‘‘(A) amounts representing long-term cap-
ital gains (as defined in section 1222 of such
Code) on assets referred to in subsection
(b)(1)(C), reduced by
‘‘(B) amounts representing long-term cap-
ital losses (as defined in such section) on assets
held in the fund.’’
(2) Subparagraph (B) of section 607(e)(4) of
such Act is amended to read as follows:
‘‘(B)(i) amounts representing short-term
capital gains (as defined in section 1222 of
such Code) on assets referred to in subsection
(b)(1)(C), reduced by
‘‘(ii) amounts representing short-term cap-
ital losses (as defined in such section) on assets
held in the fund, and’’.
(3) Subparagraph (B) of section 607(h)(3) of
such Act is amended by striking ‘‘gain’’ and all that
follows and inserting ‘‘long-term capital gain (as de-
fined in section 1222 of such Code), and’’.
(4) The last sentence of subparagraph (A) of
section 607(h)(6) of such Act is amended by striking
‘‘28 percent (34 percent in the case of a corpora-
tion)’’ and inserting ‘‘the rate applicable to net cap-
ital gain under such section 1(h) or 1201(a), as the
case may be’’.
(f) COMPUTATION OF INTEREST WITH RESPECT TO
NONQUALIFIED WITHDRAWALS.—
(1) Subparagraph (C) of section 607(h)(3) of
such Act is amended—
(A) by striking clause (i) and inserting the
following new clause:
‘‘(i) no addition to the tax shall be
payable under section 6651 of such Code,
and’’, and
(B) by striking ‘‘paid at the applicable rate
(as defined in paragraph (4))’’ in clause (ii) and
inserting ‘‘paid in accordance with section 6601
of such Code’’.
(2) Subsection (h) of section 607 of such Act
is amended by striking paragraph (4) and by redes-
ignating paragraphs (5) and (6) as paragraphs (4)
and (5), respectively.
(3) Subparagraph (A) of section 607(h)(5) of
such Act, as redesignated by paragraph (2), is
amended by striking ‘‘paragraph (5)’’ and inserting
‘‘paragraph (4)’’.
(g) OTHER CHANGES.—
(1) Section 607 of such Act is amended by
striking ‘‘the Internal Revenue Code of 1954’’ each
place it appears and inserting ‘‘the Internal Revenue
Code of 1986’’.
(2) Subsection (c) of section 607 of such Act is
amended by striking ‘‘interest-bearing securities ap-
proved by the Secretary’’ and inserting ‘‘interest-
bearing securities and other income-producing assets
(including accounts receivable) approved by the Sec-
retary’’.
SEC. 3. AMENDMENTS OF INTERNAL REVENUE CODE OF
1986.
(a) TREATMENT OF FUND EARNINGS.—
(1) Section 7518 of the Internal Revenue Code
of 1986 is amended by redesignating subsections (h)
and (i) as subsections (i) and (j), respectively, and
by inserting after subsection (g) the following new
subsection:
‘‘(h) TAXATION OF EARNINGS ON INVESTMENTS.—
‘‘(1) IN GENERAL.—The tax imposed by chap-
ter 1 shall be determined—
‘‘(A) by excluding from gross income the
earnings from the investment and reinvestment
of amounts held in a capital construction fund,
and
‘‘(B) by increasing the tax imposed by
such chapter by the product of the amount of
such earnings and the highest rate of tax speci-
fied in section 1 (section 11 in the case of a
corporation).
‘‘(2) MAXIMUM RATE ON CAPITAL GAINS.—If
there is a net capital gain on amounts held in a cap-
ital construction fund, the rate of tax taken into ac-
count under paragraph (1)(B) with respect to such
gain shall not exceed the rate applicable to net cap-
ital gain under section 1(h) or 1201(a), as the case
may be.
‘‘(3) COORDINATION
WITH
DEDUCTION
FOR
NET
OPERATING
LOSSES.—Any earnings excluded
from gross income under paragraph (1) shall be ex-
cluded in determining taxable income under section
172(b)(2).
‘‘(4) TAXABLE
EARNINGS.—For purposes of
this section, the term ‘taxable earnings’ means net
earnings determined with the following modifica-
tions:
‘‘(A) There shall be excluded interest in-
come exempt from taxation under section 203.
‘‘(B) If the person maintaining the fund is
a corporation, there shall be excluded the per-
centage applicable under section 243(a)(1) of
any dividend received by the fund with respect
to which such person would (but for paragraph
(1)(A)) be allowed a deduction under section
243.
‘‘(C) Losses from the sale or exchange of
capital assets shall be allowed only to the extent
of gains from such sales or exchanges.
‘‘(D) There shall be excluded—
‘‘(i) earnings on amounts deposited in
the fund which are attributable to vessels
documented under the laws of the United
States for operation in the fisheries of the
United States, and
‘‘(ii) earnings on earnings described in
clause (i).’’
