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B-146819, OCTOBER 30, 1968, 48 COMP. GEN. 250

B-146819 Oct 30, 1968
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FOR THE PURPOSE OF APPLYING THE REVENUE AND RECAPTURE PROVISIONS OF OPERATING-DIFFERENTIAL SUBSIDY CONTRACTS UNDER WHICH THE INVESTMENT CREDIT AGAINST FEDERAL INCOME TAX ESTABLISHED BY THE 1962 REVENUE ACT IS NOT CONSIDERED APPLICABLE TO SUBSIDIZED OPERATORS. " AS THE BOARD IN ADMINISTERING OPERATING DIFFERENTIAL SUBSIDY CONTRACTS IS NOT A REGULATORY AGENCY WITHIN THE MEANING OF SECTION 203 (E). IS WITHOUT JURISDICTION WITH RESPECT TO A TAXPAYER THAT USES THE INVESTMENT CREDIT TO REDUCE FEDERAL INCOME TAX. 1968: REFERENCE IS MADE TO YOUR REQUEST FOR A DECISION CONCERNING A QUESTION PRESENTED IN A PETITION BY THE COMMITTEE OF AMERICAN STEAMSHIP LINES (CASL). THE ODS IS FOR THE PURPOSE OF PLACING THE OPERATIONS OF SUCH VESSELS ON A PARITY WITH THE COSTS OF THEIR FOREIGN-FLAG COMPETITORS AND IS COMPUTED UPON THE DIFFERENCE IN COST OF CERTAIN CATEGORIES OF EXPENSES COMMON TO BOTH AMERICAN AND COMPETING FOREIGN VESSEL OPERATORS.

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B-146819, OCTOBER 30, 1968, 48 COMP. GEN. 250

MARITIME MATTERS - SUBSIDIES - OPERATING-DIFFERENTIAL - RECAPTURE OF EARNINGS THE "ACTUAL TAX" DOCTRINE USED BY THE MARITIME SUBSIDY BOARD IN COMPUTING THE "NET EARNINGS" OF AMERICAN VESSEL OPERATORS SUBSIDIZED UNDER THE MERCHANT MARINE ACT, 1936, AS AMENDED, FOR THE PURPOSE OF APPLYING THE REVENUE AND RECAPTURE PROVISIONS OF OPERATING-DIFFERENTIAL SUBSIDY CONTRACTS UNDER WHICH THE INVESTMENT CREDIT AGAINST FEDERAL INCOME TAX ESTABLISHED BY THE 1962 REVENUE ACT IS NOT CONSIDERED APPLICABLE TO SUBSIDIZED OPERATORS, DOES NOT CONTRAVENE SECTION 203 (E) OF THE 1964 REVENUE ACT PRESCRIBING "TREATMENT OF INVESTMENT CREDIT BY FEDERAL REGULATORY AGENCIES," AS THE BOARD IN ADMINISTERING OPERATING DIFFERENTIAL SUBSIDY CONTRACTS IS NOT A REGULATORY AGENCY WITHIN THE MEANING OF SECTION 203 (E), AND, THEREFORE, IS WITHOUT JURISDICTION WITH RESPECT TO A TAXPAYER THAT USES THE INVESTMENT CREDIT TO REDUCE FEDERAL INCOME TAX.

TO THE SECRETARY OF COMMERCE, OCTOBER 30, 1968:

REFERENCE IS MADE TO YOUR REQUEST FOR A DECISION CONCERNING A QUESTION PRESENTED IN A PETITION BY THE COMMITTEE OF AMERICAN STEAMSHIP LINES (CASL), ON BEHALF OF ITS MEMBER LINES, FOR SECRETARIAL REVIEW OF A MARITIME SUBSIDY BOARD (MSB) DECISION RELATING TO THE INVESTMENT CREDIT PROVISIONS OF THE REVENUE ACTS OF 1962 AND 1964 IN COMPUTING EXCESS EARNINGS OF SUBSIDIZED CARRIERS FOR RECAPTURE PURPOSES.

