This part prescribes rules and regulations pertaining to the filing of Capital Construction Fund Program applications and the administration of funds subject to a Capital Construction Fund Agreement, for the purpose of providing replacement vessels, additional vessels, or the reconstruction of vessels to be built and documented in the United States and operated in the United States Foreign and Domestic Trade.

Agreement means the contract to participate in the program between the approved CCF applicant (party) and the Maritime Administration (MARAD).

Act means ch. 535 of title 46 of the U.S. Code (46 U.S.C. 53501-53517), amended from time to time.

Agreement Vessel means any Eligible Vessel or Qualified Vessel that is subject to an Agreement. For purposes of generating ceilings and making Qualified Withdrawals, the term agreement vessel includes containers, trailers or barges that 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 MARAD agrees to a different complement.

CCF means Capital Construction Fund for Vessels.

Citizen of the United States or U.S. Citizen means any individual who is a United States citizen, and any corporation, partnership, association, or company organized under the laws of any State that meets the requirements of 46 U.S.C. 50501, as amended.

Constructed in the United States means a Vessel that:

(a) Is built entirely in a shipyard or shipyards within any of the United States and its territories;

(b) Has all the major components of its hull and superstructure fabricated in the United States; and

(c) Is assembled entirely in the United States.

Depository or Depositories means the designated bank or brokerage account(s) listed in Schedule D where the CCF funds will be physically held.

Domestic Trade means:

(a) Commerce or trade between two points in the contiguous United States; and

(b) Noncontiguous commerce or trade as defined in 46 U.S.C. 53501(4).

Eligible Vessel means a Vessel as defined in 46 U.S.C. 53501(2).

Extension Period means the period beginning the first day following the end of the Filing Period and ending on the last day of the party's last filing extension.

Filing Period means the period beginning the first day following the end of the Tax Year and ending on the party's last day to file their tax return absent a filing extension.

Foreign Trade means foreign commerce or trade as defined in 46 U.S.C. 109.

Joint Regulations mean regulations prescribed jointly by MARAD and Treasury under section 53502(b) of title 46.

MARAD means the Maritime Administration, an agency within the U.S. Department of Transportation.

Non-qualified Withdrawal means any withdrawal from an account that is not a Qualified Withdrawal.

Qualified Withdrawal means any withdrawal as defined in 46 U.S.C. 53509.

Qualified Vessel means a Vessel as defined in 46 U.S.C. 53501(5).

Schedule A means the section of the Agreement that designates the income producing vessel(s) from which deposits are made into a Depository.

Schedule B means the section of the Agreement that designates the qualified project(s) for which the CCF funds are to be expended.

Schedule C means the section of the Agreement that designates the Depository or Depositories for the CCF.

Schedule D means the section of the Agreement that indicates the deposits into the CCF.

Share Interest in a Vessel means the right to use the Vessel to generate income or a right to the proceeds or a portion of the proceeds from the Vessel's use ( i.e., proceeds that may result from a joint venture or partnership) even if the applicant does not have a proprietary interest in the Vessel for purposes of State or Federal law.

Tax Due Date means the date the party's Federal tax return must be filed, including extensions, with the Internal Revenue Service.

Tax Year means the period between January 1 and December 31 for calendar year filers or the designated fiscal year for fiscal year filers.

United States means the States of the United States of America, the District of Columbia, and, for citizenship purposes, includes the Commonwealth of Puerto Rico, American Samoa, Guam, the U.S. Virgin Islands, the Northern Mariana Islands, and any other territory, or possession of the United States.

Vessel means a vessel as defined at 1 U.S.C. 3 and 46 U.S.C. 53701 and includes the following:

(a) Non-loading equipment ( i.e., cargo handling equipment) ordinarily carried from port to port and not typically subject to frequent replacement due to normal wear and tear;

(b) Share Interest in a Vessel; and

(c) An Eligible Vessel under construction or has been contracted for, but construction has not yet begun.

