out the purposes of this Act, but not of less than two thousand gross tons or of less speed than twelve knots, unless the Secretary shall determine and certify in each case that a vessel of a specified lesser tonnage or speed is desirable for use by the United States in case of war or national emergency, or (ii) constructed to replace a vessel or vessels requisitioned or purchased by the United States.

(3) Reconstruction and reconditioning" shall include the reconstruction, reconditioning, or modernization of a vessel for exclusive use on the Great Lakes, including the Saint Lawrence River and Gulf, if the Secretary determines that the objectives of this title will be promoted by such reconstruction, reconditioning, or modernization, and, notwithstanding any other provisions of law, such vessel shall be deemed to be a "new vessel" within the meaning of this section for such reconstruction, reconditioning, or modernization.

(4) A vessel shall be considered as constructed or acquired by the taxpayer if constructed or acquired by a corporation at a time when the taxpayer owns at least 95 per centum of the total number of shares of each class of stock of the corporation.

(5) The terms used in this section shall have the same meaning as in subtitle A of the Internal Revenue Code.

(b) For the purposes of promoting the construction, reconstruction, reconditioning, or acquisition of vessels, or for other purposes authorized in this section, necessary to carrying out the policy stated in section 2101 of this Act, any citizen of the United States who is operating a vessel in the foreign or domestic commerce of the United States or in the fisheries or owns in whole or in part a vessel being so operated, or who, at the time of purchase or requisition of the vessel by the Government, was operating a vessel so engaged or owned in whole or in part a vessel being so operated or had acquired or was having constructed a vessel for the purpose of operation in such commerce or in the fisheries, may establish a construction reserve fund, for the construction, reconstruction, reconditioning, or acquisition of new vessels, or for other purposes authorized in this section, to be composed of deposits of proceeds from sales of vessels, indemnities on account of losses of vessels, earnings from the operation of vessels documented under the laws of the United States and from services incident thereto, and receipts, in the form of interest or otherwise, with respect to amounts previously deposited. Such construction reserve fund shall be established, maintained, expended, and used in accordance with the provisions of this section and rules or regulations to be prescribed jointly by the Secretary of Commerce and the Secretary of the Treasury.

(c) (1) In the case of the sale or actual or constructive total loss of a vessel, if the taxpayer deposits an amount equal to the net proceeds of the sale or to the net indemnity with respect to the loss in a construction reserve fund established under subsection (b), then

(A) if the taxpayer so elects in his income tax return for the taxable year in which the gain was realized, or

(B) if the taxpayer so elects, in accordance with a form of election to be prescribed by the Commissioner of Internal Revenue with the approval of the Secretary of the Treasury, prior to the expiration of sixty days after receipt of payment for a vessel purchased or requisitioned by the United States, or receipt of indemnity from the United States on account of its loss, and such payment or indemnity was received subsequent to the end of the taxable year in which the vessel was purchased, requisitioned or lost, no gain shall be recognized to the taxpayer in respect of such sale or indemnification in the computation of net income for the purchases of Federal income or excess profits taxes. If an election is made under subdivision (1)(B) of this subsection and if computation or recomputation in accordance with this subsection is otherwise allowable but is prevented, on the date of making such election or within six months thereafter, by any statute of limitation, such computation or recomputation nevertheless shall be made notwithstanding such statute if a claim therefor is filed within six months after the date of making such election.

(2) For the purposes of this subsection, (A) no amount shall be considered as deposited in a construction reserve fund unless it is deposited within sixty days after it is received by the taxpayer, and (B) "net proceeds" and "net indemnity'' mean the sum of (i) the adjusted basis of the vessel and (ii) the amount of gain which would be recognized to the taxpayer without regard to this subsection.

(d) The basis for determining gain or loss and for depreciation, for the purposes of Federal income or excess profits taxes, of any new vessel constructed, recon

structed, reconditioned, or acquired by the taxpayer, or with respect to which purchase-money indebtedness is liquidated, as provided in subsection (g), in whole or in part out of the construction reserve fund, shall be reduced by that portion of the deposits in the fund expended in the construction, reconstruction, reconditioning, acquisition, or liquidation of purchase-money indebtedness of the new vessel which represents gain not recognized for tax purposes under subsection (c).

(e) For the purposes of this section, (1) if the net proceeds of a sale or the net indemnity in respect of a loss are deposited in more than one deposit, the amount consisting of the gain shall be considered as first deposited; (2) amounts expended, obligated, or otherwise withdrawn shall be applied against the amounts deposited in the fund in the order of deposit; and (3) if any deposit consists in part of gain not recognized under subsection (c), any expenditure, obligation, or withdrawal applied against such deposit shall be considered to consist of gain in the proportion that the part of the deposit consisting of gain bears to the total amount of the deposit.

