513 F.2d 1342 (Fed. Cir. 1975), 375-69, Lykes Bros. S. S. Co., Inc. v. United States

Docket Nº:375-69
Citation:513 F.2d 1342
Party Name:Lykes Bros. S. S. Co., Inc. v. United States
Case Date:March 19, 1975
Court:Court of Federal Claims

Page 1342

513 F.2d 1342 (Fed. Cir. 1975)




No. 375--69.

United States Court of Claims.

March 19, 1975

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Daniel M. Gribbon, Washington, D.C., Atty. of record, for plaintiff; Harris Weinstein, John D. Taurman, Covington & Burling, Washington, D.C., of counsel.

Gilbert W. Rubloff, Washington, D.C., with whom was Asst. Atty. Gen. Scott P. Crampton, for defendant.

Valentine Brookes, San Francisco, Cal., filed a brief for Pacific Transport Co. and subsidiaries as amicus curiae; Lawrence v. Brookes, Brookes, Brookes & Vogl, San Francisco, Cal., of counsel.



COWEN, Chief Judge

This case concerns the application of the investment tax credit provisions of the Internal Revenue Code of 1954, 26 U.S.C. ss 38, 46--48, and the applicable regulations. 1 Plaintiff, Lykes Brothers Steamship Company, is a Louisiana corporation engaged in foreign commerce as a common carrier. It is the successor in interest to a prior corporation of the same name which operated the steamship business in 1962 (both corporations are referred to herein as plaintiff or taxpayer).

Plaintiff originally filed suit to recover an alleged overpayment of its Federal income tax for tax years 1958 through 1962. The claims for the years 1958 through 1961 were settled by the parties

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and dismissed by a stipulation filed with the court on February 8, 1974. The settlement also disposed of all issues raised by the taxpayer with respect to its tax liability for 1962, other than the single issue presented here for resolution. 2

The specific issue presently confronting us is whether certain vessels constitute property 'the construction * * * of which is completed by the taxpayer after December 31, 1961' in accordance with section 48(b)(1) so that plaintiff is entitled only to a limited tax credit, or whether the investment credit for these ships should be measured by plaintiff's entire basis in the vessels pursuant to section 48(b)(2). Since we find that the vessels in question were not constructed 'by the taxpayer' within the purview of section 48(b)(1) and instead were property 'acquired after December 31, 1961' under section 48(b)(2), plaintiff was entitled to compute its investment tax credit based on the entire basis in the vessels. It may, therefore, recover on its claim.

There is little, if any, dispute as to the facts which are material to the resolution of the legal issues. Plaintiff operates a fleet of 21 vessels of the Gulf Pride class built under the construction-differential subsidy (CDS) program established by the Merchant Marine Act of 1936, ch. 858, ss 501--09, 49 Stat. 1995, as amended, 46 U.S.C. ss 1151--1161. The CDS program has been administered at various times by the Federal Maritime Board (FMB) and the Maritime Administration (MARAD), and these agencies are sometimes collectively referred to herein as Maritime. 3 The program was designed to put American shipowners on equal footing with their foreign counterparts. The Government subsidy covers the difference between the amount it costs an American operator to get his ship built in the United States and what its foreign competitors would have to pay for a similar ship constructed by a foreign shipbuilder. At the time of the construction of the vessels in question, the subsidy normally totaled 50--55 percent of the actual construction costs.

In return for the payment of the construction subsidy, the Government exercises certain controls over the construction projects. Prior to the award of a construction subsidy, Government approval of the design of the new vessels and its determination, among other things, that such new vessels will aid in the promotion of the foreign commerce of the United States are required. 46 U.S.C. s 1151(a). A Government finding that the vessels will be suitable for use in national defense, if required, is also a prerequisite to the subsidy award. 46 U.S.C. s 1151(b). Maritime maintains an Office of Ship Construction, which reviews the financial, economic, and technical data and presentations that are submitted by prospective shipowners in support of CDS applications. To discharge these functions, the Office contains a qualified and competent technical staff, including architects and engineering specialists.