(a) General eligibility requirements. To be eligible to enter into an Agreement an applicant must:

(1) Be a Citizen of the United States;

(2) Own or lease one or more Eligible Vessels or share thereof (as defined in the Act), be party to a contract for the construction of one or more Eligible Vessels or share thereof operating in the Foreign or Domestic Trade of the United States;

(3) Have an acceptable plan to acquire, construct, or reconstruct one or more Qualified Vessels. The plan must be a firm representation of the applicant's actual intentions. Qualified Vessels must be operated in Foreign or Domestic Trade of the United States; and

(4) Demonstrate the financial capabilities to accomplish the program objective.

(b) Application. Applicants seeking an Agreement must submit a completed application form. The form of application and submission guidance may be found on the program web page of MARAD's website at www.maritime.dot.gov. The application must be received on or prior to the Tax Due Date for the Filing Period of the Federal tax return to be effective for the Tax Year to which that return relates. The applicant should file at least 45 days in advance of such date.

(c) Additional information may be required. An applicant must provide such facts, documents, and materials as MARAD 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 objective, construction contracts, financial statements, certificates of incorporation, bylaws, articles of partnership, stock ownership data, and other information including judgments and pending litigation that would affect the proposed program objective. The specific information required to be submitted is set forth in MARAD submission guidance.

(a) Acceptable objective. Generally, CCF funds may only be used for the acquisition, construction, or reconstruction of vessels documented in the United States and manned with United States Citizens in support of maintaining and increasing the Foreign and Domestic Trade of the United States.

(b) Acquisition. CCF funds may be used for the:

(1) Purchase of a new vessel from the constructing shipyard;

(2) Purchase of a vessel that is more than one year old for which there will be substantial reconstruction completed within 18 months of withdrawing CCF funds;

(3) Acquisition of a contract to construct a new Qualified Vessel;

(4) Acquisition of interest in a partnership or limited liability company; and

(5) Acquisition of existing vessels as part of the purchase of a corporation, limited liability company, partnership, or association.

(c) Construction. CCF funds may be used to construct a new Qualified Vessel.

(d) Reconstruction. The following applies to reconstruction:

(1) CCF funds may be used for the reconstruction of a vessel that can include rebuilding, replacing, reconditioning, refurbishing, converting, or improving any portion of a vessel;

(2) Reconstruction must substantially prolong the useful life of the vessel, increase its value, materially increase its safety, reliability, or energy efficiency, or adapt it to a different commercial use in the industry;

(3) Reconstruction must increase a vessel's competitiveness, efficiency, and productivity with an economically useful life for a substantial period of time beyond the date reconstruction is completed; and

(4) Repairs necessary to meet any regulatory standards or any applicable classification standards, or for previous inadequate maintenance and repair do not constitute reconstruction for purposes of this rule.

(e) Indebtedness. CCF funds may be used for new indebtedness incurred for one of the acceptable program objectives set forth in this section.

(f) Time permitted for construction or reconstruction. Construction or reconstruction must be completed within 36 months from the date construction or reconstruction first commences, unless otherwise consented to by MARAD.

(g) Unacceptable objectives. MARAD will not enter into an Agreement where the application:

(1) Fails to provide for one or more replacement, additional, or reconstructed vessel for operation in the Foreign or Domestic Trade of the United States;

(2) Proposes reconstruction of existing vessel(s) with no additional program objective, unless such reconstruction will:

(i) Collectively exceed $3,000,000 in cost;

(ii) Will be capitalized under the Internal Revenue Code of 1986, as amended, implementing regulations; and

(iii) Will result in (a) significantly more competitive vessel(s).

(3) Proposes reconstruction of an existing vessel that is more than 25 years old at the time of withdrawal;

(4) Proposes acquisition of an existing vessel (except as provided for in paragraph (b) of this section); or

(5) Proposes payment of the principal on existing indebtedness.

Non-qualified operations for Qualified Vessels include:

(a) The use of barges as docks and ramps;

(b) The use of a vessel as housing, restaurant, public space, or other similar primary use in a fixed location;

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

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

(e) Bunkering in support of non-qualified trade operations.

(a) Constructive deposits and withdrawals before Agreement executed date. Constructive deposits and withdrawals are deemed to have been deposited to and withdrawn from a designated CCF account even if the funds are not physically deposited.

(1) Constructive deposits and withdrawals are permissible only during the tax year for which a written application for an Agreement is submitted to MARAD.

