ing or subsequently incurred purchasemoney indebtedness to persons other than a parent company of, or a company affiliated or associated with, the mortgagor on & 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 purchasemoney 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 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. 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. § 287.21 Period for construction of certain vessels.

The

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.

§ 287.22 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 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. § 287.23 Noncompliance with require

ments.

(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

(li) 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 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 purchase-money 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 excess-profits tax purposes, but not for the purposes of the declared value excess-profits 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

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 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,

§ 287.26 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 subparagraph (2) of this paragraph 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.

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.

§ 287.27 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.

§ 287.28 Administrative jurisdiction. Sections 287.3 to 287.11, inclusive, § § 287.13 to 287.15, 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.

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

Bec.

289.1

289.2

289.3

289.4

Definition.

Vessels included.

Provision in subsidy agreements and mortgages.

Insurance by owners.

289.5 Insurance by the United States.

AUTHORITY: The provisions of this Part 289 issued under 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.

SOURCE: The provisions of this Part 289 contained in General Order 67, Revised, 18 F.R. 230, Jan. 10, 1953, unless otherwise noted. § 289.1 Definition.

For the purpose of this part, when reference is made to the phrase "interest of the United States", it shall mean:

(a) As to vessels constructed or sold with construction-differential subsidy and/or national defense feature allowance under Titles V or VII of the Merchant Marine Act, 1936, as amended, the value of the construction-differential subsidy allowance, plus the allowance for national defense features;

(b) As to vessels constructed or sold under Titles V or VII of the Merchant Marine Act of 1936, as amended, and adjusted in price pursuant to section 9 of the Merchant Ship Sales Act of 1946, the difference between the pre-war domestic cost and the statutory sales price as defined in the Merchant Ship Sales Act of 1946. § 289.2

Vessels included.

Vessels subject to the provisions of this part are:

(a) All vessels which may in the future be constructed or sold with constructiondifferential subsidy allowances and/or national defense features allowance under Titles V or VII of the Merchant Marine Act 1936, as amended.

(b) All vessels which have previously been constructed or sold with construction-differential subsidy allowances and national defense features allowances under Titles V or VII of the Merchant Marine Act, 1936, as amended;

(c) All vessels which have previously been constructed with construction-differential subsidy allowances or national defense features allowance under Titles

V or VII of the Merchant Marine Act of 1936, as amended, and later adjusted in price pursuant to section 9 of the Merchant Ship Sales Act of 1946;

(d) All vessels which are subsidized under operating-differential subsidy agreements.

§ 289.3 Provision in subsidy agreements and mortgages.

(a) All construction-differential subsidy agreements and mortgages relative to vessels covered in § 289.2(a) shall provide, wherever possible, that the Maritime Administrator may, in his discretion, require the owner to insure, with commercial underwriters, the interest of the United States.

(b) All future construction-differential subsidy agreements and future operating subsidy agreements shall require that owners insure vessels covered in § 289.2 (a) and (d) in amounts acceptable to the Maritime Administration. § 289.4 Insurance by owners.

Owners of vessels covered in § 289.2 will not be required to arrange commercial insurance to cover the interest of the United States, exclusive of its mortgage interest, but the United States reserves the right to require, whenever the contracts so provide, that this be done at some future date, should it deem it

Sec. 290.1 290.11

PART 290FORMS

Construction contract.

Operating-Differential Subsidy
Agreement; Part II, General
Provisions.

AUTHORITY: The provisions of this Part 290 issued under sec. 204, 49 Stat. 1987, as amended; 46 U.S.C. 1114.

§ 290.1 Construction contract.

(a) The Maritime Subsidy Board on May 9, 1967, adopted the revised form of Construction Contract under Title V, Merchant Marine Act, 1936, as amended, to be identified as "Special Provisions, Contract No. MA/MSB-Contract for the Construction of MA Design

"into

for which is incorporated "Maritime Subsidy Board, Department of Commerce Construction Contract Part II. General Provisions (Approved May 9, 1967)".

