The Construction Reserve Fund Program (CRF), authorized by 46 U.S.C. Chapter 533 (formerly, sec. 607, Merchant Marine Act, 1936, as amended), is a financial assistance program that provides tax deferral benefits to U.S.-flag operators and owners. Eligible parties can defer the gain attributable to the sale or loss of a vessel, provided the proceeds are used to expand or modernize the U.S. Merchant Marine. In the event of sale or actual constructive total loss of a vessel, CRF provides for the non-recognition of gain for purposes of Federal income or excess profits taxes. To defer taxation on the gain, the taxpayer must deposit in a CRF account an amount equal to the net proceeds of the sale (or to the net indemnity) with respect to the loss and make a proper election on the organization's Federal income tax return. Both ordinary income gain and capital gain may be deferred in this manner.

The primary purpose of CRF is to promote the construction, reconstruction, reconditioning, or acquisition of merchant vessels that are necessary for national defense and to the development of U.S. commerce. The program is administered by the Maritime Administration (MARAD).

See the CRF overview presentation here.

See the recommended application form (per 46 CRF Part 287) here.

Program Highlights

Benefits

• Deferral of taxes on the gain attributable to the sale or loss of a vessel
• Promotes growth and modernization of the U.S. maritime industry

Program Requirements

• Timing requirement to deposit funds into separate account
• Funds held in a separate account at a MARAD-approved depository
• MARAD approves withdrawals associated with sale of CCF-built vessels
• As needed, updated lists of vessels and changes to depositories must be submitted to MARAD
• Applicant and vessel must meet eligibility requirements
• The taxpayer must make the election in the taxpayer's income tax return for the taxable year in which the gain was realized and deposit the funds within 60 days after receiving payment or indemnity
• Within three years from the date of any deposit into a CRF account, the money deposited must be obligated under a contract for the construction or acquisition of a new vessel
• Within that time frame, no less than 12.5 percent of the price of the vessel must be expended or irrevocably obligated, and no less than 5 percent of the work on the vessel must be completed
• MARAD must determine that the price of the new vessel is fair and reasonable

Eligibility

Participants

A construction reserve fund account may be established by a citizen of the United States that:

• Is operating a vessel in the foreign or domestic commerce of the United States;
• Owns, in whole or in part, a vessel being operated in the foreign or domestic commerce of the United States;
• Was operating a vessel in the foreign or domestic commerce of the United States when it was bought or requisitioned by the United States Government;
• Owned, in whole or in part, a vessel being operated in the foreign or domestic commerce of the United States when it was bought or requisitioned by the Government; or
• Had acquired or was having constructed a vessel to operate in the foreign or domestic commerce of the United States when it was bought or requisitioned by the Government.

While a citizen who is operating such vessel or vessels owned by another individual may establish a CRF account, the benefits available to the non-owner operator are limited.

Vessels

The non-recognition of gain provisions applies only to the extent that monies deposited in a CRF account are expended for the construction, reconstruction, or acquisition of a new vessel(s). The Act stipulates that the new vessel must be constructed or reconstructed in the United States and documented under the laws of the United States. Ordinarily, a vessel to be acquired with withdrawals from a CRF account would not be considered suitable to carry out the purposes of CRF if it was constructed more than 5 years prior to acquisition. Vessels must be of such type, size, and speed as to be suitable for use on the high seas or Great Lakes. If a vessel is less than 2,000 gross tons or has a speed less than 12 knots, MARAD must determine that the particular vessel would be useful to the United States in case of war or national emergency.

Fund Deposits

A construction reserve fund account may include deposits of:

• The proceeds from the sale of a vessel;
• Indemnities for the loss of a vessel;
• Earnings from the operation of a documented vessel and from services incident to the operation; and
• Interest or other amounts accrued on deposits in the fund.

Deposits into a CRF account must be made within 60 days after receipt by the taxpayer of amounts representing proceeds of the sale or indemnification for loss of a vessel. The terms “net proceeds” and “net indemnity” mean the sum of (1) the adjusted basis of the vessel and (2) the amount of gain which would be recognized to the taxpayer without regard to CRF.

Note: The ability to defer gain under this provision applies only to vessel owners. Citizens operating a vessel owned by another individual cannot benefit from the provisions relating to the non-recognition of gain from the sale or loss of a vessel.

CRF also permits a vessel owner or operator to deposit into a CRF account, earnings from the operation of vessels documented under the laws of the United States and earnings from the investment of the fund. Such deposits do not exempt the taxpayer from tax liability on the earnings nor do they postpone the time such earnings are includable in gross income. However, earnings so deposited are considered to have been accumulated for the reasonable needs of the business within the meaning of the Internal Revenue Code. This ability to accumulate funds for the construction, reconstruction, or acquisition of a vessel is the only benefit available to the non-owner operator of a vessel.

Benefits

This tax deferral mechanism offered through CRF has enabled various fund holders, depending on specific circumstances, to:

• Build larger, better-equipped new vessels;
• Reduce mortgage debt on new vessels; and
• Build a greater number of vessels.

Statute and Regulations

The program is authorized under Title 46, United States Code, Chapter 533. The link to the statue is below:

46 USC Ch. 533: Construction Reserve Funds (house.gov)

The CRF programs regulations:  46 CFR Part 287 (Establishment of the Construction Reserve Fund). The link to the regulation is below:

eCFR: 46 CFR Part 287 -- Establishment of Construction Reserve Funds

Additional Information

This page is intended as general information to the Construction Reserve Fund Program and its basic provisions as administered by MARAD for commercial vessels.

Additional information regarding Federal financial assistance programs for the fisheries is available from the National Oceanic and Atmospheric Administration at the following address:

CCF Program, Financial Services Division (F/MB5)
National Marine Fisheries Service
1315 East West Highway
Silver Spring, MD 20910
(301) 713-2393