3o& ;c 76 cSSS^ The Tax Reform Act of 1976 (TRA), and regulations have changed the following sections of this booklet. Section 2 The TRA provides that commercial fishing vessels 2 net tons or over are "eligible vessels." Thus, the program is expanded to additionally cover fishing vessels between 2 net tons and 5 net tons. Section 34 The TRA also provides that in the case of qualified withdrawals made after December 31 , 1975, 50 percent of the qualified withdrawals out of the un- taxed portion of the capital gain account or out of the ordinary income account shall be treated as qualified investment for investment tax credit purposes. This means you are entitled to a 5 percent investment tax credit on withdrawals from the CCF where previously none was allowed according to IRS. The full invest- ment tax credit (10 percent) is available for that por- tion of the vessel which is not paid for through the CCF. Based on this, the example in section 34 of this booklet would be changed to provide for a loss of investment tax credit of $17,172, or $6,868 less than the $24,040 reflected in the example. Accordingly, the net additional outlay required, without use of the CCF, would be $86,109 rather than the $79,241 shown. The TRA also provides that where the basis of a vessel is reduced as a result of mortgage payments made through the CCF, after 12/31/75, the reduction of basis shall be treated as a disposition of property occurring less than 3 years after the property was placed in service and that 50 percent of the investment credit relating to such reduction must therefore be recaptured. Although 5 percent of the mortgage pay- ment will be recaptured (Vz of the original investment tax credit claimed) you will be able to accelerate mortgage payments with the deferred taxes and there- by save additional interest costs. Section 17 New Regulations have eliminated the previous provision that deposits may be made up to 60 days after the effective date of the Agreement. Deposits must be made no later than the due date for filing the Federal tax return for the year to which the deposit relates. 1. What is the Capital Construction Fund (CCF) program? The CCF program enables fishermen to construct, re- construct, or (under limited circumstances) acquire fishing vessels with before-tax, rather than after-tax, dollars. It does this by allow ingfjsJTermerLto defer payment of the Federal taxes they would otherwise have paid on taxable income from the operation of their fishing vessels. Federal taxes deferred under the CCF program and used to help pay for a vessel project constitute, in effect, an interest-free loan from the Government. In order to get this benefit, however, fishermen must agree to use some portion of their taxable in- come, and the Federal taxes associated with that por- tion, to pay for constructing, reconstructing, or (under limited circumstances) acquiring fishing vessels. Fishermen decide themselves what portion of their taxable fishing vessel income they want to use for this purpose. Federal tdxes are deferred, however, only on that portion of income actually deposited for the con- struction, reconstruction, or acquisition of fishing vessels. The purpose of the CCF program is to improve the fishing fleet by allowing fishermen to accelerate their accumulation of funds with which to replace or im- prove their fishing vessels, or expand their operations. 2. Who is eligible? Any U.S. citizen is eligible who owns or leases a fishing vessel of at least 5 net tons and who has an acceptable program for constructing, reconstructing, or (under limited circumstances) acquiring a fishing vessel of at least 5 net tons. 3. How do you get into the CCF program? You must enter into a CCF agreement with the Secre- tary of Commerce through the National Marine Fish- eries Service (NMFS). An application kit, which includes a CCF agree- ment, can be obtained from any of our Regional rep- resentatives at the addresses and telephone numbers listed in the last section of this brochure. 4. How does the CCF program work after you get into it? The following are established by the CCF agreement: (a.) which of your fishing vessels will be eligible to have the Federal taxes on their taxable income de- ferred (these are called "Schedule A" vessels). (b.) where you will keep the taxable income and Fed- eral taxes which you will use to pay for fishing ves- sel construction, reconstruction, or acquisition (the place where you decide to keep this money is called the "CCF depository" and the account in which you keep it is called the "CCF account"). (c.) what kind of fishing vessels you will construct, re- construct, or acquire with the money in your CCF account (these are called "Schedule B" vessels or objectives). You then decide what portion of the taxable in- come from your Schedule A vessels you can or want to deposit into your CCF account for any tax year. You then deposit that income, which includes the Federal taxes you would otherwise have paid on that income, into your CCF account in your CCF deposi- tory. Thus, instead of paying the Federal taxes to the Government, you have put them into your own ac- count in your own depository and will have them available to help you pay for the construction, recon- struction, or acquisition of your Schedule B vessels. When you need the money in your CCF account to pay for all or part of the cost of constructing, recon- structing, or acquiring your Schedule B vessels, you then withdraw the money from your CCF account and use it for that purpose. 5. How do you justify this with the Internal Revenue Service? When you prepare your Federal income tax return, an amount equal to eligible amounts properly deposited in your CCF account during the tax year is simply de- ducted from your taxable income. 6. Do deposits in a CCF account also defer State income taxes? This depends on the State in which your income is reported. You should check with your State income tax office. If your particular State has adopted the CCF provisions of Federal law (or uses Federal tax statutes), then your State income tax will likewise be deferred. 