REVENUE RULE 94-26

1994-1 C.B. 310, 1994-15 I.R.B. 13.

Internal Revenue Service
Revenue Ruling

CAPITAL CONSTRUCTION FUND DEPOSIT AND AN INDIVIDUAL TAXPAYER'S ADJUSTED GROSS INCOME

Published: April 11, 1994

Section 7518.--Tax Incentives Relating to Merchant Marine Capital Construction Funds
(See Also Section 62; 26 CFR 1.62-1T.)

Capital construction fund deposit and an individual taxpayer's adjusted gross income. A deposit into a capital construction fund by an individual taxpayer will not reduce the taxpayer's adjusted gross income by the amount of the deposit.

ISSUE

If an individual taxpayer makes a deposit into a capital construction fund under s 7518 of the Internal Revenue Code, is the taxpayer's adjusted gross income reduced by the amount of the taxpayer's deposit?

FACTS

A, an individual engaged in commercial fishing operations, owns a fishing vessel. In 1992, A entered into an agreement with the Secretary of Commerce under section 607 of the Merchant Marine Act of 1936, as amended (MMA), 46 U.S.C. 1177, 1970-2 C.B. 372, to establish a capital construction fund for the vessel (agreement vessel). For 1992, A had gross income under s 61 of $130x, which consisted entirely of earnings from the fishing operations of the agreement vessel. A had trade or business expenses for 1992 of $30x. In addition, A deposited $25x into the capital construction fund in 1992.

LAW AND ANALYSIS

Section 62(a) provides that "adjusted gross income" means, in the case of an individual, gross income minus specified deductions. Under s 62(a)(1), these deductions include deductions attributable to a trade or business carried on by the taxpayer, if the trade or business does not consist of the performance of services by the taxpayer as an employee.

Section 607(a) of the MMA provides that any citizen of the United States owning or leasing one or more eligible vessels may enter into an agreement under section 607 with the Secretary of Commerce to establish a capital construction fund for the purpose of providing replacement vessels, additional vessels, or reconstructed vessels, built in the United States and documented under the laws of the United States for operation in the fisheries of the United States. The statutory rules in section 607 of the MMA relating to tax incentives for capital construction funds were codified by the Tax Reform Act of 1986 in s 7518.

Section 7518(a)(1), which was originally enacted as part of the Merchant Marine Act of 1936, provides that the amount that may be deposited for any taxable year in a fund may not exceed the sum of certain specified amounts, including that portion of the taxable income of the owner or lessee for the 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 s 7518) that 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.

Section 7518(c)(1)(A) provides that taxable income (determined without regard to s 7518 and section 607 of the MMA) for the tax year is reduced by the amount deposited for the tax year attributable to the operation of the agreement vessels. Under s 62(a), A's adjusted gross income for 1992 is $100x ($130x gross income minus $30x trade or business expenses). This $100x adjusted gross income amount is not reduced by A's 1992 deposit of $25x into the capital construction fund because s 7518(c)(1)(A) provides that capital construction fund deposits reduce taxable income, not adjusted gross income. In addition, the reduction of taxable income by the amount of capital construction fund deposits under s 7518 is not a deduction allowed by chapter 1 specified in s 62(a).

HOLDING

If an individual taxpayer makes a deposit into a capital construction fund under s 7518, the taxpayer's adjusted gross income is not reduced by the amount of the taxpayer's deposit.

EFFECTIVE DATE

Because pre-1991 editions of Publication 595, Tax Guide for Commercial Fishermen, were inconsistent with the above holding, this revenue ruling will be effective for tax years beginning after December 31, 1991.

DRAFTING INFORMATION

The principal author of this revenue ruling is Jack Malgeri of the Office of the Assistant Chief Counsel (Passthroughs & Special Industries). For further information regarding this revenue ruling, contact Mr. Malgeri on (202) 622- 3040 (not a toll-free call).

Rev. Rul. 94-26, 1994-1 C.B. 310, 1994-15 I.R.B. 13.