(f) With respect to any taxable year, amounts on deposit on the last day of such year in a construction reserve fund in accordance with this section and with respect to which all the requirements of subsection (g) have been satisfied, to the extent that such requirements are applicable as of the last day of said taxable year, shall not constitute an accumulation of earnings or profits within the meaning of sections 531-537 of the Internal Revenue Code.

(g) The provisions of subsections (c) and (f) shall apply to any deposit in the construction reserve fund only to the extent that such deposit is expended or obligated for expenditure, in accordance with rules and regulations to be prescribed jointly by the Secretary of Commerce and the Secretary of the Treasury—

(1) under a contract for the construction or acquisition of a new vessel (or in the discretion of the Secretary, for a part interest therein), or, with the approval of the Secretary, for the reconstruction or reconditioning of a new vessel, entered into within three years from the date of such deposit, only if under such rules and regulations

(A) within such period not less than 121⁄2 per centum of the construction or contract price of the vessel is paid or irrevocably committed on account thereof and the plans and specifications therefor are approved by the Secretary to the extent by him deemed necessary; and

(B) in case of a vessel not constructed under the provisions of this part or not purchased from the Secretary, (i) said construction is completed, within six months from the date of the construction contract, to the extent of not less than 5 per centum thereof (or in case the contract covers more than one vessel, the construction of the first vessel so contracted for is so completed to the extent of not less than 5 per centum) as estimated by the Secretary of Commerce and certified by him to the Secretary of the Treasury, and (ii) all construction under such contract is completed with reasonable dispatch thereafter; or (2) for the liquidation of existing or subsequently incurred purchase-money indebtedness to persons other than a parent company of, or a company affiliated or associted with, the mortgagor on a new vessel within three years from the date of such deposit.

(h) The Secretary of Commerce is authorized under rules and regulations to be prescribed jointly by the Secretary of the Treasury and the Secretary of Commerce to grant extensions of the period within which the deposits shall be expended or obligated or within which construction shall have progressed to the extent of 5 per centum of completion as provided herein, but such exten ion shall not be for an aggregate additional period in excess of two years with respect to the expenditure or obligation of such deposits or more than one year with respect to the progress of such construction.

(i) Any such deposited gain or portion thereof which is not so expended or obligated within the period provided, or which is otherwise withdrawn before the expiration of such period, or with respect to which the construction has not progressed to the extent of 5 per centum of completion within the period provided, or with respect to which the Secretary of Commerce finds and certifies to the Secretary of the Treasury that, for causes within the control of the taxpayer, the entire construction is not completed with reasonable dispatch, if otherwise taxable income under the law applicable to the taxalbe year in which such gain was realized, shall be included in the gross income for such taxable year.

(j) Notwithstanding any other provision of law, any deficiency in tax for any taxable year resulting from the inclusion of any amount in gross income as provided by subsection (i) may be assessed or a proceeding in court for the collection

thereof may be begun without assessment, at any time: Provided, however, That interest on any such deficiency shall not begin until the date the deposited gain or portion thereof in question is required under subsection (i) to be included in gross income.

PART B-OPERating-DiffereNTIAL SUBSIDY

APPLICATION FOR OPERATING-DIFFERENTIAL SUBSIDY

SEC. 3201. (a) The Secretary is authorized and directed to consider the application of any citizen of the United States for financial aid in the operation of a vessel or vessels, which are to be used in an essential service in the foreign commerce of the United States or in such service and in cruises, authorized under section 3212 of this Act. No such application shall be approved by the Secretary unless he determines that (1) the operation of such vessel or vessels in such service, route, or line is required to meet foreign-flag competition and to promote the foreign commerce of the United States, except to the extent such vessels are to be operated on cruises authorized under section 3212 of this Act; (2) the applicant owns, or can and will build or purchase, a vessel or vessels, eligible for subsidy pursuant to the provisions of section 3210 of this Act, and of the size, type, speed and number, and with the proper equipment required to enable him to operate and maintain the service, route, or line, in such manner as may be necessary to meet competitive conditions, and to promote foreign commerce; (3) the applicant possesses the ability, experience, financial resources, and other qualifications necessary to enable him to conduct the proposed operations of the vessel or vessels as to meet competitive conditions and promote foreign commerce; (4) the granting of the aid applied for is necessary to place the proposed operations of the vessel or vessels on a parity with those of foreign competitors, and is reasonably calculated to carry out effectively the purposes and policy of this Act. To the extent the application covers cruises, as authorized under section 3212 of this Act, the Secretary may make the portion of this last determination relating to parity on the basis that any foreign-flag cruise from the United States competes with any American-flag cruise from the United States.

