B-148413, APRIL 23, 1962, 41 COMP. GEN. 689

B-148413, APRIL 23, 1962, 41 COMP. GEN. 689

MARITIME MATTERS - SUBSIDIES - ELIGIBILITY - RELATED COMPANY RESTRICTIONS A PROPOSAL FOR THE ACQUISITION OF VESSELS AT THE CURRENT MARKET VALUE RATHER THAN AT THE BOOK VALUE BY A SUBSIDIZED STEAMSHIP COMPANY FROM A SUBSIDIARY OF A STEAMSHIP LINE WHICH OWNS 25 PERCENT OF THE STOCK OF THE PURCHASING COMPANY IS NOT PRECLUDED BY THE PROFIT ELIMINATION PROVISIONS IN SECTION 803 OF THE MERCHANT MARINE ACT, 1936, 46 U.S.C. 1221, WHICH WERE DIRECTED AGAINST CERTAIN SPECIFIED SERVICES BETWEEN RELATED COMPANIES RATHER THAN A TRANSACTION INCIDENT TO THE MERGER OF STEAMSHIP COMPANIES AND THE APPLICATION FOR A SUBSIDY.

TO THE SECRETARY OF COMMERCE, APRIL 23, 1962:

REFERENCE IS MADE TO YOUR LETTER OF MARCH 14, 1962, PRESENTING CERTAIN QUESTIONS IN CONNECTION WITH AN AWARD OF OPERATING-DIFFERENTIAL SUBSIDY AGREEMENT BY THE MARITIME SUBSIDY BOARD ON MARCH 5, 1962, TO ISBRANDTSEN STEAMSHIP COMPANY, INC.--- AMERICAN EXPORT LINES, INC., AS SUCCESSORS TO ISBRANDTSEN COMPANY, INC., UNDER TITLE VI OF THE MERCHANT MARINE ACT, 1936, AS AMENDED, 46 U.S.C. 1171.

THE APPLICATION FOR OPERATING-DIFFERENTIAL SUBSIDY UNDER TITLE VI OF THE MERCHANT MARINE ACT, 1936, AS AMENDED, UNDER CONSIDERATION BY YOU INVOLVES A PLAN FOR THE PURCHASE BY ISBRANDTSEN COMPANY, INC., OF APPROXIMATELY 25 PERCENT OF THE STOCK IN AMERICAN EXPORT LINES, INC.; THE SALE OF FOURTEEN VESSELS AND SERVICES BY ISBRANDTSEN COMPANY, INC., TO AMERICAN EXPORT LINES, INC., THROUGH THE ISBRANDTSEN STEAMSHIP COMPANY; AND THE SUBSEQUENT MERGER OF THE AMERICAN EXPORT LINES, INC., WITH THE ISBRANDTSEN STEAMSHIP COMPANY. THIS PLAN WAS FULLY DISCLOSED IN ADVANCE BY ISBRANDTSEN COMPANY, INC., IN ITS LETTER DATED SEPTEMBER 19, 1960, TO THE THEN FEDERAL MARITIME BOARD, AND AS APPROVED IN PRINCIPLE SUBJECT TO CERTAIN STATED CONDITIONS, BY THE FEDERAL MARITIME BOARD IN ITS REPLY DATED SEPTEMBER 26, 1960. THEREAFTER, IN OCTOBER 1960 ISBRANDTSEN COMPANY, NC., PURCHASED APPROXIMATELY 25 PERCENT OF THE STOCK OF AMERICAN EXPORT LINES, INC., AS CONTEMPLATED.

THE PLAN CONTEMPLATES THE PAYMENT BY AMERICAN EXPORT LINES, INC., OF A PURCHASE PRICE FOR THE ISBRANDTSEN VESSELS EQUAL TO THE CURRENT DOMESTIC MARKET VALUES OF THE VESSELS AT THE TIME OF ACQUISITION AS DETERMINED BY THE MARITIME ADMINISTRATION. IT IS THE VIEW OF THE MARITIME SUBSIDY BOARD THAT ALL ACTIONS TAKEN SUBSEQUENT TO THE FEDERAL MARITIME BOARD'S APPROVAL IN PRINCIPLE WERE CONSONANT WITH THE PLAN AS ORIGINALLY DISCLOSED AND TENTATIVELY APPROVED, AND REPRESENTED STEPS IN THE CONSUMMATION OF SUCH PLAN.

