Title 26 — Internal Revenue CodeRelease 119-73not60
§7518 Tax Incentives Relating to Merchant Marine Capital Construction Funds
Title 26 › Subtitle Subtitle F— Procedure and Administration › Chapter 77— MISCELLANEOUS PROVISIONS › § 7518
Summary
Lets ship owners and lessees put money into a special "capital construction fund" each year, but only up to certain limits. The allowed deposit is the total of: the part of the owner’s taxable income that comes from operating the agreement vessels, the depreciation deduction for those vessels, any net proceeds from selling or getting insurance for a vessel (if those proceeds were not already counted as income), and money earned from investing the fund. If you lease a vessel, the amount you can put in for depreciation is reduced by what the owner must or may put in. “Agreement vessel” also covers barges and containers that go with the vessel. Money in the fund must be kept where the agreement says and follow trustee rules. It may be invested only in interest‑paying securities the Secretary approves. If the Secretary agrees, up to 60 percent of the fund can be in stock of U.S. companies that are fully listed on a national exchange and that a careful investor would buy. If stock value goes over the allowed percent, future investments and withdrawals must move the fund back toward the allowed mix. Certain preferred stock is treated like allowed common stock if it would otherwise qualify. For tax rules: deposits that come from vessel operations reduce taxable income for that year. Gains from a sale or insurance are not taxed if the net proceeds are deposited. Earnings inside the fund (including gains and losses) are not taxed while they stay in the fund. Corporations’ earnings and the accumulated earnings tax are figured without counting amounts in the fund. To get these tax benefits, deposits must follow the agreement and be made by the times set in the joint rules. The fund must keep three accounts: capital, capital gain, and ordinary income. Qualified withdrawals—that is, money taken out under the agreement to buy, build, or rebuild a qualified vessel or its barges/containers, or to pay principal on loans for those things—are treated first as coming from the capital account, then the capital gain account, then the ordinary income account. Withdrawals from the capital gain or ordinary accounts reduce the tax basis of the vessel. If rules or duties under the agreement are not met, the Secretary can treat some or all of the fund as a nonqualified withdrawal after notice and hearing. Nonqualified withdrawals are taxed: they are treated first as from ordinary income, then capital gain, then capital. The ordinary part is included as regular income and the capital part as long‑term gain. If money stays in the fund too long, portions left at the close of the 26th through 30th taxable years become nonqualified at rates of 20, 40, 60, 80, and 100 percent, respectively. Special rules cover interest on added tax, transfers under certain tax rules, partnership continuations, and that amounts in the fund on January 1, 1987 are treated as deposited that day. Words defined in chapter 535 of title 46 have the same meanings here.
Full Legal Text
Title 26, §7518
Internal Revenue Code — Source: USLM XML via OLRC
(a)(1)The amount deposited in a fund established under chapter 535 of title 46 of the United States Code (hereinafter in this section referred to as a “capital construction fund”) shall not exceed for any taxable year the sum of:
(A)that portion of the taxable income of the owner or lessee for such year (computed as provided in chapter 1 but without regard to the carryback of any net operating loss or net capital loss and without regard to this section) which is attributable to the operation of the agreement vessels in the foreign or domestic commerce of the United States or in the fisheries of the United States,
(B)the amount allowable as a deduction under section 167 for such year with respect to the agreement vessels,
(C)if the transaction is not taken into account for purposes of subparagraph (A), the net proceeds (as defined in joint regulations) from—
(i)the sale or other disposition of any agreement vessel, or
(ii)insurance or indemnity attributable to any agreement vessel, and
(D)the receipts from the investment or reinvestment of amounts held in such fund.
(2)In the case of a lessee, the maximum amount which may be deposited with respect to an agreement vessel by reason of paragraph (1)(B) for any period shall be reduced by any amount which, under an agreement entered into under chapter 535 of title 46, United States Code, the owner is required or permitted to deposit for such period with respect to such vessel by reason of paragraph (1)(B).
(3)For purposes of paragraph (1), the term “agreement vessel” includes barges and containers which are part of the complement of such vessel and which are provided for in the agreement.
(b)(1)Amounts in any capital construction fund shall be kept in the depository or depositories specified in the agreement and shall be subject to such trustee and other fiduciary requirements as may be specified by the Secretary.