THE MERCHANT MARINE ACT, 1936, AS AMENDED (HEREINAFTER CALLED "THE ACT"), 46 U.S.C. 1101 ET Q., PROVIDES A PROGRAM TO ASSIST IN THE DEVELOPMENT AND MAINTENANCE OF AN ADEQUATE AND WELL-BALANCED AMERICAN MERCHANT MARINE TO PROMOTE THE COMMERCE OF THE UNITED STATES AND TO AID IN THE NATIONAL DEFENSE. TITLE VI OF THE ACT, 46 U.S.C. 1117, AUTHORIZES THE MSB TO ENTER INTO A LONG TERM CONTRACT WITH AN APPROVED APPLICANT FOR THE PAYMENT OF AN OPERATING-DIFFERENTIAL SUBSIDY (ODS), DETERMINED IN ACCORDANCE WITH THE PROVISIONS OF THE ACT FOR THE OPERATION OF AMERICAN-FLAG VESSELS IN REGULAR SERVICE ON ESSENTIAL ROUTES BETWEEN AMERICAN PORTS AND CERTAIN FOREIGN PORTS. THE ODS IS FOR THE PURPOSE OF PLACING THE OPERATIONS OF SUCH VESSELS ON A PARITY WITH THE COSTS OF THEIR FOREIGN-FLAG COMPETITORS AND IS COMPUTED UPON THE DIFFERENCE IN COST OF CERTAIN CATEGORIES OF EXPENSES COMMON TO BOTH AMERICAN AND COMPETING FOREIGN VESSEL OPERATORS.

THE TERMS AND CONDITIONS OF THE ODS CONTRACTS ARE REQUIRED TO REFLECT AND TO BE CONSISTENT WITH THE SCHEME OF THE ACT (SECTION 603 (A), 46 U.S.C. 1173 (A) ). THE CONTRACTS MUST PROVIDE, AMONG OTHER THINGS, (1) FOR THE REPLACEMENT OF THE CONTRACTOR'S EXISTING VESSELS IN UNITED STATES SHIPYARDS IN ACCORDANCE WITH AN ESTABLISHED SCHEDULE (SECTION 601, 46 U.S.C. 1171); (2) FOR THE EXCLUSION OF DOMESTIC SERVICE AND THE OPERATION OF OVER-AGED VESSELS FROM SUBSIDY (SECTIONS 605 (A) AND (B), 46 U.S.C. 1175 (A) AND (B) ); (3) FOR THE REPAYMENT TO THE UNITED STATES FOR APPLICATION AGAINST THE SUBSIDY PAID AND NOT IN EXCESS THEREOF, ONE-HALF OF THE NET PROFITS OF CONTRACTOR IN EXCESS OF 10 PERCENTUM UPON THE CAPITAL INVESTMENT NECESSARILY EMPLOYED, COMPUTED ON A 10-YEAR CUMULATIVE BASIS, AFTER TAXES, EXCLUDING CAPITAL GAINS AND LOSSES, AND AFTER DEDUCTION OF DEPRECIATION CHARGES BASED UPON THE STATUTORY LIFE EXPECTANCY OF THE SUBSIDIZED VESSELS SECTION 606 (5), 46 U.S.C. 1176 (5) ); (4) FOR THE ESTABLISHMENT OUT OF GROSS EARNINGS OF A CAPITAL RESERVE FUND INTO WHICH CERTAIN SPECIFIED MONEYS, INCLUDING DEPRECIATION, ARE TO BE DEPOSITED (SECTION 607 (B), 46 U.S.C. 1177 (B) ); (5) FOR THE ESTABLISHMENT OF A SPECIAL RESERVE FUND INTO WHICH THE CONTRACTOR IS TO DEPOSIT PROFITS IN EXCESS OF 10 PERCENTUM (SECTION 607 (C), 46 U.S.C. 1177 (C) ); (6) FOR THE POWER OF THE MSB TO PRESCRIBE RULES AND REGULATIONS FOR THE ADMINISTRATION OF THE RESERVE FUND, INCLUDING THE DEFINITIONS OF THE TERMS "NET EARNINGS" AND ,CAPITAL NECESSARILY EMPLOYED" (SECTION 607 (D) (1), 46 U.S.C. 1177 (D) (1) ); (7) THAT WITH MSB APPROVAL THE CONTRACTORS MAY MAKE VOLUNTARY DEPOSITS OF EARNINGS INTO THE RESERVE FUNDS WHICH ARE THEN EXEMPT FROM ALL TAXES EXCEPT THAT IF SUCH EARNINGS ARE SUBSEQUENTLY WITHDRAWN FOR GENERAL PURPOSES THEY ARE TAXABLE AS IF EARNED DURING THE YEAR OF WITHDRAWAL (SECTION 607 (H), 46 U.S.C. 1177 (H) ); (8) THAT THE FUNDS IN THE RESERVE FUNDS MAY BE INVESTED IN CERTAIN SECURITIES AND THE EARNINGS ON THE TAX DEFERRED FUNDS ARE ALSO EXEMPT FROM TAX (SECTIONS 607 (D) (2) AND (3), 46 U.S.C. 1177 (D) (2) AND (3) ); AND (9) THAT THE CONTRACTOR KEEP ITS BOOKS, RECORDS AND ACCOUNTS IN SUCH FORM AND UNDER SUCH REGULATIONS AS MAY BE PRESCRIBED (SECTION 801, 46 U.S.C. 1211).