IT IS REPORTED THAT THE PROPOSAL THAT AMERICAN EXPORT LINES, INC., PURCHASE ISBRANDTSEN'S VESSELS AND SERVICES WAS CONSIDERED BY AMERICAN EXPORT'S STAFF, WHICH ANTICIPATED ACQUISITION AT A PRICE EQUAL TO THE MARKET VALUES OF THE VESSELS OF APPROXIMATELY $9,000,000, WAS RECOMMENDED BY AMERICAN EXPORT'S STAFF TO ITS BOARD OF DIRECTORS AND WAS UNANIMOUSLY APPROVED BY SUCH BOARD. ALSO, THE PLAN TO ACQUIRE THE VESSELS AT THEIR FAIR MARKET VALUES AS DETERMINED BY THE MARITIME ADMINISTRATOR WAS DISCLOSED TO THE STOCKHOLDERS IN AMERICAN EXPORT'S 1960 ANNUAL REPORT, DATED MARCH 17, 1961, AND WAS DESCRIBED IN EVEN MORE DETAIL IN THE PROXY STATEMENT FURNISHED TO ALL STOCKHOLDERS FOR THE ANNUAL MEETING OF APRIL 19, 1961, AT WHICH MEETING THE PLAN RECEIVED THE SANCTION OF AMERICAN EXPORT'S STOCKHOLDERS--- WITH ISBRANDTSEN NOT VOTING ITS STOCK--- BY THEIR ACTION AT THE MEETING FOR REELECTING DIRECTORS NOMINATED BY THE MANAGEMENT.

ON MARCH 5, 1962, WHEN THE MARITIME SUBSIDY BOARD APPROVED THE AWARD OF OPERATING-DIFFERENTIAL SUBSIDY TO ISBRANDTSEN STEAMSHIP COMPANY, INC.--- AMERICAN EXPORT LINES, INC., IT INCLUDED THE FOLLOWING AS A CONDITION THEREOF:

THE PRICE TO BE PAID TO ISBRANDTSEN COMPANY, INC., BY (ITS WHOLLY OWNED SUBSIDIARY) ISBRANDTSEN STEAMSHIP COMPANY, INC., FOR THE 14 VESSELS SHALL NOT EXCEED $8,190,000, LESS ANY OUTSTANDING MORTGAGE INDEBTEDNESS AT THE TIME TITLE IS ACTUALLY TRANSFERRED.

FOR PURPOSES OF DETERMINING "CAPITAL NECESSARILY EMPLOYED IN THE BUSINESS" AND NET EARNINGS SUBJECT TO RECAPTURE, THE VALUES OF THE TWELVE SUBSIDIZED VESSELS AND, TO THE EXTENT APPLICABLE, THE NON SUBSIDIZED SSS REMSEN HEIGHTS AND SIR JOHN FRANKLIN SHALL BE THE NET VALUES ON THE BOOKS OF ISBRANDTSEN COMPANY, INC., AT THE TIME TITLE IS ACTUALLY TRANSFERRED; DEPRECIATION CHARGES SHALL BE BASED ON SUCH BOOK VALUES; AND NO INTEREST CHARGES ON MORTGAGE INDEBTEDNESS TO ISBRANDTSEN COMPANY, INC., SHALL BE TAKEN INTO CONSIDERATION. FOR THE PURPOSE OF DETERMINING THE REQUIRED DEPOSITS INTO THE CAPITAL RESERVE FUND, HOWEVER, THE AMOUNTS TO BE DEPOSITED THEREIN REPRESENTING DEPRECIATION ON THE FOURTEEN VESSELS SHALL BE SUCH AMOUNTS AS THE INTERNAL REVENUE SERVICE RECOGNIZES AS DEPRECIATION FOR INCOME TAX PURPOSES, BUT IT IS AGREED THAT THERE SHALL ALSO BE DEPOSITED INTO THE CAPITAL RESERVE FUND, IN ANNUAL INSTALLMENTS OVER THE FIRST FIVE-YEAR PERIOD OF SUBSIDIZED OPERATIONS AMOUNTS EQUAL TO THE DIFFERENCE BETWEEN SUCH RECOGNIZED DEPRECIATION CHARGES AND THE PURCHASE PRICES TO BE PAID TO ISBRANDTSEN COMPANY, INC. MORTGAGE INDEBTEDNESS OUTSTANDING ON THE VESSELS AT THE TIME OF PURCHASE, AND MORTGAGE INDEBTEDNESS TO ISBRANDTSEN COMPANY, INC., MAY BE PAID FROM THE CAPITAL RESERVE FUND.

