[Federal Register Volume 73, Number 183 (Friday, September 19, 2008)]
[Proposed Rules]
[Pages 54468-54482]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-21985]
[[Page 54467]]
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Part III
Postal Regulatory Commission
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39 CFR Part 3060
Accounting and Periodic Reporting Rules; Proposed Rule
Federal Register / Vol. 73, No. 183 / Friday, September 19, 2008 /
Proposed Rules
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POSTAL REGULATORY COMMISSION
39 CFR Part 3060
[Docket No. RM2008-5; Order No. 106]
Accounting and Periodic Reporting Rules
AGENCY: Postal Regulatory Commission.
ACTION: Proposed rule.
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SUMMARY: The Commission is proposing rules affecting accounting
practices, an assumed Federal income tax, and periodic reporting for
the Postal Service's competitive products enterprise. The rules are
intended to promote transparency and accountability without imposing
undue burden on the Postal Service. Issuance of this proposal responds
to a recent law that revised the Postal Service's business model and
gave the Commission new oversight responsibilities. Comments will
assist the Commission in developing final rules.
DATES: Initial comments due October 20, 2008; reply comments due
November 3, 2008.
ADDRESSES: Submit comments electronically via the Commission's Filing
Online system at http://www.prc.gov.
FOR FURTHER INFORMATION CONTACT: Stephen L. Sharfman, General Counsel,
202-789-6820 and [email protected].
SUPPLEMENTARY INFORMATION: Regulatory History, 73 FR 6081 (February 1,
2008).
I. Introduction and Summary
The Postal Accountability and Enhancement Act (PAEA), Public Law
109-435, 120 Stat. 3218 (2006), requires the Commission to prescribe
rules applicable to competitive products for the establishment and
application of (a) the accounting practices and principles to be
followed by the Postal Service, and (b) the substantive and procedural
rules for determining the assumed Federal income tax on competitive
products income. See 39 U.S.C. 2011(h)(2)(B). In addition, such rules
shall provide for the submission by the Postal Service of annual and
other periodic reports setting forth such information as the Commission
may require. 39 U.S.C. 2011(h)(2)(B)(i)(III).
Aided by recommendations contained in a report submitted by the
Secretary of the U.S. Department of Treasury (Treasury) pursuant to the
PAEA, as well as comments on that report provided by interested
persons, including the Postal Service, the Commission proposes rules
for implementing section 2011(h)(2)(B). See sections II B and C, infra.
By statute, such rules must be issued on or before December 19, 2008,
unless the Commission and the Postal Service agree on a later date. See
39 U.S.C. 2011(h)(2)(B)(ii). Interested persons are invited to comment
on the proposed rules. Comments are due no later than 30 days after
publication in the Federal Register. Reply comments are due no later
than 45 days after publication in the Federal Register.
Among the goals of the PAEA are the following: (1) Increase the
transparency of Postal Service operations; (2) prohibit cross-subsidies
of competitive products by market dominant products; and (3) reduce
administrative burdens. In developing the proposed rules, the
Commission has been guided by these goals. The proposed rules attempt
to give effect to section 2011 in the context of the PAEA as a whole,
while recognizing the realities and complexities of the Postal
Service's operations and the legitimate expectations of stakeholders.
The assumed Federal income tax is, in reality, an intra-agency
transfer designed, it would appear, to foster fair competition, a goal
also served by the PAEA's pricing provisions applicable to competitive
products. See 39 U.S.C. 3633(a)(1)-(3). Collectively, these pricing
provisions also protect mailers of market dominant products by
requiring that each competitive product cover its attributable costs,
and that competitive products as a whole make a reasonable contribution
to institutional costs. They further preserve fair competition in
markets in which the Postal Service competes by prohibiting cross-
subsidies by market dominant products of competitive products. The
statute requires the annual ``payment'' of an assumed Federal income
tax from the competitive products fund to the general postal fund and
the proposed rules are designed to give effect to that requirement.
To that end, the proposed rules, which for the most part are in
accord with Treasury's recommendations and draw from the Postal
Service's suggestions, are based on a theoretical, on paper only
enterprise, do not require new accounting or data collection systems,
maintain the Commission's existing definition of attributable cost, and
provide the Postal Service optional means for calculating an assumed
Federal income tax on competitive products income. They are, in short,
intended to promote the goals of transparency and accountability
without imposing undue burdens on the Postal Service.
II. Legal Requirements Regarding the Accounting and Income Tax Rules
for Competitive Products
Section 2011 sets forth financial provisions specific to
competitive products, including creating a Competitive Products Fund
and specifying the conditions under which it is to operate. In
addition, section 2011 requires the Secretary of the Treasury to
develop recommendations regarding accounting principles and tax rules
applicable to competitive products. The Commission, upon receipt of
those recommendations, must provide interested persons an opportunity
to comment on the recommendations and thereafter must, by rule, provide
for the establishment and application of accounting principles and tax
rules to be followed by the Postal Service with respect to competitive
products. Finally, section 2011 requires the Postal Service to file
certain periodic reports with the Commission and Treasury. These
various requirements are discussed below.
A. Competitive Products Fund
Section 2011 establishes the Competitive Products Fund (CPF) as a
revolving fund in the Treasury of the United States. The CPF is
generally available for receipt of revenues and payment of obligations
associated with competitive products. Section 2011 also:
(1) Governs deposits of revenues and payment of costs (39 U.S.C.
2011(a)-(d)); \1\
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\1\ Costs include costs attributable to competitive products and
all other costs incurred by the Postal Service to the extent
allocable to competitive products. Id. 2011(a)(2).
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(2) Authorizes and places limits on borrowings (id. 2011(e)(1)-
(4)); \2\
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\2\ The Postal Service is authorized to borrow money and to
issue such obligations as it deems necessary to provide for
competitive products, including, for example, entering into
agreements establishing reserve, sinking, and other funds, regarding
the use of revenue and receipts of the CPF, and such other matters
as the Postal Service considers necessary to enhance the
marketability of such obligations. Id. 2011(e)(1)-(2); see also
2011(e)(3)-(4) for terms and conditions applicable for such
obligations.
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(3) Requires payments on obligations (id. 2011(e)(5)); \3\
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\3\ Funds for payments on obligations are restricted to
revenues, receipts, and assets of competitive products. The total
assets are the greater of (1) assets related to the provision of
competitive products; or (2) the percentage of total Postal Service
revenues and receipts from competitive products times the total
assets of the Postal Service. Id. 2011(e)(5).
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(4) Accords the CPF the same Federal budgetary treatment as the
Postal Service Fund (id. 2011(f)); and
(5) Requires judgments arising out of the provision of competitive
products to be paid from the CPF (id. 2011(g)).
[[Page 54469]]
B. Treasury Report Recommendations
On December 19, 2007, as required by 39 U.S.C. 2011(h)(1), the
Secretary of the Treasury submitted a report to the Commission
containing recommendations concerning accounting principles and
practices that should be followed by the Postal Service for identifying
and valuing assets and liabilities associated with providing
competitive products, and the substantive and procedural rules for
determining an assumed Federal income tax on competitive products
income.\4\ Treasury discusses specific PAEA accounting and Competitive
Products Enterprise income tax requirements, ultimately recommending an
accounting approach that it believes ``will best meet these
requirements, including identifying and valuing the assets and
liabilities for the CPF and determining the assumed federal income tax
on the income of the CPF.'' Id. at 1. Treasury endorses the use of a
simplified income tax calculation, while recognizing that the
Commission will need to determine the optimum accounting approaches
that the Postal Service should implement. Id. Treasury concludes its
introductory comments to the report with the following cautionary
observation:
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\4\ Report of the U.S. Department of the Treasury on Accounting
Principles and Practices for the Operation of the United States
Postal Service's Competitive Products Fund, December 19, 2007
(Treasury Report).
The accounting and income tax approaches described in this
report should serve as the starting points for such future
discussions and decisions. Given the size and scope of the [Postal
Service's] operations as well as the complexity involved in meeting
the PAEA accounting and other requirements, Treasury believes that
any necessary changes to the existing [Postal Service] costing and
other systems should be made incrementally and notes that some may
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need to be implemented over the long term.
Id. at 1-2.
As relates to its task of developing recommendations, Treasury
identifies five PAEA requirements applicable to competitive products:
1. The prohibition against subsidies by market dominant products
(sections 3633(a)(1) and 2011(h)(1)(A)(II));
2. The requirement that each competitive product cover its
attributable costs (section 3633(a)(2));
3. The requirement that competitive products collectively cover
what the Commission determines to be an appropriate share of the Postal
Service's institutional costs (section 3633(a)(3));
4. The obligation to annually compute an assumed Federal income tax
on competitive products income (section 3634(b)(1)); and
5. The requirement that total assets of the CPF shall be the
greater of the assets related to the provision of competitive products
calculated under section 2011(h) or the percentage of total Postal
Service revenues and receipts from competitive products times the
Postal Service's total assets (section 2011(e)(5)).
Id. at 31.
In developing its recommendations, Treasury discusses the Postal
Service's current costing system, the cost accounting requirements for
competitive products under the PAEA, and difficulties in calculating an
assumed Federal income tax on competitive products income. In the end,
based on its review of various legal, policy, and practical factors,
Treasury offers nine specific recommendations as follows:
1. Modify the current cost attribution system to reflect
competitive products as determined by the Commission;
2. Create a theoretical, on paper only competitive enterprise,
assigning to it an appropriate share of total Postal Service costs;
3. Use currently reported volume variable or marginal costs to
ensure that competitive products cover their attributable costs, and
use reported incremental costs to guard against cross-subsidization of
competitive products by market dominant products;
4. Adjust competitive products contribution to institutional costs,
if necessary, once Universal Service Obligation costs have been
reliably established;
5. Modify the current cost accounting system to capture the causal
relationship between market dominant and competitive lines of business
and their applicable business costs, with remaining costs treated as
institutional;
6. Use existing financial data systems as basis for reporting
competitive products profits with adjustments, as necessary, to
determine the assumed Federal income tax;
7. Develop a theoretical competitive products income statement;
8. Calculate an assumed income tax using a simplified approach,
preferably using a published, regularly updated tax rate; and
9. Provide sufficient accounting and financial statements regarding
the theoretical competitive products enterprise.
Id. at 32-33.
C. Docket No. PI2008-2
To fulfill its obligations under section 2011(h)(2)(A), the
Commission initiated Docket No. PI2008-2 to provide interested persons,
including the Postal Service, an opportunity to comment on Treasury's
recommendations.\5\ In addition, the Commission solicited parties'
comments on specific questions related to the Treasury Report.
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\5\ PRC Order No. 56, Notice and Order Providing an Opportunity
to Comment on Treasury Report, January 28, 2008 (Order No. 56).
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Comments were submitted by the Postal Service,\6\ United Parcel
Service (UPS),\7\ Pitney Bowes, Inc. (Pitney Bowes),\8\ Valpak Direct
Marketing Systems, Inc. and Valpak Dealers' Association, Inc.
