Capital Construction Fund Benefits For Shipbuilders
By Jim Kearns, Special Counsel, Jones Walker LLP
The Capital Construction Fund (CCF) program administered by the U.S. Maritime Administration provides, through tax benefits, an incentive to vessel owners and operators to construct new vessels and make capital improvements to existing vessels.
The CCF program allows owners or operators to deposit earnings from vessel operations, proceeds from vessel sales or other property into a CCF account, and the amounts of such deposits are excluded from taxable income in the year deposited. The earnings on funds in the account are not taxed while in the account. When the fundholder withdraws money from the account to pay a U.S. shipyard for construction of a new vessel or capital improvements to an existing vessel, the withdrawal is tax-free. The government “recaptures” the tax later by reducing the vessel’s depreciable basis by the amount that is withdrawn from the CCF account.
The CCF program was initially authorized under section 607 of the Merchant Marine Act of 1936. This statute and the regulations implementing it provide that only an “owner or lessee” of a vessel is eligible to have a CCF account. The statute and regulations require that the construction or capital improvement be done in the United States, but they do not mention shipbuilders or shipyards as potential fundholders. As a result, one might initially conclude that the benefits of the CCF program would accrue to shipbuilders only indirectly by encouraging a pipeline of work for U.S. shipyards.
However, as both shipbuilders and their customers well know, the shipbuilder typically retains title to a vessel during its construction until it is paid for and delivered to the customer, and therefore the shipbuilder is the owner of the vessel during that time. The Maritime Administration recognizes this by allowing a shipbuilder to maintain a CCF account, into which it can deposit payments that it receives from its customers for the shipyard’s work on those customers’ vessels, which would be excluded from the shipbuilder’s taxable income in the year deposited. The shipbuilder can make tax-free withdrawals from the account to pay the costs incurred in building or making capital improvements to vessels.
Sometimes the contract between the shipbuilder and the customer provides for payments to be made in installments during construction. In those cases, the contract might provide that title to the vessel passes to the customer to the extent that such partial payments have been made. This can add some complexity to the accounting required for administering the fund, which will depend on factors beyond the scope of this article.
The CCF program is currently available to shipbuilders only to fund work done on vessels, not for other purposes, such as acquiring equipment or improving or expanding its facilities. However, the success of the CCF program, with nearly $2.6 billion currently held in CCF accounts, has been recognized in the Maritime Action Plan that was issued by the White House in February. That plan proposes an initiative, modeled on the CCF program, to allow shipbuilders to establish tax-deferred accounts to reinvest earnings into infrastructure improvements, new equipment and debt repayment. The goal of the program would be to enable shipyards to accelerate the accumulation of capital and thereby be able to modernize more rapidly, to make production more efficient and to expand capacity.
The Maritime Action Plan also calls for consideration to be given to establishing similar programs for other segments of the maritime industry, including marine terminal operators. This reflects an earlier legislative initiative that would extend the existing CCF program to operators of marine facilities, allowing them to create tax-deferred CCF accounts for the acquisition of cargo-handling equipment. This proposal has been included in the Shipbuilding and Harbor Infrastructure for Prosperity and Security for America Act, more commonly referred to as the SHIPS Act, that has been re-introduced in both houses of the current Congress and is being reviewed by the relevant committees.
The CCF program was just one of several programs authorized by the Merchant Marine Act of 1936 to revive the U.S.-flag merchant marine. It is now regarded as a model to support other segments of the maritime industry.
Jim Kearns is special counsel in Jones Walker’s Maritime Practice Group, where he focuses on maritime transactions. In his more than 30 years of practice, Kearns has represented owners, operators, financial institutions (as both lessors and lenders) and end users in the purchase, construction and financing of vessels engaged in both the foreign and coastwise trades of the United States, including compliance with the requirements of the Jones Act for the ownership, chartering and transfer of vessels.