7. How does the CCF program save me money? Show me an example for an individual fisherman. Assume you decide that in 5 years you want to build a new fishing vessel to replace, for example, your pres- ent one. You decide you will start saving for it now. Assume that in each of the next 5 years your tax- able income from your present fishing operation is $30,000. Assume that you are married and need $15,000 a year for living expenses, plus taxes. You will be able to deposit into your CCF account $30,000, less the before-tax income ($19,150) necessary to provide the $15,000 for living expenses. Without the CCF program, your savings during 5 years would accumulate like this: Annual taxable income $30,000 Living expenses $(15,000) Federal taxes on $30,000 (a) (7,880) (22,880) Annual savings $ 7,120 5 years' savings (5x$7,120) $35,600 5 years'interest earned (b) $ 6,690 5 years' Federal taxes on interest earned (a) (2,627) Net interest saved 4,063 TOTAL SAVINGS WITHOUT CCF $39,663 With the CCF program, your savings during 5 years would accumulate like this: Annual taxable income $30,000 Living expenses $(15,000) Federal taxes on $19,150 (a) (4,150) (19,150) Annual savings deposited into CCF $10,850 5 years' savings (5 x$1 0,850) $54,250 5 years' interest earned and deposited into CCF (b) 10,715 TOTAL ACCUMULATIONS WITH CCF $64,965 (a) Federal tax rates in effect at 3/15/75. (b) Total interest earned during 5 years @ 7 percent on average yearly balance. As you can see, use of the CCF program during those 5 years will give you an additional $25,302 with which to pay the cost of your new vessel. This means that you will have to borrow $25,302 less than you would if you had not used the CCF program (thus, saving yourself the interest which you would otherwise have had to pay as the cost of borrowing that addi- tional $25,302). In effect, you might say that you are receiving an interest-free loan from the Government of the $25,302. This may well represent the required downpayment on your new vessel, which you might not otherwise have been able to accumulate during those five years. Had you decided to do the same thing 10 years in advance (rather than the 5 years in the above ex- ample) the CCF program would have given you an additional $68,929, instead of $25,302. 8. Show me another example, this time using a corporate owner. Assume that your fishing corporation enjoys substan- tial profits. It wants to build a new, large vessel in 5 years and decides to set aside $30,000 a year for the next 5 years in order to have a substantial downpay- ment. Without the CCF program, the corporation would have to earn $57,700 per year before Federal taxes in order to save the $30,000 per year. Without the CCF program, funds would be accum- ulated like this: Annual taxable income $ 57,700 Federal income tax 48% (27,700) Annual savings $ 30,000 5 years' savings (5x$30,000) $150,000 5 years' interest earned (a) $27,036 5 years' Federal taxes (at 48 percent) on interest earned (12,977) Net interest saved 14,059 TOTAL SAVINGS WITHOUT CCF $164,059 With the CCF program, the corporation could de- posit the full $57,700 and funds would be accumulated like this: Annual taxable income deposited into CCF $ 57,700 Federal income tax — — Annual savings $ 57,700 5 years' savings (5x$57,700) $288,500 Interest earned and deposited into CCF (a) 54,932 Federal taxes on interest earned — — TOTAL ACCUMULATIONS WITH CCF $343,432 (a) Total interest earned during 5 years @ 7 percent on average yearly balance. (Annual compounding). As you can see, the CCF program in this example will give you an additional $179,373 downpayment toward the cost of your new vt&jel. In effect, you will be receiving an interest-free loan from the Government in the amount of $179,373. If you had had a 10-year program (instead of a 5-year one), the additional a- mount would have been $464,680 instead of $179,373. 9. If you sell a vessel in order to get funds to construct a new vessel, can you still use the CCF program? Yes. Assume the following situation. You are married and presently own an unencum- bered fishing vessel, which you purchased in 1963. The cost of that vessel, plus improvements, totals $60,000. You have previously claimed depreciation of $54,000 for tax purposes on that vessel. Since you have kept the vessel in good shape, you can sell it today for $74,000. You decide to sell it in order to get funds to construct a bigger vessel costing $175,000. Your taxable income for the last 5 years has been $20,000 per year. Without the CCF program, you would report the gain on the sale of your vessel for income tax pur- poses as follows: Selling Price $74,000 Undepreciated cost ($60,000 - $54,000) (6,000) Total Gain $68,000 Ordinary Income Depreciation Recapture $54,000 Capital Gain 14,000 TOTAL TAXABLE $68,000 As a result of this sale and using income averaging (your best tax advantage), you would still have to pay an additional $23,420 in income taxes for the year (i.e., the tax on $54,000 of ordinary income and on a $14,000 capital gain). This would leave you with only $50,580 ($74,000 - $23,420) to reinvest in your new vessel. (NOTE: Without income averaging, your tax would be considerably higher). With the CCF program, ycu would deposit the full net proceeds ($74,000) into your CCF account and would have no additional tax on the sales proceeds of the vessel. You could then reinvest the full $74,000 in your new vessel, thus reducing the amount you would have to borrow and the interest cost of doing so. The $23,420 in taxes you would otherwise have had to pay constitutes, in effect, an interest-free loan from the Government to you. If the same set of facts were applied to a corpora- tion (with $25,000 of other profit) the tax savings would be $30,120. 