(Valpak),\9\ Parcel Shippers Association (PSA),\10\ and the Public
Representative.\11\ Reply comments were submitted by the Postal
Service,\12\ the Public Representative,\13\ Parcel Shippers
Association,\14\ and Robert W. Mitchell.\15\ The Commission appreciates
the commenters' submissions. They have been helpful in developing the
proposed rules.
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\6\ Initial Comments of the United States Postal Service in
Response to Order No. 56 and the Treasury Report, April 1, 2008
(Postal Service Comments).
\7\ Comments of United Parcel Service on the Treasury Report,
April 1, 2008 (UPS Comments).
\8\ Comments of Pitney Bowes Inc. in Response to Notice and
Order Providing an Opportunity to Comment on Treasury Report, April
1, 2008 (Pitney Bowes Comments).
\9\ Valpak Direct Marketing Systems, Inc. and Valpak Dealers'
Association, Inc. Initial Comments on Report of the U.S. Department
of the Treasury on Accounting Principles and Practices for the
Operations of the United States Postal Service's Competitive
Products Fund, April 1, 2008 (Valpak Comments).
\10\ Comments of the Parcel Shippers Association on Treasury
Report, April 1, 2008 (PSA Comments).
\11\ Public Representative's Comments in Response to Commission
Order No. 56, April 1, 2008 (Public Representative Comments).
\12\ Reply Comments of the United States Postal Service in
Response to Order No. 56 and the Treasury Report, May 1, 2008
(Postal Service Reply Comments).
\13\ Public Representative Reply Comments in Response to
Commission Order No. 56, May 1, 2008 (Public Representative Reply
Comments).
\14\ Reply Comments of the Parcel Shippers Association on
Treasury Report, May 1, 2008 (PSA Reply Comments).
\15\ Reply Comments of Robert W. Mitchell, May 2, 2008 (Mitchell
Reply Comments).
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The parties' specific comments are discussed below in connection
with the proposed rules. In general, however, the comments are broadly
consistent and supportive, in large part, of Treasury's
recommendations.\16\ While there are differences among the comments,
there appears to be agreement that a theoretical, on paper only
enterprise is the only viable construct; the current costing and
financial reporting systems are suitable as a basis for competitive
[[Page 54470]]
product reporting purposes; and a simplified income tax approach is
appropriate.\17\
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\16\ As the Postal Service notes, no commenter expresses any
material disagreement with the recommendations. Postal Service Reply
Comments at 1.
\17\ See, e.g., Valpak Comments at 3; Public Representative
Comments at 4; and Pitney Bowes Comments at 3-4.
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D. Periodic Reports
Section 2011(h)(2)(B)(i)(III) provides for the submission of annual
and other periodic reports containing such information as the
Commission may require. Pursuant to this provision and consistent with
Treasury's recommendation (No. 9), the Commission proposes, as part of
this rulemaking, that the Postal Service submit the following annual
periodic reports: Income Report, Financial Status Report, Identified
Property and Equipment Assets Report, and Pro Forma Balance Sheet.\18\
Details of the proposed reports are discussed in section V below. If,
in the future, it appears that additional financial reporting may be
necessary to preserve an appropriate level of transparency and
accountability, the Commission will consider requiring additional
reports.
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\18\ The pro forma Balance Sheet is a hypothetical statement
designed to provide information on the assets and liabilities of the
hypothetical competitive products enterprise.
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By statute, these reports are also to be filed with Treasury and
the Postal Service Office of the Inspector General. 39 U.S.C.
2011(h)(2)(D). In addition, and as a separate matter, the Postal
Service is obligated to submit a report to Treasury concerning
operation of the Competitive Products Fund, which shall address, inter
alia, reserve balances, allocation or distribution of money, and
liquidity requirements. Id. 2011(i)(1). While a copy of this report is
to be filed with the Commission, the detailed reporting requirements
are matters to be addressed by the Postal Service and Treasury.
III. Accounting Practices and Principles
In developing its recommendations regarding the accounting
practices and principles that should be followed by the Postal Service
to identify and value assets and liabilities associated with providing
competitive products, Treasury focuses on what it characterizes as the
PAEA's cost accounting requirements, in particular, the requirements of
section 3633(a). See Treasury Report at 3-10, which sets forth
Treasury's recommendations 1 through 7. See also id. at 31.
The Commission's proposed rules regarding accounting practices and
procedures associated with providing competitive products are similarly
derived and focus on the costing methodology to be used by the Postal
Service; methods for valuing assets and liabilities; and the financial
reporting requirements for the competitive products enterprise. In this
section, the Commission addresses the accounting principles embodied in
the proposed rules and, as appropriate, Treasury's related
recommendations and commenters' suggestions.
A. Competitive Products Fund
The PAEA requires a separate fund, the Competitive Products Fund,
to be established for competitive products. The principal purpose of
the Competitive Products Fund appears to be to ensure that expenses
related to competitive products are not paid by market dominant
products. The PAEA, which was implemented in December 2006,
contemplates a two-year review period under section 2011 to implement
the accounting practices and tax rules for determining the assumed
Federal income tax on competitive products income. Although the
proposed rules will not be effective prior to the end of FY 2008, the
competitive products enterprise will, as proposed herein, be subject to
the assumed income tax for that period. Given these timing differences,
the Commission believes that, as a practical matter, the beginning
balance of the Competitive Products Fund should reflect the
contribution to institutional costs made by competitive products in FY
2007 that exceeded the 5.5 percent required by the rules. Based on the
FY 2007 Annual Compliance Determination, that amount was $49
million.\19\
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\19\ See PRC Annual Compliance Determination, U.S. Postal
Service Performance Fiscal Year 2007, March 27, 2008, Table IV-A-1
at 24. The $49 million is calculated as the total contribution to
institutional costs of competitive products ($1,785.9 million) less
5.5 percent of the total institutional costs of the Postal Service
of $31,577.12 million ($1,785.9-($31,577.2 *.055) = $49.1).
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B. Theoretical Enterprise
The Commission agrees with Treasury's conclusion that the
[o]nly viable method to begin to address the PAEA requirements
for competitive products is to establish a theoretical, regulatory
reporting construct under which the [Postal Service] would `on paper
only' analytically segregate and identify the revenue and costs
associated with the competitive products--that is, to treat
competitive products as if they were sold by a separate, theoretical
enterprise or corporation that shares economies of scale and scope
with the market-dominant products.
Treasury Report at 4.
The Commission accepts Treasury's recommendation (id. at 7) that a
theoretical enterprise be analytically created by assigning it an
appropriate share of all Postal Service costs. As Treasury points out
and no commenter disputes, if this assumption is not made, then
sophisticated cost modeling of a true stand-alone enterprise would be
required, an undertaking that would be costly and necessitate numerous
assumptions that would be difficult to validate. Id. at 6.
Adopting the virtual enterprise means that financial reporting
related to competitive products will derive from the accounting and
data collection systems used for all postal services. While refinements
may be necessary to account for all activities related to competitive
products, it would not be economical to require the Postal Service to
construct entirely new systems solely for competitive products. Just as
economies of scope can derive from shared equipment and facilities, so
can economies of scope derive from shared accounting systems. As long
as existing systems can be adjusted to generate complete and accurate
information concerning competitive products, using existing systems is
more economical.
C. Attributable Costs
Treasury states that ``[t]he volume-variable or marginal product
costs reported by the [Postal Service] cost system should be used--
after the product definition modification required by PAEA--to ensure
that the competitive products cover their attributable costs.'' Id. at
7. This description of attributable costs differs from that
traditionally used by the Commission which includes both product
specific and volume variable costs. In reply comments, Mitchell
proposes that the Commission remove product specific costs from
attributable costs. He contends that these costs will be captured in
incremental costs. He reserves the term ``attributable'' for volume
variable costs alone. Mitchell Reply Comments at 9 and 10.
The Commission does not accept Treasury's or Mitchell's definition
that equates volume variable costs with attributable costs because it
is at odds with the Commission's long-held and judicially approved
treatment of attributable costs.\20\ The PAEA, which codifies the
Commission's definition, defines ``cost attributable'' to mean ``the
direct and indirect postal costs attributable to such product through
reliably identified causal relationships.'' 39 U.S.C. 3631(b). The
Commission
[[Page 54471]]
attributes product-specific costs because a causal relationship can be
established between these costs and the products they are associated
with. Accordingly, the proposed rules are based on the Commission's
long-held definition of attributable costs, which forms the basis for
determining compliance with section 3633(a)(2), the requirement that
each competitive product covers its attributable costs.
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\20\ National Association of Greeting Card Publishers v. United
States Postal Service, 462 U.S. 810, 830 (1983).
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Valpak, Pitney Bowes, and UPS contend that improvements should be
made to attributable cost measurement by the Postal Service to more
accurately measure competitive products costs and to prevent cross-
subsidization of competitive products by market dominant products.
Valpak Comments at 4-6; UPS Comments at 2-3; and Pitney Bowes Comments
at 2-4. The Commission agrees that the current costing system should be
improved to the extent practicable to reflect new products, and used as
the basis for the attribution of costs to competitive products.
Regarding data validity, Valpak states that the Commission may want
to consider establishing minimal acceptable limits for reliability and
require the Postal Service to meet those limits. While the Commission
agrees with commenters that accurate cost data are essential, it
refrains from prescribing specific data validation at this time. Should
data quality issues arise the Commission may, at its discretion, or at
the request of an interested party, initiate proceedings to address
these issues. See 39 U.S.C. 2011(h)(2)(c)(ii).
D. Cost Nomenclature
Treasury describes what it terms ``line of business'' costs as
those costs incurred by providing a particular type or line of
business, i.e., competitive products or market dominant products.
Treasury Report at 9. The Postal Service equates these costs with group
specific costs, which it defines as ``costs that are caused by the
group of competitive products[.]'' Postal Service Comments at 12; see
also id. at 30. Illustratively, it uses the example of a manager
responsible for a particular business line, i.e., competitive products.
Id. at 31-32. This manager's salary and benefits plus those costs for
any support staff would be included as ``line of business'' costs and
be borne by competitive products as a group. The Postal Service
describes the remaining costs as ``enterprise sustaining'' costs, i.e.,
costs not associated with any individual line of business but generated
in sustaining all lines of business. The Postmaster General's salary
and benefits are an example of such costs. Id. at 29-37. The Commission
concludes that ``line of business costs'' are the same as group
specific costs and ``enterprise sustaining'' costs are the same as
institutional costs.
E. Incremental Costs
Treasury defines incremental costs in the following manner:
In a multi-product firm like [the Postal Service], incremental
cost is the amount of cost avoided by eliminating a given product.
The average incremental cost is this dollar figure divided by the
number of units that are no longer produced. It is also possible to
compute incremental cost by looking at the additional cost of adding
a given number of units of a new product to the product line.
