Accounting and Periodic Reporting Rules, 54468-54482 [E8-21985]

Agencies

• POSTAL REGULATORY COMMISSION

[Federal Register Volume 73, Number 183 (Friday, September 19, 2008)]
[Proposed Rules]
[Pages 54468-54482]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-21985]



[[Page 54467]]

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Part III





Postal Regulatory Commission





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39 CFR Part 3060



Accounting and Periodic Reporting Rules; Proposed Rule

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

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POSTAL REGULATORY COMMISSION

39 CFR Part 3060

[Docket No. RM2008-5; Order No. 106]


Accounting and Periodic Reporting Rules

AGENCY: Postal Regulatory Commission.

ACTION: Proposed rule.

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SUMMARY: The Commission is proposing rules affecting accounting 
practices, an assumed Federal income tax, and periodic reporting for 
the Postal Service's competitive products enterprise. The rules are 
intended to promote transparency and accountability without imposing 
undue burden on the Postal Service. Issuance of this proposal responds 
to a recent law that revised the Postal Service's business model and 
gave the Commission new oversight responsibilities. Comments will 
assist the Commission in developing final rules.

DATES: Initial comments due October 20, 2008; reply comments due 
November 3, 2008.

ADDRESSES: Submit comments electronically via the Commission's Filing 
Online system at https://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\
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    \1\ Costs include costs attributable to competitive products and 
all other costs incurred by the Postal Service to the extent 
allocable to competitive products. Id. 2011(a)(2).
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    (2) Authorizes and places limits on borrowings (id. 2011(e)(1)-
(4)); \2\
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    \2\ The Postal Service is authorized to borrow money and to 
issue such obligations as it deems necessary to provide for 
competitive products, including, for example, entering into 
agreements establishing reserve, sinking, and other funds, regarding 
the use of revenue and receipts of the CPF, and such other matters 
as the Postal Service considers necessary to enhance the 
marketability of such obligations. Id. 2011(e)(1)-(2); see also 
2011(e)(3)-(4) for terms and conditions applicable for such 
obligations.
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    (3) Requires payments on obligations (id. 2011(e)(5)); \3\
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    \3\ Funds for payments on obligations are restricted to 
revenues, receipts, and assets of competitive products. The total 
assets are the greater of (1) assets related to the provision of 
competitive products; or (2) the percentage of total Postal Service 
revenues and receipts from competitive products times the total 
assets of the Postal Service. Id. 2011(e)(5).
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    (4) Accords the CPF the same Federal budgetary treatment as the 
Postal Service Fund (id. 2011(f)); and
    (5) Requires judgments arising out of the provision of competitive 
products to be paid from the CPF (id. 2011(g)).

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B. Treasury Report Recommendations

    On December 19, 2007, as required by 39 U.S.C. 2011(h)(1), the 
Secretary of the Treasury submitted a report to the Commission 
containing recommendations concerning accounting principles and 
practices that should be followed by the Postal Service for identifying 
and valuing assets and liabilities associated with providing 
competitive products, and the substantive and procedural rules for 
determining an assumed Federal income tax on competitive products 
income.\4\ Treasury discusses specific PAEA accounting and Competitive 
Products Enterprise income tax requirements, ultimately recommending an 
accounting approach that it believes ``will best meet these 
requirements, including identifying and valuing the assets and 
liabilities for the CPF and determining the assumed federal income tax 
on the income of the CPF.'' Id. at 1. Treasury endorses the use of a 
simplified income tax calculation, while recognizing that the 
Commission will need to determine the optimum accounting approaches 
that the Postal Service should implement. Id. Treasury concludes its 
introductory comments to the report with the following cautionary 
observation:
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    \4\ Report of the U.S. Department of the Treasury on Accounting 
Principles and Practices for the Operation of the United States 
Postal Service's Competitive Products Fund, December 19, 2007 
(Treasury Report).

    The accounting and income tax approaches described in this 
report should serve as the starting points for such future 
discussions and decisions. Given the size and scope of the [Postal 
Service's] operations as well as the complexity involved in meeting 
the PAEA accounting and other requirements, Treasury believes that 
any necessary changes to the existing [Postal Service] costing and 
other systems should be made incrementally and notes that some may 
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need to be implemented over the long term.

Id. at 1-2.
    As relates to its task of developing recommendations, Treasury 
identifies five PAEA requirements applicable to competitive products:
    1. The prohibition against subsidies by market dominant products 
(sections 3633(a)(1) and 2011(h)(1)(A)(II));
    2. The requirement that each competitive product cover its 
attributable costs (section 3633(a)(2));
    3. The requirement that competitive products collectively cover 
what the Commission determines to be an appropriate share of the Postal 
Service's institutional costs (section 3633(a)(3));
    4. The obligation to annually compute an assumed Federal income tax 
on competitive products income (section 3634(b)(1)); and
    5. The requirement that total assets of the CPF shall be the 
greater of the assets related to the provision of competitive products 
calculated under section 2011(h) or the percentage of total Postal 
Service revenues and receipts from competitive products times the 
Postal Service's total assets (section 2011(e)(5)).

Id. at 31.
    In developing its recommendations, Treasury discusses the Postal 
Service's current costing system, the cost accounting requirements for 
competitive products under the PAEA, and difficulties in calculating an 
assumed Federal income tax on competitive products income. In the end, 
based on its review of various legal, policy, and practical factors, 
Treasury offers nine specific recommendations as follows:
    1. Modify the current cost attribution system to reflect 
competitive products as determined by the Commission;
    2. Create a theoretical, on paper only competitive enterprise, 
assigning to it an appropriate share of total Postal Service costs;
    3. Use currently reported volume variable or marginal costs to 
ensure that competitive products cover their attributable costs, and 
use reported incremental costs to guard against cross-subsidization of 
competitive products by market dominant products;
    4. Adjust competitive products contribution to institutional costs, 
if necessary, once Universal Service Obligation costs have been 
reliably established;
    5. Modify the current cost accounting system to capture the causal 
relationship between market dominant and competitive lines of business 
and their applicable business costs, with remaining costs treated as 
institutional;
    6. Use existing financial data systems as basis for reporting 
competitive products profits with adjustments, as necessary, to 
determine the assumed Federal income tax;
    7. Develop a theoretical competitive products income statement;
    8. Calculate an assumed income tax using a simplified approach, 
preferably using a published, regularly updated tax rate; and
    9. Provide sufficient accounting and financial statements regarding 
the theoretical competitive products enterprise.

