Title 46—Shipping--Volume 1
PART 390—CAPITAL CONSTRUCTION FUND
§ 390.1   Scope of the regulations.
(a) In general —(1) Scope. The regulations prescribed in this part govern the capital construction fund (“fund”) authorized by 46 U.S.C. 53501 et seq.
(2) Establishment of a fund. A fund is established by an agreement (“agreement”), which is a contract between the party (“party”) and the United States.
(3) Purpose of the fund. Chapter 535 provides that any agreement entered into with the Secretary of Transportation must be for the purpose of providing replacement vessels, additional vessels or reconstructed vessels to be built and documented in the United States and operated in the United States foreign, Great Lakes or noncontiguous domestic trade.
(4) Benefits of a fund. Chapter 535 provides for the nontaxability of certain deposits of money or other property placed into a fund established pursuant to an agreement within certain ceilings. These ceilings are equal to:
(i) Earnings or gains realized from the operation of an agreement vessel;
(ii) Net proceeds realized from the sale or other disposition of an agreement vessel or from insurance or indemnification from the loss of an agreement vessel; and
(iii) Earnings from the investment or reinvestment of amounts on deposit in the fund.
(5) Delegation. The Secretary of Transportation has delegated the authority for matters relating to the United States Merchant Marine to the Maritime Administrator, Department of Transportation (“Maritime Administrator”).
(b) Act. For purposes of this part, the term Act shall mean Chapter 535 of Title 46, United States Code.
(c) Joint regulations. For purposes of this part, the term joint regulations shall mean the regulations prescribed by the Secretary of Transportation and the Secretary of the Treasury under Chapter 535 and published in title 26, part 3 of the Code of Federal Regulations (reprinted in part 391 of this chapter).
(d) Cross references. For rules relating to the Federal Income Tax aspects of a fund, see the joint regulations. For rules governing agreements relating to the fisheries of the United States, see the separate Secretary of Commerce regulations published in title 50, part 259 of the Code of Federal Regulations.
§ 390.2   Application for an agreement.
(a) In general —(1) Application instructions. The Maritime Administrator has adopted instructions for making application for an agreement. These instructions are contained in appendix I to this part. MARAD will accept electronic options (such as facsimile and Internet) for transmission of required information to MARAD, if practicable.
(2) General eligibility requirements. Chapter 535 specifies who is eligible for a fund and the application instructions specify what information is required to establish such eligibility. An applicant must:
(i) Be a citizen of the United States within the meaning of 46 U.S.C. 50501, as amended (46 U.S.C. 802, 803). See part 355 of this title for requirements for establishing United States citizenship;
(ii) Own or be the lessee of one or more eligible vessels or share thereof as defined in 46 U.S.C. 53501, or be party to a contract for the construction of one or more eligible vessels, or share thereof, as defined in paragraph (b) of § 390.5;
(iii) Have a program which furthers the purposes of the Act (see § 390.3 relating to policy considerations) and provides for the acquisition, construction or reconstruction of a qualified vessel, as defined in 46 U.S.C. 53501(5). Such provisions state that the vessel will be operated in the United States foreign, Great Lakes, noncontiguous domestic, or short sea transportation trade as defined in 46 U.S.C. 53501 and 46 U.S.C. 109(b); and
(iv) Demonstrate the financial capabilities to accomplish the program.
(b) Information which may be required in conjunction with the application. An applicant must provide such facts, documents and materials as the Maritime Administrator may require in considering whether to enter into an agreement. An applicant should be ready to make available such applicable materials, including, but not limited to: Design plans, data concerning the reasonableness of the cost of the program, construction contracts, financial statements, certificates of incorporation, bylaws, articles of partnership, stock ownership data and other information including judgments and pending litigation which would affect the proposed program. The specific information required is set forth in the instructions.
§ 390.3   Policy considerations.
(a) In general. It is the policy of the United States, as set forth in 46 U.S.C. 50501, that for the national defense and the development of its foreign and domestic commerce, the United States shall have a merchant marine: sufficient to carry a substantial portion of its water-borne export and import foreign commerce and to provide shipping service essential for maintaining the flow of such commerce at all times; capable of serving as auxiliaries in time of war or national emergency; owned and operated by United States citizens insofar as practicable and composed of the best equipped, safest and most suitable types of vessels, constructed and documented in the United States and manned with United States citizens.
(b) Unacceptable programs —(1) In general. The Maritime Administrator will not enter into an agreement where the proposed program is not, in his opinion, in consonance with the policies of the Act.
(2) Specific unacceptable programs. The Maritime Administrator will not enter into an agreement where the proposed program is merely to accomplish the following:
(i) Reconstruction of an existing vessel, unless such reconstruction will exceed $1,000,000 in cost, will be capitalized under the Internal Revenue Code of 1986, as amended, and the regulations thereunder and will result in a vessel which is significantly more competitive;
(ii) Acquisition of an existing vessel; or
(iii) Payment of the principal on existing indebtedness.
(3) Waiver. The Maritime Administrator may, for good cause shown, waive the provisions of paragraph (b)(2) of this section. For example, the Maritime Administrator may waive the monetary limit in paragraph (b)(2)(i) of this section where the applicant proposes to reconstruct a small vessel.
§ 390.4   Description of the agreement.
(a) In general. The agreement consists of a standard part and appended schedules. The standard part of the agreement contains recitals, covenants and warranties which apply to all parties. The appended schedules set forth the particular program of the party and contain other information unique to each agreement. See § 390.6 (relating to administration of the agreement) for procedures and criteria for the modification of schedules.
(b) Schedule A—Eligible agreement vessels. Schedule A lists the names of eligible agreement vessels (as defined in § 390.5), whether owned or leased, and the allowable percentage of the depreciation ceiling, if any, available for deposit purposes by the party. See § 390.7 (relating to deposits) for allowable depreciation in the case of leased vessels.
(c) Schedule B—Program —(1) In general. Schedule B sets forth the program of the party including the cost of the program and the time in which the program shall be accomplished.