However, the standard incremental cost calculation is based on the
total cost that would be avoided if the current output of a product
were reduced to zero and all associated costs with producing the
product were eliminated.
Treasury Report at 39; see also id. at 3.
Section 3633(a)(1) prohibits cross-subsidies of competitive
products by market dominant products. To test for cross-subsidies,
Treasury recommends that competitive products reported incremental
costs be used; i.e., that such costs must be less than competitive
products revenues. Id. at 32; see also id. at 7. Treasury's statements
on this issue are somewhat ambiguous. On the one hand, it suggests that
the incremental cost test should apply to each competitive product. Id.
at 7. On the other hand, it states that ``reported incremental costs
should be used to ensure that cross-subsidization of the competitive
products by market-dominant products is not occurring.'' Id.
Five parties address the issue of the appropriate application of
the incremental cost test. Valpak and UPS suggest the incremental cost
test should be applied to both individual competitive products and the
competitive products enterprise as a whole. Valpak Comments at 7; UPS
Comments at 2. Alternatively, Mitchell recommends that the Postal
Service develop an estimate of the incremental cost of competitive
products as a group, including any product specific costs. Mitchell
Reply Comments at 10.
The application of the incremental cost test is a settled issue. In
Docket No. RM2007-1, the Commission interpreted section 3633(a)(1) to
mean that incremental costs apply to competitive products as a group,
not to individual competitive products. See 39 CFR 3015.7(b). The
Postal Service and Pitney Bowes concur with this interpretation. Postal
Service Comments at 35; Pitney Bowes Comments at 7. In Docket No.
RM2008-4, the Commission proposes rules to require the Postal Service
to file the relevant incremental cost data so that the incremental cost
test can be applied.
F. Contribution to Institutional Costs
In addition to the incremental cost test, the PAEA requires that
revenues from competitive products make an appropriate contribution to
institutional costs, as determined by the Commission. 39 U.S.C.
3633(a)(3).\21\ Treasury addresses this requirement in two respects.
Following its discussion of group specific (or line of business) costs,
Treasury recommends that the unassigned costs be treated as
institutional costs and that an appropriate share of such costs should
be covered by the theoretical competitive enterprise. Treasury Report
at 6.
In addition, Treasury discusses the costs associated with the
Postal Service's Universal Service Obligation (USO) and the degree to
which such costs should be borne by competitive products. Among other
things, Treasury comments that the USO may impose additional costs on
the Postal Service that would not be incurred otherwise and that, as a
general rule, USO costs are allocated solely to market dominant
products. Id. at 7-8. Treasury further points out that economies of
scope between competitive and market dominant products serve to reduce
USO costs. Id. at 8.\22\ It notes the pendency of the Commission's
report on the USO and recommends that once the USO costs have been
reliably determined, the Commission should adjust the allocation of
institutional costs to competitive products as may be appropriate.\23\
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\21\ In Docket No. RM2007-1, the Commission set the appropriate
share at 5.5 percent. PRC Order No. 43, Order Establishing
Ratemaking Regulations for Market Dominant Competitive Products,
October 29, 2007, at 90-92.
\22\ Regarding the Commission's implementation of the PAEA,
including sections 2011 and 3634, the Public Representative
emphasizes that the continued existence of universal service is of
paramount importance. Public Representative Comments at 3.
\23\ In Order No. 56, the Commission asked whether its
determination of an appropriate share of institutional costs under
section 3633(a)(3) also satisfies, at least implicitly, the
objective of section 3622(b)(9) (that institutional costs be
allocated appropriately between market dominant and competitive
products). PRC Order No. 56, Notice and Order Providing an
Opportunity to Comment on Treasury Report, January 28, 2008, at 12.
The two parties to address this question, the Postal Service and
Valpak, equate the two provisions. Postal Service Comments at 37-38;
Valpak Comments at 8.
Id. at 8.
[[Page 54472]]
Several parties comment on the appropriate allocation of
institutional costs. PSA, which agrees with Treasury's recommendation
regarding USO costs, also endorses Treasury's recommendation that
unassigned costs be treated as institutional costs with an appropriate
share allocated to competitive products. PSA Comments at 5. It
suggests, however, that the Commission may wish to revisit that issue
once various modifications required by the PAEA have been made to the
Postal Service's costing systems. Id. at 5, 11.\24\
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\24\ PSA also asserts (and the Commission agrees) that the
assumed Federal income tax will have no effect on whether
competitive products meet the requirements of section 3633(a)(3)
since the tax applies only to amounts in excess of the required 5.5
percent share. PSA Reply Comments at 3, n.6.
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Pitney Bowes likewise endorses Treasury's recommendation to capture
group specific (or incremental) costs that are incurred by market
dominant or competitive products. Pitney Bowes Comments at 7. It
suggests that modifications to the costing systems ``could result in
noncompliance with the appropriate share requirement as currently
established.'' Id. If that were to happen, it believes that the
Commission should review the appropriateness of the 5.5 percent. Id. 7-
8.
It is premature for the Commission to act on any of these
suggestions. The Commission will, as appropriate, take its findings on
the USO study into account with respect to its obligations under
sections 3633(a)(3) and 3622(b)(9). See Valpak Comments at 5.
G. Valuation of Assets and Liabilities
1. Assets
Section 2011(h)(1)(A)(i)(I) requires Treasury to make
recommendations regarding accounting practices that should be followed
by the Postal Service in identifying and valuing the assets and
liabilities associated with competitive products. Treasury observes
that ``[e]fforts to analyze each [Postal Service] asset to determine
its theoretical enterprise origin and usage could be a significant
undertaking.'' Treasury Report at 26. It indicates, however, that the
separation of assets could be achieved using cost drivers currently
employed by the Postal Service to record depreciation and other
expenses. Id. While not intended as exhaustive, Treasury discusses four
potential methods for assigning assets to a theoretical competitive
products enterprise. Two methods involve analyzing each individual
asset and assigning it to competitive products based on an appropriate
usage factor.\25\ The other two methods use either a cost of revenue
ratio, which distributes assets based on attributable costs, or a total
revenue ratio, which distributes assets on the basis of total revenue.
Id. at 26-27. While Treasury makes no specific recommendations, it
notes that the simplicity of the latter two methods makes them an
attractive option for the ``greater of'' test.\26\
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\25\ Both of these methods would necessitate establishing a set
of accounting books to monitor and track assignment for ongoing
maintenance, including asset additions and/or reductions, associated
with competitive products. Id.
\26\ Id. at 27 regarding section 2011(e)(5)(A) and (B).
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In its initial comments, the Postal Service notes that ``there are
few, if any, physical assets strictly identifiable with competitive
products at this point in time.'' Postal Service Comments at 17
(emphasis in original). To address this problem, the Postal Service
proposes to provide an Annual Identified Property and Equipment Report,
which would provide a listing and valuation of assets uniquely
associated with providing competitive products. This listing would be
limited to ``those cases where the Postal Service chooses to establish
separate operational or administrative units devoted solely to
competitive products.'' Id. at 17-18 (emphasis in original).
The Commission concurs with Treasury that the cost of requiring the
Postal Service to analyze each individual asset separately to determine
its theoretical enterprise origin and usage would significantly
outweigh any potential tax or other benefit. Such an assignment is not
required under section 2011. The Commission agrees with Treasury that
market dominant and competitive assets can be reasonably separated for
purposes of section 2011 using cost drivers the Postal Service
currently uses for reporting depreciation and other expenses. The
Commission concludes that a simplified method similar to Treasury's
suggested cost of revenue method will provide an appropriate comparison
for the ``greater of'' test. This simplified method would not appear to
be too burdensome or costly since it would basically follow the
attribution of costs among products and thus would not require a
significant asset analysis by the Postal Service to identify many of
the asset accounts in the chart of accounts that would apply either
partially or fully to the provision of competitive products. Moreover,
as the Postal Service recognizes, a simplified approach is appropriate
under section 2011. Id. at 41.
To assess the merits of the simplified method, the Commission,
using the Postal Service's FY 2007 Annual Compliance Report (ACR) and
the September FY 2007 National Consolidated Trial Balance, assigned
over $2.1 billion of assets to the theoretical competitive products
enterprise. The following is illustrative of the Commission's
analysis.\27\
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\27\ Worksheets supporting the allocation analysis are in
Library Reference 1, Commission allocation of USPS Assets and
Liabilities at tab ``assets''.
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The Cost Segments and Components report provides depreciation costs
for Mail Processing Equipment, Motor Vehicles, Buildings, and Leasehold
Improvements attributed to the products. Major property assets can be
assigned to the competitive products enterprise using the ratio of
depreciation costs attributed to competitive products to total
depreciation costs. Furthermore, under the reasonable assumption that
revenues from the sales of particular products will generate either
cash or a receivable account, which will eventually become cash, many
of the current assets--such as the cash and cash equivalents and
accounts receivables--could be allocated to competitive products using
the ratio of competitive products revenues to total revenues. The
assets for supplies, advances, and prepayments can be assigned using
cost drivers derived from the expense accounts for those assets.
Additionally, there are several asset accounts described in the
Postal Service's chart of accounts devoted exclusively to competitive
products.\28\ These assets would be wholly assigned to competitive
products.
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\28\ For example, account 13264 is Foreign Country Receivable--
International Express Mail and is used to record receivables from
foreign countries for International Express Mail.
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2. Liabilities
Treasury notes that many of the same assignment techniques used to
allocate assets would also be applicable to liabilities. Treasury
Report at 26. For example, the current liability accrued compensation
and benefits could be partially assigned to competitive products using
the ratio of competitive products labor costs to total attributable
labor costs. A minimal amount of analysis of the liability accounts for
payables and customer deposit accounts would be needed to determine the
liability accounts that are specific to competitive products.\29\ Some
non-current liabilities could also be
[[Page 54473]]
allocated to competitive products using the applicable attributable
costs as a basis for the distribution key (e.g., workers' compensation,
repriced annual leave, and leasehold improvements depreciation costs).
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\29\ One such account that would be specific to competitive
products would be account number 25311.055, Expedited Mail Advance
Deposit.
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Using the FY 2007 ACR and the FY 2007 National Consolidated Trial
Balance, the Commission was able to estimate over $1.8 billion of
liabilities for competitive products.\30\
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\30\ Worksheets supporting the allocation analysis are in
Library Reference 1, Commission allocation of USPS assets and
Liabilities at tab ``liabilities.''
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While the proposed rules will require the production and filing of
a balance sheet for competitive products, the methodology for assigning
assets and liabilities is not specified therein. See proposed rules
3060.14 and 3060.30. The methods used to develop the Commission's
estimates are illustrative. Nonetheless, these methods are reasonably
related to relevant cost drivers. Any method employed by the Postal
Service should be as well and must be based on the same costing
methodology used to produce the report required by 39 CFR part 3050.
