HQ 0109543 - Application of the coastwise passenger law to a foreign-flag yacht chartered by corporations and used to transport business guests of the corporate charterers - United States International Trade Commision Rulings

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HQ 109543

September 9, 1988

VES-3-02 CO:R:P:C 109543 PH/BEW

CATEGORY: CARRIER

Thomas J. Stadnik, Esq.
Associate International Counsel
American International Group, Inc.
70 Pine Street
New York, New York 10270

RE: Application of the coastwise passenger law to a foreign-flag yacht chartered by corporations and used to transport business guests of the corporate charterers

Dear Mr. Stadnik:

This in response to your letters of May 16, 1988, in which you request a ruling on the use of a foreign-flag yacht under charter. With your communication of June 29, 1988, you transmit- ted a copy of the charter party you intend to use. You requested that the terms and information contained in the charter party be kept CONFIDENTIAL and we will do so with regard to the financial information therein.

With regard to the "hypothetical fact scenario" you describe concerning the requirements for obtaining a yacht cruising li- cense under 19 CFR 4.94, we regret that we are unable to issue a ruling with regard to questions which are hypothetical in nature (see 19 CFR 177.7(a)). However, we are making advisory comments on the issues you raise in this regard in the LAW AND ANALYSIS portion of this ruling.

FACTS:

You state that your company ("AIG") is a Delaware corporation headquartered in New York and "majority-owned" by United States citizens. AIG is the parent holding company of a worldwide
insurance and financial services organization. Keys, Ltd. ("Owner") is a Cayman Islands company which owns the Cayman-flag yacht TEMPTRESS OF CAYMAN ("Yacht"). The Owner holds a valid cruising license for the Yacht.

You state that AIG, on behalf of itself and its subsidiaries, as well as on behalf of an affiliated company ("Charterers") de- sires to charter the Yacht for one year from the Owner. AIG will execute the charter for itself and for its subsidiaries and affiliate, each of whom will be named in the charter party joint- ly as charterers and each of whom will contribute to the charter hire. You state that the Charterers will not enter into any bareboat charter with any third party in or for use in United States waters. The Charterers will choose and pay for a crew. The Yacht will be in use in United States waters during the sum- mer months and it is likely that it will be used in both southern United States and foreign Caribbean waters during the winter months.

You describe the charter arrangement under which the Yacht will be chartered as a bareboat charter. The copy of the charter party which you provided us is denominated a "Bareboat Yacht Charter Agreement." Article 11 of the charter party provides that:

It is mutually agreed that full authority regarding the operation and management of the yacht is hereby transferred to the Charterer for the term thereof.

In the event, however, that the Charterer wishes to utilize the services of a Captain and/or crew members in connection with the operation and management of the yacht, whether said Captain and/or crew members are furnished by the Owner or by the Charterer, it is agreed that said Captain and/or crew members are agents and employees of the Charterer and not of the Owner.

In the further event that local United States Coast Guard or other regulations require the Owner exclusive- ly to provide a Captain and/or crew, the Owner agrees to provide a Captain who is competent not only in coastwise piloting but in deep sea navigation, and to provide a proper crew. The Captain shall in no way be the agent of the Owner, except that he shall handle clearance and the normal running of the yacht subject to the limitations of this charter party. The Captain shall receive orders from the Charterer as to ports to be called at and the general course of the voyage, but the Captain shall be responsible for the safe naviga- tion of the yacht, and the Charterer shall abide by his
judgement as to sailing, weather, anchorages, and pertinent matters. The Charterer assumes total control and liability as if the Charterer were the owner of the yacht during the term of the Charter.

Notwithstanding any of the foregoing, the Charterer shall have and exercise complete management and control of the yacht, shall be free to hire its own crew, and use the yacht as it sees fit.

You state that the Charterers would use the Yacht to entertain insurance brokers, business and financial customers, and other contacts. Occasionally, such persons may be embarked at one United States port and disembarked at a different United States port. The charterers will not charge or accept from any such person any contribution to the expenses of any trip or event undertaken during the term of the charter.

ISSUE:

Are insurance brokers, business and financial customers, and other contacts of the corporate charterers of a foreign-flag vessel "passengers" for purposes of 46 U.S.C. App. 289?

LAW AND ANALYSIS:

The Act of June 19, 1886, as amended (24 Stat. 81; 46 U.S.C. App. 289, sometimes called the coastwise passenger law), provides that:

No foreign vessel shall transport passengers between ports or places in the United States either directly or by way of a foreign port, under a penalty of $200 for each passenger so transported and landed.

For your general information, we have consistently interpreted this proscription to apply to any vessel except a United States- built, owned, and properly documented vessel (see 46 U.S.C. 12106 and 12110, 46 U.S.C. App. 883, and 19 CFR 4.80(a)).

In interpreting the coastwise laws as applied to the transportation of passengers, we have 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 point, is considered coastwise trade subject to the coastwise laws. However, the transportation of passengers to the high seas or foreign waters and back to the point of embarka- tion, 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. The carriage of fishing parties for hire, even if the vessel proceeds beyond territorial waters and returns to the point of the passengers' embarkation, is considered coastwise trade subject to the coast- wise laws. The territorial waters of the United States consist of 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.

We have consistently ruled that yachts or pleasure vessels chartered under a bona fide bareboat or demise charter may be used by the charterer and his guests for pleasure cruising in the United States and between points therein without violating the coastwise laws. The use of a yacht or pleasure vessel chartered under a charter arrangement other than a bareboat charter (e.g., a time charter) to transport the charterer and/or his guests between coastwise points or in territorial waters would be considered coastwise trade.

