum tax on nondeductible CFC dividends, as reduced by
allowable foreign tax credits computed in accordance with section 965(e)(1) and section
9.02 of this notice. As a result, credits for prior year minimum tax may be allowed in the
election year to reduce the regular tax on nondeductible CFC dividends and other
income, subject to the limitation of section 53(c), even if the taxpayer's entire taxable
income is attributable to nondeductible CFC dividends or if the taxpayer is subject to

AMT on taxable income other than nondeductible CFC dividends in the election year.
See Examples 3 through § of section 9.06 of this notice .

.05 Computation of Alternative Minimum Tax in Election Year
Section 965(e)(1) provides that the U.S. tax on nondeductible CFC dividends is
not treated as tax imposed by chapter 1 for purposes of computing the AMT imposed by
section 55. For purposes of computing AMT for the election year, the taxpayer's regular
tax described in section 55 (c) does not include the portion of the taxpayer's pre-credit
regular tax liability that is attributable to nondeductible CFC dividends, and the foreign
tax credit taken into account does not include the portion of the taxpayer's allowable
foreign tax credit that is attributable to nondeductible CFC dividends. Similarly, the
taxpayer's tentative minimum tax determined under section 55(b)(1 )(8) does not include
the portion of the taxpayer's tentative minimum tax or alternative minimum tax foreign
tax credit that is attributable to nondeductible CFC dividends. In addition, the deductible
portion of qualifying dividends is not treated as a preference item in computing
alternative minimum taxable income. Accordingly, the additional tax owed by the
taxpayer by reason of the AMT in the election year is the same that would be owed if
the qualifying dividends were not paid. See Examples 1, ~,

1. and § of section

9.06 of

this notice .

.06 Examples
The following examples illustrate the application of section 965(e)(1) and sections
9.04 and 9.05 of this notice.
Example 1. Calculation of AMT with no foreign tax credit. (i) Facts. For the

election year USP's taxable income consists of $200x of foreign source general
limitation nondeductible CFC dividends subject to no foreign tax and $400x of U.S.
source income. USP's pre-credit regular tax liability is $210x (.35 x $600x). USP has
$600x of U.S. source preference items.
(ii) Result. Taking into account the adjustments required by section 965(e)(1 )(8)
for purposes of computing USP's alternative minimum tax under section 55 in the
election year, USP's taxable income computed without regard to the $200x of
nondeductible CFC dividends is $400x, which would result in a pre-credit regular tax
liability of $140x (.35 x $400x). USP's alternative minimum taxable income computed
without regard to the $200x of nondeductible CFC dividends is increased by $600x of
preference items from $400x to $1 ,OOOx. USP's tentative minimum tax, computed
without regard to the nondeductible CFC dividends, is $200x (.20 x $1 ,000x). The
excess of USP's adjusted tentative minimum tax of $200x over its adjusted regular tax
of $140x results in alternative minimum tax of $60x. USP's pre-credit tax for the
election year is $270x ($21 Ox of regular tax plus $60x of alternative minimum tax). This
amount is equivalent to 20 percent of $1 ,000x, USP's alternative minimum taxable
income exclusive of the nondeductible CFC dividends, plus 35 percent of $200x of
nondeductible CFC dividends.
Example 2. Alternative minimum tax foreign tax credit. (i) Facts. The facts are
the same as in Example 1, except that instead of $400x of U.S. source income, USP
has $200x of U.S. source income and $200x of other foreign source general limitation
income, and USP's foreign taxes paid or deemed paid with respect to general limitation
income are $1 OOx, including $20x of foreign tax paid or accrued with respect to the
$200x of nondeductible CFC dividends.
(ii) Result. As in Example 1, USP's pre-credit regular tax on $400x of taxable
income in excess of the $200x of nondeductible CFC dividends is $140x and its precredit tentative minimum tax on $1 ,000x of alternative minimum taxable income in
excess of the nondeductible CFC dividends ($400x plus $600x of preference items) is
$200x. USP's allowable foreign tax credit computed for regular tax purposes is $90x,
the lesser of $100x, the foreign taxes paid, $140x, the regular section 904 limitation
(($400x FSTII$600x WWTI) x $210x pre-credit U.S. tax), or $90x, the section 965(e)
limitation ($20x foreign tax on nondeductible CFC dividends + $70x, the limitation on
other income of ($200x FSTI/$400x WWTI) x $140x). The portion of the allowable
regular foreign tax credit that is attributable to the nondeductible CFC dividends is $20x,
the smaller of the $70x pre-credit U.S. tax on the nondeductible CFC dividends (.35 x
$200x) or $20x, the foreign taxes paid or accrued with respect to the nondeductible
CFC dividends. The remaining $70x of the allowable regular foreign tax credit is the
amount attributable to USP's other foreign source income. Accordingly, USP's regular
tax described in section 55(c), computed without regard to the tax on nondeductible
CFC dividends, is $70x ($140x regular tax - $70x foreign tax credit).

Computed without regard to section 965(e)(1 )(8), USP's alternative minimum tax
foreign tax credit is $60x, the lesser of $1 OOx, the foreign taxes paid, $80x, the regular
alternative minimum tax foreign tax credit limitation (($400x FSAMTI/$1200x WWAMTI)
x $240x), or $60x, the section 965(e) limitation ($20x + ($200x FSAMTII $1000x
WWAMTI) x $200x). The portion of the alternative minimum tax foreign tax credit that is
attributable to nondeductible CFC dividends is $20x, the lesser of $40x, the pre-credit
U.S. alternative minimum tax on the nondeductible CFC dividends (.20 x $200x) or
$20x, the foreign taxes paid or accrued with respect to the nondeductible CFC
dividends. The $40x balance of the alternative minimum tax foreign tax credit is
attributable to USP's other foreign source income.
Accordingly, USP's tentative minimum tax described in section 55(b)(1 )(8),
computed without regard to the tax on nondeductible CFC dividends, is $160x ($200x $40x). Under section 55 as modified by section 965(e)(1 )(8), USP's alternative
minimum tax is $90x, the excess of its tentative minimum tax over its regular tax ($160x
- $70x). Accordingly, USP's tax for the election year is $21 Ox ($210x regular tax on
$600x of taxable income - $90x regular foreign tax credit + $90x alternative minimum
tax). This amount is equivalent to 20 percent of USP's $1 ,000x of alternative minimum
taxable income exclusive of the nondeductible CFC dividends less the $40x alternative
minimum tax foreign tax credit on that amount ($200x - $40x), plus 35 percent of $200x
of nondeductible CFC dividends less the $20x regular foreign tax credit on that amount
($70x - $20x).
Example 3. No AMT; prior year minimum tax credit. (i) Facts. For the election
year USP's taxable income consists of $200x of foreign source nondeductible CFC
dividends subject to no foreign tax. USP's pre-credit regular tax liability is $70x (.35 x
$200x). USP has no preference items.
(ii) Result. Taking into account the adjustments required by section 965(e)(1 )(8)
for purposes of computing USP's alternative minimum tax under section 55 in the
election year, USP's taxable income computed without regard to the $200x of
nondeductible CFC dividends is $0, which would result in a pre-credit regular tax liability
of $0. USP's alternative minimum taxable income computed without regard to the
$200x of nondeductible CFC dividends is also $0, so its tentative minimum tax,
computed without regard to the nondeductible CFC dividends, is $0. The excess of
USP's adjusted tentative minimum tax of $0 over its adjusted regular tax of $0 results in
alternative minimum tax of $0. USP's pre-credit tax for the election year is $70x ($70x
of regular tax plus $0 alternative minimum tax), equal to 35 percent of $200x of
nondeductible CFC dividends.
For purposes of computing USP's prior year minimum tax credit under section 53
for the election year, the modifications to section 55 that are required under section

965(e)(1 )(8) do not apply. Accordingly, for purposes of computing the limitation of
section 53(c), USP's regular tax liability is $70x (.35 x $200x of taxable income
including nondeductible CFC dividends), its tentative minimum tax is $40x (.20 x $200x
of alternative minimum taxable income including nondeductible CFC dividends), and the
excess of the regular tax liability over the tentative minimum tax for the election year is
$30x ($70x - $40x). USP may claim a credit under section 53(a) in the election year for
the excess (if any) of its adjusted net minimum tax imposed for all post-1986 taxable
years prior to the election year over the amount allowable as a credit under section
53(a) for such prior taxable years, up to the $30x limitation computed under section
53(c).
Example 4. AMT with no foreign tax credit and prior year minimum tax credit. (i)
Facts. For the election year USP's taxable income consists of $200x of foreign source
general limitation nondeductible CFC dividends subject to no foreign tax and $400x of
U.S. source income. USP's pre-credit regular tax liability is $21 Ox (.35 x $600x). USP
has $350x of U.S. source preference items described in section 57(a)(5).
(ii) Result. Taking into account the adjustments required by section 965(e)(1 )(8)
for purposes of computing USP's alternative minimum tax under section 55 in the
election year, USP's taxable income computed without regard to the $200x of
nondeductible CFC dividends is $400x, which would result in a pre-credit U.S. regular
tax liability of $140x (.35 x $400x). USP's alternative minimum taxable income
computed without regard to the $200x of nondeductible CFC dividends is $750x, taxable
income of $400x increased by $350x of preference items. USP's tentative minimum
tax, computed without regard to the nondeductible CFC dividends, is $150x (.20 x
$750x). The excess of USP's adjusted tentative minimum tax of $150x over its adjusted
regular tax of $140x results in alternative minimum tax of $10x. USP's pre-credit tax for
the election year is $220x ($210x of regular tax plus $10x of alternative minimum tax).
This amount is equivalent to $150x (20 percent of $750x, USP's alternative minimum
taxable income exclusive of the nondeductible CFC dividends), plus $70x (35 percent of
$200x of nondeductible CFC dividends).
For purposes of computing USP's prior year minimum tax credit under section 53
for the election year, the modifications to section 55 that are required under section
965(e)(1 )(8) do not apply. Accordingly, for purposes of computing the limitation of
section 53(c), USP's regular tax liability is $210x (.35 x $600x of regular taxable income
including nondeductible CFC dividends), its tentative minimum tax is $190x (.20 x $950x
of alternative minimum taxable income including nondeductible CFC dividends), and the
excess of the regular tax liability over the tentative minimum tax for the election year is
$20x ($210x - $190x). USP may claim a credit under section 53(a) in the election year
for the excess (if any) of its adjusted net minimum tax imposed for all post-1986 taxable
years prior to the election year over the amount allowable as a credit under section
53(a) for such prior taxable years, up to the $20x limitation computed under section

53(c).
Example 5. AMT with foreign tax credit and prior year minimum tax credit. (i)
Facts. The facts are the same as in Example 2, except that USP has $200x rather than
$600x of U.S. source preference items.
(ii) Result. Taking into account the adjustments required by section 965(e)(1 )(8)
for purposes of computing USP's alternative minimum tax under section 55 in the
election year, USP's taxable income computed without regard to the $200x of
nondeductible CFC dividends is $400x, which would result in a pre-credit U.S. regular
tax liability of $140x (.35 x $400x). USP's pre-credit tentative minimum tax, computed
without regard to the nondeductible CFC dividends, is $120x (.20 x $600x).
USP's allowable foreign tax credit computed for regular tax purposes is $90x, the
lesser of $100x, the foreign taxes paid, $140x, the regular section 904 limitation (($400x
FSTII$600x WWTI) x $210x pre-credit U.S. tax), or $90x, the section 965(e) limitation
($20x foreign tax on nondeductible CFC dividends + $70x, the limitation on other
income of (($200x FSTI/$400x WWTI) x $140x). The portion of the allowable regular
foreign tax credit that is attributable to the nondeductible CFC dividends is $20x, the
smaller of the $70x pre-credit U.S. tax on the nondeductible CFC dividends (.35 x
$200x) or $20x, the foreign taxes paid or accrued with respect to the nondeductible
CFC dividends. The remaining $70x of the allowable regular foreign tax credit is the
amount attributable to USP's other foreign source income. Accordingly, USP's regular
tax described in section 55 (c), computed without regard to the tax on nondeductible
CFC dividends, is $70x ($140x regular tax - $70x foreign tax credit).
Computed without regard to section 965(e)(1 )(8), USP's alternative minimum tax
foreign tax credit is $60x, the lesser of $100x, the foreign taxes paid, $80x, the regular
alternative minimum tax foreign tax credit limitation (($400x FSAMTII$800x WWAMTI) x
$160x), or $60x, the section 965(e) limitation ($20x + ($200x FSAMTII $600x WWAMTI)
x $120x). The portion of the alternative minimum tax foreign tax credit that is
attributable to nondeductible CFC dividends is $20x, the lesser of $40x, the pre-credit
tentative minimum tax on the nondeductible CFC dividends (.20 x $200x) or $20x, the
foreign taxes paid or accrued with respect to the nondeductible CFC dividends. The
$40x balance of the alternative minimum tax foreign tax credit is attributable to USP's
other foreign source income. Accordingly, USP's tentative minimum tax described in
section 55(b)(1 )(8), computed without regard to the tax on nondeductible CFC
dividends, is $80x ($120x - $40x). Under section 55 as modified by section
965( e)( 1)(8), the excess of USP's tentative minimum tax over its regular tax is $1 Ox
($80x - $70x).
For purposes of computing USP's prior year minimum tax credit under section 53
for the election year, the modifications to section 55 that are required under section

965( e)( 1)(8) do not apply. Accordingly, for purposes of computing the limitation of
section 53(c), USP's pre-credit regular tax liability is $21 Ox (.35 x $600x of taxable
income including nondeductible CFC dividends) and its pre-credit tentative minimum tax
liability is $160x (.20 x $800x of alternative minimum taxable income including
nondeductible CFC dividends). As described above, USP's regular and AMT foreign tax
credits are limited under section 965(e) to $90x and $60x, respectively. Therefore, for
purposes of section 53(c) USP's regular tax liability is $120x ($210x - $90x foreign tax
credit), its tentative minimum tax is $100x ($160x - $60x alternative minimum tax foreign
tax credit), and the excess of its regular tax over its tentative minimum tax is $20x
($120x - $100x). USP may claim a credit under section 53(a) in the election year for the
excess (if any) of its adjusted net minimum tax imposed for all post-1986 taxable years
prior to the election year over the amount allowable as a credit under section 53(a) for
such prior taxable years, up to $20x, the limitation computed under section 53(c).
Example 6. Minimum tax credit after OFL recapture. (i) Facts. The facts are
the same as in Example 5, except that USP has a pre-2005 general limitation OFL
account of $500x.
(ii) Result. Under section 904(f)(1), unless USP elects to recapture a larger
percentage of the OFL account, 50 percent or $250x of USP's $400x of foreign source
general limitation income is recharacterized as U.S. source income. After OFL
recapture USP has $150x of foreign source general limitation income, a" attributable to
nondeductible CFC dividends. See section 8.03 of this notice. Pursuant to section 9.02
of this notice, $15x (($150xl$200x) x $20x) of foreign tax is paid or accrued with respect
to the $150x of nondeductible CFC dividends.
Pursuant to sections 9.03 and 9.05 of this notice, for purposes of computing
USP's alternative minimum tax under section 55 in the election year, USP's pre-credit
regular tax and pre-credit tentative minimum tax are computed without regard to the
$200x of nondeductible CFC dividends, as determined under section 965(e)(3) without
regard to the recharacterization of $50x of nondeductible CFC dividends as U.S. source
income pursuant to the recapture of USP's general limitation OFL account under section
904(f) and section 8.03 of this notice. As in Example 5, USP's pre-credit regular tax and
pre-credit tentative minimum tax, computed without regard to nondeductible CFC
dividends, are $140x and $120x, respectively.
USP's allowable foreign tax credit computed for regular tax purposes is $15x, the
lesser of $100x, the foreign taxes paid, $52.50x, the regular section 904 limitation
(($150x FSTII$600x WWTI) x $210x pre-credit U.S. tax), or $15x, the section 965(e)
limitation ($15x foreign tax on nondeductible CFC dividends + $0, the limitation on other
income of ($0 FSTI/$400x WWTI) x $140x). Pursuant to section 9.03 of this notice, the
portion of the a"owable regular foreign tax credit that is attributable to the nondeductible
CFC dividends is $15x, the smaller of the $52.50x pre-credit U.S. tax on the reduced

amount of nondeductible CFC dividends (.35 x $150x) or $15x, the foreign taxes paid or
accrued with respect to the reduced amount of nondeductible CFC dividends.
Therefore, no foreign tax credit is attributable to USP's other foreign source income.
Accordingly, USP's regular tax described in section 55(c), computed without regard to
the tax on nondeductible CFC dividends, is $140x ($140x regular tax - $0 foreign tax
credit).
Computed without regard to section 965(e)(1 )(8), USP's alternative minimum tax
foreign tax credit is $15x, the lesser of $100x, the foreign taxes paid, $30x, the regular
alternative minimum tax foreign tax credit limitation (($150x FSAMTI/$800x WWAMTI) x
$160x) or $15x, the section 965(e) limitation ($15x + ($0 FSAMTII $600x WWAMTI) x
$120x). Pursuant to section 9.03 of this notice, the portion of the alternative minimum
tax foreign tax credit that is attributable to nondeductible CFC dividends is $15x, the
lesser of $30x, the pre-credit tentative minimum tax on the nondeductible CFC
dividends (.20 x $150x) or $15x, the foreign taxes paid or accrued with respect to the
nondeductible CFC dividends. Accordingly, none of the alternative minimum tax foreign
tax credit is attributable to USP's other foreign source income. Therefore, USP's
tentative minimum tax described in section 55(b)(1 )(8), computed without regard to the
tax on nondeductible CFC dividends, is $120x ($120x tentative minimum tax - $0
alternative minimum tax foreign tax credit). Under section 55 as modified by section
965(e)(1 )(8), USP's regular tax of $140x exceeds its tentative minimum tax of $120x.
Therefore, USP does not owe AMT for the election year.
For purposes of computing USP's prior year minimum tax credit under section 53
for the election year, the modifications to section 55 that are required under section
965(e)(1 )(8) do not apply. Accordingly, for purposes of computing the limitation of
section 53(c), USP's pre-credit regular tax is $21 Ox (.35 x $600x of taxable income
including nondeductible CFC dividends) and its pre-credit tentative minimum tax is
$160x (.20 x $800x of alternative minimum taxable income including nondeductible CFC
dividends). As described above, USP's regular and AMT foreign tax credits are limited
under section 965(e) to $15x, all attributable to nondeductible CFC dividends.
Therefore, for purposes of section 53( c) USP's regular tax liability is $195x ($21 Ox $15x foreign tax credit), its tentative minimum tax is $145x ($160x - $15x alternative
minimum tax foreign tax credit), and the excess of its regular tax over its tentative
minimum tax is $50x ($195x - $145x). USP may claim a credit under section 53(a) in
the election year for the excess (if any) of its adjusted net minimum tax imposed for all
post-1986 taxable years prior to the election year over the amount allowable as a credit
under section 53(a) for such prior taxable years, up to $50x, the limitation computed
under section 53(c).

SECTION 10. OTHER GUIDANCE

.01 Application of General Tax Law Principles
Unless otherwise specifically provided, general tax law principles, including the
circular cash flow, step-transaction, and substance-aver-form doctrines, apply for
purposes of determining the federal income tax consequences of transactions
undertaken in connection with section 965. For example, assume USP, a domestic
corporation, wholly owns CFC1 which, in turn, wholly owns CFC2. If CFC2 declares a
dividend and CFC1 declares a dividend of the same amount, and, at the direction of
CFC1, CFC2 pays the amount of its dividend in cash directly to USP, then under
applicable Code provisions, including section 965, such payment shall be treated as a
distribution of cash from CFC2 to CFC1, followed by a distribution of cash from CFC1 to
USP. See, e.g., Rev. Rul. 80-292,1980-2 C.B. 104 .

.02 Base Period Inclusions under Section 965(b)(2)(B)
In computing a taxpayer's base period amount, section 965(b)(2)(8)(i) includes
dividends described in section 965(c)(3) that were received during each base period
year from CFCs, section 965(b)(2)(8)(ii) includes amounts includible in gross income for
each base period year under section 951 (a)(1 )(8) with respect to CFCs, and section
965(b)(2)(8)(iii) includes amounts that would have been included for each base period
year but for section 959(a). For this purpose, dividends received from CFCs by a
disregarded entity or a partnership owned by a U.S. shareholder during a base period
year shall be treated as received by such U.S. shareholder to the extent the dividend
was included in income shown on the U.S. shareholder's return described in section
965(b)(2) for the base period year, regardless of whether cash or property in the amount

of the dividend was received by the shareholder in the base period year. In addition, for
purposes of section 965(b)(2)(8), amounts includible under section 951 (a)(1 )(8) (or that
would have been so included but for section 959(a)) in gross income of a domestic
partnership that was owned by a U.S. shareholder during a base period year shall be
treated as includible in the U.S. shareholder's income under section 951 (a)(1 )(8), or
excluded under section 959(a), to the extent the includible amount was (i) allocated to
the U.S. shareholder-partner under the rules of sections 702 and 704 and the
regulations thereunder in a base period year; and (ii) separately stated to the partner
under Treas. Reg. §1.702-1 (a)(8)(ii) .
.03 Allocation of $500 Million Limitation-Clarification of Section 4.05 of Notice 2005-38

Section 4.05 of Notice 2005-38 provides that the $500 million limitation on
qualifying dividends described in section 965(b)(1 )(A) is allocated among the qualified
members of a section 52(a) group in proportion to the aggregate amount of total current
and accumulated non-previously-taxed earnings and profits of all CFCs owned (within
the meaning of section 958(a)) by such qualified members, determined with reference to
the earnings and profits appropriately reported on Schedule J of the last Form 5471 filed
on or before the apportionment date. For this purpose, the amount of non-PTI earnings
and profits of a CFC taken into account by a qualified member is that member's pro rata
share of the CFC's earnings and profits, determined in accordance with section
951 (a)(2) for the year for which Form 5471 was filed .
.04 Effect of Restatement of Certified Financial Statement

A restatement of a previously filed and certified financial statement described in

section 965(c)(1) that occurs after June 30, 2003, does not alter the statement's status
as having been filed and certified on or before June 30,2003. In such a case, the
limitations described in section 965(b)(1 )(8) and (C) are the amount of earnings
permanently reinvested outside the United States, and a specific amount of tax liability,
respectively, that are shown on the statement as originally filed, not the amounts shown
on the restatement.

.05 Definition of United States
For purposes of section 965, the term "United States" includes the 50 states, the
District of Columbia, the territorial waters of the United States, and the seabed and
subsoil of those submarine areas that are adjacent to the territorial waters of the United
States and over which the United States has exclusive rights, in accordance with
international law, with respect to the exploration and exploitation of natural resources.
The term "United States" does not include possessions and territories of the United
States or the airspace over the United States and these areas .

.06 Treatment of Accounts Payable Resulting from Section 482 Adjustments
Accounts payable established under Rev. Proc. 99-32, 1999-2 C.B. 296, in
connection with section 482 adjustments are treated as indebtedness for purposes of
section 965(b)(3) .

