Final Regs for Passenger Tax on Water Transportation

 [4830-01]

 ACTION: Final Regulations.

 SUMMARY: This document contains regulations that implement the tax on the transportation of passengers on covered voyages by certain vessels under sections 4471 and 4472 of the Internal Revenue Code ("the Code") as enacted by section 7504 of the Revenue Reconciliation Act of 1989 (Pub. L. 101-239, 103 Stat. 2106, 2362). These regulations affect persons providing transportation by water.

 EFFECTIVE DATE: These regulations are effective for voyages beginning on or after January 1, 1990.

 FOR FURTHER INFORMATION CONTACT: Edward B. Madden, Jr., on (202) 566-4077 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

BACKGROUND

This document contains final regulations to be added to part 43 of title 26 of the Code of Federal Regulations ("CFR") under sections 4471 and 4472 of the Code. On Friday, October 12, 1990, the Internal Revenue Service ("the Service") published temporary regulations in the Federal Register (T.D. 8314; 55 FR 41519, as corrected in 55 FR 46667) on the Excise Tax on Transportation by Water under section 4471. A Notice of Proposed Rulemaking cross-referencing the temporary regulations was published the same day in the Federal Register (55 FR 41546). Also on Friday, October 12, 1990, the Service published a Notice of Proposed Rulemaking in the Federal Register (55 FR 41545, as corrected in 55 FR 46132) proposing regulations under section 4472. Further, on Thursday, January 3, 1991, the Service published a Notice of Proposed Rulemaking in the Federal Register (56 FR 233) proposing amendments to the regulations on the Excise Tax on Transportation by Water (26 CFR part 43) by cross-reference to temporary regulations published the same day in the Federal Register (T.D. 8328; 56 FR 179). Written comments responding to the notices were received and a public hearing was held on April 8, 1991.

EXPLANATION OF PROVISIONS

 The regulations provide taxpayers with rules and definitions for complying with the tax imposed by section 4471 of the Code. The preamble to the proposed regulations generally explains the provisions of the regulations except as discussed below.

 Section 4471 of the Code imposes a tax of $3 per passenger on a covered voyage to be paid by the person providing the covered voyage. The tax is to be imposed only once for each passenger, either at the time of first embarkation or disembarkation in the United States. A "covered voyage" is a voyage of a commercial passenger vessel that extends over one or more nights, or of a commercial vessel that transports passengers engaged in gambling aboard the vessel beyond the territorial waters of the United States. A passenger vessel is any vessel with stateroom or berth accommodations for more than 16 passengers.

 One commentator suggested that the regulations should clarify that a single "voyage" does not encompass different sets of passengers. In keeping with the definition of "covered voyage" contained in section 4472 of the Code, the regulations define "voyage" in relation to the movement of a vessel and independent of the itinerary of the passengers of the vessel. The itinerary of a passenger or of a group of passengers may include all or any part of a voyage by a vessel.

 Several commentators suggested that the definition of "over 1 or more nights" as 18 or more hours including midnight fails to take account of the customary practices of the charter fishing industry. Commentators suggested that the definition should be revised to include one complete period of darkness. The Service and the Treasury Department believe that this definition is too expansive and is not consistent with Congressional intent. For example, under the suggested definition, a voyage commencing after nightfall on day one would not extend for one complete period of darkness until sunrise on day three. However, in order to address the commentators' concerns, the final regulations provide that a voyage extends over 1 or more nights if it extends for more than 24 hours.

 Several commentators suggested that the regulations may be in conflict with recognized principles of international law. They contended that, to the extent the tax applies to foreign vessels conducting gambling outside the territorial waters of the United States, the United States lacks both territorial and subject jurisdiction over the activity being taxed and that by failing to limit the application of the tax the regulations make an unwarranted assumption of extra-territorial jurisdiction. One commentator cited Equal Employment Opportunity Commission v. Arabian American Oil Company, 111 S.Ct. 1227 (1991) (Aramco), for the proposition that "legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States." Another commentator suggested that the tax is a de facto income tax on revenue derived from gambling and that imposition of such a tax is in violation of tax treaties between the United States and other countries.

 The activity being taxed, the first embarkation or disembarkation in the United States of passengers on a covered voyage, is within the territorial jurisdiction of the United States. The tax is not imposed on gambling activities, or on income derived from gambling activities; rather, gambling is only one element in the determination of whether a voyage is a "covered voyage" for purposes of imposing the tax. In addition, the statutory language on its face unambiguously indicates that Congress intended activities outside the territorial limits of the United States to be considered in determining whether a voyage is a "covered voyage." Therefore, the tax is a legitimate and well recognized exercise of territorial jurisdiction.