YOU ADVISE THAT THE STATED PURCHASE PRICE OF $8,190,000 TO BE PAID ISBRANDTSEN COMPANY, INC., BY ISBRANDTSEN STEAMSHIP COMPANY, INC. REPRESENTS "DOMESTIC MARKET VALUES" OF THE 14 VESSELS INVOLVED, AS DETERMINED BY THE SHIP VALUATION COMMITTEE, MARITIME ADMINISTRATION, AND AFFIRMED BY THE MARITIME ADMINISTRATOR ON FEBRUARY 13, 1962. BY CONTRAST, YOU SAY, THE "BOOK VALUES" OF THE VESSELS ON ISBRANDTSEN'S BOOKS AGGREGATED $2,938,635 AS OF DECEMBER 31, 1961. HOWEVER, THE BOARD HAS PROVIDED THAT ONLY THE "NET VALUES ON THE BOOKS OF ISBRANDTSEN COMPANY, INC., AT THE TIME TITLE IS ACTUALLY TRANSFERRED" TO THE STEAMSHIP COMPANY SHALL BE TAKEN INTO CONSIDERATION FOR PURPOSES OF DETERMINING "CAPITAL NECESSARILY EMPLOYED IN THE BUSINESS" AND NET EARNINGS SUBJECT TO RECAPTURE OF SUBSIDY PURSUANT TO SECTION 606 (5) OF THE MERCHANT MARINE ACT, 1936, AS AMENDED, 46 U.S.C. 1176 (5). YOU FURTHER ADVISE THAT IN CONSIDERING THE APPLICATION FOR SUBSIDY AND THE PLAN FOR A MERGER OF THE STEAMSHIP COMPANY WITH AMERICAN EXPORT LINES, INC., WITHIN 30 DAYS AFTER EXECUTION OF THE SUBSIDY CONTRACT, THE MARITIME SUBSIDY BOARD REQUESTED AND RECEIVED MEMORANDA FROM CERTAIN OF ITS STAFF MEMBERS OBJECTING TO THE ACQUISITION BY EXPORT OF ISBRANDTSEN'S SHIPS AT CURRENT MARKET PRICES RATHER THAN AT THE LATTER'S BOOK VALUES. HOWEVER, YOU FORWARDED TO OUR OFFICE A COPY OF REPORT DATED MARCH 8, 1962, BY THE BOARD CONTAINING A SUMMARIZATION OF THE PLAN INVOLVED IN ITS APPROVAL OF THE SUBSIDY APPLICATION, WHICH INCLUDES DETAILS OF THE REASONS FOR ITS DECISION TO APPROVE ACQUISITION BY EXPORT OF THE ISBRANDTSEN VESSELS AT CURRENT MARKET VALUES INSTEAD OF BOOK VALUES.

IN CONCLUSION, YOU ADVISE THAT UPON CONSIDERATION OF ALL FACTORS INVOLVED YOU HAVE DECIDED THAT YOU SHOULD CONCUR IN THE DECISION OF THE MARITIME SUBSIDY BOARD, AND ALSO CONCUR IN THE BOARD'S POSITION THAT THERE IS NO STATUTORY OR REGULATORY PROVISION WHICH PRECLUDES THE ACQUISITION OF THE ISBRANDTSEN VESSELS AT THEIR CURRENT MARKET VALUES. HOWEVER, IN VIEW OF THE REFERRED-TO MEMORANDA EXPRESSING THE OPINION THAT THE PRINCIPLE ENUNCIATED IN GENERAL ORDER NO. 24, AND ALSO REFLECTED IN SECTION 803 OF THE MERCHANT MARINE ACT, 46 U.S.C. 1221, PERTAINING TO THE ELIMINATION OF PROFIT IN TRANSACTIONS BETWEEN RELATED COMPANIES, PRECLUDES YOUR ACQUIESCENCE IN A PURCHASE AT MORE THAN BOOK VALUE, YOU REQUEST OUR ADVICE AS TO WHETHER WE CONCUR IN THE LATTER PART OF YOUR CONCLUSION AS STATED ABOVE.

