Construction Reserve Fund
The Construction Reserve Fund (CRF), authorized by 46 U.S.C. Chapter 533 (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.
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.
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.
The Act 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.
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 Shipyards and Marine Financing
U.S. Department of Transportation
1200 New Jersey Avenue, SE
Washington, D.C. 20590
Information the CRF program as it relates to fishing vessels may be obtained from:
CCF Program, Financial Services Division (F/MB5)
National Marine Fisheries Service
1315 East West Highway
Silver Spring, MD 20910