§ 7518. — Tax incentives relating to merchant marine capital construction funds.
[Laws in effect as of January 7, 2003]
[Document affected by Public Law Section (2)(D)]
[CITE: 26USC7518]
TITLE 26--INTERNAL REVENUE CODE
Subtitle F--Procedure and Administration
CHAPTER 77--MISCELLANEOUS PROVISIONS
Sec. 7518. Tax incentives relating to merchant marine capital
construction funds
(a) Ceiling on deposits
(1) In general
The amount deposited in a fund established under section 607 of
the Merchant Marine Act, 1936 (hereinafter in this section referred
to as a ``capital construction fund'') shall not exceed for any
taxable year the sum of:
(A) that portion of the taxable income of the owner or
lessee for such year (computed as provided in chapter 1 but
without regard to the carryback of any net operating loss or net
capital loss and without regard to this section) which is
attributable to the operation of the agreement vessels in the
foreign or domestic commerce of the United States or in the
fisheries of the United States,
(B) the amount allowable as a deduction under section 167
for such year with respect to the agreement vessels,
(C) if the transaction is not taken into account for
purposes of subparagraph (A), the net proceeds (as defined in
joint regulations) from--
(i) the sale or other disposition of any agreement
vessel, or
(ii) insurance or indemnity attributable to any
agreement vessel, and
(D) the receipts from the investment or reinvestment of
amounts held in such fund.
(2) Limitations on deposits by lessees
In the case of a lessee, the maximum amount which may be
deposited with respect to an agreement vessel by reason of paragraph
(1)(B) for any period shall be reduced by any amount which, under an
agreement entered into under section 607 of the Merchant Marine Act,
1936, the owner is required or permitted to deposit for such period
with respect to such vessel by reason of paragraph (1)(B).
(3) Certain barges and containers included
For purposes of paragraph (1), the term ``agreement vessel''
includes barges and containers which are part of the complement of
such vessel and which are provided for in the agreement.
(b) Requirements as to investments
(1) In general
Amounts in any capital construction fund shall be kept in the
depository or depositories specified in the agreement and shall be
subject to such trustee and other fiduciary requirements as may be
specified by the Secretary.
(2) Limitation on fund investments
Amounts in any capital construction fund may be invested only in
interest-bearing securities approved by the Secretary; except that,
if such Secretary consents thereto, an agreed percentage (not in
excess of 60 percent) of the assets of the fund may be invested in
the stock of domestic corporations. Such stock must be currently
fully listed and registered on an exchange registered with the
Securities and Exchange Commission as a national securities
exchange, and must be stock which would be acquired by prudent men
of discretion and intelligence in such matters who are seeking a
reasonable income and the preservation of their capital. If at any
time the fair market value of the stock in the fund is more than the
agreed percentage of the assets in the fund, any subsequent
investment of amounts deposited in the fund, and any subsequent
withdrawal from the fund, shall be made in such a way as to tend to
restore the fund to a situation in which the fair market value of
the stock does not exceed such agreed percentage.
(3) Investment in certain preferred stock permitted
For purposes of this subsection, if the common stock of a
corporation meets the requirements of this subsection and if the
preferred stock of such corporation would meet such requirements but
for the fact that it cannot be listed and registered as required
because it is nonvoting stock, such preferred stock shall be treated
as meeting the requirements of this subsection.
(c) Nontaxability for deposits
(1) In general
For purposes of this title--
(A) taxable income (determined without regard to this
section and section 607 of the Merchant Marine Act, 1936) for
the taxable year shall be reduced by an amount equal to the
amount deposited for the taxable year out of amounts referred to
in subsection (a)(1)(A),
(B) gain from a transaction referred to in subsection
(a)(1)(C) shall not be taken into account if an amount equal to
the net proceeds (as defined in joint regulations) from such
transaction is deposited in the fund,
(C) the earnings (including gains and losses) from the
investment and reinvestment of amounts held in the fund shall
not be taken into account,
(D) the earnings and profits (within the meaning of section
316) of any corporation shall be determined without regard to
this section and section 607 of the Merchant Marine Act, 1936,
and
(E) in applying the tax imposed by section 531 (relating to
the accumulated earnings tax), amounts while held in the fund
shall not be taken into account.