THE DOCUMENTS FURNISHED BY YOU INDICATE THAT YOUR QUESTION WHETHER THERE IS ANY STATUTORY OR REGULATORY PROVISION WHICH PRECLUDES THE ACQUISITION OF THE ISBRANDTSEN VESSELS AT THEIR CURRENT MARKET VALUES IS PREMISED UPON THE PROPOSITION THAT SINCE, AS STATED ABOVE, SECTION 803 PROVIDES FOR THE ELIMINATION OF PROFIT WHERE CERTAIN OTHERWISE PROHIBITED TRANSACTIONS BETWEEN RELATED COMPANIES ARE PERMITTED BY THE BOARD, IT HAS BEEN SUGGESTED THAT THE PURCHASE OF VESSELS BY AMERICAN EXPORT LINES FROM A SUBSIDIARY OF ISBRANDTSEN COMPANY, INC., (WHICH LATTER COMPANY OWNS 25 PERCENT OF EXPORT STOCK), AT A FIGURE IN EXCESS OF THE DEPRECIATED BOOK VALUE OF SUCH VESSELS INVOLVES A PROFIT WHICH SECTION 803, IN EFFECT, WAS DESIGNED TO PROHIBIT. IN VIEW THEREOF, OUR COMMENTS IMMEDIATELY FOLLOWING WILL BE ADDRESSED TO THOSE AREAS WHICH, IN OUR OPINION, THE SECTION WAS DESIGNED TO COVER.

SECTION 803, INSOFAR AS HERE APPLICABLE, PROVIDES AS FOLLOWS:

IT SHALL BE UNLAWFUL FOR ANY CONTRACTOR RECEIVING AN OPERATING DIFFERENTIAL SUBSIDY UNDER TITLE VI OR FOR ANY CHARTERER UNDER TITLE VIII OF THIS ACT TO EMPLOY ANY PERSON OR CONCERN PERFORMING OR SUPPLYING STEVEDORING, SHIP-REPAIR, SHIP-CHANDLER, TOWBOAT, OR KINDRED SERVICES, TO SUPPLY SUCH SERVICES TO THE OPERATOR'S SUBSIDIZED OR CHARTERED VESSELS IF SUCH CONTRACTORS, OR ANY SUBSIDIARY COMPANY, HOLDING COMPANY, AFFILIATE COMPANY, OR ASSOCIATE COMPANY OF SUCH CONTRACTOR, OR ANY OFFICER, DIRECTOR, OR EMPLOYEE OF SUCH CONTRACTOR, OR ANY MEMBER OF THE IMMEDIATE FAMILY OF ANY SUCH CONTRACTOR, OFFICER, DIRECTOR, OR EMPLOYEE, OR ANY MEMBER OF THE IMMEDIATE FAMILY OF ANY OFFICER, DIRECTOR, OR EMPLOYEE, OR SUCH SUBSIDIARY COMPANY, HOLDING COMPANY, AFFILIATE COMPANY, OR ASSOCIATE COMPANY OF SUCH CONTRACTOR, OWNS ANY PECUNIARY INTEREST DIRECTLY OR INDIRECTLY IN THE PERSON OR CONCERN SUPPLYING SUCH SERVICES TO THE CONTRACTOR'S SUBSIDIZED OR CHARTERED VESSELS OR RECEIVES ANY PAYMENT OR OTHER THING OF VALUE DIRECTLY OR INDIRECTLY AS A RESULT OF SUCH EMPLOYMENT OR SERVICES, * * *. ( ITALICS SUPPLIED.)

STANDING ALONE, THE ABOVE PROVISION, IN OUR OPINION, CONTAINS NO PATENT AMBIGUITY AND, HENCE, ORDINARILY WOULD PRESENT NO PROBLEM OF CONSTRUCTION. IN OTHER WORDS, IN OUR OPINION THE LANGUAGE OF THE STATUTE IS SPECIFIC AND NOT SUBJECT TO REASONABLE DOUBT. HOWEVER, IN VIEW OF THE CONFLICTING OPINIONS AS EVIDENCED BY THE VARIOUS MEMORANDA SUBMITTED BY YOU WITH THE RECORD, WE HAVE FURTHER ANALYZED THE MATTER FOR THE PURPOSE OF ASCERTAINING AS NEARLY AS POSSIBLE THE EXACT INTENT OF THE CONGRESS DURING CONSIDERATION AND PASSAGE OF THE SECTION. AS A BASIS FOR SUCH ACTION, ATTENTION IS INVITED TO THE CASE OF BOSTON SAND COMPANY V. UNITED STATES, 278 U.S. 41, WHEREIN THE SUPREME COURT OF THE UNITED STATES COMMENTED, IN PERTINENT PART, AS FOLLOWS:

* * * IT IS SAID THAT WHEN THE MEANING OF LANGUAGE IS PLAIN WE ARE NOT TO RESORT TO EVIDENCE IN ORDER TO RAISE DOUBTS. THAT IS RATHER AN AXIOM OF EXPERIENCE THAN A RULE OF LAW, AND DOES NOT PRECLUDE CONSIDERATION OF PERSUASIVE EVIDENCE IF IT EXISTS. * * *.