.07 Exceptions to Related Party Indebtedness for Certain Ordinary Course
Transactions of Banks and Dealers in Securities-Addition to Section 7.02 of Notice
2005-38
For purposes of section 965(b)(3), the term "indebtedness" does not include

indebtedness of a CFC arising in the ordinary course of business as a bank or as a
dealer in securities that would not be treated as U.S. property under section
956(c)(2)(A)(i), (J), (K), or (L) were it an obligation of a United States person (and not of
the CFC). For purposes of applying the exception under section 956(c)(2)(A)(i), a
"bank" is a CFC that meets the definition of a bank in section 585(a)(2)(8), without
regard to the second sentence thereof, and without regard to whether the CFC is
engaged in a U.S. trade or business, provided that the CFC operates under the laws of
the foreign jurisdiction where it is engaged in business and is subject to supervision and
examination by an authority having supervision over banking institutions in that
jurisdiction (in lieu of supervision by a Federal or State supervisory authority) .

.08 Intercompany Trade Payables--Modification of Section 7.02 of Notice 2005-38
For purposes of section 965(b)(3), in addition to the exceptions described in
section 7.02 of Notice 2005-38 and section 10.07 of this notice, the term "indebtedness"
does not include indebtedness of a CFC arising in the ordinary course of a business
from licenses, provided that such indebtedness is actually paid within 183 days .

.09 Distributions to Intermediary Partnerships-Clarification of Section 3.02 of Notice
2005-10 and Section 9.06 of Notice 2005-38
Section 3.02 of Notice 2005-10 provides that for purposes of section 965(a), a
cash dividend paid by a CFC to a pass-through entity that is owned by a U.S.
shareholder is treated as received by such U.S. shareholder only if and to the extent
that such shareholder receives a cash distribution in the amount of the CFC dividend
during the election year. Section 9.06 of Notice 2005-38 provides a limited exception to

the general cash distribution requirement with respect to cash dividends paid to a
disregarded entity. This limited exception does not apply to cash dividends paid to a
partnership. Therefore, a cash dividend paid by a CFC to a partnership that is owned
by a U.S. shareholder is treated as received by such U.S. shareholder only if and to the
extent the partnership distributes cash to the shareholder-partner in the election year.
For this purpose, a distribution of cash does not include a guaranteed payment, as
defined in section 707(c), or a payment made to the shareholder other than in its
capacity as a member of the partnership .
.10 Domestic Reinvestment Plans-Clarification of Section 4.01 of Notice 2005-10

Section 965(b)(4)(B) provides that section 965(a) shall not apply to any dividend
received by a U.S. shareholder unless the amount of the dividend is invested in the
United States pursuant to a domestic reinvestment plan which provides for the
reinvestment of such dividend in the United States. Section 4.01 of Notice 2005-10
provides that a taxpayer may adopt separate domestic reinvestment plans to apply to
different cash dividends made during the election year. A taxpayer may, but is not
required to, adopt a domestic reinvestment plan that provides for the reinvestment of
cash dividends only from specified CFCs, to the extent of the dollar amounts of
anticipated investments that are specified in the plan in accordance with section 4.03 of
Notice 2005-10. In this situation, cash dividends from other CFCs in the election year
that are not covered by another domestic reinvestment plan will not be subject to the
section 965(a) ORO or to the disallowance of deductions and credits under section
965(d), even if the dollar amount of cash dividends from the specified CFCs is less than

the total dollar amount of anticipated investments specified in the plan and if the
taxpayer in fact expends the total dollar amount specified in the plan on permitted
investments. On the other hand, a taxpayer may not choose to claim the section 965(a)

ORO with respect to less than all of the qualifying dividends that are covered by a
domestic reinvestment plan, assuming that all such amounts are properly reinvested in
accordance with the plan and that all the other requirements under section 965 are
satisfied. For example, assume that USP wholly owns CFC1 and CFC2. USP properly
adopts a domestic reinvestment plan that provides for the reinvestment of up to $10
million of qualifying dividends in the United States. During the election year CFC1 pays
qualifying dividends of $8 million, CFC2 pays qualifying dividends of $2 million, USP
invests at least $10 million in permitted investments, and all the other requirements of
section 965 are met. Unless the plan provides only for the reinvestment of qualifying
dividends from either CFC1 or CFC2, the entire $10 million of qualifying dividends is
subject to section 965 .
.11 Qualified Plan Funding--Clarification of Section 5.05(b) of Notice 2005-10
Section 5.05(b) of Notice 2005-10 provides, in part, that the satisfaction of an
obligation to fund a qualified plan ordinarily will contribute to the financial stabilization of
the taxpayer. For this purpose, contributions to a qualified pension plan that do not give
rise to excise tax under section 4972 (which imposes a tax on certain nondeductible
pension contributions) will be considered to satisfy an obligation to fund a qualified plan
even if those contributions are not currently deductible. Contributions to a qualified
profit sharing or stock bonus plan also qualify for this purpose if those contributions to

the plan are required under a fixed contribution formula provided under the terms of the
plan. Contributions to a qualified profit sharing or stock bonus plan do not qualify if
contributions to the plan are made on a discretionary basis.

SECTION 11. TRANSITION RULES
.01 Domestic Reinvestment Plans Approved Prior to August 19, 2005
If a domestic reinvestment plan is approved prior to August 19, 2005, the
taxpayer may modify such plan to take into account the guidance herein not later than
October 19, 2005, even if the dividend to which the domestic reinvestment plan relates
has already been paid. Any plan that is so modified must be subsequently approved by
the taxpayer's president, chief executive officer, or comparable official and by the
taxpayer's board of directors, management committee, executive committee, or similar
body .
.02 Tax Returns Filed Prior to August 19, 2005
If, prior to August 19, 2005, a taxpayer has filed its tax return for the taxable year
to which it elects section 965 to apply, such taxpayer may revise its computations or
annual reporting to conform to the guidance in this notice on an amended tax return that
is filed by December 31, 2005.

SECTION 12. EFFECT ON OTHER DOCUMENTS
Sections 10.09, 10.10, and 10.11 of this notice clarify sections 3.02, 4.01, and
5.05(b), respectively, of Notice 2005-10. Section 10.03 of this notice modifies section

4.05, section 10.09 clarifies section 9.06, and section 10.07 makes an addition to and
section 10.08 modifies section 7.02, of Notice 2005-38. See also section 11 of this
notice, pursuant to which domestic reinvestment plans approved prior to August 18,
2005, (including domestic reinvestment plans adopted or modified pursuant to the
guidance included in Notice 2005-10 and Notice 2005-38), may be modified to take into
account the guidance in this notice.
SECTION 13. EFFECTIVE DATE
This notice is effective for taxable years ending on or after October 22, 2004.

SECTION 14. PAPERWORK REDUCTION ACT
The collections of information contained in this notice have been reviewed and
approved by the Office of Management and Budget in accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number 1545-1957.
An agency may not conduct or sponsor, and a person is not required to respond
to, a collection of information unless the collection of information displays a valid control
number.
The collections of information are in sections 3 and 11 of this notice. This
information is required to provide the IRS sufficient information to determine whether a
taxpayer has properly elected to apply section 965 to a taxable year and whether the
taxpayer has properly calculated its taxable income and allowable credits with respect to
qualifying dividends, taking into account the limitations imposed by sections 965(d) and
(e). The collections of information are required to obtain the benefit of section 965 for a

taxable year. The likely respondents are business corporations.
Estimated total annual reporting and/or recordkeeping burden: 250,000 hours.
Estimated average annual burden hours per respondent: 10 hours.
Estimated number of respondents: 25,000.
Estimated annual frequency of responses: once.
The collections of information contained in this notice have been submitted to the
Office of Management and Budget for review in accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the collections of information
should be received by October 19, 2005. Comments are specifically requested
concerning:
Whether the proposed collections of information are necessary for the proper
performance of the functions of the Internal Revenue Service, including whether the
information will have practical utility;
The accuracy of the estimated burden associated with the proposed collections
of information (see below);
How the quality, utility, and clarity of the information to be collected may be
enhanced;
How the burden of complying with the proposed collections of information may be
minimized, including through the application of automated collection techniques or other
forms of information technology; and
Estimates of capital or start-up costs and costs of operation, maintenance, and
purchase of services to provide information.

Comments concerning the accuracy of the burden estimate and suggestions for
reducing the burden of the final or temporary regulations should be sent to the Office of
Management and Budget, Attn: Desk Officer for the Department of the Treasury,

Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the
Internal Revenue Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:T:T:SP,

Washington DC 20224.
Books or records relating to a collection of information must be retained as long
as their contents may become material in the administration of any internal revenue law.
Generally, tax returns and tax return information are confidential, as required by 26
U.S.C.6103.

SECTION 15. DRAFTING INFORMATION

The principal author of this notice is Barbara Allen Felker of the Office of
Associate Chief Counsel (International). However, other personnel form the IRS and the
Treasury Department participated in its development. For further information regarding
this notice contact Ms. Felker or Michael Gilman at (202) 622-3850 (not a toll-free call).

Page 1 of 1

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August 19,2005
JS-2689
Treasury Releases Regulations on Valuation of Annuity Contracts
Involved in Roth Conversions
The Treasury Department and the IRS issued proposed and temporary regulations
today clarifying the amount of income that must be reflected when a traditional IRA
account that holds an annuity contract (or a traditional IRA that is itself an annuity)
is converted into a Roth IRA.
Generally, when a traditional IRA is converted into a Roth IRA, the fair market value
of the account is included in the individual's income, as if it were distributed.
However, the absence of a specific rule addressing converted annuity contracts has
led some taxpayers to believe that the amount includable in income upon
conversion is the cash surrender value (i.e., that amount that would be available
upon immediate surrender of the contract). This in turn has led to the development
and promotion of specially-designed annuity contracts that are intended to suppress
the amount of income which must be recognized upon conversion. These contracts
provide for temporarily depressed cash surrender values that later "spring" up to a
more realistic value. Under the rules applicable to Roth IRAs, the amounts received
under those contracts will ultimately be tax-free, if they are paid after a 5-year
holding period and attainment of age 59 %.
The regulations specify that the full fair market value must be included in income
upon conversion and provide standards for determining that fair market value. For
example, if the conversion occurs soon after the contract was sold, the fair market
value is generally its original purchase price.
These regulations, which will be effective for transfers made on or after August 19,
2005, will prevent taxpayers from using artificial devices to understate the value of
the contract.
REPORTS
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http://www.treas.gov/pressfreleasesljf>2689.htm

9/1/2005

[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[RE G-122857 -05]
RIN 1545-BE65
Converting an IRA Annuity to a Roth IRA
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations.
SUMMARY: In the Rules and Regulations section of this issue of the Federal Register,
the IRS is issuing temporary regulations under section 408A of the Internal Revenue
Code (Code). The temporary regulations provide guidance concerning the tax
consequences of converting a non-Roth IRA annuity to a Roth IRA. The temporary
regulations affect individuals establishing Roth IRAs, beneficiaries under Roth IRAs, and
trustees, custodians and issuers of Roth IRAs. The text of those temporary regulations
also serves as the text of these proposed regulations.
DATES: Written or electronic comments and requests for a public hearing must be
received by October 20,2005.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-122857-05), room 5203,
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044.
Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m.
and 4 p.m. to CC:PA:LPD:PR (REG-122857-05), Courier's Desk, Internal Revenue
Service, 1111 Constitution Avenue, NW., Washington, DC. Alternatively, taxpayers may

submit comments electronically via the IRS Internet site at www.irs.gov/regs or the
Federal eRulemaking Portal at www.regulations.gov (IRS-REG-122857-05).
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Cathy A. Vohs,
202-622-6060; concerning submissions and requests for a public hearing, contact Treena
Garrett, 202-622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background

Temporary regulations in the Rules and Regulations portion of this issue of the
Federal Register amend the Income Tax Regulations (26 CFR part 1) relating to section

408A. The temporary regulations (§1.408A-4T) contain rules concerning the tax
consequences of converting a traditional IRA annuity to a Roth IRA. The text of those
temporary regulations also serves as the text of these proposed regulations. The
preamble to the temporary regulations explains the temporary and proposed regulations.
Applicability Date

These regulations are proposed to be applicable to any Roth IRA conversion
where an annuity contract is distributed or treated as distributed from a traditional IRA on
or after August 19, 2005. No implication is intended concerning whether or not a rule to
be adopted in these regulations is applicable law for taxable years ending before that
date.
Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant
regulatory action as defined in Executive Order 12866. Therefore, a regulatory
2

assessment is not required. It also has been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these proposed
regulations, and, because these regulations do not impose a collection of information on
small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant
to section 7805(f) of the Code, these proposed regulations will be submitted to the Chief
Counsel for Advocacy of the Small Business Administration for comment on its impact on
small business.

Comments and Requests for a Public Hearing
Before these proposed regulations are adopted as final regulations, consideration
will be given to any written (a signed original and eight (8) copies) or electronic comments
that are submitted timely to the IRS. The IRS and Treasury Department request
comments on the clarity of the proposed rules and how they can be made easier to
understand. Comments are specifically requested regarding the proposed additional
guidance discussed in the preamble to the Temporary Regulations under section 408A
(i.e., §1.408A-4T). The IRS and Treasury Department also request comments regarding
whether the method used to calculate the fair market value of an annuity contract that is
converted to a Roth IRA should also apply for purposes of determining the fair market
value of an annuity contact under sections 408(e) and 401 (a)(9). All comments will be
available for public inspection and copying. A public hearing will be scheduled if
requested in writing by any person that timely submits written comments. If a public
hearing is scheduled, notice of the date, time, and place for the public hearing will be
published in the Federal Register.

Drafting Information
The principal author of these proposed regulations is Cathy A. Vohs of the Office
of the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities).
However, other personnel from the IRS and Treasury Department participated in the
development of these regulations.

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

Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for Part 1 continues to read, in part, as follows:
Authority: 26 U.S.C. 7B05 * * *
§1.40BA-4 also issued under 26 U.S.C. 40BA * * *
Par. 2. Section 1.40BA-4 is amended by adding, in numerical order, 0-14 and
A-14, to read as follows:
§1. 40BA-4 Converting amounts to Roth IRAs.
*****

0-14. [The text of proposed regulation §1.40BA-4, 0-14 is the same as the text of
§1.40BA-4T, 0-14 published elsewhere in this issue of the Federal Register].

A-14. [The text of proposed regulation §1.40BA-4, A-14, is the same as the text of
§1.40BA-4T, A-14, published elsewhere in this issue of the Federal Register].
4

Deputy Commissioner for Services and Enforcement.
Mark E. Matthews

[4830-01-pJ
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TO 9220J
RIN 1545-BE66
Converting an IRA Annuity to a Roth IRA
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Temporary Regulations.
SUMMARY: This document contains temporary regulations under section 408A of the
Internal Revenue Code (Code). These temporary regulations provide guidance
concerning the tax consequences of converting a non-Roth IRA annuity to a Roth IRA.
These temporary regulations affect individuals establishing Roth IRAs, beneficiaries
under Roth IRAs, and trustees, custodians and issuers of Roth IRAs. The text of these
temporary regulations also serves as the text of proposed regulations set forth in a notice
of proposed rulemaking in the Proposed Rules section of this issue of the Federal
Register.
DATES: Effective Date: These regulations are effective August 19, 2005.
Applicability Date: These regulations are applicable to any Roth IRA conversion
where an annuity contract is distributed or treated as distributed from a traditional IRA on
or after August 19, 2005.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Cathy A. Vohs,
202-622-6060.

SUPPLEMENTARY INFORMATION:
Background

Roth IRAs and Conversions
This document contains temporary regulations that amend the Income Tax
Regulations (26 CFR part 1) under section 408A of Code relating to Roth IRAs. Section
408A of the Code, which was added by section 302 of the Taxpayer Relief Act of 1997,
Public Law 105-34 (111 Stat. 788), establishes the Roth IRA as a type of individual
retirement plan, effective for taxable years beginning on or after January 1, 1998.
Under Code section 408A, a Roth IRA is treated like a traditional IRA with several
significant exceptions. Like amounts held in traditional IRAs, amounts held in Roth IRAs
generally are exempt from Federal income tax under Code section 408(e)(1). Likewise,
contributions to traditional IRAs and Roth IRAs are subject to specific limitations.
The identifying characteristic of Roth IRAs is that all contributions are after-tax
contributions, and qualified distributions are tax free. Thus, unlike certain contributions to
traditional IRAs, which may be deductible, contributions to Roth IRAs cannot be deducted
from gross income. Distributions from a traditional IRA are includable in gross income
except to the extent attributable to a return of basis. However, qualified distributions from
Roth IRAs are excludable from gross income. Under section 408A(d)(2), a qualified
distribution from a Roth IRA is a distribution that is made: (1) at least 5 years after the
account owner (or the account owner's spouse) made a Roth IRA contribution, and (2)
after age 59 Y:z, after death, on account of disability, or for a first-time home purchase.
A taxpayer whose modified adjusted gross income for a year does not exceed

$100,000 may convert an amount held in a non-Roth IRA (i.e., a traditional IRA or
SIMPLE IRA) to an amount held in a Roth IRA. This conversion requires taking into
income the value of the non-Roth IRA being converted (to the extent the conversion is not
a conversion of basis in the non-Roth IRA), essentially converting the value into an
after-tax rollover contribution to the Roth IRA. A conversion may be accomplished by
means of a rollover, trustee-to-trustee transfer, or account redesignation.
Regardless of the means used to convert, any amount converted from a non-Roth
IRA to a Roth IRA is treated as distributed from the non-Roth IRA and rolled over to the
Roth IRA. The conversion amount is generally includible in gross income for the year of
the conversion under section 40B(d)(1) and (2). In the case of a conversion involving
property, the conversion amount generally is the fair market value of the property on the
date of distribution or the date the property is treated as distributed from the traditional
IRA.
Final regulations regarding Roth IRAs were published in the Federal Register on
February 4, 1999 (64 FR 5597). Section 1.40BA-4 provides rules relating to converting
amounts from a traditional IRA to a Roth IRA. Section 1.40BA-4, A-7, which sets forth the
tax consequences of converting an amount held in a traditional IRA to a Roth IRA,
provides that any amount that is converted to a Roth IRA is includible in gross income as
a distribution according to the rules of section 40B(d)(1) and (2) for the taxable year in
which the amount is distributed or transferred from the traditional IRA.
Under A-1 of §1.40BA-7, any amount converted from a non-Roth IRA to a Roth IRA
is treated as a distribution for which a Form 1099-R, "Distributions From Pensions,

Annuities, Retirement or Profit-Sharing Plans, IRA, Insurance Contracts," must be filed by
the trustee maintaining the non-Roth IRA.
Fair Market Value of Annuity Contracts
Before the enactment of section 408A, the need to value an annuity contract as a
result of distribution from a qualified plan or IRA rarely arose. The distribution of an
annuity contract from a qualified plan or a traditional IRA is generally not a taxable event
because, in most cases, the distributed annuity account contract continues to be subject
to requirements necessary for tax deferral, e.g., the annuity remains subject to the
minimum distribution requirements of section 401 (a)(9). In such a case, no amount is
includible in income until amounts are actually distributed from the annuity contract.
However, in certain situations, the Code provides that the fair market value of an
individual retirement annuity is treated as a taxable distribution. For example, under
section 408(e), the fair market value of the annuity is included in taxable income if the
annuity ceases to be an individual retirement annuity because of violations of
requirements set forth under that subsection.
Section 25.2512-6 of the Gift Tax Regulations provides rules regarding the
valuation of certain life insurance contracts for gift tax purposes

Under these rules, the

value of a life insurance contract or of a contract for the payment of an annuity issued by
a company regularly engaged in the selling of contracts of that character is established

I In Rev. Rul. 59-195 (1959 -1 C.B. 18), the IRS ruled that, in situations similar to those in
which an employer purchases and pays the premiums on an insurance policy on the life
of one of its employees and subsequently sells such policy, on which further premiums
must be paid, the value of such policy for computing taxable gain in the year of purchase
should be determined under the method of valuation prescribed in §25.2512-6 of the Gift

through the sale of the particular contract by the company, or through the sale by the
company of comparable contracts. In addition, §25.2512-6 provides that, as the value of
an insurance policy through sale of comparable contracts is not readily ascertainable
when the gift is of a contract which has been in force for some time and on which further
premium payments are to be made, the value may be approximated by adding to the
interpolated terminal reserve at the date of the gift the proportionate part of the gross
premium last paid before the date of the gift which covers the period extending beyond
that date. If, however, because of the unusual nature of the contract, such approximation
is not reasonably close to the full value, this method may not be used. Thus, this method
may not be used to determine the fair market value of an insurance policy where the
reserve does not reflect the value of all relevant features of the policy. These gift tax
valuation rules also apply for purposes of commercial annuity contracts. See Examples 1
and

g of §25.2512-6.

In addition, under §20.2031-B of the Estate Tax Regulations, the

same rules govern the valuation of such life insurance and commercial annuity contracts
for estate tax purposes. See §§20.2031-7(b) and 20.2039-1 (c).
Under A-12 of §1.401 (a)(9)-6, an employee's entire interest under an annuity
contract is the dollar amount credited to the employee or beneficiary under the contract
plus the actuarial value of any additional benefits (such as survivor benefits in excess of
the account balance) that will be provided under the contract. This rule requiring that the
value of additional benefits under an annuity contract be included in the employee's entire
interest, for purposes of determining the required minimum distribution under section

Tax Regulations.