It is generally settled law that, "To create a demise [or bareboat charter] the owner of the vessel must completely and ex- clusively relinquish 'possession, command, and navigation' there- of to the demisee ... It is therefore tantamount to, though just short of, an outright transfer of ownership. However, anything short of such a complete transfer is a time or voyage charter party or not a charter party at all." (Guzman v. Pichirilo, 369 U.S. 698, 699-670 (1962); see also, Leary v. United States, 81 U.S. 607, 611 (1871), and 2B Benedict on Admiralty (1978 Ed.), 3- 9 through 3-13, Test for Demise Charter.)

In our review of charter arrangements to determine whether or not they are bareboat charters for Customs purposes, we have gen- erally held, in addition to the above-described generally settled principles, that:

The nature of a particular charter arrangement is a question of fact to be determined from the circumstanc- es of each case ... The crux of the matter is whether complete management and control have been wholly sur- rendered by the owner to the charterer so that for the period of the charter the charterer is in effect the owner. Although a charter agreement on its face may appear to be a bareboat or demise charter, the manner in which its covenants are carried out and the inten- tion of the respective parties to relinquish or to assume complete management and control are also factors to be considered.

In this case, the copy of the charter party which you provided us appears to be a bareboat or demise charter agreement on its face. We note, however, that only AIG would be a signatory to the charter party. Only those parties which are signatories to the charter party as charterers have standing as bareboat charterers. Assuming that the manner in which the charter arrangement is carried out is not inconsistent with a bareboat charter, as described above, the charter arrangement under consideration would be considered a bareboat or demise charter with regard to AIG.

Even when a yacht is chartered under a bareboat or demise charter arrangement, the charterers may not use the vessel in the coastwise trade if, as is true in this case, it is not qualified to engage in the coastwise trade. As noted above, 46 U.S.C. App. 289 prohibits the transportation between points in the United States of passengers in a non-coastwise-qualified vessel. "Pas- senger," for purposes of this provision, is defined as "... any person carried on a vessel who is not connected with the opera- tion of such vessel, her navigation, ownership, or business" (19 CFR 4.50(b)). Because there appears to have been some confusion on the interpretation of this provision with regard to the transportation of corporate or business "guests" on a yacht, we have reviewed the earliest rulings in this regard. Based on this review, we have concluded that although a member of the board of directors of a corporate yacht owner (or bareboat charterer) and members of his immediate family would not be considered passen- gers, business "guests" such as insurance brokers and financial customers would be considered passengers.

Accordingly, the transportation between points in the United States of business "guests" such as insurance brokers, business and financial customers, and other contacts in the Yacht would be prohibited by 46 U.S.C. App. 289 regardless of whether or not the charter arrangement is a bareboat charter. Of course, section 289 would not prohibit the use of the Yacht for the transporta- tion of such passengers in non-coastwise movements (e.g., on "voyages to nowhere" to the high seas, see above, or foreign voyages (but see 19 CFR 4.80a with regard to voyages to "nearby foreign ports")) or the entertainment of such passengers when the vessel remains stationary at its moorage.

We offer the following general comments on yacht cruising licenses. Cruising licenses may be issued, on a reciprocal basis, to pleasure vessels of the foreign countries listed in 19 CFR 4.94(b). A vessel which has a cruising license is exempt from the requirements for vessel entry (see 19 U.S.C. 1435; 19 CFR 4.2), except for entry on its first arrival before it has a cruising license, vessel clearance (see 46 U.S.C. App. 91; 19 CFR

4.60 et seq.), and vessel permits to proceed between United States ports (see 46 U.S.C. App. 313-315; 19 CFR 4.80 et seq.). A cruising license does not exempt a vessel from the requirement to report its arrival in the United States to Customs immediately upon such arrival (see 19 U.S.C. 1433; 19 CFR 4.2). We emphasize that although cruising licenses exempt yachts having them from the above described requirements while cruising in the United States, they are not required as a condition precedent to cruising in the United States or its waters.

Pursuant to 46 U.S.C. App. 104 and 19 CFR 4.94, an application for a cruising license is to be filed with Customs by the vessel owner or master. Since a bareboat charterer is treat- ed as the owner pro hac vice during the term of the charter, a bareboat charterer or his master could apply for a cruising license.

Only yachts which are "used and employed exclusively as pleasure vessels" (see 46 U.S.C. App. 104) may be granted cruis- ing licenses. A yacht used under a "time" or similar charter would not be considered to be used exclusively as a pleasure vessel and could not be granted a cruising license. Since the use of a yacht to transport business "guests" would be considered an engagement in trade (coastwise trade if the passengers are transported between coastwise points), a yacht so used could not be granted a cruising license.

You should be aware that a yacht or pleasure boat owned by a resident of the United States or brought into the United States for sale or charter to a resident thereof is dutiable at the rate of 1.5 percent ad valorem, under item 696.05 or 696.10, Tariff Schedules of the United States.

HOLDING:

Business guests such as insurance brokers, business and financial customers, and other contacts of the corporate charter- ers of a foreign-flag vessel are "passengers" for purposes of 46 U.S.C. App. 289, and their transportation between coastwise points or on a "voyage to nowhere" solely in United States terri- torial waters would be prohibited by that statute.

Sincerely,

John E. Elkins

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