Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 67-66

1967-1 C.B. 191

Sec. 1001

Sec. 1002

Sec. 1031

IRS Headnote

Gain or loss from the exchange of vessels pursuant to section 510(i) of the Merchant Marine Act of 1936, 46 U.S.C. 1160, as amended by Public Law 86-575, 74 Stat. 312, and Public Law 89-254, 79 Stat. 980, is recognized under section 1002 of the Internal Revenue Code of 1954.

In determining fair market value for Federal income tax purposes, the fair and reasonable value assigned to the vessels by the Maritime Administration or the Secretary of Commerce pursuant to section 510(i) of the Merchant Marine Act is not controlling but will be taken into consideration.

Full Text

Rev. Rul. 67-66

Advice has been requested concerning the tax treatment to be given gains or losses on the exchange of certain vessels under section 510(i) of the Merchant Marine Act of 1936, 46 U.S.C. 1160, as amended, 46 U.S.C. 1160 (Supp.I, 1965).

The taxpayer, a commercial shipper, exchanged two of its C-3 freighters for two C-4 vessels owned by the United States. The Maritime Administration, hereinafter referred to as `MARAD,' valued both the two C-3 freighters and the two C-4 freighters. In accordance with condition `(4)' of section 510(i) of the act, below, no money was paid to the taxpayer upon the exchange of the vessels.

On the exchange transaction, the taxpayer in accordance with condition `(6)' of the act, below, reported the difference between the value assigned the C-4 vessels by `MARAD' and the adjusted bases of the C-3 freighters.

Section 510(i) of the Merchant Marine Act of 1936, which was added by Public Law 86-575, July 5, 1960, and was amended by Public Law 89-254, October 10, 1965, authorizes the Secretary of Commerce to acquire war-built vessels in exchange for more modern or efficient war-built vessels owned by the United States under certain conditions, including the following:

(1) The traded-in vessel shall have been owned by a citizen or citizens of the United States, documented under the laws of the United States, and shall not have been operated with operating-differential subsidy under subchapter VI of this chapter by the applicant or any affiliate of the applicant for at least three years immediately prior to the date of the exchange.

(2) The fair and reasonable value of the traded-in and traded-out vessels shall be determined, as of the date of the exchange, pursuant to subsection (d) of this section.

(3) In determining said fair and reasonable value the Secretary shall consider the cost of placing the vessels in class with respect to hull and machinery, and, with respect to any traded-out vessels of the military type, the cost of reconverting and restoring such vessels for normal operation in commercial service * * *.

(4) The value of the traded-out vessel which is in excess of the value of the traded-in vessel or vessels shall be paid in cash at the time of the exchange. No payment shall be made by the United States to the owner of a traded-in vessel in connection with any exchange under this subsection.

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(6) Neither subsection (e) of this section, nor the nontaxable exchange provisions of the Internal Revenue Code, shall apply to the exchange of vessels under this subsection.

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Subsection (d) of the act, referred to above, states that in determining the fair and reasonable value of the obsolete vessel (traded-in vessel) the Maritime Administration or the Secretary of Commerce shall consider: (1) The scrap value of the obsolete vessel both in American and in foreign markets; (2) the depreciated value based on a 20- or 25-year life, whichever is applicable; and (3) the market value thereof for operation in the world trade or in the foreign or domestic trade of the United States. Subsection (e) of the act, also referred to above, provides for the nonrecognition of gain for Federal income tax purposes in the case of certain other transfers of obsolete vessels to the Maritime Administration or the Secretary of Commerce under section 510 of the act.

Three questions have been presented. The first is whether gain or loss on the exchange of certain vessels for more efficient ones under the provisions of section 510(i) of the Merchant Marine Act of 1936, as amended, will be recognized as provided for in section 1002 of the Internal Revenue Code of 1954. Assuming the first is answered in the affirmative, the second question is whether the method of computing that gain or loss is the difference between the fair market value of the vessels received and adjusted bases of those given up. The last question is whether the value assigned by `MARAD' will be considered by the Service in determining the amount of gain or loss under section 1001(a) of the Code.

Section 1001 of the Code provides the following:

(a) COMPUTATION OF GAIN OR LOSS.-The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 1011 for determining gain, and the loss shall be the excess of the adjusted basis provided in such section for determining loss over the amount realized.

(b) AMOUNT REALIZED.-The amount realized from the sale or other disposition of property shall be the sum of any money received, plus the market value of the property (other than money) received.

Section 1002 of the Code states the following:

Except as otherwise provided in this subtitle, on the sale or exchange, of property the entire amount of the gain or loss, determined under section 1001, shall be recognized.

Section 1031 of the Code provides, in part, as follows:

(a) NONRECOGNITION OF GAIN OR LOSS FROM EXCHANGES SOLELY IN KIND.-No gain or loss shall be recognized if property held for productive use in trade or business or for investment (not including stock in trade or other property held primarily for sale, nor stocks, bonds, notes, choses in action, certificates of trust or beneficial interest or other securities or evidences of indebtedness or interest) is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment.

Gain or loss is recognized in the instant case, although the transaction would otherwise qualify as a nontaxable exchange under section 1031 of the Code, because section 510(i)(6) of the Merchant Marine Act of 1936, as amended, specifically states that the nontaxable exchange provisions of the Internal Revenue Code do not apply to the exchange of vessels under this subsection of the act. Further support for this result is found in Senate Report 1275, 86th Congress which states: `The changes in language in subsection (6) of the bill are intended to assure that any capital gain on the traded-in vessel will be recognized for tax purposes and that a tax will be paid by the operator at the time of exchange.' The changes in language referred to are incorporated in the act set out above.

Except for section 510(i)(6) of the act which precludes the application of the nontaxable exchange provisions of the Internal Revenue Code to an exchange of vessels under section 510(i), the act does not otherwise alter the application of section 1002 of the Code to the gain or loss recognized on the exchange. Under the provisions of section 1001(a) of the Code, which governs the computation of gain or loss for purposes of section 1002, the gain or loss from the exchange is the difference between the amount realized by the taxpayer on account of the C-4 freighters received and the adjusted bases of the C-3 freighters transferred.

Section 510(i) of the act requires the Maritime Administration or the Secretary of Commerce to determine the `fair and reasonable value' of the vessels involved in the exchange. This valuation is not controlling but will be taken into consideration in determining fair market value for purposes of section 1001(b) of the Code.

Accordingly, gain or loss on the exchange of vessels under section 510(i) of the Merchant Marine Act of 1936 is recognized in accordance with section 1002 of the Code. Such gain or loss is determined under the provisions of section 1001(a) of the Code. The value assigned to the vessels by `MARAD' is not controlling but will be taken into consideration in determining fair market value for Federal income tax purposes.