A REVIEW OF THE LEGISLATIVE HISTORY IN THIS CASE LEAVES LITTLE DOUBT THAT THERE WAS AN INTENT ON THE PART OF THE CONGRESS TO MAKE IT UNLAWFUL FOR ANY CONTRACTOR OR CHARTERER UNDER THE MERCHANT MARINE ACT TO EMPLOY ANY OF THE CONCERNS SPECIFIED IN SECTION 803 TO SERVICE THE OPERATOR'S SUBSIDIZED OR CHARTERED VESSELS IF THE CONTRACTOR OR ANY SUBSIDIARY, AFFILIATE OR ASSOCIATE COMPANY OWNS ANY PECUNIARY INTEREST IN THE CONCERN SUPPLYING THE SERVICES. THIS VIEW IS CLEARLY SUBSTANTIATED BY TESTIMONY ADDUCED AT THE HEARINGS, AND BY COMMITTEE REPORTS AND STATEMENTS ON THE FLOORS OF THE RESPECTIVE LEGISLATIVE BODIES, A FEW OF WHICH FOLLOW.

IN HOUSE REPORT NO. 1277, 74TH CONGRESS, ST SESSION, ACCOMPANYING H.R. 8555, THERE IS CONTAINED THE FOLLOWING EXPLANATION:

NO SERVICES MAY BE RENDERED ANY SUCH VESSEL BY AFFILIATES, SUBSIDIARIES, OR HOLDING COMPANIES CONNECTED WITH, INDIRECTLY CONTROLLING OR CONTROLLED BY THE CONTRACTOR EXCEPT UNDER CONDITIONS PRESCRIBED BY THE AUTHORITY. ITALICS SUPPLIED.)

ATTENTION ALSO IS INVITED TO THE COMMENTS OF REPRESENTATIVE WEARIN, A MEMBER OF THE HOUSE COMMITTEE ON MERCHANT MARINE AND FISHERIES, 79 CONG. REC. 8581 (1935), IN EXPLAINING VARIOUS AMENDMENTS TO H.R. 7521, WHEREIN HE EXPLAINED AS FOLLOWS REGARDING SECTION 511 (A) WHICH, IN SUBSTANCE, BECAME FINALIZED AS SECTION 803 OF THE ACT:

THE AMENDMENT TO THIS SECTION IS INTENDED TO FORBID ANY CONTRACTOR RECEIVING A SUBSIDY FROM ENGAGING IN ANY SERVICE OTHER THAN THE STEAMSHIP BUSINESS AND TO COMPEL HIM TO CONFINE HIS STEAMSHIP ACTIVITIES EITHER DIRECTLY OR INDIRECTLY TO THE DEVELOPMENT OF THE FOREIGN SERVICE WHICH IS BEING SUBSIDIZED. IT ALSO FORBIDS A SHIPBUILDER FROM DIRECTLY OR INDIRECTLY OWNING ANY STOCK IN A SHIPOWNER OR OPERATOR WHO IS BEING SUBSIDIZED AND IT ALSO FORBIDS ANY SHIPOWNER AND OPERATOR FROM RECEIVING A SUBSIDY FROM OR OWNING ANY STOCK EITHER DIRECTLY OR INDIRECTLY IN SHIPBUILDING COMPANIES. GENERALLY SPEAKING, THE AMENDMENT WOULD PRECLUDE THE PIPING OUT OF REVENUES OF A SUBSIDIZED COMPANY TO SUBSIDIARY, AFFILIATED, OR HOLDING COMPANIES. IT PROTECTS THE INDEPENDENT STEVEDORE, TOWBOAT COMPANIES, SHIP CHANDLERS, SHIP REPAIR COMPANIES, AND SO FORTH, AGAINST UNFAIR COMPETITION FROM A STEAMSHIP COMPANY WHICH IS RECEIVING FINANCIAL AID AND PRESTIGE FROM THE GOVERNMENT. IT IS ENTIRELY FAIR TO ALL CONCERNED. IT IS WORKABLE AND SHOULD BE ENFORCED WITH EVERY COMPANY RECEIVING AID. ( ITALICS SUPPLIED.)