(2)Amounts in any capital construction fund may be invested only in interest-bearing securities approved by the Secretary; except that, if such Secretary consents thereto, an agreed percentage (not in excess of 60 percent) of the assets of the fund may be invested in the stock of domestic corporations. Such stock must be currently fully listed and registered on an exchange registered with the Securities and Exchange Commission as a national securities exchange, and must be stock which would be acquired by prudent men of discretion and intelligence in such matters who are seeking a reasonable income and the preservation of their capital. If at any time the fair market value of the stock in the fund is more than the agreed percentage of the assets in the fund, any subsequent investment of amounts deposited in the fund, and any subsequent withdrawal from the fund, shall be made in such a way as to tend to restore the fund to a situation in which the fair market value of the stock does not exceed such agreed percentage.
(3)For purposes of this subsection, if the common stock of a corporation meets the requirements of this subsection and if the preferred stock of such corporation would meet such requirements but for the fact that it cannot be listed and registered as required because it is nonvoting stock, such preferred stock shall be treated as meeting the requirements of this subsection.
(c)(1)For purposes of this title—
(A)taxable income (determined without regard to this section and chapter 535 of title 46, United States Code) for the taxable year shall be reduced by an amount equal to the amount deposited for the taxable year out of amounts referred to in subsection (a)(1)(A),
(B)gain from a transaction referred to in subsection (a)(1)(C) shall not be taken into account if an amount equal to the net proceeds (as defined in joint regulations) from such transaction is deposited in the fund,
(C)the earnings (including gains and losses) from the investment and reinvestment of amounts held in the fund shall not be taken into account,
(D)the earnings and profits (within the meaning of section 316) of any corporation shall be determined without regard to this section and chapter 535 of title 46, United States Code, and
(E)in applying the tax imposed by section 531 (relating to the accumulated earnings tax), amounts while held in the fund shall not be taken into account.
(2)Paragraph (1) shall apply with respect to any amount only if such amount is deposited in the fund pursuant to the agreement and not later than the time provided in joint regulations.
(d)For purposes of this section—
(1)Within a capital construction fund 3 accounts shall be maintained:
(A)the capital account,
(B)the capital gain account, and
(C)the ordinary income account.
(2)The capital account shall consist of—
(A)amounts referred to in subsection (a)(1)(B),
(B)amounts referred to in subsection (a)(1)(C) other than that portion thereof which represents gain not taken into account by reason of subsection (c)(1)(B),
(C)the percentage applicable under section 243(a)(1) of any dividend received by the fund with respect to which the person maintaining the fund would (but for subsection (c)(1)(C)) be allowed a deduction under section 243, and
(D)interest income exempt from taxation under section 103.
(3)The capital gain account shall consist of—
(A)amounts representing capital gains on assets held for more than 6 months and referred to in subsection (a)(1)(C) or (a)(1)(D), reduced by
(B)amounts representing capital losses on assets held in the fund for more than 6 months.
(4)The ordinary income account shall consist of—
(A)amounts referred to in subsection (a)(1)(A),
(B)(i)amounts representing capital gains on assets held for 6 months or less and referred to in subsection (a)(1)(C) or (a)(1)(D), reduced by
(ii)amounts representing capital losses on assets held in the fund for 6 months or less,
(C)interest (not including any tax-exempt interest referred to in paragraph (2)(D)) and other ordinary income (not including any dividend referred to in subparagraph (E)) received on assets held in the fund,
(D)ordinary income from a transaction described in subsection (a)(1)(C), and
(E)the portion of any dividend referred to in paragraph (2)(C) not taken into account under such paragraph.
(5)Except on termination of a capital construction fund, capital losses referred to in paragraph (3)(B) or in paragraph (4)(B)(ii) shall be allowed only as an offset to gains referred to in paragraph (3)(A) or (4)(B)(i), respectively.
(e)(1)A qualified withdrawal from the fund is one made in accordance with the terms of the agreement but only if it is for:
(A)the acquisition, construction, or reconstruction of a qualified vessel,
(B)the acquisition, construction, or reconstruction of barges and containers which are part of the complement of a qualified vessel, or
(C)the payment of the principal on indebtedness incurred in connection with the acquisition, construction, or reconstruction of a qualified vessel or a barge or container which is part of the complement of a qualified vessel.