(2) Only qualified deposits eligible for treatment
Paragraph (1) shall apply with respect to any amount only if
such amount is deposited in the fund pursuant to the agreement and
not later than the time provided in joint regulations.
(d) Establishment of accounts
For purposes of this section--
(1) In general
Within a capital construction fund 3 accounts shall be
maintained:
(A) the capital account,
(B) the capital gain account, and
(C) the ordinary income account.
(2) Capital account
The capital account shall consist of--
(A) amounts referred to in subsection (a)(1)(B),
(B) amounts referred to in subsection (a)(1)(C) other than
that portion thereof which represents gain not taken into
account by reason of subsection (c)(1)(B),
(C) the percentage applicable under section 243(a)(1) of any
dividend received by the fund with respect to which the person
maintaining the fund would (but for subsection (c)(1)(C)) be
allowed a deduction under section 243, and
(D) interest income exempt from taxation under section 103.
(3) Capital gain account
The capital gain account shall consist of--
(A) amounts representing capital gains on assets held for
more than 6 months and referred to in subsection (a)(1)(C) or
(a)(1)(D), reduced by
(B) amounts representing capital losses on assets held in
the fund for more than 6 months.
(4) Ordinary income account
The ordinary income account shall consist of--
(A) amounts referred to in subsection (a)(1)(A),
(B)(i) amounts representing capital gains on assets held for
6 months or less and referred to in subsection (a)(1)(C) or
(a)(1)(D), reduced by
(ii) amounts representing capital losses on assets held in
the fund for 6 months or less,
(C) interest (not including any tax-exempt interest referred
to in paragraph (2)(D)) and other ordinary income (not including
any dividend referred to in subparagraph (E)) received on assets
held in the fund,
(D) ordinary income from a transaction described in
subsection (a)(1)(C), and
(E) the portion of any dividend referred to in paragraph
(2)(C) not taken into account under such paragraph.
(5) Capital losses only allowed to offset certain gains
Except on termination of a capital construction fund, capital
losses referred to in paragraph (3)(B) or in paragraph (4)(B)(ii)
shall be allowed only as an offset to gains referred to in paragraph
(3)(A) or (4)(B)(i), respectively.
(e) Purposes of qualified withdrawals
(1) In general
A qualified withdrawal from the fund is one made in accordance
with the terms of the agreement but only if it is for:
(A) the acquisition, construction, or reconstruction of a
qualified vessel,
(B) the acquisition, construction, or reconstruction of
barges and containers which are part of the complement of a
qualified vessel, or
(C) the payment of the principal on indebtedness incurred in
connection with the acquisition, construction, or reconstruction
of a qualified vessel or a barge or container which is part of
the complement of a qualified vessel.
Except to the extent provided in regulations prescribed by the
Secretary, subparagraph (B), and so much of subparagraph (C) as
relates only to barges and containers, shall apply only with respect
to barges and containers constructed in the United States.
(2) Penalty for failing to fulfill any substantial
obligation
Under joint regulations, if the Secretary determines that any
substantial obligation under any agreement is not being fulfilled,
he may, after notice and opportunity for hearing to the person
maintaining the fund, treat the entire fund or any portion thereof
as an amount withdrawn from the fund in a nonqualified withdrawal.
(f) Tax treatment of qualified withdrawals
(1) Ordering rule
Any qualified withdrawal from a fund shall be treated--
(A) first as made out of the capital account,
(B) second as made out of the capital gain account, and
(C) third as made out of the ordinary income account.
(2) Adjustment to basis of vessel, etc., where withdrawal
from ordinary income account
If any portion of a qualified withdrawal for a vessel, barge, or
container is made out of the ordinary income account, the basis of
such vessel, barge, or container shall be reduced by an amount equal
to such portion.