(2) Items in Schedule B. Schedule B shall contain:
(i) A statement describing each qualified agreement vessel (as defined in § 390.5) to be acquired, constructed or reconstructed. In the case of reconstruction, the statement will include a general description of the work to be performed;
(ii) The anticipated date on which the acquisition, construction or reconstruction of each qualified agreement vessel will commence;
(iii) The anticipated total cost, including any costs which will not be paid from the fund, of the acquisition, construction or reconstruction of each qualified agreement vessel; and
(iv) The amount to be withdrawn from the fund with respect to the acquisition, construction or reconstruction of each qualified agreement vessel.
(3) Submission of contracts. When a contract is executed for any acquisition, construction or reconstruction relating to the agreement, such contract shall be submitted within 30 days after execution to the Maritime Administrator who shall then determine whether such undertaking is in accordance with the program set forth in Schedule B.
(d) Schedule C—Depositories. Schedule C lists, by name and address, the depositories of the fund. See § 390.7 (relating to deposits).
(e) Schedule D—Minimum deposits. Schedule D sets forth the minimum deposits which must be made into the fund. See § 390.7 (relating to deposits) for the procedure in setting minimum deposits.
(f) Submission of proposed schedules. An applicant shall submit proposed schedules with his application. The specific information required in such schedules is set forth in the application instructions referred to in paragraph (a)(1) of § 390.2. A sample agreement (standard part and appended schedules) is contained in appendix II to this part.
§ 390.5   Agreement vessels.
(a) In general. 46 U.S.C. 53501 states the requirements for eligible, qualified and agreement vessels. The rules in this section further define such terms and state how vessels must be listed on Schedules A and B in the agreement.
(b) Eligible agreement vessels —(1) Definition. An eligible agreement vessel, which may be used to establish ceilings for deposit purposes, is any vessel:
(i) Constructed in the United States, and if reconstructed, reconstructed in the United States; the term constructed or reconstructed in the United States includes any vessel which was constructed or reconstructed outside of the United States but documented under the laws of the United States on April 15, 1970, or constructed or reconstructed outside of the United States for use in the United States foreign commerce pursuant to a contract entered into before April 15, 1970;
(ii) Documented under the laws of the United States;
(iii) Operated in the foreign or domestic commerce of the United States;
(iv) Engaged primarily in the waterborne carriage of men, materials, goods or wares; and
(v) Designated in the agreement as an “eligible agreement vessel.”
(2) Scope of the term “eligible agreement vessel.” For purposes of generating ceilings for deposits under 46 U.S.C. 53505 and the joint regulations the term eligible agreement vessel includes any:
(i) Tug or barge;
(ii) Vessels which have been contracted for or are in the process of construction; and
(iii) Share interest in a vessel; the party is considered to have a share interest in an eligible agreement vessel if the party has the right to use the vessel to generate income or a right to the proceeds or a portion of the proceeds from its use even if the party does not have a proprietary interest in the vessel for purposes of State or Federal law.
(3) Foreign or domestic commerce. For the purpose of paragraph (b)(1)(iii) of this section the term foreign or domestic commerce means the water-borne carriage of men, materials, goods or wares between:
(i) Two points in the United States;
(ii) A point in the United States and a point in a foreign country; or
(iii) Two points in the same foreign country or points in two different foreign countries.
(c) Qualified agreement vessels —(1) Definition. A qualified agreement vessel which may be acquired, constructed or reconstructed with the aid of qualified withdrawals, is any vessel:
(i) Constructed in the United States, and if reconstructed, reconstructed in the United States; the term constructed or reconstructed in the United States includes any vessel which was constructed or reconstructed outside of the United States but documented under the laws of the United States on April 15, 1970, or constructed or reconstructed outside of the United States for use in the United States foreign commerce pursuant to a contract entered into before April 15, 1970;
(ii) Documented under the laws of the United States;
(iii) Operated in the United States foreign, Great Lakes, noncontiguous domestic, or short sea transportation trade.
(iv) Engaged primarily in the water-borne carriage of men, materials, goods or wares; and
(v) Designated in the agreement as a “qualified agreement vessel.”
(2) Scope of the term “qualified agreement vessel.” For purposes of making qualified withdrawals under 46 U.S.C. 53509 and the joint regulations the term qualified agreement vessel includes any:
(i) Cargo handling equipment which the Maritime Administrator determines will be used primarily on a qualified agreement vessel. Normally any auxiliary equipment which is ordinarily carried from port to port, excluding equipment that needs frequent replacement due to normal wear and tear, and is used in conjunction with the loading or unloading of the vessel is deemed to be cargo handling equipment;
(ii) Ocean-going towing vessel or barge which the Maritime Administrator determines is suitable for the trade in which the party intends to operate such vessel or barge, or any comparable vessel or barge operated on the Great Lakes which is suitable for its intended trade; and
(iii) Proprietary interest in a qualified agreement vessel as, for example, that which may result from a joint venture or partnership.
(3) Foreign trade. Foreign trade shall mean the water-borne carriage of men, materials, goods or wares between:
(i) A point in the United States and a point in a foreign country;
(ii) Two points in the domestic trade permitted under the first sentence of 46 U.S.C. 53101 note; or
(iii) Two points in the same foreign country or points in two different foreign countries in the case of liquid and dry bulk cargo carrying services provided the party demonstrates that such operating flexibility is needed to compete with foreign flag vessels in its operations or in competing for charters.
(4) Great Lakes trade. Great Lakes trade shall mean the waterborne carriage of men, materials, goods or wares between points on the Great Lakes and their connecting and tributary waterways in the immediate environs of the Great Lakes.
(5) Noncontiguous domestic trade. Noncontinguous domestic trade shall mean the water-borne carriage of men, materials, goods or wares between:
(i) The contiguous 48 States on the one hand and Alaska, Hawaii, Puerto Rico and the insular territories and possessions of the United States on the other hand; and
(ii) Any point in Alaska, Hawaii, Puerto Rico and the insular territories and possessions of the United States, and any other point in Alaska, Hawaii, Puerto Rico and such territories and possessions.
(6) Short Sea Transportation Trade. The term short sea transportation trade means the carriage by vessel of cargo—
(i) That is:
(A) Contained in intermodal cargo containers and loaded by crane on the vessel; or
(B) Loaded on the vessel by means of wheeled technology; and
(ii) That is:
(A) Loaded at a port in the United States and unloaded either at another port in the United States or at a port in Canada located in the Great Lakes Saint Lawrence Seaway System; or
(B) Loaded at a port in Canada located in the Great Lakes Saint Lawrence Seaway System and unloaded at a port in the United States.”
