B-130135, FEBRUARY 4, 1957, 36 COMP. GEN. 566

B-130135: Feb 4, 1957

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MARITIME MATTERS - VESSELS COVERED BY CONSTRUCTION-DIFFERENTIAL SUBSIDIES - TRADE-IN VALUATION WHEN VESSELS WHICH ARE COVERED BY CONSTRUCTION-DIFFERENTIAL SUBSIDIES ARE TRADED-IN AS OBSOLETE FOR REPLACEMENT FOR NEW CONSTRUCTION. THE VALUATION IS FOR COMPUTATION ON THE BASIS OF THE FAIR AND REASONABLE FORMULA PRESCRIBED IN THE TRADE-IN PROVISIONS OF SECTION 510. 1957: REFERENCE IS MADE TO YOUR LETTER OF DECEMBER 18. WHEREIN IT WAS CONCLUDED THAT SECTION 802 OF THE MERCHANT MARINE ACT. IT IS YOUR VIEW THAT THE SUBJECT LEGAL OPINION IS CORRECT AND YOU REQUEST OUR CONCURRENCE IN THE CONCLUSION THEREOF. ACQUIRE OWNERSHIP OF THE VESSEL OR VESSELS ON WHICH A CONSTRUCTION DIFFERENTIAL SUBSIDY WAS PAID.

B-130135, FEBRUARY 4, 1957, 36 COMP. GEN. 566

MARITIME MATTERS - VESSELS COVERED BY CONSTRUCTION-DIFFERENTIAL SUBSIDIES - TRADE-IN VALUATION WHEN VESSELS WHICH ARE COVERED BY CONSTRUCTION-DIFFERENTIAL SUBSIDIES ARE TRADED-IN AS OBSOLETE FOR REPLACEMENT FOR NEW CONSTRUCTION, THE VALUATION IS FOR COMPUTATION ON THE BASIS OF THE FAIR AND REASONABLE FORMULA PRESCRIBED IN THE TRADE-IN PROVISIONS OF SECTION 510, MERCHANT MARINE ACT, 1936, RATHER THAN ON THE VALUATION FORMULA PRESCRIBED IN SECTION 802 APPLICABLE TO VESSELS PURCHASED OR REQUISITIONED BY THE GOVERNMENT.

TO THE CHAIRMAN, FEDERAL MARITIME BOARD, FEBRUARY 4, 1957:

REFERENCE IS MADE TO YOUR LETTER OF DECEMBER 18, 1956, TRANSMITTING A COPY OF THE OPINION OF YOUR GENERAL COUNSEL, DATED JANUARY 19, 1956, WHEREIN IT WAS CONCLUDED THAT SECTION 802 OF THE MERCHANT MARINE ACT, 1936, 46 U.S.C. 1212, DOES NOT CONSTITUTE A CEILING ON TRADE-IN ALLOWANCES DETERMINED PURSUANT TO SECTION 510 OF THAT ACT, 46 U.S.C. 1160. IT IS YOUR VIEW THAT THE SUBJECT LEGAL OPINION IS CORRECT AND YOU REQUEST OUR CONCURRENCE IN THE CONCLUSION THEREOF.

SECTION 802 PROVIDES THAT:

EVERY CONTRACT EXECUTED BY THE FEDERAL MARITIME BOARD UNDER AUTHORITY OF SECTIONS 1151-1161 OF THIS TITLE SHALL PROVIDE THAT---

IN THE EVENT THE UNITED STATES SHALL, THROUGH PURCHASE OR REQUISITION, ACQUIRE OWNERSHIP OF THE VESSEL OR VESSELS ON WHICH A CONSTRUCTION DIFFERENTIAL SUBSIDY WAS PAID, THE OWNER SHALL BE PAID THEREFOR THE VALUE THEREOF, BUT IN NO EVENT SHALL SUCH PAYMENT EXCEED THE ACTUAL DEPRECIATED CONSTRUCTION COST THEREOF (TOGETHER WITH THE ACTUAL DEPRECIATED COST OF CAPITAL IMPROVEMENTS THEREON, BUT EXCLUDING THE COST OF NATIONAL-DEFENSE FEATURES) LESS THE DEPRECIATED AMOUNT OF CONSTRUCTION DIFFERENTIAL SUBSIDY THERETOFORE PAID INCIDENT TO THE CONSTRUCTION OR RECONDITIONING OF SUCH VESSEL OR VESSELS, OR THE FAIR AND REASONABLE SCRAP VALUE OF SUCH VESSEL AS DETERMINED BY THE SECRETARY OF COMMERCE, WHICHEVER IS THE GREATER. SUCH DETERMINATION SHALL BE FINAL. IN COMPUTING THE DEPRECIATED VALUE OF SUCH VESSEL, DEPRECIATION SHALL BE COMPUTED ON EACH VESSEL ON THE SCHEDULE ADOPTED BY THE BUREAU OF INTERNAL REVENUE FOR INCOME-TAX PURPOSES.