401 (a)(9), is based on the general requirement that the fair market value of all assets
must be reflected in valuing an account balance under a defined contribution
plan. However, certain additional benefits may be disregarded for purposes of
calculating the required minimum distribution, such as when there is a pro-rata reduction
in additional benefits for a withdrawal and a guaranteed return of premiums upon death,
to reflect the fact that distributions are being made to satisfy section 401 (a)(9).
Rev. Proc. 2005-25 (2005-17 I.R.B. 962), provides safe harbor formulas that, if
used to determine the value of a life insurance contact, retirement income contract,
endowment contract, or other contract providing life insurance protection that is
distributed or otherwise transferred from a qualified plan, will meet the definition of fair
market value for purposes of applying the rules of section 402(a) (as well as sections 79,
83, and 402(b)).
Explanation of Provisions
These temporary regulations under section 408A clarify that, when a non-Roth
individual retirement annuity is converted to a Roth IRA, the amount that is treated as
distributed is the fair market value of the annuity contract on the date the annuity contract
is converted. Similarly, when a non-Roth individual retirement account holds an annuity
contract as an account asset and the account is converted to a Roth IRA, the amount that
is treated as distributed with respect to the annuity contract is the fair market value of the
annuity contract on the date the annuity contract is distributed or treated as distributed
from the non-Roth IRA.
Some taxpayers and their advisers assert that the only amount includible in

income as a distribution when a non-Roth individual retirement annuity is converted to a
Roth IRA is the cash surrender value of the contract, even when the cash surrender value
does not accurately reflect the fair market value of the contract. In particular, some
advisers market a transaction in which taxpayers are encouraged to invest their non-Roth
IRA funds in a single premium annuity contract with significant artificial penalties that
apply in the first year (or years) of the contract if the annuity is surrendered, causing the
annuity to have a low cash surrender value in the early years of the contract. Under this
transaction, shortly after the annuity contract is purchased by the non-Roth IRA, the
taxpayer converts the IRA to a Roth IRA. In such a case, the taxpayer asserts that the
only amount includible in gross income as a result of the conversion is the low cash
surrender value. This assertion is made even though the surrender penalties are unlikely
to be paid because the taxpayers do not expect to surrender the contract during the early
years. In this case, the taxpayers expect that the ultimate payments under the contract
will be qualified distributions from the Roth IRA (i.e., tax-exempt), and thus, they also
expect the artificially depressed cash surrender value to be the only amount ever
includible in gross income.
In another situation, a taxpayer purchases a non-Roth individual retirement
variable annuity with a guaranteed minimum death benefit equal to the highest account
value ever attained under the contract, adjusted for withdrawals. If an amount is
withdrawn from the contract, the death benefit is reduced dollar for dollar (rather than a
pro-rata reduction) by the amount of the withdrawal. Prior to the date of conversion, the
annuity has a death benefit far in excess of the account value and the taxpayer withdraws

from the IRA annuity all but a minimum account value that will keep the IRA annuity in
force. Because the withdrawal reduces the guaranteed minimum death benefit on a
dollar-for-dollar basis, the remaining death benefit will be significantly greater than the
current account value, and accordingly, the current account value will not reflect the fair
market value of the contract. For example, suppose such an individual retirement
variable annuity has a guaranteed minimum death benefit of $200,000 with an account
value of $100,000. The taxpayer withdraws $99,000 leaving a $1,000 account value and
a $101,000 death benefit ($200,000 less $99,000)). The taxpayer then converts the IRA
annuity into a Roth IRA and takes the position that the $1,000 account value is the
conversion amount even though the account value does not reflect the fair market value
of the additional $100,000 that will be paid upon the taxpayer's death. In this case, the
taxpayer expects that the entire benefit payment of $101,000 will be a qualified
distribution from the Roth IRA (i.e., tax-exempt), and thus, expects that the $1,000
account value on the date of conversion will be the only amount ever includible in gross
income.
The IRS and Treasury Department have concluded that cash surrender value is
not always an appropriate measure of fair market value with respect to non-Roth IRA
annuities that are converted to Roth IRA annuities.

Rather than use the cash surrender

value as the basis for determining fair market value, these temporary regulations follow
the gift tax regulations in providing that the fair market value of an individual retirement
annuity is established by the premiums paid for such annuity if the conversion occurs
soon after the annuity was purchased.

Under the temporary regulations, if the conversion occurs after the annuity
contract has been in force for some time and no further premium payments are to be
made, fair market value is determined through the sale by the company of comparable
contracts. The temporary regulations further provide that, if the conversion occurs after
the annuity contract has been in force for some time and future premium payments are to
be made, fair market value is determined through an approximation that is based on the
interpolated terminal reserve at the date of the conversion, plus the proportionate part of
the gross premium last paid before the date of the conversion which covers the period
extending beyond that date. However, if, because of the unusual nature of the contract,
this approximation is not reasonably close to the full value, this method may not be used.
These temporary regulations also provide authority for the Commissioner to issue
additional guidance regarding the fair market value of an individual retirement annuity,
including formulas to be used for determining fair market value. The IRS and Treasury
Department expect to issue additional guidance regarding the rules to be used in
determining the fair market value of a non-Roth IRA annuity.

It is anticipated that such

guidance will be similar to the provisions of Rev. Proc. 2005-25 (2005-17 I.R.B. 962, April
25, 2005), except that the adjustment for potential surrender charges, to the extent
permitted, will not exceed 9 percent. It is also anticipated that such guidance will provide
that in determining fair market value, the value of all additional benefits (such as
guaranteed minimum death benefits) under the contract must be taken into account. The
IRS and Treasury Department request comments regarding this anticipated guidance.
The IRS and Treasury Department also request comments regarding whether the method

used to calculate the fair market value of an annuity contract that is converted to a Roth
IRA should also apply for purposes of the determining fair market value of an annuity
contract under sections 408(e) and 401(a)(9). These comments may be submitted in
conjunction with the comments submitted on the proposed regulations discussed below.
Proposed regulations regarding the determination of fair market value of an
annuity contract are contained in the Proposed Rules section of the Federal Register.
The preamble and text of these temporary regulations also serves as the preamble and
text of the proposed regulations.

Effective Date
The temporary amendments to §1.408A-4 of the regulations are applicable to any
Roth IRA conversion where an annuity contract is distributed or treated as distributed
from a traditional IRA on or after August 19, 2005. No implication is intended concerning
whether or not a rule to be adopted in these regulations is applicable law for taxable years
ending before that date.

Special Analyses
It has been determined that these temporary regulations are not a significant
regulatory action as defined in Executive Order 12866. Therefore, a regulatory
assessment is not required. It also has been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these temporary
regulations. For applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6), refer to
the notice of proposed rulemaking published in the Proposed Rules section of this issue
of the Federal Register. Pursuant to section 7805(f) of the Code, these temporary

regulations will be submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.

Drafting Information
The principal author of these temporary regulations is Cathy A. Vohs of the Office
of the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities).
However, other personnel from the IRS and Treasury Department participated in the
development of these regulations.

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

Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for Part 1 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
§1.40BA-4T also issued under 26 U.S.C. 40BA * * *
Par. 2. Section 1.40BA-4 is amended by adding, in numerical order, 0-14 and
A-14, to read as follows:

§1.40BA-4 Converting amounts to Roth IRAs.
* * * * *

0-14. [Reserved]. For further guidance, see §1.40BA-4T, 0-14.
A-14. [Reserved]. For further guidance, see §1.40BA-4T, A-14.
11

Par. 3. Section 1.40BA-4T is added to read as follows:
§1.40BA-4T Converting amounts to Roth IRAs.
*****

0-14. What is the amount that is includable in income as a distribution when a
conversion involves an annuity contract?
A-14. (a) In general. Notwithstanding §1.408-4(e), when part or all of a traditional
IRA that is an individual retirement annuity described in section 408(b) is converted to a
Roth IRA, for purposes of determining the amount includible in gross income as a
distribution under §1.40BA-4, A-7, the amount that is treated as distributed is the fair
market value of the annuity contract on the date the annuity contract is converted.
Similarly, when a traditional IRA that is an individual retirement account described in
section 40B(a) holds an annuity contract as an account asset and the traditional IRA is
converted to a Roth IRA, for purposes of determining the amount includible in gross
income as a distribution under §1.40BA-4, A-7, the amount that is treated as distributed
with respect to the annuity contract is the fair market value of the annuity contract on the
date that the annuity contract is distributed or treated as distributed from the traditional
IRA.
(b) Determination offair market value--(1) General rule. For purposes of this A-14,
the fair market value of an individual retirement annuity issued by a company regularly
engaged in the selling of contracts of that character generally is established as follows-(A) If the conversion occurs soon after the contract was sold and there have been
no material changes in market conditions, the fair market value of the contract is
established through the sale of the particular contract by the company (I.e., the actual
12

premiums paid for such contract);
(B) If the conversion occurs after the contract has been in force for some time and
no further premium payments are to be made, the fair market value of the contract is
established through the sale by the company of comparable contracts;
(C) If the conversion occurs after the contract has been in force for some time and
future premium payments are to be made, the fair market value of the contract is
established through an approximation that is based on the interpolated terminal reserve
at the date of the conversion, plus the proportionate part of the gross premium last paid
before the date of the conversion which covers the period extending beyond that date.
However, if, because of the unusual nature of the contract, this approximation is not
reasonably close to the full value, this method may not be used. Thus, this method may
not be used to determine the fair market value of an annuity contract where the reserve
does not reflect the value of all relevant features of the contract.
(2) Additional guidance. Additional guidance regarding the fair market value of an
individual retirement annuity, including formulas to be used for determining fair market
value, may be issued by the Commissioner in revenue rulings, notices, or other guidance
published in the Internal Revenue Bulletin (See §601.601 (d)(2)(ii)(b)).
(c) Effective date. The provisions of this A-14 are applicable to any conversion
where an annuity contract is distributed or treated as distributed from a traditional IRA on
or after August 19, 2005.
(d) Definitions. The definitions set forth in §1.408A-8 apply for purposes of this

A-14.
13

Deputy Commissioner for Services and Enforcement.
Mark E. Matthews

Approved: August 9,2005

Acting Deputy Assistant Secretary for Tax Policy.
Eric Solomon

August 23, 2005
2005-8-23-15-1-44-2635

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 $72,221 million as of the end of that week, compared to $76.230 million as of the end of the prior week.

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

TOTAL
1. Foreign Currency Reserves

a. Securities

August 12, 2005

August 19, 2005

76,230

72,221

Euro

Yen

TOTAL

11,572

12,988

24,560

Of which, issuer headquartered in the US.

Euro

Yen

TOTAL

11,330

12,405

23,735

b. Total deposits with:
11,276

b.i. Other central banks and BIS

4,255

15,531

11,025

4,664

15,689

b.ii. Banks headquartered In the US.

b.ii. Of which, banks located abroad

b.iii. Banks headquartered outside the US.

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

13,685

13,538

11,413

8,218

11,041

2. IMF Reserve Position

3. Special Drawing Rights (SDRs)
4. Gold Stock

5. Other Reserve Assets

II. Predetermined Short-Term Drains on Foreign Currency Assets
August 19, 2005

August 12, 2005
Euro
1. Foreign currency loans and securities

Yen

TOTAL

Euro

Yen

TOTAL

2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vIs the U.S. dollar:
2.a. Short positions
2.b. Long positions

3 Other

o
o

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

o
o
o

August 12, 2005
Euro
1. Contingent liabilities in foreign currency

Yen

August 19, 2005

TOTAL

Euro

Yen

TOTAL

o
o

1.a Collateral guarantees on debt due within 1 year

U. 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 institutJons
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 I MF and are
valued in dollar terms at the offiCial SDR/dollar eXChange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.

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

Page 1 of 1

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Viewer.

August 24, 2005
js-2690
TREASURY AND IRS ANNOUNCE PROPOSED REGULATIONS REGARDING
COST SHARING ARRANGEMENTS UNDER SECTION 482
Today, the Treasury Department and IRS announced proposed regulations that
provide guidance regarding methods under section 482 to determine taxable
income in connection with a cost sharing arrangement.
Experience in the administration of the existing cost sharing rules has demonstrated
the need for additional guidance to improve compliance with, and administration of,
those rules. In amending section 482 in 1986, Congress indicated that while it did
not intend to preclude the use of bona fide research and development cost sharing
arrangements, it expected the results of those arrangements to be consistent with
the commensurate with income standard. The proposed regulations provide
additional guidance to ensure that Congressional intent is fulfilled by requiring that
cost sharing arrangements between controlled taxpayers produce results consistent
with the arm's length standard. In other words, cost sharing arrangements must
produce results consistent with the results that would have been realized if
uncontrolled taxpayers had engaged in the same transaction under the same
circumstances.
The proposed regulations generally are proposed to be effective on the date of
publication of the proposed regulations as final regulations in the Federal Register.
Transition rules are provided which, if certain conditions are met, allow existing cost
sharing arrangements to conform to the new rules with certain modifications, as
well as rules for terminating such grandfather status. The Treasury Department
and IRS request comments on the rules contained in the proposed regulations and
any additional guidance that should be provided in the final regulations.
REPORTS
•

Proposed regulations under section 482

http://www.treas.gov/pressfreleasesljfi269Q.htm

9/112005

[4830-01-P]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 301
[REG-144615-02]
RIN 1545-8826
Section 482: Methods to Determine Taxable Income in Connection With a Cost
Sharing Arrangement
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
SUMMARY: This document contains proposed regulations that provide guidance

regarding methods under section 482 to determine taxable income in connection with a
cost sharing arrangement. These proposed regulations potentially affect controlled
taxpayers within the meaning of section 482 that enter into cost sharing arrangements
as defined herein. This document also provides a notice of public hearing on these
proposed regulations.
DATES: Written or electronic comments must be received on or before November 28,

2005. Requests to speak and outlines of topics to be discussed at the public hearing
scheduled for November 16, 2005, at 10:00 a.m. must be received by October 26,
2005.
ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-144615-02), room 5203,

Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC

Page 1 of 1

August24,2005
JS-2691

Treasurer to Discuss Strengthening Social Security in Oakland
U.S. Treasurer Anna Escobedo Cabral will be in Oakland this week to discuss
President Bush's efforts to strengthen and preserve Social Security. The Treasurer
will deliver remarks at the California Hispanic Chambers of Commerce's 26th
Annual State Convention on Friday.
"Right now, we have a historic opportunity and obligation to save and strengthen
the nation's retirement security system. The President's leadership, combined with
our economic health, gives us this opportunity," said Treasurer Cabral. "If we don't
take steps now to fix Social Security, we will be placing an unfair burden on future
generations of workers."
The following event is open to the media:

WHO:
U.S. Treasurer Anna Escobedo Cabral
Treasurer Cabral's bio: http:£/VV\iVw.tLeQsllrY---9QvLorgCl!}iz<;Jtion/Qios/cQbral::e.htn)i
History of the Treasurer's Office: btt1-r//\f/Ww.trtLasSlQvlQffice§/trea_surerlpffjc~~
lli~tory-"-shtml

WHAT:
California Hispanic Chambers of Commerce 26th Annual State Convention
Latina Recognition Luncheon Speech
WHEN:
Friday, August 26
12:30 p.m. - 1:30pm PT
WHERE:
Oakland Marriott City Center
1001 Broadway
Oakland, CA

http://www.treas.gov/pressfreleasesljf>269t.htm

9/112005

Page 1 of 1

J0 vIew or print the fJut- content on thIS page, C1ownJoaC1 tne tree Aaone',') AcronaN;; f<eaaef1")

August 25, 2005
JS-2692

Treasury and IRS Issue Proposed Regulations Concerning Health Savings
Account Comparability Rules
WASHINGTON, DC -- Today the IRS and Treasury issued proposed regulations
with respect to the comparability rules for employer Health Savings Account (HSA)
contributions. The proposed regulations generally follow the previously issued
guidance on comparability rules. The rules also provide additional clarification with
respect to a few issues not previously addressed.
Unlike many other employer-provided tax-favored benefits, the HSA rules do not
have nondiscrimination rules restricting the amount of benefits provided to highly
compensated employees. Instead, the HSA statute requires that all employer pretax contributions to employee HSAs be comparable. That is, all employer
contributions to employee HSAs must be the same amount or the same percentage
of the High Deductible Health Plan (HDHP) deductible for all employees with the
same category (self-only or family) of HDHP coverage. These rules, as provided in
prior guidance, provide an exception from the comparability rules for employer
contributions to HSAs made through cafeteria plans.
A copy of the proposed regulations is attached.

####

REPORTS

http://www.treas.gov/pressfreleasesljf>16Q2.htm

91112005

[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 54
[RE G-13864 7 -04]
RIN 1545-BE30
Employer Comparable Contributions to Health Savings Accounts under Section
4980G
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains proposed regulations providing guidance
on employer comparable contributions to Health Savings Accounts (HSAs) under
section 4980G. In general, these proposed regulations would affect employers
that contribute to employees' HSAs.
DATES: Written or electronic comments and requests for a public hearing must
be received by November 25,2005.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-138647-04), room
5203, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-138647-04),
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW.,
Washington, DC. Alternatively, taxpayers may submit comments electronically
via the IRS Internet site at www.irs.gov/regs or via the Federal eRulemaking
Portal at www.regulations.gov (IRS - REG-138647-04).

2
FOR FURTHER INFORMATION CONTACT: Concerning the proposed
regulations, Barbara E. Pie at (202) 622-6080; concerning submissions of
comments or a request for a public hearing, Kelly Banks at (202) 622-7180 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION
Background
This document contains proposed Pension Excise Tax Regulations (26
CFR part 54) under section 4980G of the Internal Revenue Code (Code). Under
section 4980G of the Code, an excise tax is imposed on an employer that fails to
make comparable contributions to the HSAs of its employees.
Section 1201 of the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (Act), Public Law 108-173, (117 Stat. 2066, 2003)
added section 223 to the Code to permit eligible individuals to establish HSAs for
taxable years beginning after December 31,2003. Section 4980G was also
added to the Code by the Act. Section 4980G(a} imposes an excise tax on the
failure of an employer to make comparable contributions to the HSAs of its
employees for a calendar year. Section 4980G(b} provides that rules and
requirements similar to section 4980E (the comparability rules for Archer Medical
Savings Accounts (Archer MSAs)} apply for purposes of section 4980G. Section
4980E(b) imposes an excise tax equal to 35% of the aggregate amount
contributed by the employer to the Archer MSAs of employees during the
calendar year if an employer fails to make comparable contributions to the Archer
MSAs of its employees in a calendar year. Therefore, if an employer fails to

3
make comparable contributions to the HSAs of its employees during a calendar
year, an excise tax equal to 35% of the aggregate amount contributed by the
employer to the HSAs of its employees during that calendar year is imposed on
the employer. See Sections 4980G(a) and (b) and 4980E(b). See also Notice
2004-2 (2004-2 I.R.B. 269), Q & A-32.

Explanation of Provisions
Overview
The proposed regulations clarify and expand on the guidance regarding
the comparability rules published in Notice 2004-2 and in Notice 2004-50 (200433 I.R.S. 196), Q & A-46 through Q & A-54.
I. Comparable Contributions in General
An employer is not required to contribute to the HSAs of its employees.
However, in general, if an employer makes contributions to any employee's HSA,
the employer must make comparable contributions to the HSAs of all comparable
participating employees. Comparable participating employees are eligible
individuals (as defined in section 223(c)(1)) who have the same category of high
deductible health plan (HDHP) coverage. The categories of coverage are selfonly HDHP coverage and family HDHP coverage.
These proposed regulations incorporate the rule in Notice 2004-2, Q & A32 that contributions are comparable if they are either the same amount or the
same percentage of the deductible for employees who are eligible individuals
with the same category of coverage. An employer is not required to contribute
the same amount or the same percentage of the deductible for employees who

4
are eligible individuals with self-only HDHP coverage that it contributes for
employees who are eligible individuals with family HDHP coverage. An employer
that satisfies the comparability rules by contributing the same amount to the
HSAs of all employees who are eligible individuals with self-only HDHP coverage
is not required to contribute any amount to the HSAs of employees who are
eligible individuals with family HDHP coverage, or to contribute the same
percentage of the family HDHP deductible as the amount contributed with
respect to self-only HDHP coverage. Similarly, an employer that satisfies the
comparability rules by contributing the same amount to the HSAs of all
employees who are eligible individuals with family HDHP coverage is not
required to contribute any amount to the HSAs of employees who are eligible
individuals with self-only HDHP coverage, or to contribute the same percentage
of the self-only HDHP deductible as the amount contributed with respect to family
HDHP coverage.
II. Calculating Comparable Contributions
The proposed regulations clarify that contributions to the HSAs of certain
individuals are not taken into account in determining whether an employer's
contributions to the HSAs of its employees satisfy the comparability rules.
Specifically, contributions to the HSAs of independent contractors, sole
proprietors, and partners in a partnership are not taken into account under the
comparability rules. In addition, the comparability rules do not apply to amounts
rolled over from an employee's HSA or Archer MSA or to after-tax employee
contributions.

5
The proposed regulations also clarify that the categories of employees for
comparability testing are current full-time employees, current part-time
employees, and former employees (except for former employees with coverage
under the employer's HDHP because of an election under a COBRA continuation
provision (as defined in section 9832(d)(1 )). The proposed regulations provide
that the comparability rules apply separately to each of the categories of
employees. If an employer contributes to the HSA of any employee in a category
of employees, the employer must make comparable contributions to the HSAs of
all comparable participating employees within that category. Therefore, the
comparability rules apply to a category of employees only if an employer
contributes to the HSA of any employee within the category. For example, an
employer that makes comparable contributions to the HSAs of all full-time
employees who are eligible individuals but does not contribute to the HSA of any
employee who is not a full-time employee, satisfies the comparability rules.
The categories of employees set forth in these proposed regulations are
the exclusive categories for comparability testing. An employer must make
comparable contributions to the HSAs of all comparable partiCipating employees
(eligible individuals who are in the same category of employees with the same
category of HDHP coverage) during the calendar year without regard to any
classification other than these categories. Therefore, the comparability rules do
not apply separately to groups of collectively bargained employees. While the
comparability rules apply separately to part-time employees, there is no similar
rule permitting separate application of the comparability rules to collectively

6
bargained employees. Neither section 4980E nor section 4980G provides an
exception to the comparability rules for collectively bargained employees.
Accordingly, an employer must make comparable contributions to the HSAs of all
comparable participating employees, both those who are covered under a
collective bargaining agreement and those who are not covered. Similarly, the
comparability rules do not apply separately to management and nonmanagement employees.
The proposed regulations also provide that the comparability rules apply
separately to employees who have HSAs and employees who have Archer
MSAs. However, if an employee has both an HSA and an Archer MSA, the
employer may contribute to either the HSA or the Archer MSA, but not to both.
The proposed regulations incorporate the rule set forth in Q & A-53 of
Notice 2004-50, which provides that if an employer limits HSA contributions to
employees who are eligible individuals with coverage under an HDHP provided
by the employer, the employer is not required to make comparable contributions
to the HSAs of employees who are eligible individuals with coverage under an
HDHP not provided by the employer. However, if an employer contributes to the
HSAs of employees who are eligible individuals with coverage under any HDHP,
in addition to the HDHPs provided by the employer, the employer is required to
make comparable contributions to the HSAs of all comparable participating
employees whether or not covered under employer's HDHP. The proposed
regulations also provide that similar rules apply to employer contributions to the
HSAs of former employees. For example, if an employer limits HSA

7
contributions to former employees who are eligible individuals with coverage
under an HDHP provided by the employer, the employer is not required make
comparable contributions to the HSAs of former employees who are eligible
individuals with coverage under an HDHP not provided by the employer.
However, if an employer contributes to the HSAs of former employees who are
eligible individuals with coverage under the employer's HDHP, the employer is
not required to make comparable contributions to the HSAs of former employees
who are eligible individuals with coverage under the employer's HDHP because
of an election under a COBRA continuation provision (as defined in section
9832(d)(1 )).
The proposed regulations also incorporate the rule set forth in Q & A-46 of
Notice 2004-50, which provides that the comparability rules will not be satisfied if
an employer makes HSA contributions in an amount equal to an employee's HSA
contribution or a percentage of the employee's HSA contribution (matching
contributions) because if all comparable participating employees do not
contribute the same amount to their HSAs, they will not receive comparable
contributions to their HSAs. In addition, the comparability rules will not be
satisfied if an employer conditions contributions to an employee's HSA on an
employee's participation in health assessments, disease management programs
or wellness programs because if all comparable participating employees do not
elect to participate in all the programs, they will not receive comparable
contributions to their HSAs. See Q & A-48 of Notice 2004-50. Similarly, the
comparability rules will not be satisfied if an employer makes additional

8
contributions to the HSAs of all comparable participating employees who have
attained a specified age or who have worked for the employer for a specified
number of years, because if all comparable participating employees do not meet
the age or length of service requirement, they will not receive comparable
contributions to their HSAs. See Q & A-50 of Notice 2004-50.
III. Procedures for Making Comparable Contributions
The proposed regulations provide that in determining whether the
comparability rules are satisfied, an employer must take into account all full-time
and part-time employees who were eligible individuals for any month during the
calendar year. An employee is an eligible individual if as of the first day of the
month the employee meets all of the requirements set forth in section 223(c). An
employer may comply with the comparability rules by contributing amounts at
one or more times for the calendar year to the HSAs of employees who are
eligible individuals, if contributions are the same amount or the same percentage
of the HDHP deductible for employees who are eligible individuals with the same
category of coverage and are made at the same time (contributions on a pay-asyou-go basis).
An employer may also satisfy the comparability rules by determining
comparable contributions for the calendar year at the end of the calendar year,
taking into account all employees who were eligible individuals for any month
during the calendar year and contributing the correct amount (a percentage of
the HDHP deductible or a specified dollar amount for the same categories of

9
coverage) to the employees' HSAs by April 15th of the following year
(contributions on a look-back basis).
If an employer makes comparable HSA contributions on a pay-as-you-go
basis, it must do so for each comparable participating employee who is an
employee during the time period used to make contributions. For example, if an
employer makes HSA contributions each pay period, it must do so for each
comparable participating employee who is an employee during the pay period. If
an employer makes comparable contributions on a look-back-basis, it must do so
for each employee who was a comparable participating employee for any month
during the calendar year.
In addition, an employer may make all of its contributions to the HSAs of
employees who are eligible individuals at the beginning of the calendar year
(contributions on a pre-funded basis). An employer that makes comparable HSA
contributions on a pre-funded basis will not fail to satisfy the comparability rules
because an employee who terminates employment prior to the end of the
calendar year has received more HSA contributions on a monthly basis than
employees who worked the entire calendar year. If an employer makes HSA
contributions on a pre-funded basis, it must do so for all employees who are
comparable participating employees at the beginning of the calendar year. An
employer that makes HSA contributions on a pre-funded basis must make
comparable HSA contributions for all employees who are comparable
participating employees for any month during the calendar year, including
employees hired after the date of initial funding.

