CFR-2017 Title 46, Vol 8, Part 287

§ 272.43

46 CFR Ch. II (10–1–17 Edition)

any items disallowed and the reasons
for such disallowance.

after the date of the notification sent
to the operator by the appropriate Director pursuant to paragraph (d) of this
section or § 272.33.

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[57 FR 34690, Aug. 6, 1992]

§ 272.43 Review and appeal procedures.
(a) Exclusive procedures. Notwithstanding the audit appeal procedures of
part 205 of this chapter, the provisions
of this section shall be the exclusive
remedy available to an Operator for
the review and appeal of any disallowance of subsidy for a M&R expense
claimed or any penalty assessed pursuant to § 272.31.
(b) Request for review. An Operator
may request review by:
(1) The Director, Office of Ship Operations, with respect to any disallowance by the Region office of a claimed
M&R expense, after receiving the notification required by § 272.41(c); or
(2) The Director, Office of Financial
Approvals, with respect to any disallowance of a claimed M&R expense,
after receiving the notification required by § 272.42(b).
(c) Timeliness of request. The Operator
shall file all requests for review pursuant to paragraph (b) of this section
within 60 days after the date of the
audit notification. Any disallowance
with respect to which the Operator
fails to file a timely request for review
shall be final and shall not be subject
to appeal to the Board pursuant to
paragraph (e) of this section.
(d) Notification of review determination.
The appropriate MARAD Office Director shall notify the Operator by letter,
with respect to each timely filed review request, of the Director’s determination and the reasons for each disallowance and whether the determination is final or subject to the submission of additional information.
(e) Appeal to the Maritime Subsidy
Board—(1) Right to appeal. An Operator
may appeal a MARAD Office Director’s
final determination issued pursuant to
§ 272.32 (penalties) or § 272.43 (review of
claims disallowance or of audit results)
of this section to the Board in writing.
(2) Contents and timeliness. The Operator shall set forth in any appeal the
reasons for the Operator’s objection to
a penalty or disallowance of M&R subsidy and shall file such appeal with the
Secretary of the Board within 60 days

§ 272.44 Dates.
The dates noted on the letters or notifications sent to the Operator by officials of the Region Office, any Director
or any other official or MARAD, pursuant to the provisions of this part, shall
be conclusive for the purposes of determining the timeliness of any requests
for review made under the provisions of
this part.

PART 276 [RESERVED]
PART 277—DOMESTIC AND
FOREIGN TRADE; INTERPRETATIONS
§ 277.1 Guam, Midway and Wake.
Steamship service between ports of
the United States mainland and ports
in the islands of Guam, Midway and
Wake is not ‘‘domestic intercoastal or
coastwise service’’ within the meaning
of section 805(a) of the Merchant Marine Act, 1936. This interpretation is
limited to Guam, Midway and Wake
and does not signify that a similar interpretation is or would be applicable
to Hawaii, Puerto Rico or Alaska.
(Sec. 204, 49 Stat. 1987, as amended; 46 U.S.C.
1114. Interprets or applies sec. 805, 49 Stat.
2012, as amended; 46 U.S.C. 1223)
[G.O. 73, 15 FR 9065, Dec. 19, 1950]

PARTS 280–283 [RESERVED]
PART 287—ESTABLISHMENT OF
CONSTRUCTION RESERVE FUNDS
Sec.
287.1 Definitions.
287.2 Scope of section 511 of the Act and the
regulations in this part.
287.3 Requirements as to vessel operations.
287.4 Application to establish fund.
287.5 Tentative authorization to establish
fund.
287.6 Establishment of fund.
287.7 Circumstances permitting reimbursement from a construction reserve fund.
287.8 Investment of funds in securities.
287.9 Valuation of securities in fund.
287.10 Withdrawals from fund.
287.11 Time deposits.
287.12 Election as to nonrecognition of gain.

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Maritime Administration, DOT

§ 287.1

287.13 Deposit of proceeds of sales or indemnities.
287.14 Deposit of earnings and receipts.
287.15 Time for making deposits.
287.16 Tax liability as to earnings deposited.
287.17 Basis of new vessel.
287.18 Allocation of gain for tax purposes.
287.19 Requirements as to new vessels.
287.20 Obligation of deposits.
287.21 Period for construction of certain
vessels.
287.22 Time extensions for expenditure or
obligation.
287.23 Noncompliance with requirements.
287.24 Extent of tax liability.
287.25 Assessment and collection of deficiencies.
287.26 Reports by taxpayers.
287.27 Controlled corporation.
287.28 Administrative jurisdiction.

(7) Stock includes the shares in an association, joint-stock company, or insurance company.
(8) Affiliate or associate means a person directly or indirectly controlling,
controlled by, or under common control with, another person.
(9) Control, as used in paragraph (a)(8)
of this section, means the possession of
the power to direct in any manner the
management and policies of a person,
and the terms controlling and controlled
shall have the meanings correlative to
the foregoing.
(10) Person means an individual, a
corporation, a partnership, an association, an estate, a trust, or a company.
(11) Partnership includes a syndicate,
group, pool, joint venture, or other unincorporated organization.
(12) Construction, if so determined by
the Administration, shall include reconstruction and reconditioning.
(13) Reconstruction and reconditioning
shall include the reconstruction, reconditioning, or modernization of a vessel
for exclusive use on the Great Lakes,
including the Saint Lawrence River
and Gulf, if the Administration determines that the objectives of the Act
will be promoted by such reconstruction, reconditioning, or modernization,
and, notwithstanding any other provisions of law, such vessel shall be
deemed to be a new vessel within the
meaning of section 511 of the Act for
such reconstruction, reconditioning, or
modernization.
(14)
Purchase-money
indebtedness
means any indebtedness, or evidence
thereof, created as the result of the
purchase of a vessel by the taxpayer.
(15) Contract, contract for the construction, and construction contract shall include, if so determined by the Administration, a contract for reconstruction
or reconditioning and shall include, in
the case of a taxpayer who constructs a
new vessel in a shipyard owned by such
taxpayer, an agreement, between such
taxpayer and the Administration with
respect to such construction, and containing provisions deemed necessary or
advisable by the Administration to
carry out the purposes and policy of
section 511 of the Act.
(b) Insofar as the computation and
collection of taxes are concerned, other
terms used in the regulations in this

AUTHORITY: Secs. 204, 511, 49 Stat. 1987, as
amended, 54 Stat. 1106, as amended; 46 U.S.C.
1114, 1161.
SOURCE: General Order 38 (2d Rev.), 30 FR
7215, May 29, 1965; 30 FR 8162, June 25, 1965,
unless otherwise noted.
EDITORIAL NOTE: The regulations contained
in this part were codified by the Internal
Revenue Service in Treasury Decision 6820,
30 FR 6030, Apr. 29, 1965. For text see also 26
CFR part 2.

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§ 287.1

Definitions.

(a) As used in the regulations in this
part, except as otherwise expressly provided—
(1) Act means the Merchant Marine
Act, 1936, as amended (46 U.S.C., ch. 27).
(2) Section means one of the sections
of the regulations in this part.
(3) Administration means the Maritime Administration of the Department of Transportation.
(4) Citizen means a person who, if an
individual, was born or naturalized as a
citizen of the United States or, if other
than an individual, meets the requirements of section 905(c) of the Act and
section 2 of the Shipping Act, 1916, as
amended (46 U.S.C. 802).
(5) Taxpayer means a citizen who has
established or seeks to establish a construction reserve fund under the provisions of section 511 of the Act and the
regulations in this part, and may include a partnership.
(6) Corporation includes associations,
joint-stock companies and insurance
companies.

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§ 287.2

46 CFR Ch. II (10–1–17 Edition)

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part, except as otherwise provided,
have the same meaning as in the Internal Revenue Code and the regulations
thereunder.

to sales or losses of vessels within the
scope of § 287.3 or in respect of earnings
derived from the operation of such vessels. A loss to be within section 511 of
the Act must be an actual or constructive total loss. Whether there is a total
loss, actual or constructive, will be determined by the Administration.