(b) Every application for an operating-differential subsidy under the provisions of this part shall be accompanied by statements disclosing the names of all persons having any pecuniary interest, direct or indirect, in such application, or in the ownership or use of the vessel or vessels, routes, or lines covered thereby, and the nature and extent of any such interest together with such financial and other statements as may be required by the Secretary. All such statements shall be under oath or affirmation and in such form as the Secretary shall prescribe. Any person who, in an application for financial aid under this title or in any statement required to be filed therewith, willfully makes any untrue statement of a material fact, shall be guilty of a misdemeanor.

SUBSIDY TO MEET FOREIGN-FLAG COMPETITION

SEC. 3202. Except with respect to cruises authorized under section 3212 of this Act, no contract for an operating-differential subsidy shall be made by the Secretary for the operation of a vessel or vessels to meet foreign competition, except direct foreign-flag competition, until and unless the Secretary, after a full and complete investigation and hearing, shall determine that an operating-differential subsidy is necessary to meet competition of foreign-flag ships.

CONTRACTS FOR PAYMENTS OF SUBSIDY

SEC. 3203. (a) If the Secretary approves the application, he may enter into a contract with the applicant for the payment of an operating-differential subsidy determined in accordance with the provisions of subsection (b) of this section, for the operation of such vessel or vessels in such service, route, or line and in cruises authorized under section 3212 of this Act for a period not exceeding twenty years, and subject to such reasonable terms and conditions, consistent with this Act, as the Secretary shall require to effectuate the purposes and policy of this Act. including a performance bond with approved sureties, if such bond is required by the Secretary.

(b) Such contract shall provide that the amount of the operating-differential subsidy for the operation of vessels on a service, route, or line shall not exceed the excess of the fair and reasonable cost of insurance, maintenance, repairs not compensated by insurance, wages and subsistence of officers and crews, and any other items of expense in which the Secretary shall find and determine that the appli

cant is at a substantial disadvantage in competition with vessels of the foreign country hereinafter referred to, in the operation under United States registry of the vessel or vessels covered by the contract, over the estimated fair and reasonable cost of the same items of expense (after deducting therefrom any estimated increase in such items necessitated by features incorporated pursuant to the provisions of section 3102(b) of this Act) if such vessel or vessels were operated under the registry of a foreign country whose vessels are substantial competitors of the vessel or vessels covered by the contract. For any period during which a vessel cruises as authorized by section 3212 of this Act, operating-differential subsidy shall be computed as though the vessel were operating on the essential service to which the vessel is assigned: Provided, however, That if the cruise vessel calls at a port or ports outside of its assigned service, but which is served with passenger vessels (as defined in section 3212 of this Act) by another subsidized operator at an operating-differential subsidy rate for wages lower than the cruise vessel has on its assigned essential service, the operating-differential subsidy rates for each of the subsidizable items for each day (a fraction of a day to count as a day) that the vessel stops at such port shall be at the respective rates applicable to the subsidized operator regularly serving the area.

(c) The amount of such subsidy shall be determined and payable on the basis of a final accounting made as soon as practicable after the end of each year or other period fixed in the contract. The Secretary may provide for in the contract, or otherwise approve, the payment from time to time during any such period of such amounts on account as he deems proper. Such payments on account shall in no case exceed 90 per centum of the amount estimated to have accrued on account of such subsidy, except that, with respect to that part of the subsidy relating to any particular voyage, an additional 5 per centum may be paid to the contractor after such contractor's audit of the voyage account for such voyage has been completed and the Secretary has verified the correctness of the same. Any such payments shall be made only after there has been furnished to the Secretary such security as he deems to be reasonable and necessary to insure refund of any overpayment. No such operating-differential subsidy shall be paid until the contractor shall have furnished evidence satifactory to the Secretary that the wages prescribed in accordance with subsection 3501(a) of this Act have been paid to the ship's personnel.

ADDITIONAL SUBSIDY

SEC. 3204. If in the case of any particular foreign trade route the Secretary of Commerce shall find, after consultation with the Secretary of State, that the subsidy provided for in this part is in any respect inadequate to offset the effect of governmental aid paid to foreign competitors, he may grant such additional subsidy as he determines to be necessary for that purpose.

