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HQ 114314

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May 7, 1998

VES-3-02/VES-3-19-RR:IT:EC 114314 GG

CATEGORY: CARRIER

Captain Don W. Harper
P.O. Box 10441
St. Petersburg, FL 33733

RE: Coastwise Trade; Passengers; Seamanship Instruction; Bareboat Charter

Dear Captain Harper:

This is in response to your letter, dated March 31, 1998, requesting answers to several issues you raise with respect to vessels and the U.S. coastwise laws. Our reply follows.

FACTS:

Situation #1: A foreign built vessel is purchased by a U.S. citizen or corporation, converted from a fishing vessel or freighter into an uninspected passenger vessel, and is then U.S. documented. It is used in the intercoastal waterway and along the U.S. coast as a floating, cruising classroom to teach recreational boating safety, seamanship, and navigation to paying students. Students attend classes several hours a day, take tests, stand trainee watches, and receive a certificate of completion at the end of the cruise if they have passed the course. You ask whether these activities violate the U.S. coastwise laws. Would our opinion change if a couple goes on the cruise but only one of them takes the course? You also ask whether classroom lecture is required each day of the cruise, and if subjects unrelated to boating and seamanship may be offered in place of those described above.

Situation #2: The same vessel is chartered to one or more individuals or a business for an agreed- upon period of time. The vessel is taken to various ports in the intercoastal waterway and along the coast, and occasionally to the Bahamas, for the recreation of the persons chartering the vessel and their families and other non-paying guests. The vessel owner provides and pays for the crew, and covers the costs of marine insurance and dockage and vessel upkeep when the vessel is not out on charter. The person chartering the vessel is responsible for actual boat operating expenses during the time of the charter, and is able to choose the itinerary with the consent of the owner-provided captain.

ISSUE:

Whether the uses of the vessel described above are considered uses in the coastwise trade within the purview of 46 U.S.C. App. ?289.

LAW AND ANALYSIS:

Title 46, United States Code Appendix, Section 289 (the passenger coastwise law), prohibits the transportation of passengers between points embraced within the coastwise laws, either directly or by way of a foreign port, in any vessel other than a vessel built in, documented under the laws of, and owned by citizens of the United States. Pursuant to section 4.50(b), Customs Regulations, (19 CFR ?4.50(b)), the word "passenger" for purposes of this provision is defined as "... any person carried on a vessel who is not connected with the operation of such vessel, her navigation, ownership, or business."

In interpreting the coastwise laws, Customs has consistently held that a point in the 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 the territorial sea, defined as the belt, 3 nautical miles wide, seaward of the territorial sea baseline, and to points located in internal waters, landward of the territorial sea baseline, in cases where the baseline and the coastline differ.

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 the coastwise laws. However, the transportation of passengers to the high seas (i.e., beyond the 3 mile territorial sea) 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. (Treasury Decision 55193(2).)

A person transported on a vessel as a student in courses such as oceanography or sailing and seamanship, when the presence of that person is required on board the vessel as a part of his or her course or training, is not a passenger for purposes of the coastwise laws. Although we do not require that a set amount of time be devoted to study, clearly there must be enough so that it is readily apparent that the educational component is the primary purpose of the cruise. Accordingly, the use of the vessel for instruction in recreational boating safety, seamanship, and navigation to paying students, as outlined in Situation #1, is not a use within the meaning of the coastwise laws. However, courses offered exclusively in areas unrelated to seamanship, such as art, photography, or business, would be activities that would render students passengers under the coastwise laws. Finally, the presence on board of a person, such as an accompanying spouse,
who elects not to participate in the training course and who is not a member of the crew, would also be a violation of the U.S. coastwise laws.

The allowance of the charter arrangement described in Situation #2 is dependent on whether the arrangement qualifies as a bareboat, or as a time or voyage charter. Under a bareboat or demise charter, the owner relinquishes complete management and control of the vessel to the charterer. If the owner retains a degree of management and control, however slight, the charter is a time or voyage charter, and the vessel is deemed to be engaged in coastwise trade. The crux of the matter is whether complete management and control have been wholly surrendered 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 intention of the respective parties to relinquish or to assume complete management and control are also factors to be considered. When a vessel is chartered under a bona fide bareboat charter, the bareboat charterer is treated as the owner of the vessel for the period of the charter, and, because owners are not considered "passengers" for purposes of the coastwise laws, the charterer is not proscribed by the coastwise laws from using the vessel during the charter for pleasure purposes only. A vessel chartered under a charter arrangement other than a bareboat charter (e.g., a time or voyage charter) and used in coastwise transportation would be subject to penalties under the coastwise laws. A vessel chartered under a bareboat charter would also be subject to penalties if the bareboat charterer used it in the coastwise trade (i.e., to transport passengers other than bona fide guests) between coastwise points or entirely within territorial waters.

With one exception, the proposed arrangement with regard to vessel operating expenses would support a designation as a bareboat, rather than as a time charter. According to the facts, the actual owner will pay for vessel expenses while the vessel is not out on charter, whereas the charterers will cover actual operating expenses throughout the duration of the charter. This indicates an appropriate transfer of management and control. However, what is problematic in this particular case is the owner assigning a captain and crew members to the charterer. Generally, we have held that a charter arrangement in which the captain and crew are selected by the owner or his agent and not by the charterer, by its very nature results in an implication that the owner may not have relinquished complete management and control to the charterers. (Headquarters ruling letter 226808, dated June 7, 1996, and 108414, dated July 24, 1986.) Consequently, this would negate a determination that the proposed charter operation is in fact a bareboat one. The actual selection process must be accomplished by the charterer, not the owner.
A vessel being chartered out as a bona fide bareboat charter would require a recreational endorsement to operate in that manner. You should contact the Coast Guard to obtain a determination as to documentation requirements for vessels used as a sailing school.

HOLDING:

The use of a vessel for purposes of instruction in navigation and seamanship is not considered a use in the coastwise trade within the purview of 46 U.S.C. App. ?289. Courses offered for purposes other than navigation or seamanship would constitute such a use. The transportation of a passenger who accompanies a student but who does not take the course him/herself would be a violation of the passenger coastwise laws.

Chartering a vessel under a bareboat charter arrangement, where control is relinquished to the charterer, is not a use within the meaning of the passenger coastwise laws. The provision of a captain and crew by the vessel owner would, however, signify a retention of control by the owner, thus negating a designation as a bona fide bareboat charter.

Sincerely,

Jerry Laderberg
Chief

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