10/4/2017 UNIQUE FUNDING OPPORTUNITIES FOR MARINE FLEET OWNERS & OPERATORS Bill Finnecy Marne Babich Tim Goldsmith Partner Senior Manager Managing Director wfinnecy@bkd.com mbabich@bkd.com tgoldsmith@bkd.com October 4, 2017 1
10/4/2017 TO RECEIVE CPE CREDIT Participate in entire webinar • Answer polls when they are provided • If you are viewing this webinar in a group • Complete group attendance form with Title & date of live webinar • Your company name • Your printed name, signature & email address • All group attendance sheets must be submitted to training@bkd.com within 24 hours of live webinar Answer polls when they are provided If all eligibility requirements are met, each participant will be emailed their CPE certificates within • 15 business days of live webinar INTRODUCTION I. CRF II. CCF III. Program Compliance IV. Comparison of CRF/CCF V. Q & A 2
10/4/2017 Introduction INTRODUCTION I Vessel owners & operators utilizing the benefits of a CRF/CCF span a wide range of the U.S. Maritime industry. They all enjoy the benefit of lowering their effective cost of a new vessel acquisition, construction, reconstruction or modernization by saving before tax dollars accumulate capital expenditure funds more quickly 3
10/4/2017 INTRODUCTION II Types of U.S. vessel fleet owners/operators benefitting from the utilization of the CRF/CCF program include • Container ship liner companies operating from points on the west coast, gulf coast & East Coast to points in Hawaii, Europe & the other continents • Oil tank supply vessels delivering oil from Alaska to the lower 48 U.S. states • Offshore towing & supply vessels servicing oil rigs off the coast of the United States & in foreign waters • Vessels servicing ports in Central America & the Caribbean • Tug & barge operators servicing points in Alaska to points in the lower 48 U.S. states • Hawaiian cruise vessel operators providing inter-island service • Great Lakes freight/ferry service operators I. A. CRF – TAX DEFERRAL BENEFITS • The Construction Reserve Fund (CRF) seeks to promote construction, reconstruction, reconditioning or acquisition of merchant vessels essential for national defense & development of U.S. commerce through the deferral of federal income taxes • The CRF program was created by the Merchant Marine Act of 1936, as amended, (46 U.S.C. 533) & is administered by the U.S. Department of Transportation Maritime Administration (MARAD) 4
10/4/2017 I. A. CRF – TAX DEFERRAL BENEFITS • The CFR permits eligible parties to defer the tax on gains from the sale or exchange of U.S. flagged vessels, as long as the proceeds are then reinvested in new vessels within approximately a three-year period • 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 I. B. CRF VESSEL GEOGRAPHIC TRADING RESTRICTIONS • A CRF may be established by any citizen of the United States who owns, in whole or in part, a vessel or vessels operation in the foreign or domestic commerce of the United States • The foreign commerce of the United States includes trade between the United States, its territories & possessions & a foreign country • The domestic commerce of the United States includes trade between ports of the United States, its territories & possessions embraced within the coastwise laws, on the Great Lakes & on inland rivers 5
10/4/2017 I. C. CRF COMPLIANCE MATTERS Eligibility Requirements Overview • The nonrecognition of gain applies only when money deposited in the CRF is allocated toward construction, reconstruction or acquisition of a new vessel or vessels • New vessels must be constructed or reconstructed in the U.S. & documented under U.S. laws I. C. CRF COMPLIANCE MATTERS Eligibility Requirements Overview • Ordinarily, a vessel to be acquired with expenditures for the CRF would not be considered suitable to carry out the purposes of the Act if constructed more than five years prior to acquisition • Within three years from the date of any deposit in a CRF, money deposited must be obligated under a contract for construction or acquisition of a new vessel 6
10/4/2017 II. A. CCF – TAX DEFERRAL BENEFITS • The CCF program was created by the Merchant Marine Act of 1936, as amended, (46 U.S.C. 1177) & is administered by the U.S. Department of Transportation Maritime Administration (MARAD) • Program Objectives • Two distinct agreement vessel categories accomplish this objective Schedule A (eligible vessels) A. Schedule B (qualified vessels) B. II. A. CCF – TAX DEFERRAL BENEFITS Four allowable funding subceilings A. Taxable income from agreement vessel operation B. Depreciation taken on an agreement vessel C. Net proceeds from the sale or other disposition of an agreement vessel D. The earnings from investment or reinvestment of amounts deposited in a CCF account 7