§ 287.2 Scope of section 511 of the Act
and the regulations in this part.
(a) Applicability of regulations. The
regulations prescribed in this part—
(1) Apply to gain realized from the
sale or loss of vessels, earnings from
the operation of vessels, and interest
(or otherwise) with respect to amounts
previously deposited in the construction reserve fund, for a taxable year beginning after December 31, 1964, and
(2) Apply to the expenditure, obligation, or withdrawal, during a taxable
year beginning after December 31, 1964,
of any deposits of gain, earnings, and
interest (or otherwise) of the character
referred to in paragraph (a)(1) of this
section without regard to the taxable
year in which the deposits were made.
(b) Nonrecognition and accumulation.
Section 511 of the Act provides, under
conditions specified, for the nonrecognition, for income and excessprofits tax purposes, of the gain realized from the sale or indemnification
for loss of certain vessels including certain vessels in the course of construction, or shares therein. It also permits
the accumulation of the proceeds of
such sales or indemnification and of
certain earnings without liability
under part I (section 531 and following),
subchapter G, chapter 1 of the Internal
Revenue Code of 1954, and the regulations thereunder (26 CFR 1.531 through
1.537–1 (Income Tax Regulations)).
(c) Availability of benefits. The benefits of section 511 of the Act are available to any citizen as defined in paragraph (a)(4) of § 287.1, who, during any
taxable year owns, in whole or in part,
a vessel or vessels within the scope of
§ 287.3. A citizen operating such a vessel
or vessels owned by any other person or
persons can derive no benefit from the
provisions relating to the nonrecognition of gain from the sale or loss of
such vessel or vessels so owned, but
may establish a construction reserve
fund in which he may deposit earnings
from the operation of such vessel or
vessels.
(d) Applicability of section 511. Section
511 of the Act applies only with respect

§ 287.3 Requirements as to vessel operations.
Section 511 of the Act applies with
respect to vessels operated in the foreign or domestic commerce of the
United States or in the fisheries of the
United States and vessels acquired or
being constructed for the purpose of
such operation. The foreign commerce
of the United States includes commerce or trade between the United
States (including the District of Columbia), the territories and possessions
which are embraced within the coastwise laws, and a foreign country or
other territories and possessions of the
United States. The domestic commerce
of the United States includes commerce or trade between ports of the
United States and its territories and
possessions, embraced within the
coastwise laws and on inland rivers.
The fisheries include the fisheries of
the United States and its territories
and possessions. Section 511 of the Act
does not apply to vessels operated in
the foreign commerce or fisheries of
any country other than the United
States.
§ 287.4

Application to establish fund.

(a) Any person claiming to be entitled to the benefits of section 511 of the
Act may make application, in writing,
to the Administration for permission
to establish a construction reserve
fund. The original application shall be
executed and verified by the taxpayer,
or if the taxpayer is a corporation, by
one of its principal officers, in triplicate, and shall be accompanied by
eight conformed copies when filed with
the Administration. MARAD will accept electronic options (such as facsimile and Internet) for transmission of
required information to MARAD, if
practicable.
(b) Form of application:

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Maritime Administration, DOT

§ 287.4

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APPLICATION FOR PERMISSION TO ESTABLISH A
CONSTRUCTION RESERVE FUND UNDER SEC.
511, MERCHANT MARINE ACT, 1936, AS
AMENDED

be deemed necessary to establish the U.S.
citizenship of the applicant pursuant to section 2, Shipping Act, 1916, or section 905(c),
Merchant Marine Act, 1936, as amended.)
8. A brief statement of the general effect of
each voting agreement, voting trust, or
other arrangement whereby the voting
rights in any shares of the applicant are
owned, controlled or exercised, or whereby
the control of the applicant is in any way
held or exercised by any person not the holder of legal title to such shares. Give the
name, address, nationality, and business of
any such person, and, if not an individual,
the form of organization.
B. Business of the applicant and proposed use
of the new vessel.
9. A brief description of (a) the shipping
business, or (b) the fishing business, and (c)
any other business activities of the applicant.
10. If engaged in the domestic or foreign
commerce of the United States, full details
concerning the services, routes, or lines on
which vessels owned or chartered by the applicant are or have been operated.
11. If applicant is engaged in the fisheries
of the United States, full details concerning
the location of the fishing operations and the
method employed.
C. Proceeds to be deposited.
12. If applicant proposes to deposit the proceeds from the sale of a vessel, a description
of the transaction from which the funds were
obtained, including the name of the vessel
sold, name of purchaser, selling price, date
and terms of sale, consideration received by
the applicant, amount and description of any
mortgage or other lien on the vessel at the
time of sale, whether such mortgage or lien
was satisfied from the proceeds of sale, brief
description of vessel as to size, speed, tonnage, etc., age of vessel at the time of sale,
and value and accrued depreciation for income tax purposes at time of sale.
13. If applicant proposes to deposit proceeds of indemnity from loss of a vessel, the
name of the vessel, date and description of
the loss, amount of indemnity and date received, name of underwriter, amount and description of any mortgage or other lien on
the vessel at time of loss, whether such
mortgage or lien was satisfied from the proceeds of the indemnity, age of vessel at time
of loss, brief description of vessel as to size,
speed, tonnage, etc., and value and accrued
depreciation for income tax purposes at time
of loss.
14. If applicant proposes to deposit earnings from the operation of vessels, a statement of the amount of such earnings to be
deposited, the period during which earned,
and their source, including the vessels, services, routes, or lines involved.
D. The new vessel.

The undersigned applicant, lll, hereby
applies, under section 511, Merchant Marine
Act, 1936, as amended, and the regulations
prescribed by the Secretary of Transportation acting by and through the Maritime
Administrator (hereinafter referred to as
‘‘Administrator’’) (46 CFR Part 287) and the
Secretary of the Treasury, Internal Revenue
Service (26 CFR Part 2) for permission to establish a construction reserve fund to be
used for the construction or acquisition of a
new vessel or vessels as defined by subsection (a) of said section 511, and submits in
support of its application the following information:
A. Identity and nationality of applicant.
1. Exact name.
2. Status (individual, partnership, corporation, etc.).
3. Give the place of incorporation—whether
under the laws of the United States, or of a
State, Territory, District, or possession
thereof.
4. Address of principal executive offices.
5. A statement, if applicant is an individual or a partnership, should be attached
in the application in affidavit form, containing information that applicant is a citizen of the United States by virtue of birth
in the United States, naturalization, etc.;
give place and date of birth and/or naturalization; if derivative U.S. citizenship is alleged through naturalization of parent while
a minor, the number, date and place of issue
of the certificate of derivative citizenship of
applicant should be cited together with any
other pertinent details relative thereto.
6. (a) The name, office, and nationality of
each officer and director of the applicant
owning shares of stock in the corporation
should be submitted together with the number and class of capital shares owned.
(b) In order that the U.S. citizenship status
of a corporation applicant may be determined by the Administration, an affidavit as
in accordance with Part 355 of this Chapter
shall be furnished together with a current
copy of the Articles or Certificate of Incorporation certified by the Secretary of the
State where incorporated (or appropriate officer, if other than a State, as provided in
‘‘A.3’’ above), and a copy of the current ByLaws certified by the Secretary of the Corporation.
7. The name, address and nationality of,
and number and class of capital shares
owned by, each person not named in answer
to Item 6, owning of record, or beneficially if
known, 5 percent or more of the outstanding
capital shares of any class of the applicant.
(The applicant shall be required, upon request, to furnish such additional data as may

