
From the U.S. Code Online via GPO Access
[wais.access.gpo.gov]
[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[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 20 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.)

                       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

    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 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.
