The Capital Construction Fund (CCF) is a special investment program administered by the National Marine Fisheries Service (NMFS) and the Internal Revenue Service (IRS). This program allows fishermen to defer paying income tax on certain income they invest in a CCF account and later use to acquire, build, or rebuild fishing vessels.

The following sections discuss CCF accounts and the types of bookkeeping accounts that you must maintain when you invest in a CCF account. They also discuss the income tax treatment of CCF deposits, earnings, and withdrawals.

CCF Accounts

This section explains who can open a CCF account and how to use the account to defer income tax.

Opening a CCF account. If you are a U.S. citizen and you own or lease one or more eligible vessels (defined later), you can open a CCF account. Before you open your CCF account, you must enter into an agreement with the Secretary of Commerce through the NMFS. This agreement will establish the following.

• Agreement vessels. These are any eligible vessels contained in the agreement that will be the basis for the deferral of income tax.
• Planned use of withdrawals. The use of the money in your CCF account to acquire, build, or rebuild a vessel is a planned use of withdrawals.
• CCF depository. This is where your CCF funds will be held.

	You can request an application kit or get additional information from NMFS at the following address. CCF Program Financial Services Division (F/SF2) NOAA/National Marine Fisheries Service 1315 East-West Highway, 13th Floor Silver Spring, MD 20910-3282
	You can call NMFS to request an application kit or get additional information at (301) 713-2393. The fax number is (301) 713-1306.

Eligible vessels. There are two types of vessels that may be considered eligible, those weighing 5 tons or more and those weighing less than 5 tons. For each type, certain requirements must be met.

Vessel weighing 5 tons or more. This is a vessel that must meet all the following requirements to be considered eligible. The vessel must be:

• Built or rebuilt in the United States.
• Documented under the laws of the United States.
• Used commercially in the fisheries of the United States.
• Operated in the foreign or domestic commerce of the United States.

Vessel weighing less than 5 tons. A small vessel, one weighing at least 2 net tons but less than 5 net tons, must meet all the following requirements to be considered eligible. The vessel must:

• Be built or rebuilt in the United States.
• Be owned by a U.S. citizen.
• Have a home port in the United States.
• Be used commercially in the fisheries of the United States.

Deferring tax on CCF deposits and earnings. You can use a CCF account to defer income tax by taking the following actions.

• Making deposits to your CCF account.
• Excluding from income tax deposits that are assigned to certain accounts (discussed later).
• Making withdrawals from your CCF account when you acquire, build, or rebuild fishing vessels.
• Reducing the tax basis of fishing vessels you acquire, build, or rebuild to "recapture" the amounts that were previously excluded from tax.

Reporting requirements. Beginning with the tax year in which you established your agreement, you must report annual deposit and withdrawal activity to the NMFS on NOAA Form 34-82. This form is due within 30 days after you file your federal income tax return even if no deposits or withdrawals are made. For more information, contact the NMFS at the address or phone number given earlier.

Types of Accounts You Must Maintain Within a CCF

This section discusses the three types of bookkeeping accounts you must maintain when you invest in a CCF account. Your total CCF deposits and earnings for any given year are limited to the amount that can be attributed for that year to these three accounts.

Capital account. The capital account consists primarily of amounts attributable to the following items.

1. Allowable depreciation deductions for agreement vessels.
2. Any nontaxable return of capital from either (a) or (b), below.
   1. The sale or other disposition of agreement vessels.
   2. Insurance or indemnity proceeds attributable to agreement vessels.
3. Any tax-exempt interest earned on state or local bonds in your CCF account.

Capital gain account. The capital gain account consists of amounts attributable to the following items reduced by any capital losses from assets held in your CCF account for more than 6 months.

1. Any capital gain from either of the following sources.
   1. The sale or other disposition of agreement vessels held for more than 6 months.
   2. Insurance or indemnity proceeds attributable to agreement vessels held for more than 6 months.
2. Any capital gain from assets held in your CCF account for more than 6 months.

Ordinary income account. The ordinary income account consists of amounts attributable to the following items.