(2) Once MARAD executes the Agreement, the constructive deposit and withdrawal period ends, and all deposits must be physically deposited into a designated CCF account.

(b) Consent for constructive deposits and withdrawals. All qualified deposits and withdrawals occurring within the period specified in paragraph (a) of this section may be consented to by MARAD as constructive deposits and withdrawals so long as the following criteria are met:

(1) The amount deposited into the account for a taxable year does not exceed the sum of—

(i) That portion of the taxable income of the owner or lessee for the taxable year (computed under chapter 1 of the ( printed page 60061) Internal Revenue Code of 1986 (26 U.S.C. ch. 1) but without regard to the carryback of net operating loss or net capital loss or this chapter) attributable to the operation of Agreement Vessels in the foreign or domestic trade of the United States or in the fisheries of the United States;

(ii) The amount allowable as a deduction under section 167 of such Code (26 U.S.C. 167) for the taxable year for Agreement Vessels;

(iii) If the transaction is not taken into account for purposes of paragraph (i), the net proceeds (as defined in Joint Regulations) from the disposition of an Agreement Vessel or from insurance or indemnity attributable to an Agreement Vessel;

(iv) The receipts from the investment or reinvestment of amounts held in the account; and

(v) For a lessee, the maximum amount that may be deposited for an Agreement Vessel under subsection (b)(1)(ii) for any period must be reduced by any amount the owner is required or permitted, under the Agreement, to deposit for that period for the Vessel under subsection (b)(1)(ii).

(2) For MARAD to consent to constructive deposit and withdrawal treatment, the applicant must include a written request with the application and provide sufficient supporting data to enable MARAD to evaluate the request; and

(3) The written request must be submitted no later than the extension period for that party's initial tax year.

(c) Constructive deposits and withdrawals after the Agreement effective date. Constructive deposits or withdrawals are not permitted after the effective date of an Agreement. Deposits made after the effective date of an Agreement must be physically deposited into a dedicated CCF account.

(a) First tax year for which an Agreement is effective. For an Agreement to be effective for any applicant's tax year, the written application must be submitted to MARAD before the end of the `Filing Period' or `Extension Period' for that tax year, whichever applies.

(1) If the written application is received by MARAD after the end of the `Filing Period' or `Extension Period,' whichever applies, then the Agreement will be first effective for the next succeeding tax year.

(2) An applicant must submit a written application at least 45 days in advance of the end of the applicant's tax due date. If the written application is submitted too close to the tax due date, and MARAD does not execute the Agreement prior to the tax due date, the applicant bears the burden of negotiating with the Internal Revenue Service for relief.

(3) Penalties related to a denied application will be considered due to the applicant's failure to apply for an Agreement in a timely manner.

(b) Ratification of withdrawals.

(1) Any withdrawals that require MARAD's consent made after the effective date of an Agreement and without MARAD's consent are automatically Non-qualified Withdrawals, unless MARAD subsequently consents to them by ratification;

(2) MARAD may ratify, as qualified, any withdrawal made under paragraph (1), provided the withdrawal would have resulted in MARAD's consent had it been requested before withdrawal;

(3) MARAD may issue retroactive consent, if appropriate. However, if MARAD does not issue retroactive consent for withdrawals made without consent, those withdrawals and any associated penalties will be deemed due to the party's failure to apply in a timely manner;

(4) A party must submit a request for withdrawal at least 45 days in advance of the expected withdrawal date;

(5) Withdrawals made without MARAD's consent or in reliance on obtaining MARAD's consent are made purely at a party's own risk;

(6) Should any withdrawal be made without MARAD's consent prove, for any reason, to be one that MARAD will not or cannot consent to ratify, then the result will be a Non-qualified Withdrawal or an involuntary termination of the Agreement or both;

(7) Should a party withdraw CCF funds for a project not previously deemed an eligible Schedule B objective without having first obtained MARAD's consent, MARAD may entertain an application to amend the Agreement's Schedule B objectives as the prerequisite to consenting by ratification to the withdrawal; and

(8) Redeposit of any withdrawals made without MARAD's consent, and for which such consent is not subsequently given (either by ratification or otherwise), is not permitted. If the Non-qualified Withdrawal adversely affects the Agreement's general status, MARAD may terminate the Agreement.