This case involves four vessels, the Leslie Lykes, the Brinton Lykes, the Shirley Lykes, and the Marjorie Lykes, which were constructed under the CDS program. The circumstances leading to the construction of these vessels began in the early 1950's. At the start of the Korean War, the American Merchant Marine was composed primarily of ships built prior to or during World War II. Anticipating that the nation's fleet would soon be obsolete, Maritime began

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various programs to replace and modernize the fleet. In 1950, the Government began construction of a number of cargo vessels under the designation known as the 'Mariner.' These vessels had the largest cargo designation (C4) and were capable of surface speeds of 20 knots or more. After the ships were built by the Government, they were ultimately sold or leased. Shortly thereafter, Maritime's staff devised and prepared plans, specifications, and designs for a number of cargo vessels, including a designation called the 'Clipper,' which was to be the replacement for the medium-sized C2 and C3 class vessels.

Starting in 1954, Maritime asked plaintiff and other shippers to comment on the suitability of the 'Mariner' and the 'Clipper' as replacement vessels for their fleets. Plaintiff advised Maritime that neither design was satisfactory and countered with a suggestion for a more acceptable replacement vessel. Although the counterproposal was of the same general character as the Maritime 'Clipper' proposal, it differed from it in nearly every respect except for the type of machinery and the number of passengers it could hold. The major differences were in the beam, the horsepower, and the normal sea speed. 4 Plaintiff's initial proposal (as well as the ship finally constructed) was essentially a different vessel from that originally suggested by the Government.

While not rejecting plaintiff's proposal out of hand, Maritime informed plaintiff in mid-1955 that the data and specifications presented on the proposed vessel lacked the detail necessary for a decision on plaintiff's application for CDS. Maritime recommended that plaintiff obtain expert assistance for this purpose, whereupon plaintiff retained Gibbs and Cox as its naval architects to prepare the necessary design and specification work. In December 1955, plaintiff applied to Maritime for CDS and supported the application by an 'outline specification' which had been prepared by Gibbs and Cox. Although these plans did not contain sufficient detail for bids or construction by a shipyard sufficient data was provided to define the type and quality of ship suitable for plaintiff's needs and to enable Maritime to determine whether such a vessel was acceptable to it.

Plaintiff's proposed vessel had 8,500 horsepower, with a maximum sustained speed capability of 16.7 knots. In February 1956, Maritime and plaintiff met in Washington, D.C. to discuss this portion of plaintiff's proposal. At this meeting Maritime continued to adhere to its original 18-knot speed requirement by invited plaintiff to offer further submissions demonstrating that 18 knots was not a necessary requirement for plaintiff's particular trade. In November 1956, on the basis of facts submitted by plaintiff, a compromise was made in which Maritime agreed to a vessel with a 17.5-knot speed capacity and 9,000 horsepower. In a letter to plaintiff dated November 30, 1956, Maritime supplemented a recitation of the terms of the speed and horsepower agreement with the following:

* * * (I)t is to be understood that the said action does not constitute approval of the basic design in its entirety, but is limited to the speed question. It remains incumbent upon you to have your design agent submit 12 sets of a complete preliminary design at the earliest possible date in order that the Office of Ship Construction and Repair may advise the Federal Maritime Board, from an engineering standpoint, with respect to the adequacy of the revised design on an overall basis in relation to the needs of the service, and so that the appropriate other Offices of the Maritime Administration may furnish their comments to the Federal Maritime Board with respect to said revised design.

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After a compromise was reached concerning the speed and horsepower requirement, Maritime approved the application for CDS for five vessels, subject to further approval of the bidding or contract plans and specification to be developed by Gibbs and Cox. When the contract plans and specifications were submitted, Maritime critically reviewed them through various interdepartmental committees, and this examination generated almost 400 adverse comments. These comments were the subject of further discussions resulting in compromises which were ultimately approved by Maritime. Thereafter, the contract plans and specifications were used to invite construction bids from domestic shipyards, and Maritime determined the eligibility and responsibility of each bidder.

The construction contracts for the four ships involved in this case were awarded to the Bethlehem Steel Company and its subsidiary, the Bethlehem-Sparrows Point Shipyard, Inc. (hereinafter collectively referred to as Bethlehem) for construction in the shipyard located at Sparrows Point, Maryland. The vessels were constructed under two contracts: one entered into in 1958 (FMB--83), for the Leslie Lykes, and...

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