1. WORKBOAT SHELTERING SHIPYARD PROFITS TO BENEFIT CUSTOMERS
Professional Series
SHELTERING SHIPYARD PROFITS TO BENEFIT
CUSTOMERS
SHIPYARD USE OF MARAD’s CCF
YOUR SHIPYARD’s CCF USE
VESSEL LEASING & CCF SINKING FUNDS
NON-CITIZEN JONES ACT LEASING
STRANDED CCF ACCOUNTS
December 3, 2015
International Work Boat Show & Exposition New Orleans, Louisiana
H. Clayton Cook, Jr., Principal Cook Maritime Finance LLC

2. SHIPYARD USE OF MARAD’s CCF
PROGRAM HISTORY & SUBSTANCE
SHIPYARD USES: NATIONAL STEEL & SHIPBUILDING COMPANY
SUN SHIPBUILDING & DRYDOCK COMPANY
YOUR SHIPYARD’s CCF USE
QUALIFICATION, APPLICATION & EFFECTIVE DATES
AGREEMENTS, DEPOSITS & WITHDRAWALS AND EIGHT POINTS TO REMEMBER
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3. SHIPYARD USE OF MARAD’s CCF
PROGRAM HISTORY & SUBSTANCE
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4. SHIPYARD USE OF MARAD’s CCF
1. PROGRAM HISTORY & SUBSTANCE
The Merchant Marine Act of 1970 authorized a Capital Construction Fund (“CCF”) tax deferral program (“Program”).
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“It is believed that these provisions will do more than anything else in the bill to help the ship operating, and therefore the shipbuilding industry to build ships in United States shipyards which are so urgently needed to modernize our United States merchant marine.”
S. Rep. No , at 43 (1970)

5. SHIPYARD USE OF MARAD’s CCF
1. PROGRAM HISTORY & SUBSTANCE
The CCF Program had its origins in the Merchant Marine Act of 1936 and its special and capital reserve funds for the U.S. international liner trade operators.
The 1970 Act expanded the tax deferrals for the U.S. international liner trades and added the international bulk trades, and the domestic Great Lakes and Alaska, Hawaii and Puerto Rico non-contiguous services.
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6. SHIPYARD USE OF MARAD’s CCF
1. PROGRAM HISTORY & SUBSTANCE
As first implemented in 1970, the CCF Program was available to ship owners and operators to shelter vessel operating and sales and portfolio income in order to accumulate the capital for financing vessel purchases and retiring vessel debt, and to owner-lessors to shelter vessel leasing and sales income and investment portfolio income in vessel leasing transactions.
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7. SHIPYARD USE OF MARAD’s CCF
1. PROGRAM HISTORY & SUBSTANCE
Most of us think of the CCF Program as used by Gulf Coast owner-operators like Edison Chouest Offshore or Harvey Gulf International Marine or Hornbeck Offshore.
However, in 1988 MARAD expanded the CCF Program’s scope to include U.S. shipyards.
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8. SHIPYARD USE OF MARAD’s CCF
1. PROGRAM HISTORY & SUBSTANCE
MARAD’s first shipyard agreement was with National Steel & Shipbuilding Company “NASSCO” shipyard (then an ESOP and only later acquired by its present General Dynamics owner).
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9. SHIPYARD USE OF MARAD’s CCF
1. PROGRAM HISTORY & SUBSTANCE
MARAD’s authority to enter the NASSCO agreement was challenged by the Treasury in MARAD’s authority and the agreement text were upheld by the Department of Justice, Office of Legal Counsel, in a 17 page opinion issued in 1996.
There have no subsequent Treasury challenges.
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10. SHIPYARD USE OF MARAD’s CCF
2. SHIPYARD USES: NATIONAL STEEL & SHIPBUILDING COMPANY
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11. SHIPYARD USE OF MARAD’s CCF
2. SHIPYARD USES: NASSCO
The CCF Program allows a shipyard to defer federal and state tax on income from most or all of its U.S. flag vessel construction and conversions projects, and from vessel financing and leasing – allowing the shipyard to accumulate a working capital account for financing vessel construction for customers, or for its own account and vessel leasing.
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12. SHIPYARD USE OF MARAD’s CCF
2. SHIPYARD USES: NASSCO
NASSCO has been a CCF Program participant since It has one of the largest CCF Program tax deferred working capital accounts that exists today.
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13. SHIPYARD USE OF MARAD’s CCF
2. SHIPYARD USES: NASSCO
The deferrals are on a transaction by transaction basis, and for a 25 year base period.
However, a shipyard may be able to operate on a tax deferred basis over more extended periods if the shipyard is engaged in vessel construction for qualifying trades.