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§ 287.4

46 CFR Ch. II (10–1–17 Edition)
22. Name and address of proposed depository or depositories for the construction reserve fund.
F. Taxable year of applicant.
23. Whether applicant files its Federal income tax return on a calendar year or fiscal
year basis and if on the latter, the beginning
of its fiscal year.
G. Exhibits to be furnished.
24. The following documents shall be filed
as exhibits attached to the application:
Exhibit I—If available at the time this application is filed, an authenticated copy of
any irrevocable commitment to finance the
construction or acquisition of the new vessel
proposed to be deposited in the construction
reserve fund pursuant to the provisions of 46
CFR 287.13(d).
Exhibit II—If the applicant is a corporation, a copy of each contract or agreement
presently in effect, referred to in answer to
Item 8.
H. Covenants of the applicant.
25. The applicant hereby agrees as follows:
(a) That the construction reserve fund
shall be subject to the provisions of section
511, Merchant Marine Act, 1936, as amended,
to the regulations prescribed by the Administrator, and the Secretary of the Treasury
with respect to the establishment, maintenance, expenditure, and use of such fund, and
to such resolutions as may be adopted by the
Administrator with respect to such fund;
(b) That it will furnish copies of any contracts entered into for the construction or
acquisition of new vessels which the Administrator may require;
(c) That it will furnish hull plans and specifications, machinery plans and specifications, and data with respect to communication facilities if and to the extent required
by the Administrator; and
(d) If no contract for the construction of a
new vessel as set forth in paragraph D, subdivision 15(a) hereof, has been entered into at
the time of making of this application, it
will, upon entering into said contract, furnish to the Administrator the date thereof,
the parties thereto, the terms thereof and
date of delivery thereunder. Name of applicant:

15. Statement whether applicant proposes:
(a) To have a new vessel built to specifications, or (b) to acquire a vessel already constructed or under construction. If the
former, and a contract for construction has
been entered into at the time of the making
of this application, state the date said contract was entered into, the parties thereto,
the terms thereof, and date of delivery thereunder. If the latter, give name of vessel,
builder, from whom purchased, or to be purchased, date when construction commenced,
and date when delivered, or if vessel is still
under construction, anticipated date of delivery.
16. The general characteristics of the proposed new vessel, including (a) principal dimensions; (b) gross, net and deadweight tonnage; (c) bale and grain capacities of all
cargo holds; (d) capacities of all tanks, storage spaces, refrigerator cargo spaces and separately chilled cargo spaces; (e) number and
classes of passenger accommodations; (f)
type and power, and in case of steam machinery, the gauge pressure, total temperature, and vacuum expected of propulsive machinery; (g) kind of fuel to be burned; and (h)
sustained sea speed at designed load draft.
17. If the proposed new vessel is to operate
in the domestic or foreign commerce of the
United States, a statement of how it will
meet the needs of the service, route or line
for which it is intended, with emphasis on
the following factors: (a) Cargo accommodations—cargo space and fittings and appliances for handling and stowing cargo; (b)
passenger accommodations; (c) construction
and design; and (d) accommodations for officers and crews.
18. If the proposed new vessel is to be operated in the fisheries of the United States, a
description of the vessel, and a statement of
how the vessel will meet the needs of such
operations.
19. If the proposed new vessel is intended to
replace a vessel or vessels requisitioned or
purchased by the United States, a statement
of how the proposed replacement vessel will
meet the needs of the service, route, line, or
use for which it is intended.
20. If the proposed new vessel is less than
2,000 gross tons or of less speed than 12
knots, a description of the features which
would make it desirable for use by the
United States in case of war or national
emergency.
E. The construction reserve fund.
21. A description of the deposit or deposits
which the applicant proposes to make in the
construction reserve fund, including the
amounts to be deposited in cash, notes,
mortgages or other evidences of indebtedness, irrevocable commitments, or securities, giving reference to the source as described in items C–12, C–13, or C–14.

llllllllllllllllllll
By lllllllllllllllll
(Name, typed)
llllllllllllllllll
(Title)
llllllllllllllllll
(Signature)

(Date)

I, lll, certify that I am the lll (Title of
office) of lll (Exact name of applicant)
the applicant on whose behalf I am authorized to execute the foregoing application and
agreements; that the applicant is a citizen of
the United States, in accordance with the requirements of the Merchant Marine Act,

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Maritime Administration, DOT

§ 287.6

1936, as amended; that this application is
made for the purpose of inducing the Secretary of Transportation, represented by the
Maritime Administrator to grant to the applicant, pursuant to the provisions of section
511 of the Merchant Marine Act, 1936, as
amended, and the regulations promulgated
by the Secretary of the Treasury and the
Maritime Administrator thereunder, with all
of which I am familiar, permission to establish a construction reserve fund; that I have
carefully examined the application and all
documents submitted in connection therewith and, to the best of my knowledge, information and belief, the statements and representations contained in said application
and related documents are full, complete, accurate, and true.
Date:
llllllllllllllllll
(Name)
llllllllllllllllll
(Title)
llllllllllllllllll
(Signature)

therewith current and correct while the application is pending.

(c) Fee. Each such application shall
be accompanied by the sum of $225,
which sum will be retained to recover
the cost of processing the application.
(Approved by the Office of Management and
Budget under control number 2133–0032)
[G.O. 38, 2d Rev., 30 FR 7215, May 29, 1965, as
amended by Amdt. 1, 31 FR 3397, Mar. 4, 1966;
47 FR 25530, June 14, 1982; 68 FR 62537, Nov. 5,
2003; 69 FR 61451, Oct. 19, 2004]

§ 287.5 Tentative authorization to establish fund.
Where the time between the receipt
by the Administration of the application for permission to establish a construction reserve fund and the date
prior to which an amount received
from the sale or loss of a vessel must
be deposited to come within the scope
of section 511 of the Act is insufficient
to permit a determination of the eligibility of the applicant, the Administration may tentatively authorize the establishment of a construction reserve
fund and the deposit of such amount
therein. Such tentative authorization
shall be subject to rescission by the
Administration if subsequently it is determined that the applicant is not entitled to the benefits of section 511 of the
Act, or has not complied with the statutory requirements. For example, a
tentative authorization will be rescinded if the Administration ascertains that the applicant is not a citizen. Upon such determination, the
fund shall be closed and all amounts on
deposit therein shall be withdrawn.

Attention: A false statement in this application is punishable by law (18 U.S.C. 1001).

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INSTRUCTIONS AS TO PREPARATION OF
APPLICATION

1. Applications shall be prepared in the
form provided according to the lettered
items and serially numbered paragraphs.
They must be signed and sworn to as provided. Eleven copies of the applications shall
be filed with the Maritime Administrator, at
least one copy of which shall be signed.
2. Each application shall be complete.
Items or part of items which are inapplicable
may, however, be omitted. The information
required by Article 25 need be furnished only
as stated in that item. The applicant may incorporate by specific reference information
previously furnished the Maritime Administrator provided that such information so incorporated shall have been furnished at least
in triplicate.
3. If any information called for by an applicable item is not furnished, and explanation
of the omission shall be given. The applicant
may furnish such relevant information as it
may desire, in addition to that specified in
the form.
4. Any additional information called for by
the Maritime Administrator from time to
time shall be furnished as an amendment or
amendments to the application. The original
and 11 copies of each amendment shall be
filed, shall refer to the application, and shall
be identified as an amendment and dated.
Without any specific request from the Maritime Administrator the applicant shall file
from time to time as amendments any information necessary to keep the information
contained therein or furnished in connection

§ 287.6

Establishment of fund.

