MarAd’s Capital Construction Fund: An Opportunity For The Inland Waterways

By Jim Kearns and Will Baldwin

The Capital Construction Fund (CCF) program is a tax-deferral program administered by the U.S. Maritime Administration (MarAd). The program allows the owner or operator of eligible U.S.-flag vessels to defer federal taxes on income from the operation of those vessels and on gain from the sale of the vessels by excluding from taxable income any amounts from such sources that are deposited into a CCF account. Deposits in a CCF account can be invested in cash and cash equivalents, interest-bearing securities, and common and preferred stock, and the earnings from such investments are nontaxable while in the account.

The key to the program is that withdrawals from a CCF account are nontaxable if they are used for the construction or reconstruction of qualified U.S.-flag vessels or the retirement of the principal portion of debt incurred for such purposes. A CCF account could be viewed like a Health Savings Account in that deposits into the account are deductible from taxable income, earnings on the balance in the account are not taxed while in the account, and withdrawals from the account are not taxed if they are used for an eligible purpose.

In theory, the program is only a deferral of taxes because the tax basis of the new vessel is reduced by the amounts withdrawn from the CCF account to pay for the vessel’s construction or reconstruction. The owner would not be able to take depreciation deductions for the vessel in future years to shelter other taxable income, and if the owner were to sell the vessel, all the proceeds would be taxable gain. However, if the gain from the sale is deposited into the owner’s CCF account, then there is a tax deduction for that deposit as well.

The CCF program is one of the programs created by the Merchant Marine Act of 1936 as part of the New Deal, with the stated goal of revitalizing U.S. merchant shipping and strengthening the nation’s defense, which are recurring themes in most federal maritime legislation. These programs included substantial subsidies and other incentives to build vessels in U.S. shipyards and to employ American mariners on U.S.-flag vessels, but vessels operated on the U.S. inland waterways were originally not eligible for these incentives since those vessels were already required by law to be built in the United States.

Through federal legislation passed in December 2022, the geographical trading restrictions were removed so that qualified withdrawals under the CCF program could be made for the construction and reconstruction of vessels that are operated on the U.S. inland waterways. These vessels are not restricted to the large line boats and cargo barges that might first come to mind when thinking of the inland waterways. MarAd’s website specifically lists harbor service vessels, passenger and auto ferries, and dinner cruise and sightseeing vessels as examples of the vessels that can benefit from the expansion of the CCF program.

Many ports and terminals own or operate smaller vessels such as these as part of their overall operations. As awareness of the program grows within the inland waterways industry, port and terminal operators have begun taking advantage of the expanded eligibility for the CCF program.

The CCF program has clearly been a success. At the end of 2021, even before its expansion to include the inland waterways, $1.9 billion was on deposit in CCF accounts. By the end of 2023, that amount had increased to $2.6 billion. The CCF program remains an opportunity for many more owners and operators of vessels on the inland waterways.

Jim Kearns is special counsel in Jones Walker’s Maritime Practice Group, where he focuses on maritime transactions. In his more than 30 years of practice, he has represented owners, operators, financial institutions (as both lessors and lenders) and end users in the purchase, construction and financing of vessels engaged in both the foreign and coastwise trades of the United States, including compliance with the requirements of the Jones Act for the ownership, chartering and transfer of vessels. Kearns regularly handles vessel construction contracts, bareboat and time charters, leveraged lease financings, vessel purchases and sales, ship mortgages, ocean carrier contracts, pooling agreements and other maritime matters.

Will Baldwin is co-leader of Jones Walker’s Maritime Industry Group and leader of the firm’s maritime transactional team, where he focuses on maritime transactions and marine finance. Baldwin also serves as co-chair of the firm’s offshore wind initiative.