LIMITATION ON SUBSIDIZED OPERATIONS

SEC. 3205. (a) No operating-differential subsidy shall be paid for the operation of any vessel on a voyage on which it engages in coastwise or intercoastal trade: Provided, however, That such subsidy may be paid on a round-the-world voyage or a round voyage from the west coast of the United States to a European port or ports or a round voyage from the Atlantic coast to the Orient which includes intercoastal ports of the United States or a voyage in foreign trade on which the vessel may stop at the State of Hawaii, or an island possession or island territory of the United States or the Commonwealth of Puerto Rico, and if the subsidized vessel earns any gross revenue on the carriage of mail, passengers, or cargo by reason of such coastal or intercoastal trade the subsidy payment for the entire voyage shall be reduced by an amount which bears the same ratio to the subsidy otherwise payable as such gross revenue bears to the gross revenue derived from the entire voyage. No vessel operating on the Great Lakes or on the inland waterways of the United States shall be considered for the purposes of this title to be operating in foreign trade.

(b) No operating-differential subsidy shall be paid for the operation of a vessel that is more than twenty-five years of age except (1) as otherwise provided in section 6109 of this Act, or (2) one whose life expectancy has been determined as provided in section 3207(b) of this Act for a period in no case to exceed the life expectancy determined thereunder, unless the Secretary finds that it is to the public interest to grant such financial aid for the operation of such vessel and enters a formal order thereon.

(c) Except as provided in section 3212 of this Act, no contract shall be made under this part with respect to a vessel to be operated on a service, route, or line

served by citizens of the United States which would be in addition to the existing service, or services, unless the Secretary shall determine after proper hearing of all parties that the service already provided by vessels of United States registry in such service, route or line is inadequate, and that in the accomplishment of the purposes and policy of this Act additional vessels should be operated thereon; and no contract shall be made with respect to a vessel operated or to be operated in a service, route, or line served by two or more citizens of the United States with vessels of United States registry, if the Secretary shall determine the effect of such a contract would be to give undue advantage or be unduly prejudicial, as between citizens of the United States, in the operation of vessels in competitive services, routes, or lines, unless following public hearing, due notice of which shall be given to each line serving the route, the Secretary shall find that it is necessary to enter into such contract in order to provide adequate service by vessels of United States registry. The Secretary, in determining for the purposes of this section whether services are competitive shall take into consideration the type, size, and speed of the vessels employed, whether passenger or cargo, or combination passenger and cargo, vessels, the ports or ranges between which they run, the character of cargo carried, and such other facts as he may deem proper.

CONDITIONS IN SUBSIDY CONTRACTS

SEC. 3206. Every contract for an operating-differential subsidy under this part shall provide that

(1) the amount of the future payments to the contractor shall be subject to review and readjustment from time to time, but not more frequently than once a year, at the instance of the Secretary or of the contractor in the following manner: (A) if any such readjustment cannot be reached by mutual agreement, the Secretary, on his own motion or on the application of the contractor, shall, after a proper hearing, determine the facts and make such readjustment in the amount of such future payments as he may determine to be fair and reasonable and in the public interest; (B) the testimony in every such proceeding shall be reduced to writing and filed in the office of the Secretary; and (C) the Secretary's decision shall be based upon and governed by the changes which may have occurred since the date of the said contract, with respect to the items theretofore considered and on which such contract was based, and other conditions affecting shipping, and shall be promulgated in a formal order, which shall be accompanied by a report in writing in which the Secretary shall state his findings of fact;

(2) the compensation to be paid under the contract shall be reduced, under such terms and in such amounts as the Secretary shall determine, for any periods in which the vessel or vessels are laid up;

(3) if the Secretary shall determine that a change in the service, route, or line, which is receiving an operating-differential subsidy under this part, is necessary in the accomplishment of the purposes of this Act, he may make such change upon such readjustment of payments to the contractor as shall be arrived at by the method prescribed in clause (1) of these conditions;

(4) if at any time the contractor receiving an operating-differential subsidy claims that he cannot maintain and operate his vessels on such service, route, or line, with a reasonable profit upon his investment, and applies to the Secretary for a modification or rescission of his contract to maintain such service, route, or line, and the Secretary determines that such claim is proved, the Secretary shall modify or rescind such contract and permit the contractor to withdraw such vessels from such service, route, or line, upon a date fixed by the Secretary, and upon the date of such withdrawal the further payment of the operating-differential subsidy shall cease and the contractor be discharged from any further obligation under such contract;

(5) when at the end of any ten-year period during which an operatingdifferential subsidy has been paid under a contract or consecutive contracts (such period to be computed from the end of the operator's last completed recapture period regardless of its duration, or from the beginning of subsidized operations if the operator has not previously completed a recapture period`, or when prior to the end of such ten-year period subsidized operations shall be finally terminated, if the net profit of the contractor on his subsidized vessels and services incident thereto during such period or time (without regard to capital gains and capital losses), after deduction of depreciation charges based upon a life expectancy of the subsidized vessels determined as provided in section 3207(b) of this Act, has averaged more than 10 percent per annum upon the contractor's capital investment necessarily employed