(a) Annual reporting requirements.

(1) Every party to an Agreement must file a final deposit and withdrawal report annually for each Depository at the end of the tax year. Each report must be—

(i) Filed no later than 30 days after expiration of the due date for filing the party's Federal income tax return;

(ii) Made using a MARAD form (including all exhibits and, if applicable, a copy of the applicant's extension of time to file the tax return) using a separate form for each Depository; and

(iii) Include the certification of an independent certified public accountant to the effect that the report and supporting exhibits include all deposit and withdrawal activity and are prepared in accordance with all published orders, rules, regulations, and instructions issued by MARAD. Where there is no deposit or withdrawal activity with respect to a Depository during the party's tax year, a report must be submitted showing the lack of activity.

(2) Failure to submit the report will be cause for involuntary termination of the associated Agreement.

(3) MARAD may, at its discretion, after due notice, disqualify withdrawals and involuntarily terminate the Agreement of any participant that fails to submit the required annual report(s).

(b) Modification of Agreement.

(1) The Agreement is subject to modification and amendment by mutual consent. MARAD will normally agree to modification or amendment of the schedules unless such modification or amendment delays imposition of Federal income tax in a manner not contemplated or authorized by the Act, or if the proposed modification or amendment would not be in consonance with the policies of the Act, this part, or the Joint Regulations.

(2) MARAD may require a Non-qualified Withdrawal if the modification or amendment results in an amount held in the account in excess of an amount determined to be necessary to meet the Agreement's objectives.

(a) If a Schedule B objective has not commenced within 10 years from the date the Agreement was established and the Agreement has not been extended by written approval of MARAD, the Agreement will be considered inactive and subject to termination; and

(b) If the account balance of all depositories of an Agreement is zero dollars 10 years after the date it was established, and the Agreement has not been extended through amendment, the Agreement will be considered inactive ( printed page 60062) and subject to termination unless a Schedule B objective has commenced.

(a) Deposits cannot be made once a party has deposited 100 percent of the anticipated cost of all Schedule B objectives unless the Agreement is then amended to establish additional Schedule B objectives.

(b) MARAD will permit deposits of any given Schedule B objective to accumulate for a maximum of 25 years.

(a) General. Each CCF account in a scheduled depository will have an account number that must be reflected in the reports required in section 390.15. All CCF accounts must be reserved only for CCF transactions. Intermingling of CCF and non-CCF transactions is prohibited.

(1) CCF accounts may not be pooled without the prior consent of MARAD; and

(2) Safe deposit boxes, safes, or the like are not eligible as CCF depositories without MARAD's consent, which may be granted solely at MARAD's discretion.

(b) Assignment. The use of funds held in a CCF depository for transactions structured as a countervailing balance, compensating balance, pledge, assignment, or similar security arrangement without the prior written consent of MARAD will constitute a material breach of the Agreement.

(c) Depositories. Amounts in a CCF account must be kept in the depository or depositories specified in the Agreement and be subject to such trustee or other fiduciary requirements as MARAD may require. Unless otherwise specified in the Agreement, the party may select the type or types of accounts in which assets may be deposited.

(d) Dual use account. A CCF account may, with MARAD approval, serve in lieu of a restricted or reserve fund account required in connection with a financing through the Federal Ship Financing Program in accordance with 46 U.S.C. ch. 537 and MARAD implementing regulations. Approval will be conditioned upon the execution by the party of an Agreement, satisfactory in form and substance to MARAD, governing the dual use of the CCF account. Requests for permission to use a CCF account in this dual capacity must be made in writing to MARAD.

(e) Timing of deposits.

