§ 390.1 Scope of the regulations.

(a) In general—(1) Scope. The regulations prescribed in this part govern the capital construction fund ("fund") authorized by section 607, Merchant Marine Act, 1936, as amended (46 U.S.C. 1177).

(2) Establishment of a fund. A fund is established by an agreement ("agreement"), which is a contract between the party ("party") and the United States.

(3) Purpose of the fund. Section 607 provides that any agreement entered into with the Secretary of Transportation must be for the purpose of providing replacement vessels, additional vessels or reconstructed vessels to be

built and documented in the United States and operated in the United States foreign, Great Lakes or noncontiguous domestic trade.

(4) Benefits of a fund. Section 607 provides for the nontaxability of certain deposits of money or other property placed into a fund established pursuant to an agreement within certain ceilings. These ceilings are equal to:

(i) Earnings or gains realized from the operation of an agreement vessel; (ii) Net proceeds realized from the sale or other disposition of an agreement vessel or from insurance or indemnification from the loss of an

agreement vessel; and

(iii) Earnings from the investment or reinvestment of amounts on deposit in the fund.

(5) Delegation. The Secretary of Transportation has delegated the authority for matters relating to the United States Merchant Marine to the Maritime Administrator, Department of Transportation (“Maritime Administrator").

(b) Act. For purposes of this part, the term Act shall mean the Merchant Marine Act, 1936, as amended (46 U.S.C. 1101 through 1249).

(c) Joint regulations. For purposes of of this part, the term joint regulations shall mean the regulations prescribed by the Secretary of Transportation and the Secretary of the Treasury under section 607 of the Act and published in title 26, part 3 of the Code of Federal Regulations (reprinted in part 391 of this chapter).

(d) Cross references. For rules relating to the Federal Income Tax aspects of a fund, see the joint regulations. For rules governing agreements relating to the fisheries of the United States, see the separate Secretary of Commerce regulations published in title 50, part 259 of the Code of Federal Regulations. § 390.2 Application for an agreement.

(a) In general—(1) Application instructions. The Maritime Administrator has adopted instructions for making application for an agreement. These instructions are contained in appendix I to this part.

(2) General eligibility requirements. Section 607 of the Act specifies who is eligible for a fund and the application instructions specify what information is required to establish such eligibility. An applicant must:

(i) Be a citizen of the United States within the meaning of section 2 of the Shipping Act, 1916, as amended (46 U.S.C. 802, 803). See part 355 of this title for requirements for establishing United States citizenship;

(ii) Own or be the lessee of one or more eligible vessels or share thereof as defined in section 607(k)(1) of the Act, or be party to a contract for the construction of one or more eligible vessels, or share thereof, as defined in paragraph (b) of § 390.5;

(iii) Have a program which furthers the purposes of the Act (see §390.3 relating to policy considerations) and provides for the acquisition, construction or reconstruction of a qualified vessel, as defined in section 607(k)(2) of the Act. Such provisions state that the vessel will be operated in the United States foreign, Great Lakes or noncontiguous domestic trade as defined in sections 607(k) and 905(a) of the Act; and

(iv) Demonstrate the financial capabilities to accomplish the program.

(b) Information which may be required in conjunction with the application. An applicant must provide such facts, documents and materials as the Maritime Administrator may require in considering whether to enter into an agreement. An applicant should be ready to make available such applicable materials, including, but not limited to: Design plans, data concerning the reasonableness of the cost of the program, construction contracts, financial statements, certificates of incorporation, bylaws, articles of partnership, stock ownership data and other information including judgments and pending litigation which would affect the proposed program. The specific information required is set forth in the instructions. (Approved by the Office of Management and Budget under control number 2133-0027)

[41 FR 4265, Jan. 29, 1976, as amended at 47 FR 25530, June 14, 1982]

§ 390.3 Policy considerations.

(a) In general. It is the policy of the United States, as set forth in section 101 of the Act, that for the national defense and the development of its foreign and domestic commerce, the United States shall have a merchant marine: sufficient to carry a substantial portion of its water-borne export and import foreign commerce and to provide shipping service essential for maintaining the flow of such commerce at all times; capable of serving as auxiliaries in time of war or national emergency; owned and operated by United States citizens insofar as practicable and composed of the best equipped, safest and most suitable types of vessels, constructed and documented in the United States and manned with United States citizens.

(b) Unacceptable programs-(1) In general. The Maritime Administrator will not enter into an agreement where the proposed program is not, in his opinion, in consonance with the policies of the Act.

(2) Specific unacceptable programs. The Maritime Administrator will not enter into an agreement where the proposed program is merely to accomplish the following:

(i) Reconstruction of an existing vessel, unless such reconstruction will exceed $1,000,000 in cost, will be capitalized under the Internal Revenue Code of 1954, as amended, and the regulations thereunder and will result in a vessel which is significantly more competitive;

or

(ii) Acquisition of an existing vessel;

(iii) Payment of the principal on existing indebtedness.

(3) Waiver. The Maritime Administrator may, for good cause shown, waive the provisions of paragraph (b)(2) of this section. For example, the Maritime Administrator may waive the monetary limit in paragraph (b)(2)(i) of this section where the applicant proposes to reconstruct a small vessel.