Id. at 32-33.

C. Docket No. PI2008-2

    To fulfill its obligations under section 2011(h)(2)(A), the 
Commission initiated Docket No. PI2008-2 to provide interested persons, 
including the Postal Service, an opportunity to comment on Treasury's 
recommendations.\5\ In addition, the Commission solicited parties' 
comments on specific questions related to the Treasury Report.
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    \5\ PRC Order No. 56, Notice and Order Providing an Opportunity 
to Comment on Treasury Report, January 28, 2008 (Order No. 56).
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    Comments were submitted by the Postal Service,\6\ United Parcel 
Service (UPS),\7\ Pitney Bowes, Inc. (Pitney Bowes),\8\ Valpak Direct 
Marketing Systems, Inc. and Valpak Dealers' Association, Inc. 
(Valpak),\9\ Parcel Shippers Association (PSA),\10\ and the Public 
Representative.\11\ Reply comments were submitted by the Postal 
Service,\12\ the Public Representative,\13\ Parcel Shippers 
Association,\14\ and Robert W. Mitchell.\15\ The Commission appreciates 
the commenters' submissions. They have been helpful in developing the 
proposed rules.
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    \6\ Initial Comments of the United States Postal Service in 
Response to Order No. 56 and the Treasury Report, April 1, 2008 
(Postal Service Comments).
    \7\ Comments of United Parcel Service on the Treasury Report, 
April 1, 2008 (UPS Comments).
    \8\ Comments of Pitney Bowes Inc. in Response to Notice and 
Order Providing an Opportunity to Comment on Treasury Report, April 
1, 2008 (Pitney Bowes Comments).
    \9\ Valpak Direct Marketing Systems, Inc. and Valpak Dealers' 
Association, Inc. Initial Comments on Report of the U.S. Department 
of the Treasury on Accounting Principles and Practices for the 
Operations of the United States Postal Service's Competitive 
Products Fund, April 1, 2008 (Valpak Comments).
    \10\ Comments of the Parcel Shippers Association on Treasury 
Report, April 1, 2008 (PSA Comments).
    \11\ Public Representative's Comments in Response to Commission 
Order No. 56, April 1, 2008 (Public Representative Comments).
    \12\ Reply Comments of the United States Postal Service in 
Response to Order No. 56 and the Treasury Report, May 1, 2008 
(Postal Service Reply Comments).
    \13\ Public Representative Reply Comments in Response to 
Commission Order No. 56, May 1, 2008 (Public Representative Reply 
Comments).
    \14\ Reply Comments of the Parcel Shippers Association on 
Treasury Report, May 1, 2008 (PSA Reply Comments).
    \15\ Reply Comments of Robert W. Mitchell, May 2, 2008 (Mitchell 
Reply Comments).
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    The parties' specific comments are discussed below in connection 
with the proposed rules. In general, however, the comments are broadly 
consistent and supportive, in large part, of Treasury's 
recommendations.\16\ While there are differences among the comments, 
there appears to be agreement that a theoretical, on paper only 
enterprise is the only viable construct; the current costing and 
financial reporting systems are suitable as a basis for competitive

[[Page 54470]]

product reporting purposes; and a simplified income tax approach is 
appropriate.\17\
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    \16\ As the Postal Service notes, no commenter expresses any 
material disagreement with the recommendations. Postal Service Reply 
Comments at 1.
    \17\ See, e.g., Valpak Comments at 3; Public Representative 
Comments at 4; and Pitney Bowes Comments at 3-4.
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D. Periodic Reports

    Section 2011(h)(2)(B)(i)(III) provides for the submission of annual 
and other periodic reports containing such information as the 
Commission may require. Pursuant to this provision and consistent with 
Treasury's recommendation (No. 9), the Commission proposes, as part of 
this rulemaking, that the Postal Service submit the following annual 
periodic reports: Income Report, Financial Status Report, Identified 
Property and Equipment Assets Report, and Pro Forma Balance Sheet.\18\ 
Details of the proposed reports are discussed in section V below. If, 
in the future, it appears that additional financial reporting may be 
necessary to preserve an appropriate level of transparency and 
accountability, the Commission will consider requiring additional 
reports.
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    \18\ The pro forma Balance Sheet is a hypothetical statement 
designed to provide information on the assets and liabilities of the 
hypothetical competitive products enterprise.
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    By statute, these reports are also to be filed with Treasury and 
the Postal Service Office of the Inspector General. 39 U.S.C. 
2011(h)(2)(D). In addition, and as a separate matter, the Postal 
Service is obligated to submit a report to Treasury concerning 
operation of the Competitive Products Fund, which shall address, inter 
alia, reserve balances, allocation or distribution of money, and 
liquidity requirements. Id. 2011(i)(1). While a copy of this report is 
to be filed with the Commission, the detailed reporting requirements 
are matters to be addressed by the Postal Service and Treasury.

III. Accounting Practices and Principles

    In developing its recommendations regarding the accounting 
practices and principles that should be followed by the Postal Service 
to identify and value assets and liabilities associated with providing 
competitive products, Treasury focuses on what it characterizes as the 
PAEA's cost accounting requirements, in particular, the requirements of 
section 3633(a). See Treasury Report at 3-10, which sets forth 
Treasury's recommendations 1 through 7. See also id. at 31.
    The Commission's proposed rules regarding accounting practices and 
procedures associated with providing competitive products are similarly 
derived and focus on the costing methodology to be used by the Postal 
Service; methods for valuing assets and liabilities; and the financial 
reporting requirements for the competitive products enterprise. In this 
section, the Commission addresses the accounting principles embodied in 
the proposed rules and, as appropriate, Treasury's related 
recommendations and commenters' suggestions.