THE MARITIME ADMINISTRATOR'S GENERAL ORDER 31, 2D REVISION, 25 F.R. 3714, APRIL 28, 1960, CONTAINS THE CURRENT RULES AND REGULATIONS COVERING THE ESTABLISHMENT AND MAINTENANCE OF THE STATUTORY CAPITAL AND SPECIAL RESERVE FUNDS AND THE DETERMINATION OF "CAPITAL NECESSARILY EMPLOYED IN THE BUSINESS" AND "NET EARNINGS" FOR THE PURPOSES OF APPLYING THE RESERVE AND RECAPTURE PROVISIONS OF THE OPERATING DIFFERENTIAL SUBSIDY AGREEMENTS ENTERED INTO UNDER THE PROVISIONS OF THE ACT. SECTION 286.5 (B) LIMITS THE DEDUCTION FOR FEDERAL INCOME TAX IN DETERMINING NET EARNINGS TO THE TOTAL OF SUCH TAX REPORTED OR ASSESSED UPON THE TOTAL TAXABLE INCOME OF THE OPERATOR FOR THE YEAR OR OTHER ACCOUNTING PERIOD. THE FEDERAL INCOME TAX TO BE TAKEN INTO ACCOUNT IN DETERMINING THE NET EARNING UNDER SUBSIDY AGREEMENTS ENTERED INTO SINCE THE INCEPTION OF THE ACT HAVE BEEN THUS LIMITED TO THOSE TAXES PAID OR PAYABLE AS DETERMINED BY THE INTERNAL REVENUE SERVICE.

ON APRIL 27, 1965, THE MARITIME ADMINISTRATION COMPTROLLER ISSUED ACCOUNTING INSTRUCTION NO. 37, THE CONCLUDING PARAGRAPH OF WHICH PROVIDES AS FOLLOWS:

THE PROVISION FOR FEDERAL INCOME TAX DEDUCTED IN THE DETERMINATION OF NET EARNINGS FOR SUBSIDIZED OPERATIONS WILL CONTINUE TO BE COMPUTED AS PRESCRIBED IN GENERAL ORDER 31, 2D REVISION, I.E., THE TAX PROVISION SHALL NOT EXCEED THE AMOUNT PAID OR PAYABLE FOR THE YEAR OR OTHER ACCOUNTING PERIOD INVOLVED.

CASL ALLEGES THAT THE QUOTED PROVISION OF ACCOUNTING INSTRUCTION NO. 37 IS INVALID IN THAT IT REQUIRES THE INVESTMENT CREDIT PROVIDED BY THE REVENUE ACT OF 1962, 76 STAT. 960, TO BE CONSIDERED A REDUCTION IN THE SUBSIDIZED OPERATORS' COST OF SERVICE WHICH IS IN CONTRAVENTION OF SECTION 203 (E) OF THE REVENUE ACT OF 1964, 78 STAT. 33, 26 U.S.C. 38 NOTE.

ACCOUNTING INSTRUCTION NO. 37 APPEARS TO HAVE BEEN INTENDED TO BE, AND IN OUR OPINION IS, MERELY A REITERATION OF THE PRIOR REGULATIONS IN EFFECT FOR THE ACCOUNTING FOR FEDERAL INCOME TAXES BY SUBSIDIZED OPERATORS. HOWEVER, THIS IS NOT MATERIAL TO THE ISSUE INVOLVED.

