Memorandum of Disapproval of Bill To Amend the Merchant Ship Sales Act of 1946

I have withheld my approval from H.R. 3419, "To amend the Merchant Ship Sales Act of 1946".

This bill provides that in certain cases the cost basis of a war-built vessel purchased prior to the enactment of the Merchant Ship Sales Act shall be the undepreciated original purchase price reduced by the net amount of the adjustment provided in section 9(b) of the Act.

The purpose of the Merchant Ship Sales Act was to establish a uniform pricing policy for the sale of Government vessels. The prices computed by the formula provided in the Act are considerably below the actual construction cost of the vessels and also below the prices of identical vessels sold prior to the date of enactment.

In order to accord prior purchasers a parity of treatment with those buying vessels subsequent to passage of the Act, section 9(b) prescribes certain procedures by which a prior purchaser voluntarily may obtain adjustments in his original price. The buyer is treated as if he purchased his vessel at the date of enactment of the Merchant Ship Sales Act, and certain previous negotiations between the buyer and the Government are taken into account in determining the net adjustment downward. Thus, among other items, the buyer is required to credit to the Government the amount of charter-hire paid by it to him for the use of his vessel during this period. The Government, in turn, credits the buyer with the taxes paid on this charter-hire and with interest on certain amounts of his investment in the vessel.

The net effect of these adjustments has usually been in favor of the Government so that the adjusted obligation of the prior purchaser has been somewhere between the price which he originally paid for the vessel and the statutory sales price.

The enactment of this bill arises primarily from the fact that the Treasury Department has ruled that for tax purposes the cost basis of a prior purchased vessel is the statutory sales price. In so ruling, the Treasury Department has held that the adjustments which raised the purchaser's obligation above the statutory sales price are in the nature of bookkeeping corrections, designed to cancel out completely the financial transactions between the Government and the shipowners who bought war-built vessels prior to the passage of the Merchant Ship Sales Act. These shipowners, on the other hand, contend that the section 9(b) language is not intended to undo the previous operations and that it merely prescribes a formula for arriving at a price which should reflect the net cost for tax purposes as well as for other purposes. On the basis of this interpretation, the shipowners argue that they ultimately will be required to pay to the Government an amount greater than the statutory sales price and that consequently the cost basis of the vessels, upon which depreciation allowances are claimed, should include this additional amount.

The fundamental question presented by this bill is which of the two interpretations of the section 9(b) provisions results in the more equitable treatment to all parties concerned. This measure would resolve the issue in favor of the shipowners' contention.

It is my belief, however, that, as a matter of principle and if no adjustment contracts had already been executed, interpretation of section 9(b) to require an undoing of all transactions prior to the enactment of the Merchant Ship Sales Act would afford more equitable treatment to both prior and subsequent purchasers and to the Government. Only this interpretation can negate the benefit to prior purchasers of profits on charterhire rates which were based upon a valuation of the vessels considerably in excess of the statutory sales price set in 1946. Furthermore, other provisions of the Merchant Ship Sales Act already provide that for certain purposes the cost basis of the vessels owned by prior purchasers shall be the statutory sales price. The consistent pattern of treatment provided in the Act would be destroyed by granting in this one subsection the concession on cost basis entailed in this measure. Finally, the benefits accruing to prior purchasers, if they are allowed to capitalize these amounts above the statutory sales price, would afford them the special operating advantages which arise from the higher depreciation allowances possible under this measure.

I am concerned, however, lest some shipowners who have already accepted price adjustments did so on the assumption that the cost basis of their vessels for tax purposes would be the original price reduced by the net amount of the adjustments under section 9(b), operating only as a pricing formula. I am advised that, as a consequence, these owners may not be able to choose the course of action which would prove the more beneficial to them taxwise--an election which will still be available to purchasers who have filed for price adjustments but have not yet accepted them. I believe, therefore, that the owners who have taken the adjustments and now find that their contracts are disadvantageous should request the Secretary of Commerce to examine the possibility of relieving them from these commitments. If it is determined that no authority exists to take such action, I believe the Congress should be requested to enact legislation which would permit these owners to be released from price adjustment commitments already made.

HARRY S. TRUMAN