(7) Nonqualified operations. Nonqualified operations for qualified agreement vessels include:
(i) Positioning vessels in support of domestic operations prohibited by Chapter 535;
(ii) Use of barges as docks and ramps;
(iii) Except as provided in (c)(8) (i) and (ii) of this section:
(A) Foreign-to-foreign trade, consisting of voyages originating and ending in foreign ports, with no intermediate domestic cargo operation, and
(B) Trade from foreign ports to and form U.S. oil rigs in international waters; and
(iv) Bunkering in support of non-qualified trade operations.
(8) Permissible operations. Permissible operations for qualified agreement vessels include:
(i) Foreign-to-foreign trade in the case of vessels operating as part of U.S.-flag service and carrying cargo originating in or destined for U.S. ports, i.e., U.S.-flag feeder vessels;
(ii) Foreign-to-foreign trade, including the lightering of foreign-flag vessels, in the case of vessels carrying liquid or dry bulk cargoes when the carrier has demonstrated to the Administrator:
(A) The need for such foreign-to-foreign shipments (as required by 46 U.S.C. 109 and paragraph (c)(iii) of this section), and
(B) That the proposed cargo would qualify as liquid or dry bulk cargo;
(iii) Ship assist work, including lightering or shifting of a vessel at the end or beginning of a noncontiguous domestic, short sea transportation trade, Great Lakes or U.S. foreign trade voyage. In addition, the lightering of foreign-flag vessels in U.S. ports is permitted.
(9) United States construction. An agreement vessel is considered to be of United States construction if:
(i) It is built entirely in a shipyard or shipyards within any of the United States and the Commonwealth of Puerto Rico;
(ii) All components of the hull and superstructure are fabricated in the United States; and
(iii) The vessel is assembled entirely in the United States.
(d) Agreement vessels —(1) Definition. The term agreement vessel means any eligible or qualified vessel which is subject to an agreement.
(2) Scope of the term “agreement vessel.” For purposes of generating ceilings and making qualified withdrawals the term agreement vessel includes containers, trailers or barges which are part of the complement of an agreement vessel. The complement is limited to three times the container, trailer or barge capacity of the vessel, unless the Maritime Administrator shall agree to a different complement.
§ 390.6   Administration of the agreement.
(a) In general. The Maritime Administrator will administer and enforce the agreement in a manner which will insure that the fund is properly established, that the assets in the fund are used to accomplish the program and that the party fully complies with all obligations and responsibilities. This section specifies the reports which must be submitted to the Maritime Administrator and sets forth the procedures for administering the agreement.
(b) Reporting requirements —(1) In general. This paragraph describes the reports required to be submitted to the Maritime Administrator by the party.
(2) Submission dates. Reports must be submitted annually, in triplicate, for the party's taxable year not later than 90 days after the close of each reporting period. An affidavit regarding the operation of qualified agreement vessels as required by paragraph (b)(7) of this section shall be submitted concurrently with each annual report.
(3) Cumulation. The annual report submitted following the close of the party's taxable year shall be cumulative for the party's entire taxable year.
(4) Certification. The annual report shall be accompanied by an opinion of an independent certified public accountant to the effect that exhibits (see paragraph (b)(5) of this section) composing the accounting have been prepared in accordance with all published orders, rules, regulations and instructions issued or adopted by the Maritime Administrator.
(5) Format. The reports shall consist of the following exhibits:
(i) “Exhibit A”—a summary of cash, securities and stock on deposit (showing the adjusted basis for securities and stock), including a subtotal of cash, securities and stock on deposit, net amount of accrued deposits to and accrued withdrawals from the fund and the fund total at the end of the period, and if applicable, a summary of the portion of the fund which represents a “CCF: Security Amount” pursuant to an Agreement Covering the Dual Use of a Capital Construction Fund;
(ii) “Exhibit A-1”—a summary of balances in all cash accounts within the fund at the end of the period;
(iii) “Exhibit A-2”—a summary of the securities and stock within the fund at the end of the period (showing both the adjusted basis and fair market value of each item);
(iv) “Exhibit A-3”—a summary of the accrued deposits to and accrued withdrawals from the fund at the end of the period;
(v) “Exhibit B”—a transcript of transactions occurring within the fund during the period by date;
(vi) “Exhibit C”—a summary showing the opening balance, additions thereto due to deposits to the fund, subtractions therefrom due to withdrawals from the fund, and the closing balance for the period for each of the three separate accounts: ordinary income account, capital gains account and capital account; and
(vii) “Exhibit D”—a summary, by vessel, of the qualified withdrawals made from the fund during the period.
(6) Sample report. A sample report is contained in appendix III of this part.
(7) Affidavit. An official of the party who is knowledgeable about the operation of the party's qualified agreement vessels shall submit an affidavit for each taxable year indicating that the party's qualified agreement vessels operated only in qualified trades during such taxable year, or if any such vessel operated in a trade other than a qualified trade, the details of such operation. See § 390.5(c) of this part for a description of what constitutes a qualified trade. A sample affidavit is contained in appendix V of this part.
(8) Failure to submit reports. The failure by a party to make the timely submission of any report or affidavit required by this section shall constitute a material breach of the agreement unless the Maritime Administrator shall determine that such failure was excusable. See § 390.13 (relating to the failure to fulfill a substantial obligation under the agreement).
(c) Review in the event of changed circumstances. Each agreement provides that the party shall promptly inform the Maritime Administrator of any change in circumstances which affects its agreement. Such changes may be mere form, such as a change of the party's name, or substantive such as the sale of an eligible agreement vessel. The Maritime Administrator may require a full review of the agreement if in his opinion the changed circumstances materially affect the agreement.
(d) Modification of agreement —(1) In general. The agreement is subject to modification and amendment by mutual consent. However, except in special circumstances, the Maritime Administrator will not consent to modification or amendment of the standard part of the agreement unless such modification or amendment is of uniform application to similarly situated parties. The Maritime Administrator will normally agree to modification or amendment of the schedules subject to the restriction in paragraph (d)(2) of this section.