10. Can the CCF program be used to pay off a mortgage? Yes. Where the cost of constructing, reconstructing, or acquiring a Schedule B vessel is financed by a mort- gage, payments of the principal of that mortgage can be made through your CCF account. NMFS consents to withdrawal from your CCF ac- count of an amount equal to the total cost of the completed Schedule B project (even though payment is to be made by a series of withdrawals over an ex- tended period of time to meet installment payments as they come due). Thus, you will not have to re- quest NMFS consent to each and every separate install- ment payment that is made. 11. How much can be deposited into a CCF account each year? The total amount which can be deposited during any one tax year is equal to the total of the following for each Schedule A vessel you designate in your CCF agreement: (a.) 100 percent of taxable income from vessel operation, (b.) 100 percent of vessel depreciation, (c.) 100 percent of the net proceeds from the sale or other disposition of vessels, (d.) 100 percent of the earnings from investment or reinvestment of amounts deposited. (When you de- posit into your CCF account the earnings of that CCF account, you may also defer the Federal tax which you would otherwise have paid on those earnings.) Although you can deposit up to 100 percent of the amounts listed in (a.) through (d.) above, it is up to you to decide how much you actually can or want to deposit. Whatever you decide to deposit cannot, of course, be more than the total amount needed to pay for the cost of all Schedule B projects. 12. How much must be deposited into a CCF account each year? The minimum annual deposit is an amount equal to 2 percent of the estimated cost of all Schedule B pro- jects; or, if that 2 percent is more than 50 percent of your taxable income in any year, then 50 percent of your taxable income in that year. If a Schedule B project is scheduled for completion more than 3 years in the future, (say you plan to con- struct a vessel at the end of 7 years), then this annual 2 percent test may be met on a 3-year basis. In other words, 6 percent must be deposited every 3 years. In this case, deposits can be made in any amount, and in any year, provided that for each 3-year period a total of 6 percent of the estimated cost of all Schedule B projects is deposited. Excess deposits (over the 2 per- cent in any one year) may be carried forward for the purposes of meeting this minimum deposit requirement for future years. Any earnings of the CCF account which are rede- posited may be used to meet the minimum annual deposit. 13. May you keep the investment income (earnings) of the CCF rather than redepositing it into the CCF account? Yes. In that case, the earnings would, however, be tax- able income to you. If the earnings are redeposited or left in your CCF account, taxation on those earnings is deferred and is available for payment of the cost of your Schedule B projects. 14. If you have already deposited 100 percent of your taxable income into a CCF account, why would you want to deposit any depreciation? Although you do not get an additional tax deduction for a deposit of depreciation, any earnings of your CCF account as a result of investing the deposit of depreciation may be redeposited and taxation on those earnings deferred. When you are saving money for the construction of a new vessel, this can considerably accelerate your ability to accumulate a greater sum of money. 15. What benefit is derived from a CCF deposit of the net proceeds from the sale or other disposition of a vessel or from insurance or indemnity attributable to a vessel? If you dispose of a Schedule A vessel and have any gain as a result, tax on that gain may be deferred by depositing the full net proceeds in your CCF account (see example given in No. 9). In order to defer tax on the gain, the full net pro- ceeds of the sale (or of the insurance or indemnity or other disposition of the vessel) must be deposited. A deposit of anything less than full net proceeds will not allow a partial deferment. You may either defer 100 percent of the gain (including both ordinary in- come and capital gain) or nothing. If the purchaser of your vessel pays you the pur- chase price in installments (by giving you a note or by some other means), the installment obligation may be deposited, in trust, to your CCF account and still satis- fy the requirement that full net proceeds be deposited. 16. What is the first year you can enter the CCF program? You may enter the program at any time. To be applic- able, however, to any given tax year, your CCF agree- ment must be executed and entered into on or before the due date, with extensions, for filing of your Fed- eral tax return for that tax year. Your CCF application should be sent to the Regional Financial Assistance Division of NMFS in your area at least 45 days in advance of such date. If, for example, you were an individual (as opposed to a corporate) taxpayer, on a calendar year tax basis, and wanted your new CCF agreement to apply to cal- endar year 1975, and you received an extension of time until June 15, 1976 (from April 15, 1976) in which to file your calendar year 1975 Federal income tax return, May 1, 1976, would be 45 days in advance of the extended tax due date of June 15, 1976. Thus, your application to enter the CCF program could be sent to NMFS as late as May 1, 1976. If your CCF agreement were timely executed, it would then cover the entire calendar year 1975. If you decide to enter the CCF program, we urge you to submit your application as soon as possible in order to insure timely execution by NMFS. 17. What is the advantage in entering into a CCF agreement after the end of a tax year (as in example in No. 16 above) instead of just doing it for the following tax year? There are two advantages. Deposits into your CCF account made after the tax year's end, but before the due date of your Fed- eral tax return or 60 c days after the effective date of your CCF agreement, whichever is later, may be con- sidered as having been made in the previous tax year. Therefore (using the same situation as in the example in No. 16 above), you could make a CCF deposit any- time until June 15, 1976, or 60 days after the effective date of your CCF agreement, whichever was later, and still claim an income tax deduction on your 1975 tax return. NMFS will ratify, as a constructive deposit or with- drawal, any otherwise eligible and qualified transaction occurring during the first year of your CCF agreement, even though it occurred-before entering into the agree- ment. The transaction must have been such that it normally would have been qualified under the law had the CCF agreement existed and a CCF agreement must be entered into on or before the due date, with ex- tensions, for filing your tax return. Assume, for example, you constructed a new fish- ing vessel in 1975 and did not know of the CCF pro- gram until early 1976. You could enter the CCF program, before the due date, with extensions for filing your Federal tax return for 1975, and any pay- ments made on the new vessel in 1975 could be rati- fied as having been constructively deposited and con- structively withdrawn from your CCF account. This would give you a 1975 income tax deduction of a like amount. 18. When taxes are deferred under the CCF program, and you use them to pay for constructing, reconstructing, or acquiring vessels, do you ever have to pay those taxes back somehow? Yes, in a sense. Taxes which are deferred under the CCF program, and used to pay for Schedule B projects under your CCF agreement, are subject to future "recapture" by the Internal Revenue Service. This "recapture" is accomplished by a reduction in the basis for depreciation of Schedule B vessels. In other words, your future depreciation allowance for Schedule B vessels will be reduced to compensate for the taxes you previously deferred under your CCF agreement. Although the deferred taxes are eventually "recap- tured," your use of those deferred taxes to help pay for the cost of your Schedule B projects still consti- tutes an interest-free loan from the Government to you. Since "recapture" of those deferred taxes occurs over the depreciable life of your Schedule B vessels, the interest-free-loan aspect of the deferred taxes con- tinues for as long as you still have depreciation to claim on your Schedule B vessels. 19. If the basis for depreciation of Schedule B vessels must be reduced, and you therefore lose future depreciation allowances on those vessels, why should you enter the CCF program? Although the future basis for depreciation of your Schedule B vessels must be reduced, remember that you did receive a tax deduction of a like amount in the year in which you made your CCF deposits. Therefore, although you really are not losing anything as a result of this future reduction, you are gaining several things. First, by accumulating before-tax dollars, rather than after-tax dollars, you can save much more quickly the funds with which to pay a greater portion of the cost of your Schedule B projects. If, for example, you have a profit of $50,000 and pay a tax of $15,000, you can only accumulate $35,000; however, if you do not have to pay the taxes immedi- ately, you can accumulate the full $50,000. Every be- fore-tax dollar accumulated in your CCF account now reduces the amount which you would otherwise have had to borrow later in order to pay the cost of your Schedule B projects. This means you will not in the fu- ture have to pay the interest cost of money which you otherwise would have had to borrow in order to fi- nance the cost of your Schedule B projects. With to- day's high cost of long-term financing, this advantage ca*n mean a very substantial net saving over time. Second, deferred taxes constitute an interest-free loan from the Government to you over the depreciable life of your Schedule B vessels. Third, a CCF agreement may simply enable some fishermen to accumulate the required downpayment on a new vessel which they otherwise would have been unable to accumulate. Even for those fishermen who eventually would have been able to accumulate the required downpay- ment, a CCF agreement will enable accumulation of that downpayment much more quickly, thus allowing acquisition of the new vessel and its income-producing potential much sooner than would otherwise have been the case. Even those who accumulate only enough in their CCF account for the required downpayment on a new vessel (and consequently must finance, say, 75 percent of that vessel's construction cost), can continue to make tax-deferred deposits into their CCF account af- ter the new vessel's acquisition. Income from both the newly acquired vessel and the previous Schedule A vessel are deposited, then withdrawn from the CCF account for payment of the mortgage indebtedness. Thus, payment of that mortgage indebtedness is accel- erated, considerably reducing the interest cost of the mortgage since the mortgage indebtedness will be out- standing for a shorter length of time. The fact that depreciation allowances on the newly acquired vessel will be reduced to recapture deferred taxes which you used to help pay that vessel's mort- gage indebtedness simply means that you will have more taxable income from the operation of that vessel to deposit into your CCF account for subsequent with- drawal to further pay that vessel's mortgage indebted- ness that much more quickly. In other words, the new- ly acquired Schedule B vessel, whose basis for depreci- ation is reduced, can become a Schedule A vessel. Tax-deferred earnings from it may likewise be depos- ited into your CCF account in order to meet mortgage payments on the new vessel, or to accomplish any other Schedule B projects. The tax deferral can, thus, effectively be extended until you no longer have any remaining Schedule B projects you wish to accomplish at some future date. As long as you have plans to replace or expand your vessels, you can extend the effect of CCF tax deferrals into the future. 