10
If an employee has not established an HSA at the time the employer funds
its employee's HSAs, the employer complies with the comparability rules by
contributing comparable amounts to the employee's HSA when the employee
establishes the HSA, taking into account each month that the employee was a
comparable participating employee. However, an employer is not required to
make comparable contributions for a calendar year to an employee's HSA if the
employee has not established an HSA by December 31 st of the calendar year.
The proposed regulations provide that if an employer determines that the
comparability rules are not satisfied for a calendar year, the employer may not
recoup from an employee's HSA any portion of the employer's contribution to the
employee's HSA because under section 223(d)(1 )(E), an account beneficiary's
interest in an HSA is nonforfeitable. However, an employer may make additional
HSA contributions to satisfy the comparability rules. An employer may contribute
up until April 15th following the calendar year in which the non-comparable
contributions were made. An employer that makes additional HSA contributions
to correct non-comparable contributions must also contribute reasonable interest.
IV. Exception to the Comparability Rules for Cafeteria Plans
The legislative history of the Act states that the comparability rules do not
apply to HSA contributions that an employer makes through a cafeteria plan.
See Conf. Rep. No. 391, 108th Cong., 1st Sess. 843 (2003), 2004 U.S.C.C.A.N.
1808. See also Notice 2004-2, Q & A-32. The nondiscrimination rules in section
125 of the Code apply to HSA contributions (including matching contributions)
made through a cafeteria plan. Generally, a cafeteria plan is a written plan under

11
which all participants are employees and participants may choose among two or
more benefits consisting of cash and qualified benefits. Unlike the cafeteria plan
nondiscrimination rules, the comparability rules are not based upon
discrimination in favor of highly compensated or key employees. Therefore, an
employer that maintains an HDHP only for highly compensated or key employees
and makes HSA contributions through a cafeteria plan only for those eligible
employees, does not violate the comparability rules, but may violate the cafeteria
plan nondiscrimination rules.
V. Waiver of Excise Tax
In the case of a failure which is due to reasonable cause and not to willful
neglect, all or a portion of the excise tax imposed under section 4980G may be
waived to the extent that the payment of the tax would be excessive relative to
the failure involved. See sections 4980G(b) and 4980E(c).
Proposed Effective Date
It is proposed that these regulations apply to employer contributions made
on or after the date the final regulations are published in the Federal Register.
However, taxpayers may rely on these regulations for guidance pending the
issuance of final regulations.
Special Analyses
It has been determined that this notice of proposed rulemaking is not a
significant regulatory action as defined in Executive Order 12866. Therefore, a
regulatory assessment is not required. It also has been determined that section
553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to

12
these regulations. This notice of proposed rulemaking does not impose a
collection of information on small entities, thus the Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, these
proposed regulations will be submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small business.
Comments and Requests for Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (a signed original and eight
(8) copies) or electronic comments that are submitted timely to the IRS. The
Treasury Department and the IRS specifically request comments on the clarity of
the proposed rules and how they can be made easier to understand. In addition,
comments are requested on the application of the comparability rules to
employees who are on leave pursuant to the Family and Medical Leave Act of
1993, Public Law 103-3, (107 Stat. 6,1993,29 U.S.C. 2601 et seq.). Comments
are also requested concerning employer matching HSA contributions made
through a cafeteria plan. Specifically, whether the ratio of an employer's
matching HSA contributions to an employee's salary reduction HSA contributions
should be limited, and whether employer matching contributions exceeding a
specific limit should be subject to the section 4980G comparability rules. All
comments will be available for public inspection and copying. A public hearing
will be scheduled if requested in writing by any person that timely submits written
comments.

13
Drafting Information
The principal author of these proposed regulations is Barbara E. Pie,
Office of Division Counsel/Associate Chief Counsel (Tax Exempt and
Government Entities), Internal Revenue Service. However, personnel from other
offices of the IRS and Treasury Department participated in their development.
List of Subjects in 26 CFR Part 54
Excise taxes, Pensions, Reporting and record keeping requirements.
Proposed Amendment to the Regulations
Accordingly, 26 CFR part 54 is proposed to be amended as follows:
PART 54--PENSION EXCISE TAXES
Paragraph 1. The authority citation for part 54 is amended by adding an
entry in numerical order to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Section 54.4980G-1 also issued under 26 U.S.C. 4980G. * * *
Paragraph 2. Sections 54.4980G-0 through 54.4980G-5 are added to
read as follows:
'54.4980G-0 Table of contents
This section contains the questions for' 54.4980G-1 through '54.4980G-

5.
'54.4980G-1 Failure of employer to make comparable health savings account
contributions.
0-1. What are the comparability rules that apply to employer contributions to
Health Savings Accounts (HSAs)?
0-2. What are the categories of HDHP coverage for purposes of applying the
comparability rules?
0-3. What is the testing period for making comparable contributions to
employees' HSAs?

14
0-4. How is the excise tax computed if employer contributions do not satisfy the
comparability rules for a calendar year?
I

54.4980G-2 Employer contribution defined.

0-1. Do the comparability rules apply to amounts rolled over from an employee's
HSA or Archer Medical Savings Account (Archer MSA)?
0-2. If an employee requests that his or her employer deduct after-tax amounts
from the employee's compensation and forward these amounts as employee
contributions to the employee's HSA, do the comparability rules apply to these
amounts?
I

54.4980G-3 Definition of employee for comparability testing.

0-1. Do the comparability rules apply to contributions that an employer makes to
the HSAs of independent contractors?
0-2. Maya sole proprietor who is an eligible individual contribute to his or her
own HSA without contributing to the HSAs of his or her employees who are
eligible individuals?
0-3. Do the comparability rules apply to contributions by a partnership to a
partner's HSA?
0-4. How are members of controlled groups treated when applying the
comparability rules?
0-5. What are the categories of employees for comparability testing?
0-6. Is an employer permitted to make comparable contributions only to the
HSAs of comparable partiCipating employees who have coverage under the
employer's HDHP?
0-7. If an employee and his or her spouse are eligible individuals who work for
the same employer and one employee-spouse has family coverage for both
employees under the employer's HDHP, must the employer make comparable
contributions to the HSAs of both employees?
0-8. Does an employer that makes HSA contributions only for non-management
employees who are eligible individuals, but not for management employees who
are eligible individuals or that makes HSA contributions only for management
employees who are eligible individuals but not for non-management employees
who are eligible individuals satisfy the requirement that the employer make
comparable contributions?
0-9. If an employer contributes to the HSAs of former employees who are
eligible individuals, do the comparability rules apply to these contributions?
0-10. Is an employer permitted to make comparable contributions only to the
HSAs of comparable participating former employees who have coverage under
the employer's HDHP?
0-11. If an employer contributes only to the HSAs of former employees who are
eligible individuals with coverage under the employer's HDHP, must the
employer make comparable contributions to the HSAs of former employees who
are eligible individuals with coverage under the employer's HDHP because of an

15
election under a COBRA continuation provision (as defined in section
9832(d)(1 ))?
Q-12. How do the comparability rules apply if some employees have HSAs and
other employees have Archer MSAs?
'54.4980G-4 Calculating comparable contributions.
Q-1. What are comparable contributions?
Q-2. How do the comparability rules apply to employer contributions to
employees' HSAs if some employees work full-time during the entire calendar
year, and other employees work full-time for less than the entire calendar year?
Q-3. How does an employer comply with the comparability rules when some
employees who are eligible individuals do not work for the employer during the
entire calendar year?
Q-4. Mayan employer make all of its contributions to the HSAs of its employees
who are eligible individuals at the beginning of the calendar year (i.e., on a prefunded basis) instead of contributing on a pay-as-you-go or on a look-back
basis?
Q-5. Must an employer use the same contribution method as described in
Q & A-3 and Q & A-4 of this section for all employees who were comparable
participating employees for any month during the calendar year?
Q-6. How does an employer comply with the comparability rules if an employee
has not established an HSA at the time the employer contributes to its
employees' HSAs?
Q-7. If an employer bases its contributions on a percentage of the HDHP
deductible, how is the correct percentage or dollar amount computed?
Q-8. Does an employer that contributes to the HSA of each comparable
participating employee in an amount equal to the employee's HSA contribution or
a percentage of the employee's HSA contribution (matching contributions) satisfy
the rule that all comparable participating employees receive comparable
contributions?
Q-9. If an employer conditions contributions by the employer to an employee's
HSA on an employee's participation in health assessments, disease
management programs or wellness programs and makes the same contributions
available to all employees who participate in the programs, do the contributions
satisfy the comparability rules?
Q-10. If an employer makes additional contributions to the HSAs of all
comparable participating employees who have attained a specified age or who
have worked for the employer for a specified number of years, do the
contributions satisfy the comparability rules?
Q-11. If an employer makes additional contributions to the HSAs of all
comparable participating employees who qualify for the additional contributions
(HSA catch-up contributions) under section 223(b)(3), do the contributions satisfy
the comparability rules?

16
Q-12. If an employer's contributions to an employee's HSA result in noncomparable contributions, may the employer recoup the excess amount from the
employee's HSA?
, 54.4980G-5 HSA comparability rules and cafeteria plans and waiver of excise
tax.
0-1. If an employer makes contributions through a section 125 cafeteria plan to
the HSA of each employee who is an eligible individual are the contributions
subject to the comparability rules?
0-2. If an employer makes contributions through a cafeteria plan to the HSA of
each employee who is an eligible individual in an amount equal to the amount of
the employee's HSA contribution or a percentage of the amount of the
employee's HSA contribution (i.e., matching contributions), are the contributions
subject to the section 4980G comparability rules?
0-3. If an employer provides HDHP coverage through a cafeteria plan, but the
employer's HSA contributions are not provided through the cafeteria plan, do the
cafeteria plan nondiscrimination rules or the comparability rules apply to the HSA
contributions?
0-4. If under the employer's cafeteria plan, employees who are eligible
individuals and who participate in health assessments, disease management
programs or well ness programs receive an employer contribution to an HSA,
unless the employees elect cash, are the contributions subject to the
comparability rules?
0-5. Mayall or part of the excise tax imposed under section 4980G be waived?
'54.4980G-1 Failure of employer to make comparable health savings account
contributions.
0-1. What are the comparability rules that apply to employer contributions
to Health Savings Accounts (HSAs)?
A-1. If an employer makes contributions to any employee's HSA, the
employer must make comparable contributions to the HSAs of all comparable
participating employees. See Q & A-1 in 1 54.4980G-4 for the definition of
comparable contributions. Comparable participating employees are eligible
individuals (as defined in section 223(c)(1)) who have the same category of high
deductible health plan (HDHP) coverage. See sections 4980G(b) and

17
4980E(d)(3). See section 223(c)(2) and (g) for the definition of an HDHP. See
also 0 & A-5 in

54.4980G-3 for the categories of employees and 0 & A-2 in this

section for the categories of HDHP coverage.
0-2. What are the categories of HDHP coverage for purposes of applying
the comparability rules?
A-2. The categories of coverage are self-only HDHP coverage and family
HDHP coverage. See sections 4980G(b) and 4980E(d)(3)(8).
0-3. What is the testing period for making comparable contributions to
employees' HSAs?
A-3. To satisfy the comparability rules, an employer must make
comparable contributions for the calendar year to the HSAs of employees who
are comparable participating employees. See section 4980G(a).
0-4. How is the excise tax computed if employer contributions do not
satisfy the comparability rules for a calendar year?
A-4. (a) Computation of tax. If employer contributions do not satisfy the
comparability rules for a calendar year, the employer is subject to an excise tax
equal to 35% of the aggregate amount contributed by the employer to HSAs for
that period.
(b) Example. The following example illustrates the rules in paragraph (a)
of this 0 & A-4:
Example. In this Example, assume that the HDHP provided by Employer
A satisfies the definition of an HDHP for the 2007 calendar year. During the
2007 calendar year, Employer A has 8 employees who are eligible individuals
with self-only coverage under an HDHP provided by Employer A. The deductible
for the HDHP is $2,000. For the 2007 calendar year, Employer A contributes
$2,000 each to the HSAs of two employees and $1,000 each to the HSAs of the

18
other six employees, for total HSA contributions of $10,000. Employer A's
contributions do not satisfy the comparability rules. Therefore, Employer A is
subject to an excise tax of $3,500 (Le., 35% x $10,000) for its failure to make
comparable contributions to its employees' HSAs.
'54.4980G-2 Employer contribution defined.

0-1. Do the comparability rules apply to amounts rolled over from an
employee's HSA or Archer Medical Savings Account (Archer MSA)?
A-1. No. The comparability rules do not apply to amounts rolled over
from an employee's HSA or Archer MSA.
0-2. If an employee requests that his or her employer deduct after-tax
amounts from the employee's compensation and forward these amounts as
employee contributions to the employee's HSA, do the comparability rules apply
to these amounts?
A-2. No. Section 106( d) provides that amounts contributed by an
employer to an eligible employee's HSA shall be treated as employer-provided
coverage for medical expenses and are excludible from the employee's gross
income up to the limit in section 223(b). After-tax employee contributions to an
HSA are not subject to the comparability rules because they are not employer
contributions under section 106(d).
I

54.4980G-3 Definition of employee for comparability testing.

0-1. Do the comparability rules apply to contributions that an employer
makes to the HSAs of independent contractors?
A-1. No. The comparability rules apply only to contributions that an
employer makes to the HSAs of employees.

19
Q-2. Maya sole proprietor who is an eligible individual contribute to his or
her own HSA without contributing to the HSAs of his or her employees who are
eligible individuals?
A-2. (a) Sole proprietor not an employee. Yes. The comparability rules
apply only to contributions made by an employer to the HSAs of employees.
Because a sole proprietor is not an employee, the comparability rules do not
apply to contributions he or she makes to his or her own HSA. However, if a sole
proprietor contributes to any employee's HSA, he or she must make comparable
contributions to the HSAs of all comparable participating employees. In
determining whether the comparability rules are satisfied, contributions that a
sole proprietor makes to his or her own HSA are not taken into account.
(b) Example. The following example illustrates the rules in paragraph (a)
of this Q & A-2:
Example. In a calendar year, B, a sole proprietor is an eligible individual
and contributes $1,000 to B's own HSA. B also contributes $500 for the same
calendar year to the HSA of each employee who is an eligible individual. The
comparability rules are not violated by B's $1,000 contribution to B's own HSA.
Q-3. Do the comparability rules apply to contributions by a partnership to
a partner's HSA?
A-3. (a) Partner not an employee. No. Contributions by a partnership to
a bona fide partner's HSA are not subject to the comparability rules because the
contributions are not contributions by an employer to the HSA of an employee.
The contributions are treated as either guaranteed payments under section
707(c) or distributions under section 731. However, if a partnership contributes

20
to the HSAs of employees who are not partners, the comparability rules apply to
those contributions.
(b) Example. The following example illustrates the rules in paragraph (a)
of this Q & A-3:
Example. (i) Partnership X is a limited partnership with three equal
individual partners, A (a general partner), 8 (a limited partner), and C (a limited
partner). C is to be paid $300 annually for services rendered to Partnership X in
her capacity as a partner without regard to partnership income (a section 707(c))
guaranteed payment). D and E are the only employees of Partnership X and are
not partners in Partnership X. A, 8, C, D, and E are eligible individuals and each
has an HSA. During Partnership X's Year 1 taxable year, which is also a
calendar year, Partnership X makes the following contributions-(A) A $300 contribution to each of A's and 8's HSAs which are treated as
section 731 distributions to A and 8;
(8) A $300 contribution to C's HSA in lieu of paying C the guaranteed
payment directly; and
(C) A $200 contribution to each of D's and E's HSAs, who are comparable
partiCipating employees.
(ii) Partnership X's contributions to A's and 8's HSAs are section 731
distributions, which are treated as cash distributions. Partnership X's contribution
to C's HSA is treated as a guaranteed payment under section 707(c). The
contribution is not excludible from C's gross income under section 106(d)
because the contribution is treated as a distributive share of partnership income
for purposes of all Code sections other than sections 61 (a) and 162(a), and a
guaranteed payment to a partner is not treated as compensation to an employee.
Thus, Partnership X's contributions to the HSAs of A, 8, and C are not subject to
the comparability rules. Partnership X's contributions to D's and E's HSAs are
subject to the comparability rules because D and E are employees of Partnership
X and are not partners in Partnership X. Partnership X's contributions satisfy the
comparability rules.
Q-4. How are members of controlled groups treated when applying the
comparability rules?

21
A-4. All persons or entities treated as a single employer under section
414 (b), (c), (m), or (0) are treated as one employer. See sections 4980G(b) and
4980E(e).
Q-5. What are the categories of employees for comparability testing?
A-5. (a) Categories. The categories of employees for comparability
testing are as follows-(1) Current full-time employees;
(2) Current part-time employees; and
(3) Former employees (except for former employees with coverage under
the employer's HDHP because of an election under a COBRA continuation
provision (as defined in section 9832(d)(1 )).
(b) Part-time and full-time employees. Part-time employees are
customarily employed for fewer than 30 hours per week and full-time employees
are customarily employed for 30 or more hours per week. See sections
4980G(b) and 4980E(d)(4)(A) and (B).
(c) In general. The categories of employees in paragraph (a) of this Q &
A-5 are the exclusive categories for comparability testing. An employer must
make comparable contributions to the HSAs of all comparable participating
employees (eligible individuals who are in the same category of employees with
the same category of HDHP coverage) during the calendar year without regard to
any classification other than these categories. Thus, the comparability rules do
not apply separately to collectively bargained and non-collectively bargained

22
employees. Similarly, the comparability rules do not apply separately to groups
of collectively bargained employees.
Q-6. Is an employer permitted to make comparable contributions only to
the HSAs of comparable participating employees who have coverage under the
employer's HDHP?
A-6. (a) Employer-provided HDHP coverage. If during a calendar year,
an employer contributes to the HSA of any employee who is an eligible individual
covered under an HDHP provided by the employer, the employer is required to
make comparable contributions to the HSAs of all comparable participating
employees with coverage under any HDHP provided by the employer. An
employer that contributes only to the HSAs of employees who are eligible
individuals with coverage under the employer's HDHP is not required to make
comparable contributions to HSAs of employees who are eligible individuals but
are not covered under the employer's HDHP. However, an employer that
contributes to the HSA of any employee who is an eligible individual with
coverage under any HDHP, in addition to the HDHPs provided by the employer,
must make comparable contributions to the HSAs of all comparable participating
employees whether or not covered under the employer's HDHP.
(b) Examples. The following examples illustrate the rules in paragraph (a)
of this Q & A-6:
Example 1. In a calendar year, Employer C offers an HDHP to its full-time
employees. Most full-time employees are covered under Employer C's HDHP
and Employer C makes comparable contributions only to these employees'
HSAs. Employee W, a full-time employee of Employer C and an eligible
individual, is covered under an HDHP provided by W's spouse's employer and

23
not under Employer C's HDHP. Employer C is not required to make comparable
contributions to W's HSA.
Example 2. In a calendar year, Employer 0 does not offer an HDHP.
Several full-time employees, who are eligible individuals, have HSAs. Employer
o contributes to these employees' HSAs. Employer 0 must make comparable
contributions to the HSAs of all full-time employees who are eligible individuals.
Example 3. In a calendar year, Employer E offers an HDHP to its full-time
employees. Most full-time employees are covered under Employer E's HDHP
and Employer E makes comparable contributions to these employees' HSAs and
also to the HSAs of full-time employees who are eligible individuals and who are
not covered under Employer E's HDHP. Employee H, a full-time employee of
Employer E and a comparable participating employee, is covered under an
HDHP provided by H's spouse's employer and not under Employer E's HDHP.
Employer E must make comparable contributions to H's HSA.