(3) Adjustment to basis of vessel, etc., where withdrawal
from capital gain account
If any portion of a qualified withdrawal for a vessel, barge, or
container is made out of the capital gain account, the basis of such
vessel, barge, or container shall be reduced by an amount equal to
such portion.
(4) Adjustment to basis of vessels, etc., where withdrawals
pay principal on debt
If any portion of a qualified withdrawal to pay the principal on
any indebtedness is made out of the ordinary income account or the
capital gain account, then an amount equal to the aggregate
reduction which would be required by paragraphs (2) and (3) if this
were a qualified withdrawal for a purpose described in such
paragraphs shall be applied, in the order provided in joint
regulations, to reduce the basis of vessels, barges, and containers
owned by the person maintaining the fund. Any amount of a withdrawal
remaining after the application of the preceding sentence shall be
treated as a nonqualified withdrawal.
(5) Ordinary income recapture of basis reduction
If any property the basis of which was reduced under paragraph
(2), (3), or (4) is disposed of, any gain realized on such
disposition, to the extent it does not exceed the aggregate
reduction in the basis of such property under such paragraphs, shall
be treated as an amount referred to in subsection (g)(3)(A) which
was withdrawn on the date of such disposition. Subject to such
conditions and requirements as may be provided in joint regulations,
the preceding sentence shall not apply to a disposition where there
is a redeposit in an amount determined under joint regulations which
will, insofar as practicable, restore the fund to the position it
was in before the withdrawal.
(g) Tax treatment of nonqualified withdrawals
(1) In general
Except as provided in subsection (h), any withdrawal from a
capital construction fund which is not a qualified withdrawal shall
be treated as a nonqualified withdrawal.
(2) Ordering rule
Any nonqualified withdrawal from a fund shall be treated--
(A) first as made out of the ordinary income account,
(B) second as made out of the capital gain account, and
(C) third as made out of the capital account.
For purposes of this section, items withdrawn from any account shall
be treated as withdrawn on a first-in-first-out basis; except that
(i) any nonqualified withdrawal for research, development, and
design expenses incident to new and advanced ship design, machinery
and equipment, and (ii) any amount treated as a nonqualified
withdrawal under the second sentence of subsection (f)(4), shall be
treated as withdrawn on a last-in-first-out basis.
(3) Operating rules
For purposes of this title--
(A) any amount referred to in paragraph (2)(A) shall be
included in income as an item of ordinary income for the taxable
year in which the withdrawal is made,
(B) any amount referred to in paragraph (2)(B) shall be
included in income for the taxable year in which the withdrawal
is made as an item of gain realized during such year from the
disposition of an asset held for more than 6 months, and
(C) for the period on or before the last date prescribed for
payment of tax for the taxable year in which this withdrawal is
made--
(i) no interest shall be payable under section 6601 and
no addition to the tax shall be payable under section 6651,
(ii) interest on the amount of the additional tax
attributable to any item referred to in subparagraph (A) or
(B) shall be paid at the applicable rate (as defined in
paragraph (4)) from the last date prescribed for payment of
the tax for the taxable year for which such item was
deposited in the fund, and
(iii) no interest shall be payable on amounts referred
to in clauses (i) and (ii) of paragraph (2) or in the case
of any nonqualified withdrawal arising from the application
of the recapture provision of section 606(5) of the Merchant
Marine Act of 1936 as in effect on December 31, 1969.
(4) Interest rate
For purposes of paragraph (3)(C)(ii), the applicable rate of
interest for any nonqualified withdrawal--
(A) made in a taxable year beginning in 1970 or 1971 is 8
percent, or
(B) made in a taxable year beginning after 1971, shall be
determined and published jointly by the Secretary of the
Treasury or his delegate and the applicable Secretary and shall
bear a relationship to 8 percent which the Secretaries determine
under joint regulations to be comparable to the relationship
which the money rates and investment yields for the calendar
year immediately preceding the beginning of the taxable year
bear to the money rates and investment yields for the calendar
year 1970.