(2) Limitations on modification of schedules. The Maritime Administrator will not agree to modification or amendment of the schedules (as described in § 390.4) when, in his opinion, such modification or amendment delays imposition of Federal Income Tax in a manner not contemplated or authorized by the Act, or if the proposed modification or amendment would not be in consonance with the policies of the Act, these rules and regulations or the joint regulations.
(e) Fund adjustment upon modification. Upon application by a party for modification or amendment of the agreement, the Maritime Administrator will determine whether the requested modification or amendment would result in an amount held in the fund in excess of an amount determined to be necessary or appropriate to carry out the program. If such an excess is created in the fund by such modification or amendment, the Maritime Administrator will require a nonqualified withdrawal (as defined in § 390.10) of such excess as a condition to the modification or amendment.
§ 390.7   Deposits into the fund.
(a) In general —(1) Source of deposits. 46 U.S.C. 53505 provides ceilings within which fund deposits may be made. This section provides rules for the qualification of depositories, timing of deposits, the type of property which may be deposited and the level of deposits.
(2) Tax aspects of deposits. For the Federal Income Tax aspects of deposits into a fund, see 46 U.S.C. 53507 and § 3.3 of the joint regulations (§ 391.3 of this chapter).
(b) Depositories —(1) In general. 46 U.S.C. 53506 provides that amounts in a fund must be kept in the depository or depositories specified in the agreement and be subject to such trustee or other fiduciary requirements as the Maritime Administrator may specify.
(2) Qualifications. The Maritime Administrator has established general qualifications for depositories for all maritime programs authorized under the Act, including the capital construction fund program. The general qualifications are published in part 351 of this title.
(3) Fiduciary requirements. Except in unusual circumstances, the Maritime Administrator will not impose special trustee or other fiduciary requirements upon depositories of a fund. For rules relating to a fund held in trust for investment purposes, see paragraph (h) of this section.
(4) Type and name of accounts. Unless otherwise specified in the agreement, the party may select the type or types of accounts in which assets of the fund may be deposited. For example, the party may select a savings account for cash and a trust account for intangible property which is held in the fund. Each account shall be in the name of the party and identified as a capital construction fund account.
(5) Compensating balances. The obligation of the assets in the fund as a compensating balance shall constitute a material breach of the agreement.
(c) Timing of deposits —(1) In general. 46 U.S.C. 53507(b) provides that deposits shall not be taxable only when they are made in accordance with the agreement and not later than the time provided in the joint regulations.
(2) Deposits prior to the time provided in joint regulations. The party may make deposits for any taxable year prior to the time provided in joint regulations in accordance with the following rules:
(i) Amounts representing taxable income attributable to the operation of agreement vessels for a taxable year may be deposited at any time during such taxable year, and thereafter within the time provided for in the joint regulations, based upon the party's estimated Federal taxable income for such vessels for the entire taxable year;
(ii) Amounts representing net proceeds from the sale or other disposition (including mortgaging) with respect to agreement vessels may be deposited when accrued and thereafter within the time provided for in the joint regulations;
(iii) Amounts representing receipts from the investment or reinvestment of amounts held in a fund may be deposited when accrued and thereafter within the time provided for in the joint regulations; and
(iv) Amounts representing depreciation with respect to agreement vessels for a taxable year may be deposited at any time during such taxable year, and thereafter within the time provided for in the joint regulations.
(3) Deposits required prior to the time provided in joint regulations. The Maritime Administrator may require that deposits be made earlier than the latest time provided for in the joint regulations. Generally, the Maritime Administrator will require early deposits only when necessary for the party to meet its agreed upon obligations.
(d) Types of property which may be deposited into a fund —(1) Form of deposits. Deposits may be made into a fund only in the form of money or intangible property of the type in which assets of the fund may be invested pursuant to 46 U.S.C. 53506, the Agreement, and these regulations, other than the securities or common and preferred stock of the party or a company related to the party within the meaning of paragraph (d)(2) of this section, except that in the case of deposits representing net proceeds from the sale or other disposition of any agreement vessel to other than a purchaser or transferee related to the party (within the meaning of paragraph (d)(2) of this section) or deposits representing receipts from the investment or reinvestment of amounts held in a fund, any intangible property received may be deposited.
(2) Related purchaser. For purposes of this paragraph a purchaser or transferee is a related person to the party if—
(i) The relationship between purchaser or transferee and the party would result in disallowance of losses under section 267 or 707 of the Code, or
(ii) The purchaser or transferee and the party are members of the same controlled group of corporations (as defined in section 1563(a) of the Code, except that “more than 50 percent” shall be substituted for “at least 80 percent” each place it appears therein).
(e) Level of deposits —(1) In general. 46 U.S.C. 53504 states that the agreement must provide for the deposit in the fund of amounts agreed upon but only to the extent necessary or appropriate to provide for qualified withdrawals to accomplish the program set forth in the agreement.
(2) Maximum level of deposits. The party shall not be permitted to deposit more than is necessary to complete its program. See § 390.4 (relating to description of the agreement).
(3) Minimum level of deposits. Each agreement shall contain an agreed upon minimum deposit schedule applicable to each three-year period under the agreement. The minimum deposit shall be calculated taking into consideration the scheduling of the anticipated qualified withdrawals. The purpose of the minimum deposit is to insure that the party has made a sufficient commitment to accomplish its program. See § 390.13 (relating to failure to fulfill a substantial obligation under the agreement).
(4) Determination of minimum deposits. The minimum deposit shall be set by the Maritime Administrator. In determining the minimum deposit, the Maritime Administrator shall give consideration to the anticipated ceilings, financial history, current conditions and future business expectations of the party.
(5) Waiver of minimum deposit. The Maritime Administrator shall waive a failure to meet the minimum deposit schedule when the party has deposited all allowable taxable income as specified in Article 5(c) of this agreement attributable to the operation of agreement vessels, net proceeds from all sales or other dispositions of agreement vessels, all receipts from the investment or reinvestment of amounts held in the fund and all earned depreciation on agreement vessels. The Maritime Administrator may also waive the minimum deposit schedule in any case where the party can demonstrate that such deposits will adversely affect its ability to operate its agreement vessels. In the event of a waiver, the Maritime Administrator may require modification of the schedules. See § 390.6 (relating to administration of the agreement).
