26 USC 7518 - Tax incentives relating to merchant marine capital construction funds

U.S Code last checked for updates: Apr 26, 2024

§ 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 chapter 535 of title 46 of the United States Code (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

(3)

Certain barges and containers included

(b)

Requirements as to investments

(1)

In general

(2)

Limitation on fund investments

(3)

Investment in certain preferred stock permitted

(c)

Nontaxability for deposits

(1)

In general

For purposes of this title—

(A)

taxable income (determined without regard to this section and chapter 535 of title 46, United States Code) 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 chapter 535 of title 46, United States Code, 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

(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

(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

(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

(3)

Adjustment to basis of vessel, etc., where withdrawal from capital gain account

(4)

Adjustment to basis of vessels, etc., where withdrawals pay principal on debt

(5)

Ordinary income recapture of basis reduction

(g)

Tax treatment of nonqualified withdrawals

(1)

In general

(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, 1936, as in effect on December 31, 1969.

(4)

Interest rate

(5)

Amount not withdrawn from fund after 25 years from deposit taxed as nonqualified withdrawal

(A)

In general

(B)

Earnings treated as deposits

(C)

Amounts committed treated as withdrawn

(D)

Authority to treat excess funds as withdrawn

(E)

Amounts in fund on January 1, 1987

(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).

In the case of a taxpayer other than 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) applies, the rate of tax taken into account under the preceding sentence shall not exceed 20 percent.

(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

(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

(Added Pub. L. 99–514, title II, § 261(b), Oct. 22, 1986, 100 Stat. 2208; amended Pub. L. 100–647, title I, §§ 1002(m)(1), 1018(u)(23), Nov. 10, 1988, 102 Stat. 3382, 3591; Pub. L. 101–508, title XI, § 11101(d)(7)(A), Nov. 5, 1990, 104 Stat. 1388–405; Pub. L. 105–34, title III, § 311(c)(2), Aug. 5, 1997, 111 Stat. 835; Pub. L. 108–27, title III, § 301(a)(2)(D), May 28, 2003, 117 Stat. 758; Pub. L. 109–304, § 17(e)(6), Oct. 6, 2006, 120 Stat. 1708; Pub. L. 112–240, title I, § 102(c)(1)(D), Jan. 2, 2013, 126 Stat. 2319; Pub. L. 113–295, div. A, title II, § 221(a)(117), Dec. 19, 2014, 128 Stat. 4054; Pub. L. 115–97, title I, § 13001(b)(2)(Q), (7), Dec. 22, 2017, 131 Stat. 2097, 2098; Pub. L. 115–141, div. U, title IV, § 401(a)(352), Mar. 23, 2018, 132 Stat. 1201.)

cite as: 26 USC 7518

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