(b) Copies of the contract form, containing the said "Special Provisions and General Provisions," may be obtained by persons having a proper interest therein upon application to the Secretary, Maritime Subsidy Board, Washington, D.C. 20235.

Copy of the contract was filed with the original of this document.

[32 F.R. 7174, May 12, 1967]

§ 290.11 Operating-Differential Subsidy Agreement; Part II, General Provisions.

(a) The Federal Maritime Board on July 29, 1957, and August 5, 1957, adopted a revised standard form of OperatingDifferential Subsidy Agreement incorporating general provisions, effective as of January 1, 1958, to existing and future Operating-Differential Subsidy Agreements made under authority of Title VI of the Merchant Marine Act, 1936, as amended (46 U. S. C. 1171).

(b) Copies of the Agreement, identifiled as Part II, General Provisions, Operating-Differential Subsidy Agreement, may be obtained by persons having a proper interest upon application to the Secretary, Federal Maritime Washington 25, D. C.

[24 F.R. 55, Jan. 8, 1959]

Board,

PART 291-DEFINITION OF CAPITAL NECESSARILY EMPLOYED IN THE BUSINESS

8 291.5 Definition of capital necessarily employed in the business.

Pursuant to section 607 (d) of the Merchant Marine Act, 1936, as amended (46 U.S.C. 1177 (d)), “capital necessarily employed in the business" is defined to be that part of the net worth of a contractor as of the beginning of the accounting period, as defined in paragraph (f) (2) of this section (subject, however, to such interim adjustments as may be provided in this section), properly allocated to and required in the business of operating subsidized vessels and services incident thereto, covered by an effective operating-differential subsidy contract which is represented by and limited to the aggregate of the amounts determined in accordance with the succeeding paragraphs of this section.

(a) Ship equities. The sum of the allowable financial equities of the contractor shall be determined, on a ship by ship basis (except for the purposes

of subparagraph (4) (i), (ii), and (iii) of this paragraph), as set forth in subparagraphs (1) through (7) of this paragraph, with respect to vessels owned by the contractor and covered by an effective operating-differential subsidy contract as of the beginning of the accounting period (except as otherwise specifically provided in this paragraph), to the extent of the use in relation to time that such vessels are employed under such operating-differential subsidy contract during the accounting period, including the time the vessels are in idle status incident to normal operations of the vessels or resulting from unavoidable causes; subject, however, in particular cases to the provisions of section 606 (2) of the Merchant Marine Act, 1936, as amended (46 U. S. C. 1176 (2)).

(1) Acquisition cost. The cost of the vessel to the contractor shall be ascertained as set forth in subdivisions (1) and (ii) of this subparagraph:

(i) If the vessel was acquired for cash paid in full, or for cash in part and deferred payments for the balance, the acquisition cost of the vessel shall be determined to be the amount of the cash paid in full or the cash paid in part, plus the principal amount of the deferred payments, except as provided in subdivision (ii) of this subparagraph.

(ii) If the vessel was acquired from a related company or for a consideration other than cash, the cost of the vessel shall be determined as provided in Part 284 of this chapter (General Order 24, 2d Revision).

(2) Improvements. To the cost of the vessel, as determined in subparagraph (1) of this paragraph, shall be added such of the contractor's capital expenditures for improvements added to the vessel as are determined by the Maritime Administration to be properly capitalizable in conformity with the provisions of Part 284 of this chapter (General Order 24, 2d Revision, 14 F. R. 7589) and not reflected in the initial acquisition cost or in any adjustment of the purchase price of the vessel under section 9 of the Merchant Ship Sales Act of 1946 (50 U. 8. C. App. 1742). Improvements so found to be properly capitalizable shall be added to the acquisition cost of the vessel determined pursuant to subparagraph (1) of this paragraph, as of the beginning of the accounting period next succeeding the end of the month during which such improvements are completed.