THE REVENUE ACT OF 1962 GENERALLY PROVIDED A CREDIT AGAINST FEDERAL INCOME TAX EQUAL TO 7 PERCENT OF THE QUALIFIED INVESTMENT IN SECTION 38, 26 U.S.C. 46 (A) (1), PROPERTY ACQUIRED AFTER DECEMBER 31, 1961. THE LAW ALSO REQUIRED THAT THE BASIS OF SUCH PROPERTY BE REDUCED BY THE TAX CREDIT FOR THE PURPOSE OF COMPUTING DEPRECIATION. SUBSEQUENTLY, CERTAIN OF THE FEDERAL REGULATORY AGENCIES ADOPTED THE "FLOW THROUGH" CONCEPT. UNDER THIS CONCEPT THE INVESTMENT CREDIT IS CONSIDERED AS A REDUCTION IN THE REGULATED INDUSTRY'S COST OF SERVICE AND THE BENEFIT OF THE INVESTMENT CREDIT IS PASSED THROUGH TO THE INDUSTRY'S CUSTOMERS IN THE FORM OF LOWER RATES.

IN 1963 THERE WAS INTRODUCED IN THE 88TH CONGRESS H.R. 8363 WHICH PROPOSED, AMONG OTHER THINGS, TO REPEAL ENTIRELY THE REDUCTION-IN-BASIS PROVISION OF THE 1962 ACT AND TO PREVENT FEDERAL REGULATORY AGENCIES IN CERTAIN CASES FROM REQUIRING THE "FLOW THROUGH" OF THE BENEFITS OF THE INVESTMENT CREDIT TO THE CUSTOMERS OF REGULATED INDUSTRIES. (H.REPT. NO. 749, SEPTEMBER 13, 1963, AND S.REPT. NO. 830, JANUARY 28, 1964.) SAID BILL BECAME THE REVENUE ACT OF 1964, PUBLIC LAW 82-272, FEBRUARY 26, 1964, 78 STAT. 19. SECTION 203 (A), 26 U.S.C. 48, REPEALED THE REDUCTION-IN- BASIS PROVISION OF 1962 ACT OUTRIGHT. WITH RESPECT TO THE "FLOW THROUGH" CONCEPT SECTION 203 (E) PROVIDED AS FOLLOWS:

(E) TREATMENT OF INVESTMENT CREDIT BY FEDERAL REGULATORY AGENCIES.- - IT WAS THE INTENT OF THE CONGRESS IN PROVIDING AN INVESTMENT CREDIT UNDER SECTION 38 OF THE INTERNAL REVENUE CODE OF 1954, AND IT IS THE INTENT OF THE CONGRESS IN REPEALING THE REDUCTION IN BASIS REQUIRED BY SECTION 48 (G) OF SUCH CODE, TO PROVIDE AN INCENTIVE FOR MODERNIZATION AND GROWTH OF PRIVATE INDUSTRY (INCLUDING THAT PORTION THEREOF WHICH IS REGULATED). ACCORDINGLY, CONGRESS DOES NOT INTEND THAT ANY AGENCY OR INSTRUMENTALITY OF THE UNITED STATES HAVING JURISDICTION WITH RESPECT TO A TAXPAYER SHALL, WITHOUT THE CONSENT OF THE TAXPAYER, USE--

(1) IN THE CASE OF PUBLIC UTILITY PROPERTY (AS DEFINED IN SECTION 46 (C) (3) (B) OF THE INTERNAL REVENUE CODE OF 1954), MORE THAN A PROPORTIONATE PART (DETERMINED WITH REFERENCE TO THE AVERAGE USEFUL LIFE OF THE PROPERTY WITH RESPECT TO WHICH THE CREDIT WAS ALLOWED) OF THE CREDIT AGAINST TAX ALLOWED FOR ANY TAXABLE YEAR BY SECTION 38 OF SUCH CODE, OR

(2) IN THE CASE OF ANY OTHER PROPERTY, ANY CREDIT AGAINST TAX ALLOWED BY SECTION 38 OF SUCH CODE, TO REDUCE SUCH TAXPAYER'S FEDERAL INCOME TAXES FOR THE PURPOSE OF ESTABLISHING THE COST OF SERVICE OF THE TAXPAYER OR TO ACCOMPLISH A SIMILAR RESULT BY ANY OTHER METHOD.