A. Competitive Products Fund

    The PAEA requires a separate fund, the Competitive Products Fund, 
to be established for competitive products. The principal purpose of 
the Competitive Products Fund appears to be to ensure that expenses 
related to competitive products are not paid by market dominant 
products. The PAEA, which was implemented in December 2006, 
contemplates a two-year review period under section 2011 to implement 
the accounting practices and tax rules for determining the assumed 
Federal income tax on competitive products income. Although the 
proposed rules will not be effective prior to the end of FY 2008, the 
competitive products enterprise will, as proposed herein, be subject to 
the assumed income tax for that period. Given these timing differences, 
the Commission believes that, as a practical matter, the beginning 
balance of the Competitive Products Fund should reflect the 
contribution to institutional costs made by competitive products in FY 
2007 that exceeded the 5.5 percent required by the rules. Based on the 
FY 2007 Annual Compliance Determination, that amount was $49 
million.\19\
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    \19\ See PRC Annual Compliance Determination, U.S. Postal 
Service Performance Fiscal Year 2007, March 27, 2008, Table IV-A-1 
at 24. The $49 million is calculated as the total contribution to 
institutional costs of competitive products ($1,785.9 million) less 
5.5 percent of the total institutional costs of the Postal Service 
of $31,577.12 million ($1,785.9-($31,577.2 *.055) = $49.1).
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B. Theoretical Enterprise

    The Commission agrees with Treasury's conclusion that the

    [o]nly viable method to begin to address the PAEA requirements 
for competitive products is to establish a theoretical, regulatory 
reporting construct under which the [Postal Service] would `on paper 
only' analytically segregate and identify the revenue and costs 
associated with the competitive products--that is, to treat 
competitive products as if they were sold by a separate, theoretical 
enterprise or corporation that shares economies of scale and scope 
with the market-dominant products.

Treasury Report at 4.
    The Commission accepts Treasury's recommendation (id. at 7) that a 
theoretical enterprise be analytically created by assigning it an 
appropriate share of all Postal Service costs. As Treasury points out 
and no commenter disputes, if this assumption is not made, then 
sophisticated cost modeling of a true stand-alone enterprise would be 
required, an undertaking that would be costly and necessitate numerous 
assumptions that would be difficult to validate. Id. at 6.
    Adopting the virtual enterprise means that financial reporting 
related to competitive products will derive from the accounting and 
data collection systems used for all postal services. While refinements 
may be necessary to account for all activities related to competitive 
products, it would not be economical to require the Postal Service to 
construct entirely new systems solely for competitive products. Just as 
economies of scope can derive from shared equipment and facilities, so 
can economies of scope derive from shared accounting systems. As long 
as existing systems can be adjusted to generate complete and accurate 
information concerning competitive products, using existing systems is 
more economical.

C. Attributable Costs

    Treasury states that ``[t]he volume-variable or marginal product 
costs reported by the [Postal Service] cost system should be used--
after the product definition modification required by PAEA--to ensure 
that the competitive products cover their attributable costs.'' Id. at 
7. This description of attributable costs differs from that 
traditionally used by the Commission which includes both product 
specific and volume variable costs. In reply comments, Mitchell 
proposes that the Commission remove product specific costs from 
attributable costs. He contends that these costs will be captured in 
incremental costs. He reserves the term ``attributable'' for volume 
variable costs alone. Mitchell Reply Comments at 9 and 10.
    The Commission does not accept Treasury's or Mitchell's definition 
that equates volume variable costs with attributable costs because it 
is at odds with the Commission's long-held and judicially approved 
treatment of attributable costs.\20\ The PAEA, which codifies the 
Commission's definition, defines ``cost attributable'' to mean ``the 
direct and indirect postal costs attributable to such product through 
reliably identified causal relationships.'' 39 U.S.C. 3631(b). The 
Commission

[[Page 54471]]

attributes product-specific costs because a causal relationship can be 
established between these costs and the products they are associated 
with. Accordingly, the proposed rules are based on the Commission's 
long-held definition of attributable costs, which forms the basis for 
determining compliance with section 3633(a)(2), the requirement that 
each competitive product covers its attributable costs.
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    \20\ National Association of Greeting Card Publishers v. United 
States Postal Service, 462 U.S. 810, 830 (1983).
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    Valpak, Pitney Bowes, and UPS contend that improvements should be 
made to attributable cost measurement by the Postal Service to more 
accurately measure competitive products costs and to prevent cross-
subsidization of competitive products by market dominant products. 
Valpak Comments at 4-6; UPS Comments at 2-3; and Pitney Bowes Comments 
at 2-4. The Commission agrees that the current costing system should be 
improved to the extent practicable to reflect new products, and used as 
the basis for the attribution of costs to competitive products.
    Regarding data validity, Valpak states that the Commission may want 
to consider establishing minimal acceptable limits for reliability and 
require the Postal Service to meet those limits. While the Commission 
agrees with commenters that accurate cost data are essential, it 
refrains from prescribing specific data validation at this time. Should 
data quality issues arise the Commission may, at its discretion, or at 
the request of an interested party, initiate proceedings to address 
these issues. See 39 U.S.C. 2011(h)(2)(c)(ii).

D. Cost Nomenclature

    Treasury describes what it terms ``line of business'' costs as 
those costs incurred by providing a particular type or line of 
business, i.e., competitive products or market dominant products. 
Treasury Report at 9. The Postal Service equates these costs with group 
specific costs, which it defines as ``costs that are caused by the 
group of competitive products[.]'' Postal Service Comments at 12; see 
also id. at 30. Illustratively, it uses the example of a manager 
responsible for a particular business line, i.e., competitive products. 
Id. at 31-32. This manager's salary and benefits plus those costs for 
any support staff would be included as ``line of business'' costs and 
be borne by competitive products as a group. The Postal Service 
describes the remaining costs as ``enterprise sustaining'' costs, i.e., 
costs not associated with any individual line of business but generated 
in sustaining all lines of business. The Postmaster General's salary 
and benefits are an example of such costs. Id. at 29-37. The Commission 
concludes that ``line of business costs'' are the same as group 
specific costs and ``enterprise sustaining'' costs are the same as 
institutional costs.

