SECTION 6. COORDINATION

OF DETERMINATION OF U.S. ASSETS ON AN ADJUSTED OR FAIR MARKET VALUE BASIS WITH DETERMINATION OF U.S.-CONNECTED LIABILITIES USING THE FIXED OR ACTUAL RATIO

The Treasury Department and the IRS recognize that an increase in the fixed ratio, as contemplated by section 3 of this notice, will render the fixed ratio relatively more attractive as compared to the actual ratio for purposes of the Step 2 determination of the U.S.-connected liabilities of foreign banks. Pursuant to the existing regulations, foreign banks may combine an election of the fixed ratio for the Step 2 determination of U.S.-connected liabilities with an election of the fair market value basis for the Step 1 determination of U.S. assets.

The Treasury Department and the IRS are reconsidering whether combining these elections is consistent with the poli

cies underlying the regulations. In particular, it is unclear that such a combination of elections would produce an appropriate result in light of the prevalence and significance of intangibles in the banking industry. The Step 2 determination of U.S.-connected liabilities using an actual ratio determined on a fair market value basis reflects in a balanced manner the effect of intangibles because such intangibles would be taken into account at their fair market in both steps. The Step 2 determination of U.S.-connected liabilities using the fixed ratio in conjunction with a fair market value election in Step 1 may not similarly reflect in a balanced manner the effect of intangibles. The Treasury Department and the IRS are concerned, therefore, that the current ability to apply a fair market value election in conjunction with a fixed ratio election may distort the Step 2 determination of U.S.-connected liabilities. The Treasury Department and the IRS solicit comments to assist them in their review of this matter.