20. How do you establish the CCF account? Generally your CCF account is simply a regular check- ing or savings account established at your local bank, savings and loan association, or other federally insured savings institution. Your CCF account is in your own name. It must be separate from your general operating account or personal savings or checking account and must not be used for any purpose other than CCF deposits and withdrawals. If your CCF deposits are sufficient to warrant other investments (such as stocks, bonds, etc.) a simple trust arrangement may be set up with a trustee of your choice after NMFS approval of both the trust arrange- ment and investment plan. You may open more than one CCF account as long as each is used solely for CCF purposes and each CCF depository is designated in the CCF agreement. Vessel Earnings CO CO O Q_ LLI G Depreciation Sale or other Disposition Depreciation Recapture Return of Basis Capital Gains Receipts from Investments of Fund rest and Dividends CAPITAL ACCOUNT WITHDRAWALS FROM CCF ARE IN THE FOLLOWING ORDER: QUALIFIED - 1-2-3 NONQUALIFIED 3-2-1 21. How do you withdraw CCF deposits? Before making any CCF withdrawal you must obtain NMFS consent. Once consent is granted, you simply withdraw the money as you would from any other account. If you need to make a quick CCF withdrawal for a qualified purpose, a phone call to your Regional Financial Assistance Division of NMFS will generally result in verbal consent. The necessary paper work can be completed later. BEFORE ANY WITHDRAWAL IS MADE, NMFS APPROVAL MUST BE OBTAINED. Without NMFS approval, the tax-deferral associated with any such with- drawal may be jeopardized. 22. What effect does a CCF withdrawal have on my taxes? The effect of a CCF withdrawal depends on two things: (1 ) whether the withdrawal is "qualified" or "nonqual- ified," and (2) the source of previous deposits into your CCF account. 23. What are "qualified" and "nonqualified" withdrawals? Withdrawals from your CCF account, approved by NMFS for payment toward your Schedule B objec- tives, are called qualified withdrawals. Anything other than the above is called a nonqualified withdrawal. 24. What is meant by the "source of previous deposits" into your CCF account? As shown in No. 11, CCF deposits can be from four different sources. Each of these sources has its own "ceiling." Deposits or withdrawals associated with each of these sources have a different effect for tax pur- poses. The four sources and their ceilings (for each Schedule A vessel) are: a. 100 percent of taxable income from vessel op- erations, b. 100 percent of vessel depreciation, c. 100 percent of the net proceeds from sale or other disposition of vessels or from insurance or indemnity attributable to vessels, and d. 100 percent of the earnings from the investment or reinvestment of CCF deposits. 25. If deposits and withdrawals associated with these different sources receive different treatment, how do you keep track of all of this? Although you have only one CAPITAL CONSTRUC- TION FUND, it has three separate "bookkeeping ac- counts." These "bookkeeping accounts" are: (a.) The capital account. (b.) The capital gain account. (c.) The ordinary income account. The chart in the center of this brochure shows how each of the four sources are deposited into, or with- drawn from, these three bookkeeping accounts. You should refer to the chart at this point. 26. What is the effect of deposits into the various bookkeeping accounts? (a.) The Capital Account. Deposits which go into the capital account do not generate a CCF tax deduction. These are principally deposits from vessel depreciation and the return of capital on the sale or other disposi- tion of CCF agreement vessels. Since you receive an income tax deduction for depreciation whether or not you have a CCF agreement, you naturally do not re- ceive another deduction when you make a deposit to your CCF account which is attributable to this depre- ciation. If, however, you have cash in excess of that which you want to, or may, deposit to the ordinary income account, you can deposit that excess cash to the capital account under the depreciation ceiling and any income (interest, etc.) earned by this deposit can be redeposited and the taxes thereon deferred. This will allow you to accumulate funds faster. (As the next section of this booklet explains, withdrawals from the capital account do not, however, result in a reduc- tion of the basis for depreciation of your Schedule B vessels, since no income tax deduction was received when the deposit was made). (b.) The Capital Gain Account. Deposits which go into the capital gain account are principally the result of a sale or other disposition of CCF agreement vessels. The effect of these deposits is to defer taxation of the capital gain portion of such sale or other disposition. (c.) The Ordinary Income Account. Deposits which go into the ordinary income account create an imme- diate income tax deduction of a similar amount. This account is used to deposit current year's earnings on which you wish to defer taxation, to deposit the ordi- nary income portion (depreciation recapture) from the sale or other disposition of CCF agreement vessel, and to deposit the ordinary income portion of the earnings of the CCF itself. 