(6) Selection of ceiling. Except as may be otherwise provided in the agreement or these rules and regulations, the party may choose the ceilings with respect to which deposits are made.
(f) Allocation of depreciation deposits —(1) In general. 46 U.S.C. 53505(b) provides that in the case of a lessee of an eligible agreement vessel the maximum amount which may be deposited with respect to such vessel, under the depreciation ceiling, shall be reduced by any amount which the owner is required or permitted to deposit with respect to such vessel under its depreciation ceiling.
(2) Method of allocation. When an agreement vessel is leased, the party's agreement shall fix a percentage of the annual depreciation which the party may deposit. The percentage shall be that agreed upon between the lessors and the lessees unless the Maritime Administrator determines that the agreed upon percentage will result in an accumulation of assets in the fund or funds which is greater than or less than an amount necessary or appropriate to carry out the party's program. See paragraph (e) of this section (relating to level of deposits).
(g) [Reserved]
(h) Funds held in trust for investment purposes. A fund may be transferred in whole or in part to the control of an unrelated trustee for investment purposes with the prior written permission of the Maritime Administrator. The Maritime Administrator shall approve such a transfer when:
(1) The trustee meets the requirements for a depository under paragraph (b) of this section;
(2) The trust instrument provides that all investment restrictions stated in 46 U.S.C. 53506 and § 390.8 of these regulations will be observed;
(3) The trust instrument provides that the trustee will give consideration to the party's withdrawal requirements under the agreement when investing the fund;
(4) The trustee agrees to be bound by all rules and regulations which have been or will be promulgated governing the investment or management of the fund.
(i) Federal ship mortgage guarantee or insurance. A fund may serve in lieu of a Restricted Fund required in connection with Federal Ship Mortgage Guarantee or Insurance under 46 U.S.C. Chapter 537 and the regulations thereunder upon approval by the Maritime Administrator. Approval by the Maritime Administrator shall be conditioned upon the execution by the party of an agreement, satisfactory in form and substance to the Maritime Administrator, governing the dual use of the fund. Applications for permission to use the fund in this dual capacity should be made in writing to the Secretary, Maritime Administration.
§ 390.8   Investment of the fund.
(a) In general. 46 U.S.C. 53506 provides that assets in the fund must be invested in accordance with certain restrictions. The rules in this section provide for the quality of securities, restrictions on the type of stock in which a fund may invest, related company investments and miscellaneous prohibited activities.
(b) Permissible investments —(1) In general. The party, at its discretion, or the party's trustee, if established pursuant to paragraph (h) of § 390.7, may invest in the types of securities specified in this paragraph.
(2) Interest bearing securities. The party or the party's trustee may invest in any obligation of the United States Government, including any agency or instrumentality thereof, and in the interest bearing securities listed below:
(i) Any obligation of a state or local government, including any agency or instrumentality thereof, or any domestic obligation, which is rated by Moody's Investors Service, Inc., as “Baa” or better or by Standard and Poor's Corporations as “BBB” or better;
(ii) Bankers' acceptances, certificates of deposit, repurchase agreements, and short-term commercial obligations, provided that the latter must be readily marketable and rated not lower than “Prime” by Moody's Investors Services, Inc. or “B” by Standard & Poor's Corp.; and
(iii) Any unsubordinated obligation of an issuer that has any unsecured securities with a credit rating of “Baa” or better if rated by Moddy's Investors Services, Inc., or “BBB” or better if rated by Standard and Poor's Corporation, or by an issuer that has a commercial paper rating not lower than “Prime” by Moody's Investors Service, Inc. or “B” by Standard and Poor's Corporation.
(3) Guaranteed interest bearing securities. The party or the party's trustee may invest in interest bearing securities which do not meet the investment criteria set forth in this paragraph (b) Provided, That:
(i) The types of interest bearing securities and their terms and conditions are acceptable to the Maritime Administration;
(ii) All principal and interest of the interest bearing securities are unconditionally guaranteed in a form satisfactory to the Maritime Administration and neither the securities nor the obligation to pay interest on the securities is that of a party or a company related to the party within the meaning of section 482 of the Internal Revenue Code of 1986, as amended, and the regulations thereunder; and
(iii) The guarantor, which may be an affiliate of the party, must be either a person that has any unsecured securities with a credit rating of “Baa” or better if rated by Moody's Investors Services, Inc., or “BBB” or better if rated by Standard & Poor's Corporations, or a person whose commercial paper rated not lower than “Prime” by Moody's Investors Services, Inc. or “B” junior securities are rated in the highest grade by Moody's Commercial Paper Service or in one of the two highest grades by Standard & Poor's Corporations, and is otherwise acceptable to the Maritime Administration.
(4) Common and preferred stocks. The party or the party's trustee may invest in the following common and preferred stocks:
(i) Stock of domestic corporations which is fully listed and registered at the time of purchase on an exchange registered with the Securities and Exchange Commission as a national securities exchange and 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; and
(ii) Preferred stock of a corporation if the common stock of that corporation meets the requirements of this paragraph and if the preferred stock of such corporation would meet such requirements but for the fact that such preferred stock cannot be listed and registered as required because it is nonvoting stock.
(c) Limitations on investments —(1) Interest bearing securities. The value of securities of any one issuer held in the Fund compared to the value of the total assets of the fund shall not exceed 10 percent in the case of nongovernmental securities referred to in paragraph (b)(2)(i) of this section.
(2) Common and preferred stock. The value of common and preferred stock of any one issuer held in the fund shall not exceed 25 percent of the value of the total assets of the fund. In no case may more than 60 percent of the value of the total assets of the fund be invested in common or preferred stock.
(3) Margin or short sale. No interest bearing securities or common and preferred stock shall be purchased on margin or be sold short for the account of a fund.
(4) Related company investments. Funds shall not be invested in the interest bearing securities or common and preferred stock of the party or of a company related to the party within the meaning of section 482 of the Internal Revenue Code of 1986, as amended, and the regulations thereunder.
