VES-3-02/07-CO:R:P:C 111051 GEV

Ms. Phyllis E. Marcus
Chief, Branch 2
Associate Chief Counsel
(International)
Internal Revenue Service
Washington, D.C. 20224

RE: Coastwise Trade; Passengers; Foreign-Flag Vessel; 46 U.S.C. App. 289

Dear Ms. Marcus:

This is in response to your memorandum dated May 11, 1990 (your ref: CC:INTL-Br2 INTL-948-86) requesting our assistance in the application of the Jones Act to various fact patterns involving foreign-owned and foreign-operated vessels. Our findings are set forth below.

FACTS:

In developing regulations for the taxation of transportation income you are interested in determining the circumstances under which the operation of a cruise ship between a foreign port and one or more U.S. ports would be in violation of the Jones Act. You are also interested in whether the provisions of the Jones Act consider related activities performed by unrelated or related parties, or if they apply only to the activities of an individual vessel. The specific fact patterns you wish us to consider are as follows:

EXAMPLE 1. Passengers are transferred by bus from the airport in City A in the United States to a port in City B in a contiguous country. The passengers embark on a cruise on a foreign-owned vessel in City B. The vessel travels from City B to various intermediate U.S. ports. The cruise concludes at a U.S. port in City C, where the passengers disembark.

Would the facts violate U.S. Customs Service regulations if the bus is either (a) owned by the company that owns and operates the vessel; (b) the bus company is a related or an unrelated company that has a contractual - 2 -

arrangement with the owner/operator of the vessel; or (c) the bus company is an unrelated company that has a contractual arrangement with a tour company, which is related to the owner/operator or the vessel.

EXAMPLE 2. On the cruise in Example 1, passengers either disembark or go ashore temporarily to take sight-seeing excursions at an intermediate U.S. port. Would there be a violation of the Act if:

(a) Passengers are allowed to remain on shore at the intermediate U.S. port for an extended period of time (e.g., several days), but are on board when the vessel leaves port;

(b) Passengers are allowed to disembark at an intermediate U.S. port?

EXAMPLE 3. Passengers begin a cruise on a foreign-owned and operated vessel in City A in the United States. The vessel travels to one or more U.S. coastwise ports and a foreign port. The passengers disembark at a U.S. coastwise port. Is it relevant that the intermediate foreign port is: (a) a contiguous country foreign port; (b) a nearby foreign port; or (c) a foreign port?

For example, could a foreign-owned and operated vessel operate a cruise which carries passengers from Miami, Florida through the Panama Canal to Acapulco, Mexico to San Diego, California and finally to Seattle, Washington and not violate Customs regulations? Similarly, what would be the result for a foreign-owned and operated vessel that operated a cruise from New York City to Philadelphia to Nassau, and ultimately to Miami?

ISSUE:

Whether the transportation of passengers on foreign-flag vessels as described above constitute violations of 46 U.S.C. App. 289.

LAW AND ANALYSIS:

Title 46, United States Code Appendix, section 883 (46 U.S.C. App. 883), the merchandise coastwise law often called the "Jones Act", provides, in part, that no merchandise shall be transported between points in the United States embraced within the coastwise laws, either directly or via a foreign part, or for any part of the transportation, in any vessel other than a vessel built in and documented under the laws of the United States and owned by persons who are citizens of the United States (i.e., a coastwise-qualified vessel). Section 289 of title 46 (46 U.S.C. App. 289, the passenger coastwise law which appears to be more - - 3 -

relevant to your concerns) as interpreted by the Customs Service, prohibits the transportation of passengers between points in the United States embraced within the coastwise laws, either directly or by way of a foreign port, in a non-coastwise-qualified vessel (see above). For purposes of section 289, "passenger" is defined as "... any person carried on a vessel who is not connected with the operation of such vessel, her navigation, ownership, or business." (19 CFR 4.50(b)) Section 4.80a, Customs Regulations (19 CFR 4.80a, copy enclosed) is interpretive of section 289.

