[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)).

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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

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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''.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    \29\ One such account that would be specific to competitive 
products would be account number 25311.055, Expedited Mail Advance 
Deposit.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \30\ Worksheets supporting the allocation analysis are in 
Library Reference 1, Commission allocation of USPS assets and 
Liabilities at tab ``liabilities.''
---------------------------------------------------------------------------

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

    \33\ See also Federal Trade Commission's Accounting for Laws 
that Apply Differently to the USPS and its Private Competitors, 
December 2007, p. 26.
---------------------------------------------------------------------------

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

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

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

    \37\ See id. at 44.
---------------------------------------------------------------------------

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

    \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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

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

    \44\ United States Postal Service Annual Report 2007 at 51-52.
---------------------------------------------------------------------------

    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