Additionally, the proposed rules provide the Postal Service 12 months
to develop an analysis of the asset and liability accounts in the
general ledger to be able to formulate a logical and reasonably
accurate assignment methodology.
IV. Calculation of an Assumed Federal Income Tax
The PAEA requires the Postal Service to calculate an assumed
Federal income tax on competitive products income. Section 2011(h)
provides minimal guidance as to how that assumed Federal income tax
should be computed. It directs the Commission to ``provide for the
establishment and application of the substantive and procedural rules''
to be followed in determining the annual assumed Federal income tax on
competitive products within the meaning of section 3634. 39 U.S.C.
2011(h)(2)(B)(i)(II).
Section 3634 outlines the basis for calculating an assumed Federal
income tax. First, it defines the term ``assumed Federal income tax on
competitive products income'' to mean ``the net income tax that would
be imposed by chapter 1 of the Internal Revenue Code of 1986 (IRC) on
the Postal Service's assumed taxable income from competitive products
for the year[.]'' 39 U.S.C. 3634(a)(1). Second, it defines the term
``assumed taxable income from competitive products'' to mean:
[t]he amount representing what would be the taxable income of a
corporation under the Internal Revenue Code of 1986 for the year,
if--
(A) The only activities of such corporation were the activities
of the Postal Service allocable under section 2011(h) to competitive
products; and
(B) The only assets held by such corporation were the assets of
the Postal Service allocable under section 2011(h) to such
activities.
Id. 3634(a)(2).
Finally, it requires the assumed tax be ``paid,'' i.e., transferred
from the Competitive Products Fund to the Postal Service Fund, on or
before January 15 of the next subsequent year. Id. 3634(b)-(c).
What follows is a discussion of the concepts the Commission
believes are pertinent to the establishment and application of the
substantive and procedural rules that should govern the assumed Federal
income tax for the theoretical competitive products enterprise.
A. Appropriate Methods of Calculating Tax
In section 2 of its report, Treasury discusses numerous
considerations that influence the calculation of an assumed Federal
income tax on competitive products income. Treasury Report at 11-23. It
identifies two approaches, complex and simplified, that could be used
for this purpose, but notes that they differ ``greatly in the cost,
effort, and method of application.'' Id. at 24. Moreover, although it
endorses a simplified approach, Treasury cautions that that approach,
in particular, ``would require some level of PAEA intent interpretation
and scope determination by the appropriate governance bodies.'' Id.
Treasury discusses three methods to arrive at a ``simple'' assumed
tax rate. First, Treasury states that the Postal Service could use the
effective C corporation tax rate (currently a maximum of 35 percent)
and apply it to competitive products pretax income. Treasury states
that this approach would put the Postal Service at a disadvantage
because it is unlikely that any of its competitors would ever pay taxes
based on that effective tax rate. Second, Treasury discusses that the
Postal Service could select a set of competitive firms in the private
sector that publish their effective tax rates, determine their weighted
average tax rate, and pay that rate. Treasury points out that finding a
sample of corporations that would be truly comparable to the Postal
Service would be very problematic. Third, Treasury states that the
Postal Service could use as an assumed set tax rate the Congressional
Research Service's most currently reported average effective tax rate
for C corporations (e.g., 26.3 percent for 1993-2002). Id. at 21-23.
No commenter disagrees with Treasury's recommendation that a
simplified approach may be used to calculate the assumed Federal income
tax of the competitive products enterprise. See Postal Service Comments
at 14; Public Representative Comments at 11; UPS Comments at 4; and PSA
Reply Comments at 3.
The Commission agrees that a simplified approach may be used. That
approach, however, must adhere to section 3634(a), which defines the
assumed tax to be ``the net income that would be imposed by chapter 1
of the Internal Revenue Code of 1986[.]'' The simplified approach
recommended by Treasury, which is based on a Congressional Research
Service (CRS) composite figure, would not appear to satisfy the
statutory definition.\31\ The simplified approach proposed by the
Commission applies the effective C corporation tax rate to the
competitive products enterprise's pretax income. See proposed rule
3060.40. Treasury characterizes this approach as viable, but notes it
``puts the [competitive products] enterprise at an income disadvantage
[because] * * * very few C corporations actually pay the effective tax
rate.'' Treasury Report at 22. While it may be true that few C
corporations actually pay the effective tax rate, the assumed Federal
income tax ``paid'' by the theoretical competitive products enterprise
is simply an intra-agency transfer from the Competitive Products Fund
to the Postal Service Fund. Thus, any ``income disadvantage'' under
this approach is more perceived than real.\32\
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\31\ Despite efforts, the Commission was unable to verify the
CRS results or to determine how often they may be updated.
\32\ Moreover, using either of the other simplified approaches
suggested by Treasury would not be without tradeoffs. Using a
composite effective tax rate, whether derived from competitors or
the CRS, would likely require making adjustments for many tax
treatments elected by private companies. For example, the Postal
Service is not subject to foreign, state, or local taxes. Thus,
using a composite effective tax rate could be viewed as giving the
theoretical enterprise an ``income advantage.''
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In lieu of simply applying the effective C corporations' tax rate
to the theoretical competitive products enterprise pretax income, the
Postal Service may elect, under the proposed rules, to avail itself of
various deductions and/or credits under chapter 1 of the IRC. See
proposed rule 3060.40. This option is available to the extent the
Postal Service wishes to use it to reduce the competitive products
enterprise assumed Federal income tax. However,
[[Page 54474]]
because the assumed tax is merely an intra-agency transfer, the Postal
Service lacks the same incentives as private industry, to minimize its
tax payment.
While the Commission is cognizant of concerns over imposing
unnecessary burdens on the Postal Service, it does not believe that
using either of these approaches to calculate the assumed Federal
income tax would be too burdensome or costly. The complexity of
computing the appropriate tax rate and income tax due for the
theoretical competitive products enterprise under chapter 1 of the IRC
is largely determined by the specific tax treatments the Postal Service
chooses to apply. The Postal Service may make adjustments to
competitive products taxable income and assumed taxes due by availing
itself of certain deductions and/or credits available under chapter 1
of the IRC. Yet taking some of these available deductions and credits
to reduce taxable income or taxes due is optional. The Postal Service
may choose to take any or all appropriate deductions and/or credits
under chapter 1 of the IRC; however, the costs of attempting to reduce
the transfer payment must be weighed against the benefits. See PSA
Reply Comments at 3, suggesting that any expenditure to reduce the
assumed tax payment would represent a net loss to the Postal Service.
B. Specific Issues Concerning the Competitive Products Tax Liability
Treasury states, ``[t]ax law requires detailed accounting data for
revenue and cost accruals/deferrals and asset-type specific
depreciation methods in order to determine their applicability for tax
treatment.'' Treasury Report at 27.
However, because the assumed Federal income tax is an intra-agency
transfer and not an actual tax payment, certain simplifying assumptions
and calculations can be made that will lessen the burden for the Postal
Service while promoting fairness among the Postal Service and its
competitors. Specific recommendations regarding tax issues are
discussed below.
Timing of the competitive products enterprise taxes. The question
of timing arises in two contexts. First, what ``year end'' should be
applied each year for purposes of computing the assumed Federal income
tax for competitive products and transferring that tax amount, if any,
to the Postal Service Fund? Second, in what year should the first
assumed Federal income tax be calculated for the competitive products
enterprise.
Year end should be Postal Service fiscal year end September 30.
Chapter 1 of the IRC allows a domestic C corporation to use any year
end it chooses. 26 U.S.C. 441(b) and (e). Viewing the competitive
products enterprise as akin to a domestic C corporation and given that
the Postal Service's annual financial statements are provided on a
September 30 fiscal year basis, the competitive products enterprise
income tax return should be prepared on a September 30 year-end basis
as well. Using this approach meets the requirement of the computation
of an assumed Federal income tax under the PAEA while maximizing
efficiency and minimizing costs for the Postal Service. No re-
configuring of data related to non-conforming year ends is needed to
compute the assumed Federal income tax. In addition, this approach is
consistent with the statutory requirement that the transfer of the
assumed Federal income tax, if any, from the Competitive Products Fund
to the Postal Service Fund is due by January 15 following the close of
the tax year (fiscal year end September 30). 39 U.S.C. 3634(c).
First fiscal year should be 2008. Section 3634 states that ``[t]he
Postal Service shall, for each year beginning with the year in which
occurs the deadline for the Postal Service's first report to the Postal
Regulatory Commission under section 3652(a) * * * compute its assumed
Federal income tax on competitive products income for such year * * *
39 U.S.C. 3634(b). Section 3652 provides that the Postal Service must
provide annual reports on costs, revenues, rates, and service to the
Commission ``no later than 90 days after the end of each year[.]'' 39
U.S.C. 3652. The Postal Service voluntarily submitted its first annual
report (for fiscal year 2007) under 39 U.S.C. 3652 on December 28,
2007. It follows that the first assumed Federal income tax computation
must be made by the Postal Service for fiscal year ending September 30,
2008.
This would mean that according to 39 U.S.C. 3634(c), the transfer
of the competitive products income tax due, if any, would have to be
made by January 15, 2009. However, as explained above, the Commission
expects final rules for the assumed Federal income tax computation to
be completed no earlier than December 19, 2008. Therefore, a January
15, 2009 deadline does not appear to be reasonable. Hence, a one-time
6-month extension for computing and transferring the assumed Federal
income tax will be allowed for the fiscal year ending September 30,
2008, which means that the computation and transfer must be completed
by July 15, 2009. The computation and transfer for the assumed Federal
income tax for fiscal year ending September 30, 2009 will be due on
January 15, 2010.
Assuming that fiscal year 2008 is the first year of the tax
computation for the theoretical competitive products enterprise and
transfer payment to the Postal Service Fund, the issue arises as to
whether income deferred from fiscal year 2007 relative to competitive
products activities should be included in the theoretical competitive
products enterprise taxable income. In order to match income and
expenses for a given year, the Commission believes that the income
deferred from fiscal year 2007 should not be included in the tax
computation for fiscal year 2008. Therefore, the Commission recommends
backing out of income for fiscal year 2007 deferrals related to
competitive products.
A similar issue arises with regard to deferred gains on installment
sales of real estate. The Commission believes that this income should
not be included in the tax computation for the theoretical competitive
products enterprise for fiscal year 2008. The Postal Service should
also back out those amounts of taxable income related to competitive
products for any taxable year that sales proceeds were collected.
No quarterly estimated taxes. A domestic corporation would normally
be required to pay estimated taxes on its projected income four times a
year. 26 U.S.C. 6655. The complexity of accurately estimating such
quarterly estimated corporate tax payments involves considerable time,
effort, and cost. From the Commission's point of view, the PAEA's
explicit requirement of a January 15 transfer of the assumed Federal
income tax from the Competitive Products Fund to the Postal Service
Fund (without requiring any other payment or transfer in the statute)
indicates that quarterly payments were not intended by the drafters of
the legislation. Also, since 26 U.S.C. 6655 requires quarterly tax
payments for corporations is not in chapter 1 but in chapter 68 of the
IRC, and the PAEA requires computing the hypothetical competitive
products income tax under chapter 1 of the IRC, estimated tax payments
and their related computations are not actually required under the
PAEA. Hence, no computation or payment of estimated taxes is required.