THE MSB IN DECISION OF SEPTEMBER 29, 1967, AND IN MEMORANDUM OPINION OF NOVEMBER 13, 1967, HELD THAT SECTION 203 (E) OF THE 1964 REVENUE ACT IS NOT APPLICABLE TO THE MSB IN SUBSIDY MATTERS UNDER THE 1936 ACT. WHILE QUESTION WAS RAISED IN THE DECISION OF SEPTEMBER 29, 1967, WHETHER THE SHIPPING PROPERTY OF SUBSIDIZED OPERATORS IS "OTHER PROPERTY" WITHIN THE MEANING OF SECTION 203 (E) (2) OF THE 1964 REVENUE ACT, WE BELIEVE AS STATED IN THE LATER MEMORANDUM OPINION THAT SUCH QUESTION IS NOT ESSENTIAL TO THE BASIC QUESTION HERE INVOLVED. THE FEDERAL INCOME TAX FOR CONSIDERATION IN MSB'S DETERMINATION OF NET EARNINGS IS THE AMOUNT OF THE TAX AS FINALLY DETERMINED BY THE INTERNAL REVENUE SERVICE UNDER BOTH GENERAL ORDER 31, 2D REVISION, AND ACCOUNTING INSTRUCTION NO. 37.

CASL ALLEGES THAT SECTION 203 (E) OF THE 1964 ACT IS NOT LIMITED TO "REGULATORY" AGENCIES OF THE UNITED STATES OR TO AGENCIES HAVING JURISDICTION OVER THE REASONABLENESS OF RATES AS MAINTAINED BY MSB. FURTHERMORE, CASL URGES THAT MSB IS IN FACT A REGULATORY AGENCY AND PERFORMS MANY OF THE FUNCTIONS WHICH ARE ANALOGOUS TO THOSE PERFORMED BY ADMITTEDLY REGULATORY AGENCIES, SUCH AS THE CIVIL AERONAUTICS BOARD (CAB), THE INTERSTATE COMMERCE COMMISSION (ICC), THE FEDERAL POWER COMMISSION (FPC), AND THE FEDERAL MARITIME COMMISSION (FMC).

AS POINTED OUT BY MSB, ALL OF CASL'S CITED "REGULATORY" ACTIVITIES OF THE MSB (EXCEPT SECTIONS 9 AND 37 OF THE SHIPPING ACT, 1916, AS AMENDED, 46 U.S.C. 801, WHICH HAVE NO BEARING ON THE PROBLEM INVOLVED), ARE MERELY THE TERMS OF ODS CONTRACTS, FOR WHICH THE SUBSIDIZED OPERATORS APPLIED AND INTO WHICH THEY ENTERED FREELY AND WILLINGLY. THAT MSB IS NOT CONSIDERED AS A ,REGULATORY" AGENCY, OR AT LEAST NOT A REGULATORY AGENCY IN THE SAME CATEGORY AS THE ICC, FPC, CAB, AND FMC, IS BORNE OUT BY REORGANIZATION PLAN NO. 7 OF 1961, 75 STAT. 840, SET FORTH IN NOTE UNDER 46 U.S.C. 1111. THE VERY PURPOSE OF THE REORGANIZATION PLAN WAS TO SEPARATE THE FUNCTIONS THERETOFORE INCLUDED IN THE MARITIME ADMINISTRATION'S FEDERAL MARITIME BOARD, TRANSFERRING THE ,REGULATORY" FUNCTIONS TO THE NEWLY-CREATED FEDERAL MARITIME COMMISSION, AND LEAVING THE ,PROMOTIONAL" ACTIVITIES (INCLUDING ODS) IN THE SECRETARY OF COMMERCE, WHO THEN DELEGATED SUCH ACTIVITIES TO THE MARITIME ADMINISTRATION AND MSB.

IN ANY EVENT, HOWEVER, AND REGARDLESS OF WHAT TYPE AGENCY THE MSB MAY PROPERLY BE CALLED, WHEN THE RELATIONSHIP HERE INVOLVED BETWEEN MSB AND THE SUBSIDIZED OPERATORS IS CREATED SOLELY BY CONTRACT FREELY ENTERED INTO, WE DO NOT BELIEVE THAT SUCH RELATIONSHIP CONSTITUTES, WITHIN THE MEANING OF SECTION 203 (E) OF THE 1964 REVENUE ACT, THE MSB AS A "REGULATORY" AGENCY OR AN "AGENCY OR INSTRUMENTALITY OF THE UNITED STATES HAVING JURISDICTION WITH RESPECT TO A TAXPAYER" WHICH IS USING THE TAX INVESTMENT CREDIT TO REDUCE A SUBSIDIZED OPERATOR'S FEDERAL INCOME TAXES FOR THE PURPOSE OF ESTABLISHING THE COST OF SERVICE OF SUCH OPERATOR OR TO ACCOMPLISH A SIMILAR RESULT BY ANY OTHER METHOD.