THE FOREGOING PROVISION RESPECTING THE REQUISITION OR THE ACQUISITION OF OWNERSHIP BY THE UNITED STATES SHALL RUN WITH THE TITLE TO SUCH VESSEL OR VESSELS AND BE BINDING ON ALL OWNERS THEREOF.

THE CRUX OF THE QUESTION PRESENTED IS WHETHER THE CONTRACTUAL AGREEMENT REQUIRED BY SECTION 802 RELATIVE TO THE VALUATION OF A VESSEL ON WHICH A CONSTRUCTION-DIFFERENTIAL SUBSIDY HAD BEEN GRANTED, WHEN SUCH VESSEL IS "PURCHASED OR REQUISITIONED" BY THE GOVERNMENT, CONSTITUTES A LIMITATION UPON THE VALUATION THEREOF FOR ITS TRADE-IN TO THE GOVERNMENT IN EXCHANGE FOR A CREDIT ALLOWANCE TOWARD THE CONSTRUCTION COSTS OF A REPLACEMENT VESSEL PURSUANT TO SECTION 510.

EXAMINATION OF THE LEGISLATIVE HISTORY OF SECTION 802 CLEARLY ESTABLISHES THAT IT IS A COROLLARY OF SECTION 902, 46 U.S.C. 1242, WHICH AUTHORIZES THE "REQUISITION OR PURCHASE (OF) ANY VESSEL OR OTHER WATERCRAFT OWNED BY CITIZENS OF THE UNITED STATES" (W/HENEVER THE PRESIDENT SHALL PROCLAIM THAT THE SECURITY OF THE NATIONAL DEFENSE MAKES IT ADVISABLE OR DURING ANY NATIONAL EMERGENCY DECLARED BY PROCLAMATION OF THE PRESIDENT.'

THE FIRST BILLS PRESENTED IN RESPONSE TO THE PRESIDENT'S REQUEST FOR NEW MERCHANT MARINE LEGISLATION IN HIS MESSAGE TO THE CONGRESS OF MARCH 4, 1935, PROPOSED TO AMEND SECTION 702 OF THE MERCHANT MARINE ACT, 1928, 45 STAT. 689, 697. UNDER THOSE BILLS, THE AUTHORITY TO TAKE OVER AND PURCHASE OR USE PRIVATELY-OWNED VESSELS WAS LIMITED TO THOSE VESSELS WHICH HAD RECEIVED GOVERNMENT AID AND THEN ONLY WHEN THEY WERE "TAKEN OVER AND PURCHASED OR USED BY THE UNITED STATES FOR NATIONAL DEFENSE OR DURING ANY NATIONAL EMERGENCY DECLARED BY PROCLAMATION OF THE PRESIDENT.' SEE H.R. 7251 AND S. 2582, 74TH CONGRESS, ST SESSION, APRIL 15, 1935; H.R. 8555, JUNE 19, 1935, AND PAGE 26 OF THE ACCOMPANYING HOUSE REPORT NO. 1277, JUNE 20, 1935. THE SENATE COMMITTEE ON COMMERCE REPORTED OUT AN AMENDED VERSION OF H.R. 8555 ON JULY 29, 1935, AND IN ITS ACCOMPANYING SENATE REPORT NO. 1226 OF THE SAME DATE, EXPLAINED THE PERTINENT CHANGE IN THE HOUSE BILL AS FOLLOWS:

SECTION 1104 OF THE HOUSE BILL, WHICH DEALS WITH THE REQUISITION OF VESSELS, IS AMPLIFIED BY THE SENATE AMENDMENT TO CONTAIN THE PRINCIPLE OF ESTABLISHING BY CONTRACTUAL RELATIONS WITH THE OWNER OF THE VESSEL AT THE TIME THE GOVERNMENT AID IS GRANTED, THE TERMS AND CONDITIONS UNDER WHICH SUCH VESSEL MAY BE REQUISITIONED BY THE GOVERNMENT IN A NATIONAL EMERGENCY. ( ITALICS SUPPLIED.)