E. Incremental Costs

    Treasury defines incremental costs in the following manner:

    In a multi-product firm like [the Postal Service], incremental 
cost is the amount of cost avoided by eliminating a given product. 
The average incremental cost is this dollar figure divided by the 
number of units that are no longer produced. It is also possible to 
compute incremental cost by looking at the additional cost of adding 
a given number of units of a new product to the product line. 
However, the standard incremental cost calculation is based on the 
total cost that would be avoided if the current output of a product 
were reduced to zero and all associated costs with producing the 
product were eliminated.

Treasury Report at 39; see also id. at 3.
    Section 3633(a)(1) prohibits cross-subsidies of competitive 
products by market dominant products. To test for cross-subsidies, 
Treasury recommends that competitive products reported incremental 
costs be used; i.e., that such costs must be less than competitive 
products revenues. Id. at 32; see also id. at 7. Treasury's statements 
on this issue are somewhat ambiguous. On the one hand, it suggests that 
the incremental cost test should apply to each competitive product. Id. 
at 7. On the other hand, it states that ``reported incremental costs 
should be used to ensure that cross-subsidization of the competitive 
products by market-dominant products is not occurring.'' Id.
    Five parties address the issue of the appropriate application of 
the incremental cost test. Valpak and UPS suggest the incremental cost 
test should be applied to both individual competitive products and the 
competitive products enterprise as a whole. Valpak Comments at 7; UPS 
Comments at 2. Alternatively, Mitchell recommends that the Postal 
Service develop an estimate of the incremental cost of competitive 
products as a group, including any product specific costs. Mitchell 
Reply Comments at 10.
    The application of the incremental cost test is a settled issue. In 
Docket No. RM2007-1, the Commission interpreted section 3633(a)(1) to 
mean that incremental costs apply to competitive products as a group, 
not to individual competitive products. See 39 CFR 3015.7(b). The 
Postal Service and Pitney Bowes concur with this interpretation. Postal 
Service Comments at 35; Pitney Bowes Comments at 7. In Docket No. 
RM2008-4, the Commission proposes rules to require the Postal Service 
to file the relevant incremental cost data so that the incremental cost 
test can be applied.

F. Contribution to Institutional Costs

    In addition to the incremental cost test, the PAEA requires that 
revenues from competitive products make an appropriate contribution to 
institutional costs, as determined by the Commission. 39 U.S.C. 
3633(a)(3).\21\ Treasury addresses this requirement in two respects. 
Following its discussion of group specific (or line of business) costs, 
Treasury recommends that the unassigned costs be treated as 
institutional costs and that an appropriate share of such costs should 
be covered by the theoretical competitive enterprise. Treasury Report 
at 6.
    In addition, Treasury discusses the costs associated with the 
Postal Service's Universal Service Obligation (USO) and the degree to 
which such costs should be borne by competitive products. Among other 
things, Treasury comments that the USO may impose additional costs on 
the Postal Service that would not be incurred otherwise and that, as a 
general rule, USO costs are allocated solely to market dominant 
products. Id. at 7-8. Treasury further points out that economies of 
scope between competitive and market dominant products serve to reduce 
USO costs. Id. at 8.\22\ It notes the pendency of the Commission's 
report on the USO and recommends that once the USO costs have been 
reliably determined, the Commission should adjust the allocation of 
institutional costs to competitive products as may be appropriate.\23\
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    \21\ In Docket No. RM2007-1, the Commission set the appropriate 
share at 5.5 percent. PRC Order No. 43, Order Establishing 
Ratemaking Regulations for Market Dominant Competitive Products, 
October 29, 2007, at 90-92.
    \22\ Regarding the Commission's implementation of the PAEA, 
including sections 2011 and 3634, the Public Representative 
emphasizes that the continued existence of universal service is of 
paramount importance. Public Representative Comments at 3.
    \23\ In Order No. 56, the Commission asked whether its 
determination of an appropriate share of institutional costs under 
section 3633(a)(3) also satisfies, at least implicitly, the 
objective of section 3622(b)(9) (that institutional costs be 
allocated appropriately between market dominant and competitive 
products). PRC Order No. 56, Notice and Order Providing an 
Opportunity to Comment on Treasury Report, January 28, 2008, at 12. 
The two parties to address this question, the Postal Service and 
Valpak, equate the two provisions. Postal Service Comments at 37-38; 
Valpak Comments at 8.

Id. at 8.

[[Page 54472]]

    Several parties comment on the appropriate allocation of 
institutional costs. PSA, which agrees with Treasury's recommendation 
regarding USO costs, also endorses Treasury's recommendation that 
unassigned costs be treated as institutional costs with an appropriate 
share allocated to competitive products. PSA Comments at 5. It 
suggests, however, that the Commission may wish to revisit that issue 
once various modifications required by the PAEA have been made to the 
Postal Service's costing systems. Id. at 5, 11.\24\
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    \24\ PSA also asserts (and the Commission agrees) that the 
assumed Federal income tax will have no effect on whether 
competitive products meet the requirements of section 3633(a)(3) 
since the tax applies only to amounts in excess of the required 5.5 
percent share. PSA Reply Comments at 3, n.6.
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    Pitney Bowes likewise endorses Treasury's recommendation to capture 
group specific (or incremental) costs that are incurred by market 
dominant or competitive products. Pitney Bowes Comments at 7. It 
suggests that modifications to the costing systems ``could result in 
noncompliance with the appropriate share requirement as currently 
established.'' Id. If that were to happen, it believes that the 
Commission should review the appropriateness of the 5.5 percent. Id. 7-
8.
    It is premature for the Commission to act on any of these 
suggestions. The Commission will, as appropriate, take its findings on 
the USO study into account with respect to its obligations under 
sections 3633(a)(3) and 3622(b)(9). See Valpak Comments at 5.