0-7. If an employee and his or her spouse are eligible individuals who
work for the same employer and one employee-spouse has family coverage for
both employees under the employer's HDHP, must the employer make
comparable contributions to the HSAs of both employees?
A-7. (a) In general. If the employer makes contributions only to the HSAs
of employees who are eligible individuals covered under its HDHP, the employer
is not required to contribute to the HSAs of both employee-spouses. The
employer is required to contribute to the HSA of the employee-spouse with
coverage under the employer's HDHP, but is not required to contribute to the
HSA of the employee-spouse covered under the employer's HDHP by virtue of
his or her spouse's coverage. However, if the employer contributes to the HSA
of any employee who is an eligible individual with coverage under any HDHP, the
employer must make comparable contributions to the HSAs of both employeespouses if they are both eligible individuals. If an employer is required to
contribute to the HSAs of both employee-spouses, the employer is not required

24
to contribute amounts in excess of the annual contribution limits in section
223(b).
(b) Examples. The following examples illustrate the rules in paragraph (a)
of this Q & A-7:
Example 1. In a calendar year, Employer F offers an HDHP to its full-time
employees. Most full-time employees are covered under Employer F's HDHP
and Employer F makes comparable contributions only to these employees'
HSAs. Employee H, a full-time employee of Employer F and an eligible
individual has family coverage under Employer F's HDHP for Hand H's spouse,
Employee W, who is also a full-time employee of Employer F and an eligible
individual. Employer F is required to make comparable contributions to H's HSA,
but is not required to make comparable contributions to W's HSA.
Example 2. In a calendar year, Employer G offers an HDHP to its full-time
employees. Most full-time employees are covered under Employer G's HDHP
and Employer G makes comparable contributions to these employees' HSAs and
to the HSAs of full-time employees who are eligible individuals but are not
covered under Employer G's HDHP. Employee W, a full-time employee of
Employer G and an eligible individual, has family coverage under Employer G's
HDHP for Wand W's spouse, Employee H, who is also a full-time employee of
Employer G and an eligible individual. Employer G must make comparable
contributions to W's HSA and to H's HSA.
0-8. Does an employer that makes HSA contributions only for nonmanagement employees who are eligible individuals, but not for management
employees who are eligible individuals or that makes HSA contributions only for
management employees who are eligible individuals but not for nonmanagement employees who are eligible individuals satisfy the requirement that
the employer make comparable contributions?
A-8. (a) Management v. non-management. No. If management
employees and non-management employees are comparable participating
employees, the comparability rules are not satisfied. However, if nonmanagement employees are comparable participating employees and

25
management employees are not comparable participating employees, the
comparability rules may be satisfied. But see

a & A-1

in I 54.4980G-5 on

contributions made through a cafeteria plan.
(b) Examples. The following examples illustrate the rules in paragraph (a)
of this

a & A-8:

Example 1. In a calendar year, Employer H maintains an HDHP covering
all management and non-management employees. Employer H contributes
$1,000 for the calendar year to the HSA of each non-management employee
who is an eligible individual covered under its HDHP. Employer H does not
contribute to the HSAs of any of its management employees who are eligible
individuals covered under its HDHP. The comparability rules are not satisfied.
Example 2. In a calendar year, Employer J maintains an HDHP for nonmanagement employees only. Employer J does not maintain an HDHP for its
management employees. Employer J contributes $1,000 for the calendar year to
the HSA of each non-management employee who is an eligible individual with
coverage under its HDHP. Employer J does not contribute to the HSAs of any of
its non-management employees not covered under its HDHP or to the HSAs of
any of its management employees. The comparability rules are satisfied.
Example 3. In a calendar year, Employer K maintains an HDHP for
management employees only. Employer K does not maintain an HDHP for its
non-management employees. Employer K contributes $1,000 for the calendar
year to the HSA of each management employee who is an eligible individual with
coverage under its HDHP. Employer K does not contribute to the HSAs of any of
its management employees not covered under its HDHP or to the HSAs of any of
its non-management employees. The comparability rules are satisfied.

0-9. If an employer contributes to the HSAs of former employees who are
eligible individuals, do the comparability rules apply to these contributions?
A-9. (a) Former employees. Yes. The comparability rules apply to
contributions an employer makes to former employees' HSAs. Therefore, if an
employer contributes to any former employee's HSA, it must make comparable
contributions to the HSAs of all comparable participating former employees

26
(former employees who are eligible individuals with the same category of HDHP
coverage). However, an employer is not required to make comparable
contributions to the HSAs of former employees with coverage under the
employer's HDHP because of an election under a COBRA continuation provision
(as defined in section 9832(d)(1)). See Q & A-5 and Q & A-11 in this section.
The comparability rules apply separately to former employees because they are
a separate category of covered employee. See Q & A-5 in this section.
(b) Examples. The following examples illustrate the rules in paragraph (a)
of this Q & A-9:
Example 1. In a calendar year, Employer L contributes $1,000 for the
calendar year to the HSA of each current employee who is an eligible individual
with coverage under any HDHP. Employer L does not contribute to the HSA of
any former employee who is an eligible individual. Employer L's contributions
satisfy the comparability rules.
Example 2. In a calendar year, Employer M contributes to the HSAs of
current employees and former employees who are eligible individuals covered
under any HDHP. Employer M contributes $750 to the HSA of each current
employee with self-only HDHP coverage and $1,000 to the HSA of each current
employee with family HDHP coverage. Employer M also contributes $300 to the
HSA of each former employee with self-only HDHP coverage and $400 to the
HSA of each former employee with family HDHP coverage. Employer M's
contributions satisfy the comparability rules.
0-10. Is an employer permitted to make comparable contributions only to
the HSAs of comparable participating former employees who have coverage
under the employer's HDHP?
A-10. If during a calendar year, an employer contributes to the HSA of
any former employee who is an eligible individual covered under an HDHP
provided by the employer, the employer is required to make comparable
contributions to the HSAs of all former employees who are comparable

27
participating former employees with coverage under any HDHP provided by the
employer. An employer that contributes only to the HSAs of former employees
who are eligible individuals with coverage under the employer's HDHP is not
required to make comparable contributions to the HSAs of former employees
who are eligible individuals and who are not covered under the employer's
HDHP. However, an employer that contributes to the HSA of any former
employee who is an eligible individual with coverage under any HDHP, even if
that coverage is not the employer's HDHP, must make comparable contributions
to the HSAs of all former employees who are eligible individuals whether or not
covered under an HDHP of the employer.
0-11. If an employer contributes only to the HSAs of former employees
who are eligible individuals with coverage under the employer's HDHP, must the
employer make comparable contributions to the HSAs of former employees who
are eligible individuals with coverage under the employer's HDHP because of an
election under a COBRA continuation provision (as defined in section
9832(d)(1 ))?
A-11. No. An employer that contributes only to the HSAs of former
employees who are eligible individuals with coverage under the employer's
HDHP is not required to make comparable contributions to the HSAs of former
employees who are eligible individuals with coverage under the employer's
HDHP because of an election under a COBRA continuation provision (as defined
in section 9832(d)(1 )).

28
Q-12. How do the comparability rules apply if some employees have
HSAs and other employees have Archer MSAs?
A-12. (a) HSAs and Archer MSAs. The comparability rules apply
separately to employees who have HSAs and employees who have Archer
MSAs. However, if an employee has both an HSA and an Archer MSA, the
employer may contribute to either the HSA or the Archer MSA, but not to both.
(b) Examples. The following examples illustrate the rules in paragraph (a)
of this Q & A-12:
Example 1. In a calendar year, Employer N contributes $600 to the
Archer MSA of each employee who is an eligible individual and who has an
Archer MSA. Employer N contributes $500 for the calendar year to the HSA of
each employee who is an eligible individual and who has an HSA. If an
employee has both an Archer MSA and an HSA, Employer N contributes to the
employee's Archer MSA and not to the employee's HSA. Employee X has an
Archer MSA and an HSA. Employer N contributes $600 for the calendar year to
X's Archer MSA but does not contribute to X's HSA. Employer N's contributions
satisfy the comparability rules.
Example 2. Same facts as Example 1, except that if an employee has
both an Archer MSA and an HSA, Employer N contributes to the employee's
HSA and not to the employee's Archer MSA. Employer N contributes $500 for
the calendar year to X's HSA but does not contribute to X's Archer MSA.
Employer N's contributions satisfy the comparability rules.
I

54.4980G-4 Calculating comparable contributions.
Q-1. What are comparable contributions?
A-1. (a) Definition. Contributions are comparable if they are either the

same amount or the same percentage of the deductible under the HDHP for
employees who are eligible individuals with the same category of coverage.
Employees with self-only HDHP coverage are tested separately from employees
with family HDHP coverage. See Q & A-1 and Q & A-2 in '54.4980G-1. An

29
employer is not required to contribute the same amount or the same percentage
of the deductible for employees who are eligible individuals with self-only HDHP
coverage that it contributes for employees who are eligible individuals with family
HDHP coverage. An employer that satisfies the comparability rules by
contributing the same amount to the HSAs of all employees who are eligible
individuals with self-only HDHP coverage is not required to contribute any
amount to the HSAs of employees who are eligible individuals with family HDHP
coverage, or to contribute the same percentage of the family HDHP deductible as
the amount contributed with respect to self-only HDHP coverage. Similarly, an
employer that satisfies the comparability rules by contributing the same amount
to the HSAs of all employees who are eligible individuals with family HDHP
coverage is not required to contribute any amount to the HSAs of employees who
are eligible individuals with self-only HDHP coverage, or to contribute the same
percentage of the self-only HDHP deductible as the amount contributed with
respect to family HDHP coverage.
(b) Examples. Assume that the HDHPs in Example 1 through Example 7
satisfy the definition of an HDHP for the 2007 calendar year. The following
examples illustrate the rules in paragraph (a) of this Q & A-1:
Example 1. In the 2007 calendar year, Employer A offers its full-time
employees three health plans, including an HDHP with self-only coverage and a
$2,000 deductible. Employer A contributes $1,000 for the calendar year to the
HSA of each employee who is an eligible individual electing the self-only HDHP
coverage. Employer A makes no HSA contributions for employees with family
HDHP coverage or for employees who do not elect the employer's self-only
HDHP. Employer A's HSA contributions satisfy the comparability rules.
Example 2. In the 2007 calendar year, Employer B offers its employees
an HDHP with a $3,000 deductible for self-only coverage and a $4,000

30
deductible for family coverage. Employer 8 contributes $1,000 for the calendar
year to the HSA of each employee who is an eligible individual electing the selfonly HDHP coverage. Employer 8 contributes $2,000 for the calendar year to
the HSA of each employee who is an eligible individual electing the family HDHP
coverage. Employer 8's HSA contributions satisfy the comparability rules.
Example 3. In the 2007 calendar year, Employer C offers its employees
an HDHP with a $1,500 deductible for self-only coverage and a $3,000
deductible for family coverage. Employer C contributes $1,000 for the calendar
year to the HSA of each employee who is an eligible individual electing the selfonly HDHP coverage. Employer C contributes $1,000 for the calendar year to
the HSA of each employee who is an eligible individual electing the family HDHP
coverage. Employer C's HSA contributions satisfy the comparability rules.
Example 4. In the 2007 calendar year, Employer D offers its employees
an HDHP with a $1,500 deductible for self-only coverage and a $3,000
deductible for family coverage. Employer D contributes $1,500 for the calendar
year to the HSA of each employee who is an eligible individual electing the selfonly HDHP coverage. Employer D contributes $1,000 for the calendar year to
the HSA of each employee who is an eligible individual electing the family HDHP
coverage. Employer D's HSA contributions satisfy the comparability rules.
Example 5. (i) In the 2007 calendar year, Employer E maintains two
HDHPs. Plan A has a $2,000 deductible for self-only coverage and a $4,000
deductible for family coverage. Plan 8 has a $2,500 deductible for self-only
coverage and a $4,500 deductible for family coverage. For the calendar year,
Employer E makes contributions to the HSA of each full-time employee who is an
eligible individual covered under Plan A of $600 for self-only coverage and
$1,000 for family coverage. Employer E satisfies the comparability rules, if it
makes either of the following contributions for the 2007 calendar year to the HSA
of each full-time employee who is an eligible individual covered under Plan 8-(A) $600 for each full-time employee with self-only coverage and $1,000
for each full-time employee with family coverage; or
(8) $750 for each employee with self-only coverage and $1,125 for each
employee with family coverage (the same percentage of the deductible Employer
E contributes for full-time employees covered under Plan A, 30% of the
deductible for self-only coverage and 25% of the deductible for family coverage).
(ii) Employer E also makes contributions to the HSA of each part-time
employee who is an eligible individual covered under Plan A of $300 for self-only
coverage and $500 for family coverage. Employer E satisfies the comparability
rules, if it makes either of the following contributions for the 2007 calendar year to
the HSA of each part-time employee who is an eligible individual covered under
Plan 8--

31
(A) $300 for each part-time employee with self-only coverage and $500 for
each part-time employee with family coverage; or

(8) $375 for each part-time employee with self-only coverage and $563 for
each part-time employee with family coverage (the same percentage of the
deductible Employer E contributes for part-time employees covered under Plan
A, 15% of the deductible for self-only coverage and 12.5% of the deductible for
family coverage).
Example 6. (i) In the 2007 calendar year, Employer F maintains an
HOHP. The HOHP has a $2,500 deductible for self-only coverage, and the
following family coverage options-(A) A $3,500 deductible for self plus one dependent;

(8) A $3,500 deductible for self plus spouse;
(C) A $3,500 deductible for self plus two or more dependents;

(0) A $3,500 deductible for self plus spouse and one dependent; and
(E) A $3,500 deductible for self plus spouse and two or more dependents.
(ii) Employer F makes the following contributions for the calendar year to
the HSA of each full-time employee who is an eligible individual covered under
the HOHP-(A) $750 for self-only coverage;

(8) $1,000 for self plus one dependent;
(C) $1,000 for self plus spouse;

(0) $1,000 for self plus two or more dependents;
(E) $1,000 for self plus spouse and one dependent; and
(F) $1,000 for self plus spouse and two or more dependents.
(iii) Employer F's HSA contributions satisfy the comparability rules.
Example 7. (i) In the 2007 calendar year, Employer G maintains an
HOHP. The HOHP has a $1,800 deductible for self-only coverage and the
following family coverage options-(A) A $3,500 deductible for self plus one dependent;

(8) A $3,800 deductible for self plus spouse;
(C) A $4,000 deductible for self plus two or more dependents;

(0) A $4,500 deductible for self plus spouse and one dependent; and
(E) A $5,000 deductible for self plus spouse and two or more dependents.
(ii) Employer G makes the following contributions for the calendar year to
the HSA of each full-time employee who is an eligible individual covered under
the HOHP-(A) $360 for self-only coverage;

(8) $875 for self plus one dependent;
(C) $950 for self plus spouse;

(0) $1,000 for self plus two or more dependents;
(E) $1,125 for self plus spouse and one dependent; and
(F) $1,250 for self plus spouse and two or more dependents.
(iii) Employer G's HSA contributions satisfy the comparability rules
because Employer G has made contributions that are the same percentage of
the deductible for eligible employees with the same category of coverage (20% of
the deductible for eligible employees with self-only coverage and 25% of the
deductible for eligible employees with family coverage). Employer G could also
satisfy the comparability rules by contributing the same dollar amount for each
category of coverage.
Example 8. In a calendar year, Employer H offers its employees an
HOHP and a health flexible spending arrangement (health FSA). The health FSA
reimburses employees for medical expenses as defined in section 213(d). Some
of Employer H's employees have coverage under the HOHP and the health FSA.
For the calendar year, Employer H contributes $500 to the HSA of each of
employee who is an eligible individual, but does not contribute to the HSAs of
employees who have coverage under the health FSA or under a spouse's health
FSA. In addition, some of Employer H's employees have coverage under the
HOHP and are enrolled in Medicare. Employer H does not contribute to the
HSAs of employees who are enrolled in Medicare. The employees who have
coverage under the health FSA or under a spouse's health FSA are not
comparable participating employees because they are not eligible individuals
under section 223(c)(1). Similarly, the employees who are enrolled in Medicare
are not comparable participating employees because they are not eligible

33
individuals under section 223(b)(7) and (c)(1). Therefore, employees who have
coverage under the health FSA or under a spouse's health FSA and employees
who are enrolled in Medicare are excluded from comparability testing. See
sections 4980G(b) and 4980E. Employer H's contributions satisfy the
comparability rules.
Q-2. How do the comparability rules apply to employer contributions to
employees' HSAs if some employees work full-time during the entire calendar
year, and other employees work full-time for less than the entire calendar year?
A-2. Employer contributions to the HSAs of employees who work full-time
for less than twelve months satisfy the comparability rules if the contribution
amount is comparable when determined on a month-to-month basis. For
example, if the employer contributes $240 to the HSA of each full-time employee
who works the entire calendar year, the employer must contribute $60 to the
HSA of a full-time employee who works three months of the calendar year. The
rules set forth this Q & A-2 apply to employer contributions made on a pay-asyou-go basis or on a look-back-basis as described in Q & A-3 in this section.
See sections 4980G(b) and 4980E(d)(2)(B).
Q-3. How does an employer comply with the comparability rules when
some employees who are eligible individuals do not work for the employer during
the entire calendar year?
A-3. (a) In general. In determining whether the comparability rules are
satisfied, an employer must take into account all full-time and part-time
employees who were employees and eligible individuals for any month during the
calendar year. (Full-time and part-time employees are tested separately. See Q
& A-5 in '54.4980G-3.) There are two methods to comply with the comparability

34
rules when some employees who are eligible individuals do not work for the
employer during the entire calendar year; contributions may be made on a payas-you-go basis or on a look-back basis. See Q & A-9 through Q & A-11 in
I

54.4980G-3 for the rules regarding comparable contributions to the HSAs of

former employees.
(b) Contributions on a pay-as-you-go basis. An employer may comply
with the comparability rules by contributing amounts at one or more times for the
calendar year to the HSAs of employees who are eligible individuals, if
contributions are the same amount or the same percentage of the HDHP
deductible for employees who are eligible individuals as of the first day of the
month with the same category of coverage and are made at the same time.
Contributions made at the employer's usual payroll interval for different groups of
employees are considered to be made at the same time. For example, if salaried
employees are paid monthly and hourly employees are paid bi-weekly, an
employer may contribute to the HSAs of hourly employees on a bi-weekly basis
and to the HSAs of salaried employees on a monthly basis. An employer may
change the amount that it contributes to the HSAs of employees at any point.
However, the changed contribution amounts must satisfy the comparability rules.
(c) Examples. The following examples illustrate the rules in paragraph (b)
of this Q & A-3:
Example 1. (i) Beginning on January 1st, Employer J contributes $50 per
month on the first day of each month to the HSA of each employee who is an
eligible individual. Employer J does not contribute to the HSAs of former
employees. In mid-March of the same year, Employee X, an eligible individual,
terminates employment after Employer J has contributed $150 to X's HSA. After
X terminates employment, Employer J does not contribute additional amounts to

35
X's HSA. In mid-April of the same year, Employer J hires Employee Y, an
eligible individual, and contributes $50 to V's HSA in May and $50 in June.
Effective in July of the same year, Employer J stops contributing to the HSAs of
all employees and makes no contributions to the HSA of any employee for the
months of July through December. In August, Employer J hires Employee Z, an
eligible individual. Employer J does not contribute to Z's HSA. After Z is hired,
Employer J does not hire additional employees. As of the end of the calendar
year, Employer J has made the following HSA contributions to its employees'
HSAs-(A) Employer J contributed $150 to X's HSA;
(8) Employer J contributed $100 to V's HSA;
(C) Employer J did not contribute to Z's HSA; and
(D) Employer J contributed $300 to the HSA of each employee who was
an eligible individual and employed by Employer from January through June.
(ii) Employer J's contributions satisfy the comparability rules.
Example 2. In a calendar year, Employer K offers its employees an HDHP
and contributes on a monthly pay-as-you go-basis to the HSAs of employees
who are eligible individuals with coverage under Employer K's HDHP. In the
calendar year, Employer K contributes $50 per month to the HSA of each of
employee with self-only HDHP coverage and $100 per month to the HSA of each
employee with family HDHP coverage. From January 1st through March 30 th of
the calendar year, Employee X is an eligible individual with self-only HDHP
coverage. From April 1st through December 30 th of the calendar year, X is an
eligible individual with family HDHP coverage. For the months of January,
February and March of the calendar year, Employer K contributes $50 per month
to X's HSA. For the remaining months of the calendar year, Employer K
contributes $100 per month to X's HSA. Employer K's contributions to X's HSA
satisfy the comparability rules.
(d) Contributions on a look-back basis. An employer may also satisfy the
comparability rules by determining comparable contributions for the calendar
year at the end of the calendar year, taking into account all employees who were
eligible individuals for any month during the calendar year and contributing the
correct amount (a percentage of the HDHP deductible or a specified dollar
amount for the same categories of coverage) to the employees' HSAs.

36
(e) Example. The following example illustrates the rules in paragraph (d)
of this Q & A-3:
Example. In a calendar year, Employer L offers its employees an HDHP
and contributes on a look-back-basis to the HSAs of employees who are eligible
individuals with coverage under Employer L's HDHP. Employer L contributes
$600 (i.e. $50 per month) for the calendar year to the HSA of each of employee
with self-only HDHP coverage and $1,200 (i.e., $100 per month) for the calendar
year to the HSA of each employee with family HDHP coverage. From January
th
1st through June 30 of the calendar year, Employee Y is an eligible individual
with family HDHP coverage. From July 1st through December 31, Y is an eligible
individual with self-only HDHP coverage. Employer L contributes $900 on a lookback-basis for the calendar year to V's HSA ($100 per month for the months of
January through June and $50 per month for the months of July through
December). Employer L's contributions to V's HSA satisfy the comparability
rules.
Q-4. Mayan employer make all of its contributions to the HSAs of its
employees who are eligible individuals at the beginning of the calendar year (i.e.,
on a pre-funded basis) instead of contributing on a pay-as-you-go or on a lookback basis?
A-4. (a) Contributions on a pre-funded basis. Yes. An employer may
make all of its contributions to the HSAs of its employees who are eligible
individuals at the beginning of the calendar year. An employer that pre-funds the
HSAs of its employees will not fail to satisfy the comparability rules because an
employee who terminates employment prior to the end of the calendar year has
received more contributions on a monthly basis than employees who have
worked the entire calendar year. See Q & A-12 in this section. Under section
223(d)(1 )(E), an account beneficiary's interest in an HSA is nonforfeitable. An
employer must make comparable contributions for all employees who are
comparable participating employees for any month during the calendar year,

37
including employees who are eligible individuals hired after the date of initial
funding. An employer that makes HSA contributions on a pre-funded basis may
also contribute on a pre-funded-basis to the HSAs of employees who are eligible
individuals hired after the date of initial funding. Alternatively, an employer that
has pre-funded the HSAs of comparable participating employees may contribute
to the HSAs of employees who are eligible individuals hired after the date of
initial funding on a pay-as-you-go basis or on a look-back basis. An employer
that makes HSA contributions on a pre-funded basis must use the same
contribution method for all employees who are eligible individuals hired after the
date of initial funding.
(b) Example. The following example illustrates the rules in paragraph (a)
of this Q & A-4:
Example. (i) On January 1, Employer M contributes $1,200 for the
calendar year on a pre-funded basis to the HSA of each of employee who is an
eligible individual. In mid-May, Employer M hires Employee B, an eligible
individual. Therefore, Employer M is required to make comparable contributions
to B's HSA beginning in June. Employer M satisfies the comparability rules with
respect to contributions to B's HSA if it makes HSA contributions in anyone of
the following ways-(A) Pre-funding B's HSA by contributing $700 to B's HSA;
(B) Contributing $100 per month on a pay-as-you-go basis to B's HSA; or
(C) Contributing to B's HSA at the end of the calendar year taking into
account each month that B was an eligible individual and employed by
Employer M.
(ii) If Employer M hires additional employees who are eligible individuals
after initial funding. it must use the same contribution method for these
employees that it used to contribute to B's HSA.