AND, AT THE HEARINGS BEFORE THE COMMITTEE ON MERCHANT MARINE AND FISHERIES, HOUSE OF REPRESENTATIVES, ON MARCH 19, 1935, CHAIRMAN BLAND, IN EXPLAINING THE BACKGROUND EVENTS AND ABUSES LEADING THE SUBSTANTIVE PROHIBITIONS IN THIS SECTION, STATED:

I THINK THE BLACK HEARING PRETTY WELL DEVELOPED THAT THAT WAS TRUE IN SOME SECTIONS, ESPECIALLY UNDER THE SYSTEM THAT OBTAINED BEFORE THE AWARD OF MAIL CONTRACTS. I DO NOT KNOW HOW FAR IT IS TRUE SINCE THEY AWARDED MAIL CONTRACTS, BUT IT IS MY RECOLLECTION THAT THERE WAS EVIDENCE BEFORE THE BLACK COMMITTEE, AND I HAVE READ THE BETTER PART OF THEIR TESTIMONY, THAT WHEN THEY WERE RECEIVING A LUMP SUM MANY OF THEM ORGANIZED STEVEDORING COMPANIES AND TOWBOAT COMPANIES AND OTHER COMPANIES OF THAT KIND, FOR WHICH THEY PAID VERY HIGH WAGES AND, OF COURSE, REDUCED THE PROFIT TO THE STEAMBOAT COMPANY AND INCREASED THE LUMP-SUM COMPENSATION WHICH THEY WERE RECEIVING FOR RUNNING THESE COMPANIES. I THINK IT WAS SOMETHING OF THAT KIND. ( ITALICS SUPPLIED.) WHILE, AS STATED ABOVE, THE FOREGOING EXPLANATIONS CONCERNING THE LEGISLATIVE PURPOSE IN ENACTING SECTION 803 ARE ONLY A FEW OBSERVED DURING THE COURSE OF OUR RESEARCH, WE BELIEVE THAT THE INFORMATION THUS DISCLOSED IS SUFFICIENT TO SUPPORT THE CONCLUSION OF THE MARITIME SUBSIDY BOARD THAT THE PROHIBITIONS CONTAINED IN THE SECTION WERE INTENDED TO BE DIRECTED AGAINST THOSE SPECIFIED SERVICE ACTIVITIES ENUMERATED THEREIN. FOR THESE REASONS, THEREFORE, IT IS OUR OPINION THAT SECTION 803 OF THE MERCHANT MARINE ACT, 1936, AS AMENDED, DOES NOT PRECLUDE THE TRANSACTIONS HERE INVOLVED.

THE ABOVE-MENTIONED MEMORANDA CONTAINED IN THE RECORD SUBMITTED BY YOU ALSO INDICATE OBJECTION TO THE PLAN FOR THE REASON THAT THE PRINCIPLES ENUNCIATED IN THE ADMINISTRATION'S GENERAL ORDER 24, PROVIDING FOR THE ELIMINATION OF PROFITS IN TRANSACTIONS BETWEEN RELATED COMPANIES, SHOULD BE APPLIED IN THIS CASE, THEREBY RESTRICTING AMERICAN EXPORT'S ACQUISITION COST TO ISBRANDTSEN'S BOOK VALUES.

WHILE WE ARE AWARE OF NO STATUTORY REQUIREMENT THAT THE ACQUISITION COST OF A VESSEL BY A SUBSIDIZED OPERATOR BE RESTRICTED TO THE SELLER'S BOOK VALUE, WE OBSERVE FROM THE BOARD'S STATEMENT OF MARCH 8, 1962, THAT THE PURPOSE OF GENERAL ORDER 24 IS TO AFFECT ONLY THE VALUATION OF VESSELS FOR DETERMINING CAPITAL EMPLOYED AND NET EARNINGS UNDER OPERATING-DIFFERENTIAL SUBSIDY CONTRACTS. ALTHOUGH THE BOARD RECOGNIZES THAT THE PRINCIPLES SET FORTH IN THE ORDER IMPLY THAT TRANSACTIONS BETWEEN RELATED COMPANIES SHOULD NOT BE PERMITTED TO ENRICH UNJUSTLY ONE PARTY OR THE OTHER AT THE COST OF THE AMERICAN TAXPAYER, IT, NEVERTHELESS, CONCLUDED THAT SUCH PRINCIPLES ARE HERE INAPPLICABLE BECAUSE, IN ITS OPINION, THE TRANSACTION IS NOT ONE BETWEEN RELATED COMPANIES AND NO UNJUST ENRICHMENT IS INVOLVED.