G. Valuation of Assets and Liabilities

1. Assets
    Section 2011(h)(1)(A)(i)(I) requires Treasury to make 
recommendations regarding accounting practices that should be followed 
by the Postal Service in identifying and valuing the assets and 
liabilities associated with competitive products. Treasury observes 
that ``[e]fforts to analyze each [Postal Service] asset to determine 
its theoretical enterprise origin and usage could be a significant 
undertaking.'' Treasury Report at 26. It indicates, however, that the 
separation of assets could be achieved using cost drivers currently 
employed by the Postal Service to record depreciation and other 
expenses. Id. While not intended as exhaustive, Treasury discusses four 
potential methods for assigning assets to a theoretical competitive 
products enterprise. Two methods involve analyzing each individual 
asset and assigning it to competitive products based on an appropriate 
usage factor.\25\ The other two methods use either a cost of revenue 
ratio, which distributes assets based on attributable costs, or a total 
revenue ratio, which distributes assets on the basis of total revenue. 
Id. at 26-27. While Treasury makes no specific recommendations, it 
notes that the simplicity of the latter two methods makes them an 
attractive option for the ``greater of'' test.\26\
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    \25\ Both of these methods would necessitate establishing a set 
of accounting books to monitor and track assignment for ongoing 
maintenance, including asset additions and/or reductions, associated 
with competitive products. Id.
    \26\ Id. at 27 regarding section 2011(e)(5)(A) and (B).
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    In its initial comments, the Postal Service notes that ``there are 
few, if any, physical assets strictly identifiable with competitive 
products at this point in time.'' Postal Service Comments at 17 
(emphasis in original). To address this problem, the Postal Service 
proposes to provide an Annual Identified Property and Equipment Report, 
which would provide a listing and valuation of assets uniquely 
associated with providing competitive products. This listing would be 
limited to ``those cases where the Postal Service chooses to establish 
separate operational or administrative units devoted solely to 
competitive products.'' Id. at 17-18 (emphasis in original).
    The Commission concurs with Treasury that the cost of requiring the 
Postal Service to analyze each individual asset separately to determine 
its theoretical enterprise origin and usage would significantly 
outweigh any potential tax or other benefit. Such an assignment is not 
required under section 2011. The Commission agrees with Treasury that 
market dominant and competitive assets can be reasonably separated for 
purposes of section 2011 using cost drivers the Postal Service 
currently uses for reporting depreciation and other expenses. The 
Commission concludes that a simplified method similar to Treasury's 
suggested cost of revenue method will provide an appropriate comparison 
for the ``greater of'' test. This simplified method would not appear to 
be too burdensome or costly since it would basically follow the 
attribution of costs among products and thus would not require a 
significant asset analysis by the Postal Service to identify many of 
the asset accounts in the chart of accounts that would apply either 
partially or fully to the provision of competitive products. Moreover, 
as the Postal Service recognizes, a simplified approach is appropriate 
under section 2011. Id. at 41.
    To assess the merits of the simplified method, the Commission, 
using the Postal Service's FY 2007 Annual Compliance Report (ACR) and 
the September FY 2007 National Consolidated Trial Balance, assigned 
over $2.1 billion of assets to the theoretical competitive products 
enterprise. The following is illustrative of the Commission's 
analysis.\27\
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    \27\ Worksheets supporting the allocation analysis are in 
Library Reference 1, Commission allocation of USPS Assets and 
Liabilities at tab ``assets''.
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    The Cost Segments and Components report provides depreciation costs 
for Mail Processing Equipment, Motor Vehicles, Buildings, and Leasehold 
Improvements attributed to the products. Major property assets can be 
assigned to the competitive products enterprise using the ratio of 
depreciation costs attributed to competitive products to total 
depreciation costs. Furthermore, under the reasonable assumption that 
revenues from the sales of particular products will generate either 
cash or a receivable account, which will eventually become cash, many 
of the current assets--such as the cash and cash equivalents and 
accounts receivables--could be allocated to competitive products using 
the ratio of competitive products revenues to total revenues. The 
assets for supplies, advances, and prepayments can be assigned using 
cost drivers derived from the expense accounts for those assets.
    Additionally, there are several asset accounts described in the 
Postal Service's chart of accounts devoted exclusively to competitive 
products.\28\ These assets would be wholly assigned to competitive 
products.
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    \28\ For example, account 13264 is Foreign Country Receivable--
International Express Mail and is used to record receivables from 
foreign countries for International Express Mail.
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2. Liabilities
    Treasury notes that many of the same assignment techniques used to 
allocate assets would also be applicable to liabilities. Treasury 
Report at 26. For example, the current liability accrued compensation 
and benefits could be partially assigned to competitive products using 
the ratio of competitive products labor costs to total attributable 
labor costs. A minimal amount of analysis of the liability accounts for 
payables and customer deposit accounts would be needed to determine the 
liability accounts that are specific to competitive products.\29\ Some 
non-current liabilities could also be

[[Page 54473]]

allocated to competitive products using the applicable attributable 
costs as a basis for the distribution key (e.g., workers' compensation, 
repriced annual leave, and leasehold improvements depreciation costs).
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    \29\ One such account that would be specific to competitive 
products would be account number 25311.055, Expedited Mail Advance 
Deposit.
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    Using the FY 2007 ACR and the FY 2007 National Consolidated Trial 
Balance, the Commission was able to estimate over $1.8 billion of 
liabilities for competitive products.\30\
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    \30\ Worksheets supporting the allocation analysis are in 
Library Reference 1, Commission allocation of USPS assets and 
Liabilities at tab ``liabilities.''
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    While the proposed rules will require the production and filing of 
a balance sheet for competitive products, the methodology for assigning 
assets and liabilities is not specified therein. See proposed rules 
3060.14 and 3060.30. The methods used to develop the Commission's 
estimates are illustrative. Nonetheless, these methods are reasonably 
related to relevant cost drivers. Any method employed by the Postal 
Service should be as well and must be based on the same costing 
methodology used to produce the report required by 39 CFR part 3050. 
Additionally, the proposed rules provide the Postal Service 12 months 
to develop an analysis of the asset and liability accounts in the 
general ledger to be able to formulate a logical and reasonably 
accurate assignment methodology.

