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CONSTRUCTION RESERVE FUND (CRF)
Introduction
The Construction Reserve Fund (CRF), authorized by
Section 511 of the Merchant Marine Act of 1936, as amended (the Act), is a financial
assistance program which provides tax deferral benefits to U.S.-flag operators. Eligible
parties can defer the gain attributable to the sale or loss of a vessel, provided the
proceeds are used to expand or modernize the U.S. merchant fleet. The primary purpose of
the CRF is to promote the construction, reconstruction, reconditioning, or acquisition of
merchant vessels which are necessary for national defense and to the development of U.S.
commerce. This page discusses eligibility requirements for the CRF, the program's
benefits, and restrictions on the Fund's use.
Eligibility Requirements
A CRF may be established by any citizen of the United
States who owns, in whole or in part, a vessel or vessels operating in the foreign or
domestic commerce of the United States or in the fisheries. Additionally, a citizen who is
operating such vessel or vessels owned by another individual may establish a CRF. The
benefits available to the non-owner operator, however, are limited.
The foreign commerce of the United States includes trade
between the United States, its territories and possessions, and a foreign country. The
domestic commerce of the United States includes trade between ports of the United States,
its territories and possessions embraced within the coastwise laws, on the Great Lakes,
and on inland rivers. It is primarily operators in coastwise trades and on inland rivers
that today use the CRF.
Also eligible to establish a CRF are owners of vessels
operating in the fisheries of the United States, its territories, and possessions. More
complete information regarding Federal financial assistance programs for the fisheries is
available from the National Oceanic and Atmospheric Administration whose address is given
at the end of this page.
Benefits
In the event of sale or actual constructive total loss of
a vessel, Section 511 provides for the non-recognition of gain for purposes of Federal
income or excess profits taxes. To defer taxation on the gain the taxpayer must deposit in
the CRF an amount equal to the net proceeds of the sale or to the net indemnity with
respect to the loss and make a proper election on his Federal income tax return. Both
ordinary income gain and capital gain may be deferred in this manner.
This tax deferral mechanism has enabled various fund
holders, depending on specific circumstances, to build larger, better-equipped new
vessels, to reduce mortgage debt on new vessels, or to build a greater number of vessels
than would have been possible without the CRF.
Deposits into the CRF must be made within 60 days after
receipt by the taxpayer of amounts representing proceeds of the sale or indemnification
for loss of a vessel. As defined by Section 511, the terms "net proceeds" and
"net indemnity" mean the sum of (1) the adjusted basis of the vessel and (2) the
amount of gain which would be recognized to the taxpayer without regard to the CRF.
The ability to defer gain under this provision applies
only to vessel owners. Citizens operating a vessel owned by another individual can not
benefit from the provisions relating to the non-recognition of gain from the sale or loss
of a vessel.
Section 511 also permits a vessel owner or operator to
deposit into the CRF earnings from the operation of vessels documented under the laws of
the United States and earnings from the investment of the fund. Such deposits do not
exempt the taxpayer from tax liability on the earnings nor do they postpone the time such
earnings are includable in gross income. However, earnings so deposited are considered to
have been accumulated for the reasonable needs of the business within the meaning of the
Internal Revenue Code. This ability to accumulate funds for the construction,
reconstruction, or acquisition of a vessel is the only benefit available to the non-owner
operator of a vessel.
Requirements for New Vessels
The non-recognition of gain provisions applies only to
the extent that monies deposited in the CRF are expended for the construction,
reconstruction, or acquisition of a new vessel or vessels. The Act stipulates that the new
vessel must be constructed or reconstructed in the United States and documented under the
laws of the United States. Ordinarily, a vessel to be acquired with expenditures from the
CRF would not be considered suitable to carry our the purposes of the Act if constructed
more than 5 years prior to acquisition. Vessels must be of such type, size, and speed as
to be suitable for use on the high seas or Great Lakes. If a vessel is less than 2,000
gross tons or has a speed less than 12 knots, the Maritime Administration must determine
that the particular vessel would be useful to the United States in case of war or national
emergency.
Within three years from the date of any deposit into a
CRF, the money deposited must be obligated under a contract for the construction or
acquisition of a new vessel. Within that time frame not less than 12 1/2 percent of the
price of the vessel must be expended or irrevocably obligated, and not less than five
percent of the work on the vessel must be completed. Finally, the Maritime Administration
must determine that the price of the new vessel is fair and reasonable.
Additional Information
This page is intended as a general information to the
Construction Reserve Fund and its basic provisions, as administered by the Maritime
Administration. More specific information and application instructions may be obtained
from:
Director, Office of Ship Financing
Maritime Administration
U.S. Department of Transportation
400 Seventh Street, S.W., Room 8122
Washington, D.C. 20590
(202) 366-5744
Information the CRF program as it related to fishing
vessels may be obtained from:
Financial Assistance Division
National Marine Fisheries Service
National Oceanic and Atmospheric Administration
3300 Whitehaven Street, N.W.
Washington, D.C. 20235
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