No state, local, and foreign taxes. It is apparent that under 39
U.S.C. 3634 only the computation and transfer of an assumed ``Federal''
income tax by the Postal Service is required. In fact, section 3634 is
titled ``Assumed Federal income tax on competitive products income.''
The Postal Service will not be
[[Page 54475]]
required to make a transfer payment from the Competitive Products Fund
to the Postal Service Fund for state, local, or any foreign taxes.\33\
Consequently, no deduction or credit for any assumed foreign, state, or
local tax will be available to the Postal Service.
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\33\ See also Federal Trade Commission's Accounting for Laws
that Apply Differently to the USPS and its Private Competitors,
December 2007, p. 26.
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Net operating losses. Chapter 1 of the IRC permits a Net Operating
Loss (NOL) to be carried back two years and forward 20 years. 26 U.S.C.
172(b). A carryback of a competitive products NOL resulting in the
refund of previously transferred tax remittances to the Postal Service
Fund will be allowed and should not be viewed as a prohibited cross-
subsidy by market dominant products of competitive products. It should
instead be seen as the same type of tax treatment any Postal Service
competitor would be permitted to claim under chapter 1 of the IRC.\34\
26 U.S.C. 172. In its comments, Valpak specifically supports the
carryforward of a NOL for competitive products. It states, ``[t]o the
extent that competitive products share in any reported loss by the
Postal Service as a whole * * * no income tax should be payable, and
losses reported for the Competitive Products Fund should have the same
carry-forward privilege as in the private sector.'' Valpak Comments at
8. The Commission concludes that a two-year carryback and a 20-year
carryforward of NOLs per chapter 1 of the IRC are permissible. It
should be noted, however, that the two-year carryback is optional and
may be waived by the Postal Service under 26 U.S.C. 172(b)(3).
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\34\ The following example is illustrative of the possible use
of NOLs for the theoretical competitive products enterprise tax
liability computation: In fiscal year 2008 and 2009, the competitive
products enterprise earned $150,000,000 in taxable income and
transferred $40,000,000 in assumed Federal income tax from the
Competitive Products Fund to the Postal Service Fund. Then in 2010
the competitive products enterprise registered a loss of
$60,000,000. A $60,000,000 NOL carryover would be appropriate and
should not be viewed as a cross-subsidy by market dominant products
of competitive products, since the carryback would not exceed the
total income reported. This would be the same tax treatment that
would be available to any regular domestic corporation under section
172 of chapter 1 of the Internal Revenue Code. Only if losses
exceeded the past or future income would a refund not be
appropriate.
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Accrual method. The accrual method of tax accounting is the
appropriate method to be used for the theoretical competitive products
enterprise because of the level of gross receipts it generates and the
activities it performs. Generally, the cash method of accounting for
tax purposes is only available to entities that generate less than $5
million in gross revenue. 26 U.S.C. 448. Competitive products generated
almost $8 billion in gross revenue in fiscal year 2007.\35\ Using the
accrual method will also conform to the Postal Service's current
financial accounting method,\36\ which would minimize any necessary
changes to the existing cost systems.
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\35\ It should be noted that while the activities performed by
the theoretical competitive products enterprise are primarily
services, they are not personal services as defined in Treasury
Regulation 1.448-1T(e)(4) (law, accounting, health, engineering,
architecture, actuarial, performing arts or consulting).
\36\ United States Postal Service Annual Report 2007, Note 2, at
44.
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Elections for competitive products. The Commission agrees with
Treasury that certain first-year and other elections should be deemed
to have been made for the theoretical competitive products enterprise
including recurring item exception, rotable spare part treatment for
supplies and repairs,\37\ section 266 election for capitalizing
interest expense related to construction, and the election to defer
revenue from services to be performed the next year according to
Revenue Procedure 2004-34. Treasury Report at 23.
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\37\ See id. at 44.
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Deductions available to competitive products. The Commission
discusses below selected deductions that may be available to the Postal
Service with regard to competitive products. Other deductions may also
be available. Their omission from the following discussion does not
preclude the Postal Service from adopting them if appropriate. The
Postal Service may elect to forgo deductions and apply the applicable
tax rate under the IRC to its net income instead.
Adjustments for depreciation of assets. The tax law pursuant to 26
U.S.C. 362 would normally require the basis of contributed assets to a
business organization to be computed on a tax basis.\38\ However, the
re-computation of depreciation for Postal Service assets assigned to
the competitive products enterprise could be extremely complex, costly,
and burdensome. The Commission concludes that for simplicity purposes,
the competitive products assets deemed to be transferred to the
theoretical competitive products enterprise should be considered to be
transferred at their book basis (original cost plus improvements net of
financial/cost accounting depreciation). Therefore, the Commission
recommends that for all assets placed into service prior to October 1,
2007, the historical basis, in conformance with the existing Postal
Service cost accounting system, should be used. Future depreciation of
those assets put into service prior to October 1, 2007, and any
subsequent sales gain or loss computation of those assets should be at
their historical cost and in conformance with the existing financial
accounting depreciation basis. The allowable depreciation for these
assets for tax purposes will be captured in the attributable costs of
competitive products. For assets placed in service beginning on or
after October 1, 2007, tax depreciation in accordance with the IRC may
be used.
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\38\ The tax basis would be the original cost of the assets less
the depreciation taken for tax purposes in previous years. Tax
depreciation is normally greater than book depreciation.
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Leasehold improvements placed in service after December 31, 1986 by
a lessee should be depreciable over the life of the real estate that
they have improved which generally means either 31\1/2\ years or 39
years. When a lease terminates, whatever adjusted basis is remaining
may be written off at that time. If the improvements were made before
1987, then the shorter of the lease term or the useful life of the
property is the depreciation term. For simplicity purposes, the
Commission believes that it would be appropriate for the financial
statement amortization of leasehold improvements to be deductible for
tax purposes as long as the assets were placed in service before
October 1, 2007. Any leasehold improvements placed in service on or
after October 1, 2007 should be depreciated according to the IRC.
For tax purposes, the theoretical competitive products enterprise
should not be viewed as a government entity, but as a regular taxable
corporate entity. Therefore, assets allocated to the theoretical
competitive products enterprise should not be considered government
property, which would normally be subject to section 168(g)'s slower
and longer depreciation method.
Alternative minimum tax. Because the Alternative Minimum Tax (AMT)
sections \39\ are part of chapter 1 of the IRC, the AMT and the
Adjusted Current Earnings (ACE) subsystem \40\ must be considered as
part of the computation of the assumed Federal income tax for the
theoretical competitive products enterprise. Normally, depreciation
would require a significant adjustment as the tax law generally allows
a 200 percent declining balance, while the AMT rules only allow a 150
percent declining balance.\41\ However, under 26 U.S.C. 55(e)(2)(A),
only newly acquired assets will be subject to the AMT, and therefore,
the AMT computations
[[Page 54476]]
should be relatively simple. Further, if property is depreciated using
the 26 U.S.C. 168(k) bonus depreciation (15-year life), no AMT
adjustment is required for the depreciation component. The Postal
Service should create a spreadsheet of the portion of assets allocated
to the competitive products that were placed in service post September
30, 2007, and compute the difference between the regular tax and the
AMT depreciation. However, no such AMT adjustment is required for real
estate, intangibles, or leasehold improvements.
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\39\ 26 U.S.C. 53-59.
\40\ 26 U.S.C. 56(g).
\41\ 26 U.S.C. 56(a)(1).
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Capital and operating leases. The Postal Service should determine
if its cost accounting systems have sufficient information available to
distinguish capital leases from operating leases. In the case of
operating leases, a deduction of rent expenses paid or accrued is
allowed. In the case of capital leases, the lessor is the seller of the
property on an installment basis. With regard to leases, the rules for
tax purposes are slightly different than the rules for financial
statement purposes. Chapter 1 of the IRC utilizes the guidelines in
Revenue Ruling 55-540 for determining if a lease is an operating or
capital lease.
The Commission recommends that given the number of leases the
Postal Service has outstanding and the time it would take to analyze
all those lease agreements that only the portion of leases related to
competitive products and entered into post September 30, 2007 should be
subject to potential adjustment for tax purposes.
Health benefits. Health benefit costs are incurred by the Postal
Service for both current employees and retirees. For purposes of the
theoretical competitive products enterprise, the Federal Employees'
Health Benefit Plan, which covers substantially all Postal Service
employees, is the equivalent of a qualified funded Welfare Benefit
Program. Therefore, the Postal Service's annual portion of the
allocated costs related to the theoretical competitive products
enterprise for fiscal year 2008 and later years are deductible.
Similarly, the Postal Service's annual portion of the allocated retiree
health benefit costs related to competitive products for fiscal year
2008 and later years are deductible. These costs are already reflected
in the attributable costs so no adjustments to book income are
necessary.
Pension plan costs. Postal Service employees participate in one of
three government retirement programs depending on their date of
hire.\42\ The IRC contains a large number of complex rules and
requirements for qualified pension plans. Among them are participation
requirements, limits on annual benefits, and non-discrimination rules
to prevent terms which favor highly compensated employees. There are
also rules covering minimum funding standards and ceilings on
deductions for contributions to the pension and annuity plans. In some
areas, different rules apply to single employer plans and multi-
employer plans. In general, the minimum funding requirements must cover
the liability for benefit accruals for the current year, as well as
amortization of underfunded benefit accruals earned in prior years. The
Commission concludes that the Postal Service's pension programs would
qualify as the equivalent of qualified pension plans under 26 U.S.C.
401. Accordingly no adjustment to book income is required to determine
taxable income.\43\
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\42\ The three retirement programs are the Civil Service
Retirement System (CSRS), the Dual Civil Service Retirement System/
Social Security (Dual CSRS), or the Federal Employees Retirement
System (FERS). United States Postal Service Annual Report 2007, Note
10, at 49-51.
\43\ This area of Postal Service pension costs and plans should
be revisited starting in 2017 when actuarial calculations required
by section 802 of the PAEA could show an underfunded liability with
respect to the Postal Service employees. Public Law 109-435, 120
stat. 3249, December 20, 2006.
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Workers' compensation costs. In Note 11 to its 2007 financial
statements, the Postal Service states that it pays workers'
compensation costs under a program administered by the Department of
Labor.\44\ This program is not a workers' compensation insurance
program because the Postal Service pays the actual costs for postal
workers injured on the job. The Postal Service estimates and records as
a liability the estimated present value of the amount it expects to pay
in the future for workers incurring job related injuries. Accordingly,
the Postal Service self insures for workers' compensation and for
accounting purposes accrues a liability and a related income statement
expense.
