financing assistance. Finally, two more vessels are on 
order (with no request for government aid to date) 
for potential use in the U.S. import trade. Orders 
could soon be forthcoming for as many as 16 more 
LNG vessels to carry U.S. gas imports. 
The prospects for U.S. shipping and shipbuilding 
in the LNG area will depend on future policy re- 
sponses to such issues as the growing public concern 
for the safety of LNG transport °° and the concern 
over increased U.S. reliance on foreign energy 
sources. One important potential source of LNG 
carrier employment was recently eliminated by the 
President’s decision to support the trans-Canada 
pipeline option for transporting Alaska natural gas 
to the “lower-48.” Had the trans-Alaska option been 
adopted, it is estimated that from 8 to 11 LNG car- 
riers would have been used in the transportation 
operation from the liquefaction plant in Southern 
Alaska to regasification facilities on the West Coast. 
The issue of U.S. ownership of foreign-flag ship- 
ping and the defense utility of such shipping has long 
been debated. Ji is likely that this issue will continue 
to be argued, particularly in conjunction with discus- 
sions of U.S. policies which tend to aid the owners 
of foreign tonnage. 
As indicated previously, the lapse in authority 
under the War Risk Insurance Program from Sep- 
tember 1975 through October 1976 can be traced to 
Congressional concern over the appropriateness of 
providing war risk insurance coverage to foreign-flag 
carriers. While foreign coverage authority was finally 
extended until September 1979, foreign-flag eligibility 
standards were tightened to require that specific con- 
sideration be given to “. . . the characteristics, the 
employment, and the general management . . .” of 
any foreign-flag vessel seeking coverage in order to 
determine if extension of coverage would be “. . . in 
the interest of the national defense or the national 
economy .. .” In addition, all insured vessels, both 
US. and foreign, were made subject to strict location 
reporting requirements. While these changes did not 
®5 U.S. Congress, Office of Technology Assessment. Transpor- 
tation of Liquefied Natural Gas. Washington, D.C., Govern- 
ment Printing Office, September 1977. This source provides an 
excellent recent summary of U.S. LNG policies and projects and 
is particularly useful in delineating the major safety issues asso- 
ciated with LNG transportation. 
An issue closely related to considerations of LNG vessel safety 
which may assume importance in the near future relates to the 
question of whether Government indemnification to a shipbuilder 
may be made available under Public Law 85-804 (or if such 
indemnification authority should be provided) to cover LNG 
vessel product liability claims. Public Law 85-804 grants the 
President the authority to authorize anv department or agency 
of the Government exercising functions in connection with the 
national deferise to execute cr amend contracts whenever he 
deems that such action wouid facilitate the national defense. 
Although shipyard indemnification for LNG vessels constructed 
with CDS has not yet been decided. recent developments in 
product liability law coupled with limited availability of ade- 
quate commercial insurance may necessitate consideration of in- 
demnification in the near future. 
alter the fundamental nature of the war risk insurance 
authority, they did offer clear evidence that it is the 
intent of Congress that the War Risk Insurance Pro- 
gram be used to provide access to needed shipping 
resources in a national emergency—not simply to 
protect U.S.-owned foreign shipping assets. 
Another form of controversial foreign-flag assis- 
tance is provided through the current tax treatment 
of certain income earned by U.S. owners of foreign- 
flag shipping. Under the terms of Subpart F of the 
Internal Revenue Code, certain types of income of 
American-controlled foreign corporations must be 
included as income to the U.S. shareholder in the 
year it is earned by the foreign company even if it is 
not distributed in that year to the U.S. shareholder. 
One such category of income subject to current taxa- 
tion is foreign base company service income which 
consists of income derived from the performance of 
services by a U.S.-controlled foreign corporation for 
a related person or corporation outside the country 
in which the U.S.-controlled foreign corporation is 
organized. In the Internal Revenue Code, however, 
there is an express statutory exclusion of shipping 
income from these foreign base company income pro- 
visions. It is due to this exclusion that the income of 
a US.-controlled foreign shipping corporation is gen- 
erally not subject to U.S. taxation in the year in which 
it is earned, even though the ships may have been 
performing services for the U.S. parent corporation 
throughout the year. 
In 1975, with enactment of the Tax Reduction Act 
of 1975, the value of the foreign subsidiary shipping 
income exclusion under Subpart F was somewhat 
diminished. Effective January !, 1976, the new law 
eliminated the income exclusion on foreign shipping 
income that is not reinvested in shipping operations. 
As a consequence of this change, the House of Rep- 
resentatives Committee on Ways and Means esti- 
mated that additional tax revenues of $35 million 
would be collected each year. Income reinvested in 
foreign shipping, however, remains eligible for tax 
deferral. 
Since the Subpart F shipping income exclusion 
still provides a significant tax benefit to foreign-flag 
shipping (Treasury estimates place the tax revenue 
loss at between $90 million and $140 million per 
year), it has been argued that it encourages foreign 
registry and is therefore contrary to U.S. maritime 
policy. This issue will, no doubt, continue to be 
raised in conjunction with future deliberations relating 
to both U.S. maritime policy and U.S. tax policy. 
Repeated demonstrations of the utility of the Na- 
tional Defense Reserve Fleet (NDRF) in times of 
national emergency and the continuing decline of this 
national shipping asset have led to growing demands 
for NDRF renewal. Under existing law, subsidized 
operators have had the option, in conjunction with 
their vessel replacement obligations, to sell older mer- 
V-47 