NASSCO CCF Program tax deferrals commenced 1988 and continue today.
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14. SHIPYARD USE OF MARAD’s CCF
2. SHIPYARD USES: NASSCO
NASSCO has deferred the tax that would have been due on profits from the construction, reconstruction and conversion of different vessel types for commercial and U.S. government customers as CCF Program “eligible vessels.”
NASSCO has used the working capital account created by these tax deferrals to finance NASSCO construction of CCF Program “qualified vessels” for the Alaska, Hawaii and Puerto Rico non-contiguous qualified trades.
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15. SHIPYARD USE OF MARAD’s CCF
3. SUN SHIPBUILDING & DRYDOCK COMPANY
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16. SHIPYARD USE OF MARAD’s CCF
3. SUN SHIPBUILDING & DRYDOCK COMPANY
The CCF Program allows the deferral of tax on interest and other income from CCF Program portfolio investments acquired from affiliated group members.
In the Sun Shipbuilding & Drydock vessel leasing transactions, the leasing company portfolio investments were SUNOCO credit card receivables of Sun Oil Company customers that had purchased Sun motor fuels and petroleum products.
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17. SHIPYARD USE OF MARAD’s CCF
3. SUN SHIPBUILDING & DRYDOCK COMPANY
This allowed Sun to achieve tax sheltered CCF portfolio yields of as much as 30 percent in its CCF Program leasing transactions.
This allowed Sun to reduce its fully financed vessel costs, and to offer reductions of as much as 30 percent in the Sun leasing affiliate demise charter rates to potential lessee-operator customers.
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18. SHIPYARD USE OF MARAD’s CCF
3. SUN SHIPBUILDING & DRYDOCK COMPANY
With these reductions, the Sun leasing affiliates were always able to contract with lessee-operator customers for the Ro/Ro and tanker vessel series production runs that Sun Shipbuilding had not been able to sell.
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19. SHIPYARD USE OF MARAD’s CCF
4. YOUR SHIPYARD’s CCF USE
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20. SHIPYARD USE OF MARAD’s CCF
4. YOUR SHIPYARD’s CCF USE
The NASSCO example illustrates the range U.S. government and commercial owner vessel types available for CCF Program use; the significant measure of the tax deferred working capital account that can be created; and the essentially ongoing availability of the tax deferrals so long as the U.S. citizen shipyard remains engaged in the construction of CCF Program “qualified vessels.”
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21. SHIPYARD USE OF MARAD’s CCF
4. YOUR SHIPYARD’s CCF USE
The Sun Shipbuilding example illustrates how the use of a U.S. citizen leasing company affiliate can enable a shipyard that cannot itself qualify for CCF Program benefits (because of non-citizen ownership) to gain access to some (but not all) of these benefits; and owner-lessor investments in third-party receivables can be used to increase CCF portfolio yields under MARAD investment regulations.
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22. SHIPYARD USE OF MARAD’s CCF
4. YOUR SHIPYARD’s CCF USE
Learning from the Sun Shipbuilding example, the addition of a shipyard leasing company affiliate would also make the non-citizen exceptions of 46 U.S.C available to avoid the otherwise applicable MARAD 51 percent and Jones Act domestic trade 75 percent ownership requirements.
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23. SHIPYARD USE OF MARAD’s CCF
4. YOUR SHIPYARD’s CCF USE
How can your shipyard benefit from these examples?
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24. SHIPYARD USE OF MARAD’s CCF
5. QUALIFICATION & EFFECTIVE DATE
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25. SHIPYARD USE OF MARAD’s CCF
5. QUALIFICATION & EFFECTIVE DATE
To qualify for the CCF Program a shipyard must: (i) be a U.S. citizen; (ii) own or lease or be a party to a contract for the construction of one or more “eligible” or “qualified” vessels; (iii) have a program that calls for the construction or reconstruction of one or more “qualified” vessels; and (iv) demonstrate that it has the financial capability to accomplish the program.
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26. SHIPYARD USE OF MARAD’s CCF
5. QUALIFICATION & EFFECTIVE DATE
MARAD must have approved the applicant’s Program application and the Depositary must have received the initial deposit of funds no later than the last day for the Participant’s filing of its tax return for the year.
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27. SHIPYARD USE OF MARAD’s CCF
5. QUALIFICATION & EFFECTIVE DATE
A CCF Agreement executed on this basis is effective for the shipyard applicant’s entire tax year.
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28. SHIPYARD USE OF MARAD’s CCF
5. QUALIFICATION & EFFECTIVE DATE
A CCF program shipyard applicant should assume that 90 to 120 days may be required for MARAD review and approval prior to the CCF Agreement execution.
There are no MARAD filing fees or other CCF Program charges.