10/4/2017 II. A. CCF – TAX DEFERRAL BENEFITS • Timing of deposits • Over deposits II. A. CCF – TAX DEFERRAL BENEFITS • CCF Account A CCF account is a separate bank account established & maintained by the fund holder & is not a joint account between MARAD & the fund holder 8
10/4/2017 II. A. CCF – TAX DEFERRAL BENEFITS Three required bookkeeping accounts Ordinary income account A. Capital gains account B. Capital account C. These separately tracked bookkeeping accounts required by MARAD will be discussed in more detail later in the presentation II. A. CCF – TAX DEFERRAL BENEFITS Qualified withdrawals Qualified withdrawals ordering rules – capital account, capital gains A. account, ordinary income account Agreement vessel basis reduction B. 9
10/4/2017 II. A. CCF – TAX DEFERRAL BENEFITS Nonqualified withdrawals Tax implication A. Nonqualified withdrawals ordering rules B. 25 years withdrawal requirement C. II. B. VESSEL GEOGRAPHIC TRADING RESTRICTIONS Schedule A (Eligible Vessels) A. Schedule B (Qualified Vessel) B. 10
10/4/2017 II. B. VESSEL GEOGRAPHIC TRADING RESTRICTIONS A. Schedule A (Eligible Vessels) Vessels that produce income to be deposited into the CCF These vessels must be constructed or reconstructed in the United States, operated in foreign or domestic U.S. commerce, & primarily engaged in carrying people, materials, goods or wares over water II. B. VESSEL GEOGRAPHIC TRADING RESTRICTIONS B. Schedule B (Qualified Vessel) Vessels built or reconstructed utilizing CCF withdrawals These vessels must be constructed, reconstructed or acquired with the aid of funds from qualified CCF withdrawals. They must be constructed or reconstructed in the United States & operated in the U.S. foreign, Great Lakes or noncontiguous domestic trade. They also must be engaged primarily in the waterborne carriage of people, materials, good or wares & designated in the agreement as “qualified agreement vessels”. However, they cannot be used in domestic trades on inland waterways or in coastwise domestic trade between the 48 contiguous states, except in the Great Lakes 11
10/4/2017 II. B. VESSEL GEOGRAPHIC TRADING RESTRICTIONS Schedule B (Qualified Vessel) Areas of “U.S. Foreign Trade” Applies to commerce between the following 1. A point in the U.S. & a point in a foreign country A round-the-world voyage or a voyage from the U.S. West Coast to a European port(s) that 2. includes intercoastal ports on the U.S. East Coast A roundtrip voyage from the U.S. Atlantic Coast to Asia that includes intercoastal ports on the 3. U.S. West Coast Two points in the same foreign country or in two different foreign countries, in the case of liquid 4. or bulk cargo-carrying services, if the party can substantiate that this operating flexibility is necessary to compete with foreign flag vessels in its operation or to compete for charters From foreign ports in the North Sea area to drilling & production rigs in North Sea waters 5. II. B. VESSEL GEOGRAPHIC TRADING RESTRICTIONS Schedule B (Qualified Vessel) Areas of Great Lakes Trade Applies to commerce between points on the Great Lakes & their connecting waterways in the immediate evirons of the Great Lakes 12
10/4/2017 II. B. VESSEL GEOGRAPHIC TRADING RESTRICTIONS Schedule B (Qualified Vessel) Areas of “Noncontiguous Domestic” Trade The 48 contiguous states on one hand & Alaska, Hawaii, Puerto Rico & all other U.S. 1. territories & possessions on the other hand Any point in Alaska, Hawaii, Puerto Rico & the insular territories & possessions of the 2. United States & any other point in Alaska, Hawaii, Puerto Rico, & those possessions & territories; platforms or rigs attached to the seabed of the continental shelf (beyond the three-mile limit) are included in the definition of insular U.S. territories & possessions II. C. COMPLIANCE MATTERS MARAD CCF Application Guidelines & Compliance • Eligibility requirements U.S. citizen owning or leasing a Schedule A (eligible vessel) A. Vessel plan that is acceptable to MARAD B. Demonstrate the financial means C. • Unacceptable programs 13
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