States Steamship Company v. Internal Revenue Service

The plaintiff, States Steamship Company (“States”), is a common carrier operating cargo vessels. It qualified for and received operating subsidies from the Maritime Administration (“MARAD”) pursuant to the Merchant Marine Act of 1936, ch. 858, 49 Stat. 1985 , 46 U.S.C. §§ 1101 et seq. (“the Act”). As a condition to receiving subsidies, States was required under section 607(b) of the Act to create and maintain a capital reserve fund out of its gross earnings and to deposit into this fund an amount equal to its annual depreciation on the subsidized vessels. States also entered into a closing agreement with the Internal Revenue Service (“the IRS”) in order to effect a uniform solution to tax problems arising under section 607 of the Act. If the amount of depreciation deposits required by MARAD exceeded the amount of depreciation normally allowed for tax purposes, then the excess deposit was tax-deferred. It is this excess depreciation that underlies the controversy in this case.

Pursuant to the Act, MARAD promulgated regulations pertaining to the method of computing depreciation of the subsidized vessels in relation to the required deposits to the shipper’s capital reserve fund. The…