THIS PRINCIPLE OF REQUIRING CONTRACTUAL AGREEMENT BY THE OWNER IS PRESCRIBED IN SECTION 802 OF THE 1936 ACT. HOWEVER, IT IS NOTED THAT THE SENATE AMENDMENT CONTINUED TO PREMISE THE ACQUISITION AUTHORITY UPON EMERGENCY NEEDS OF THE GOVERNMENT AND LIMITED ITS PROVISIONS TO VESSELS UPON WHICH GOVERNMENT FINANCIAL AID HAD BEEN GRANTED. THE BROADENING OF THE GOVERNMENT'S REQUISITION AND PURCHASE AUTHORITY TO INCLUDE ALL AMERICAN-FLAG VESSELS WAS RECOMMENDED BY THE NAVY DEPARTMENT IN ITS LETTER OF MAY 10, 1935, TO THE HOUSE MERCHANT MARINE AND FISHERIES COMMITTEE (PAGES 1147 AND 1148 OF THE COMMITTEE'S HEARINGS ON H.R. 7521, 74TH CONGRESS) WHEREIN IT WAS STATED---

THE NAVY DEPARTMENT HAS ALREADY SUBMITTED TO CONGRESS A PROPOSED AMENDMENT TO SECTION 702 (A) OF THE MERCHANT MARINE ACT OF 1928 WHICH WOULD AUTHORIZE THE PRESIDENT TO TAKE AND PURCHASE OR USE ANY VESSEL DOCUMENTED UNDER THE LAWS OF THE UNITED STATES FOR NATIONAL DEFENSE WHEN WAR IS IMMINENT. THE IMPORTANCE OF SUCH AN AMENDMENT TO THE NATIONAL DEFENSE CANNOT BE OVER-EMPHASIZED. IT HAS THE APPROVAL OF THE WAR DEPARTMENT AND THE DEPARTMENT OF COMMERCE AND, SO FAR AS IS KNOWN, THERE HAS BEEN NO OPPOSITION FROM THE MERCHANT MARINE INDUSTRY.

IT IS IMPERATIVE THAT THE PRESIDENT HAVE AUTHORITY TO TAKE AND PURCHASE OR USE FOR NATIONAL DEFENSE PRIOR TO THE DECLARATION OF WAR NOT ONLY THOSE SHIPS WHICH HAVE RECEIVED FINANCIAL AID FROM THE UNITED STATES BUT ALSO ALL OTHER VESSELS ENJOYING THE PROTECTION OF OUR FLAG. NO ENHANCEMENT OF THE VALUE OF SUCH VESSELS BY REASON OF THE CAUSES NECESSITATING THE TAKING SHOULD BE PERMITTED. IT IS RECOMMENDED THAT THE AMENDMENT TO SECTION 702 (A) OF THE MERCHANT MARINE ACT OF 1928 AS CONTAINED IN SECTION 1004 OF H.R. 7521 BE CHANGED TO READ AS FOLLOWS:

" SEC. 702 (A) ANY VESSEL REGISTERED, ENROLLED, OR LICENSED UNDER THE LAWS OF THE UNITED STATES MAY BE TAKEN AND PURCHASED OR USED BY THE UNITED STATES FOR NATIONAL DEFENSE IN TIME OF WAR OR WHEN WAR IS IMMINENT.' ITALICS SUPPLIED.)

EXAMINATION OF SUBSEQUENT BILLS AND THE PERTINENT CONGRESSIONAL DEBATES SUPPORT THE VIEW THAT SECTIONS 802 AND 902 WERE RELATED PROVISIONS AND THAT BOTH CONTEMPLATED THE "PURCHASE OR REQUISITION" OF VESSELS BY THE GOVERNMENT FOR DEFENSE PURPOSES ONLY. THE LEGISLATIVE HISTORY LEAVES NO DOUBT OF THE CONGRESS' INTENTION THAT THE SECTION 802 VALUATION FORMULA CONTRACTUALLY AGREED TO BECOME APPLICABLE "WHEN ANY (CONSTRUCTION DIFFERENTIAL SUBSIDY) VESSEL IS TAKEN OR USED UNDER AUTHORITY OF THIS SECTION (902).'