(5) Amount not withdrawn from fund after 25 years from
deposit taxed as nonqualified withdrawal
(A) In general
The applicable percentage of any amount which remains in a
capital construction fund at the close of the 26th, 27th, 28th,
29th, or 30th taxable year following the taxable year for which
such amount was deposited shall be treated as a nonqualified
withdrawal in accordance with the following table:
If the amount remains in the fund The applicable
at the close of the-- percentage is--
26th taxable year...................................... 20 percent
27th taxable year...................................... 40 percent
28th taxable year...................................... 60 percent
29th taxable year...................................... 80 percent
30th taxable year...................................... 100 percent.
(B) Earnings treated as deposits
The earnings of any capital construction fund for any
taxable year (other than net gains) shall be treated for
purposes of this paragraph as an amount deposited for such
taxable year.
(C) Amounts committed treated as withdrawn
For purposes of subparagraph (A), an amount shall not be
treated as remaining in a capital construction fund at the close
of any taxable year to the extent there is a binding contract at
the close of such year for a qualified withdrawal of such amount
with respect to an identified item for which such withdrawal may
be made.
(D) Authority to treat excess funds as withdrawn
If the Secretary determines that the balance in any capital
construction fund exceeds the amount which is appropriate to
meet the vessel construction program objectives of the person
who established such fund, the amount of such excess shall be
treated as a nonqualified withdrawal under subparagraph (A)
unless such person develops appropriate program objectives
within 3 years to dissipate such excess.
(E) Amounts in fund on January 1, 1987
For purposes of this paragraph, all amounts in a capital
construction fund on January 1, 1987, shall be treated as
deposited in such fund on such date.
(6) Nonqualified withdrawals taxed at highest marginal rate
(A) In general
In the case of any taxable year for which there is a
nonqualified withdrawal (including any amount so treated under
paragraph (5)), the tax imposed by chapter 1 shall be
determined--
(i) by excluding such withdrawal from gross income, and
(ii) by increasing the tax imposed by chapter 1 by the
product of the amount of such withdrawal and the highest
rate of tax specified in section 1 (section 11 in the case
of a corporation).
With respect to the portion of any nonqualified withdrawal made
out of the capital gain account during a taxable year to which
section 1(h) or 1201(a) applies, the rate of tax taken into
account under the preceding sentence shall not exceed 15 percent
(34 percent in the case of a corporation).
(B) Tax benefit rule
If any portion of a nonqualified withdrawal is properly
attributable to deposits (other than earnings on deposits) made
by the taxpayer in any taxable year which did not reduce the
taxpayer's liability for tax under chapter 1 for any taxable
year preceding the taxable year in which such withdrawal
occurs--
(i) such portion shall not be taken into account under
subparagraph (A), and
(ii) an amount equal to such portion shall be treated as
allowed as a deduction under section 172 for the taxable
year in which such withdrawal occurs.
(C) Coordination with deduction for net operating losses
Any nonqualified withdrawal excluded from gross income under
subparagraph (A) shall be excluded in determining taxable income
under section 172(b)(2).
(h) Certain corporate reorganizations and changes in partnerships
Under joint regulations--
(1) a transfer of a fund from one person to another person in a
transaction to which section 381 applies may be treated as if such
transaction did not constitute a nonqualified withdrawal, and
(2) a similar rule shall be applied in the case of a
continuation of a partnership.
(i) Definitions
For purposes of this section, any term defined in section 607(k) of
the Merchant Marine Act, 1936 which is also used in this section
(including the definition of ``Secretary'') shall have the meaning given
such term by such section 607(k) as in effect on the date of the
enactment of this section.
(Added Pub. L. 99-514, title II, Sec. 261(b), Oct. 22, 1986, 100 Stat.