1. Any earnings (without regard to the carryback of any net operating or net capital loss) from the operation of agreement vessels in the fisheries of the United States or in the foreign or domestic commerce of the United States.
2. Any capital gain from the following sources reduced by any capital losses from assets held in your CCF account for 6 months or less.
   1. The sale or other disposition of agreement vessels held for 6 months or less.
   2. Insurance or indemnity proceeds attributable to agreement vessels held for 6 months or less.
   3. Any capital gain from assets held in your CCF account for 6 months or less.
3. Any ordinary income (such as depreciation recapture) from either of the following sources.
   1. The sale or other disposition of agreement vessels.
   2. Insurance or indemnity proceeds attributable to agreement vessels.
4. Any interest (not including tax-exempt interest from state and local bonds), most dividends, and other ordinary income earned on the assets in your CCF account.

Tax Treatment of CCF Deposits

This section explains the tax treatment of income that you use as the basis for CCF deposits.

Capital gains. Do not report on your income tax return any transaction that produces a capital gain if you deposit the net proceeds into your CCF account. This treatment applies to either of the following transactions.

• The sale or other disposition of an agreement vessel.
• The receipt of insurance or indemnity proceeds attributable to an agreement vessel.

Depreciation recapture. Do not report on your income tax return any transaction that produces depreciation recapture if you deposit the net proceeds into your CCF account. This treatment applies to either of the following transactions.

• The sale or other disposition of an agreement vessel.
• The receipt of insurance or indemnity proceeds attributable to an agreement vessel.

Earnings from operations. Report earnings from the operation of agreement vessels on your Schedule C or C-EZ (Form 1040) even if you deposit part of these earnings into your CCF account. Subtract any part of the earnings that you deposited into your CCF account from the amount that you would normally enter as taxable income on line 39 (Form 1040). In the margin to the left of line 39, write "CCF" and the amount of these deposits. Do not deduct these CCF deposits on Schedule C or C-EZ (Form 1040).

If you deposit earnings from operations into your CCF account and you must complete other forms such as Form 6251 or a worksheet for Schedule D, you will need to make an extra computation. When the other form instructs you to use the amount from line 37, Form 1040, do not use that amount. Instead, add lines 38 and 39, Form 1040, and use that amount.

Self-employment tax. You must use your net profit or loss from your fishing business to figure your self-employment tax. Do not reduce your net profit or loss by any earnings from operations you deposit into your CCF account.

Partnerships and S corporations. The deduction for partnership earnings from operations that are deposited into a CCF account is separately stated on Schedule K (Form 1065), line 11, and allocated to the partners on Schedule K-1 (Form 1065), line 11.

The deduction for S corporation earnings that are deposited is separately stated on Schedule K (Form 1120S), line 10, and allocated to the shareholders on Schedule K-1 (Form 1120S), line 10.

Nontaxable return of capital. Do not report on your income tax return any transaction that produces a nontaxable return of capital if you deposit the net proceeds into your CCF account. This treatment applies to either of the following transactions.

• The sale or other disposition of an agreement vessel.
• The receipt of insurance or indemnity proceeds attributable to an agreement vessel.

Tax Treatment of CCF Earnings

This section explains the tax treatment of the earnings from the assets in your CCF account when the earnings are redeposited or left in your account. However, if you choose to withdraw the earnings in the year earned, you must generally pay income tax on them.

Capital gains. Do not report on your income tax return any capital gains from the sale of capital assets held in your CCF account. This includes capital gain distributions reported to you on Form 1099-DIV or a substitute statement. However, you should attach a statement to your tax return to list the payers and the amounts and to identify the capital gains as "CCF account earnings."

Interest and dividends. Do not report on your income tax return any ordinary income (such as interest and dividends) you earn on the assets in your CCF account. However, you should attach a statement to your return to list the payers and the amounts and to identify them as "CCF account earnings."

If you are required to file Schedule B (Form 1040), you can add these earnings to the list of payers and amounts on line 1 or line 5 and identify them as "CCF earnings." Then subtract the same amounts from the list and identify them as "CCF deposits."

Tax-exempt interest. Do not report on your federal income tax return tax-exempt interest from state or local bonds you held in your CCF account. You are not required to report this interest on line 8b of Form 1040.

Tax Treatment of CCF Withdrawals

This section discusses the tax treatment of amounts you withdraw from your CCF account during the year.

Qualified Withdrawals

A qualified withdrawal from a CCF account is one that is approved by NMFS for either of the following uses.

• Acquiring, building, or rebuilding qualified vessels (defined next).
• Making principal payments on the mortgage of a qualified vessel.

Qualified vessel. This is any vessel that meets all the following requirements.

• The vessel was built or rebuilt in the United States.
• The vessel is documented under the laws of the United States.
• The person maintaining the CCF account agrees with the Secretary of Commerce that the vessel will be operated in the United States foreign, Great Lakes, or noncontiguous domestic trade or in the fisheries of the United States.