CASL REFERS TO THE DECISION IN NORTH CENTRAL AIRLINES, INC. V CIVIL AERONAUTICS BOARD, 363 F.2D 983 (D.C. CIR. 1966), AS BEING DETERMINATIVE OF THE ISSUE. HOWEVER, WE AGREE WITH THE MSB THAT SUCH CASE IS NOT CONTROLLING IN THE DETERMINATION OF NET EARNINGS ON CAPITAL NECESSARILY EMPLOYED UNDER THE ODS CONTRACTS.

THE SUBSIDY INVOLVED IN THE NORTH CENTRAL AIRLINES CASE IS PROVIDED FOR BY SECTION 406, FEDERAL AVIATION ACT OF 1958, AS AMENDED, 49 U.S.C. 1376. THE BASIS AND PURPOSE OF SUCH SUBSIDY IS DESCRIBED IN THE CASE TRANS WORLD AIRLINES, INCORPORATED V CIVIL AERONAUTICS BOARD, 385 F.2D 648 (D.C. CIR. 1967) AT PAGE 653, AS FOLLOWS:

THE TERMS "SERVICE" AND "SUBSIDY" DO NOT APPEAR IN THE ACT BUT ARE WIDELY USED TO DESCRIBE THE DIFFERENT FORMS OF MAIL PAY PROVIDED IN SECTION 406. THE "SERVICE" MAIL RATE, PAID BY THE POSTMASTER GENERAL, COMPENSATES CARRIERS FOR TRANSPORTATION OF MAIL, AND IS BASED ON THE COST OF PERFORMING MAIL SERVICE INCLUDING COST OF EQUIPMENT USED AND A FAIR RETURN ON THE CAPITAL ALLOCABLE TO THE MAIL SERVICE. IN ADDITION THE BOARD MAKES "SUBSIDY" PAYMENTS TO MAIL-CERTIFICATED CARRIERS WHOSE OPERATIONS ARE NOT SELF-SUSTAINING ON THE BASIS OF COMMERCIAL REVENUES AND SERVICE MAIL PAY. SECTION 406 (B) PROVIDES THAT THE "SUBSIDY" IS BASED ON: THE NEED OF EACH SUCH AIR CARRIER (OTHER THAN A SUPPLEMENTAL AIR CARRIER) FOR COMPENSATION FOR THE TRANSPORTATION OF MAIL SUFFICIENT TO INSURE THE PERFORMANCE OF SUCH SERVICE, AND, TOGETHER WITH ALL OTHER REVENUE OF THE AIR CARRIER, TO ENABLE SUCH AIR CARRIER UNDER HONEST, ECONOMICAL, AND EFFICIENT MANAGEMENT, TO MAINTAIN AND CONTINUE THE DEVELOPMENT OF AIR TRANSPORTATION TO THE EXTENT AND OF THE CHARACTER AND QUALITY REQUIRED FOR THE COMMERCE OF THE UNITED STATES, THE POSTAL SERVICE, AND THE NATIONAL DEFENSE. THE SUBSIDY COMPREHENDS WHAT THE CARRIER "NEEDS" FOR "DEVELOPMENT," AS WELL AS FOR CURRENT OPERATIONS, AND FOR NON-MAIL SERVICE AS REQUIRED FOR OUR COMMERCE AND NATIONAL DEFENSE. A SERVICE RATE APPLIES ONLY TO MAIL CARRIED, WHILE THE SUBSIDY IS BASED ON MILES FLOWN. DURING THE PERIOD INVOLVED SERVICE RATES WERE BASED ON COSTS OF ALL CARRIERS IN THE GROUP, WHILE THE SUBSIDY MAIL RATE WAS BASED ON THE FINANCIAL NEEDS OF EACH CARRIER. THE AMOUNT OF SERVICE MAIL PAY, ESTABLISHED AT A GROUP RATE OF 85 CENTS PER TON MILE FOR MAIL CARRIED, IS NOT CONTESTED IN THIS CASE.