IV. Calculation of an Assumed Federal Income Tax

    The PAEA requires the Postal Service to calculate an assumed 
Federal income tax on competitive products income. Section 2011(h) 
provides minimal guidance as to how that assumed Federal income tax 
should be computed. It directs the Commission to ``provide for the 
establishment and application of the substantive and procedural rules'' 
to be followed in determining the annual assumed Federal income tax on 
competitive products within the meaning of section 3634. 39 U.S.C. 
2011(h)(2)(B)(i)(II).
    Section 3634 outlines the basis for calculating an assumed Federal 
income tax. First, it defines the term ``assumed Federal income tax on 
competitive products income'' to mean ``the net income tax that would 
be imposed by chapter 1 of the Internal Revenue Code of 1986 (IRC) on 
the Postal Service's assumed taxable income from competitive products 
for the year[.]'' 39 U.S.C. 3634(a)(1). Second, it defines the term 
``assumed taxable income from competitive products'' to mean:

    [t]he amount representing what would be the taxable income of a 
corporation under the Internal Revenue Code of 1986 for the year, 
if--
    (A) The only activities of such corporation were the activities 
of the Postal Service allocable under section 2011(h) to competitive 
products; and
    (B) The only assets held by such corporation were the assets of 
the Postal Service allocable under section 2011(h) to such 
activities.

Id. 3634(a)(2).
    Finally, it requires the assumed tax be ``paid,'' i.e., transferred 
from the Competitive Products Fund to the Postal Service Fund, on or 
before January 15 of the next subsequent year. Id. 3634(b)-(c).
    What follows is a discussion of the concepts the Commission 
believes are pertinent to the establishment and application of the 
substantive and procedural rules that should govern the assumed Federal 
income tax for the theoretical competitive products enterprise.

A. Appropriate Methods of Calculating Tax

    In section 2 of its report, Treasury discusses numerous 
considerations that influence the calculation of an assumed Federal 
income tax on competitive products income. Treasury Report at 11-23. It 
identifies two approaches, complex and simplified, that could be used 
for this purpose, but notes that they differ ``greatly in the cost, 
effort, and method of application.'' Id. at 24. Moreover, although it 
endorses a simplified approach, Treasury cautions that that approach, 
in particular, ``would require some level of PAEA intent interpretation 
and scope determination by the appropriate governance bodies.'' Id.
    Treasury discusses three methods to arrive at a ``simple'' assumed 
tax rate. First, Treasury states that the Postal Service could use the 
effective C corporation tax rate (currently a maximum of 35 percent) 
and apply it to competitive products pretax income. Treasury states 
that this approach would put the Postal Service at a disadvantage 
because it is unlikely that any of its competitors would ever pay taxes 
based on that effective tax rate. Second, Treasury discusses that the 
Postal Service could select a set of competitive firms in the private 
sector that publish their effective tax rates, determine their weighted 
average tax rate, and pay that rate. Treasury points out that finding a 
sample of corporations that would be truly comparable to the Postal 
Service would be very problematic. Third, Treasury states that the 
Postal Service could use as an assumed set tax rate the Congressional 
Research Service's most currently reported average effective tax rate 
for C corporations (e.g., 26.3 percent for 1993-2002). Id. at 21-23.
    No commenter disagrees with Treasury's recommendation that a 
simplified approach may be used to calculate the assumed Federal income 
tax of the competitive products enterprise. See Postal Service Comments 
at 14; Public Representative Comments at 11; UPS Comments at 4; and PSA 
Reply Comments at 3.
    The Commission agrees that a simplified approach may be used. That 
approach, however, must adhere to section 3634(a), which defines the 
assumed tax to be ``the net income that would be imposed by chapter 1 
of the Internal Revenue Code of 1986[.]'' The simplified approach 
recommended by Treasury, which is based on a Congressional Research 
Service (CRS) composite figure, would not appear to satisfy the 
statutory definition.\31\ The simplified approach proposed by the 
Commission applies the effective C corporation tax rate to the 
competitive products enterprise's pretax income. See proposed rule 
3060.40. Treasury characterizes this approach as viable, but notes it 
``puts the [competitive products] enterprise at an income disadvantage 
[because] * * * very few C corporations actually pay the effective tax 
rate.'' Treasury Report at 22. While it may be true that few C 
corporations actually pay the effective tax rate, the assumed Federal 
income tax ``paid'' by the theoretical competitive products enterprise 
is simply an intra-agency transfer from the Competitive Products Fund 
to the Postal Service Fund. Thus, any ``income disadvantage'' under 
this approach is more perceived than real.\32\
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    \31\ Despite efforts, the Commission was unable to verify the 
CRS results or to determine how often they may be updated.
    \32\ Moreover, using either of the other simplified approaches 
suggested by Treasury would not be without tradeoffs. Using a 
composite effective tax rate, whether derived from competitors or 
the CRS, would likely require making adjustments for many tax 
treatments elected by private companies. For example, the Postal 
Service is not subject to foreign, state, or local taxes. Thus, 
using a composite effective tax rate could be viewed as giving the 
theoretical enterprise an ``income advantage.''
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    In lieu of simply applying the effective C corporations' tax rate 
to the theoretical competitive products enterprise pretax income, the 
Postal Service may elect, under the proposed rules, to avail itself of 
various deductions and/or credits under chapter 1 of the IRC. See 
proposed rule 3060.40. This option is available to the extent the 
Postal Service wishes to use it to reduce the competitive products 
enterprise assumed Federal income tax. However,

[[Page 54474]]

because the assumed tax is merely an intra-agency transfer, the Postal 
Service lacks the same incentives as private industry, to minimize its 
tax payment.
    While the Commission is cognizant of concerns over imposing 
unnecessary burdens on the Postal Service, it does not believe that 
using either of these approaches to calculate the assumed Federal 
income tax would be too burdensome or costly. The complexity of 
computing the appropriate tax rate and income tax due for the 
theoretical competitive products enterprise under chapter 1 of the IRC 
is largely determined by the specific tax treatments the Postal Service 
chooses to apply. The Postal Service may make adjustments to 
competitive products taxable income and assumed taxes due by availing 
itself of certain deductions and/or credits available under chapter 1 
of the IRC. Yet taking some of these available deductions and credits 
to reduce taxable income or taxes due is optional. The Postal Service 
may choose to take any or all appropriate deductions and/or credits 
under chapter 1 of the IRC; however, the costs of attempting to reduce 
the transfer payment must be weighed against the benefits. See PSA 
Reply Comments at 3, suggesting that any expenditure to reduce the 
assumed tax payment would represent a net loss to the Postal Service.

