[Congressional Record Volume 149, Number 54 (Thursday, April 3, 2003)]
[Senate]
[Page S4826]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Ms. SNOWE:
  S. 774. A bill to amend the Internal Revenue Code of 1986 to allow 
the use of completed contract method of accounting in the case of 
certain long-term naval vessel construction contracts; to the Committee 
on Finance.
  Ms. SNOWE. Mr. President, I rise today to once again introduce 
legislation to simplify and restore fairness to the tax accounting 
rules under which our six major U.S. naval shipyards determine their 
tax liability on the naval ship contracts they are awarded by the Navy.
  Quite simply, this legislation would permit naval shipyards to use a 
method of accounting under which shipbuilders would pay income taxes 
upon delivery of a ship rather than during construction. Under current 
law, profits must be estimated during the construction phases of the 
shipbuilding process and taxes must be paid on those estimated profits, 
a process known as the ``Percent of Completion Method'' of accounting.
  The major shortcoming of this method is that shipbuilders must report 
progress payments as ``revenue'' rather than as a source of financing, 
which had been recognized and permitted for the 64 years between 1918 
and 1982. Additionally, it creates a ``legal fiction'' of an ``interim 
profit,'' when in reality a profit or loss is not reasonably known 
until after a ship is completed. This places a financial burden on 
shipbuilders during the critical construction phase; reduces the 
resources available to invest in facilities and processes to reduce 
construction costs; places a burden on the cash flow management of the 
shipbuilder; and weakens the financial health of the defense 
shipbuilding industrial base.
  The legislation being proposed would simply allow naval shipbuilders 
and their team members to use a modified ``Completed Contract Method'' 
of accounting, under which the shipbuilder would pay taxes when the 
ship is actually delivered to the Navy. In other words, the delivery of 
each ship would be treated as the completion of the contract for 
``Completed Contract'' purposes, regardless of how many ships are built 
under a contract.
  Prior to 1982, Federal law permitted shipbuilders to use this method 
but the law was changed due to abuses by Federal contractors in another 
sector, having absolutely nothing to do with shipbuilding. Moreover, 
non-government shipbuilding contracts are already allowed to use this 
method of accounting, and this legislation contains provisions designed 
to prevent the types of abuses witnessed in the past. Specifically, the 
bill would restrict shipyards from deferring tax payments for a period 
beyond the time it takes to build a single ship.
  This bill would not reduce the amount of taxes ultimately paid by the 
shipbuilder. It simply would defer payment until the profit is actually 
known upon delivery of the ship. I believe that this is the most fair 
and most sensible accounting method. It is the method that naval 
shipbuilders employed in the past. It is the method which commercial 
builders are permitted to use to this day. This legislation has the 
strong support of the major shipyards that build for the Navy. As such, 
I strongly urge my colleagues to join me in a strong show of support 
for this effort.
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