(a) Authorization by the Administration. If the application is approved by
the Administration, the Administration will adopt Orders authorizing the
establishment of a construction reserve
fund with the depository or depositories designated by the taxpayer and
approved by the Administration. The
Orders will provide for joint control by
the Administration and the taxpayer
over such fund, will set forth the conditions governing the establishment and
maintenance of the fund and the making of deposits therein and withdrawals

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§ 287.7

46 CFR Ch. II (10–1–17 Edition)

therefrom, and will designate the representatives authorized to execute instruments of withdrawal on behalf of
the Administration.
(b) Resolution or agreement of the taxpayer. A certified copy of the Orders of
the Administration will be furnished
the taxpayer. If the taxpayer is a corporation, it shall promptly adopt,
through its board of directors, a resolution satisfactory in form and substance
to the Administration, authorizing the
establishment and maintenance of the
fund in conformity with the action of
the Administration. If the taxpayer is
not a corporation, it shall promptly
execute an agreement with the depository satisfactory in form and substance
to the Administration to conform to
the action of the Administration as set
forth in the Orders. Certified copies of
the Orders of the Administration and
of the resolution of the taxpayer (if it
is a corporation) will be furnished to
the depository by the Administration
and the taxpayer, respectively, for its
guidance in maintaining the fund and
honoring instruments of withdrawal.
The taxpayer, if a corporation, shall
also furnish the Administration with a
certified copy of its resolution, or if
not a corporation a duplicate original
of its agreement with the depository.

§ 287.7 Circumstances permitting reimbursement from a construction reserve fund.
(a) Payments prior to establishment of
fund. If, prior to the establishment of a
construction reserve fund under the
regulations in this part, a taxpayer has
made necessary payments under a contract which satisfies the provisions of
the regulations in this part and section
511 of the Act for the construction or
acquisition of a new vessel, such taxpayer may, if subsequently authorized
to establish a construction reserve
fund under the regulations in this part,
draw against such fund as reimbursement for the amount, if any, of other
funds which, with the approval or ratification of the Administration, the taxpayer used for making such necessary
payments prior to the establishment of
the fund.
(b) Payments subsequent to establishment of fund. If, subsequent to the establishment of a construction reserve
fund under the regulations in this part,
the taxpayer has made necessary payments under a contract which satisfies
the provisions of the regulations in
this part and section 511 of the Act for
the construction or acquisition of a
new vessel, such taxpayer may draw
against such fund as reimbursement for
the amount, if any, of other funds
which, with the approval or ratification of the Administration, the taxpayer had used for the purpose of making such necessary payments.

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NOTE: The resolutions referred to in this
section shall be retained 2 years after a final
release or settlement agreement is completed between the Maritime Administration/Maritime Subsidy Board and the taxpayer.

§ 287.8 Investment of funds in securities.
(a) Obligations of or guaranteed by the
United States. Interest-bearing direct
obligations of the United States, or obligations fully guaranteed as to principal and interest by the United States
may be deposited in the construction
reserve fund in lieu of cash, may be
purchased with cash on deposit in the
fund, or may be substituted for securities or commitment to finance in the
fund, subject to the provisions of paragraph (b) of this section.
(b) Other securities. In cases where the
taxpayer desires to deposit any securities in the fund in lieu of cash other
than those of or guaranteed by the
United States or to purchase such
other securities with cash on deposit in

(c) Constructive action not recognized.
Constructive deposits, substitutions or
withdrawals will not be recognized by
the Administration in the establishment and maintenance of the fund.
(d) Failure to make deposits as basis for
termination of fund. In the event no deposit is made into the fund for more
than five years, any amounts remaining in the fund shall be removed from
the fund at the discretion of the Administration and, if so removed, the
fund shall be terminated. In the event
of such termination, see § 287.23 for recognition of gain.

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Maritime Administration, DOT

§ 287.9

the fund, or to substitute such other
securities for securities or commitment to finance in the fund, the taxpayer shall make written application
to the Administration and shall not
consummate the transaction until the
written consent of the Administration
shall have been received. The application shall describe the securities fully.
Every approval by the Administration
of such application shall be conditioned upon agreement by the taxpayer
forthwith to dispose of such securities
upon subsequent request by the Administration. Immediately upon the purchase of any securities for deposit in
the fund, the taxpayer shall advise the
Administration, giving the date of purchase, a description of the securities,
and the price paid therefor (net, brokerage and other charges, and gross).
Ordinarily, the Administration will not
approve the deposit in the fund in lieu
of cash, or the purchase with cash on
deposit in the fund or the substitution
for securities in the fund of securities
not actively traded in on exchanges
registered under the Securities Exchange Act of 1934 (15 U.S.C. Chapter
2B), or securities which are not legal
for investment of trust funds. Whenever the Administration approves the
substitution of other securities for securities in the fund, such substitution
shall be effected only upon or after the
deposit of the substituted securities
into the fund.
(c) Cash. Cash may be substituted for
amounts which are on deposit in the
fund in any other form.
(d) Devalued securities. In the event
the Administration determines that
the market value at any date of any securities in the fund has decreased to a
figure which is less than 90 percent of
the market value at the time of deposit
into the fund, then within 60 days after
the taxpayer receives notice of such determination the taxpayer shall (except
as otherwise provided in this paragraph) deposit into the fund cash or securities in an amount equal to the difference between the current market
value of the devalued securities and the
market value of such securities at the
time of their original deposit. However,
if any securities in the fund are valued
at the time of their deposit at less than
the market value of such securities at

the time of their deposit the taxpayer
shall be required to deposit only an
amount equal to that portion of the
difference between the current market
value of the devalued securities and the
market value of such securities at the
time of their original deposit which
bears the same ratio to such total difference as the amount at which the securities were valued at the time of
their deposit bears to the market value
at the time of such deposit.
§ 287.9 Valuation of securities in fund.
(a) Equipment values. In cases where
securities are deposited in the fund in
lieu of cash, or are purchased with cash
on deposit in the fund, or are substituted for securities in the fund, the
value of such securities must not be
less than the amount of cash in lieu of
which they are so deposited or with
which they are so purchased, or the
value at the time of deposit of the securities for which they were so substituted. If the securities on deposit in
the fund are replaced by cash from the
general funds of the taxpayer, the
amount of cash to be deposited in the
fund in lieu thereof shall be not less
than the amount at which such securities were valued at the time of their
deposit in the fund.
(b) Determination of value. (1) For the
purpose of determining the amount in
the fund, the value of securities shall
be their ‘‘market value’’ (which shall
be the basis for determining value, unless otherwise agreed to by the administration) and shall be determined in
the following manner:
(i) In instances where no actual purchase is involved, such as the initial
deposit of securities in the fund in lieu
of cash, the last sales price thereof on
the principal exchange on the day the
deposit was made shall be deemed to be
the ‘‘market value’’ thereof, or, if no
such sales were made, the ‘‘market
value’’ thereof will be determined by
the Administration on such basis as it
may deem to be fair and reasonable in
each case.
(ii) In instances where the purchase
of securities with cash on deposit in
the fund is involved, ‘‘market value’’
shall be the gross price paid (adjusted
for accrued interest); Provided, That if
such securities are purchased otherwise

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§ 287.10

46 CFR Ch. II (10–1–17 Edition)
(b) Other withdrawals. Checks, drafts,
or other instruments of withdrawal executed by the taxpayer for purposes
other than to meet obligations under a
contract for the construction or acquisition of a new vessel or vessels or for
the liquidation of existing or subsequently incurred purchase-money indebtedness, whether the taxpayer has
the entire or a partial interest therein,
shall be drawn by the taxpayer to its
own order and forwarded to the Administration in Washington, DC, with appropriate explanation of the purpose of
the proposed withdrawal. Such withdrawals may occur by reason of a determination by the Administration
that the taxpayer is not entitled to the
benefits of section 511 of the Act (see
§ 287.5), or that a particular deposit has
been improperly made (see § 287.13), or
by reason of the election of the taxpayer to make such withdrawals. Upon
receipt of such checks, drafts, or other
instruments of withdrawal, the Administration will give notice thereof to the
Commissioner of Internal Revenue. The
Commissioner will advise the Administration of the receipt of the notice and
the date it was received. The Administration shall not countersign such
checks, drafts, or other instruments of
withdrawal or transmit them to the
taxpayer until the expiration of 30 days
from the date of receipt of the notice
by the Commissioner, unless the Commissioner or such official of the Internal Revenue Service as he may designate for the purpose consents in writing to earlier countersignature by the
Administration and transmittal to the
taxpayer. Upon the expiration of such
30-day period, or prior thereto if the
aforesaid consent of the Commissioner
has been obtained, the Administration
will countersign the check, draft, or
other instrument of withdrawal and
forward it to the taxpayer.
(c) Inapplicability to certain transactions. The provisions of this section
shall not be applicable to transactions
deemed to be withdrawals by reason of
the sale of securities held in the fund
for an amount less than the market
value thereof at the time of their deposit (see § 287.23), nor to the cancellation of an irrevocable commitment deposited in the fund, upon proof satisfactory to the Administration that the

than upon a registered exchange the
price shall be within the range of
transactions on the exchange on the
date of such purchase, or, if there were
no such transactions, then the ‘‘market value’’ thereof will be determined
by the Administration on such basis as
it may deem to be fair and reasonable
in each case.
(2) Purchase-money obligations secured by mortgages on vessels sold or
irrevocable commitments to finance
the construction or acquisition of new
vessels which are deposited in the construction reserve fund as provided in
§ 287.13 ordinarily will be considered as
equivalent to their face value.