B. Specific Issues Concerning the Competitive Products Tax Liability

    Treasury states, ``[t]ax law requires detailed accounting data for 
revenue and cost accruals/deferrals and asset-type specific 
depreciation methods in order to determine their applicability for tax 
treatment.'' Treasury Report at 27.
    However, because the assumed Federal income tax is an intra-agency 
transfer and not an actual tax payment, certain simplifying assumptions 
and calculations can be made that will lessen the burden for the Postal 
Service while promoting fairness among the Postal Service and its 
competitors. Specific recommendations regarding tax issues are 
discussed below.
    Timing of the competitive products enterprise taxes. The question 
of timing arises in two contexts. First, what ``year end'' should be 
applied each year for purposes of computing the assumed Federal income 
tax for competitive products and transferring that tax amount, if any, 
to the Postal Service Fund? Second, in what year should the first 
assumed Federal income tax be calculated for the competitive products 
enterprise.
    Year end should be Postal Service fiscal year end September 30. 
Chapter 1 of the IRC allows a domestic C corporation to use any year 
end it chooses. 26 U.S.C. 441(b) and (e). Viewing the competitive 
products enterprise as akin to a domestic C corporation and given that 
the Postal Service's annual financial statements are provided on a 
September 30 fiscal year basis, the competitive products enterprise 
income tax return should be prepared on a September 30 year-end basis 
as well. Using this approach meets the requirement of the computation 
of an assumed Federal income tax under the PAEA while maximizing 
efficiency and minimizing costs for the Postal Service. No re-
configuring of data related to non-conforming year ends is needed to 
compute the assumed Federal income tax. In addition, this approach is 
consistent with the statutory requirement that the transfer of the 
assumed Federal income tax, if any, from the Competitive Products Fund 
to the Postal Service Fund is due by January 15 following the close of 
the tax year (fiscal year end September 30). 39 U.S.C. 3634(c).
    First fiscal year should be 2008. Section 3634 states that ``[t]he 
Postal Service shall, for each year beginning with the year in which 
occurs the deadline for the Postal Service's first report to the Postal 
Regulatory Commission under section 3652(a) * * * compute its assumed 
Federal income tax on competitive products income for such year * * * 
39 U.S.C. 3634(b). Section 3652 provides that the Postal Service must 
provide annual reports on costs, revenues, rates, and service to the 
Commission ``no later than 90 days after the end of each year[.]'' 39 
U.S.C. 3652. The Postal Service voluntarily submitted its first annual 
report (for fiscal year 2007) under 39 U.S.C. 3652 on December 28, 
2007. It follows that the first assumed Federal income tax computation 
must be made by the Postal Service for fiscal year ending September 30, 
2008.
    This would mean that according to 39 U.S.C. 3634(c), the transfer 
of the competitive products income tax due, if any, would have to be 
made by January 15, 2009. However, as explained above, the Commission 
expects final rules for the assumed Federal income tax computation to 
be completed no earlier than December 19, 2008. Therefore, a January 
15, 2009 deadline does not appear to be reasonable. Hence, a one-time 
6-month extension for computing and transferring the assumed Federal 
income tax will be allowed for the fiscal year ending September 30, 
2008, which means that the computation and transfer must be completed 
by July 15, 2009. The computation and transfer for the assumed Federal 
income tax for fiscal year ending September 30, 2009 will be due on 
January 15, 2010.
    Assuming that fiscal year 2008 is the first year of the tax 
computation for the theoretical competitive products enterprise and 
transfer payment to the Postal Service Fund, the issue arises as to 
whether income deferred from fiscal year 2007 relative to competitive 
products activities should be included in the theoretical competitive 
products enterprise taxable income. In order to match income and 
expenses for a given year, the Commission believes that the income 
deferred from fiscal year 2007 should not be included in the tax 
computation for fiscal year 2008. Therefore, the Commission recommends 
backing out of income for fiscal year 2007 deferrals related to 
competitive products.
    A similar issue arises with regard to deferred gains on installment 
sales of real estate. The Commission believes that this income should 
not be included in the tax computation for the theoretical competitive 
products enterprise for fiscal year 2008. The Postal Service should 
also back out those amounts of taxable income related to competitive 
products for any taxable year that sales proceeds were collected.
    No quarterly estimated taxes. A domestic corporation would normally 
be required to pay estimated taxes on its projected income four times a 
year. 26 U.S.C. 6655. The complexity of accurately estimating such 
quarterly estimated corporate tax payments involves considerable time, 
effort, and cost. From the Commission's point of view, the PAEA's 
explicit requirement of a January 15 transfer of the assumed Federal 
income tax from the Competitive Products Fund to the Postal Service 
Fund (without requiring any other payment or transfer in the statute) 
indicates that quarterly payments were not intended by the drafters of 
the legislation. Also, since 26 U.S.C. 6655 requires quarterly tax 
payments for corporations is not in chapter 1 but in chapter 68 of the 
IRC, and the PAEA requires computing the hypothetical competitive 
products income tax under chapter 1 of the IRC, estimated tax payments 
and their related computations are not actually required under the 
PAEA. Hence, no computation or payment of estimated taxes is required.
    No state, local, and foreign taxes. It is apparent that under 39 
U.S.C. 3634 only the computation and transfer of an assumed ``Federal'' 
income tax by the Postal Service is required. In fact, section 3634 is 
titled ``Assumed Federal income tax on competitive products income.'' 
The Postal Service will not be