(2)Under joint regulations, if the Secretary determines that any substantial obligation under any agreement is not being fulfilled, he may, after notice and opportunity for hearing to the person maintaining the fund, treat the entire fund or any portion thereof as an amount withdrawn from the fund in a nonqualified withdrawal.
(f)(1)Any qualified withdrawal from a fund shall be treated—
(A)first as made out of the capital account,
(B)second as made out of the capital gain account, and
(C)third as made out of the ordinary income account.
(2)If any portion of a qualified withdrawal for a vessel, barge, or container is made out of the ordinary income account, the basis of such vessel, barge, or container shall be reduced by an amount equal to such portion.
(3)If any portion of a qualified withdrawal for a vessel, barge, or container is made out of the capital gain account, the basis of such vessel, barge, or container shall be reduced by an amount equal to such portion.
(4)If any portion of a qualified withdrawal to pay the principal on any indebtedness is made out of the ordinary income account or the capital gain account, then an amount equal to the aggregate reduction which would be required by paragraphs (2) and (3) if this were a qualified withdrawal for a purpose described in such paragraphs shall be applied, in the order provided in joint regulations, to reduce the basis of vessels, barges, and containers owned by the person maintaining the fund. Any amount of a withdrawal remaining after the application of the preceding sentence shall be treated as a nonqualified withdrawal.
(5)If any property the basis of which was reduced under paragraph (2), (3), or (4) is disposed of, any gain realized on such disposition, to the extent it does not exceed the aggregate reduction in the basis of such property under such paragraphs, shall be treated as an amount referred to in subsection (g)(3)(A) which was withdrawn on the date of such disposition. Subject to such conditions and requirements as may be provided in joint regulations, the preceding sentence shall not apply to a disposition where there is a redeposit in an amount determined under joint regulations which will, insofar as practicable, restore the fund to the position it was in before the withdrawal.
(g)(1)Except as provided in subsection (h), any withdrawal from a capital construction fund which is not a qualified withdrawal shall be treated as a nonqualified withdrawal.
(2)Any nonqualified withdrawal from a fund shall be treated—
(A)first as made out of the ordinary income account,
(B)second as made out of the capital gain account, and
(C)third as made out of the capital account.
(3)For purposes of this title—
(A)any amount referred to in paragraph (2)(A) shall be included in income as an item of ordinary income for the taxable year in which the withdrawal is made,
(B)any amount referred to in paragraph (2)(B) shall be included in income for the taxable year in which the withdrawal is made as an item of gain realized during such year from the disposition of an asset held for more than 6 months, and
(C)for the period on or before the last date prescribed for payment of tax for the taxable year in which this withdrawal is made—
(i)no interest shall be payable under section 6601 and no addition to the tax shall be payable under section 6651,
(ii)interest on the amount of the additional tax attributable to any item referred to in subparagraph (A) or (B) shall be paid at the applicable rate (as defined in paragraph (4)) from the last date prescribed for payment of the tax for the taxable year for which such item was deposited in the fund, and
(iii)no interest shall be payable on amounts referred to in clauses (i) and (ii) of paragraph (2) or in the case of any nonqualified withdrawal arising from the application of the recapture provision of section 606(5) of the Merchant Marine Act, 1936, as in effect on December 31, 1969.
(4)For purposes of paragraph (3)(C)(ii), the applicable rate of interest for any nonqualified withdrawal shall be determined and published jointly by the Secretary of the Treasury or his delegate and the applicable Secretary and shall bear a relationship to 8 percent which the Secretaries determine under joint regulations to be comparable to the relationship which the money rates and investment yields for the calendar year immediately preceding the beginning of the taxable year bear to the money rates and investment yields for the calendar year 1970.
(5)(A)The applicable percentage of any amount which remains in a capital construction fund at the close of the 26th, 27th, 28th, 29th, or 30th taxable year following the taxable year for which such amount was deposited shall be treated as a nonqualified withdrawal in accordance with the following table: If the amount remains in the fund at the close of the—The applicable percentage is— 26th taxable year20 percent 27th taxable year40 percent 28th taxable year60 percent 29th taxable year80 percent 30th taxable year100 percent.