 One commentator recommended that at least 10 percent of a vessel's gross income should be derived from gambling before passengers are considered to be engaged in gambling aboard the vessel. This recommendation is not adopted because it would (in many cases) preclude the operator from passing the tax on to the passenger because the gambling revenues of the vessel could not be determined until the end of the voyage. A rule based on determining the percentage of gross receipts from various sources would also be more difficult for taxpayers to comply with and for the Service to administer.

 A commentator suggested that the tax be limited to persons who actually gamble. This comment was not adopted because the statute makes no such distinction; it imposes the tax on each passenger on a covered voyage. Moreover, the Service could not administer a tax that depended on a passenger's conduct on the vessel.

 In response to a comment, the final regulations modify the definition of "passenger" to exclude persons who, although routinely carried aboard vessels, are not paying passengers. Thus, the Master, the crew, and other persons actively engaged in the business of the vessel or its owners (such as, lecturers, instructors or group tour leaders in the employ of the vessel or its owners) are not "passengers" subject to the tax. On the other hand, persons on "familiarization" or promotional trips such as independent travel agents, vendors, contest winners, and tour group leaders not in the employ of the vessel or her owners are "passengers" subject to the tax.

REQUIREMENTSFOR FILING RETURNS, PAYING TAX, AND USING GOVERNMENT DEPOSITARIES

For the rules relating to filing returns, paying tax, and using government depositaries, see the regulations under 26 CFR part 40.

SPECIAL ANALYSES

 It has been determined that these rules are not major rules as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required. It has also been determined that section 553(b) of the Administrative procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a final Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of the proposed rulemaking for the regulations was submitted to the Administrator of the Small Business Administration for comment on their impact on small business.

DRAFTING INFORMATION

 The principal author of these regulations is Edward B. Madden, Jr., Office of Assistant Chief Counsel (Passthroughs & Special Industries), Internal Revenue Service. Other personnel from the Service and Treasury Department, however, participated in their development.

LIST OF SUBJECTS IN 26 CFR PART 43

 Excise taxes, Gambling, Transportation by water, Vessels.

Treasury Decision 8422

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR, part 43, is amended as follows:

Paragraph 1. The authority citation for part 43 continues to read in part as follows:

Authority 26 U.S.C. 7805 * * *

Par. 2. Section 43.0-1T is redesignated as section 43.0-1 and the section heading is amended by removing "(temporary)".

Par. 3. Section 43.4471-1T is redesignated as section 43.4471-1 and the section heading is amended by removing "(temporary)".

Par. 4. New section 43.4472-1 is added to read as follows:

SECTION 43.4472-1 DEFINITIONS.

(a) IN GENERAL. For definitions of the terms "covered voyage" and "passenger vessel," see sections 4472(1) and (2).

(b) VOYAGE. For purposes of this section, "voyage" means a journey of a vessel that includes the outward and homeward trips or passages. The voyage commences when the vessel begins to load passengers and continues during the entire ensuing period until the vessel has made one outward and one homeward passage (including intermediate passages, if made). A voyage may be a covered voyage with respect to a passenger even if the passenger does not make both an outward and homeward passage or if the point of first embarkation or disembarkation by the passenger in the United States is an intermediate stop of the vessel.

(c) OVER 1 OR MORE NIGHTS. A voyage is considered to extend over 1 or more nights if it extends for more than 24 hours.

(d) ENGAGED IN GAMBLING. A passenger is engaged in gambling aboard a vessel if that person is participating as a player in any policy game or other lottery, or any other game of chance, for money or other thing of value, provided that the policy game, other lottery, or game of chance is conducted, sponsored, or operated by the owner or operator of the vessel, as either principal or agent, or by an employee, agent, or franchisee of the owner or operator of the vessel. A passenger is not engaged in gambling aboard a vessel if the passenger participates with other passengers in a casual, "friendly" game of chance that is not conducted, sponsored, or operated by the owner or operator of the vessel or by an employee, agent, or franchisee of the owner or operator.

(e) TERRITORIAL WATERS. For purposes of sections 4471 and 4472, the territorial waters of the United States are those waters within the international boundary line between the United States and any contiguous foreign country or within 3 nautical miles (3.45 statute miles) from low tide on the coastline. No inference is intended as to the extent of the territorial limits for other federal tax purposes.

(f) PASSENGER. For purposes of section 4471 and 4472, "passenger" means an individual carried on the vessel except --

(1) The Master; or

(2) A crew member or other individual engaged in the business of the vessel or her owners. A person is engaged in the business of the vessel or her owners if the person is an employee of the vessel or her owners or has a duty, contractual or otherwise, to perform on the vessel on behalf of the vessel or her owners. For example, a person engaged as an entertainer, instructor, or lecturer for the benefit of the passengers is not a passenger, but a person on a promotional trip such as a travel agent or contest winner is a passenger even though the vessel or her owners may derive some future benefit from the promotion.