(1) All amounts deposited in the CCF account are presumed to have been deposited pursuant to an Agreement unless, after an examination of the facts upon the request of the Commissioner of Internal Revenue or the Commissioner's delegate, MARAD determines otherwise. The Commissioner or the Commissioner's delegate will request such a determination where MARAD determines there is a substantial question as to whether a deposit is made in accordance with an Agreement;

(2) Deposits are not taxable for the applicable taxable year only when made in accordance with the Agreement and not later than the time provided in the Joint Regulations;

(3) A party may make deposits for any taxable year prior to the time provided in the Joint Regulations in accordance with the following:

(i) Amounts representing taxable income attributable to the operation of Agreement Vessels for a taxable year may be deposited at any time during such taxable year, and thereafter within the time provided for in the Joint Regulations, based upon the party's estimated Federal taxable income for such vessels for the entire taxable year;

(ii) Amounts representing net proceeds from the sale or other disposition (including mortgaging) with respect to Agreement Vessels may be deposited when received or accrued and thereafter within the time provided for in the Joint Regulations;

(iii) Amounts representing receipts from the investment or reinvestment of amounts held in a CCF account may be deposited when received or accrued and thereafter within the time provided for in the Joint Regulations; and

(iv) Amounts representing depreciation with respect to Agreement Vessels for a taxable year may be deposited at any time during such taxable year, and thereafter within the time provided for in the Joint Regulations.

(4) MARAD may require that deposits be made earlier than the latest time provided for in the Joint Regulations; and

(5) MARAD will require early deposits only when necessary for the party to meet its agreed upon obligations.

(a) MARAD may conditionally consent to the classification of a withdrawal that would otherwise be considered a Non-qualified Withdrawal as a Qualified Withdrawal. Such consent will be conditioned upon the timely submission to MARAD of the items requested in the conditional approval letter. Failure to provide these items in a timely manner will result in the withdrawal being determined to be a Non-qualified Withdrawal, involuntary termination of the Agreement, or both.

(b) MARAD will administer a withdrawal subject to this section as follows:

(1) Any withdrawal from a CCF account that has not received conditional consent from MARAD or if the requestor does not timely provide the items required by the conditional approval letter is a Non-qualified Withdrawal.

(2) For the tax implications of a Qualified and Non-qualified Withdrawal, see the Act and the Joint Regulations.

(c) Prior written consent of MARAD is required before a withdrawal requested pursuant to this section may be made and not considered a Non-qualified Withdrawal.

(a) Eligible Vessels. Prior MARAD approval is not required for a party to an Agreement to sell or otherwise dispose (including the mortgage) of an Eligible Vessel but the party must provide written notification within 30 days after the sale or other disposition to include a description of the transaction, the identity of the transferee, the proceeds to be realized, the date of the transaction, and whether the proceeds will be deposited into the CCF account.

(b) Qualified vessels. (1) MARAD approval is required prior to the sale or other disposition (including the mortgage) of a Qualified Vessel.

(2) The sale or other disposition (including the mortgage) of a Qualified Vessel that has had its cost basis reduced within the last year using Qualified Withdrawals is prohibited.

(3) If MARAD determines that the sale or other disposition of a Qualified Vessel is in violation of this section, MARAD will require the following from the party to the Agreement:

(i) Payment of interest on the amount of the gain on the Qualified Vessel attributable to the basis reduction; and

(ii) The deposit into the CCF account of the net proceeds from the sale of the Qualified Vessel or deposit of the net proceeds from the mortgage of the Qualified Vessel for which Qualified Withdrawals from the CCF account have been made.

(4) For purposes of this section, last year is 365 calendar days from the date of final delivery or redelivery from the shipyard for new construction or reconstruction, respectively, or from the ( printed page 60063) date of first loading of the vessel for acquisition.

(c) Sale or other disposition of Agreement Vessels to related persons.

(1) Net proceeds from the sale or other disposition of an Agreement Vessel will be the fair market value of the vessel when the party and the purchaser are owned or controlled directly or indirectly by the same interests within the meaning of section 482 of the Internal Revenue Code of 1986, as amended, and implementing regulations. In such case, the party must furnish data to establish that the amount realized or to be realized is the fair market value; and

(2) Sufficient data must be submitted to support a MARAD determination of the fair market value including the original cost of the vessel, dates of original delivery, acquisition, and reconstruction (as applicable), cost of improvements, sales price, costs of sale, and any other information that would assist in making such determination.

If MARAD determines that a party to an Agreement holder fails to fulfill a substantial obligation under the Agreement, MARAD will send a certified letter informing the party that the Agreement will terminate 60 days after the date of the letter unless the deficiencies identified in the letter are addressed to MARAD's satisfaction.

Wherever MARAD prescribes time constraints, the postmark date will control if mailed. If a courier service is used the date listed on the label will control.