IN THE DETERMINATION OF THE "NEED" OF AN AIR CARRIER FOR SECTION 406 SUBSIDY, THE OVERALL FINANCIAL CONDITION OF THE CARRIER IS TAKEN INTO CONSIDERATION. IN SUCH CIRCUMSTANCES AND SINCE THE ACTUAL TAX PAID (AFTER DEDUCTION OF INVESTMENT CREDIT), WAS USED IN THE SUBSIDY COMPUTATION, THE CARRIER WAS DENIED THE BENEFIT OF THE INVESTMENT CREDIT. THIS WAS HELD IN THE NORTH CENTRAL AIRLINES CASE TO BE IN VIOLATION OF SECTION 203 (E) OF THE 1964 REVENUE ACT.

UNDER THE ODS CONTRACTS THE SUBSIDY IS FOR THE PURPOSE OF ENABLING UNITED STATES-FLAG OPERATORS TO COMPETE WITH THEIR FOREIGN-FLAG COMPETITORS. THE SUBSIDY IS COMPUTED UPON THE DIFFERENCE IN COST OF CERTAIN CATEGORIES OF EXPENSES COMMON TO BOTH THE UNITED STATES AND COMPETING FOREIGN VESSEL OPERATORS. NO CONSIDERATION IS GIVEN TO THE FINANCIAL NEED OF THE CONTRACTOR FOR THE SUBSIDY. THE CONTRACTOR IS NOT GUARANTEED A PROFIT NOR IS HIS PROFIT LIMITED BY THE SUBSIDY. AS A PART OF THE PROGRAM, HOWEVER, THE ODS CONTRACTS PROVIDE FOR REPAYMENT TO THE UNITED STATES OF ONE-HALF OF THE NET PROFITS, BUT NOT IN EXCESS OF THE SUBSIDY PAID, IN EXCESS OF 10 PERCENTUM UPON THE CAPITAL INVESTMENT NECESSARILY EMPLOYED, COMPUTED ON A 10-YEAR CUMULATIVE BASIS. THUS, UNLESS A CONTRACTOR HAS PROFITS ON CAPITAL EMPLOYED IN THE SUBSIDIZED OPERATIONS WHICH EXCEED 10 PERCENT OVER A 10-YEAR PERIOD, HE KEEPS ALL PROFITS INCLUDING ANY INVESTMENT TAX CREDIT TO WHICH HE MAY BE ENTITLED. THE CONTRACTOR'S PROFITS FROM OTHER THAN THE SUBSIDIZED OPERATIONS ARE NOT TOUCHED.

THE WHOLE SCHEME OF THE SUBSIDY FOR AMERICAN-FLAG VESSEL OPERATORS UNDER THE ODS CONTRACTS, PARTICULARLY WHEN CONSIDERATION IS GIVEN TO THE TAX FREE RESERVE FUNDS WHICH ARE FOR THE PURPOSE OF ENABLING A CONTRACTOR TO ACCUMULATE CAPITAL FOR THE MODERNIZATION OF HIS EQUIPMENT, IS VASTLY DIFFERENT FROM THE SUBSIDY PROVIDED FOR AIR CARRIERS ON A "NEED" BASIS UNDER SECTION 406 OF THE FEDERAL AVIATION ACT. IN VIEW THEREOF, IT WOULD TAKE EMPHATIC LANGUAGE FROM THE CONGRESS TO MAKE US CONCLUDE THAT SECTION 203 (E) OF THE REVENUE ACT OF 1964 WAS INTENDED TO REPEAL THE "ACTUAL AX" DOCTRINE CONSISTENTLY USED IN THE COMPUTATION OF NET EARNINGS OF SUBSIDIZED VESSEL OPERATORS UNDER THE ODS CONTRACTS ENTERED INTO PURSUANT TO THE MERCHANT MARINE ACT OF 1936.

ACCORDINGLY, YOU ARE ADVISED THAT, IN OUR OPINION, THE MARITIME ADMINISTRATION/MARITIME SUBSIDY BOARD IN THE ADMINISTERING OF THE PROVISIONS OF ODS CONTRACTS, IS NOT AN "AGENCY OR INSTRUMENTALITY OF THE UNITED STATES HAVING JURISDICTION WITH RESPECT TO A TAXPAYER" WITHIN THE MEANING OF SECTION 203 (E) OF THE 1964 REVENUE ACT, AND THAT, THEREFORE, THE PROVISIONS OF SECTION 286.5 (B) OF GENERAL ORDER 31, 2D REVISION, AND ACCOUNTING INSTRUCTION NO. 37 PROVIDING FOR THE USE OF "ACTUAL TAX" IN THE DETERMINATION OF NET EARNINGS UNDER ODS CONTRACTS ARE NOT INVALID.

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