Suspension of Operating-differential Subsidy Agreements

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HOUSE OF REPRESENTATIVES,

COMMITTEE ON THE MERCHANT MARINE AND FISHERIES,

Washington, D. C. The committee met, at 10 a. m., pursuant to notice, Hon. Schuyler O. Bland, chairman, presiding for consideration of H. R. 134, which is as follows:

[H. R. 134, 78th Cong., 1st sess.]

A BILL To provide for the suspension, during the war, of operating-differential subsidy agreements, and attendant benefits, under title VI of the Merchant Marine Act, 1936, as amended, and for other purposes Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That section 607 (h) of title VI of the Merchant Marine Act, 1936, as amended, is amended to read as follows:

(h) (1) EXEMPTION FROM TAXATION OF DEPOSITS IN RESERVE FUNDS.—All or any part of the net income (including gains from the sale, exchange, or involuntary conversion of vessels) of any contractor, receiving an operating-differential subsidy under authority of this title, which is deposited in the contractor's reserve funds as provided in this section shall, except as hereafter provided, be exempt from all Federal income and excess profits taxes.

"(2) TAXATION OF WITHDRAWals from reserve funds.—Amounts withdrawn from the contractor's reserve funds, to the extent that such amounts are deemed to be out of net income (including gains from the sale, exchange, or involuntary conversion of vessels), shall, except when withdrawn (A) for the purchase, construction, or reconstruction of vessels to be employed by the contractor on an essential foreign-trade line, route, or service approved by the Commission, (B) for the purpose of paying off indebtedness secured by mortgage on a subsidized vessel or vessels, or (C) from the special reserve fund and transferred to the capital reserve fund as permitted by subsection (g) of this section, be taxed as if earned during the taxable year in which the withdrawal occurs.

(3) TAXATION OF RESERVE FUNDS UPON TERMINATION OF SUBSIDY CONTRACT.— Upon the termination of the operating-differential subsidy contract, all amounts which are in the reserve funds at the time of such termination, to the extent that such amounts are deemed to be net income (including gains from the sale, exchange, or involuntary conversion of vessels), shall be taxed as if earned during the taxable year in which such termination occurs, except that there shall not be taxed (A) amounts to be recaptured by the Commission as provided by section 606, and (B) amounts which are obligated to the Commission as the minimum cash payments required to be made pursuant to an existing contract entered into by the contractor and the Commission under the provisions of title V.

"(4) TAXATION OF NET INCOME DEPOSITED IN RESERVE FUNDS DURING SUSPENSION PERIOD.—The exemption provided in paragraph (1) of this subsection shall not apply to deposits of net income (other than gains from the sale, exchange, or involuntary conversion of vessels) attributable to any taxable year of the contractor beginning after December 31, 1941, and before the termination of the present war, as proclaimed by the President. Such net income (other than gains from the sale, exchange, or involuntary conversion of vessels) deposited during this period shall be deemed capital, for the purposes of paragraph (i) (1) of this section. With the consent of the Commission, the contractor may withdraw from such deposits made during this period sums sufficient to pay Federal income and excess-profits taxes which are attributable to such deposits.

"(5) REDUCTION IN THE BASIS OF VESSELS.-In the case of amounts withdrawn from the contractor's reserve funds during the first taxable year beginning after December 31, 1941, and all subsequent taxable years, for the purchase, construction, or reconstruction of vessels to be employed by the contractor on an essential foreign-trade line, route, or service approved by the Commission, or for the purpose of paying off indebtedness secured by mortgage on any subsidized vessel or vessels, the basis of such vessels for determining gain or loss and for depreciation for the purposes of Federal income or excess-profits taxes, shall be reduced by such amounts to the extent that they are deemed to be out of net income (including gains from the sale, exchange, or involuntary conversion of vessels). The basis of vessels constructed or acquired with amounts described under (B) of paragraph (3) of this subsection shall be reduced to the extent of such amounts.

"(i) (1) CLASSIFICATION OF DEPOSITS IN RESERVE FUNDS.-For the purposes of subsection (h), all amounts which have been, or shall be, deposited in either of the reserve funds shall be separately classified, so as to indicate (A) whether they consist of capital, or net income (including gains from the sale, exchange, or involuntary conversion of vessels), and (B) the amounts in each class. All withdrawals which have been, or shall be, made from such reserve funds for the purchase, construction, or reconstruction of vessels to be employed by the contractor on an essential foreign-trade line, route, or service approved by the Commission, or for the purpose of paying off indebtedness secured by mortgage on any subsidized vessel or vessels, shall be deemed to be first out of capital to the extent thereof at the time of such withdrawals, and then out of net income (including gains from the sale, exchange, or involuntary conversion of vessels). Withdrawals for all other purposes shall be deemed to be first out of net income (including gains from the sale, exchange, or involuntary conversion of vessels) to the extent thereof at the time of such withdrawals, and then out of capital. Amounts recaptured by the Commission as provided by section 606 shall be deemed first out of net income (including gains from the sale, exchange, or involuntary conversion of vessels) to the extent thereof at the time of recapture, and then out of capital. Upon the termination of the operating-differential subsidy contract, amounts which are obligated to the Commission as the minimum required cash payments to be made on a subsidized vessel or vessels to be constructed by, or to be acquired from, the Commission pursuant to an existing contract entered into by the contractor and the Commission under the provisions of title V of this Act, as amended, shall be deemed first out of capital to the extent thereof at the time of such termination, and then out of net income (including gains from the sale, exchange, or involuntary conversion of vessels).

