54468 Federal Register / Vol. 73, No. 183 / Friday, September 19, 2008 / Proposed Rules 

1Costs 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). 

2The 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. 

3Funds 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). 

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. 

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 

stephen.sharfman@prc.gov. 

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

(2) Authorizes and places limits on 

borrowings (id. 2011(e)(1)–(4)); 2

(3) Requires payments on obligations 

(id. 2011(e)(5)); 3

(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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4Report 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). 

5PRC Order No. 56, Notice and Order Providing 

an Opportunity to Comment on Treasury Report, 

January 28, 2008 (Order No. 56). 

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). 

7Comments of United Parcel Service on the 

Treasury Report, April 1, 2008 (UPS Comments). 

8Comments 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). 

10Comments of the Parcel Shippers Association 

on Treasury Report, April 1, 2008 (PSA Comments). 

11Public Representative’s Comments in Response 

to Commission Order No. 56, April 1, 2008 (Public 

Representative Comments). 

12Reply Comments of the United States Postal 

Service in Response to Order No. 56 and the 

Treasury Report, May 1, 2008 (Postal Service Reply 

Comments). 

13Public Representative Reply Comments in 

Response to Commission Order No. 56, May 1, 2008 

(Public Representative Reply Comments). 

14Reply Comments of the Parcel Shippers 

Association on Treasury Report, May 1, 2008 (PSA 

Reply Comments). 

15Reply Comments of Robert W. Mitchell, May 2, 

2008 (Mitchell Reply Comments). 

16As the Postal Service notes, no commenter 

expresses any material disagreement with the 

recommendations. Postal Service Reply Comments 

at 1. 

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: 

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 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 crosssubsidization 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. 

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. 

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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17See, e.g., Valpak Comments at 3; Public 

Representative Comments at 4; and Pitney Bowes 

Comments at 3–4. 

18The pro forma Balance Sheet is a hypothetical 

statement designed to provide information on the 

assets and liabilities of the hypothetical competitive 

products enterprise. 

19See 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). 

20National Association of Greeting Card 

Publishers v. United States Postal Service, 462 U.S. 

810, 830 (1983). 

product reporting purposes; and a 

simplified income tax approach is 

appropriate.17

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. 

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

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 volumevariable 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 


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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. 

22Regarding 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. 

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. 

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 crosssubsidies 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 marketdominant 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

Id. at 8. 


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24PSA 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. 

25Both 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). 

27Worksheets supporting the allocation analysis 

are in Library Reference 1, Commission allocation 

of USPS Assets and Liabilities at tab ‘‘assets’’. 

28For example, account 13264 is Foreign Country 

Receivable—International Express Mail and is used 

to record receivables from foreign countries for 

International Express Mail. 

29One such account that would be specific to 

competitive products would be account number 

25311.055, Expedited Mail Advance Deposit. 

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

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

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

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. 

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 noncurrent liabilities could also be 


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30Worksheets supporting the allocation analysis 

are in Library Reference 1, Commission allocation 

of USPS assets and Liabilities at tab ‘‘liabilities.’’ 

31 Despite efforts, the Commission was unable to 

verify the CRS results or to determine how often 

they may be updated. 

32Moreover, 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.’’ 

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). 

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

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

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, 


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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 assettype 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 onetime 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 


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33See also Federal Trade Commission’s 

Accounting for Laws that Apply Differently to the 

USPS and its Private Competitors, December 2007, 

p. 26. 

34The 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 crosssubsidy 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. 

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). 

36United States Postal Service Annual Report 

2007, Note 2, at 44. 

37See id. at 44. 

38The 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. 

39 26 U.S.C. 53–59. 

40 26 U.S.C. 56(g). 

41 26 U.S.C. 56(a)(1). 

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. 

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 twoyear carryback is optional and may be 

waived by the Postal Service under 26 

U.S.C. 172(b)(3). 

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. 

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. 

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. 

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 

311⁄2 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 


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42The 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. 43This 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. 44United States Postal Service Annual Report 

2007 at 51–52. 

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. 

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

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. 

For tax purposes, a deduction for selfinsured 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 


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45Moreover, beginning in FY 2010, Postal Service 

financial reports must include segment reporting, 

Continued 

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 


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54478 Federal Register / Vol. 73, No. 183 / Friday, September 19, 2008 / Proposed Rules 

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). 

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. 

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 volumevariable 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. 


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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. 

§ 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. 

§ 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). 

§ 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 § 3060.12. 

§ 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 § 3050.11 of this chapter. 

§ 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 


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54480 Federal Register / Vol. 73, No. 183 / Friday, September 19, 2008 / Proposed Rules 

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 § 3050.11 of this chapter. 

§ 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 §§ 3060.12 and 3060.13 

in the format as prescribed under 

§ 3060.30 for each fiscal year starting 

with FY 2010. 

§ 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 § 3050.11 of this chapter. 

§ 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] 

FY 20xx FY 20xx–1 % Change 

from SPLY 

% Change 

from 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 Costs ................................... x,xxx x,xxx xxx xx.x 

(8) Net Income Before Institutional Cost Contribution ............................. x,xxx x,xxx xxx ........................

(9) Required Institutional Cost Contribution (5.5) ..................................... x,xxx x,xxx xxx x.x 

(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. 

§ 3060.22 Financial Status Report. 

The Postal Service shall file a 

Financial Status Report in the form and 

content of Table 2, below. 


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TABLE 2—ANNUAL SUMMARY OF COMPETITIVE PRODUCTS FINANCIALS

Beginning 

value 

Change from 

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. 

§ 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 number Finance 

location Asset identifier Asset description Cost Accumulated depreciation 

Net book 

value 

Total ......................................................... ........................ ........................ ........................ $x,xxx $x,xxx $x,xxx 

§ 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). 

§ 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

Total net assets 

USPS 

annual 

report 

FY 20XX 

competitive 

products 

FY 20XX–1 

competitive 

products 

Distributed 

on 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 2011(e)(5) .................... x,xxx x,xxx x,xxx 

Total net liabilities 

USPS 

annual 

report 

FY 20XX 

competitive 

products 

FY 20XX–1 

competitive 

products 

Distributed 

on 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 


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54482 Federal Register / Vol. 73, No. 183 / Friday, September 19, 2008 / Proposed Rules 

Total net liabilities 

USPS 

annual 

report 

FY 20XX 

competitive 

products 

FY 20XX–1 

competitive 

products 

Distributed 

on basis of: 

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. 

§ 3060.31 Initial Filing. 

The due date for filing the initial Pro 

Forma Balance Sheet is January 15, 

2010. 

§ 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. 

§ 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. 

§ 3060.42 Commission Review. 

(a) The Commission will review the 

supporting documentation submitted by 

the Postal Service pursuant to § 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 

§ 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. 

§ 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 § 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 


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