§ 390.4 Description of the agreement.

(a) In general. The agreement consists of a standard part and appended schedules. The standard part of the agreement contains recitals, covenants and warranties which apply to all parties.

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The appended schedules set forth the particular program of the party and contain other information unique to each agreement. See §390.6 (relating to administration of the agreement) for procedures and criteria for the modification of schedules.

(b) Schedule A-Eligible agreement vessels. Schedule A lists the names of eligible agreement vessels (as defined in § 390.5), whether owned or leased, and the allowable percentage of the depreciation ceiling, if any, available for deposit purposes by the party. See § 390.7 (relating to deposits) for allowable depreciation in the case of leased vessels.

(c) Schedule B-Program-(1) In general. Schedule B sets forth the program of the party including the cost of the program and the time in which the program shall be accomplished.

(2) Items in Schedule B. Schedule B shall contain:

(i) A statement describing each qualified agreement vessel (as defined in § 390.5) to be acquired, constructed or reconstructed. In the case of reconstruction, the statement will include a general description of the work to be performed;

(ii) The anticipated date on which the acquisition, construction or reconstruction of each qualified agreement vessel will commence;

(iii) The anticipated total cost, including any costs which will not be paid from the fund, of the acquisition, construction or reconstruction of each qualified agreement vessel; and

(iv) The amount to be withdrawn from the fund with respect to the acquisition, construction or reconstruction of each qualified agreement vessel.

(3) Submission of contracts. When a contract is executed for any acquisition, construction or reconstruction relating to the agreement, such contract shall be submitted within 30 days after execution to the Maritime Administrator who shall then determine whether such undertaking is in accordance with the program set forth in Schedule

B.

(d) Schedule C-Depositories. Schedule C lists, by name and address, the depositories of the fund. See § 390.7 (relating to deposits).

(e) Schedule D-Minimum deposits. Schedule D sets forth the minimum de

posits which must be made into the fund. See § 390.7 (relating to deposits) for the procedure in setting minimum deposits.

(f) Submission of proposed schedules. An applicant shall submit proposed schedules with his application. The specific information required in such schedules is set forth in the application instructions referred to in paragraph (a)(1) of §390.2. A sample agreement (standard part and appended schedules) is contained in appendix II to this part.

$390.5 Agreement vessels.

(a) In general. Section 607(k) of the Act states the requirements for eligible, qualified and agreement vessels. The rules in this section further define such terms and state how vessels must be listed on Schedules A and B in the agreement.

(b) Eligible agreement vessels—(1) Definition. An eligible agreement vessel, which may be used to establish ceilings for deposit purposes, is any vessel:

(i) Constructed in the United States, and if reconstructed, reconstructed in the United States; the term constructed or reconstructed in the United States includes any vessel which was constructed or reconstructed outside of the United States but documented under the laws of the United States on April 15, 1970, or constructed or reconstructed outside of the United States for use in the United States foreign commerce pursuant to a contract entered into before April 15, 1970;

(ii) Documented under the laws of the United States;

(iii) Operated in the foreign or domestic commerce of the United States; (iv) Engaged primarily in the waterborne carriage of men, materials, goods or wares; and

(v) Designated in the agreement as an "eligible agreement vessel.”

(2) Scope of the term "eligible agreement vessel." For purposes of generating ceilings for deposits under section 607(b) of the Act and the joint regulations the term eligible agreement vessel includes any:

(i) Tug or barge;

(ii) Vessels which have been contracted for or are in the process of construction; and

(iii) Share interest in a vessel; the party is considered to have a share interest in an eligible agreement vessel if the party has the right to use the vessel to generate income or a right to the proceeds or a portion of the proceeds from its use even if the party does not have a proprietary interest in the vessel for purposes of State or Federal law.

(3) Foreign or domestic commerce. For the purpose of paragraph (b)(1)(iii) of this section the term foreign or domestic commerce means the water-borne carriage of men, materials, goods or wares between:

(i) Two points in the United States; (ii) A point in the United States and a point in a foreign country; or

(iii) Two points in the same foreign country or points in two different foreign countries.

(c) Qualified agreement vessels—(1) Definition. A qualified agreement vessel which may be acquired, constructed or reconstructed with the aid of qualified withdrawals, is any vessel:

(i) Constructed in the United States, and if reconstructed, reconstructed in the United States; the term constructed or reconstructed in the United States includes any vessel which was constructed or reconstructed outside of the United States but documented under the laws of the United States on April 15, 1970, or constructed or reconstructed outside of the United States for use in the United States foreign commerce pursuant to a contract entered into before April 15, 1970;

(ii) Documented under the laws of the United States;

(iii) Operated in the United States foreign, Great Lakes or noncontiguous domestic trade;

(iv) Engaged primarily in the waterborne carriage of men, materials, goods or wares; and

(v) Designated in the agreement as a "qualified agreement vessel."