27. What are the effects of withdrawals from the three bookkeeping accounts? Remember that no income tax is paid on the amounts deposited in the capital gain or ordinary income ac- counts of your CCF. To recapture that deferred in- come tax by taxing these deposits when withdrawn from your CCF account would provide no benefit. Instead the deferred income tax is recaptured by de- creasing the depreciable basis of the vessel being con- structed, reconstructed, or acquired with withdrawals from your CCF account. Since, however, capital gains receive different tax treatment than ordinary income, and since deposits to the capital account do not directly defer taxes, with- drawals from these three different accounts receive different treatment. The effect of withdrawals from the three accounts are as follows: (a.) The Ordinary Income Account. Qualified With- drawals from the ordinary income account reduce the depreciable basis of your Schedule B vessel being con- structed, reconstructed, or acquired by an amount equal to the withdrawal. Nonqualified withdrawals from the ordinary in- come account must be included in your income tax return as ordinary income in the year the withdrawal is made. This is due to the fact that the ordinary income would have been reported in its entirety and taxed at ordinary income rates had it not been deposited in your CCF account. (b.) The Capital Gain Account. Qualified with- drawals from the capital gain account reduce the de- preciable basis of your Schedule B vessel being con- structed, reconstructed, or acquired in an amount equal to 50 percent of the withdrawal for an individual and five-eighths of the withdrawal for a corporation. Nonqualified withdrawals from the capital gain account must be included in your income tax return as a long-term capital gain in the year the withdrawal is made. This is due to the fact that an individual would have paid tax on only one-half of the long-term capital gain had it not been deposited in the CCF. Therefore, he reduces his depreciable basis by only one-half of the qualified withdrawal from the capital gain account. Corporations, on the other hand, have capital gains taxed at a maximum rate of 30 percent rather than the normal maximum rate of 48 percent. Therefore, they reduce depreciable basis by five-eighths (30/48) of the qualified withdrawal from the capital gain account. (c.) The Capital Account. Withdrawals from the capital account are equivalent to a return of capital to the depositor and accordingly have no effect on tax- able income or the depreciable basis of Schedule B vessels. This is true whether the withdrawal is qualified or nonqualified, and is due to the fact that the depos- itor did not receive any income tax deduction at the time of the deposit. 28. Can you choose the bookkeeping account from which a withdrawal will be made? No. Qualified withdrawals come, first, from the capital account; second, from the capital gain account; and, = last, from the ordinary income account. Nonqualified withdrawals are made in the reverse order; ordinary income, first; capital gain, second; capital, last. Generally, withdrawals from a particular account are made on a first-in/first-out basis. 29. Will nonqualified withdrawals be approved regardless of reason? No. Nonqualified withdrawals will only be approved for good cause. For instance, should you incur a net oper- ating loss and need funds to continue operation, NMFS would approve a nonqualified withdrawal upon sub- stantiation of the need. 30. Are there any penalties connected with an approved nonqualified withdrawal? Any nonqualified withdrawals from the ordinary in- come or capital gain accounts must be included in your taxable income for the year of withdrawal. In addition, the Internal Revenue Service assesses an interest charge (generally around 8 percent per year) on the tax attrib- utable to the nonqualified withdrawal. The interest is charged on the amount of the tax, not on the amount of the withdrawal itself. Withdrawals are made on a first-in/first-out basis and interest is charged from the year of deposit to the year of withdrawal. 31. What happens if you make withdrawals without first getting them approved by NMFS? Without NMFS approval, the withdrawal may be con- sidered as a nonqualified withdrawal. In addition to the tax consequences of a nonqualified withdrawal, this is a breach of your CCF agreement which could result in its termination. 32. What happens if your CCF agreement is terminated? If your CCF agreement is terminated, voluntarily or involuntarily, any balance remaining in the CCF is treated as a nonqualified withdrawal at the date of termination. This could result in the bunching of in- come (deposits from several years) into the year of termination, thus incurring a substantial tax liability during that tax year. 33. Are there any penalties connected with a qualified withdrawal? No. You must, however, reduce the basis for deprecia- tion of the Schedule B vessel you are constructing, re- constructing, or acquiring whenever withdrawals are made from either the ordinary income or capital gain accounts (as explained in No. 27). 34. If the basis of your Schedule B vessel is reduced for depreciation purposes as a result of qualified CCF withdrawals, does this affect investment tax credit also? The Internal Revenue Service maintains that you are not entitled to investment tax credit on that portion of the depreciable basis of your Schedule B vessel which is reduced as a result of withdrawals from your CCF account. This does not mean that the use of the CCF program cannot still be most advantageous, but you must decide whether the one-time investment tax credit more closely fits the needs of your business than the longer-term CCF benefits. You must also consider that Congress may either change the current Internal Revenue Service position at any time or repeal the investment tax credit before you initiate work on your future vessel projects. You may, however, use the CCF program for some portion of the cost of your future Schedule B projects and claim investment tax credit on that portion for which you do not use the CCF program. Consider the following example demonstrating how the CCF program can be more advantageous to you than use of the investment tax credit. In the example given in No. 8 of this booklet, a corporation had planned construction of a new vessel and had saved for a 5-year period toward the cost of that construction. By using the CCF program, the cor- poration accumulated $343,432, or $179,373 more than it would have accumulated if it had not used the CCF program. When the $343,432 is withdrawn from the corpor- ation's CCF account, the depreciable basis of the new vessel will be reduced and