"(2) TREATMENT OF DEPOSITS FOR DEPRECIATION.-For the purposes of this subsection and subsection (h), any amount deposited as depreciation in respect of any taxable year in the contractor's reserve funds shall be deemed capital to the extent that it does not exceed the amount of the deduction allowed as depreciation in respect of such taxable year under the applicable Federal income tax provisions. The part of the amount in excess of such allowed depreciation shall be deemed net income to the extent that it consists of net income, and the remaining part shall be deemed capital.

"(3) DEFINITIONS AND REGULATIONS.-The terms used in this subsection and subsection (h) shall, unless the context otherwise requires, have the same meaning as in chapter I of the Internal Revenue Code. The Commission and the Commissioner of Internal Revenue with the approval of the Secretary of the Treasury shall prescribe jointly the regulations for the administration of this subsection and subsection (h)."

SEC. 2. Title VI of such Act, as amended, is amended by adding at the end thereof new sections to read as follows:

"SEC. 613. (a) Whenever the Commission shall determine, with respect to any operating-differential subsidy agreement made pursuant to this title, as amended, that conditions arising out of the present war have made the continued performance of such agreement impossible or inadvisable in the public interest, the Commission may enter into a contract with the holder of such agreement for the suspension thereof for a period and under terms and conditions prescribed or authorized in this section and in accordance with such rules, regulations, or orders as the Commission may prescribe or issue as necessary or appropriate for carrying out the provisions of this section. Any such contract for suspension of an agreement may be made effective as of any time on or after January 1, 1942, and may continue the suspension in effect until the beginning of the first taxable year of the agreement holder commencing after the termination of the war. No contract for the suspension of any such agreement shall extend the life of such agreement beyond the time fixed therein, except that the contract may provide, in case of any such agreement otherwise expiring during the war, for an extension of the

life thereof until the beginning of the first taxable year of the agreement holder commencing after the termination of the war. The suspension of any such agreement under this section shall not constitute a termination thereof within the meaning of section 607 (f) of this title or any other provision of this Act, and no contract hereunder shall provide for the termination of such agreement.

"(b) The capital reserve fund and the special reserve fund of the agreement holder shall be continued during the period of suspension of the agreement hereunder. The provisions of the subsidy agreement relating to deposits in, as required by the first paragraph of section 607 (b) of this title, and all withdrawals from, the capital reserve fund shall remain in full force and effect. The contract suspending the agreement need not require any deposit to be made in the special reserve fund from earnings accruing during the period of suspension, and the provisions of the suspended agreement relating to withdrawals from the special reserve fund shall remain in full force and effect, except as provided in section 607 (h) (4). The time during which any such agreement is suspended by contract under this section shall not be taken as any part of the period with respect to which excess profits of the agreement holder are subject to recapture under section 606 (5) of this title, nor as any part of any period, applicable in respect of the agreement holder or his vessels or his operation thereof, fixed or determined under this Act on the basis of the twenty-year economic life of a vessel, but the agreement holder shall not be relieved by such contract from making deposits in his capital reserve fund to cover annual depreciation based upon the twenty-year life of the vessel.

"SEC. 614. Throughout the period of suspension under section 613, the holder of every operating-differential subsidy agreement made pursuant to this Act may be required by the Commission, with the approval of the Secretary of the Treasury, to invest all of the holder's capital and special reserve funds, not specifically excepted from such investment by the Commission, in such securities of the United States as the Commission may from time to time designate. The securities so designated by the Commission need not be interest-bearing securities and may be securities issued by the United States at a discount. All interest on such securities and all realized discount thereon shall be dpeosited in the capital reserve fund. The Commission is authorized, in the case of securities issued at par or at a premium, to accept such securities at the par value thereof, and, in the case of securities issued at a discount to accept such securities at the par value thereof less unearned discount, in payment of any obligations due or which may become due to the Commission under any of the provisions of this Act or of any contract thereunder and which are payable or may be paid out of either of such reserve funds."

SEC. 3. Any holder of an operating-differential subsidy agreement under title VI of the Merchant Marine Act, 1936, as amended, may, within thirty days after the effective date of this Act, amend the declaration of value contained in its return filed under section 1203 of the Internal Revenue Code for the year ending June 30, 1942, and such declaration of value as amended shall be considered as the declared value for the purposes of section 1202 of the Internal Revenue Code. The CHAIRMAN. The committee will come to order. Gentlemen, we have met this morning to consider bill H. R. 134, which is the same as the bill introduced in the last Congress as H. R. 7105.

The subject matter is very technical and I hope you gentlemen, in presenting your statements, will also just come down and talk turkey and tell us in plain old English what it all means so that all of us can understand just why it is necessary, and what the objections are so that we will not have to wade through a lot of words to find it out. I know you are busy and we are too. We would be glad to have any statements you care to make, but sometimes I have found statements are a little obscure. When a fellow gets right down to it, as Mr. Ackerson does, in a few words, and tells me what it is all about that is what I want. First I will hear from the Maritime Commission. Admiral Land, do you desire to go on now?

Admiral LAND. Yes, sir.

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