(5) Subsequent investments. If at any time the fair market value of the interest bearing securities or common and preferred stock in the fund is more than the limitations stated in this paragraph (c), any subsequent deposit to or withdrawal from the fund or investment made within the fund shall be made in such a way as tends to restore the fund to a posture in which the fair market values of such securities or stock do not exceed such limitations. Values of such securities and stocks shall be the fair market values as determined by the party on the last day of each semi-annual and annual reporting period.
§ 390.9   Qualified withdrawals.
(a) In general —(1) Defined. In accordance with 46 U.S.C. 53509, qualified withdrawals are those made from a fund in accordance with the agreement, but only if they are for:
(i) The acquisition, construction or reconstruction of a qualified agreement vessel;
(ii) The acquisition, construction or reconstruction of barges or containers which are part of the complement of a qualified agreement vessel; or
(iii) The payment of the principal on indebtedness incurred in connection with the acquisition, construction or reconstruction of a qualified agreement vessel or a barge or container which is part of the complement of a qualified agreement vessel.
(2) Tax aspects of a qualified withdrawal. For the tax aspects of a qualified withdrawal, see 46 U.S.C. 50510 and § 3.6 of the joint regulations (§ 391.6 of this chapter).
(b) Purpose of qualified withdrawals —(1) Acquisition of qualified agreement vessels. (i) The term acquisition of a qualified agreement vessel shall mean any transaction, including a corporate merger, where the party obtains a proprietary interest in an existing vessel and such a proprietary interest will, in the opinion of the Maritime Administrator, further the purposes and policies of the Act. See § 390.3 (relating to policy considerations).
(ii) Qualified withdrawals for the acquisition of a qualified agreement vessel shall only be allowed for amounts determined by independent appraisal to be the fair market value of the vessel, at the time of the acquisition, or the actual cost directly allocable to acquiring only the vessel, whichever is less.
(2) Construction of qualified agreement vessels. The term construction of a qualified agreement vessel shall mean the construction of a vessel with the aid of qualified withdrawals.
(3) Reconstruction of qualified agreement vessels. Once an agreement has been entered into, the term reconstruction of a qualified agreement vessel shall mean any improvement to an existing vessel which increases the vessel's competitiveness and involves an aggregate sum in excess of $100,000. The Maritime Administrator may waive the monetary limit in this subparagraph in the case of small vessels.
(4) Payment of principal on indebtedness. 46 U.S.C. 53509(a)(2) provides that any indebtedness which the party proposes to pay through qualified withdrawals must be shown to the satisfaction of the Maritime Administrator to have been incurred in direct connection with the acquisition, construction or reconstruction of a qualified agreement vessel. The fact that indebtedness is secured by an interest in a qualified agreement vessel is insufficient by itself to demonstrate the direct connection. It is not necessary that the lien or mortgage securing the indebtedness be on the vessel. For example, if the party mortgages an office building in order to finance the construction of a vessel, payments of principal on the mortgage may be made with qualified withdrawals.
(c) Limitations on qualified withdrawals —(1) Capitalized costs requirement. All qualified withdrawals must be for costs which are capitalized under the Internal Revenue Code of 1986, as amended, and the regulations thereunder and so reported on the party's Federal Income Tax return.
(2) Executed contract requirement and reimbursement of general funds. Qualified withdrawals may be made for the purpose of reimbursing general funds subject to the following limitations:
(i) Qualified withdrawals may not be made until a construction, reconstruction or acquisition contract is executed. However, the party may reimburse its general funds for expenditures applicable to the construction, reconstruction or acquisition contract which occurred prior to the date of contracting if such reimbursements are made within 120 days from the date of such contracting.
(ii) The party may also reimburse its general funds for expenditures which could have been paid initially by a qualified withdrawal, if such reimbursements are made within 120 days of such expenditure.
(iii) The party may reimburse its general funds for expenditures made prior to the time an agreement or amendment is entered into, but after the party has made application therefor, if such expenditures would otherwise qualify for reimbursement pursuant to paragraphs (c)(3) (i) and (ii) of this section but for the fact that an agreement or amendment has not been executed, and if such reimbursement is effected within 120 days of the execution of an agreement or amendment.
(3) Prepayment of indebtedness. The party shall not prepay principal on indebtedness with qualified withdrawals without the prior written consent of the Maritime Administrator.
(4) Qualified withdrawals paid to related persons. A withdrawal, including payments for indebtedness, paid to a related person, within the meaning of section 482 of the Internal Revenue Code of 1986, as amended, and the regulations thereunder, shall not constitute a qualified withdrawal unless the Maritime Administrator determines that no portion of such payment constitutes a dividend, a return of capital or a contribution of capital under the Internal Revenue Code. Transactions which include payments to a related person, will be approved if the cost of the item to be acquired, constructed or reconstructed through qualified withdrawals is or was at the time of the acquisition, construction or reconstruction its fair market value. The party must obtain the prior written permission of the Maritime Administrator before any qualified withdrawals may be paid to a related person. Any such withdrawal prior to approval shall be a nonqualified withdrawal.
(d) Permission to make qualified withdrawals. Once a program has been approved, prior approval of the Maritime Administrator is not required for specific qualified withdrawals except as provided in paragraphs (c)(4) and (c)(5) of this section. However, the Maritime Administrator will give prior approval to qualified withdrawals upon written request.
§ 390.10   Nonqualified withdrawals.
(a) In general —(1) Defined. Any withdrawal from a fund which is not a qualified withdrawal is a nonqualified withdrawal.
(2) Tax aspects of a nonqualified withdrawal. For the tax aspects of a nonqualified withdrawal, see 46 U.S.C. 53511 and § 3.7 of the joint regulations (§ 391.7 of this chapter).
(b) Permission required —(1) In general. The prior written permission of the Maritime Administrator is required before a nonqualified withdrawal may be made.
(2) Failure to secure permission. A nonqualified withdrawal made without the prior written permission of the Maritime Administrator shall constitute a material breach of the agreement unless the Maritime Administrator shall determine that failure to obtain prior written consent was excusable. See § 390.13 (relating to failure to fulfill a substantial obligation under the agreement).