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§ 287.10

Withdrawals from fund.

(a) Withdrawals for obligations or liquidation. (1) Checks, drafts, or other instruments of withdrawal to meet obligations under a contract for the construction or acquisition of new vessel
or vessels or for the liquidation of existing or subsequently incurred purchase-money indebtedness, after having been executed by the taxpayer,
shall be forwarded to the Administration in Washington, DC, with appropriate explanation of the purpose of the
proposed withdrawal, including properly certified invoices or other supporting papers. Such instruments of
withdrawal, if payable to the Administration, will be deposited by the Administration for collection, and the
proceeds thereof, upon collection, will
be credited to the appropriate contract
with the Administration; but if drawn
to the order of payees other than the
Administration, after countersignature
on behalf of the Administration, will
ordinarily be forwarded to the payees.
(2) An amount obligated under a contract for the construction or acquisition of a new vessel or vessels or for
the liquidation of existing or subsequently incurred purchase-money indebtedness, whether the obligor has the
entire or a partial interest therein
within the scope of section 511 of the
Act, may not, so long as the contract
or indebtedness continues in full force
and effect, be withdrawn except to
meet payments due or to become due
under such contract or for such liquidation.

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Maritime Administration, DOT

§ 287.12

terms of such commitment have been
fully satisfied.

lost, in any taxable year and the taxpayer receives payment for the vessel
so purchased or requisitioned, or receives from the United States indemnity on account of such loss, subsequent to the end of such taxable year,
the taxpayer shall make his election by
filing notice thereof with the Commissioner of Internal Revenue, Washington, DC, 20224, prior to the expiration of 60 days after receipt of the payment or indemnity. The taxpayer shall
file a copy of the notice with the Secretary,
Maritime
Administration,
Washington, DC, 20590. The form of the
notice of election shall be prepared by
the taxpayer and shall be substantially
as follows:

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§ 287.11 Time deposits.
Deposits in the construction reserve
fund not invested in securities may be
placed in time deposits when, in the
judgment of the taxpayer, it is desirable and feasible so to do. The taxpayer
shall promptly advise the Administration of any time deposit arrangements
made with the depository. The Administration reserves the right at any time
to require the termination or modification of any such arrangements. With
prior approval of the Administration a
time deposit may be made in a depository other than the one with which the
construction reserve fund is established.

ELECTION RELATIVE TO NONRECOGNITION OF
GAIN UNDER SECTION 511(c)(2), MERCHANT
MARINE ACT, 1936

§ 287.12 Election as to nonrecognition
of gain.
(a) Election requirements. As a prerequisite to the nonrecognition of gain
on the sale or loss of a vessel (or of a
part interest therein) for Federal income tax purposes, the taxpayer, after
establishing a construction reserve
fund, must make an election with respect to such vessel or interest in the
manner set forth in this paragraph.
(1) In general. Except as provided in
paragraph (a)(2) of this section, the
election must be made in the taxpayer’s Federal income tax return (or,
in the case of a partnership, in the
partnership return of income) for the
taxable year in which the gain with respect to the sale or loss of the vessel is
realized. The election as to the nonrecognition of gain shall be shown by a
statement to that effect, submitted as
a part of, and attached to, the return.
The statement, which need not be on
any prescribed form, shall set forth a
computation of the amount of the realized gain, the identity of the vessel, the
nature and extent of the taxpayer’s interest therein, whether such vessel was
sold or lost and the date of sale or loss,
the full sale price or full amount of indemnity, and the amount and date of
each payment thereof, the basis of tax
purposes and any other data affecting
the determination of the realized gain.
(2) Certain Government payments. In
case a vessel is purchased or requisitioned by the United States, or is

Pursuant to the provisions of section
511(c)(2) of the Merchant Marine Act, 1936, as
amended, notice is hereby given that the undersigned taxpayer elects that gain in respect of the sale to the United States, or indemnification received from the United
States on account of the loss, of the vessel
named below or share therein shall not be
recognized. The circumstances involved in
the computation of such gain are as follows:
Name and other identification of vessel

Nature and extent of the taxpayer’s interest
in the vessel llllllllllllllll
Nature of disposition, i.e., sale or loss
Date of disposition

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lll

lllllllllllll

Full sale price or full amount of indemnity
received by taxpayer lllllllllll
Amount and date of each payment of sale
price or indemnity received by taxpayer l
Amount and date of each previous deposit of
such payments in construction reserve
fund llllllllllllllllllll
Identification of each check or other instrument by which payment made to taxpayer
Tax basis of taxpayer’s interest in vessel ll
Any other data affecting the determination
of the realized gain llllllllllll
Amount of gain (submit computation)

lll

llllllllllllllllll
(Name of taxpayer)
By lllllllllllllllll

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§ 287.13

46 CFR Ch. II (10–1–17 Edition)

(Date of execution)

lllllllllllll

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§ 287.13 Deposit of proceeds of sales or
indemnities.
(a) Manner of deposit. The deposit required by section 511 of the Act must
be made in a construction reserve fund
established with a depository or depositories approved by the Administration
and subject to the joint control of the
Administration and the taxpayer. It is
not necessary to establish a separate
fund with respect to each vessel or
share in a vessel sold or lost.
(b) Amount of deposit. With respect to
any vessel sold or lost, or a share
therein, the deposit must be in an
amount equal to the ‘‘net proceeds’’ of
the sale, or the ‘‘net indemnity’’ for
the loss. By ‘‘net proceeds’’ and ‘‘net
indemnity’’ is meant (1) the depositor’s
interest in the adjusted basis of the
vessel plus (2) the amount of gain
which would be recognized for tax purposes in the absence of section 511 of
the Act. In determining ‘‘net proceeds’’, the amount necessarily paid or
incurred for brokers’ commissions is to
be deducted from the gross amount of
the sales price. In the event the taxpayer is an affiliate or associate of the
buyer, the amount of the sales price
shall not exceed the fair market value
of the vessel or vessels sold as determined by the Administration. In such
case the taxpayer shall furnish evidence sufficient, in the opinion of the
Administration, to establish that the
sales price is not in excess of the fair
market value. In determining ‘‘net indemnity’’, the amount necessarily paid
or incurred purely for collection, or
rate of exchange discounts on the payment, of the indemnity is to be deducted from the gross amount of collectible indemnity. In case of the sale
or loss of several vessels or share therein, a deposit of the ‘‘net proceeds’’ or
‘‘net indemnity’’ with respect to one or
more of the vessels or shares is permissible. Where several vessels or shares
are sold for a lump sum, the ‘‘net proceeds’’ allocated to each vessel or share
shall be determined in accordance with
any reasonable rule satisfactory to the
Commissioner of Internal Revenue. The
taxpayer must deposit the full amount
of each payment (including cash, notes,
or other evidences of indebtedness) as a