In its administration of 46 U.S.C. App. 289, the Customs Service has ruled that the carriage of passengers entirely within territorial waters, even though the passengers disembark at their point of embarkation and the vessel touches no other coastwise point, is considered coastwise trade subject to coastwise laws. However, the transportation of passengers to the high seas (i.e., beyond U.S. territorial waters) and back to the point of embarkation, assuming the passengers do not go ashore, even temporarily, at another United States point, often called a "voyage to nowhere", is not considered coastwise trade. It should be noted that the carriage of fishing parties for hire, even if the vessel proceeds beyond territorial waters and returns to the point of the passenger's embarkation, is considered coastwise trade.

In interpreting the coastwise laws, Customs has ruled that a point in United States territorial waters is a point in the United States embraced within the coastwise laws. The territorial waters of the United States consist of those inland U.S. waters deemed navigable, and the territorial sea, defined as the belt, 3 nautical miles wide, adjacent to the coast of the United States and seaward of the territorial sea baseline. The U.S. Coast Guard determines whether a particular body of water is deemed to be navigable waters of the United States in order to ascertain its jurisdiction to enforce the laws it administers. The U.S. Customs Service, in ascertaining its own jurisdiction to enforce the navigation laws its administers, is strongly disposed to follow the determinations of the U.S. Coast Guard in the absence on Federal judicial decisions or explicit Congressional enactment, although it is not required to do so.

In regard to Example 1 above, the relationship of the bus to the vessel in terms of ownership or contractual arrangement is irrelevant for purposes of section 289. The focus of section 289 is on the route of the vessel in question. In this fact scenario the vessel embarked passengers at a port of a contiguous foreign country (i.e., a "nearby foreign port" as defined in 19 CFR 4.80a(a)(2)), proceeded to various intermediate U.S. ports before the passengers finally "disembarked" (as defined in 19 CFR 4.80a(a)(4)) at a U.S. port. Such a voyage does not constitute coastwise transportation of passengers for purposes of section 289. It should be noted that the applicable provisions - 4 -

prohibiting the movement of passengers on foreign-based busses between United States points are set forth in 19 CFR 123.14(c)(1).

In regard to Example 2 above, if passengers either disembark (see the definitions of "embark" and "disembark" set forth in 19 CFR 4.80a(a)(4)) or go ashore temporarily to take sight-seeing excursions at an intermediate U.S. port there would be no violation of section 289 if they are either: (a) allowed to remain on shore at the intermediate U.S. port for an extended period of time (e.g., several days), but are on board when the vessel leaves the port; or (b) allowed to disembark at an intermediate U.S. port. The rationale behind this is the same as that discussed above: in both scenarios the passengers in question embarked at a non-coastwise point (City B in a contiguous foreign country) and disembarked at a U.S. coastwise point. Accordingly, there is no coastwise transportation of passengers for purposes of section 289.

In regard to Example 3 above, the relevancy of whether an intermediate foreign port is a "nearby foreign port" (as defined in 19 CFR 4.80a(a)(2)) or a "distant foreign port" (as defined in 19 CFR 4.80a(a)(3)) is crucial in determining whether or not a violation of section 289 has occurred. In the first fact pattern set forth in Example 3, the passengers embark at a coastwise point (Miami) on a voyage to several coastwise points (San Diego and Seattle) and a nearby foreign port (Acapulco). In view of the fact that the passengers are disembarking at Seattle (a coastwise port other than the port of embarkation) there is a violation of section 289 (see 19 CFR 4.80a(b)(2)). The same analysis holds true for the second fact pattern in Example 3; the passengers embark at a coastwise point (New York City) on a voyage to several coastwise points (Philadelphia and Miami) and a nearby foreign port (Nassau) with the passengers disembarking at Miami (a coastwise port other than the port of embarkation) resulting in a violation of section 289.

It should be noted, however, that in each of the two fact patterns set forth in Example 3, had a distant foreign port (see 19 CFR 4.80a(a)(3)) been substituted on the cruise itinerary for the nearby foreign ports (i.e., Acapulco and Nassau) or merely added to the existing itinerary and the passengers proceeded with the vessel to the distant foreign port, there would have been no violation of section 289 (see 19 CFR 4.80a(b)(3)).

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HOLDING:

The transportation of passengers on foreign-flag vessels as described above constitutes violations of 46 U.S.C. App. 289 as discussed above.

Sincerely,

B. James Fritz
Chief
Carrier Rulings Branch

Enclosure