(3) Types of nonqualified withdrawals which will be permitted. Generally, the Maritime Administrator will give permission to make nonqualified withdrawals when:
(i) The party has incurred operating losses from the operations of agreement vessels which have impaired his working capital and it becomes necessary to reimburse its general funds to the extent of such losses;
(ii) The party desires to make an expenditure for research, development or design and such an expenditure is incident to new and advanced ship design, machinery and equipment;
(iii) The withdrawal would be a qualified withdrawal except for the fact that there is no tax basis left that can be reduced; or
(iv) The party demonstrates, to the satisfaction of the Maritime Administrator, that it cannot fulfill its program due to circumstances beyond its control or due to a change in circumstances which makes the completion of its program economically unfeasible.
§ 390.11   Sale or other disposition of agreement vessels.
(a) Eligible agreement vessels. The sale or other disposition (including mortgages) of eligible agreement vessels shall not require prior approval of the Maritime Administrator, but shall require written notification within 10 days after the sale or other disposition. Such notification shall include a description of the transaction, the identity of the transferee, the proceeds to be realized, the date of the transaction and whether the proceeds will be deposited into the fund.
(b) Qualified agreement vessels —(1) In general. If a qualified agreement vessel whose basis has been reduced through the application of qualified withdrawals is sold or disposed of (including mortgaged) within one year, interest on the amount of gain attributable to the basis reduction shall attach if the Maritime Administrator determines that the disposition was contrary to the policies of the Act, the joint regulations or these regulations. See § 390.13 (relating to failure to fulfill a substantial obligation under the agreement).
(2) Period of one year defined. The one-year period shall mean 365 days from the date of final delivery from the shipyard in the case of construction or reconstruction and 365 days from the date of first loading of the vessel in the case of an acquisition.
(3) Prior approval. The party shall obtain the written approval of the Maritime Administrator prior to the sale or other disposition (including mortgage) of a qualified agreement vessel.
(4) Deposit requirement. The Maritime Administrator will not normally require the deposit of the net proceeds from the sale of a qualified agreement vessel but shall require the deposit of the net proceeds from the mortgage of a qualified agreement vessel for which qualified withdrawals from the fund have been made.
(c) Sale or other disposition of agreement vessels to related persons —(1) In general. Section 3.2(c)(4) of the joint regulations (§ 391.2(c)(4) of this chapter) requires that the net proceeds from the sale or other disposition of an agreement vessel shall be the fair market value of the vessel when the party and the purchaser are owned or controlled directly or indirectly by the same interests within the meaning of section 482 of the Internal Revenue Code of 1986, as amended, and the regulations thereunder. In such case, the party shall furnish data to establish that the amount realized or to be realized is the fair market value.
(2) Data to be submitted. Sufficient data must be submitted to support a determination by the Maritime Administrator of the fair market value including the original cost of the vessel, dates of original delivery, acquisition and reconstruction, as applicable, cost of improvements, sales price, costs of sale and any other information which would assist in making such determination.
§ 390.12   Liquidated damages.
(a) Liquidated damages —(1) In general. Each agreement entered into under Chapter 535 shall contain a liquidated damages provision for the purpose of placing the party into its prefund position for each day a qualified agreement vessel is operated in violation of the geographic trading restrictions contained in the Act and § 390.5. The liquidated damages provision requires that the party repay the time value of the deferral of Federal Income Tax which the party has received.
(2) Calculation of liquidated damages. The liquidated damages specified in this paragraph shall be calculated as follows:
(i) With respect to each vessel operated in violation of the applicable trading restrictions, add (A) the sum of qualified withdrawals for the vessel which have been made from the ordinary income and capital gain accounts to the date of breach, and (B) the amount of any unpaid principal on indebtedness for the vessel which may be paid from the fund less any portion of such amount which by operation of law must be withdrawn from the capital account balance on deposit in the fund on the date of the breach.
(ii) Multiply the total derived in paragraph (a)(2)(i) of this section by an assumed effective Federal Income Tax rate of 30 percent;
(iii) Compound the product derived in paragraph (a)(2)(ii) of this section at 8 percent annually (A) for 20 years, if the duration of the trading restrictions applicable to the vessel is 20 years in accordance with paragraph (b)(1)(i) of this section; (B) for 10 years, if the duration of the trading restrictions applicable to the vessel is 10 years in accordance with paragraphs (b)(1) (ii), (iii) or (iv) of this section; or (C) for 5 years, if the duration of the trading restrictions applicable to the vessel is 5 years in accordance with paragraph (b)(1)(iv) of this section.
(iv) Subtract the amount calculated in paragraph (a)(2)(ii) of this section from the product derived in paragraph (a)(2)(iii) of this section;
(v) Divide the result derived in paragraph (a)(2)(iv) of this section by 2; and
(vi) Divide the result derived in paragraph (a)(2)(v) of this section (A) by 7300 (days) if the duration of the trading restrictions applicable to the vessel is 20 years; (B) by 3650 (days) if the duration of the trading restrictions applicable to the vessel is 10 years; or (C) by 1825 (days) if the duration of the trading restrictions applicable to the vessel is 5 years.
(3) Formula. The calculation of the daily rate of liquidated damages may be reduced to the following formula:
The formula may be further reduced to:
(4) Example. The provisions of paragraphs (c)(2) and (c)(3) of this section may be illustrated by the following example:
Assume that a qualified agreement vessel has been constructed with qualified withdrawals from a fund. The total cost was $20 million of which $6 million was withdrawn from the fund for a downpayment. Pursuant to the agreement, an additional $4 million may be withdrawn from the fund to pay principal on indebtedness. Thus, $10 million has been or may be withdrawn from the fund with respect to this vessel. The daily rate of liquidated damages would be:
(5) Payment of liquidated damages. The amount derived in paragraph (a)(2) of this section shall be the daily rate of liquidated damages and shall be paid to the Maritime Administrator, for deposit in the Treasury of the United States, within 30 days from the date the qualified agreement vessel first entered the prohibited geographic trade and shall be for all amounts owing from such date thereafter until the date payment is due. Payments, for continuing breaches, shall be made at 30 day intervals.
(6) Other remedies. Nothing in this paragraph shall diminish the Maritime Administrator's other remedies for breach under the Act, the rules and regulations or the agreement.