single deposit in the construction reserve fund. A payment divided between
two or more depositories will be regarded as a single deposit. Amounts received by the taxpayer prior to the
date of consummation of the sale of the
vessel shall be considered as having
been received by the taxpayer at the
time the sale is consummated.
(c) Purchase-money obligations. Where
the proceeds from the sale of a vessel
include purchase-money obligations,
such obligations together with the entire collateral therefor, or, in the case
of deposit of the proceeds of a share in
the vessel, a proportionate part of the
obligations and collateral as determined by the Administration, shall be
deposited, with the remainder of the
proceeds, in the construction reserve
fund as a part of the ‘‘net proceeds’’.
The depository shall receive payment
of all amounts due on such purchasemoney obligations and such amounts
shall be placed in the fund in substitution for the portion of the obligations paid. All installments of purchase-money obligations shall be paid
directly into the fund by the obligor. In
the event any such installment is not
so deposited, the Administration, at
any time after the due date, may require the taxpayer to deposit an
amount equal to such installment. If
the taxpayer so desires, he may deposit
in the construction reserve fund cash
or approved securities in an amount
equal to the face value of any purchase-money obligations in lieu of depositing such obligations.
(d) Vessel subject to mortgage at time of
sale or loss. Where a vessel is subject to
a mortgage or other encumbrance at
the time of its sale or loss and the taxpayer actually receives only an amount
representing the equity therein or a
share in such equity corresponding to
his share in the vessel, he shall deposit
in the construction reserve fund such
amount and concurrently therewith
other funds in an amount equal to the
difference between the amount received and the ‘‘net proceeds’’ or ‘‘net
indemnity’’. Such other funds may be
in the form of cash, or, subject to the

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Maritime Administration, DOT

§ 287.18
spect to amounts previously deposited
does not exempt the taxpayer from tax
liability with respect thereto nor postpone the time such earnings or receipts
are includible in gross income. Earnings and receipts deposited in a construction reserve fund established in
accordance with the provisions of section 511 of the Act and the regulations
in this part will be deemed to have
been accumulated for the reasonable
needs of the business within the meaning of part 1 (section 531 and following),
subchapter G, chapter 1 of the Internal
Revenue Code of 1954, so long as the requirements of section 511 of the Act
and the regulations in this part are
satisfied relative to the use of the fund
in the construction, reconstruction, reconditioning, or acquisition of new vessels, or for the liquidation of purchasemoney indebtedness on such vessels.
For incurrence of tax liability due to
noncompliance with the requirements
of section 511 of the Act and the regulations in this part with respect to deposits in the construction reserve fund,
see the provisions of § 287.23.

approval of the Administration, (1) interest-bearing securities, or (2) an irrevocable and unconditional commitment to finance the construction or acquisition of a new vessel in whole or in
part by an obligor approved by the Administration in an amount equal to the
amount by which the ‘‘net proceeds’’
exceed the cash or securities deposited
in the fund.
(e) Unauthorized deposits. A deposit
which is not provided for by section 511
of the Act shall, without unreasonable
delay, be withdrawn from the fund and
tax liability will be determined as
though such deposit had not been
made. (See §§ 287.10 and 287.24.)
§ 287.14 Deposit of earnings and receipts.
(a) Earnings. A citizen may deposit
all or any part of earnings derived from
the operation, within the scope of
§ 287.3, of a vessel or vessels owned either by himself or any other person, if
such earnings are intended for construction or acquisition of new vessels.
Such earnings may include payments
received by an owner, as compensation
for use of his vessel, from other persons
by whom it is so operated. Earnings
from other sources may not be deposited. The earnings from operation of
vessels which are eligible for deposit
are the net earnings determined without regard to any deduction for depreciation, obsolescence, or amortization
with respect to such vessels.
(b) Receipts. Receipts from deposited
funds, in the form of interest or otherwise, may be deposited.

§ 287.17 Basis of new vessel.
The basis for determining gain or
loss and for depreciation for the purpose of the Federal income tax with respect to a new vessel constructed, reconstructed, reconditioned, or acquired
by the taxpayer, or with respect to
which purchase-money indebtedness is
liquidated as provided in section 511(g)
of the Act, with funds deposited in the
construction reserve fund, is reduced
by the amount of the unrecognized
gain represented in the funds allocated
under the provisions of the regulations
in this part to the cost of such vessel.
(See § 287.18.)

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§ 287.15 Time for making deposits.
(a) Proceeds of sale or indemnification.
Deposits of amounts representing proceeds of the sale or indemnification for
loss of a vessel or share therein must
be made within 60 days after receipt by
the taxpayer.
(b) Earnings and receipts. Earnings
and receipts for the taxable year may
be deposited at any time. (See § 287.14.)

§ 287.18 Allocation of gain for tax purposes.
(a) General rules of allocation. As provided in § 287.17, if amounts on deposit
in a construction reserve fund are expended, obligated, or withdrawn for
construction, reconstruction, reconditioning, or acquisition of new vessels,
or for the liquidation of purchasemoney indebtedness of such vessels,
the portion thereof which represents
gain shall be applied in reduction of
the basis of such new vessels. The rules

§ 287.16 Tax liability as to earnings deposited.
Deposit in the construction reserve
fund of earnings from the operation of
a vessel or vessels, or receipts, in the
form of interest or otherwise, with re-

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§ 287.19

46 CFR Ch. II (10–1–17 Edition)
$400,000. Payment of $100,000 is received in
March 1963 when the contract is signed, and
the balance of $900,000 is received in June
1963 on delivery of the vessel. The $1,000,000 is
deposited in a construction reserve fund in
July 1963. In December 1963, the taxpayer
also deposits $150,000, representing earnings
of that year. In 1964, he sells another vessel
for $1,000,000, realizing a gain of $250,000. The
sale price of $1,000,000 is received on delivery
of the vessel in February 1964, and deposited
in the construction reserve fund in March
1964. In September 1964, the taxpayer purchases for cash out of the construction reserve fund a new vessel for $1,750,000. To the
cost of this vessel must be allocated the 1963
deposits of $1,150,000 and $600,000 of the
March 1964 deposit. This leaves in the fund
$400,000 of the March 1964 deposit. The
amount of the unrecognized gain to be applied against the basis of the new vessel is
$550,000, computed as follows: Gain of $400,000
represented in the 1963 deposits, plus the
same proportion of the $250,000 gain represented in the March 1964 deposit ($1,000,000)
which the amount ($600,000) allocated to the
vessel is of the amount of the deposit, i.e.,
$400,000 plus 600,000/1,000,000 of $250,000 or
$150,000, a total of $550,000. This reduces the
basis of the new vessel to $1,200,000 ($1,750,000
less $550,000).
(2) In 1965, the taxpayer sells a third vessel
for $3,000,000, realizing a gain of $900,000. The
$3,000,000 is received and deposited in the
construction reserve fund in June 1965, making a total in the fund of $3,400,000. In December 1965, the taxpayer contracts for the
construction of a second new vessel to cost a
maximum of $3,200,000, thereby obligating
that amount of the fund, and in June 1966,
receives permission to withdraw the unobligated balance amounting to $200,000. To the
cost of the second new vessel must be allocated the $400,000 balance of the March 1964
deposit and $2,800,000 of the June 1965 deposit. The unrecognized gain to be applied
against the basis of such new vessel is that
proportion of the gain represented in each
deposit which the portion of the deposit allocated to the vessel bears to the amount of
such deposit, i.e., 400,000/1,000,000 of $250,000,
or $100,000 plus 2,800,000/3,000,000 of $900,000, or
$840,000 making a total of $940,000. The
$200,000 withdrawal is applied against the
June 1965 deposit and the portion thereof
which represents gain will be recognized as
income for 1965, the year in which realized.
The computation of the recognized gain is as
follows: 200,000/3,000,000 of $900,000, or $60,000.