IN SUPPORT OF THIS VIEW, THE BOARD HAS REFERRED TO A CHRONOLOGY OF EVENTS LEADING TO THE SALE OF THE VESSELS HERE INVOLVED, WHICH CHRONOLOGY DEMONSTRATES THAT THE PURCHASE BY ISBRANDTSEN COMPANY, INC., OF ABOUT 25 PERCENT OF THE STOCK OF AMERICAN EXPORT LINES, AND THE SALE OF THE 14 ISBRANDTSEN VESSELS TO EXPORT FOR APPROXIMATELY THE SAME AMOUNT AS WAS PAID FOR THE STOCK WERE CONCEIVED OF AS TWO INTERRELATED AND INTERDEPENDENT PARTS OF ONE TRANSACTION. IN ESSENCE, THEREFORE, THE BOARD VIEWED THIS SERIES OF ARRANGEMENTS AS AN INDIRECT METHOD OF ACCOMPLISHING AN EXCHANGE OF ISBRANDTSEN VESSELS FOR AMERICAN EXPORT STOCK. IT ALSO IS OBSERVED THAT BY LETTER DATED SEPTEMBER 26, 1960, TO THE PRESIDENT OF ISBRANDTSEN COMPANY, INC., THE FEDERAL MARITIME BOARD APPROVED IN PRINCIPLE THE TRANSACTION IN ALL OF ITS PARTS WITH THE PROVISO "THAT THE PRICE PAID BY ( EXPORT) FOR THE ISBRANDTSEN VESSELS, ROUTES, SERVICES AND LINES WILL NOT EXCEED THE MARKET VALUE OF THE VESSELS, AT THE TIME OF SUCH ACQUISITION, AS DETERMINED BY THE MARITIME ADMINISTRATOR.' IN VIEW THEREOF, AND RELYING UPON THIS APPROVAL, THE ISBRANDTSEN COMPANY, INC., BORROWED AN AMOUNT OF MONEY SUFFICIENT TO PURCHASE THE AMERICAN EXPORT STOCK, AND THEN ACCOMPLISHED THE PURCHASE, THUS CONSUMMATING THE FIRST STAGE IN THE TRANSACTION. THE SECOND STAGE, SALE OF THE VESSELS, HAD TO AWAIT APPROVAL BY THE FEDERAL MARITIME COMMISSION AND THE MARITIME SUBSIDY BOARD. IN THE LIGHT OF THESE EVENTS, THE MARITIME SUBSIDY BOARD EXPRESSES THE OPINION THAT AT THE TIME THE PURCHASE OF STOCK AND SALE OF VESSELS WAS ARRANGED AND APPROVED BY THE FEDERAL MARITIME BOARD THERE WAS NO INTERRELATION AMONG THE COMPANIES AND, HENCE, NO NEED TO DEAL WITH THE TRANSACTIONS SEPARATELY. HOWEVER, THE BOARD IS OF THE VIEW THAT EVEN IF THE COMPONENT PARTS OF THIS SERIES OF TRANSACTIONS SHOULD BE VIEWED SEPARATELY AND THE SALE CONSIDERED AS ONE BETWEEN RELATED COMPANIES, THE FAIR PURCHASE PRICE FOR THE VESSELS IS THE MARKET VALUE AS SET UP BY THE ADMINISTRATION'S SHIP VALUATION COMMITTEE, AND IT IS REPORTED THAT ALL CONCERNED IN THEIR OFFICE AGREE THAT THE ISBRANDTSEN SHIPS ARE WORTH THE MARKET VALUE AS SET BY THE SHIP VALUATION COMMITTEE. THE BOARD ALSO POINTS OUT THAT WHEN IT IS CONSIDERED THAT THE ROUTES AND SERVICES OF ISBRANDTSEN ARE TRANSFERRED WITH THE SHIPS, NO ONE COULD JUSTIFIABLY COMPLAIN THAT THE PURCHASE PRICE IS UNFAIR TO AMERICAN EXPORT LINES, PARTICULARLY SINCE THE PLAN WAS APPROVED BY THE INDEPENDENT DIRECTORS OF AMERICAN EXPORT LINES, AND BY THE OVERWHELMING MAJORITY OF STOCKHOLDERS IN AN ELECTION IN WHICH THE ISBRANDTSEN STOCK WAS NOT VOTED.

