46 U.S.C. § 53511 — Tax treatment of nonqualified withdrawals

(a) In General. Except as section 53513 allows, any fund withdrawal that isn't a qualified withdrawal is treated as a nonqualified withdrawal. (b) Order of Withdrawals. A nonqualified withdrawal is treated as coming, in order: (1) first from the ordinary income account; (2) second from the capital gain account; and (3) third from the capital account. (c) Tax Treatment. For federal tax purposes: (1) a nonqualified withdrawal from the ordinary income account counts as ordinary income for that tax year; (2) a nonqualified withdrawal from the capital gain account counts as a gain from selling an asset held over 6 months, for that tax year; and (3) up through the tax-payment deadline for that year: (A) no interest is charged under tax code section 6601 and no late-payment addition is charged under section 6651; (B) interest on the extra tax from a nonqualified withdrawal out of the ordinary income or capital gain account is charged, at the rate set in (d), starting from the tax-payment deadline for the year the money was originally deposited; and (C) no interest applies to amounts withdrawn on a last-in-first-out basis under section 53512. (d) Interest Rate. For a nonqualified withdrawal in a tax year starting after 1971, the Secretary and the Secretary of the Treasury jointly set and publish the interest rate used in (c)(3)(B). The rate's relationship to 8 percent must match, as the Secretaries decide under joint regulations, the relationship between: (1) money rates and investment returns for the calendar year right before the tax year; and (2) money rates and investment returns for calendar year 1970. (e) Nonqualified Withdrawals. (1) A rising percentage of any amount still in the fund gets treated as a nonqualified withdrawal, based on how many years after its deposit it remains: 20 percent if it's still there at the close of the 26th tax year after deposit; 40 percent at the close of the 27th year; 60 percent at the 28th year; 80 percent at the 29th year; and 100 percent at the 30th year. (2) A fund's yearly earnings (other than net gains) count as an amount deposited that year, for this rule. (3) An amount isn't treated as "remaining" in the fund at year-end if there's a binding contract at that point for a qualified withdrawal of that amount for a specific identified item. (4) If the Secretary decides the fund's balance is bigger than needed to meet the fund holder's vessel-construction goals, the excess is treated as a nonqualified withdrawal under (1) — unless the holder sets appropriate goals within 3 years to use up the excess. (5) Amounts already in a fund on January 1, 1987 are treated, for this subsection, as deposited on that date. (f) Tax Determinations. (1) For a tax year with a nonqualified withdrawal (including one treated as such under (e)), the tax is figured by: (A) leaving the withdrawal out of gross income; and (B) then increasing the regular tax by the withdrawal amount multiplied by the highest individual tax rate (or the highest corporate rate, for a corporation). (2) For the part of a nonqualified withdrawal from the capital gain account that gets favorable capital-gains tax treatment, the rate used in (1)(B) can't be more than 20 percent (34 percent for a corporation). (3) If part of a nonqualified withdrawal is properly traced to deposits (not counting earnings) that didn't reduce the taxpayer's tax in an earlier year, that part isn't counted under (1), and an equal amount is instead allowed as a net-operating-loss deduction for the year of the withdrawal. (4) A nonqualified withdrawal excluded from gross income under (1) is also excluded when figuring taxable income for net-operating-loss purposes under tax code section 172(b)(2).