set forth below in this paragraph shall
apply in allocating the unrecognized
gain to the amounts so expended, obligated, or withdrawn:
(1) If the ‘‘net proceeds’’ of a sale or
‘‘net indemnity’’ in respect of a loss
are deposited in more than one deposit,
the portion thereof representing unrecognized gain shall be considered as having been deposited first.
(2) Amounts expended, obligated, or
withdrawn from the construction reserve fund shall be applied against
amounts deposited in the order of deposit.
(3) If any deposit consists in part of
gain not recognized under section 511(c)
of the Act, then any expenditure, obligation, or withdrawal applied against
such deposit shall be considered to consist of gain in the same proportion that
the part of the deposit which constitutes gain bears to the total amount
of the deposit.
(b) Date of obligation. The date funds
are obligated under a contract for the
construction, reconstruction, reconditioning, or acquisition of new vessels,
or for the liquidation of purchasemoney indebtedness on such vessels,
rather than the date of payment from
the fund, will determine the order of
application against the deposits in the
fund. When a contract for the construction, reconstruction, reconditioning, or
acquisition of new vessels, or for the
liquidation of purchase-money indebtedness on such vessels is entered into,
amounts on deposit in the construction
reserve fund will be deemed to be obligated to the extent of the amount of
the taxpayer’s liability under the contract. Deposits will be deemed to be so
obligated in the order of deposit, each
new contract obligating the earliest deposit not previously expended, obligated, or withdrawn. If the liability
under the contract exceeds the amount
in the construction reserve fund, the
contract will be deemed to obligate, to
the extent of that part of such excess
not otherwise satisfied, the earliest deposit or deposits thereafter made.
(c) Illustration. The foregoing rules
are illustrated in the following example:

§ 287.19 Requirements as to new vessels.
(a) Requirements. For the purposes of
section 511 of the Act and the regulations in this part, the new vessel must
be—

Example. (1) A taxpayer who makes his returns on the calendar year basis sells a vessel in 1963 for $1,000,000, realizing a gain of

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Maritime Administration, DOT

§ 287.20

(1) Documented under the laws of the
United States when it is acquired by
the taxpayer, or the taxpayer must
agree that when acquired it will be documented under the laws of the United
States;
(2)(i) Constructed in the United
States after December 31, 1939, or (ii)
its construction has been financed
under Title V or Title VII of the Act,
or (iii) its construction has been aided
by a mortgage insured under Title XI
of the Act; and
(3) Either (i) of such type, size, and
speed as the Administration determines to be suitable for use on the high
seas or Great Lakes in carrying out the
purposes of the Act, but of not less
than 2,000 gross tons or of less speed
than 12 knots, except that a particular
vessel may be of lesser tonnage or
speed if the Administration determines
and certifies that the particular vessel
is desirable for use by the United
States in case of war or national emergency, or (ii) constructed to replace a
vessel or vessels requisitioned or purchased by the United States, in which
event it must be of such type, size, and
speed as to constitute a suitable replacement for the vessel requisitioned
or purchased, but if a vessel already
built is acquired to replace a vessel or
vessels requisitioned or purchased by
the United States, such vessel must
meet the requirements set forth in
paragraph (a)(3)(i) of this section. Ordinarily, under paragraph (a)(3)(i) of this
section, a vessel constructed more than
five years before the date on which deposits in a construction reserve fund
are to be expended or obligated for acquisition of such vessel will not be considered suitable for use in carrying out
the purpose of the Act, except that the
five-year age limitation provided above
in this sentence shall not apply to a
vessel to be reconstructed before being
placed in operation by the taxpayer.
(b) Time of construction. A vessel will
be deemed to be constructed after December 31, 1939, only if construction
was commenced after that date. Subject to the provisions of this section, a
new vessel may be newly built for the
taxpayer, or may be acquired after it is
built.
(c) Replacement of vessels. It is not
necessary that vessels shall be replaced

vessels for vessel. The new vessels may
be more or less in number than the replaced vessels, provided the other requirements of this section are met.
§ 287.20

Obligation of deposits.

(a) Time for obligation. Within three
years from the date of any deposit in a
construction reserve fund, unless extension is granted as provided in
§ 287.22, such deposit must be obligated
under a contract for the construction
or acquisition of a new vessel or vessels
(or in the discretion of the Administration for a share therein), with not less
than 121⁄2 percent of the construction or
contract price of the entire vessel or
vessels actually paid or irrevocably
committed on account thereof or must
be expended or obligated for the liquidation of existing or subsequently incurred purchase-money indebtedness to
persons other than a parent company
of, or a company affiliated or associated with, the mortgagor on a new vessel or vessels. Amounts on deposit in a
construction reserve fund will be
deemed to be obligated for expenditure
when a binding contract of construction or acquisition has been entered
into or when purchase-money indebtedness has been incurred and, if obligated
under a contract of construction or acquisition, will be deemed to be irrevocably committed when due and payable in accordance with the terms of
the contract of construction or acquisition.
(b) Requirements for obligation. Unless
otherwise authorized by the Administration, contracts for the construction
of new vessels must be for a fixed price,
or provide for a base price that may be
adjusted for changes in labor and material costs not exceeding 15 percent of
the base price. The fixed or base price,
as the case may be, shall be fair and
reasonable as determined by the Maritime Administration. Any financial or
other interests between the taxpayer
and the contractor shall be disclosed to
the Administration by the taxpayer.
Plans and specifications for the new
vessel or vessels must be approved by
the Administration to the extent it
deems necessary. A deposit in a construction reserve fund may be expended

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§ 287.21

46 CFR Ch. II (10–1–17 Edition)

or obligated for expenditure for procurement under an acquisition or construction contract of a part interest in
a new vessel or vessels only after obtaining the written consent of the Administration. The granting of such consent shall be entirely in the discretion
of the Administration and it may impose such conditions with respect
thereto as it may deem necessary or
advisable for the purpose of carrying
out the provisions of section 511 of the
Act. Applications for such consent
shall be executed in triplicate, and, together with eight conformed copies
thereof, filed with the Administration.

five percent of the construction shall
have been completed as provided in
§ 287.21 not to exceed one year in the
aggregate, and (3) may allow any other
extensions that may be provided by
amendment to the Act.
(b) Application required. A taxpayer
seeking an extension of time shall
make application therefor, and transmit it with an appropriate statement
of the circumstances, including the
reasons justifying the requested extension or extensions, and appropriate
documents in substantiation of the
statement, to the Administration. The
Administration will notify the Commissioner of Internal Revenue of any
extension granted. In case an application for extension is denied, the taxpayer will be liable for delay as though
no application had been made.

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§ 287.21 Period for construction of certain vessels.
A new vessel constructed otherwise
than under the provisions of Title V of
the Act, and not purchased from the
Administration
must,
within
six
months from the date of the construction contract, or within the period of
any extension, be completed to the extent of not less than 5 percent as estimated by the Administration and certified by it to the Secretary of the
Treasury. In case of a contract covering more than one vessel it will be
sufficient if one of the vessels is 5 percent completed within the six months’
period from the date of the contract or
within the period of any extension, and
so certified. All construction must be
completed with reasonable dispatch as
determined by the Administration. If,
for causes within the control of the
taxpayer, the entire construction is
not completed with reasonable dispatch, the Administration will so certify to the Secretary of the Treasury.
For the effect of such certification, see
§ 287.23.