WHILE CONGRESS WAS THUS PROVIDING FOR THE "PURCHASE OR REQUISITION" OF VESSELS IN THE INTEREST OF NATIONAL DEFENSE, IT DID NOT OVERLOOK THE NEED FOR PROVIDING TRADE-IN ALLOWANCES ON OBSOLETE VESSELS TO BE REPLACED BY NEW CONSTRUCTION. SECTION 507, 46 U.S.C. 1157, PROVIDES AUTHORITY FOR THE ADMINISTRATION "TO BUY SUCH REPLACED VESSEL FROM THE OWNER AT A FAIR AND REASONABLE VALUATION" NOT TO EXCEED THE DEPRECIATED COSTS TO THE OWNER OR ANY FORMER OWNER, DEPRECIATED ON THE BASIS OF A TWENTY-YEAR LIFE OF THE VESSEL. ACCORDINGLY, THE 1936 ACT, AS ORIGINALLY ENACTED, EXPRESSLY LIMITED THE VALUATION ON ALL TRADED-IN VESSELS TO THE DEPRECIATED COSTS THEREOF TO THE OWNERS, AND SEPARATELY PROVIDED A SIMILAR LIMITATION (EXCLUSIVE OF NATIONAL DEFENSE FEATURES) ON CONSTRUCTION-DIFFERENTIAL VESSELS "PURCHASED OR REQUISITIONED" BY THE GOVERNMENT UNDER THE CONDITIONS AND AUTHORITY OF SECTION 902.

OVER THREE YEARS AFTER PASSAGE OF THE MERCHANT MARINE ACT, 1936, THE TRADE-IN VALUATION FORMULA OF SECTION 507 WAS COMPLEMENTED BY THE ADDITION OF SECTION 510, AS ADDED BY THE ACT OF AUGUST 4, 1939, 53 STAT. 1182, 46 U.S.C. 1160. THE LANGUAGE OF THE SECTION ESTABLISHES ITS PURPOSE TO ,PROMOTE THE CONSTRUCTION OF NEW, SAFE, AND EFFICIENT VESSELS" BY AUTHORIZING THE ACQUISITION OF ,OBSOLETE" VESSELS, AS DEFINED THEREIN, AT THEIR "FAIR AND REASONABLE" VALUES, DETERMINED AFTER CONSIDERATION OF THEIR SCRAP, BOOK, AND WORLD MARKET VALUES. CF. B-115883, AUGUST 11, 1953. THE DEFINITION OF "OBSOLETE VESSEL" DOES NOT EXCLUDE VESSELS ON WHICH CONSTRUCTION-DIFFERENTIAL SUBSIDIES HAD BEEN GRANTED AND NOTHING IN THE LANGUAGE OF THAT SECTION NOR ITS LEGISLATIVE HISTORY INDICATES AN INTENT TO EXCLUDE SUCH VESSELS. IN RECOMMENDING THIS LEGISLATION TO THE SPEAKER OF THE HOUSE ON MARCH 16, 1939, THE FORMER MARITIME COMMISSION EXPLAINED---

THE CONTINUED OPERATION, ON THE ESSENTIAL FOREIGN TRADE ROUTES AND IN THE PROTECTED TRADES, OF OLD OR OBSOLETE TONNAGE WHICH SHOULD BE RETIRED FROM SERVICE, CONSTITUTES A MAJOR OBSTACLE TO THE ATTAINMENT OF THE OBJECTIVES OF THE COMMISSION'S LONG-RANGE CONSTRUCTION PROGRAM AND TO THE REALIZATION OF THE OBJECTIVES EXPRESSED IN THE ACT. THE GOVERNMENT IS RESPONSIBLE FOR THIS OBSTACLE TO THE EXTENT THAT LEGISLATIVE RESTRICTIONS AND NATIONAL POLICY PREVENT OR RENDER INADVISABLE THE DISPOSAL OF VESSELS IN THE MOST GENEROUS WORLD MARKET OTHERWISE AVAILABLE TO THEIR OWNERS.