(B)The earnings of any capital construction fund for any taxable year (other than net gains) shall be treated for purposes of this paragraph as an amount deposited for such taxable year.
(C)For purposes of subparagraph (A), an amount shall not be treated as remaining in a capital construction fund at the close of any taxable year to the extent there is a binding contract at the close of such year for a qualified withdrawal of such amount with respect to an identified item for which such withdrawal may be made.
(D)If the Secretary determines that the balance in any capital construction fund exceeds the amount which is appropriate to meet the vessel construction program objectives of the person who established such fund, the amount of such excess shall be treated as a nonqualified withdrawal under subparagraph (A) unless such person develops appropriate program objectives within 3 years to dissipate such excess.
(E)For purposes of this paragraph, all amounts in a capital construction fund on January 1, 1987, shall be treated as deposited in such fund on such date.
(6)(A)In the case of any taxable year for which there is a nonqualified withdrawal (including any amount so treated under paragraph (5)), the tax imposed by chapter 1 shall be determined—
(i)by excluding such withdrawal from gross income, and
(ii)by increasing the tax imposed by chapter 1 by the product of the amount of such withdrawal and the highest rate of tax specified in section 1 (section 11 in the case of a corporation).
(B)If any portion of a nonqualified withdrawal is properly attributable to deposits (other than earnings on deposits) made by the taxpayer in any taxable year which did not reduce the taxpayer’s liability for tax under chapter 1 for any taxable year preceding the taxable year in which such withdrawal occurs—
(i)such portion shall not be taken into account under subparagraph (A), and
(ii)an amount equal to such portion shall be treated as allowed as a deduction under section 172 for the taxable year in which such withdrawal occurs.
(C)Any nonqualified withdrawal excluded from gross income under subparagraph (A) shall be excluded in determining taxable income under section 172(b)(2).
(h)Under joint regulations—
(1)a transfer of a fund from one person to another person in a transaction to which section 381 applies may be treated as if such transaction did not constitute a nonqualified withdrawal, and
(2)a similar rule shall be applied in the case of a continuation of a partnership.
(i)For purposes of this section, any term defined in chapter 535 of title 46, United States Code, which is also used in this section (including the definition of “Secretary”) shall have the meaning given such term by such chapter as in effect on the date of the enactment of this section.
Legislative History
Notes & Related Subsidiaries
Editorial Notes
References in Text
section 606(5) of the Merchant Marine Act, 1936, as in effect on
December 31, 1969, referred to in subsec. (g)(3)(C)(iii), was section 606(5) of act
June 29, 1936, ch. 858, title VI, 49 Stat. 2004, as amended by acts
June 23, 1938, ch. 600, § 22, 52 Stat. 960;
July 17, 1952, ch. 939, § 16, 66 Stat. 764; and
May 10, 1956, ch. 247, § 1, 70 Stat. 148, which was classified to section 1176(5) of former Title 46, Shipping, and was repealed by Pub. L. 91–469, § 20(4), Oct. 21, 1970, 84 Stat. 1026. section 606 of the Merchant Marine Act, 1936 was subsequently transferred to section 1176 of the former Appendix to Title 46 and is now set out as a note under section 53101 of Title 46, Shipping. The date of the enactment of this section, referred to in subsec. (i), is the date of enactment of Pub. L. 99–514, which was approved Oct. 22, 1986.