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\44\ United States Postal Service Annual Report 2007 at 51-52.
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For tax purposes, a deduction for self-insured workers'
compensation is allowed in the year in which economic performance
occurs. According to Treasury Regulation 1.461-4(g)(2), ``[i]f the
liability of a taxpayer requires a payment or series of payments to
another person and arises under any workers compensation act * * *,
economic performance occurs as payment is made to the person to which
the liability is owed.'' The regulation contains an example in which a
company enters into a workers' compensation insurance contract with an
unrelated insurance company but must pay the first $5,000 of any
damages. The company is deemed to be self-insured with respect to the
$5,000, and economic performance occurs when the $5,000 is paid to the
person to whom the workers' compensation liability is owed. Id. Example
7.
In computing taxable income, workers compensation liabilities
related to the theoretical competitive products enterprise arising in
fiscal year 2008 and later are deductible when paid to the injured
worker. The Postal Service also pays an administrative fee to the
Office of Workers' Compensation Programs (OWCP) for processing workers'
compensation claims. The fees for fiscal year 2008 and later years
related to the theoretical competitive products enterprise should be
deducted under normal accrual rules.
Available credits. The income tax law has various incentives that
allow a dollar-for-dollar offset or credit against a taxpayer's tax
liability. The purpose of many of these credits is to induce certain
perceived economic or socially positive behaviors. The Commission
believes that several of these credits may be available to the Postal
Service to reduce the hypothetical tax liability of the theoretical
competitive products enterprise under chapter 1 of the IRC. These
credits include, but are not limited to, alternative fuel credit,
targeted employee hiring credits, research and development credits, and
rehabilitation credits. However, the Commission notes that applying any
of the credits is elective. If the Postal Service finds that it would
be too complex and cost prohibitive to compute any or all of the
credits available relative to the competitive products activity, it may
choose not to avail itself of these credits.
V. Periodic Reporting Requirements
Section 2011(h)(2)(B)(i)(III) provides for the submission by the
Postal Service of annual and other periodic reports concerning
competitive products setting forth such information as the Commission
may require. In line with this provision, Treasury recommended that the
Postal Service should ``provide sufficient accounting and financial
statements of operations reporting and supporting information for the
theoretical USPS competitive enterprise.'' Treasury Report at 29.
The Postal Service proposes to use an accounting and reporting
methodology which it claims will satisfy the requirements set forth in
the PAEA and follows closely the recommendations of the Department of
Treasury. Using current GAAP-related accounting and
[[Page 54477]]
costing systems, the Postal Service proposes, as indicated above, to
produce three financial reports on competitive products financial
activities: (1) An Annual Income Report; (2) an Annual Financial Status
Report; and (3) an Annual Identified Property and Equipment Assets
Report. The Postal Service's proposal involves the use of its current
chart of accounts. Id. at 9-11.
As proposed by the Postal Service, the Annual Income Report would
be derived from the data provided in the Annual Compliance Report.
Using the results from the Cost and Revenue Analysis (CRA) report, the
Annual Income Report would provide the total competitive product
revenues less the competitive product attributable costs, competitive
product group specific costs and the required competitive products'
share of total institutional costs (currently set at 5.5 percent) at
the end of each fiscal year. This computation would determine the total
income of competitive products before payment of the assumed Federal
income tax due on competitive products income.
The Commission accepts the Postal Service's proposed Annual Income
Report as the basis of the assumed Federal income tax. The Commission
has developed a format, which is incorporated into the proposed rules
as Table 1. The data in the report should be traceable to the
information supplied by the Postal Service that backs up the annual CRA
report filed as part of the Annual Compliance Report. The Commission
will also require that the Postal Service include as attachments to the
income statement notes that show the source of the revenue and cost
data used to produce the annual income statement and an explanation of
the investments used to produce any investment income. The notes should
also explain the calculation of the assumed Federal income tax and any
special rules or accounting methods used to determine the tax.
The Postal Service's proposed competitive products enterprise
Annual Financial Status Report would report the cumulative annual
income for competitive products, the total financial obligations
(outstanding debt) of competitive products, and the total financial
investments of competitive products. This Annual Financial Status
Report would show the balances at the beginning of the fiscal year, the
annual changes from the prior year, and the ending values for the
fiscal year for income, debt, and investments. The data underlying the
Annual Financial Status Report would be derived from the Competitive
Products Annual Income Report and the accounts reported in the system
of accounts trial balance and the balance sheet of the audited
financial statements. The Postal Service notes that it would identify
the investments and obligations used solely by competitive products
with a unique 3-digit sub-account number attached to the appropriate
accounts in the General Ledger (Chart of Accounts). Id. at 14-16. The
Postal Service would not attempt to allocate a portion of shared
investments and obligations of the competitive products.
The Commission agrees with the Postal Service on the provision of
the Annual Financial Status Report. The cumulative net income (loss) in
the first line of the Financial Status Report is akin to the retained
earnings column in the Statement of Changes in Net Capital as reported
in the annual Consolidated Financial Statements. Additionally, a list
of the obligations (type of obligation including interest rate) and
investments would need to be included in this report.
The Public Representative remarks that the Annual Income Statement
and the Annual Financial Status Report proposed by the Postal Service
would rely on data inputs from the ACR. Public Representative Reply
Comments at 3. It recommends that inputs should be allowed from the ACR
as well as other sources the Commission deems to be appropriate. Id. It
considers this advisable because the Postal Service voluntarily
produced an ACR in 2008 prior to the Commission issuing final
regulations as to what the Postal Service's specific annual reporting
requirements should be. Id. The Commission recommends that all
applicable data, including the ACR data and supporting documents, be
used in compiling the required reports.
Lastly, the Postal Service proposes an Annual Identified Property
and Equipment Assets Report that would list and value any property and
equipment used specifically to provide competitive products. The Postal
Service notes that currently there are no identifiable assets that can
be specifically associated with competitive products. However, that
does not preclude competitive product assets from being added in the
future. The Postal Service proposes to use specific finance numbers (7-
digit numbers associated with facilities or operational units) to
identify assets used exclusively for competitive products. The Postal
Service, however, only proposes assigning finance numbers if they
decide to establish separate units for processing, transportation,
delivery, or administrative functions for competitive products. Postal
Service Comments at 17-18. Again, it does not propose to allocate a
portion of shared assets to competitive products.
The Public Representative suggests that the Postal Service should
be required to file an Annual Identified Property and Equipment Assets
Report regardless of whether the Postal Service has identifiable assets
that can be specifically associated with competitive products for any
given year. Public Representative Comments at 4. It recommends that if
no such assets can be reliably identified the report could be called
``Statement in Lieu of Asset Report.'' Id. The Commission supports this
suggestion.
Formats for the Financial Status Report and the Annual Identified
Property and Equipment Asset Report as developed by the Commission are
incorporated into the proposed rules as Tables 2 and 3.
The PAEA requires valuation of both assets and liabilities. In its
initial comments, the Postal Service contends:
The annual income statement for Competitive Products will
therefore be based on an allocation of total accrued revenues and
accrued expenses to the competitive products, which, in turn, are
based on economic and statistical analyses. Cash inflows from
postage sales, meter settings, and trust account deposits cannot be
identified by the product or service. Cash outflows for salaries and
benefits, transportation, equipment, and other purchases pay for
services and assets used by all products, and they cannot be
identified by the product or service provided using the resource.
There is no way, short of establishing a physically separate
business entity with its own retail windows, labor force, and
network, to create a balance sheet and track cash flows for
competitive products.
Postal Service Comments at 8 (emphasis in original).
However, as discussed in detail above, it is possible to make a
reasonable assignment of assets and liabilities to competitive products
each year, and create a pro forma balance sheet, based on the same
allocations of total accrued revenues and expenses used in the annual
income statement. While the balance sheet will not be in strict
compliance with generally accepted accounting principles, it will
increase transparency and facilitate calculation of the assumed Federal
income tax. The Commission believes that calculating and reporting just
the assets allocable to competitive products will result in a distorted
view of the strength of the competitive products enterprise.\45\ The
balance sheet can be
[[Page 54478]]
constructed using ratios of revenues and attributable costs that are
tied to the assets and liabilities. The format for the balance sheet
will follow the current format for the consolidated Postal Service
balance sheet and will be incorporated into the proposed rule.
---------------------------------------------------------------------------
\45\ Moreover, beginning in FY 2010, Postal Service financial
reports must include segment reporting, i.e., a requirement that the
Postal Service address the activities of its market dominant and
competitive products business segments. See 39 U.S.C. 3654(b)(3)(A).
---------------------------------------------------------------------------
VI. Section-by-Section Analysis of the Proposed Rules
Below, the Commission provides a concise description of each rule
designed to assist commenters in understanding the scope and nature of
the proposed rules.
Rule 3060.1 Scope. This provision sets forth the scope of the
Postal Service's obligation with regard to the assumed Federal income
tax due on competitive products income. On an annual basis, the Postal
Service must calculate the assumed Federal income tax on competitive
products income and transfer any tax due from the Competitive Products
Fund to the Postal Service Fund.
Rule 3060.10 Costing. This proposed rule defines income subject to
tax as competitive products revenue minus competitive products costs.
Competitive products costs are defined as volume-variable costs plus
product-specific costs plus group specific costs plus assigned share of
institutional costs. All costs are to be calculated using the
methodologies most recently approved by the Commission.
Rule 3060.11 Valuation of Assets. This proposed rule sets forth the
basis for assigning assets to the theoretical competitive products
enterprise.
Rule 3060.12 Asset Allocation. This proposed rule requires the
Postal Service to allocate all assets between competitive and market
dominant products within 12 months of the effective date of the rule
and to use these allocations to prepare the balance sheet required by
rule 3060.30.
Rule 3060.13 Valuation of Liabilities. This proposed rule requires
the Postal Service to allocate all liabilities between competitive and
market dominant products within 12 months of the effective date of the
rule and to use these allocations to prepare the balance sheet required
by rule 3060.30.
Rule 3060.14 Competitive Products Balance Sheet. This proposed rule
directs the Postal Service to prepare a competitive products balance
sheet no later than FY 2010.
Rule 3060.20 Reports. This proposed rule sets forth the accounting
procedures to be used for reporting on the theoretical competitive
products enterprise. It sets the deadline for filing the reports at
January 15; requires that each report include workpapers citing all
numbers to primary sources and notes that provide summary descriptions
of computations used, assumptions made, and other relevant information;
specifies the books of accounts and data collection systems to be used;
and requires the Postal Service to use the same accounting practices
for future reports as approved by the Commission in its review of the
January 15, 2009 reports unless changed by the Commission. The proposed
rule also specifies the procedures which the Postal Service must use
for any proposed changes in accounting practices.
