Capital construction funds: sec. 7518.

• Author: Weber, Neal A.

The Capital Construction Fund (CCF) program was authorized in 1936 by the Merchant Marine Act (46 U.S.C. [section][section]1177 and 1177-1). This program was created to help owners and operators of U.S. flag vessels accumulate the large amounts of capital needed for the modernization and expansion of the U.S. Merchant Marine. The program allows this accumulation of capital by deferring federal income taxes (increasing cash flow due to no income tax) on certain deposits of money or other property placed into the fund.

The program is the responsibility of two agencies within the federal government--the Department of Transportation's Maritime Administration and the Department of Commerce's National Oceanic and Atmospheric Administration (NOAA). NOAA administers the program that is related to the vessels used in the fisheries of the United States, and the Maritime Administration handles the programs for vessels that are not related to the fishing industry. The IRS administers the fund under Sec. 7518.

Before opening a CCF account, a taxpayer must request an application kit from either agency. This kit will help the taxpayer produce a document that will establish the following:

* Agreement vessels: Eligible vessels named in the agreement that will be the basis of the deferral of income tax;

* Planned use of the withdrawals for acquisition, building, or rebuilding of the vessel; and

* A CCF depository, where the funds will be held.

Once the agreement is approved by the secretary of the agencies, the fund provides that any U.S. citizen owning or leasing one or more eligible vessels may establish this fund. The fund is established to provide replacement vessels, additional vessels, or reconstructed vessels built in the United States and documented under the laws of the United States for operation in the United States, foreign regions, the Great Lakes, or the noncontiguous domestic trade or the fisheries of the United States. Once the agreement is approved, Sec. 7518 then applies to the mechanics and investment activity of the fund.

"Eligible vessels" are defined as vessels that weigh more than five tons. They must be built or rebuilt in the United States and must be documented under U.S. laws. They must either be used for U.S. fisheries or be operated in the foreign commerce or domestic commerce of the United States. Eligible vessels are also allowed under the five-ton weight requirement if the vessel:

* Is built or rebuilt in the United States;

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