0-5. Must an employer use the same contribution method as described in

a & A-3 and a & A-4 of this section for all employees who were comparable
participating employees for any month during the calendar year?
A-5. Yes. If an employer makes comparable HSA contributions on a payas-you-go basis, it must do so for each employee who is a comparable
participating employee during the pay period. If an employer makes comparable
contributions on a look-back basis, it must do so for each employee who was a
comparable participating employee for any month during the calendar year. If an
employer makes HSA contributions on a pre-funded basis, it must do so for all
employees who are comparable participating employees at the beginning of the
calendar year. An employer that contributes on a pre-funded basis must make
comparable HSA contributions for all employees who are comparable
participating employees for any month during the calendar year, including
employees who are eligible individuals hired after the date of initial funding. See

a & A-4 in this section for rules regarding contributions for employees hired after
initial funding.
0-6. How does an employer comply with the comparability rules if an
employee has not established an HSA at the time the employer contributes to its
employees' HSAs?
A-6. (a) Employee has not established an HSA. If an employee has not
established an HSA at the time the employer funds its employees' HSAs, the
employer complies with the comparability rules by contributing comparable
amounts to the employee's HSA when the employee establishes the HSA, taking
into account each month that the employee was a comparable participating

39
employee. However, an employer is not required to make comparable
contributions for a calendar year to an employee's HSA if the employee has not
established an HSA by December 31

of the calendar year.

(b) Example. The following example illustrates the rules in paragraph (a)
of this Q & A-6:
Example. Beginning on January 1st, Employer N contributes $500 per
calendar year on a pay-as-you-go basis to the HSA of each employee who is an
eligible individual. Employee C is an eligible individual during the entire calendar
year but does not establish an HSA until March. Notwithstanding C's delay in
establishing an HSA, Employer N must make up the missed HSA contributions
th
for January and February by April 15 of the following calendar year.

0-7. If an employer bases its contributions on a percentage of the HDHP
deductible, how is the correct percentage or dollar amount computed?
A-7. (a) Computing HSA contributions. The correct percentage is
determined by rounding to nearest 1/1 ooth of a percentage point and the dollar
amount is determined by rounding to the nearest whole dollar.
(b) Example. The following example illustrates the rules in paragraph (a)
of this Q & A-7:
Example. In this Example, assume that the HDHP provided by Employer
P satisfies the definition of an HDHP for the 2007 calendar year. In the 2007
calendar year, Employer P maintains two HDHPs. Plan A has a deductible of
$3,000 for self-only coverage. Employer P contributes $1,000 for the calendar
year to the HSA of each employee covered under Plan A. Plan B has a
deductible of $3,500 for self-only coverage. Employer P satisfies the
comparability rules if it makes either of the following contributions for the 2007
calendar year to the HSA of each employee who is an eligible individual with selfonly coverage under Plan B-(i) $1,000; or
(ii) $1,167 (33.33% of the deductible rounded to the nearest whole dollar
amount).

40
0-8. Does an employer that contributes to the HSA of each comparable
participating employee in an amount equal to the employee's HSA contribution or
a percentage of the employee's HSA contribution (matching contributions) satisfy
the rule that all comparable participating employees receive comparable
contributions?
A-8. No. If all comparable participating employees do not contribute the
same amount to their HSAs and, consequently, do not receive comparable
contributions to their HSAs, the comparability rules are not satisfied,
notwithstanding that the employer offers to make available the same contribution
amount to each comparable participating employee. But see
I

a & A-1

54.4980G-5 on contributions to HSAs made through a cafeteria plan.
0-9. If an employer conditions contributions by the employer to an

employee's HSA on an employee's participation in health assessments, disease
management programs or wellness programs and makes the same contributions
available to all employees who participate in the programs, do the contributions
satisfy the comparability rules?
A-9. No. If all comparable participating employees do not elect to
participate in all the programs and consequently, all comparable participating
employees do not receive comparable contributions to their HSAs, the employer
contributions fail to satisfy the comparability rules. But see
I

a & A-1

54.4980G-5 on contributions made to HSAs through a cafeteria plan.
0-10. If an employer makes additional contributions to the HSAs of all

comparable participating employees who have attained a specified age or who

41
have worked for the employer for a specified number of years, do the
contributions satisfy the comparability rules?
A-10. No. If all comparable participating employees do not meet the age
or length of service requirement, all comparable participating employees do not
receive comparable contributions to their HSAs and the employer contributions
fail to satisfy the comparability rules.
0-11. If an employer makes additional contributions to the HSAs of all
comparable participating employees who qualify for the additional contributions
(HSA catch-up contributions) under section 223(b)(3), do the contributions satisfy
the comparability rules?
A-11. No. If all comparable participating employees do not qualify for the
additional HSA contributions under section 223(b)(3), all comparable participating
employees do not receive comparable contributions to their HSAs, and the
employer contributions fail to satisfy the comparability rules.
0-12. If an employer's contributions to an employee's HSA result in noncomparable contributions, may the employer recoup the excess amount from the
employee's HSA?
A-12. No. An employer may not recoup from an employee's HSA any
portion of the employer's contribution to the employee's HSA. Under section
223(d)(1 )(E), an account beneficiary's interest in an HSA is nonforfeitable.
However, an employer may make additional HSA contributions to satisfy the
th

comparability rules. An employer may contribute up until April 15 following the
calendar year in which the non-comparable contributions were made. An

42
employer that makes additional HSA contributions to correct non-comparable
contributions must also contribute reasonable interest. However, an employer is
not required to contribute amounts in excess of the annual contribution limits in
section 223(b).
I

54.4980G-5 HSA comparability rules and cafeteria plans and waiver of excise

tax.
Q-1. If an employer makes contributions through a section 125 cafeteria
plan to the HSA of each employee who is an eligible individual are the
contributions subject to the comparability rules?
A-1. No. The comparability rules do not apply to HSA contributions that
an employer makes through a section 125 cafeteria plan. However, contributions
to an HSA made under a cafeteria plan are subject to the section 125
nondiscrimination rules (eligibility rules, contributions and benefits tests and key
employee concentration tests). See section 125(b), (c) and (g) and Prop. Treas.
Reg. §1.125-1, Q & A-19, (49 FR 19321).
Q-2. If an employer makes contributions through a cafeteria plan to the
HSA of each employee who is an eligible individual in an amount equal to the
amount of the employee's HSA contribution or a percentage of the amount of the
employee's HSA contribution (i.e., matching contributions), are the contributions
subject to the section 4980G comparability rules?
A-2. No. The comparability rules do not apply to HSA contributions that
an employer makes through a section 125 cafeteria plan. Thus, where matching
contributions are made by an employer through a cafeteria plan, the contributions

43
are not subject to the comparability rules of section 4980G. However,
contributions, including matching contributions, to an HSA made under a
cafeteria plan are subject to the section 125 nondiscrimination rules (eligibility
rules, contributions and benefits tests and key employee concentration tests).
See Q & A-1 in this section.
Q-3. If an employer provides HDHP coverage through a cafeteria plan,
but the employer's HSA contributions are not provided through the cafeteria plan,
do the cafeteria plan nondiscrimination rules or the comparability rules apply to
the HSA contributions?
A-3. (a) HDHP provided through cafeteria plan. The comparability rules
in section 4980G apply to the HSA contributions. The cafeteria plan
nondiscrimination rules apply only to HSA contributions made through a cafeteria
plan irrespective of whether the HDHP is provided through a cafeteria plan.
(b) Example. The following example illustrates the rules in paragraph (a)
of this Q & A-3:
Example. Employer A provides HDHP coverage through its cafeteria plan.
Employer A automatically contributes to the HSA of each employee who is an
eligible individual with HDHP coverage through the cafeteria plan. Employees
make no election with respect to Employer A's HSA contributions and have no
right to receive cash or other taxable benefits in lieu of the HSA contributions.
Employer A contributes only to the HSAs of employees who have elected HDHP
coverage through the cafeteria plan. The comparability rules apply to Employer
A's HSA contributions because the HSA contributions are not made through the
cafeteria plan.
Q-4. If under the employer's cafeteria plan, employees who are eligible
individuals and who participate in health assessments, disease management
programs or well ness programs receive an employer contribution to an HSA,

44
unless the employees elect cash, are the contributions subject to the
comparability rules?
A-4. No. The comparability rules do not apply to employer contributions
to an HSA made through a cafeteria plan. See

a & A-1

in this section.

0-5. Mayall or part of the excise tax imposed under section 4980G be
waived?
A-5. In the case of a failure which is due to reasonable cause and not to
willful neglect, all or a portion of the excise tax imposed under section 4980G
may be waived to the extent that the payment of the tax would be excessive

relative to the failure involved. See sections 4980G(b) and 4980E(c).

Deputy Commissioner for Services and Enforcement.

Page 1 of 1

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August 25, 2005
js-2693
Treasury and IRS Issue Proposed Regulations Relating to Deductibility of
Dividends Paid on Employer Securities Held by an ESOP
The Treasury Department and IRS issued proposed regulations today to provide
guidance under sections 162(k) and 404(k) of the Internal Revenue Code relating to
the deductibility of certain dividends paid on stock held by an employee stock
ownership plan (ESOP).
The regulations address two issues that have arisen in the application of section
404(k) (which allows a deduction for certain dividends paid in cash by a corporation
with respect to its stock that is held by certain ESOPs) and section 162(k) (which
generally provides that no deduction is allowed for any amount paid or incurred by a
corporation in connection with the reacquisition of its stock). The regulations would
provide that the payor of the dividend is entitled to the deduction under section 404
(k), regardless of whether the payor is the employer maintaining the ESOP. The
regulations would also provide that payments to reacquire stock held by an ESOP,
even if properly characterized as dividends, are not deductible.
The regulations would be effective on the date of publication of the final
regulations.
A copy of the regulations is attached.
REPORTS

http://www.treas.gov/pressfreleasesljf>:l6~J.htm

91112005

[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-133578-05]
RIN 1545-BE74
Dividends Paid Deduction for Stock Held in Employee Stock Ownership Plan
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains proposed regulations under sections
162(k) and 404(k) of the Internal Revenue Code (Code) relating to employee
stock ownership plans (ESOPs). The regulations provide guidance concerning
which corporation is entitled to the deduction for applicable dividends under
section 404(k). These regulations also clarify that a payment in redemption of
employer securities held by an ESOP is not deductible. These regulations will
affect administrators of, employers maintaining, participants in, and beneficiaries
of ESOPs. In addition, they will affect corporations that make distributions in
redemption of stock held in an ESOP.
DATES: Written or electronic comments and requests for a public hearing must
be received by [ENTER DATE 90 DAYS AFTER PUBLICATION OF THIS
DOCUMENT IN THE FEDERAL REGISTER].
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-133578-05), room
5203, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington,

-2DC 20044. Submissions may be hand-delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-133578-05),
Courier=s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW.,
Washington D.C. Alternatively, taxpayers may submit comments electronically
directly to the IRS Internet site at www.irs.gov/regs, or via the Federal
eRulemaking Portal at www.regulations.gov (IRS-REG-133578-05).
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, John
T. Ricotta at (202) 622-6060 with respect to section 404(k) or Martin Huck at
(202) 622-7750 with respect to section 162(k); concerning submission of
comments or to request a public hearing, Robin Jones at (202) 622-7180 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background and Explanation of Provisions
This document contains proposed regulations under sections 162(k) and
404(k) of the Internal Revenue Code (Code). These regulations address two
issues that have arisen in the application of these sections. The first issue arises
in a case in which the applicable employer securities held in an employee stock
ownership plan (ESOP) are not securities of the corporation or corporations that
maintain the plan. The issue is which corporation is entitled to the deduction
under section 404(k) for certain dividends paid with respect to the stock held in
the ESOP. The second issue is whether payments in redemption of stock held
by an ESOP are deductible.
Code and Regulations

-3Section 404(a) provides that contributions paid by an employer to or under
a stock bonus, pension, profit sharing, or annuity plan are deductible under
section 404(a), if they would be otherwise deductible, within the limitations of that
section. Section 404(k)(1) provides that, in the case of a C corporation, there is
allowed as a deduction for a taxable year the amount of any applicable dividend
paid in cash by such corporation during the taxable year with respect to
applicable employer securities held by an ESOP. The deduction under section
404(k) is in addition to the deductions allowed under section 404(a).
Section 4975(e)(7) provides, in relevant part, that an ESOP is a defined
contribution plan that is a stock bonus plan qualified under section 401 (a) and
designed to invest primarily in qualifying employer securities. Section 4975(e)(8)
states that the term qualifyinq employer security means any employer security
within the meaning of section 409(1). Section 409(1) generally provides that the
term employer security means common stock issued by the employer (or a
corporation that is a member of the same controlled group) that is readily
tradable on an established securities market, if the corporation (or a member of
the controlled group) has common stock that is readily tradable on an established
securities market. Section 409(I)(4)(A) provides that, for purposes of section
409(1), the term controlled group of corporations has the meaning given to that
term by section 1563(a) (determined without regard to subsections (a)(4) and
(e)(3)(C) of section 1563). Section 409(1)(4)(8) provides that, for purposes of
section 409(1)(4 )(A), if a common parent owns directly stock possessing at least
50 percent of the voting power of all classes of stock and at least 50 percent of

-4each class of nonvoting stock in a first tier subsidiary, such subsidiary (and all
corporations below it in the chain which would meet the 80 percent test of section
1563(a) if the first tier subsidiary were the common parent) are treated as
includible corporations.
Section 404(k)(2), for taxable years beginning on or after January 1, 2002,
generally provides that the term applicable dividend means any dividend which,
in accordance with the plan provisions -- (i) is paid in cash to the participants in
the plan or their beneficiaries, (ii) is paid to the plan and is distributed in cash to
participants in the plan or their beneficiaries not later than 90 days after the close
of the plan year in which paid, (iii) is, at the election of such participants or their
beneficiaries -- (I) payable as provided in clause (i) or (ii), or (II) paid to the plan
and reinvested in qualifying employer securities, or (iv) is used to make
payments on a loan described in section 404(a)(9), the proceeds of which were
used to acquire the employer securities (whether or not allocated to participants)
with respect to which the dividend is paid. Under section 404(k)(4), the
deduction is allowable in the taxable year of the corporation in which the dividend
is paid or distributed to a participant or beneficiary.
Prior to 2002, section 404(k)(5)(A) provided that the Secretary may
disallow the deduction under section 404(k) for any dividend if the Secretary
determines that such dividend constitutes, in substance, an evasion of taxation.
Section 662(b) of the Economic Growth and Tax Relief Reconciliation Act of
2001 (115 Stat. 38, 2001) amended section 404(k)(5)(A) to provide that the
Secretary may disallow a deduction under section 404(k) for any dividend the

-5Secretary determines constitutes, in substance, an avoidance or evasion of
taxation. The amendment is effective for tax years after December 31,2001.
Section 162(k)( 1) generally provides that no deduction otherwise
allowable under chapter 1 of the Code is allowed for any amount paid or incurred
by a corporation in connection with the reacquisition of its stock or the stock of
any related person (as defined in section 465(b )(3)(C)). The legislative history of
section 162(k) states that the phrase "in connection with" is "intended to be
construed broadly." H.R. Conf. Rep. No. 99-841, at 168 (1986).
Corporation Entitled to Section 404(k) Deduction
An ESOP may benefit employees of more than one corporation. In
addition, an ESOP may be maintained by a corporation other than the payor of a
dividend. In these cases, the issue arises as to which entity is entitled to the
deduction provided under section 404(k). Assume, for example, that a publicly
traded corporation owns all of the stock of a subsidiary. The subsidiary operates
a trade or business with employees in the U.S. and maintains an ESOP that
holds stock of its parent for its employees. If the parent distributes a dividend
with respect to its stock held in the ESOP maintained by the subsidiary,
questions have arisen as to whether the parent or subsidiary is entitled to the
deduction under section 404(k). This question arises in cases in which the
parent and subsidiary file a consolidated return as well as in cases in which the
parent and subsidiary do not file a consolidated return.
The IRS and Treasury Department believe that the statutory language of
section 404(k) clearly provides that only the payor of the applicable dividend is

-6entitled to the deduction under section 404(k), regardless of whether the
employees of multiple corporations benefit under the ESOP and regardless of
whether another member of the controlled group maintains the ESOP.
Therefore, in the example above, the parent, not the subsidiary, is entitled to the
deduction under section 404(k).
Treatment of Payments Made to Reacquire Stock
Some corporations have claimed deductions under section 404(k) for
payments in redemption of stock held by an ESOP that are used to make benefit
distributions to participants or beneficiaries, including distributions of a
partiCipant's account balance upon severance from employment. These
taxpayers have argued that the payments in redemption qualify as dividends
under sections 301 and 316 and, therefore, are deductible under section 404(k).
In Rev. Rul. 2001-6 (2001-1 C.B. 491), the IRS concluded that section
162(k) bars a deduction for payments made in redemption of stock from an
ESOP. This conclusion was based on the fact that section 162(k)( 1) disallows a
deduction for payments paid in connection with the reacquisition of an issuer's
stock and that the redemption payments are such payments. The IRS also
concluded that such payments were not applicable dividends under section
404(k)(1). The IRS reasoned that allowing a deduction for redemption amounts
would vitiate important rights and protections for recipients of ESOP distributions,
including the right to reduce taxes by utilizing the return of basis provisions under
section 72, the right to make rollovers of ESOP distributions received upon
separation from service, and the protection against involuntary cash-outs.

-7Finally, the IRS stated that a deduction under section 404(k)(1) for such amounts
would constitute, in substance, an evasion of tax.
In Boise Cascade Corporation v. United States, 329 F.3d 751 (9 th Cir.
2003), the Court of Appeals for the Ninth Circuit held that payments made by a
corporation to redeem its stock held by its ESOP were deductible as dividends
paid under section 404(k), and that the deduction was not precluded by section
162(k). The court reasoned that the distribution by the ESOP of the redemption
proceeds to the participants was a transaction separate from the redemption
transaction. Therefore, the court concluded that the distribution did not constitute
a payment in connection with the corporation's reacquisition of its stock, and
section 162(k) did not bar the deduction of such payments.
For the reasons stated in Rev. Rul. 2001-6, the IRS and Treasury
Department continue to believe that allowing a deduction for amounts paid to
reacquire stock is inconsistent with the intent of, and policies underlying, section
404. In addition, the IRS and Treasury Department believe that allowing such a
deduction would constitute, in substance, an avoidance or evasion of taxation
within the meaning of section 404(k)(5)(A) because it would allow a corporation
to claim two deductions for the same economic cost: once for the value of the
stock originally contributed to the ESOP and again for the amount paid to redeem
the same stock. See Charles Ilfeld Co. v. Hernandez, 292 U.S. 62 (1934).
Moreover, despite the Ninth's Circuit's conclusion in Boise Cascade, the IRS and
Treasury Department continue to believe that, even if a payment in redemption of
stock held by an ESOP were to qualify as an applicable dividend, section 162(k)

-8would disallow a deduction for that amount because such payment would be in
connection with the reacquisition of the corporation's stock.
This notice of proposed rulemaking, therefore, includes proposed
regulations under section 404(k) that confirm that payments made to reacquire
stock held by an ESOP are not deductible under section 404(k) because such
payments do not constitute applicable dividends under section 404(k)(2) and a
deduction for such payments would constitute, in substance, an avoidance or
evasion of taxation within the meaning of section 404(k)(5). It also includes
proposed regulations under section 162(k) that provide that section 162(k),
subject to certain exceptions, disallows any deduction for amounts paid or
incurred by a corporation in connection with the reacquisition of its stock or the
stock of any related person (as defined in section 465(b)(3)(C)). The proposed
regulations also provide that amounts paid or incurred in connection with the
reacquisition of stock include amounts paid by a corporation to reacquire its stock
from an ESOP that are then distributed by the ESOP to its participants (or their
beneficiaries) or otherwise used in a manner described in section 404(k)(2)(A).

Proposed Effective Date
These regulations are proposed to be effective on the date of issuance of
final regulations. However, before these regulations become effective, the IRS
will continue to assert in any matter in controversy outside of the Ninth Circuit
that sections 162(k) and 404(k) disallow a deduction for payments to reacquire
employer securities held by an ESOP. See Chief Counsel Notice 2004-038

-9(October 1, 2004) available at www.irs.gov/foia through the electronic reading
room.
Special Analyses
It has been determined that this notice of proposed rulemaking is not a
significant regulatory action as defined in Executive Order 12866. Therefore, a
regulatory assessment is not required. It has also been determined that section
553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to
these regulations, and, because the regulations do not impose a collection of
information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section 7805(f) of the Code, this notice of proposed
rulemaking will be submitted to the Chief Counsel for Advocacy of the Small
Business Administration for comment on its impact on small business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written (a signed original and eight (8) copies)
or electronic comments that are submitted timely to the IRS. The IRS and
Treasury Department specifically request comments on the clarity of the
proposed regulations and how they may be made easier to understand. All
comments will be available for public inspection and copying. A public hearing
will be scheduled if requested in writing by any person that timely submits written
comments. If a public hearing is scheduled, notice of the date, time, and place
for the public hearing will be published in the Federal Register.
Drafting Information

- 10The principal authors of these regulations are John T. Ricotta, Office of
Division Counsel/Associate Chief Counsel (Tax Exempt and Government
Entities) and Martin Huck of Office of Associate Chief Counsel (Corporate).
However, other personnel from the IRS and Treasury participated in the
development of these regulations.