Rule 3060.21 Income Report. This proposed rule requires the Postal
Service to file an income report for the theoretical competitive
products enterprise and specifies the form and content of the report.
Rule 3060.22 Financial Status Report. This proposed rule requires
the Postal Service to file a report showing changes in net income,
financial obligations, and financial investments for the theoretical
competitive products enterprise and specifies the form and content of
the report.
Rule 3060.23 Identified Property and Equipment Assets Report. This
proposed rule requires the Postal Service to file a report showing net
book value for assets devoted to the theoretical competitive products
enterprise and specifies the form and content of the report.
Rule 3060.24 Competitive Products Fund Report. This proposed rule
requires the Postal Service to file with the Commission a copy of the
report filed with the Secretary of the Treasury pursuant to 39 U.S.C.
2011(i)(1).
Rule 3060.30 Pro Forma Balance Sheet. This proposed rule requires
the Postal Service to file a report showing how total assets and
liabilities of the Postal Service are allocated to the theoretical
competitive products enterprise and specifies the form and content of
the report.
Rule 3060.31 Initial Filing. This proposed rule sets the date for
filing the first pro forma balance sheet at January 15, 2010, a year
later than for other reports.
Rule 3060.40 Calculation of the Assumed Federal Income Tax. This
proposed rule addresses how the assumed Federal income tax must be
calculated and discusses the timing of such calculations. The proposed
rule states that the assumed Federal income tax on competitive products
income must be calculated in compliance with chapter 1 of the IRC. A
calculation under chapter 1 of the IRC requires the computation of the
competitive products' assumed tax liability at either the section 11
(regular) or section 55(b)(1)(B) (AMT) tax rates, as applicable. The
provision further provides that no estimated taxes need to be
calculated or paid and also states that no state, local, or foreign
taxes need to be calculated or paid.
With regard to the timing of the calculation of the assumed Federal
income tax, the proposed rule provides that the end of the fiscal year
for the calculation of the tax shall be September 30 (which coincides
with the Postal Service's regular fiscal year end). The provision
further requires that the assumed Federal income tax must be calculated
by January 15 of the following year.
Rule 3060.41 Supporting Documentation. This proposed rule specifies
the underlying details that the Postal Service must provide to support
its calculation of tax liability under rule 3060.40.
Rule 3060.42 Commission Review. This proposed rule states that the
Commission will review the documentation submitted under rule 3060.41
and issue an order on its findings by July 15. The proposed rule also
states that the Commission may order the Postal Service to cure or
explain any errors, omissions, or other deficiencies discovered within
3 years of a filing pursuant to rule 3060.40.
Rule 3060.43 One-Time Extension. The proposed rule allows for a
one-time extension of 6 months, until July 15, 2009, for the
calculation of the assumed Federal income tax due for fiscal year end
September 30, 2008.
Rule 3060.44 Annual Transfer from Competitive Products Fund to the
Postal Service Fund. This proposed rule provides a ``payment'' method
for the assumed Federal income tax due on competitive products' income.
On an annual basis, the Postal Service must transfer the assumed
Federal income tax due on competitive products income from the
Competitive Products Fund to the Postal Service Fund. As long as a tax
is actually due, it must be transferred to the Postal Service Fund no
later than January 15 of the year following the close of the fiscal
year. As with the calculation in proposed rules 3060.40 and 3060.43, a
one-time 6-month extension, until July 15, 2009, is granted for the
transfer of the assumed Federal income tax due for fiscal year end
September 30, 2008.
[[Page 54479]]
Under this proposed rule, if competitive products' assumed taxable
income for a given fiscal year is negative, the Postal Service is not
required to pay a tax for that year, but may be entitled to claim a
loss. If a payment was made to the Postal Service Fund in the previous
year, the Postal Service may transfer the lesser of (1) the amount paid
into the Postal Service Fund in the past 2 years, or (2) the amount of
the loss to the Postal Service Fund. This transfer must also be made no
later than January 15 of the year following the end of the fiscal year.
If, however, no payment was made into the Postal Service Fund in the
previous 2 years, the loss may only be carried forward and offset
against any calculated assumed Federal income tax on competitive
products income for the following 20 years.
VII. Proposed Rules [see below]
VIII. Ordering Paragraphs
It is Ordered:
1. Docket No. RM2008-5 is established for the purpose of receiving
comments on the Commission's proposed rules under the Postal
Accountability and Enhancement Act regarding the accounting practices
and principles to be followed by the Postal Service as well as the
substantive and procedural rules for determining the assumed Federal
income tax on competitive products income.
2. Interested persons may submit initial comments no later than 30
days from the date of publication of this Notice in the Federal
Register.
3. Reply comments may be filed no later than 45 days from the date
of publication of this Notice in the Federal Register.
4. Patricia A. Gallagher is designated as the Public Representative
representing the interests of the general public in this proceeding.
5. The Secretary shall arrange for publication of this Notice in
the Federal Register.
List of Subjects in 39 CFR Part 3060
Administrative practice and procedure, Postal Service, Reporting
and recordkeeping requirements.
By the Commission.
Issued September 11, 2008.
Steven W. Williams,
Secretary.
For the reasons stated in the preamble, under the authority at 39
U.S.C. 503, the Postal Regulatory Commission proposes to amend 39 CFR
chapter III by adding part 3060 to read as follows:
PART 3060--ACCOUNTING PRACTICES AND TAX RULES FOR THE THEORETICAL
COMPETITIVE PRODUCTS ENTERPRISE
Sec.
3060.1 Scope.
3060.10 Costing.
3060.11 Valuation of Assets.
3060.12 Asset Allocation.
3060.13 Valuation of Liabilities.
3060.14 Competitive Products Enterprise Balance Sheet.
3060.20 Reports.
3060.21 Income Report.
3060.22 Financial Status Report.
3060.23 Identified Property and Equipment Assets Report.
3060.24 Competitive Products Fund Report.
3060.30 Pro Forma Balance Sheet.
3060.31 Initial Filing.
3060.40 Calculation of the Assumed Federal Income Tax.
3060.41 Supporting Documentation.
3060.42 Commission Review.
3060.43 Annual Transfer from Competitive Products Fund to Postal
Service Fund.
Authority: 39 U.S.C. 503; 2011; 3633; 3634.
Sec. 3060.1 Scope.
The rules in this part are applicable to the Postal Service's
theoretical competitive products enterprise developed pursuant to 39
U.S.C. 2011 and 3634 and to the Postal Service's obligation to
calculate annually an assumed Federal income tax on competitive
products income and transfer annually any such assumed Federal income
tax due from the Competitive Products Fund to the Postal Service Fund.
Sec. 3060.10 Costing.
(a) The assumed taxable income from competitive products for the
Postal Service's theoretical competitive products enterprise for a
fiscal year shall be based on total revenues generated by competitive
products during that year less the costs identified in paragraph (b) of
this section calculated using the methodology most recently approved by
the Commission.
(b) The net income for the Postal Service's theoretical competitive
products enterprise shall reflect the following costs:
(1) Attributable costs, including volume variable and product
specific costs;
(2) Group specific costs defined as those costs incurred in the
provision of competitive products as a whole, which cannot be causally
related to any specific competitive product; and
(3) The appropriate share of institutional costs assigned to
competitive products by the Commission pursuant to 39 U.S.C.
3633(a)(3).
Sec. 3060.11 Valuation of Assets.
For the purposes of 39 U.S.C. 2011, the total assets of the Postal
Service theoretical competitive products enterprise are the greater of:
(a) The percentage of total Postal Service revenues and receipts
from competitive products times the total net assets of the Postal
Service, or
(b) The net assets related to the provision of competitive products
as determined pursuant to Sec. 3060.12.
Sec. 3060.12 Asset Allocation.
Within 6 months of the effective date of these rules, and for each
fiscal year thereafter, the Postal Service will develop the net assets
of the theoretical competitive products enterprise as follows:
(a) Identify all asset accounts within the Postal Service's Chart
of Accounts used solely for the provision of competitive products.
(b) Identify all asset accounts within the Postal Service's Chart
of Accounts used solely for the provision of market dominant products.
(c) The portion of asset accounts in the Postal Service's Chart of
Accounts that are not identified in either paragraphs (a) or (b) of
this section shall be assigned to the Postal Service theoretical
competitive products enterprise using a method of allocation based on
appropriate revenue or cost drivers approved by the Commission.
(d) Within 6 months of the effective date of these rules the Postal
Service shall submit to the Commission for approval a proposed
methodology detailing how each asset account identified in the Chart of
Accounts shall be allocated to the theoretical competitive products
enterprise and provide an explanation in support of each allocation.
(e) If the Postal Service desires to change the methodologies
outlined above, it shall utilize the procedures provided in Sec.
3050.11 of this chapter.
Sec. 3060.13 Valuation of Liabilities.
Within 6 months of the effective date of these rules, and for each
fiscal year thereafter, the Postal Service will develop the liabilities
of the theoretical competitive products enterprise as follows:
(a) Identify all liability accounts within the Postal Service's
Chart of Accounts used solely for the provision of competitive
products.
(b) Identify all liability accounts within the Postal Service's
Chart of Accounts used solely for the provision of market dominant
products.
(c) The portion of liability accounts in the Postal Service's Chart
of Accounts
[[Page 54480]]
that are not identified in either paragraphs (a) or (b) of this section
shall be assigned to the theoretical competitive products enterprise
using a method of allocation based on appropriate revenue or cost
drivers approved by the Commission.
(d) Within 6 months of the effective date of these rules the Postal
Service shall submit to the Commission for approval a proposed
methodology detailing how each liability account identified in the
Chart of Accounts shall be allocated to the theoretical competitive
products enterprise and provide an explanation in support of each
allocation.
(e) If the Postal Service desires to change the methodologies
outlined above, it shall utilize the procedures provided in Sec.
3050.11 of this chapter.
Sec. 3060.14 Competitive Products Enterprise Balance Sheet.
The Postal Service will report the assets and liabilities of the
theoretical competitive products enterprise as computed under
Sec. Sec. 3060.12 and 3060.13 in the format as prescribed under Sec.
3060.30 for each fiscal year starting with FY 2010.
Sec. 3060.20 Reports.
(a) The Postal Service shall file with the Commission each of the
reports required by this part by no later than January 15 of each year.
(b) Each report shall include workpapers that cite all numbers to
primary sources and such other information needed to present complete
and accurate financial information concerning the provision of
competitive products.
(c) Each report shall utilize the same books of accounts and data
collection systems used to produce the report required by part 3050 of
this chapter.
(d) Each report shall include summary descriptions of computations
used, assumptions made, and other relevant information in the form of
notes to the financial statements.
(e) The accounting practices used by the Postal Service in the
reports filed January 15, 2009, as approved by the Commission, shall be
used for all future reports until such time as they may be changed by
the Commission. If the Postal Service desires to change such practices,
it shall utilize the procedures provided in Sec. 3050.11 of this
chapter.