Amendments
2018—Subsec. (i). Pub. L. 115–141 substituted “chapter 535 of title 46, United States Code,” for “section 607(k) of the Merchant Marine Act, 1936” and “such chapter” for “such section 607(k)”. 2017—Subsec. (g)(6)(A). Pub. L. 115–97, § 13001(b)(7), in concluding provisions, substituted “In the case of a taxpayer other than a corporation, with respect to the portion” for “With respect to the portion” and struck out “(34 percent in the case of a corporation)” after “shall not exceed 20 percent”. Pub. L. 115–97, § 13001(b)(2)(Q), struck out “or 1201(a)” after “section 1(h)” in concluding provisions. 2014—Subsec. (g)(4). Pub. L. 113–295, which directed substitution of “any nonqualified withdrawal shall be determined” for “any nonqualified withdrawal” and all that followed through “ ‘shall be determined”, was executed by substituting “any nonqualified withdrawal shall be determined” for “any nonqualified withdrawal— “(A) made in a taxable year beginning in 1970 or 1971 is 8 percent, or “(B) made in a taxable year beginning after 1971, shall be determined” to reflect the probable intent of Congress. 2013—Subsec. (g)(6)(A). Pub. L. 112–240 substituted “20 percent” for “15 percent” in concluding provisions. 2006—Subsec. (a)(1). Pub. L. 109–304, § 17(e)(6)(A), substituted “chapter 535 of title 46 of the United States Code” for “section 607 of the Merchant Marine Act, 1936”. Subsecs. (a)(2), (c)(1)(A), (D). Pub. L. 109–304, § 17(e)(6)(B), substituted “chapter 535 of title 46, United States Code” for “section 607 of the Merchant Marine Act, 1936”. Subsec. (g)(3)(C)(iii). Pub. L. 109–304, § 17(e)(6)(C), substituted “Merchant Marine Act, 1936,” for “Merchant Marine Act of 1936”. 2003—Subsec. (g)(6)(A). Pub. L. 108–27 substituted “15 percent” for “20 percent” in concluding provisions. 1997—Subsec. (g)(6)(A). Pub. L. 105–34 substituted “20 percent” for “28 percent” in concluding provisions. 1990—Subsec. (g)(6)(A). Pub. L. 101–508 substituted “section 1(h)” for “section 1(j)” in last sentence. 1988—Subsec. (g)(1). Pub. L. 100–647, § 1018(u)(23), substituted “not a qualified withdrawal” for “not qualified withdrawal”. Subsec. (g)(6)(A). Pub. L. 100–647, § 1002(m)(1), substituted “section 1(j)” for “section 1(i)”.
Statutory Notes and Related Subsidiaries
Effective Date
of 2017 AmendmentAmendment by Pub. L. 115–97 applicable to taxable years beginning after Dec. 31, 2017, see section 13001(c)(1) of Pub. L. 115–97, set out as a note under section 11 of this title.
Effective Date
of 2014 AmendmentAmendment by Pub. L. 113–295 effective Dec. 19, 2014, subject to a
Savings Provision
, see section 221(b) of Pub. L. 113–295, set out as a note under section 1 of this title.
Effective Date
of 2013 AmendmentAmendment by Pub. L. 112–240 applicable to taxable years beginning after Dec. 31, 2012, see section 102(d)(1) of Pub. L. 112–240, set out as a note under section 1 of this title.
Effective Date
of 2003 AmendmentAmendment by Pub. L. 108–27 applicable to taxable years ending on or after May 6, 2003, see section 301(d) of Pub. L. 108–27, set out as an Effective and Termination Dates of 2003 Amendment note under section 1 of this title.
Effective Date
of 1997 AmendmentAmendment by Pub. L. 105–34 applicable to taxable years ending after May 6, 1997, see section 311(d) of Pub. L. 105–34, set out as a note under section 1 of this title.
Effective Date
of 1990 AmendmentAmendment by Pub. L. 101–508 applicable to taxable years beginning after Dec. 31, 1990, see section 11101(e) of Pub. L. 101–508, set out as a note under section 1 of this title.
Effective Date
of 1988 AmendmentAmendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.
Effective Date
Pub. L. 99–514, title II, § 261(g), Oct. 22, 1986, 100 Stat. 2216, provided that: “The
Amendments
made by this section [enacting this section and amending section 26 of this title and section 1177 of Title 46, Appendix, Shipping] shall apply to taxable years beginning after December 31, 1986.” Merchant Marine Capital
Construction
Funds Pub. L. 99–514, title II, § 261(a), Oct. 22, 1986, 100 Stat. 2208, provided that: “The purpose of this section [enacting this section, amending section 26 of this title and section 1177 of Title 46, Appendix, and enacting provisions set out as a note above] is to coordinate the application of the Internal Revenue Code of 1986 with the capital
Construction
program under the Merchant Marine Act, 1936 [see 46 U.S.C. 53501 et seq.].”
Reference
Citations & Metadata
Citation
26 U.S.C. § 7518
Title 26 — Internal Revenue Code
Last Updated
Apr 5, 2026
Release point: 119-73not60