the corporation will lose the investment tax credit (either $34,343 at 10 percent ITC or $24,040 at 7 percent ITC) as well as the new vessel's yearly depreciation deduction associated with the CCF withdrawals. Assume the new vessel costs $600,000 and that the corporation will have to finance (for 15 years at 10 percent interest with semi-annual payments) the portion of the new vessel's cost in ex- cess of the amounts accumulated during the past 5 years. Consider, then, the following results: Accumula- Accumula- tions with tions with- CCF out CCF Cost of new vessel Accumula- tions Amount of Financing (loan) Amount of Annual Payments Total Loan Payments Required Total Interest Expense $600,000 343,432 256,568 33,380 500,700 $600,000 164,059 435,941 56,717 850,755 Difference $179,373 179,373 23,337 350,055 244,132 414,814 170,682 To determine whether or not use of the CCF pro- gram (and, thus, loss of a portion of the investment tax credit) has any financial advantage in the above example, consideration must next be given to the in- vestment tax credit and the reduced income tax lia- bility as a result of the additional tax deductions avail- able without the CCF. This can be shown as follows: Additional Loan Payments Required $350,055 Less: Investment Tax Credit (7 percent) (24,040) Reduction of income tax as result of additional interest expense (48 percent of $1 70,682) (81 ,927) Reduction of income taxes due to depreciation which would have been lost because of CCF withdrawals (48 percent of $343,432) (164,847) Net Additional Outlay Required $ 79,241 As you can see, the corporation, in this example, saved $79,241 by using the CCF program even though it lost the right to claim investment tax credit for a portion of the new vessel's cost. In other words, in this example, it would have cost the corporation an addi- tional $79,241 to use the investment tax credit instead of CCF benefits. Your accountant, tax consultant, or other financial adviser shquld very carefully consider whether the CCF program, investment tax credit, or a combination of both are most advantageous to you — considering your unique financial and tax status and the timetable for your future vessel projects. Poor planning in this area could cost you a lot of money. And remember that when you start your future vessel projects (3, 5 or even 10 years from now), the investment tax credit allowance could be 10 percent, 7 percent, or nothing at all (the investment credit has been terminated and reinstated, or changed, several times in the past). In the latter event, if you had not used the CCF program because you thought investment tax credit would be available when you started your vessel project, then you would have lost both CCF benefits and investment tax credit. If, however, you had entered into a CCF agreement and made CCF deposits, you have main- tained all available options. Show this booklet to whomever advises you on financial or tax matters and ask him to figure out what is best for you. If there are any questions, we will be glad to assist. 35. What effect does reduction in depreciable basis of Schedule B vessels have on the future sale of those vessels? Upon the sale of a Schedule B vessel, any reduction in depreciable basis as a result of previous withdrawals under the CCF program is treated the same as depre- ciation claimed. Any gain on the sale would, conse- quently, be reported as ordinary income up to the amount of the reduction in depreciable basis (plus reg- ular depreciation which might have been claimed). If, however, the net proceeds from that sale are deposited in a CCF, taxation of the gain can again be deferred. 36. Are there penalties if you do not complete the second Schedule B vessel objective which is required where the acquisition of a used vessel is the first Schedule B objective? Yes. In order to acquire a used vessel as a Schedule B objective under your CCF agreement, you must agree to a second Schedule B objective of either reconstruct- ing that vessel or constructing another one at some time in the future. If you do not complete the second Schedule B ob- jective, all previous withdrawals for acquisition of the used vessel may be considered nonqualified. At present, it is uncertain what will happen if the tax statutes of limitation have expired in respect to any of the with- drawals. Permanent regulations may provide for some penalty in this situation. If plans or circumstances change, however, the sec- ond Schedule B objective may be amended or revised with NMFS consent. 37. What happens if you make CCF deposits in excess of your taxable income, or any other ceiling, for any tax year? You have several options available. The excess, or any portion thereof, may: 1 . Be withdrawn, as if never deposited. 2. Be treated as a deposit under another ceiling, if available. 3. Be treated as a deposit under any ceiling for the next taxable year, if all ceilings for all prior taxable years since the overdeposit are filled. 38. What happens if the Internal Revenue Service audits your tax return and changes'your profit or taxable income for any tax year? If, as the result of an Internal Revenue Service audit, your taxable income is increased, and, if you have available ceilings from vessel operations, you may make a deposit to your CCF equal to the increase in income as a result of the audit. This deposit will be attributed to the year of the tax return which was audited and can be used, in effect, to offset the increase in income as a result of the audit. The deposit must be made within specified time limits. If the audit results in a decrease in income, which reduces any ceilings below the amounts previously de- posited in your CCF, you would have an overdeposit which could be treated as explained in No. 37. 