Sec. 3060.21 Income Report.
The Postal Service shall file an Income Report in the form and
content of Table 1, below.
Table 1--Proposed Competitive Products Income Statement
[$ in 000s]
----------------------------------------------------------------------------------------------------------------
% Change from % Change from
FY 20xx FY 20xx-1 SPLY SPLY
----------------------------------------------------------------------------------------------------------------
Revenue:
(1) Mail and Services Revenues.............. $x,xxx $x,xxx $xxx xx.x
(2) Investment Income....................... xxx Xxx xx xx.x
(3) Total Competitive Products Revenue...... x,xxx x,xxx xxx xx.x
Expenses:
(4) Volume-Variable Costs................... x,xxx x,xxx xxx xx.x
(5) Product Specific Costs.................. x,xxx x,xxx xxx xx.x
(6) Group Specific Costs.................... x,xxx x,xxx xxx xx.x
(7) Total Competitive Products Attributable x,xxx x,xxx xxx xx.x
Costs......................................
(8) Net Income Before Institutional Cost x,xxx x,xxx xxx ..............
Contribution...............................
(9) Required Institutional Cost Contribution x,xxx x,xxx xxx x.x
(5.5)......................................
(10) Net Income (Loss) Before Tax........... x,xxx x,xxx xxx ..............
(11) Assumed Federal Income Tax............. x,xxx x,xxx xxx xx.x
(12) Net Income (Loss) After Tax............ x,xxx x,xxx xxx xx.x
----------------------------------------------------------------------------------------------------------------
Line (1): Total revenues from competitive products volumes and Ancillary Services.
Line (2): Income provided from investment of surplus competitive products revenues.
Line (3): Sum total of revenues from competitive products volumes, services, and investments.
Line (4): Total competitive products volume variable costs as shown in the Cost and Revenue Analysis (CRA)
report.
Line (5): Total competitive products volume variable costs as shown in the CRA report.
Line (6): Total competitive products specific fixed costs not attributable to a specific competitive product.
Line (7): Sum total of competitive products costs (sum of lines 4-6).
Line (8): Difference between competitive products total revenues and attributable costs (line 3 less line 7).
Line (9): Minimum amount of Institutional Cost contribution required under 39 CFR 3015.7 of this chapter.
Line (10): Line 8 less line 9.
Line (11): Total assumed Federal income tax as calculated under 39 CFR 3060.40.
Line (12): Line 10 less line 11.
Sec. 3060.22 Financial Status Report.
The Postal Service shall file a Financial Status Report in the form
and content of Table 2, below.
[[Page 54481]]
Table 2--Annual Summary of Competitive Products Financials
----------------------------------------------------------------------------------------------------------------
Beginning Change from
value prior year Ending value
----------------------------------------------------------------------------------------------------------------
(1) Cumulative Net Income (Loss) After Assumed Federal Income Tax...............................................
(2) Total Financial Obligations (List of Financial Obligations).................................................
(3) Total Financial Investments (List of Financial Investments).................................................
----------------------------------------------------------------------------------------------------------------
Line 1: Beginning Value: Sum total of Net Income (Loss) as of October 1 of Reportable Fiscal Year Change from
Prior Year: Amount of Net Income (Loss) of Reportable Fiscal Year Ending Value: Sum of Beginning Value and the
Change from Prior Year.
Line 2: Beginning Value: Sum total of Financial Obligations as of October 1 of Reportable Fiscal Year Change
from Prior Year: Amount of Net Financial Obligations of Reportable Fiscal Year Ending Value: Sum of Beginning
Value and the Change from Prior Year.
Line 3: Beginning Value: Sum total of Financial Investments as of October 1 of Reportable Fiscal Year Change
from Prior Year: Amount of Net Financial Investments of Reportable Fiscal Year Ending Value: Sum of Beginning
Value and the Change from Prior Year.
----------------------------------------------------------------------------------------------------------------
Sec. 3060.23 Identified Property and Equipment Assets Report.
The Postal Service shall file an Identified Property and Equipment
Assets Report in the form and content of Table 3, below.
Table 3--Identified Property and Equipment Assets Report
--------------------------------------------------------------------------------------------------------------------------------------------------------
Finance Asset Asset Accumulated
Finance number location identifier description Cost depreciation Net book value
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total................................................... .............. .............. .............. $x,xxx $x,xxx $x,xxx
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sec. 3060.24 Competitive Products Fund Report.
Within 90 days of the close of each fiscal year the Postal Service
will provide the most recent report of the activity of the Competitive
Products Fund as provided to the Secretary of the Treasury under 39
U.S.C. 2011(i)(1).
Sec. 3060.30 Pro Forma Balance Sheet.
(a) The Postal Service shall file a Pro Forma Balance Sheet in the
form and content of Table 4, below.
Table 4--Competitive Products Pro Forma Balance Sheet
----------------------------------------------------------------------------------------------------------------
FY 20XX FY 20XX-1
Total net assets USPS annual competitive competitive Distributed on
report products products basis of:
----------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents....................... $x,xxx $x,xxx $x,xxx
Net Accounts Receivable......................... x,xxx x,xxx x,xxx
Supplies, Advances, and Prepayments............. x,xxx
Appropriations Receivable--Revenue Foregone..... x,xxx
---------------------------------------------------------------
Total Current Assets........................ x,xxx x,xxx x,xxx
Property and Equipment Buildings................ x,xxx x,xxx x,xxx
Leasehold Improvements.......................... x,xxx x,xxx x,xxx
Equipment....................................... x,xxx x,xxx x,xxx
Land............................................ x,xxx x,xxx x,xxx
Accumulated Depreciation........................ x,xxx x,xxx x,xxx
Construction in Progress........................ x,xxx x,xxx x,xxx
---------------------------------------------------------------
Total Property and Equipment, Net........... x,xxx x,xxx x,xxx
---------------------------------------------------------------
Total Assets............................ x,xxx x,xxx x,xxx
---------------------------------------------------------------
Total Assets Determined from Section x,xxx x,xxx x,xxx
2011(e)(5).........................
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
FY 20XX FY 20XX-1
Total net liabilities USPS annual competitive competitive Distributed on
report products products basis of:
----------------------------------------------------------------------------------------------------------------
Liabilities:
Current Liabilities:
Compensation and Benefits................... $x,xxx $x,xxx $x,xxx
Payables and Accrued........................ x,xxx x,xxx x,xxx
Expenses:
Customer Deposit Accounts................... x,xxx x,xxx x,xxx
Deferred Appropriation and.................. x,xxx
Other Revenue:
Long-Term Portion Capital Lease Obligations. x,xxx x,xxx x,xxx
Deferred Gains on Sales of Property......... x,xxx x,xxx x,xxx
[[Page 54482]]
Contingent Liabilities and Other............ x,xxx
---------------------------------------------------------------
Total Liabilities....................... x,xxx x,xxx x,xxx
----------------------------------------------------------------------------------------------------------------
(b) The Pro Forma Balance Sheet shall detail the analysis and
selection of methods of allocation of total assets and liabilities to
the competitive products.
Sec. 3060.31 Initial Filing.
The due date for filing the initial Pro Forma Balance Sheet is
January 15, 2010.
Sec. 3060.40 Calculation of the Assumed Federal Income Tax.
(a) The assumed Federal income tax on competitive products income
shall be based on the Postal Service theoretical competitive products
enterprise income statement for the relevant year and must be
calculated in compliance with chapter 1 of the Internal Revenue Code by
computing the tax liability on the taxable income from the competitive
products of the Postal Service theoretical competitive products
enterprise at 26 U.S.C. 11 (regular) or 26 U.S.C. 55(b)(1)(B)
(Alternative Minimum Tax) tax rates, as applicable.
(b) The end of the fiscal year for the annual calculation of the
assumed Federal income tax on competitive products income shall be
September 30.
(c) The calculation of the assumed Federal income tax due shall be
submitted to the Commission no later than January 15 next occurring
following the close of the fiscal year referenced in paragraph (b) of
this section, except that a one-time extension of 6 months, until July
15, 2009, shall be permitted for the calculation of the assumed Federal
income tax due for fiscal year end September 30, 2008.
(d) No estimated taxes need to be calculated or paid.
(e) No state, local, or foreign taxes need to be calculated.
Sec. 3060.41 Supporting Documentation.
(a) In support of its calculation of the assumed Federal income
tax, the Postal Service shall file detailed schedules reporting the
Postal Service theoretical competitive products enterprise assumed
taxable income, effective tax rate, and tax due.
(b) Adjustments made to book income, if any, to arrive at the
assumed taxable income for any year shall be submitted to the
Commission no later than January 15 of the following year.
Sec. 3060.42 Commission Review.
(a) The Commission will review the supporting documentation
submitted by the Postal Service pursuant to Sec. 3060.41 and issue an
order either approving the calculation of the assumed Federal income
tax for that tax year or taking such other action as the Commission
deems appropriate, including, but not limited to, directing the Postal
Service to file additional supporting materials.
(b) The Commission will issue such order no later than 6 months
after the Postal Service's filing pursuant to Sec. 3060.40.
(c) Notwithstanding paragraph (b) of this section, if the
Commission determines within 3 years of its submission that the Postal
Service's calculation of an assumed Federal income tax is incomplete,
inaccurate, or otherwise deficient, the Commission will notify the
Postal Service in writing and provide it with an opportunity to cure or
otherwise explain the deficiency. Upon receipt of the Postal Service's
responsive pleading, the Commission may order such action as it deems
appropriate.
Sec. 3060.43 Annual Transfer from Competitive Products Fund to Postal
Service Fund.
(a) The Postal Service must on an annual basis transfer the assumed
Federal income tax due on competitive products income from the
Competitive Products Fund to the Postal Service Fund.
(b) If the assumed taxable income from competitive products for a
given fiscal year is positive, the assumed Federal income tax due,
calculated pursuant to Sec. 3060.40, shall be transferred to the
Postal Service Fund no later than January 15 next occurring following
the close of the relevant fiscal year.
(c) A one-time extension of 6 months, until July 15, 2009, shall be
permitted for the transfer of the assumed Federal income tax due for
fiscal year ending September 30, 2008.
(d) If assumed taxable income from competitive products for a given
fiscal year is negative:
(1) If a payment was made to the Postal Service Fund for the
previous tax year, a transfer equaling the lesser of the amount paid
into the Postal Service Fund for the past 2 tax years or the amount of
the loss shall be made from the Postal Service Fund to the Competitive
Products Fund no later than January 15 next occurring following the
close of the relevant fiscal year; or
(2) If no payment has been made into the Postal Service Fund for
the previous 2 tax years, the loss may be carried forward and offset
against any calculated assumed Federal income tax on competitive
products income for 20 years.
[FR Doc. E8-21985 Filed 9-18-08; 8:45 am]
BILLING CODE 7710-FW-P