Opinion ID: 65391
Heading Depth: 2
Heading Rank: 3

Heading: Criteria to Use in Determining Status of Vessels

Text: In determining whether the vessels qualify as export property, we look to the governing statute, § 927, and the regulation interpreting the statute. On its face, the governing regulation allows Tidewater and Tidewater FSC the benefit of the FSC deduction if the property is held for sublease or is subleased, by the person to a third person for the ultimate use of the third person. Temp. Treas. Reg. § 1.927(a)-1T(f)(2)(A)(1998). The statute, § 927(a)(1)(B), requires that the property be held primarily for lease in order to qualify as export property. While the language of the treasury regulation does not contain the word primarily, the regulation cannot change the terms of the statute. See Nalle v. Comm'r, 55 F.3d 189, 193 & n. 11 (5th Cir.1995) ([I]f a regulation obviously altered the scope of the relevant statute, the Commissioner should have known that such a regulation was invalid. (citing Comm'r v. Acker, 361 U.S. 87, 92-94, 80 S.Ct. 144, 4 L.Ed.2d 127 (1959) (parenthetical omitted))). The definition of export property carried forward in the regulations implicitly retains the word primarily. Therefore, our analysis will focus on whether the vessels were held by the Tidewater operating company primarily for sublease to a third party. Although the relationship of the parties in this case is controlled by the contracts between the parties, we begin with a consideration of the generally accepted definitions of the terms in play. As a general matter, the term `lease' means a transfer of the right to possession and use of goods for a term in return for consideration. 19 WILLISTON ON CONTRACTS § 53:18 (4th ed.1991). A service contract is defined simply as a contract to perform a service.... BLACK'S LAW DICTIONARY 324 (7th ed.1999). A time charter is defined generally as [a] charter for a specified period, rather than for a specific task or voyage; a charter under which the shipowner continues to manage and control the vessel, but the charterer designates the ports of call and the cargo carried. Id. at 229. As opposed to a voyage charter, which is for one voyage from point A to point B, a time charter is an arrangement of some permanency. GRANT GILMORE & CHARLES L. BLACK, JR., THE LAW OF ADMIRALTY, § 4-14, at 229 (2d ed.1975). While these general definitions are a logical starting point, the terms of the Time Charter itself controls the critical question as to whether the Time Charter is more like a lease or a service agreement. Under the Tidewater Time Charter, the customer can direct the vessel to undertake any voyage permitted by the terms of the agreement. The Time Charter covers a named vessel with specified capabilities, and while Tidewater has the right to provide a substitute vessel at any time, the customer must give its reasonable consent. [4] If the substitute vessel is not acceptable, the customer can refuse to accept it. The full capacity of the vessel is placed at the customer's disposal for use as it sees fit, and the customer can require special towing or anchor handling equipment or modify the vessel. In sum, the customer is given the full use of the vessel and the right to direct the vessel in all respects: when and where the vessel should go, the cargo it should carry, the passengers to be transported, and in other ways as set forth in the Time Charter. The government argues that the provisions of 26 U.S.C. § 7701(e) provide the proper framework for determining if the Time Charter is more like a lease or a service contract. Section 7701 is entitled Definitions, and § 7701(e) provides criteria for determining when a contract should be treated as a lease. Based on legislative history, Tidewater argues that § 7701(e) does not apply to the FSC provisions and that it only applies to investment tax credit issues. Tidewater's argument is inconsistent with the plain language of the statute. which states that the provisions apply for purposes of chapter 1. When the plain language of a statute is unambiguous, there is no need to resort to legislative history for aid in its interpretation. See Peavy v. WFAA-TV, Inc., 221 F.3d 158, 169 (5th Cir.2000). Here, the prefatory language of § 7701 clearly requires its application to all parts of Chapter 1, which includes the FSC provisions. Section 7701(e) reads: § 7701 (e) Treatment of certain contracts for providing services, etc. For purposes of chapter 1 (1) In general. A contract which purports to be a service contract shall be treated as a lease of property if such contract is properly treated as a lease of property, taking into account all relevant factors, including whether or not (A) the service recipient is in physical possession of the property, (B) the service recipient controls the property, (C) the service recipient has a significant economic or possessory interest in the property, (D) the service provider does not bear any risk of substantially diminished receipts or substantially increased expenditures if there is nonperformance under the contract, (E) the service provider does not use the property concurrently to provide significant services to entities unrelated to the service recipient, and (F) the total contract price does not substantially exceed the rental value of the property for the contract period. (2) Other arrangements. An arrangement (including a partnership or other pass-thru entity) which is not described in paragraph (1) shall be treated as a lease if such arrangement is properly treated as a lease, taking into account all relevant factors including factors similar to those set forth in paragraph (1). 26 U.S.C. § 7701(e) (2000). Although the Time Charter in this case does not purport[] to be a service contract, the factors set forth in § 7701(e)(1) are relevant because § 7701(e)(2) requires the same analysis for other contractual arrangements that may be properly treated as a lease, such as the Time Charter. Both § 7701(e)(1) and (e)(2) state that the factors are not exclusive and that all relevant factors must be considered. Before applying these individual factors to the Time Charter and considering any other relevant factors, we observe that § 7701(e) establishes a balancing test. This requires us to consider all pertinent information and determine whether, on balance, the Time Charter is more like a lease or a service contract. Section 7701(e) gives no guidance as to the weight to be given to these factors: that determination is left to the court's discretion.