(b) Duration of restrictions —(1) In general. The geographic trading restrictions in the Act and § 390.5 and the liquidated damages provision shall apply for:
(i) 20 years from the date of final delivery on qualified agreement vessels constructed or acquired within one year of final delivery from the shipyard with the aid of qualified withdrawals;
(ii) 10 years from the date of completion of reconstruction for qualified agreement vessels reconstructed with the aid of qualified withdrawals;
(iii) 10 years from the date of acquisition of qualified agreement vessels acquired with the aid of qualified withdrawals more than one year after final delivery of the vessel from the shipyard;
(iv) 10 years from the date of the first qualified withdrawal from the fund to pay the existing indebtedness on a qualified agreement vessel which was included in Schedule B for that purpose unless the qualified vessel was more than fifteen years old on the date of the first qualified withdrawal in which case the period shall be five years.
(2) Transfer of qualified agreement vessel. In the event a qualified agreement vessel is sold or transferred to another person (see paragraph (b)(3) of § 390.11 requiring prior permission), the transferor shall require in the bill of sale that the transferee agree with the Maritime Administrator to comply with the geographic trading restrictions and to pay liquidated damages for any breach of such agreement that occurs after the transfer. The transferor shall remain liable for any violations that occurred prior to the approved transfer. However, in the case of a like kind exchange which is governed by section 1031 of the Internal Revenue Code of 1986, as amended, if the vessel acquired by the party has an economic life equal to or greater than the length of the geographic trading restrictions that remain applicable to the transferred vessel, the acquired vessel shall be deemed to be a qualified agreement vessel and the geographic trading restrictions of the transferred vessel shall attach to the acquired vessel.
§ 390.13   Failure to fulfill a substantial obligation under the agreement.
(a) In general. 46 U.S.C. 53509(c) requires the Maritime Administrator to determine whether there has been a failure to fulfill a substantial obligation under an agreement.
(b) Contracting Officer's tentative conclusion —(1) Notice. If the Contracting Officer tentatively concludes that any substantial obligation under the agreement, the joint regulations or these regulations is not being fulfilled by the party he shall serve written notice of his tentative conclusion upon the party by certified mail with return receipt requested. The notice shall contain the following information:
(i) A statement of the grounds upon which the tentative conclusion is based;
(ii) The amount the Contracting Officer tentatively concludes should be withdrawn as a nonqualified withdrawal; and
(iii) A statement that the tentative conclusion shall become a final decision unless the party requests, within 30 days, an opportunity either to cure its breach or to be heard and offer evidence in opposition to the tentative conclusion.
(2) Effect of notice. The notice of the tentative conclusion shall become a final decision as described in paragraph (d)(1) of this section, unless within 30 days of receipt of such a written notice the party by personal delivery or by certified mail, requests the opportunity either to cure its breach or to be heard and offer evidence in opposition to the tentative conclusion, in which case no further withdrawals from the fund, without the written prior approval of the Contracting Officer, shall be made by the party until a binding final decision is reached by the Maritime Administration.
(c) Basis for Contracting Officer's tentative conclusion. In determining whether a party has not fulfilled a substantial obligation under its agreement, the Contracting Officer shall consider among other things:
(1) The effect of the party's action or omission upon its ability to either carry out the purpose of the fund, accomplish its Schedule B program (see § 390.4(c)) or satisfy its minimum level of deposits in Schedule D (see § 390.4(e)).
(2) Whether the party has made material misrepresentations in connection with its application, agreement or any modification or amendment thereto or has failed to disclose material information that may affect its agreement or the purpose of the fund.
(d) Contracting Officer's decision and appeals to the Maritime Administrator —(1) Where there has not been a request to cure or to be heard. If the Contracting Officer issues a written notice under paragraph (b) of this section and the party does not request within 30 days an opportunity either to cure its breach or to be heard and offer evidence in opposition to the tentative conclusion, the Contracting Officer's tentative conclusion shall become the final decision, which decision shall be final, conclusive and binding upon the party, and no appeal therefrom shall be taken to the Maritime Administrator.
(2) Where there has been a request to cure or to be heard. If the Contracting Officer issues a written notice under paragraph (b) of this section and the party requests within 30 days an opportunity either to cure its breach or to be heard and offer evidence in opposition to the tentative conclusion, the party shall be offered such an opportunity. Request to cure must include a proposal to cure the breach. If the Contracting Officer accepts the party's proposal to cure its breach, then such determination shall be final. A party requesting to be heard and offer evidence in opposition to the Contracting Officer's tentative conclusion shall be permitted to submit, in writing, any information, evidence or argument within a period set by the Contracting Officer after considering the wishes of the party. The Contracting Officer shall reduce his final decision to writing and furnish the party a copy, by certified mail—return receipt requested, which decision shall be final and conclusive and shall bind the party unless within 30 days of receipt of the decision the party appeals from said decision by personal delivery or by certified mail to the Maritime Administrator with notice to the Contracting Officer.
(e) Appeals to the Maritime Administrator. Appeals with a request for a hearing on the record, if desired, are to be transmitted pursuant to paragraph (d) of this section and are to be addressed to the Maritime Administrator. Upon the filing of an appeal, the Contracting Officer shall transmit the entire record and a copy of his final decision to the Maritime Administrator. If a request for a hearing on the record is granted, the Maritime Administrator shall proceed pursuant to the Rules of Practice and Procedure in part 201 of this title. The decision of the Maritime Administrator on any question of fact shall be final, conclusive and binding upon the party unless determined by a court of competent jurisdiction to be fraudulent, capricious, or arbitrary, or so grossly erroneous as necessarily to imply bad faith or is not supported by substantial evidence.
§ 390.14   Departmental reports and certification.
(a) In general. For each calendar year, the Secretary of Transportation shall provide the Secretary of the Treasury, within 120 days after the close of such calendar year, a written report with respect to those capital construction funds under the Secretary of Transportation's jurisdiction.
(b) Content of reports. Each report shall set forth the name and taxpayer identification number of each person:
(1) Establishing a capital construction fund during such calendar year;
(2) Maintaining a capital construction fund as of the last day of such calendar year;
(3) Terminating a capital construction fund during such calendar year;
(4) Making any withdrawal from or deposit into (and the amounts thereof) a capital construction fund during such calendar year; or
(5) With respect to which a determination has been made during such calendar year that such person has failed to fulfill a substantial obligation under any capital construction fund agreement to which such person is a party.