REVENUE RULE 91-54

1991-2 C.B. 15, 1991-43 I.R.B. 4.

Internal Revenue Service
Revenue Ruling

VESSELS; TAX-DEFERRED FUNDS; PURCHASE; RECAPTURE

Published: October 28, 1991

Section 46. Amount of Credit, 26 CFR 1.46-3: Qualified investment.

(See Also Sections 47, 1012, 7518;1.47-2, 1.1012-1.)

Vessels; tax-deferred funds; purchase; recapture. Rev. Rul. 67-395 denies an investment tax credit with respect to vessels purchased with certain untaxed amounts withdrawn from merchant marine capital construction funds. Rev. Rul. 68-468 provides for recapture of investment tax credits previously claimed with respect to vessels when untaxed amounts withdrawn from such funds are used to pay off debt incurred to acquire, construct, or reconstruct the vessels. Rev. Ruls. 67-395 and 68-468 suspended. [Full text in this issue.]

In light of the Court of Claims decisions cited in this revenue ruling and the repeal of the regular investment credit by section 211 of the Tax Reform Act of 1986, 1986-3 (Vol. 1) C.B. 83 (the 1986 Act), the Internal Revenue Service has been asked to reconsider Rev. Rul. 67-395, 1967-2 C.B. 11, and Rev. Rul. 68-468, 1968-2 C.B. 26.

In Rev. Rul. 67-395, a taxpayer bought and placed in service several new vessels with tax-deferred funds from a capital construction fund established under section 607(a) of the Merchant Marine Act of 1936, as amended (MMA), 46 U.S.C. app. section 1177 (1988), 1970-2 C.B. 372. Rev. Rul. 67-395 concludes that because the cost of the purchased vessels, for purposes of section 1012 of the Code, does not include tax-deferred amounts expended from the capital construction fund, the taxpayer has no basis for tax purposes in the vessels and thus no qualified investment in the vessels for investment credit purposes.

Rev. Rul. 68-468, which relies on and amplifies Rev. Rul. 67-395, holds that a taxpayer must recapture investment credit under former section 47 of the Code when tax-deferred qualified withdrawals from a capital construction fund are used to pay debt principal associated with the construction, acquisition, or reconstruction of vessels.

In a series of cases, the Court of Claims rejected the Service's position in Rev. Rul. 67-395 and Rev. Rul. 68-468. See Pacific Far East Line, Inc. v. United States, 544 F.2d 478 (Ct. Cl. 1976); Pacific Transport Co. v. United States, 544 F.2d 493 (Ct. Cl. 1976); Delta Steamship Lines, Inc. v. United States, 544 F.2d 496 (Ct. Cl. 1976); Oglebay Norton Co. v. United States, 610 F.2d 715 (Ct. Cl. 1979); O.L. Schmidt Barge Lines, Inc. v. United States, 610 F.2d 728 (Ct. Cl. 1979); Gilman v. United States, 222 Ct. Cl. 661 (1980); Ness v. United States, 222 Ct. Cl. 665 (1980); and Moore McCormack Resources, Inc. v. United States, 224 Ct. Cl. 672 (1980).

In Zuanich v. Commissioner, 77 T.C. 428 (1981), the Tax Court adopted the Service's position in Rev. Rul. 67-395 and expressly rejected the reasoning in the Court of Claims' line of cases. In Zuanich, the taxpayer purchased a hydraulic fishing reel with funds from a qualified withdrawal from a capital construction fund ordinary income account and placed the reel on his commercial fishing vessel. The court concluded that because the taxpayer's basis in the reel was zero, his qualified investment in and allowable investment credit for the reel was also zero.

For tax years beginning after December 31, 1975, Congress partially preempted the Service's position in Rev. Rul. 67-395 and Rev. Rul. 68-468 by enacting former section 46(g) of the Code. See section 805 of the Tax Reform Act of 1976, 1976-3 (Vol. 1) C.B. 72-74. Former section 46(g)(1), in effect, allowed taxpayers a 50 percent investment credit for qualified vessels acquired, constructed, or reconstructed with tax-deferred qualified withdrawals of funds from a capital construction fund established under section 607 of the MMA. The availability of the other 50 percent of the credit was deliberately left to the courts. See S. Conf. Rep. No. 1236, 94th Cong., 2d Sess. 447-448 (1976), 1976-3 (Vol. 3) C.B. 851-52. Former section 46(g)(4) provided that, in the case of a credit allowable without regard to former section 46(g), any recapture under former section 47 generated by debt principal payments is limited to 50 percent of that credit.

The Service continues to believe that the analyses of Rev. Rul. 67-395 and Rev. Rul. 68-468 and of the Tax Court in Zuanich are correct. However, because of the cited Court of Claims decisions, the continued availability of the Claims Court (the replacement trial court for the Court of Claims) as a forum, and the repeal of the regular investment credit by the 1986 Act, the Service has decided to suspend Rev. Rul. 67-395 and Rev. Rul. 68-468 until further notice.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 67-395 and Rev. Rul. 68-468 are suspended.

DRAFTING INFORMATION

The principal author of this revenue ruling is James F. Ranson of the Office of the Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling contact Jack Malgeri on (202) 377-6351 (not a toll-free call).

Rev. Rul. 91-54, 1991-2 C.B. 15, 1991-43 I.R.B. 4.