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

Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended to read, in part,
as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.162(k)-1 is also issued under 26 U.S.C. 162(k) * * *
Section 1.404(k)-3 is also issued under 26 U .S.C. 162(k) and
404(k)(5)(A) * * *
Par. 2. Section 1.162(k)-1 is added to read as follows:
§ 1.162(k)-1 Disallowance of deduction for reacquisition payments.
(a) In qeneral. Except as provided in paragraph (b) of this section, no
deduction otherwise allowable is allowed under Chapter 1 of the Internal
Revenue Code for any amount paid or incurred by a corporation in connection
with the reacquisition of its stock or the stock of any related person (as defined in
section 465(b)(3)(C)). Amounts paid or incurred in connection with the

- 11 reacquisition of stock include amounts paid by a corporation to reacquire its stock
from an ESOP that are used in a manner described in section 404(k)(2)(A). See
§1.404(k)-3.
(b) Exceptions. Paragraph (a) of this section does not apply to any-(i) Deduction allowable under section 163 (relating to interest);
(ii) Deduction for amounts that are properly allocable to indebtedness and
amortized over the term of such indebtedness;
(iii) Deduction for dividends paid (within the meaning of section 561); or
(iv) Amount paid or incurred in connection with the redemption of any
stock in a regulated investment company that issues only stock which is
redeemable upon the demand of the shareholder.
(c) Effective date. This section applies with respect to amounts paid or
incurred on or after the date these regulations are published as final regulations
in the Federal Register.
Par. 3. Section 1.404(k)-2 is added to read as follows:
§1.404(k)-2 Dividends paid by corporation not maintaining ESOP.
0-1: What corporation is entitled to the deduction provided under section
404(k) for applicable dividends paid on applicable employer securities of a C
corporation held by an ESOP if the ESOP benefits employees of more than one
corporation or if the corporation paying the dividend is not the corporation
maintaining the plan?
A-1: (a) In general. Under section 404(k), only the corporation paying the
dividend is entitled to the deduction with respect to applicable employer

- 12 securities held by an ESOP. Thus, no deduction is permitted to a corporation
maintaining the ESOP if that corporation does not pay the dividend.
(b) Example. (i) Facts. S is a U.S. corporation that is wholly owned by P,
an entity organized under the laws of Country A that is classified as a corporation
for Federal income tax purposes. P is not engaged in a U.S. trade or business.
P has a single class of common stock that is listed on a stock exchange in a
foreign country. In addition, these shares are listed on the New York Stock
Exchange, in the form of American Depositary Shares, and are actively traded
through American Depositary Receipts (ADRs) meeting the requirements of
section 409(1). S maintains an ESOP for its employees. The ESOP holds ADRs
of P on Date X and receives a dividend with respect to those employer securities.
The dividends received by the ESOP constitute applicable dividends as
described in section 404(k)(2).
(ii) Conclusion. P, as the payor of the dividend, is entitled to a deduction
under section 404(k) with respect to the dividends, although as a foreign
corporation P does not obtain a U.S. tax benefit from the deduction. No
corporation other than the corporation paying the dividend is entitled to the
deduction under section 404(k). Thus, because S did not pay the dividends, S is
not entitled to a deduction under section 404(k). The answer would be the same
if P is a U.S. C corporation.
0-2: What is the effective date of this section?
A-2: This section applies with respect to dividends paid on or after the
date these regulations are published as final regulations in the Federal Register.
Par. 4. Section 1.404(k)-3 is added to read as follows:
§1.404(k)-3 Disallowance of deduction for reacquisition payments.
Q-1: Are payments to reacquire stock held by an ESOP applicable
dividends that are deductible under section 404(k)(1)?
A-1: (a) Payments to reacquire stock held by an ESOP, including
reacquisition payments that are used to make benefit distributions to participants
or beneficiaries, are not deductible under section 404(k) because--

- 13 (1) Those payments do not constitute applicable dividends under section
404(k)(2); and
(2) The treatment of those payments as applicable dividends would
constitute, in substance, an avoidance or evasion on taxation within the meaning
of section 404(k)(5).
(b) See § 1.162(k)-1 concerning the disallowance of deductions for
amounts paid or incurred by a corporation in connection with the reacquisition of
its stock from an ESOP.
0-2: What is the effective date of this section?
A-2: This section applies with respect to payments to reacquire stock that
are made on or

after the date these regulations are published as final regulations in the Federal

Deputy Commissioner for Services and Enforcement.

Page 1 of2

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August 26, 2005
JS-2694

Treasury Releases Final Regulations Shutting Down Abusive Valuation of Life
Insurance Contracts
WASHINGTON, DC -- Today, the Treasury Department and the IRS issued final
regulations clarifying that any life insurance contract transferred from an employer
or a tax-qualified plan to an employee must be taxed at its full fair market value.
Issuing these regulations completes a 2-year project to shut down abusive
transactions involving "section 412(i) plans" and other similar arrangements. The
final regulations are aimed at arrangements that attempt to avoid taxes by using
artificial devices to understate the value of insurance contracts.
A "section 412(i) plan" is a tax-qualified retirement plan that is funded entirely by a
life insurance contract or an annuity. An employer may claim tax deductions for
contributions that are used by the plan to pay premiums on an insurance contract
covering an employee. The plan may hold the contract until the employee dies, or it
may distribute or sell the contract to the employee at a specific point, such as when
the employee retires.
Some firms have promoted a tax avoidance arrangement where an employer
establishes a section 412(i) plan under which the contributions made to the plan,
which are deducted by the employer, are used to purchase a specially designed life
insurance contract. Under the arrangement, the cash surrender value, or the
amount that the contract states the policy is worth if it were cashed-in, is temporarily
depressed to a level significantly below the premiums paid. The contract is then
distributed or sold to the employee for the amount of the temporarily depressed
cash surrender value.
The contract is structured so that the cash surrender value increases significantly
after it is transferred to the employee. The use of this springing cash value life
insurance results in a mismatch between the employer's deduction and the
employee's recognition of income. The employer takes a deduction for the entire
value of the premiums paid into the insurance plan and the employee pays taxes
only on the artificially depressed value of the contract allowing the employee to
avoid taxes on the true value of the contract while the employer taxes the full
deduction for the premiums paid.
The regulations announced today, which finalize regulations proposed in February
2004 require that the insurance contract be valued at its fair market value.
These regulations will be effective for transfers made on or after the proposed
regulations were announced on February 13, 2004.
A copy of the final regulations is attached.
- 30 -

REPORTS
•

Final Regulations

http://www.treas.gov/pressfreleasesfjs.2694.htm

9/1/2005

[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TO 9223]
RIN 1545-BC20
Value of Life Insurance Contracts when Distributed from a Qualified Retirement Plan
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final regulations under section 402(a) of the

Internal Revenue Code regarding the amount includible in a distributee's income when
life insurance contracts are distributed by a qualified retirement plan and regarding the
treatment of property sold by a qualified retirement plan to a plan participant or
beneficiary for less than fair market value. This document also contains final
regulations under sections 79 and 83 of the Internal Revenue Code regarding the
amounts includible in income when an employee is provided permanent benefits in
combination with group-term life insurance or when a life insurance contract is
transferred in connection with the performance of services. These regulations will affect
administrators of, participants in, and beneficiaries of qualified retirement plans. These
regulations will also affect employers who provide permanent benefits in combination
with group-term life insurance for their employees and employees who receive those
permanent benefits, as well as service recipients who transfer life insurance contracts to

-2service providers in connection with the performance of services, and service providers
to whom those life insurance contracts are transferred.

DATES: These regulations are effective August 29,2005.
FOR FURTHER INFORMATION CONTACT: Concerning the section 79 regulations,
Betty Clary at (202) 622-6080; concerning the section 83 regulations, Robert Misner at
(202) 622-6030; concerning the section 402 regulations, Bruce Perlin or Linda Marshall
at (202) 622-6090 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:
Background
A. In General
This document contains amendments to the Income Tax Regulations (26 CFR
part 1) under section 402(a) of the Internal Revenue Code (Code) relating to the amount
includible in a distributee's income when a life insurance contract, retirement income
contract, endowment contract, or other contract providing life insurance protection is
distributed by a retirement plan qualified under section 401 (a), and relating to the sale of
property by a qualified retirement plan to a plan participant or beneficiary for less than
the fair market value of the property. This document also contains amendments to the
regulations under sections 79 and 83 relating, respectively, to permanent benefits that
are provided to employees in combination with group-term life insurance, and to life
insurance contracts that are transferred in connection with the performance of services.
Section 402(a) generally provides that any amount actually distributed to any
distributee by any employees' trust described in section 401 (a) which is exempt from tax
under section 501 (a) is taxable to the distributee in the taxable year of the distributee in

-3which distributed, in accordance with section 72. Distributions from a qualified
employees' trust generally are subject to withholding and reporting requirements
pursuant to section 3405 and regulations thereunder. Section 1.402(a)-1 (a)(1 )(iii)
provides, in general, that a distribution of property by a section 401 (a) plan is taken into
account by the distributee at its fair market value. Prior to its amendment by this
Treasury decision, §1.402(a)-1 (a)(2) (which was originally published in 1956) provided,
in general, that upon the distribution of a life insurance contract, the "entire cash value"
of the contract must be included in the distributee's income. 1 Section 1.402(a)-1 (a) did
not define fair market value or entire cash value, and questions have arisen regarding
the interaction between these two provisions and regarding whether the term entire
cash value includes a reduction for surrender charges.
On April 30, 1975, proposed regulations under section 402 regarding the taxation
of certain lump sum distributions from qualified plans (the 1975 proposed regulations)
were published in the Federal Register (40 FR 18798) to reflect changes to section 402
made by the Employee Retirement Income Security Act of 1974 (ERISA) (Public Law
93-406, 88 Stat. 829). Under §1.402(a)-1 (a)(2) of the 1975 proposed regulations, the
distribution of an annuity contract must be treated as a lump sum distribution under
section 402(e) for purposes of determining the separate tax imposed under section
402(e)(1 )(A),2 even if the distribution of the annuity contract itself is not currently
taxable. The 1975 proposed regulations also expanded the situations in which the

1 Section 1.402(a)-1 (a)(2) also provides rules regarding the taxation of the distribution of an annuity
contract. In certain cases, the distribution of an annuity contract is not includible in the participant's gross
income until distributions are made from the annuity contract.
2 The tax imposed under section 402(e)(1 )(A), as in effect at. the time of th~ 1975 proposed regulations,
generally was based on 10-year averaging of the tax otherwise payable with respect to a lump-sum
distribution.

-4distribution of a retirement income, endowment, or other life insurance contract is not
currently taxable to include the situation where, within 60 days after the distribution of
such contract, the contract is treated as a rollover contribution under section 402(a)(5),
as in effect after December 31, 1973.
Section 79 generally requires that the cost of group-term life insurance coverage
provided by an employer on the life of an employee that is in excess of $50,000 of
coverage be included in the income of the employee. Pursuant to § 1 .79-1 (b), under
specified circumstances, group-term life insurance may be combined with other
benefits, referred to as permanent benefits. A permanent benefit is defined in §1.79-0
as an economic value extending beyond one policy year (for example, a paid-up or cash
surrender value) that is provided under a life insurance policy. Section 1.79-0 further
provides that certain features are not permanent benefits, including: (a) a right to
convert (or continue) life insurance after group life insurance coverage terminates, (b)
any other feature that provides no economic benefit (other than current insurance
protection) to the employee, and (c) a feature under which term life insurance is
provided at a level premium for a period of five years or less.
Permanent benefits provided to an employee are subject to taxation under rules
described in §1.79-1 (d). Under those rules, the cost of the permanent benefits, reduced
by the amount paid for those benefits by the employee, is included in the employee's
income. Section 1.79-1 (d) provides that the cost of the permanent benefits cannot be
less than an amount determined under a formula set forth in the regulations. Prior to its
amendment by this Treasury decision, §1.79-1 (d) provided that one of the factors used
in the formula for determining the cost of permanent benefits was "the net level premium

-5reserve at the end of that policy year for all benefits provided to the employee by the
policy or, if greater, the cash value of the policy at the end of that policy year."
Section 83(a) generally provides that when property is transferred to any person
in connection with the performance of services, the service provider must include in
gross income (as compensation income) the excess of the fair market value of the
property over the amount (if any) paid for the property. For this purpose, the fair market
value of the property is determined without regard to lapse restrictions and is
determined at the first time that the transferee's rights in the property are either
transferable or not subject to a substantial risk of forfeiture. Prior to its amendment by
this Treasury decision, §1.83-3(e) generally provided that in the case of "a transfer of a
life insurance contract, retirement income contract, endowment contract, or other
contract providing life insurance protection, only the cash surrender value of the
contract is considered to be property."
In TO 9092, published in the Federal Register on September 17, 2003 (68 FR

54336), relating to split-dollar life insurance arrangements, §1.83-3(e) was amended to
add the following sentence: "Notwithstanding the previous sentence, in the case of a
transfer of a life insurance contract, retirement income contract, endowment contract, or
other contract providing life insurance protection, or any undivided interest therein, that
is part of a split-dollar life insurance arrangement (as defined in §1.61-22(b)(1) or (2))
that is entered into, or materially modified (within the meaning of §1.61- 220)(2)), after
September 17,2003, the policy cash value and all other rights under such contract
(including any supplemental agreements thereto and whether or not guaranteed), other

-6than current life insurance protection, are treated as property for purposes of this
section."
The prohibited transaction provisions of ERISA generally prohibit various
transactions between plans covered by Title I of ERISA and certain parties in interest
(including plan partiCipants) with respect to such plans. Specifically, unless an
exemption from the prohibited transaction rules applies, sections 406(a)(1 )(A) and (D) of
ERISA provide that a fiduciary with respect to a plan shall not cause the plan to engage
in a transaction, if he knows or should know that such transaction constitutes a direct or
indirect sale or exchange, or leasing, of any property between the plan and a party in
interest; or transfer to, or use by or for the benefit of, a party in interest of any assets of
the plan. Accordingly, unless a statutory or administrative exemption is applicable, the
prohibited transaction rules are applicable to the sale of a life insurance contract, or
annuity contract, by a plan to a party in interest.
Section 4975 of the Code sets forth parallel rules that impose excise taxes on the
amount involved with respect to prohibited transactions involving certain plans. The
prohibited transaction provisions under section 4975, as well as the exemptions from
the application of such rules, generally parallel the prohibited transaction provisions
under Title I of ERISA.
Prohibited Transaction Exemption (PTE) 77-8 (1977-2 C.B. 425), subsequently
amended and redeSignated as Prohibited Transaction Exemption 92-6, was jointly
issued in 1977 by the Department of Labor and the IRS to provide an exemption from
the restrictions of sections 406(a) and 406(b)(1) and (b )(2) of ERISA and from the taxes
imposed by sections 4975(a) and (b) of the Code for certain transactions. Under the

-7exemption set forth in PTE 77-8 and PTE 92-6, an employee benefit plan is permitted to
sell individual life insurance contracts and annuities for the cash surrender value of the
contracts to certain specified parties, provided conditions are satisfied. Under PTE 77-8
and PTE 92-6, such specified parties are: (1) a plan participant insured under such
policies, (2) a relative of such insured participant who is the beneficiary under the
contract, (3) an employer any of whose employees are covered by the plan, or (4)
another employee benefit plan.
The preamble to PTE 77 -8 (citing Rev. Rul. 59-195, 1959-1 C. B. 18) noted that,
for Federal income tax purposes, the value of an insurance policy is not the same as,
and may exceed, its cash surrender value, and that a purchase of an insurance policy at
its cash surrender value may therefore be a purchase of property for less than its fair
market value. At the time PTE 77-8 was issued, the regulations under section 402 did
not address the consequences of a sale of property by a section 401 (a) plan to a plan
participant or beneficiary for less than the fair market value of that property. In this
regard, the preamble to PTE 77-8 stated that the Federal income tax consequences of
such a bargain purchase was required to be determined in accordance with generally
applicable Federal income tax rules but that any income realized by a participant or
relative of such participant upon such a purchase under the conditions of PTE 77-8
would not be deemed a distribution from the plan to such participant for purposes of
subchapter D of chapter 1 of subtitle A of the Internal Revenue Code (i.e., sections 401
to 424 relating to qualified pension, profit-sharing, and stock bonus plans).

B. The 2004 Proposed Regulations

-8In February 2004, the IRS issued proposed amendments to the regulations under
section 402(a} (69 FR 7384) to clarify that the requirement that a distribution of property
be included in the distributee's income at fair market value is controlling in those
situations where the regulations provided for the inclusion of the entire cash value of a
retirement income, endowment, or other life insurance contract. The 2004 proposed
regulations provided that the fair market value of a life insurance contract is determined
taking into account the value of all rights under the contract, including any supplemental
agreements thereto and whether or not guaranteed. The proposed regulations also
provided that, if a qualified retirement plan transfers property to a plan participant or
beneficiary for consideration that is less than the fair market value of the property, the
transfer would be treated as a distribution by the plan to the participant or beneficiary to
the extent the fair market value of the distributed property exceeds the value of the
consideration received. Thus, under the proposed regulations, such a transfer would be
treated as a distribution for purposes of applying the plan qualification requirements of
section 401 (a).
The 2004 proposed regulations also contained proposed amendments to existing
regulations under section 83 to clarify that fair market value is also controlling with
respect to a life insurance contract, retirement income contract, endowment contract, or
other contract providing life insurance protection and thus all of the rights under the
contract (including any supplemental agreements thereto and whether or not
guaranteed) must be considered in determining that fair market value. The proposed
regulations contained proposed amendments to §1.83-3(e), which generally apply the
definition of property for new split-dollar life insurance arrangements to all situations

-9subject to section 83 involving the transfer of life insurance contracts. The proposed
regulations also contained proposed amendments to §1.79- (d) to replace the term
"cash value" in the formula for determining the cost of permanent benefits with the term
"fair market value."
C. Determination of Fair Market Value
As noted under the heading In General, §1.402(a)-1 (a)(1 )(iii) does not define the
term fair market value. In Rev. Rul. 59-195, the IRS addressed the determination of fair
market value of a life insurance contract in situations similar to those in which an
employer purchases and pays the premiums on an insurance policy on the life of one of
its employees for several years and on which further premiums must be paid, and
subsequently sells such policy. The IRS held that the value of such a policy for
purposes of computing taxable gain to the employee in the year of purchase should be
determined under the method of valuation prescribed in §25.2512-6 of the Gift Tax
Regulations. Under this method, the value of such a policy is not its cash surrender
value but the interpolated terminal reserve at the date of sale plus the proportionate part
of any premium paid by the employer prior to the date of the sale which is applicable to
a period subsequent to the date of the sale. Section 25.2512-6 also provides that if
"because of the unusual nature of the contract such approximation is not reasonably
close to the full value, this method may not be used." Thus, this method may not be
used to determine the fair market value of an insurance policy where the reserve does
not reflect the value of all of the relevant features of the policy.
Q&A-10 of Notice 89-25 (1989-1 C. B. 662) described a distribution from a
qualified plan of a life insurance policy with a value substantially higher than the cash

- 10surrender value stated in the policy. The notice concluded that the practice of using
cash surrender value as fair market value is not appropriate where the total policy
reserves, including life insurance reserves (if any) computed under section 807(d),
together with any reserves for advance premiums, dividend accumulations, etc.,
represent a much more accurate approximation of the policy's fair market value.
Since Notice 89-25 was issued, life insurance contracts have been marketed that
are structured in a manner which results in a temporary period during which neither a
contract's reserves nor its cash surrender value represent the fair market value of the
contract. For example, some life insurance contracts may provide for large surrender
charges and other charges that are not expected to be paid because they are expected
to be eliminated or reversed in the future (under the contract or under another contract
for which the first contract is exchanged), but this future elimination or reversal is not
always reflected in the calculation of the contract's reserve. If such a contract is
distributed prior to the elimination or reversal of those charges, both the cash surrender
value and the reserve under the contract could significantly understate the fair market
value of the contract. Thus, in some cases, it would not be appropriate to use either the
net surrender value (i.e., the contract's cash value after reduction for any surrender
charges) or, because of the unusual nature of the contract, the contract's reserves to
determine the fair market value of the contract. Accordingly, Q&A-10 of Notice 89-25
should not be interpreted to provide that a contract's reserves (including life insurance
reserves (if any) computed under section 807(d), together with any reserves for
advance premiums, dividend accumulations, etc.) are always an accurate
representation of the contract's fair market value.

- 11 The IRS and Treasury recognized that taxpayers could have difficulty
determining the fair market value of a life insurance contract for which the contract's
reserves (including life insurance reserves (if any) computed under section 807(d),
together with any reserves for advance premiums, dividend accumulations, etc.) are not
an accurate representation of the contract's fair market value. Accordingly, the IRS
issued Rev. Proc. 2004-16 (2004-10 I.R.S. 559), which provided interim rules under
which the cash value (without reduction for surrender charges) of a life insurance
contract distributed from a qualified plan may be treated as the fair market value of that
contract, provided that certain requirements are satisfied. This safe harbor for
determining fair market value was also available for purposes of sections 79 and 83.
D. Comments and Public Hearing on the 2004 Proposed Regulations and Rev.
Proc. 2004-16
The IRS received comments on the 2004 proposed regulations, and a public
hearing was held on June 9, 2004. While none of the commentators objected to the
proposed amendments to the regulations, a number of commentators raised concerns
regarding the safe harbor formula for fair market value set forth in Rev. Proc. 2004-16.
Several commentators recommended that final guidance provide more than one safe
harbor for determining the fair market value of a policy and asserted that the safe harbor
formulas under Rev. Proc. 2004-16 produce a value that is too high and does not reflect
market realities. Suggestions were made that the interpolated terminal reserve (ITR)
and tax reserve valuation methods under section 807(d) be used as alternatives to the
interim safe harbor formula.
Some commentators claimed that the interim safe harbor provided by Rev. Proc
2004-16 was not usable for all types of life insurance policies. In particular, these

- 12 commentators asserted that the formulas did not function well for traditional whole life
policies. In addition, commentators were concerned about the possible double-counting
of certain dividends under the formulas, and the fact that the formulas did not make an
explicit adjustment for withdrawals or distributions, nor did they provide for any
recognition of the possibility that a surrender charge would apply in the future.

E. Rev. Proc. 2005·25 •• Safe Harbors for Determining Fair Market Value
After reviewing the comments to the prior guidance, the IRS and Treasury
concluded that the safe harbor formulas in Rev. Proc. 2004-16 did not function well for
certain types of traditional poliCies, and also should be revised to reflect a discount for
the possibility that a surrender charge would apply in certain situations. Accordingly,
Rev. Proc. 2005-25 (2005-17 I.R.S. 962) was issued to modify and supersede Rev.
Proc. 2004-16 in order to make adjustments to the safe harbor formulas. These new
safe harbor formulas replace the formulas in Rev. Proc. 2004-16 for distributions, sales,
and other transfers made on or after February 13, 2004, and for permanent benefits
provided on or after February 13, 2004. For all periods, including periods before May 1,
2005, taxpayers may rely on the safe harbors in Rev. Proc. 2005-25. In addition, for
periods on or after February 13, 2004, and before May 1, 2005, taxpayers may rely on
the safe harbors in Rev. Proc. 2004-16.

Explanation of Provisions
These final regulations retain the rules set forth in the 2004 proposed regulations
under section 402(a) providing that the requirement that a distribution of property be
included in the distributee's income at fair market value is controlling in those situations
where the former regulations provided for the inclusion of the entire cash value of a

- 13 retirement income, endowment, or other life insurance contract. Thus, these final
regulations clarify that, in those cases where a qualified plan distributes a life insurance
contract, retirement income contract, endowment contract, or other contract providing
life insurance protection, the fair market value of such a contract (i.e., the value of all
rights under the contract, including any supplemental agreements thereto and whether
or not guaranteed) is generally included in the distributee's income, and not merely the
entire cash value of the contract. However, these final regulations retain the rules from
existing final regulations setting forth the situations under which a distribution of such a
contract is not currently includible in income.
These final regulations also set forth a portion of the rules included in the 1975
proposed regulations. Under those rules, the distribution of an annuity contract must be
treated as a lump sum distribution for purposes of determining the amount of tax under
the 10-year averaging rule of section 402(e) (as in effect prior to the amendment by the
Tax Reform Act of 1986, Public Law 99-514,100 Stat. 2085), even if the distribution of
the annuity contract itself is not currently taxable. The distribution of a retirement
income, endowment, or other life insurance contract is not taxable in the situation where
within 60 days after the distribution of such contract, the contract is treated as a rollover
contribution under section 402(a)(5), as in effect after December 31, 1973. Although
the final regulations reject the use of the term entire cash value as found in the 1975
proposed regulations, no inference should be made that other rules in the 1975
proposed regulations that have not been included in these final regulations have also
been rejected.