How to determine the source of qualified withdrawals. When you make a qualified withdrawal, the amount you withdraw is treated as being made in the following order from your accounts.

• First, from the capital account.
• Second, from the capital gain account.
• Third, from the ordinary income account.

Excluding qualified withdrawals from tax. Do not report on your income tax return any qualified withdrawals from your CCF account.

Reducing the tax basis of acquired, built, or rebuilt vessels. You must reduce the depreciable basis of fishing vessels you acquire, build, or rebuild when you make a qualified withdrawal that is treated as made from either the capital gain account or the ordinary income account.

Nonqualified Withdrawals

A nonqualified withdrawal from a CCF account is generally any withdrawal that is not a qualified withdrawal. Qualified withdrawals are defined under Qualified Withdrawals, earlier.

Examples. Examples of nonqualified withdrawals include the following amounts from the ordinary income account or the capital gain account.

• Amounts remaining in a CCF account upon termination of your agreement with NMFS.
• Amounts you withdraw and use to make principal payments on the mortgage of a vessel if the basis of that vessel and the bases of other vessels you own have already been reduced to zero.
• Amounts determined by IRS to cause your CCF account balance to exceed the amount that is appropriate to meet your planned use of withdrawals. (You will generally be given 3 years to revise your plans to cover this excess balance.)
• Amounts you leave in your account for more than 25 years. (There is a graduated schedule under which the percentage that is applied to determine the amount of the nonqualified withdrawal increases from 20% in the 26th year to 100% in the 30th year.)

How to determine the source of nonqualified withdrawals. When you make a nonqualified withdrawal from your CCF account, the amount you withdraw is treated as being made in the following order from your accounts.

• First, from the ordinary income account.
• Second, from the capital gain account.
• Third, from the capital account.

Paying tax on nonqualified withdrawals. In general, nonqualified withdrawals are taxed separately from your other gross income and at the highest marginal tax rate in effect for the year of withdrawal. However, nonqualified withdrawals that are treated as made from the capital gain account are taxed at a rate that cannot exceed 20% for individuals and 34% for corporations.

Partnerships and S corporations. Taxable nonqualified partnership withdrawals are separately stated on Schedule K (Form 1065), line 24, and allocated to the partners on Schedule K-1 (Form 1065), line 25. Taxable nonqualified withdrawals by an S corporation are separately stated on Schedule K (Form 1120S), line 21, and allocated to the shareholders on Schedule K-1 (Form 1120S), line 23.

Interest. You must pay interest on the additional tax due to nonqualified withdrawals that are treated as made from either the ordinary income account or the capital gain account. The interest period begins on the last date for paying tax for the tax year for which you deposited the amount that you withdrew from your CCF account. The period ends on the last date for paying tax for the tax year in which you make the nonqualified withdrawal. The interest rate on the nonqualified withdrawal is simple interest. The rate is subject to change annually and published in the Federal Register.

The current interest rate can also be obtained by calling NMFS at (301) 713-2393.

Interest deduction. You can deduct the interest you pay on a nonqualified withdrawal as a trade or business expense.

Reporting the additional tax and interest. Attach a statement to your income tax return to show your computation of both the tax and interest on a nonqualified withdrawal. Include the tax and interest on the nonqualified withdrawal on line 57 of Form 1040. To the left of line 57, write the amount of tax and interest and "CCF."

Tax benefit rule. If any portion of your nonqualified withdrawal is properly attributable to contributions (not earnings on the contributions) you made to the CCF account that did not reduce your tax liability for any tax year prior to the withdrawal year, the following tax treatment applies.

• The part that did not reduce your tax liability for any year prior to the withdrawal year is not taxed.
• That part is allowed as a net operating loss deduction.

More Information

This section briefly discussed the CCF program. For more detailed information, see the following legislative authorities.

• Section 607 of the Merchant Marine Act of 1936, as amended (46 U.S.C. 1177).
• Chapter 2, Part 259 of title 50 of the Code of Federal Regulations (50 C.F.R., Part 259).
• Subchapter A, Part 3 of title 26 of the Code of Federal Regulations (26 C.F.R., Part 3).
• Section 7518 of the Internal Revenue Code (IRC 7518).

The application kit you can obtain from NMFS at the address or phone number given earlier may contain copies of some of these sources of additional information.

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