(2) Scope of the term "qualified agreement vessel." For purposes of making qualified withdrawals under section 607(f) of the Act and the joint regulations the term qualified agreement vessel includes any:

(i) Cargo handling equipment which the Maritime Administrator determines will be used primarily on a

qualified agreement vessel. Normally any auxiliary equipment which is ordinarily carried from port to port, excluding equipment that needs frequent replacement due to normal wear and tear, and is used in conjunction with the loading or unloading of the vessel is deemed to be cargo handling equipment;

(ii) Ocean-going towing vessel or barge which the Maritime Administrator determines is suitable for the trade in which the party intends to operate such vessel or barge, or any comparable vessel or barge operated on the Great Lakes which is suitable for its intended trade; and

(iii) Proprietary interest in a qualified agreement vessel as, for example, that which may result from a joint venture or partnership.

(3) Foreign trade. Foreign trade shall mean the water-borne carriage of men, materials, goods or wares between:

(i) A point in the United States and a point in a foreign country;

(ii) Two points in the domestic trade permitted under the first sentence of section 506 of the Act; or

(iii) Two points in the same foreign country or points in two different foreign countries in the case of liquid and dry bulk cargo carrying services provided the party demonstrates that such operating flexibility is needed to compete with foreign flag vessels in its operations or in competing for charters.

(4) Great Lakes trade. Great Lakes trade shall mean the waterborne carriage of men, materials, goods or wares between points on the Great Lakes and their connecting and tributary waterways in the immediate environs of the Great Lakes.

(5) Noncontiguous domestic trade. Noncontinguous domestic trade shall mean the water-borne carriage of men, materials, goods or wares between:

(i) The contiguous 48 States on the one hand and Alaska, Hawaii, Puerto Rico and the insular territories and possessions of the United States on the other hand; and

(ii) Any point in Alaska, Hawaii, Puerto Rico and the insular territories and possessions of the United States, and any other point in Alaska, Hawaii, Puerto Rico and such territories and possessions.

(6) Nonqualified operations. Nonqualified operations for qualified agreement vessels include:

(i) Positioning vessels in support of domestic operations prohibited by section 607 of the Act;

(ii) Use of barges as docks and ramps; (iii) Except as provided in paragraphs (c)(7) (i) and (ii) of this section:

(A) Foreign-to-foreign trade, consisting of voyages originating and ending in foreign ports, with no intermediate domestic cargo operation, and

(B) Trade from foreign ports to and form U.S. oil rigs in international waters; and

(iv) Ship assist work, including bunkering, in support of contiguous domestic, foreign-flag or U.S.-flag foreign-to-foreign operations.

(7) Permissible operations. Permissible operations for qualified agreement vessels include:

(i) Foreign-to-foreign trade in the case of vessels operating as part of U.S.-flag service and carrying cargo originating in or destined for U.S. ports, i.e., U.S.-flag feeder vessels;

(ii) Foreign-to-foreign trade, including the lightering of foreign-flag vessels, in the case of vessels carrying liquid or dry bulk cargoes when the carrier has demonstrated to the Administrator:

(A) The need for such foreign-to-foreign shipments (as required by section 905 of the Act and paragraph (c)(iii) of this section), and

(B) That the proposed cargo would qualify as liquid or dry bulk cargo;

(iii) Ship assist work, including lightering or shifting of a vessel at the end or beginning of a noncontiguous domestic or U.S. foreign trade voyage. In addition, the lightering of foreignflag vessels in U.S. ports is permitted.

(8) United States construction. An agreement vessel is considered to be of United States construction if:

(i) It is built entirely in a shipyard or shipyards within any of the United States and the Commonwealth of Puerto Rico;

(ii) All components of the hull and superstructure are fabricated in the United States; and

(iii) The vessel is assembled entirely in the United States.

(d) Agreement vessels—(1) Definition. The term agreement vessel means any eligible or qualified vessel which is subject to an agreement.

(2) Scope of the term "agreement vessel." For purposes of generating ceilings and making qualified withdrawals the term agreement vessel includes containers, trailers or barges which are part of the complement of an agreement vessel. The complement is limited to three times the container, trailer or barge capacity of the vessel, unless the Maritime Administrator shall agree to a different complement.

[41 FR 4265, Jan. 29, 1976, as amended at 55 FR 34928, Aug. 27, 1990]

$390.6 Administration of the agree ment.

(a) In general. The Maritime Administrator will administer and enforce the agreement in a manner which will insure that the fund is properly established, that the assets in the fund are used to accomplish the program and that the party fully complies with all obligations and responsibilities. This section specifies the reports which must be submitted to the Maritime Administrator and sets forth the procedures for administering the agreement.

(b) Reporting requirements—(1) In general. This paragraph describes the reports required to be submitted to the Maritime Administrator by the party.

(2) Submission dates. Reports must be submitted annually, in triplicate, for the party's taxable year not later than 90 days after the close of each reporting period. An affidavit regarding the operation of qualified agreement vessels as required by paragraph (b)(7) of this section shall be submitted concurrently with each annual report.

(3) Cumulation. The annual report submitted following the close of the party's taxable year shall be cumulative for the party's entire taxable

year.

(4) Certification. The annual report shall be accompanied by an opinion of an independent certified public accountant to the effect that exhibits (see paragraph (b)(5) of this section) composing the accounting have been