NOTWITHSTANDING THE FOREGOING, HOWEVER, THE BOARD ADVISES THAT IT HAS ADOPTED AN ULTRACONSERVATIVE APPROACH TO THE ACCOUNTING PRACTICE TO BE FOLLOWED BY AMERICAN EXPORT LINES, AND IS REQUIRING THAT THE ABOVE MENTIONED GENERAL ORDER 24 PRINCIPLES BE FOLLOWED IN ITS SUBSIDY ACCOUNTING. THUS, FOR THE PURPOSE OF COMPUTING CAPITAL EMPLOYED AND FOR RECAPTURE, THE VESSELS WILL BE VALUED AT THEIR BOOK VALUE. ACCORDING TO THE BOARD THIS IS FOR THE PURPOSE OF AVOIDING ANY POSSIBILITY OF CRITICISM WITH RESPECT TO THE SUBSIDIES PAYABLE TO AND RECAPTURABLE FROM THE NEW ENTITY. TO ACCOMPLISH THIS END, SUCH A CONDITION WAS INCORPORATED IN THE AWARD OF OPERATING-DIFFERENTIAL SUBSIDY TO ISBRANDTSEN STEAMSHIP COMPANY, INC.-1AMERICAN EXPORT LINES, INC., ON MARCH 5, 1962.

BY WAY OF SUMMARY, THEREFORE, INSOFAR AS HERE PERTINENT WITH RESPECT TO THE PURCHASE OF THE VESSELS AT THEIR CURRENT MARKET VALUES, WE VIEW THE TERMS STIPULATED IN THE BOARD'S AWARD IN THE INSTANT CASE AS PROVIDING (1) IN THE COMPUTATION OF CAPITAL NECESSARILY EMPLOYED AND NET EARNINGS SUBJECT TO RECAPTURE, THE VALUES TO BE ASSIGNED TO THOSE VESSELS SHALL BE THE NET VALUES ON THE BOOKS OF ISBRANDTSEN COMPANY, INC., AT THE TIME TITLE TO THE VESSELS IS TRANSFERRED; (2) NO INTEREST CHARGES ON MORTGAGE INDEBTEDNESS TO ISBRANDTSEN COMPANY, INC., WILL BE CONSIDERED FOR SUBSIDY ACCOUNTING PURPOSES; (3) AMOUNTS TO BE DEPOSITED IN THE CAPITAL RESERVE FUND FOR DEPRECIATION SHALL BE SUCH AMOUNTS AS ARE ALLOWED BY THE INTERNAL REVENUE SERVICE FOR INCOME TAX PURPOSES; (4) THE ANNUAL DIFFERENCE BETWEEN THE PURCHASE PRICE OF THE VESSELS AND THE AMOUNTS SO DEPOSITED FOR DEPRECIATION SHALL ALSO BE DEPOSITED IN THE CAPITAL RESERVE FUND IN ANNUAL INSTALLMENTS OVER THE FIRST 5 YEARS OF SUBSIDIZED OPERATIONS AS VOLUNTARY DEPOSITS, AND (5) MORTGAGE INDEBTEDNESS ON THE VESSELS (WHICH IS PAYABLE IN 5 YEARS) MAY BE PAID FROM THE CAPITAL RESERVE FUND.

IT WOULD APPEAR THAT THE USE OF THE LOWER (BOOK) VALUE OF THE VESSELS WILL BE ADVANTAGEOUS TO THE GOVERNMENT BECAUSE IT WILL RESULT IN A SMALLER "CAPITAL NECESSARILY EMPLOYED" FIGURE, THEREBY ENHANCING THE GOVERNMENT'S POTENTIAL RECAPTURE POSITION. AT THE SAME TIME, THE ARRANGEMENT WHEREBY THE HIGHER AMOUNT, I.E., VESSEL PURCHASE PRICE, WILL BE USED AS THE BASIS FOR MEASURING DEPOSITS IN THE CAPITAL RESERVE FUND OVER THE FIRST 5-YEAR PERIOD OF SUBSIDIZED OPERATIONS WILL INCREASE THE FUNDS WHICH WILL BE AVAILABLE FOR FUTURE REPLACEMENT OF VESSELS.

FOR THE REASONS SET FORTH ABOVE, WE CONCUR IN YOUR CONCLUSION THAT THERE IS NO STATUTORY OR REGULATORY OBJECTION TO THE ACQUISITION OF THE VESSELS AT CURRENT MARKET VALUES.