§ 287.23 Noncompliance with requirements.
(a) Noncompliance. The amount of the
gain which is that portion of the construction reserve fund otherwise constituting taxable income under the law
applicable to the taxable year in which
such gain was realized shall be included
in the taxpayer’s gross income for such
taxable year for income or excess-profits tax purposes, if:
(1) A portion of such fund is withdrawn for purposes other than—
(i) The construction, reconstruction,
reconditioning, or acquisition of a new
vessel; or
(ii) The liquidation of existing or
subsequently incurred purchase-money
indebtedness to persons other than a
parent company of, or a company affiliated or associated with, the mortgagor on a new vessel or vessels; or
(2) The taxpayer fails to comply with
the requirements of section 511 of the
Act or the regulations in this part relating to the utilization of construction reserve funds in the construction,
reconstruction, reconditioning, or acquisition of a new vessel, or the liquidation of purchase-money indebtedness on such a vessel.
If securities on deposit in a construction reserve fund are sold and the
amount placed in the fund in lieu
thereof is less than the value of the securities at the time of their deposit,
the difference between such market

§ 287.22 Time extensions for expenditure or obligation.
(a) Extensions. The Administration,
upon application and a showing of
proper circumstances, (1) may allow an
extension of time within which deposits shall be expended or obligated, not
to exceed one year, and upon a second
application received before the expiration of the first extension, may allow
an additional extension not to exceed
one year, and (2) may allow an extension or extensions of time within which

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Maritime Administration, DOT

§ 287.25

value and the amount placed in the
fund in lieu of the securities will be
deemed to have been withdrawn. With
respect to the substitution of new financing in the case of an irrevocable
commitment, see paragraph (d) of
§ 287.13.
(b) Amount recognized. In the event of
noncompliance with the prescribed
conditions relative to any contract for
construction, reconstruction, reconditioning, or acquisition of new vessels,
or for the liquidation of purchasemoney indebtedness on such vessels,
recognition will extend to the entire
amount of the gain represented in that
portion of the construction reserve
fund obligated under such contract.
Thus, if the Administration determines
and certifies to the Secretary of the
Treasury that for causes within the
control of the taxpayer construction
under a contract is not completed with
reasonable dispatch, the entire amount
of the gain represented in the portion
of the construction reserve fund obligated under the contract will be recognized even though all other conditions
have been satisfied. In case of noncompliance with the requirements of
section 511 of the Act or the regulations in this part, see the provisions of
§ 287.18 as to the allocation of gain.
(c) Unreasonable accumulation. Noncompliance with the provisions of section 511 of the Act or the regulations in
this part relative to the utilization of
the deposited amounts may also, inasmuch as the provision of section 511(f)
of the Act is then inapplicable, warrant
an examination to ascertain whether
such amounts constitute an unreasonable accumulation of earnings and
profits within the meaning of part I
(section 531 and following), subchapter
G, chapter 1 of the Internal Revenue
Code of 1954, or corresponding provisions of prior law. If amounts are deposited and the fund maintained in
good faith for the purpose of construction, reconstruction, reconditioning,
and acquisition of new vessels, or for
the liquidation of purchase-money indebtedness on such vessels, such
amounts will be deemed to have been
accumulated for the reasonable needs
of the business.

§ 287.24

Extent of tax liability.

(a) Declared value excess-profits tax.
Gain which is includible in gross income under § 287.23 shall be included in
gross income for all income and excessprofits tax purposes, but not for the
purposes of the declared value excessprofits tax and the capital stock tax as
provided in section 511(i) of the Act. In
lieu of any adjustment with respect to
such declared value excess-profits tax,
there is imposed for any taxable year
ending on or before June 30, 1945, in
which the gain is realized an additional
tax of 1.1 percent of the amount of the
gain. No additional capital stock tax
liability is incurred.
(b) Improper deposits. In the case of
deposits in the construction reserve
fund of amounts derived from sources
other than those specified in section
511 of the Act, or in the case of failure
to deposit an amount equal to the ‘‘net
proceeds’’ or ‘‘net indemnity’’ within
the period prescribed in section 511(c)
of the Act and § 287.15, the taxpayer obtains no suspension or postponement of
any tax liability and the tax is collectible without regard to the provisions of
section 511(c) of the Act.
(c) Time for filing claim subsequent to
election under section 511(c)(2). If an
election is made under section 511(c)(2)
of the Act, and paragraph (a)(2) of
§ 287.12, and if computation or recomputation in accordance therewith is otherwise allowable but is prevented, on
the date of filing of notice of such election, or within six months thereafter,
by any statute of limitation, such computation or recomputation nevertheless shall be made notwithstanding
such statute if a claim therefor is filed
within six months after the date of
making such election. If as the result
of such computation or recomputation
an overpayment is disclosed, a claim
for refund on Form 843 should also be
filed within such six months’ period.
§ 287.25 Assessment and collection of
deficiencies.
Any additional tax, including the 1.1
percent amount imposed by section
511(i) of the Act, due on account of
withdrawal from a construction reserve
fund, or failure to comply with section
511 of the Act or the regulations in this

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§ 287.26

46 CFR Ch. II (10–1–17 Edition)

part, is collectible as a deficiency. Interest upon such deficiency will run
from the date the withdrawal or noncompliance occurs. The amount of any
deficiency, including interest and additions to the tax, determined as a result
of such withdrawal or noncompliance,
may be assessed, or a proceeding in
court for the collection thereof may be
begun without assessment, at any time
and without regard to any period of
limitations or any other provisions of
law or rule of law, including the doctrine of res judicata.

§ 287.27

§ 287.26

Sections 287.3 to 287.11, inclusive,
§§ 287.13 to 187.15, inclusive, and §§ 287.19
to 287.22, inclusive, deal primarily with
matters under the jurisdiction of the
Administration. Sections 287.12, 287.16
to 287.18, inclusive, and §§ 287.23 to
287.27, inclusive, deal primarily with
matters under the jurisdiction of the
Commissioner of Internal Revenue.
Generally, matters relating to the establishment, maintenance, expenditure, and use of construction reserve
funds and the construction, reconstruction, reconditioning, or acquisition of
new vessels are under the jurisdiction
of the Administration; and matters relating to the determination, assessment, and collection of taxes are under
the jurisdiction of the Commissioner of
Internal
Revenue.
Correspondence
should be addressed to the particular
authority having jurisdiction in the
matter.

§ 287.28

Reports by taxpayers.

(a) Information required. With each income tax return filed for a taxable year
during any part of which a construction reserve fund is in existence the
taxpayer shall submit a statement setting forth a detailed analysis of such
fund. The statement, which need not be
on any prescribed form, shall include
the following information with respect
to the construction reserve fund:
(1) The actual balance in the fund at
the beginning and end of the taxable
year;
(2) The date, amount, and source of
each deposit during the taxable year;
(3) If any deposit referred to in paragraph (a)(2) of this section consists of
proceeds from the sale, or indemnification of loss, of a vessel or share thereof, the amounts of the unrecognized
gain;
(4) The date, amount, and purpose of
each expenditure or withdrawal from
the fund; and
(5) The date and amount of each contract, under which deposited funds are
deemed to be obligated during the taxable year, for the construction, reconstruction, reconditioning, or acquisition of new vessels, or for the liquidation of purchase-money indebtedness
on such vessels, and the identification
of such vessels.
(b) Records required. Taxpayers shall
keep such records and make such additional reports as the Commissioner of
Internal Revenue or the Administration may require.
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Controlled corporation.

For the purpose of section 511 of the
Act and the regulations in this part a
new vessel is considered as constructed, reconstructed, reconditioned,
or acquired by the taxpayer if constructed, reconstructed, reconditioned,
or acquired by a corporation at a time
when the taxpayer owns not less than
95 percent of the total number of
shares of each class of stock of the corporation.
Administrative jurisdiction.

PART 289—INSURANCE OF CONSTRUCTION-DIFFERENTIAL
SUBSIDY VESSELS, OPERATING-DIFFERENTIAL SUBSIDY VESSELS AND
OF VESSELS SOLD OR ADJUSTED
UNDER THE MERCHANT SHIP
SALES ACT 1946
Sec.
289.1 Definition.
289.2 Vessels included.
289.3 Provision in subsidy agreements and
mortgages.
289.4 Insurance by owners.
289.5 Insurance by the United States.
AUTHORITY: Sec. 204, 49 Stat. 1987, as
amended; 46 U.S.C. 1114. Interpret or apply
sec. 12, 60 Stat. 49, as amended; 50 U.S.C.
App. 1745.

NOTE: The records referred to in this section shall be retained for a period of six
months beyond the termination or closing
out of the reserve fund.

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