- 14 These final regulations retain the rules provided in the 2004 proposed regulations
that, if a qualified plan transfers property to a plan participant or beneficiary for
consideration that is less than the fair market value of the property, the transfer is
treated as a distribution under the plan to the participant or beneficiary to the extent the
fair market value of the distributed property exceeds the value of the consideration.
Thus, in contrast to the statement to the contrary in the preamble to PTE 77-8, these
regulations provide that any bargain element in the sale is treated as a distribution
under section 402(a). In addition, any such bargain element is treated as a distribution
under the plan for all other purposes of the Code, including the qualification
requirements of section 401 (a). Thus, for example, this bargain element is treated as a
distribution for purposes of applying the limitations on in-service distributions from
certain qualified retirement plans and the limitations of section 415. The rule treating
the bargain element in a sale as a distribution from a qualified plan applies to transfers
that occur on or after August 29, 2005. For transfers before that date, the bargain
element in the sale must be included in the plan participant's income under section 61.
However, such a transfer of a life insurance contract, retirement income contract,
endowment contract, or other contract providing life insurance protection occurring
before that date is deemed not to give rise to a distribution for purposes of applying the
requirements of subchapter 0 of chapter 1 of subtitle A of the Code.
These final regulations also retain the rules set forth in the 2004 proposed
regulations under sections 79 and 83 that clarify that fair market value is also controlling
with respect to life insurance contracts under those sections and, thus, that all of the
rights under the contract (including any supplemental agreements thereto and whether

- 15 or not guaranteed) must be considered in determining that fair market value. These
final regulations amend § 1. 79-1 (d) to replace the term cash value in the formula for
determining the cost of permanent benefits with the term fair market value. These final
regulations also amend §1.83-3(e) generally to apply the definition of property for new
split-dollar life insurance arrangements to all situations involving the transfer of a life
insurance contract, retirement income contract, endowment contract, or other contract
providing life insurance protection. Section 83(a) requires that the excess of the fair
market value of the property over the amount paid for the property be included in
income. The purpose of the changes to the regulations is to clarify that, unless
specifically excepted from the definition of permanent benefits or fair market value, the
value of all features of a life insurance policy providing an economic benefit to a service
provider (including, for example, the value of a springing cash value feature) must be
included in determining the employee's income.
These final regulations do not affect the relief granted by the provisions of
Section IV, paragraph 4 of Notice 2002-8 (2002-1 C.B. 398) to the parties to any
insurance contract that is part of a pre-January 28, 2002, split-dollar life insurance
arrangement. Also, consistent with the effective date of the final split-dollar life
insurance regulations at § 1.61-220), these final regulations do not apply to the transfer
of a life insurance contract which is part of a split-dollar life insurance arrangement
entered into on or before September 17, 2003, and not materially modified after that
date. However, taxpayers are reminded that, in determining the fair market value of
property transferred under section 83, lapse restrictions (such as life insurance contract

- 16 surrender charges) are ignored.

Effective Date
These regulations are effective August 29,2005. The amendments to §1.402(a)1(a) apply to any distribution of a retirement income, endowment, or other life insurance
contract occurring on or after February 13, 2004. The amendment to §1.79-1 is
applicable to permanent benefits provided on or after February 13, 2004. The
amendment to § 1 .83-3(e) is applicable to any transfer occurring on or after February 13,
2004.

Special Analyses
It has been determined that this Treasury decision is not a significant regulatory
action as defined in Executive Order 12866. Therefore, a regulatory assessment is not
required. It has also been determined that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. In addition,
because no collection of information is imposed on small entities, the provisions of the
Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply, and therefore, a Regulatory
Flexibility Analysis is not required. Pursuant to section 7805(f) of the Code, the notice
of proposed rulemaking preceding these regulations was submitted to the Small
Business Administration for comment on its impact on small business.

Drafting Information
The principal authors of these regulations are Bruce Perlin and Linda Marshall,
Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government
Entities). However, other personnel from the IRS and Treasury partiCipated in the

- 17 development of these regulations.

List of Subjects in 26 CFR Part 1
Income taxes, Reporting and record keeping requirements.

Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read, in part, as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In §1.79-1, paragraph (d)(3) is revised to read as follows:
§1.79-1 Group-term life insurance--general rules.

*****
(d) * * *

(3) Formula for determining deemed death benefit. The deemed death benefit
(DDS) at the end of any policy year for any particular employee is equal to--

RIY
where-R is the net level premium reserve at the end of that policy year for all benefits
provided to the employee by the policy or, if greater, the fair market value of the policy
at the end of that policy year; and
Y is the net single premium for insurance (the premium for one dollar of paid-up,
whole life insurance) at the employee's age at the end of that policy year.

**** *

- 18 Par. 3. In §1.83-3, paragraph (e), the fourth and fifth sentences are revised to
read as follows:
§1.83-3 Meaning and use of certain terms.

*****
(e) * * * In the case of a transfer of a life insurance contract, retirement income
contract, endowment contract, or other contract providing life insurance protection, or
any undivided interest therein, the policy cash value and all other rights under such
contract (including any supplemental agreements thereto and whether or not
guaranteed), other than current life insurance protection, are treated as property for
purposes of this section. However, in the case of the transfer of a life insurance
contract, retirement income contract, endowment contract, or other contract providing
life insurance protection, which was part of a split-dollar arrangement (as defined in
§1.61-22(b)) entered into (as defined in §1.61-22U)) on or before September 17, 2003,
and which is not materially modified (as defined in §1.61-22U)(2)) after September 17,
2003, only the cash surrender value of the contract is considered to be property. * * *
*****

Par. 4. Section 1.402(a)-1 is amended by:
1. Revising paragraph (a)(1 )(iii).
2. Revising paragraph (a)(2).
The revisions read as follows:
§1.402(a)-1 Taxability of beneficiary under a trust which meets the requirements of
section 401 (a).
(a) * * *

- 19 (1) * * *
(iii) Except as provided in paragraph (b) of this section, a distribution of property
by a trust described in section 401 (a) and exempt under section 501 (a) shall be taken
into account by the distributee at its fair market value. In the case of a distribution of a
life insurance contract, retirement income contract, endowment contract, or other
contract providing life insurance protection, or any interest therein, the policy cash value
and all other rights under such contract (including any supplemental agreements thereto
and whether or not guaranteed) are included in determining the fair market value of the
contract. In addition, in the case of a transfer of property that occurs on or after August
29, 2005, where a trust described in section 401 (a) and exempt under section 501 (a)
transfers property to a plan participant or beneficiary in exchange for consideration and
where the fair market value of the property transferred exceeds the value of the
consideration, then the excess of the fair market value of the property transferred by the
trust over the value of the consideration received by the trust is treated as a distribution
to the distributee under the plan for all purposes under the Internal Revenue Code.
Where such a transfer occurs before that date, the excess of the fair market value of the
property transferred by the trust over the value of the consideration received by the trust
is includible in the gross income of the participant or beneficiary under section 61.
However, such a transfer of a life insurance contract, retirement income contract,
endowment contract, or other contract providing life insurance protection occurring
before that date is not treated as a distribution for purposes of applying the
requirements of subchapter 0 of chapter 1 of subtitle A of the Internal Revenue Code.
*****

- 20(2) If a trust described in section 401 (a) and exempt under section 501 (a)
purchases an annuity contract for an employee and distributes it to the employee in a
year in which the trust is exempt, and the contract contains a cash surrender value
which may be available to an employee by surrendering the contract, such cash
surrender value will not be considered income to the employee unless and until the
contract is surrendered. For the rule as to nontransferability of annuity contracts issued
after 1962, see § 1.401-9(b)( 1). For additional requirements regarding distributions of
annuity contracts, see, e.g., §§1.401 (a)-20, Q&A-2, 1.401 (a)(31 )-1, Q&A-17, and
1.401 (a)(9)-6, Q&A-4. However, the distribution of an annuity contract must be treated
as a lump sum distribution for purposes of determining the amount of tax under the 10year averaging rule of section 402(e) (as in effect prior to amendment by the Tax
Reform Act of 1986, Public Law 99-514,100 Stat. 2085). If, however, the contract
distributed by such exempt trust is a life insurance contract, retirement income contract,
endowment contract, or other contract providing life insurance protection, the fair market
value of the contract at the time of distribution must be included in the distributee's
income in accordance with the provisions of section 402(a), except to the extent that,
within 60 days after the distribution of the contract, all or any portion of such value is
irrevocably converted into a contract under which no part of any proceeds payable on
death at any time would be excludable under section 101 (a) (relating to life insurance
proceeds), or the contract is treated as a rollover contribution under section 402(c). If
the contract distributed by such trust is a transferable annuity contract, or a retirement
income, endowment, or other life insurance contract and such contract is not treated as
a rollover contribution under section 402(c), then, notwithstanding the

- 21 -

preceding sentence, the fair market value of the contract is includible in the distributee's
gross income unless, within such 60 days, such contract is made nontransferable.
*****

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
Approved: August 9, 2005
Eric Solomon,
Acting Deputy Assistant Secretary for Tax Policy.

Page 1 of 5

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/-'Ur content on ems page, aown/aaa tne Tree Aaooe':\l f\crooat(8) Keaaer").

August 26,2005
js-2695
Prepared Remarks of United States Treasurer Anna Escobedo Cabral before
the California Hispanic Chambers of Commerce 26th Annual Conference
Latina Recognition Luncheon
Good afternoon; it's great to be here. I would like to express my sincere thanks to
the California Hispanic Chambers of Commerce and its entire membership. It is a
distinct privilege to take part in your 26th Annual Convention here in Oakland - the
largest regional gathering of Hispanic business organizations.
It is also an honor for me to appear before such a distinguished group of California
business owners and community leaders. You inspire all those who strive to
achieve what you've accomplished. You are the American Dream.
I, like all of you, am so grateful for the opportunities of this great country. Like many
of you, I come from a background that taught me the value of hard work at a very
young age. I learned that a pioneering and entrepreneurial spirit holds promise for
all of our societies and lays the groundwork for generations to come. Today I am
working in government, for a great President, because I want to preserve and
protect those opportunities.
My great grandparents risked life and limb to bring their family to the United States,
children in tow, traveling thousands of miles from Mexico to settle in California's
Santa Clara valley. They served as pillars of strength that held our families
together; they were strong and determined, and faced many hardships. They built
a life, watched their ten children and many grandchildren labor in the fields picking
apricots, cherries, prunes, grapes, and oranges, and prayed over their sons who
went off to war.
My father lived a good part of his life the same way my great grandmother lived
hers, in a tent, with dirt for floors, no running water, and an open fire to cook the
family meals. Because neither of my parents had graduated high school, they had
to work with their hands to make a life for their children.
Their dream was that their children all graduate from high school. This dream was
fulfilled, and then some. Thanks to a high school algebra teacher who took a
personal interest in me, I applied and was accepted to college as well. This dear
teacher convinced my father to let me go to the University of California, Santa Cruz,
which made me the first in my very large and extended family to go to college.
After graduating college my husband and I moved our family to Boston, so that I
could attend Harvard's John F. Kennedy School of Government. Later, we traveled
to Washington, DC, seized the opportunity to work in the marble halls of Congress
to address policy issues of great importance to the Latino community and all
Americans, and today, I have the honor of serving this great nation as Treasurer of
the United States.
Many have said that I am the American Dream as well. If that is the case, then I
know that today I am truly with my brothers and sIsters - proud LatinOS who have
worked hard and done well, thanks to good parents and the boundless
opportunities of freedom.

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9/112005

Page 2 of5

***

I want to commend you, on behalf of President Bush and Treasury Secretary John
S~o":,,, for your col.lective efforts and for your continued commitment to the important
mission of promoting Industry, economic and jobs growth, and the development of
Hispanic-owned businesses across the country. Organizations like yours have
helped propel Hispanics, the largest and one of the fastest growing minority
consumer groups in the country, into the economic and political spotlights. We are a
force to be reckoned with.
Look around the room today and you'll see evidence, everywhere you turn, of the
strength of the American economy. Right here in this room, we are looking at the
people who make the economy tick, and who benefit every day from this country's
incredible free markets.
The wonderful strength and resilience of the American economy is actually the first
thing I want to talk about today. I appreciate the work you do to grow this great
economy and create jobs, and I know how much the President appreciates it too.
He also appreciates how the cost of energy and health care affect you, your family,
and your business. He knows how those costs can make the difference, for a
family, between feeling financially secure or financially stressed.
Reforming Social Security is also a critically important part of a healthy American
economy for future generations. As we honor Latinas at this lunch today, I will tell
you one thing that matters to me, as a Latina mom, more than anything: that my
children are protected. And saving Social Security can help achieve that.
This month is Social Security's 70th anniversary, and I can't think of a better way to
mark this milestone than by saving the program - one of the great successes of
20th century American government - for our children and grandchildren. Es para
nuestros hijos.
To give you an idea, just with a local snapshot, of Social Security's impact, I'll tell
you this: in 2003, 21 percent of Oakland households received Social Security with
an average income $13,215. This issue touches all of us, in every part of this great
country, and the economic implications are wide and deep.
Overall, I'm very pleased to tell you, the American economy is really thriving. You
should all take great pride in this fact because you've had a lot to do with the
amazing economic times that we've seen in the last few years.
Well-timed tax cuts, combined with sound monetary policy set by the Federal
Reserve Board, got our economy moving when we needed it most. They gave
individuals more control over their own money, and businesses like yours the room
you needed to grow, and you took over from there.
The President often says that his economic agenda is based on the fundamental
trust that the American people make good decisions for themselves, for their
families, and for their businesses. That's why his policies allow people to keep more
of what they earn and have more control over their daily lives from health care to
education to retirement. As the President puts it, it makes sense to trust people with
their own money.
Policies that encourage open markets and trade have helped your businesses and
our economy too. The President recently signed CAFT A legislation, which was
important because it opened up new markets, with 44 million new consumers for
American products, which is terrific news for farmers and smail-business owners.
Good policies have led to visible results. It's worthwhile to take a I~ok at the
numbers. Today, GOP growth is very strong - a solid 3.4 percent In the second
quarter of this year - and job creation is robust and stea?y. with 207,000 new jobs
created last month and nearly four million jobs created since May of 2003.

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911/2005

The unemployment rate is 5 percent, which is below the average of the 1970s,
1980s and 1990s. Americans have more money in their pockets, and they're
buying the things their families need. The strong housing market continues with
more people owning their own homes today than ever before.
The most important thing, economically, for anyone is to have a job, and we're
~eeing that ha~pen. An improving economy also leads to higher real wages and
Income. More Jobs lead to more people being covered by health insurance and
retirement plans as well.
The rising cost of health care is a burden for individuals and families, and it has a
huge impact on our economy. For Hispanics, and for all Americans, affordable
health insurance is a top priority.
In America, we have the best health care system in the world but, health care costs
are rising. Health care costs are a burden on the economy and on patients. That's
why the President signed into law a break-through new product called Health
Savings Accounts, or HSAs, that helps make health insurance more affordable and
puts patients back in control of their health care.
The key to HSAs is what's called a high-deductible health care plan. A highdeductible health care plan is offered at premiums that are dramatically lower than
plans with lower-deductibles making them much more affordable. By using money
in your tax-free Health Savings Account to help pay the higher deductible or any
other health expenses, you reduce the cost of your health care.
In addition, instead of sending more money off to insurance companies in the form
of higher premiums, families can keep their savings in an account that belongs to
them, not to their employer or to an insurance company. In short, HSAs bring the
cost of purchasing quality health insurance more within reach.
An HSA plan puts consumers back in charge of their health care spending. One of
the reasons health care prices are so high is that consumers with traditional "first
dollar" health insurance don't have any idea what they are spending on health care
because it seems like someone else is paying. But, this comes at a price of higher
premiums that everyone pays. For those that have health insurance provided by
their employers already, it may sound like a good deal. But, the fact that
consumers in these sorts of plans aren't making informed choices about how their
health care dollars are spent causes prices to rise. There are no market forces to
encourage lower prices and better service. The high prices that are created are
passed along as higher premiums. The result is a very bad deal for those who
don't have health insurance already and higher health insurance costs for
everyone.
More than 30 percent of Hispanics do not have health insurance coverage. It is
vital that we work to bring affordable quality health care within reach. Health
Savings Accounts are a great way to get good health insurance at an affordable
price.
But, there is more we can do. The President has proposed allowing small
businesses to band together and purchase health insurance at lower costs through
Association Health Plans. We also must address the tremendous costs to us all of
frivolous lawsuits that are driving up health insurance premiums and driving many
good doctors out of the health care system.
To help Spanish-speakers better understand how HSAs wor,k, today we are
releasing a new Spanish-language brochure that Will be available on the Treasury
Web site (http://www.treasl.lIY-,gov/oWces/pubJi~-affairs/hsafpdf/hsa trifold brochure e~df). I've also brought copies with me to?ay. Read it and shar~ it
with your friends and neighbors. Encourage them to look Into an HSA. It really IS a
great deal that can help more people to get health insurance that they thought
might have been out of reach.
The price of energy has also been frustra~ing to consumers and business owners; I
know that the cost of gas impacts everything you do. My boss, Treasury Secretary

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John Snow, always says that it acts almost like a tax on your business or your
income. The energy bill that the President signed earlier this month should help to
reduce our dependence on foreign oil, as well as encourage energy innovation and
conservation, and that will be good for our economy over the long term.
The President has made clear his commitment to strengthen our economy further,
and the energy bill was part of that. This commitment to continued economic
strength also includes making his tax cuts permanent and reducing the budget
deficit - as well as reforming Social Security and the tax system and reducing the
burden of lawsuits and heavy-handed regulations on business.
The current strength of our economy puts us in a very strong position to achieve the
long-term goals of making Social Security solvent and alleviating the many
headaches that burden taxpayers.
Let's first look at reforming and strengthening Social Security. This is a top
domestic priority for President Bush and I share his commitment to finding a
permanent solution.
For the Latino population, the Social Security debate is of the utmost importance,
as Hispanics rely on the system more than many other Americans. Nearly 40
percent of Hispanic beneficiaries rely on Social Security for all of their income, and
three out of four rely on it for at least half of their income. Almost half of all
unmarried Hispanic retirees rely on Social Security as their only source of income. It
grieves me that more than 20 percent of Hispanic seniors are currently left in
poverty after a lifetime of paying into the system. This is unacceptable. We can do
better, and reform will make things better.
Progressive benefit growth for example, which would bring the program about 70
percent of the way to solvency, is an important element of the President's proposed
changes. It would mean that the lowest income seniors would have the fastestgrowing benefits while benefits for those who are more well-off grow more slowly,
with protection from inflation.
The opportunity to invest in our own futures, to save our own money in a retirement
nest egg, is another key part of the President's plan, and something that I think will
change our children's' retirement futures. And since the median age for Hispanics in
this country is just under 26 years - which is 10 years younger than the median age
for the United States as a whole - how the program impacts the younger
generations is especially important to us.
Personal accounts are part of the President's dedication to decreasing poverty in
the Latino community. He wants workers to be able to grow a nest-egg which could
be passed on to loved ones. He wants us to keep control of our own money,
knowing that we will do what's best with it. You've probably heard him call it the
"ownership society" and I believe this goal is wonderful for our community.
Many people think that the Social Security system is one where the government
takes your money, holds it for you, and then gives it back when you retire.
Unfortunately, that's not the way it really works. Social Security is a pay-as-you-go
system. You work hard, you pay through payroll taxes, and the government spends
your money on current retirees' benefits. Whatever is leftover - what we call the
"Social Security surplus" - ends up funding all kinds of government programs that
have nothing to do with Social Security. The government spends your money and
puts a paper IOU in a filing cabinet. That's really how it works.
With personal accounts, the money would stay in your possession. Secretary Snow
calls it the "ultimate lock box." It is through these voluntary personal accounts,
coupled with continued access to financial education resources, that people will be
better positioned to get a good rate of return on a con~ervative mix of bonds and
stocks or a portfolio of bonds only. A conservative mix of bonds and stocks can
yield a~ individual 4.6 percent. You get about 1.8 percent on your money in the
government _ a lousy rate of return compared to what a conservative mix of bonds
and stocks will get you.

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Finally, unlike the current system, in the event that a worker dies prematurely, he or
she will have an asset to leave to heirs.
Right now, we have a historic opportunity and obligation to save and strengthen the
nation's retirement security system. The President's leadership, combined with our
economic health, gives us this opportunity. The expense of waiting to act reminds
us why this opportunity must be seized, and why we are obligated to do so. Waiting
to fix the problem is terribly expensive, and irresponsible, considering younger
generations will be left paying the bill.
This is a fascinating time in government history. Enacting real retirement security
reforms this year holds great promise for generations of American workers and
retirees. And simplifying our tax code could bring enormous relief to every American
who pays taxes. No one knows that better than the people in this room. And the
President knows how you feel about our terribly complicated tax code. Done right,
tax reform will stimulate and strengthen our economy as well.
Thank you so much for having me here today; it's been wonderful to see so many
friends and so many who I admire.
With the help of this community and a continuing dedication to good pro-growth
economic policies in Washington, DC, this country has a bright future ahead of it.
Thanks again for all you do to keep our economy vibrant and to look out for the
future for our children.
Thank you.
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August 30, 2005
2005-8-30-16-43-59-1308

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 $72,794 million as of the end of that week, compared to $72,221 million as of the end of the prior week.

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

TOTAL
1. Foreign Currency Reserves

a. Securities

August 19,2005

August 26, 2005

72,221

72,794

Euro

Yen

TOTAL

Euro

Yen

TOTAL

11,330

12,405

23,735

11,501

12,042

23,543
0

Of which, issuer headquartered in the U. S.

b. Total deposits with:
11,025

b.i. Other central banks and BIS

4,664

15,689

5,154

11,190

16,344

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

b.ii. Of which, banks located abroad

13,538

13,606

8,218

8,260

11,041

b.iii. Banks headquartered outside the

u. S

b.iii. Of which, banks located in the U.S.
2. IMF Reserve Position

3. Special Drawing Rights (SDRs)
4. Gold Stock

5. Other Reserve Assets

II. Predetermined Short-Term Drains on Foreign Currency Assets
August 19, 2005
Euro
1. Foreign currency loans and securities

Yen

August 26, 2005

TOTAL

Euro

Yen

TOTAL

2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the US. dollar:
2.a. Short positions
2.b. Long positions

3. Other

o
o
o

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

o
o
o

August 19,2005
Euro

1. Contingent liabilities in foreign currency

Yen

August 26, 2005

TOTAL

Euro

Yen

TOTAL

2. Foreign currency securities with embedded options

3. Undrawn, unconditional credit lines

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 US.
3.c. With banks and other financial institutions
Headquartered outside the US.

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

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

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

Notes:

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

Full text of Press Releases of the United States Department of the Treasury : Volume 426

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