B-124619, JANUARY 19, 1956, 35 COMP. GEN. 405

B-124619, JANUARY 19, 1956, 35 COMP. GEN. 405

VESSELS - TANKER CONTRACTS - ESCALATION - DEPRECIATION SECTION 1 (B) OF TANKER CHARTER ACT OF AUGUST 10, 1954, WHICH ESTABLISHES A CEILING ON THE AMOUNT PAYABLE FOR CHARTER HIRE DOES NOT PRECLUDE PAYMENT OF A RATE IN EXCESS OF THE CEILING WHEN THE EXCESS RESULTS FROM ESCALATION IN OPERATING COSTS DURING THE PERIOD OF THE CHARTER. THE TERM "THEN DEPRECIATED VALUE" AS USED IN SECTION 1 (B) OF THE ACT OF AUGUST 10, 1954, TO ESTABLISH THE PRICE OF TANKERS FOR PURCHASE OPTION PURPOSES ON THE EXPIRATION OF THE CHARTER CONTRACTS, MEANS NORMAL DEPRECIATION ON A STRAIGHT-LINE BASIS.

TO THE SECRETARY OF THE NAVY, JANUARY 19, 1956:

REFERENCE IS MADE TO LETTER DATED JANUARY 4, 1956, FROM THE ASSISTANT SECRETARY OF THE NAVY, REQUESTING A DECISION RESPECTING (1) WHETHER ESCALATION IS PERMITTED UNDER SECTION 1 (B) OF PUBLIC LAW 575, 83D CONGRESS, 2D SESSION, 34 U.S.C. 498O, AND (2) 34 U.S.C. 498P, AN OPINION AS TO THE MEANING OF "DEPRECIATED VALUE" AS USED IN SECTION 1 (D) OF THE SAME ACT.

SECTION 1 (B), REFERRED TO IN YOUR FIRST QUESTION, PROVIDES AS FOLLOWS:

THE HIRE STIPULATED WITH RESPECT TO ANY TANKER IN ANY CHARTER PARTY ENTERED INTO UNDER THIS SECTION SHALL NOT EXCEED AN AVERAGE RATE FOR THE LIFE OF THE CHARTER PARTY OF $5 PER DEADWEIGHT TON PER MONTH: PROVIDED, THAT SUCH AVERAGE RATE WILL NOT RESULT IN THE RECOVERY OF MORE THAN TWO- THIRDS OF THE CONSTRUCTION COST OF SUCH TANKER.

STANDING ALONE, THE ABOVE PROVISION CONTAINS NO PATENT AMBIGUITY AND, HENCE, ORDINARILY WOULD PRESENT NO PROBLEM OF CONSTRUCTION. IN THE ABSENCE OF ANY EXPRESS LANGUAGE LIMITING ITS USE, IT WOULD BE REASONABLE TO HOLD THAT, FROM A STRICTLY LEGAL STANDPOINT, THE ACT PROVIDES A CEILING UPON THE AMOUNT PAYABLE FOR CHARTER HIRE WITHOUT REGARD TO AN ESCALATION PROVISION COVERING CHANGES IN THE COST OF BASIC ITEMS OF EXPENSE DURING THE PERIOD OF THE CHARTER. HOWEVER, IN THE LIGHT OF THE LEGISLATIVE HISTORY OF THE BILL, EXCERPTS OF WHICH ARE INCORPORATED IN YOUR LETTER, IT BECOMES NECESSARY TO FURTHER ANALYZE THE MATTER FOR THE PURPOSE OF ASCERTAINING AS NEARLY AS POSSIBLE THE EXACT INTENT OF THE CONGRESS DURING CONSIDERATION AND PASSAGE OF THE BILL. AS A BASIS FOR SUCH ACTION, ATTENTION IS INVITED TO THE CASE OF THE BOSTON SAND COMPANY V. UNITED STATES, 278 U.S. 41, WHEREIN THE SUPREME COURT OF THE UNITED STATES STATED, 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. * * *

ALSO, IN HELVERING V. NEW YORK TRUST COMPANY, 292 U.S. 455, THE COURT AGAIN POINTED OUT:

THE RULE THAT WHERE THE STATUTE CONTAINS NO AMBIGUITY, IT MUST BE TAKEN LITERALLY AND GIVEN EFFECT ACCORDING TO ITS LANGUAGE IS A SOUND ONE NOT TO BE PUT ASIDE TO AVOID HARDSHIPS THAT MAY SOMETIMES RESULT FROM GIVING EFFECT TO THE LEGISLATIVE PURPOSE. * * * BUT THE EXPOUNDING OF A STATUTORY PROVISION STRICTLY ACCORDING TO THE LETTER WITHOUT REGARD TO OTHER PARTS OF THE ACT AND LEGISLATIVE HISTORY WOULD OFTEN DEFEAT THE OBJECT INTENDED TO BE ACCOMPLISHED. * * * ( ITALICS SUPPLIED.)