2208; amended Pub. L. 100-647, title I, Secs. 1002(m)(1), 1018(u)(23),
Nov. 10, 1988, 102 Stat. 3382, 3591; Pub. L. 101-508, title XI,
Sec. 11101(d)(7)(A), Nov. 5, 1990, 104 Stat. 1388-405; Pub. L. 105-34,
title III, Sec. 311(c)(2), Aug. 5, 1997, 111 Stat. 835; Pub. L. 108-27,
title III, Sec. 301(a)(2)(D), May 28, 2003, 117 Stat. 758.)
Amendment of Section
For termination of amendment by section 303 of Pub. L. 108-27,
see Effective and Termination Dates of 2003 Amendment note below.
References in Text
Section 607 of the Merchant Marine Act, 1936, referred to in
subsecs. (a), (c), and (i), is classified to section 1177 of Title 46,
Appendix, Shipping.
Section 606(5) of the Merchant Marine Act of 1936, referred to in
subsec. (g)(3)(C)(iii), is classified to section 1176(5) of Title 46,
Appendix.
The date of the enactment of this section, referred to in subsec.
(i), is the date of enactment of Pub. L. 99-514, which was approved Oct.
22, 1986.
Amendments
2003--Subsec. (g)(6)(A). Pub. L. 108-27, Secs. 301(a)(2)(D), 303,
temporarily substituted ``15 percent'' for ``20 percent'' in concluding
provisions. See Effective and Termination Dates of 2003 Amendment note
below.
1997--Subsec. (g)(6)(A). Pub. L. 105-34 substituted ``20 percent''
for ``28 percent'' in concluding provisions.
1990--Subsec. (g)(6)(A). Pub. L. 101-508 substituted ``section
1(h)'' for ``section 1(j)'' in last sentence.
1988--Subsec. (g)(1). Pub. L. 100-647, Sec. 1018(u)(23), substituted
``not a qualified withdrawal'' for ``not qualified withdrawal''.
Subsec. (g)(6)(A). Pub. L. 100-647, Sec. 1002(m)(1), substituted
``section 1(j)'' for ``section 1(i)''.
Effective and Termination Dates of 2003 Amendment
Amendment by Pub. L. 108-27 applicable to taxable years ending on or
after May 6, 2003, see section 301(d) of Pub. L. 108-27, set out as a
note under section 1 of this title.
Amendment by Pub. L. 108-27 inapplicable to taxable years beginning
after Dec. 31, 2008, and the Internal Revenue Code of 1986 to be applied
and administered to such years as if such amendment had never been
enacted, see section 303 of Pub. L. 108-27, set out as a note under
section 1 of this title.
Effective Date of 1997 Amendment
Amendment by Pub. L. 105-34 applicable to taxable years ending after
May 6, 1997, see section 311(d) of Pub. L. 105-34, set out as a note
under section 1 of this title.
Effective Date of 1990 Amendment
Amendment by Pub. L. 101-508 applicable to taxable years beginning
after Dec. 31, 1990, see section 11101(e) of Pub. L. 101-508, set out as
a note under section 1 of this title.
Effective Date of 1988 Amendment
Amendment by Pub. L. 100-647 effective, except as otherwise
provided, as if included in the provision of the Tax Reform Act of 1986,
Pub. L. 99-514, to which such amendment relates, see section 1019(a) of
Pub. L. 100-647, set out as a note under section 1 of this title.
Effective Date
Section 261(g) of Pub. L. 99-514 provided that: ``The amendments
made by this section [enacting this section and amending section 26 of
this title and section 1177 of Title 46, Appendix, Shipping] shall apply
to taxable years beginning after December 31, 1986.''
Merchant Marine Capital Construction Funds
Section 261(a) of Pub. L. 99-514 provided that: ``The purpose of
this section [enacting this section, amending section 26 of this title
and section 1177 of Title 46, Appendix, and enacting provisions set out
as a note above] is to coordinate the application of the Internal
Revenue Code of 1986 with the capital construction program under the
Merchant Marine Act, 1936 [46 App. U.S.C. 1101 et seq.].''
Section Referred to in Other Sections
This section is referred to in sections 26, 56 of this title; title
46 App. section 1177.