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29. SHIPYARD USE OF MARAD’s CCF
6. AGREEMENTS, DEPOSITS & WITHDRAWLS AND
EIGHT POINTS TO REMEMBER
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30. SHIPYARD USE OF MARAD’s CCF
6. AGREEMENT DEPOSITS & WITHDRWALS AND EIGHT POINTS TO REMEMBER
Point 1. The CCF Program is a contractual program which allows a shipyard (that enters into an Agreement with MARAD) to shelter income from current taxation (federal and generally state) in exchange for the shipyard’s commitment to construct, reconstruct or convert a U.S. vessel or vessels for a “qualifying” trade.
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31. SHIPYARD USE OF MARAD’s CCF
6. AGREEMENT DEPOSITS & WITHDRAWALS AND
EIGHT POINTS TO REMEMBER
Point 2. The income to be sheltered can be from the construction, conversion or leasing of any vessel built for a U.S. government or commercial purchaser for U.S. flag operation in U.S. domestic or foreign trade that will then be named as an “eligible vessel” in the Agreement, and from CCF portfolio investments (that can include customer receivables).
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32. SHIPYARD USE OF MARAD’s CCF
6. AGREEMENT DEPOSITS & WITHDRAWALS AND EIGHT POINTS TO REMEMBER
Point 3. The CCF Program shelter is temporary because when the sheltered income is used to finance the future vessel, the shipyard’s cost basis in that vessel is correspondingly reduced for the purpose of computing the profit on the vessel sale.
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33. SHIPYARD USE OF MARAD’s CCF
6. AGREEMENT DEPOSITS & WITHDRAWALS AND EIGHT POINTS TO REMEMBER
Point 4. An “eligible” vessel is any U.S. built U.S. flag vessel built for or operating in any U.S. domestic or foreign trade. A “qualified” vessel is any U.S. built U.S. flag vessel built for operations in or actually operating in a “qualifying” trade in a Great Lakes, Alaska, Hawaii or Puerto Rico service, or in a defined U.S. foreign trade or domestic container or Ro/Ro service.
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34. SHIPYARD USE OF MARAD’s CCF
6. AGREEMENT DEPOSITS & WITHDRAWALS AND EIGHT POINTS TO REMEMBER
Point 5. The Program shelter can be extended by the deposit of a portion of proceeds sufficient to shelter the profit of that sale.
Where the construction program involves a significant percentage of “qualifying” trade vessels, the deferral of tax can be of ongoing, almost indefinite duration.
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35. SHIPYARD USE OF MARAD’s CCF
6. AGREEMENT DEPOSITS & WITHDRAWALS AND
EIGHT POINTS TO REMEMBER
Point 6. A shipyard Program participant may make deposits for a tax year in an amount equal to the measure of: (i) proceeds of sale or lease of “eligible” and “qualified” vessels; (ii) any vessel operating income; (iii) scheduled depreciation; and (iv) portfolio investment income.
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36. SHIPYARD USE OF MARAD’s CCF
6. AGREEMENT DEPOSITS & WITHDRAWALAS AND
EIGHT POINTS TO REMEMBER
SHIPYARD USE OF MARAD’s CCF
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Point 7. “Qualified” withdrawals may be made for the construction or reconstruction of “qualified” vessels, or the payment of “qualified” vessel debt. All other withdrawals will be “non-qualified” and will be taxed at the shipyard’s highest marginal rate, and generally incur an interest charge.

37. SHIPYARD USE OF MARAD’s CCF
6. AGREEMENT DEPOSITS & WITHDRAWALS AND
EIGHT POINTS TO REMEMBER
Point 8. Vessel leasing can be used by a shipyard (by the shipyard itself or in collaboration with an affiliated or independent financial institution owner-lessor) as a way to increase shipyard profits and to expand the number of citizen and non-citizen customer opportunities.
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38. SHIPYARD USE OF MARAD’s CCF
YOUR SHIPYARD’s CCF USE
VESSEL LEASING & CCF SINKING FUNDS
NON-CITIZEN JONES ACT LEASING
STRANDED CCF ACCOUNTS
SUBJECTS FOR FOLLOW-ON DISCUSSION
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39. SHIPYARD USE OF MARAD’s CCF
THANK YOU
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ADDITIONAL INFORMATION: You may wish to refer to two Marine Money International articles on the MARAD CCF Program and non-citizen vessel leasing in the U.S. domestic trades: Cook & Ogle, “Financing Jones Act Vessel Assets”, Marine Money International, May 2010, and Cook, “Financing the US Market via MARAD’s ‘CCF’ Program,” Marine Money International, October 2007.
H Clayton Cook Jr
Phone:
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