(2) Subparagraph (D) of section 7518(a)(1) of
such Code is amended by inserting ‘‘reduced by the
tax imposed on such receipts under subsection (h)’’
after ‘‘in such fund’’.
(3) Subparagraph (C) of section 7518(c)(1) of
such Code is amended by striking ‘‘shall not be
taken into account’’ and inserting ‘‘shall be taken
into account as provided in subsection (h)’’.
(4) Paragraph (2) of section 7518(d) of such
Code is amended by striking ‘‘and’’ at the end of
subparagraph (C), by striking the period at the end
of subparagraph (D) and inserting ‘‘, and’’, and by
adding at the end thereof the following new subpara-
graph:
‘‘(F) the taxable earnings (as defined in
subsection (h)) of the fund for any taxable year
beginning after the date of the enactment of the
Merchant Marine Investment Act of 1993.’’
(5) Paragraph (3) of section 7518(d) of such
Code is amended by adding at the end thereof the
following new sentence: ‘‘Any amount included in
the taxable earnings (as defined in subsection (h)) of
the fund for any taxable year beginning after the
date of the enactment of the Merchant Marine In-
vestment Act of 1993 shall not be taken into ac-
count under this paragraph.’’
(6) Paragraph (4) of section 7518(d) of such
Code is amended by adding at the end thereof the
following new sentence: ‘‘In the case of taxable years
beginning after the date of the enactment of the
Merchant Marine Investment Act of 1993, any
amount included in the taxable earnings (as defined
in subsection (h)) of the fund shall not be taken into
account under subparagraph (B), and subpara-
graphs (C) and (E) shall not apply.’’
(7) Paragraph (1) of section 7518(g) of such
Code is amended by striking ‘‘subsection (h)’’ and
inserting ‘‘subsection (i)’’.
(8) Paragraph (1) of section 7518(e) of such
Code is amended by striking ‘‘or’’ at the end of sub-
paragraph (B), by striking the period at the end of
subparagraph (C) and inserting ‘‘, or’’, and by in-
serting after subparagraph (C) the following new
subparagraph:
‘‘(D) the tax imposed by subsection (h).’’
(b) TREATMENT OF CERTAIN LEASE PAYMENTS.—
(1) Paragraph (1) of section 7518(e) of such
Code is amended by striking ‘‘or’’ at the end of sub-
paragraph (C), by striking the period at the end of
subparagraph (D) and inserting ‘‘, or’’, and by in-
serting after subparagraph (D) the following new
subparagraph:
‘‘(E) the payment of amounts which reduce
the principal amount (as determined under reg-
ulations) of a qualified lease of a qualified ves-
sel or of a barge or container which is part of
the complement of a qualified vessel.
(2) Paragraph (4) of section 7518(f) of such
Code is amended by inserting ‘‘(or to reduce the
principal amount of any qualified lease)’’ after ‘‘in-
debtedness’’.
(c) AUTHORITY TO MAKE DEPOSITS
FOR PRIOR
YEARS BASED ON AUDIT ADJUSTMENTS.—Subsection (a)
of section 7518 of such Code is amended by adding at
the end thereof the following new paragraph:
‘‘(4) To the extent permitted by joint regula-
tions, deposits may be made in excess of the limita-
tion described in paragraph (1) (and any limitation
specified in the agreement) for the taxable year if,
by reason of an audit adjustment to a prior taxable
year which became final during the taxable year, the
amount of the deposit could have been made for
such prior taxable year.’’
(d) TREATMENT OF CAPITAL GAINS AND LOSSES.—
(1) Paragraph (3) of section 7518(d) of such
Code is amended to read as follows:
‘‘(3) The capital gain account shall consist of—
‘‘(A) amounts representing long-term cap-
ital gains (as defined in section 1222) on assets
referred to in subsection (b)(1)(C), reduced by
‘‘(B) amounts representing long-term cap-
ital losses (as defined in such section) on assets
held in the fund.’’
(2) Subparagraph (B) of section 7518(d)(4) of
such Code is amended to read as follows:
‘‘(B)(i) amounts representing short-term
capital gains (as defined in section 1222) on as-
sets referred to in subsection (a)(1)(C), reduced
by
‘‘(ii) amounts representing short-term cap-
ital losses (as defined in such section) on assets
held in the fund, and’’.
(3) Subparagraph (B) of section 7518(g)(3) of
such Code is amended by striking ‘‘gain’’ and all
that follows and inserting ‘‘long-term capital gain
(as defined in section 1222), and’’.
(4) The last sentence of subparagraph (A) of
section 7518(g)(6) of such Code is amended by
striking ‘‘28 percent (34 percent in the case of a
corporation)’’ and inserting ‘‘the rate applicable to
net capital gain under such section 1(h) or 1201(a),
as the case may be’’.
(e) COMPUTATION OF INTEREST WITH RESPECT TO
NONQUALIFIED WITHDRAWALS.—