PAGE 139, HOUSE HEARINGS ON H.R. 5130, 76TH CONGRESS. THE LEGISLATIVE RESTRICTION REFERRED TO WAS THE PROVISION OF SECTION 9 OF THE SHIPPING ACT, 1916, AMENDED, 46 U.S.C. 808, WHICH REQUIRED GOVERNMENT APPROVAL PRIOR TO SALES FOREIGN OF AMERICAN-FLAG VESSELS. SEE PAGES 2-3, HOUSE HEARINGS ON H.R. 5130, 76TH CONGRESS. THAT EXPLANATION WAS ADOPTED BY THE HOUSE COMMITTEE ON MERCHANT MARINE AND FISHERIES. SEE PAGE 5, HOUSE REPORT NO. 824, TO ACCOMPANY H.R. 6746, 76TH CONGRESS, WHICH BECAME THE ACT OF AUGUST 4, 1939, 53 STAT. 1182. THAT THE CONGRESS RECOGNIZED THAT ATTAINMENT OF THE OBJECTIVES OF THE BILL WOULD BE JEOPARDIZED BY APPLYING THE PRICING PROVISIONS OF SECTION 507 TO A PARTICULAR CLASS OF VESSELS IS MADE CLEAR BY THE REJECTION OF A PROPOSAL THAT SUCH PRICES SHOULD BE APPLIED TO TRADED-IN VESSELS WHICH HAD ORIGINALLY BEEN PURCHASED FROM THE GOVERNMENT. SEE PAGE 7, HOUSE REPORT NO. 824, ACCOMPANYING H.R. 6746, 76TH CONGRESS. AS STATED THEREIN, UNDER SUCH A PROVISO THE VESSELS IN THAT CATEGORY MIGHT NOT BE REPLACED AT ALL, OR IF REPLACED MIGHT CONTINUE TO BE OPERATED BY THE OWNERS, OR BE SOLD FOR FURTHER OPERATION IN THE DOMESTIC TRADE, AND WOULD TO THAT EXTENT RETARD THE VESSEL CONSTRUCTION PROGRAM. IT MUST BE ASSUMED THAT THE CONGRESS WAS AWARE THAT A SIMILAR APPLICATION OF SECTION 507 TO THE TRADE-IN OF VESSELS ON WHICH A CONSTRUCTION DIFFERENTIAL SUBSIDY HAD BEEN PAID MIGHT ALSO RESULT IN SIMILAR ACTIONS BY THE OWNERS OF SUCH VESSELS AND A CONSEQUENT RETARDATION OF THE CONSTRUCTION PROGRAM.

IN SUMMARY, SECTION 802 REQUIRES THE CONTRACTUAL AGREEMENT, BY THE OWNER OF A VESSEL ON WHICH A CONSTRUCTION-DIFFERENTIAL SUBSIDY HAS BEEN GRANTED, THAT WHEN SUCH A VESSEL IS "PURCHASED OR REQUISITIONED" BY THE GOVERNMENT UNDER AUTHORITY OF SECTION 902, HIS PAYMENT THEREFOR WILL BE IN ACCORDANCE WITH THE VALUATION FORMULA PRESCRIBED IN SECTION 802, RATHER THAN "JUST COMPENSATION" AS PROVIDED FOR OTHER VESSELS UNDER SECTION 902 (A), 46 U.S.C. 1242 (A). WE FIND NO BASIS IN SECTION 510, OR ITS LEGISLATIVE HISTORY, FOR CONCLUDING THAT VESSELS ON WHICH CONSTRUCTION-DIFFERENTIAL HAD BEEN GRANTED WOULD BE TREATED ANY DIFFERENTLY FOR TRADE-IN PURPOSES THAN OTHER "OBSOLETE" VESSELS.

ACCORDINGLY, WE CONCUR IN THE CONCLUSION OF YOUR GENERAL COUNSEL THAT SECTIONS 802 AND 510 ARE NOT RELATED IN THEIR OBJECTIVES AND THAT SECTION 802 DOES NOT CONSTITUTE A STATUTORY CEILING ON THE "FAIR AND REASONABLE VALUE" OF A VESSEL ACQUIRED BY THE GOVERNMENT PURSUANT TO THE TRADE-IN PROVISIONS OF SECTION 510.