A REVIEW OF THE LEGISLATIVE HISTORY IN THIS CASE LEAVES LITTLE DOUBT THAT, NOTWITHSTANDING THE GENERAL AND APPARENT ALL-INCLUSIVE TERMS OF THE STATUTE AS ENACTED, IT WAS CLEARLY INTENDED BY THE CONGRESS THAT ESCALATION WAS TO BE PERMITTED WITH RESPECT TO OPERATING COSTS, AND THAT THE PROVISIONS OF SECTION 1 (B) WERE NOT INTENDED TO PRECLUDE THE HIRE PAYABLE UNDER THE CHARTER FROM EXCEEDING THE $5 AVERAGE CEILING WHEN SUCH EXCESS RESULTS FROM ESCALATION ONLY. THIS VIEW IS CLEARLY SUBSTANTIATED NOT ONLY BY VARIOUS TESTIMONY ADDUCED AT THE HEARINGS, BUT IN PARTICULAR IN THE STATEMENT OF EXPLANATION PRESENTED BY SENATOR SALTONSTALL TO THE SENATE AT THE TIME OF FINAL CONSIDERATION OF THE BILL, WHICH READS IN PERTINENT PART, AS FOLLOWS:

* * * THIS LIMITATION ON THE CHARTER HIRE AS PROVIDED IN THE BILL IS INTENDED TO LIMIT THE PROFITS TO THE OWNERS, AND DOES NOT PRECLUDE THE INCLUSION OF THE NORMAL ESCALATION CLAUSE AS USUALLY INCORPORATED IN LONG- TERM CHARTERS TO COVER CHANGES IN THE COST OF BASIC ITEMS OF EXPENSE DURING THE PERIOD OF CHARTER--- ITEMS WHICH DO NOT AFFECT THE OWNER'S PROFITS. ( ITALICS SUPPLIED.)

THE INFORMATION THUS DISCLOSED APPEARS CLEARLY TO DEFINE THE CONGRESSIONAL INTENT WITH RESPECT TO THE STATUTE AND, AS SUCH, REQUIRES NO FURTHER COMMENT. ACCORDINGLY, THE QUOTED ARTICLE 4 PREPARED BY YOUR DEPARTMENT FOR INCORPORATION IN THE PROPOSED CHARTER WILL NOT BE OBJECTED TO BY THIS OFFICE.

WITH RESPECT TO YOUR SECOND QUESTION, REFERENCE IS MADE TO SECTION 1 (D) OF THE ACT, WHICH READS AS FOLLOWS:

ANY CONTRACT ENTERED INTO PURSUANT TO THIS SECTION SHALL GRANT TO THE SECRETARY OF THE NAVY AN OPTION TO PURCHASE ANY TANKER CHARTERED PURSUANT TO THIS SECTION AT THE EXPIRATION OF SUCH CONTRACT AT ITS THEN DEPRECIATED VALUE OR FAIR MARKET VALUE, WHICHEVER IS LESS, AND SHALL CONTAIN A PROVISION THAT SUCH OPTION SHALL NOT BE EXERCISED LATER THAN ONE YEAR PRIOR TO THE EXPIRATION OF SUCH CONTRACT. ( ITALICS SUPPLIED.)