[[Page 54475]]

required to make a transfer payment from the Competitive Products Fund 
to the Postal Service Fund for state, local, or any foreign taxes.\33\ 
Consequently, no deduction or credit for any assumed foreign, state, or 
local tax will be available to the Postal Service.
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    \33\ See also Federal Trade Commission's Accounting for Laws 
that Apply Differently to the USPS and its Private Competitors, 
December 2007, p. 26.
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    Net operating losses. Chapter 1 of the IRC permits a Net Operating 
Loss (NOL) to be carried back two years and forward 20 years. 26 U.S.C. 
172(b). A carryback of a competitive products NOL resulting in the 
refund of previously transferred tax remittances to the Postal Service 
Fund will be allowed and should not be viewed as a prohibited cross-
subsidy by market dominant products of competitive products. It should 
instead be seen as the same type of tax treatment any Postal Service 
competitor would be permitted to claim under chapter 1 of the IRC.\34\ 
26 U.S.C. 172. In its comments, Valpak specifically supports the 
carryforward of a NOL for competitive products. It states, ``[t]o the 
extent that competitive products share in any reported loss by the 
Postal Service as a whole * * * no income tax should be payable, and 
losses reported for the Competitive Products Fund should have the same 
carry-forward privilege as in the private sector.'' Valpak Comments at 
8. The Commission concludes that a two-year carryback and a 20-year 
carryforward of NOLs per chapter 1 of the IRC are permissible. It 
should be noted, however, that the two-year carryback is optional and 
may be waived by the Postal Service under 26 U.S.C. 172(b)(3).
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    \34\ The following example is illustrative of the possible use 
of NOLs for the theoretical competitive products enterprise tax 
liability computation: In fiscal year 2008 and 2009, the competitive 
products enterprise earned $150,000,000 in taxable income and 
transferred $40,000,000 in assumed Federal income tax from the 
Competitive Products Fund to the Postal Service Fund. Then in 2010 
the competitive products enterprise registered a loss of 
$60,000,000. A $60,000,000 NOL carryover would be appropriate and 
should not be viewed as a cross-subsidy by market dominant products 
of competitive products, since the carryback would not exceed the 
total income reported. This would be the same tax treatment that 
would be available to any regular domestic corporation under section 
172 of chapter 1 of the Internal Revenue Code. Only if losses 
exceeded the past or future income would a refund not be 
appropriate.
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    Accrual method. The accrual method of tax accounting is the 
appropriate method to be used for the theoretical competitive products 
enterprise because of the level of gross receipts it generates and the 
activities it performs. Generally, the cash method of accounting for 
tax purposes is only available to entities that generate less than $5 
million in gross revenue. 26 U.S.C. 448. Competitive products generated 
almost $8 billion in gross revenue in fiscal year 2007.\35\ Using the 
accrual method will also conform to the Postal Service's current 
financial accounting method,\36\ which would minimize any necessary 
changes to the existing cost systems.
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    \35\ It should be noted that while the activities performed by 
the theoretical competitive products enterprise are primarily 
services, they are not personal services as defined in Treasury 
Regulation 1.448-1T(e)(4) (law, accounting, health, engineering, 
architecture, actuarial, performing arts or consulting).
    \36\ United States Postal Service Annual Report 2007, Note 2, at 
44.
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    Elections for competitive products. The Commission agrees with 
Treasury that certain first-year and other elections should be deemed 
to have been made for the theoretical competitive products enterprise 
including recurring item exception, rotable spare part treatment for 
supplies and repairs,\37\ section 266 election for capitalizing 
interest expense related to construction, and the election to defer 
revenue from services to be performed the next year according to 
Revenue Procedure 2004-34. Treasury Report at 23.
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    \37\ See id. at 44.
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    Deductions available to competitive products. The Commission 
discusses below selected deductions that may be available to the Postal 
Service with regard to competitive products. Other deductions may also 
be available. Their omission from the following discussion does not 
preclude the Postal Service from adopting them if appropriate. The 
Postal Service may elect to forgo deductions and apply the applicable 
tax rate under the IRC to its net income instead.
    Adjustments for depreciation of assets. The tax law pursuant to 26 
U.S.C. 362 would normally require the basis of contributed assets to a 
business organization to be computed on a tax basis.\38\ However, the 
re-computation of depreciation for Postal Service assets assigned to 
the competitive products enterprise could be extremely complex, costly, 
and burdensome. The Commission concludes that for simplicity purposes, 
the competitive products assets deemed to be transferred to the 
theoretical competitive products enterprise should be considered to be 
transferred at their book basis (original cost plus improvements net of 
financial/cost accounting depreciation). Therefore, the Commission 
recommends that for all assets placed into service prior to October 1, 
2007, the historical basis, in conformance with the existing Postal 
Service cost accounting system, should be used. Future depreciation of 
those assets put into service prior to October 1, 2007, and any 
subsequent sales gain or loss computation of those assets should be at 
their historical cost and in conformance with the existing financial 
accounting depreciation basis. The allowable depreciation for these 
assets for tax purposes will be captured in the attributable costs of 
competitive products. For assets placed in service beginning on or 
after October 1, 2007, tax depreciation in accordance with the IRC may 
be used.
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    \38\ The tax basis would be the original cost of the assets less 
the depreciation taken for tax purposes in previous years. Tax 
depreciation is normally greater than book depreciation.
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    Leasehold improvements placed in service after December 31, 1986 by 
a lessee should be depreciable over the life of the real estate that 
they have improved which generally means either 31\1/2\ years or 39 
years. When a lease terminates, whatever adjusted basis is remaining 
may be written off at that time. If the improvements were made before 
1987, then the shorter of the lease term or the useful life of the 
property is the depreciation term. For simplicity purposes, the 
Commission believes that it would be appropriate for the financial 
statement amortization of leasehold improvements to be deductible for 
tax purposes as long as the assets were placed in service before 
October 1, 2007. Any leasehold improvements placed in service on or 
after October 1, 2007 should be depreciated according to the IRC.
    For tax purposes, the theoretical competitive products e