39. Once you enter a CCF agreement, are there transactions which can be considered as constructive CCF deposits or withdrawals? No. Once you have entered into a CCF agreement, all deposits and withdrawals must be physically made through your designated CCF account in order to qual- ify. If, however, you make an otherwise qualified pay- ment outside of your CCF account, you may use your CCF account to reimburse yourself within 6 months from the date of the expenditure. 40. How many annual reports must be filed? Only one. This is a "DEPOSIT/WITHDRAWAL REPORT" which must be filed not later than 30 days after the due date, with extensions, for filing your Federal tax return. In order to administer the program, NMFS will, however, request various documents when necessary. These will include, but are not limited to, proof of ownership of a vessel, construction cost documenta- tion, copies of mortgages, etc. The present NMFS regulations also require that a copy of your Federal income tax return be annually submitted to NMFS. 41. What effect does the adoption of a conditional fishery have on the CCF program? When NMFS believes there is more harvesting capacity in any given fishery than is consistent with the devel- opment, advancement, management, conservation, and protection of the resources in that fishery, NMFS des- ignates that fishery as a "conditional fishery". Use of the CCF program is restricted in conditional fisheries. The CCF program cannot be used to increase the harvesting capacity in a conditional fishery, but may be used to maintain your present harvesting ca- pacity either through the replacement of a vessel re- moved from the conditional fishery, reconstruction of a vessel already in the conditional fishery, or acquisi- tion of a vessel which has been in the conditional fishery for 3 years. Funds deposited in your CCF account before the adoption of a conditional fishery are not in any way restricted. When you have a CCF agreement already in exist- ence at the time of adoption of a conditional fishery and have a Schedule B objective involving the condi- tional fishery, you may continue to make CCF de- posits. Amounts deposited before conditional fishery adoption may be withdrawn as qualified withdrawals for the completion of the Schedule B objective. Amounts deposited after conditional fishery adoption may be withdrawn as nonqualified withdrawals (pos- sible termination of the agreement), may be reserved for a different objective not involving the conditional fishery, or may be reserved in anticipation that the conditional fishery status will be removed. 42. Can the CCF program and the Fishing Vessel Obligation Guarantee (FVOG) program be used together on the same vessel? Yes. The FVOG program, also administered by NMFS, provides private lenders a 100% U.S. Government guar- antee of obligations (notes, bonds, etc.) financing or refinancing up to 75% of the cost of constructing, re- constructing, or reconditioning fishing vessels of at least 5 net tons. Long-term maturities (up to 15 years) can be ob- tained at very reasonable interest rates under the FVOG program. If you cannot find a suitable lender (for ex- ample, one whose interest rate is reasonable and who offers you a long enough maturity), NMFS can help you find one once you have an FVOG application approved. An obligation guaranteed under the FVOG pro- gram would finance the portion of your vessel project's cost which was not paid for from your CCF account at the time your vessel was delivered to you. You could, thereafter, continue to use the CCF program to pay off the obligation guaranteed under the FVOG program. If you are interested in applying under the FVOG program, call or write the Regional Financial Assistance Division of NMFS (see No. 43 of this booklet for an FVOG program brochure and application forms. 43. Where can I find out more about the CCF program? Call or write the Regional Financial Services Division Office of NMFS in your area. These are located at: Post Office Building, Box 1 109 Telephone: Gloucester, Massachusetts 01930 617-281-3600 1700 Westlake Avenue, North Telephone: Seattle, Washington 981 09 206-442-5532 P.O. Box 3830 Telephone: Honolulu, Hawaii 96812 808-946-2181 9450 Koger Blvd., Duval Bldg. Telephone: St. Petersburg, Florida 33702 813-893-3148 300 South Ferry Street Telephone: Terminal Island, California 90731 213-548-2478 3300 Whitehaven Street, N.W. Telephone: Washington, D.C. 20235 202-634-7496 Note: All attempts have been made in preparing this booklet to present the material as accurately and technically correct as. possible. Nevertheless, this program is jointly administered by NMFS and the Internal Revenue Serv- ice and NMFS cannot be responsible for actions taken in reliance on this booklet which may prove to be in variance with regulations, procedures, or determina- tions of other agencies. NMFS realizes that there are many facets of the CCF program which are not, and cannot, be covered in an informational booklet of this size. Additional sources which should be consulted about the CCF pro- gram are: The Act (1), NMFS regulations (2), joint regulations (3), and the Internal Revenue Service itself. NMFS will be happy, however, to attempt to ans- wer any questions concerning the CCF program. Simply call or write any of the offices listed in No. 43. (1) Section 607 of the Merchant Marine Act, 1936 (46 U.S.C. 1177) (2)50 CFR Part 259.30 through 259.38. (Interim Fishing Vessel Capital Construction Fund Proce- dures) (3) 50 CFR Part 259.0 through 259. 1 1 (Department of Commerce, Capital Construction Fund, Proposed Joint Tax Regulation) or 26 CFR Part 3.0 through 3.11 (Department of Treasury, Proposed Capital Construction Fund Regulations). •& U.S. Government Printing Office: 1979 — 291-137 ^pATMOS^, r/ WENT Of U.S. DEPARTMENT OF COMMERCE Juanita M. Kreps, Secretary National Oceanic and Atmospheric Administration Richard A. Frank, Administrator National Marine Fisheries Service Terry L. Leitzell, Assistant Administrator for Fisheries This publication was developed at the National Fishery Education Center, National Marine Fisheries Service, 100 East Ohio St. Chicago, Illinois 6061 1 PENN STATE UNIVERSITY LIBRARIES ADDDD7EDnSbb mf r n —