THE ASSISTANT SECRETARY STATES THAT HAVING REVIEWED THE LAW AND LEGISLATIVE HISTORY AND CONCLUDED THAT "DEPRECIATED VALUE" AS USED IN THE ACT REFERS TO VALUE RESULTING FROM STRAIGHT-LINE DEPRECIATION, THE COMMANDER, MILITARY SEA TRANSPORTATION SERVICE HAS DRAFTED THE PROPOSED CHARTER FORM IN ACCORDANCE WITH SUCH INTERPRETATION. FOR THAT PURPOSE ARTICLE 60 (C) OF THE PROPOSED CHARTER DEFINES "DEPRECIATED VALUE" AS FOLLOWS:

THE DEPRECIATED VALUE OF THE VESSEL IS UNDERSTOOD TO MEAN THE VALUE OF THE VESSEL DETERMINED IN ACCORDANCE WITH SOUND ACCOUNTING PRACTICE AS A RESULT OF STRAIGHT-LINE DEPRECIATION BASED UPON A DEPRECIABLE LIFE OF TWENTY-FIVE (25) YEARS WITHOUT REGARD TO ANY ACCELERATED DEPRECIATION WHICH MIGHT BE UTILIZED BY THE CONTRACTOR FOR TAX PURPOSES OR IN CONNECTION WITH ANY FINANCING ARRANGEMENTS.

IT IS POINTED OUT THAT, IN THE OPINION OF YOUR DEPARTMENT, THE BASIC INTENT OF THE USE OF "THEN DEPRECIATED VALUE" IN THE STATUTE WAS TO PROTECT THE UNITED STATES FROM THE POSSIBILITY OF PAYING EXORBITANT PROFITS TO THE OWNER DUE TO AN INFLATED MARKET AT THE END OF THE CHARTER PERIOD AND, HENCE, SUCH PROTECTION IS FULLY ACCOMPLISHED BY AN ALTERNATIVE PURCHASE PRICE BASED ON STRAIGHT-LINE DEPRECIATION. ALSO, IT IS ALLEGED THAT STRAIGHT-LINE DEPRECIATION PROVIDES AN OBJECTIVE STANDARD WHICH IS UNIFORM TO ALL CONTRACTORS REGARDLESS OF THE BOOK VALUES THE INDIVIDUAL COMPANIES MAY ASSIGN TO THEIR RESPECTIVE VESSEL, THE PARTICULAR ACCOUNTING SYSTEM OR SYSTEMS EACH MAY USE, OR THE FINANCIAL ARRANGEMENTS MADE WITH REGARD TO CONSTRUCTION COSTS. FURTHERMORE, IT IS URGED THAT YOUR DEPARTMENT ENTERTAINS CONSIDERABLE DOUBT THAT ANY OFFER WOULD BE RECEIVED IN RESPONSE TO THE NEW INVITATION IF THE LANGUAGE OF THE STATUTE IS TO BE INTERPRETED TO MEAN OTHER THAN STRAIGHT-LINE DEPRECIATION. IN SUPPORT OF THIS VIEW, IT IS CONTENDED THAT TO CONCLUDE THAT THE STATUTE REQUIRES THE CONSIDERATION OF ANY ACCELERATED DEPRECIATION IN ARRIVING AT THE PURCHASE PRICE IS TO ARGUE THAT CONGRESS INTENDED TO INDUCE INVESTORS TO CONSTRUCT THE TANKERS BY OFFERING A TAX SAVINGS THROUGH THE USE OF ACCELERATED DEPRECIATION AND THEN INTENDED TO COMPLETELY NEGATIVE THE INDUCEMENT BY DEDUCTING FROM THE PURCHASE PRICE OF THE VESSEL THE TOTAL SAVINGS PLUS THE REMAINDER OF THE VESSEL COSTS WRITTEN OFF AS ACCELERATED DEPRECIATION.

WE CONCUR IN THE VIEWS SET FORTH ABOVE, AND WOULD ADD THAT IT IS REASONABLE TO ASSUME THAT THE CONGRESS IN SPECIFYING "VALUE" IN THE ACT CONTEMPLATED THE ACTUAL VALUE AFTER HAVING GIVEN EFFECT TO NORMAL DEPRECIATION AGAINST CONSTRUCTION COSTS OR PURCHASE PRICE OF THE VESSELS; AND NORMAL DEPRECIATION IN TERMS OF TRADE CUSTOM APPEARS TO EMBODY THE STRAIGHT-LINE BASIS EXTENDING OVER A PERIOD OF 25 YEARS, AS EVIDENCED BY ADVICE RECEIVED BY YOUR DEPARTMENT FROM THE INTERNAL REVENUE SERVICE.

IN VIEW OF THE FOREGOING, WE PERCEIVE NO OBJECTION TO THE INTERPRETATION PLACED UPON THE TERM BY YOUR DEPARTMENT, NOR TO ARTICLE 60 (C) PROPOSED TO BE INSERTED IN THE CHARTER.