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HQ 116491

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July 26, 2005

VES-3-02-RR:IT:EC 116491 GOB

CATEGORY: CARRIER

Robert H. Nicholas, Jr., Esq.
Baker & Hostetler LLP
1000 Louisiana, Suite 2000
Houston, Texas 77002-5009

RE: Charter of Vessel; 46 U.S.C. App. 289

Dear Mr. Nicholas:

This letter is in reply to your letter of June 13, 2005, on behalf of your client, Smith Stearn Yachts, requesting a ruling regarding the applicability of 46 U.S.C. App. 289. Our ruling is set forth below.

FACTS:

You describe the facts as follows:

Smith Stearn Yachts Holding Company, LLC, a Florida limited liability company ("Holding Company"), is wholly owned by Patrick N. Smith and Leathem Stearn, both of whom are U.S. citizens. Holding Company plans to acquire options to purchase and retrofit a number of yachts for recreational use. Such yachts will range in size from 90 to 130 feet, and are expected to include vessels built in the United States as well as in foreign countries. The yachts, both U.S. and foreign built, will be either under U.S. flag or foreign flag. Once the yachts are refurbished, Holding Company will assign its option to purchase the yachts to Smith Stearn Yachts Asset Company, LLC, a Florida limited liability company ("Asset Company"). Asset Company will then acquire and hold title to the yachts. The equity owners of Asset Company will be different than the equity owners of Holding Company, although the sole owners of Holding Company intend to own an interest in Asset Company.

Pursuant to long-term bareboat charter agreements, in substantially the form attached hereto as Attachment 2, Asset Company will transfer and
convey, for cash consideration, all of its rights to use, manage, maintain, occupy and operate each of the yachts for a specified term of years to Smith Stearn Yachts Fleet Company, LLC, a Florida limited liability company ("Fleet Company"), which is an affiliate of Holding Company. Fleet Company will assign the bareboat charter agreements to a Florida not for profit corporation (the "Owners Association") in exchange for all of the membership interests in the Owners Association, pursuant to an assignment of bareboat charter substantially in the form attached hereto as Attachment 3. The Owners Association, as assignee of the bareboat charters, will assume the full responsibility and liability of Fleet Company thereunder. Fleet Company will sell the membership interests in the Owners Association to the public ("Owners') in accordance with a use sharing plan registered with and approved by state timeshare regulators having jurisdiction over such sales. As a result, the Owners will own all of the membership interests issued by the Owners Association (which will no longer be an affiliate of Asset Company, Fleet Company or Holding Company), which, in turn, will hold the bareboat charters for all of the yachts in the fleet. As assignee of the bareboat charters, the Owners Association will have and assume the same rights and obligations of the bareboat charterer. It will become the bareboat charterer or owner pro hac vice as that term is often applied to the relationship between the vessel owner and the bareboat charterer.

The membership interests in the Owners Association will be assigned a point value by the Owners Association (such share interest being referred to as "Points"). Based upon the Points acquired, Owners will be able, from time to time, to reserve the use of a specific yacht or yachts of its choice for a specified period or periods during a calendar year, for which the Owners Association has obtained the use rights as assignee under the original bareboat charter agreement between Asset Company and Fleet Company. When an owner reserves use time on a specific yacht, the Owners Association will enter into a reservation confirmation with the Owner pursuant to which the Owner will be entitled to the exclusive right to use, occupy and operate the specific yacht reserved for the particular time period. Use of any yacht by an Owner shall be for recreational purposes only and is reserved for use by such Owner and its guests. At no time will any of the yachts be used for any commercial purpose or for sports fishing.

The terms, conditions and regulations of the Owners Association will be established pursuant to the Articles of Incorporation and Bylaws of the Owners Association (the "Governing Documents"), which will include the rules and regulations by which the Owners, as members of the

Owners Association, may use the assets of the Owners Association, including the yachts. The Governing Documents will provide that the Owners Association will be managed by a board of directors (the "Board") elected annually by the Owners. Pursuant to the Governing Documents, members of the Board will be elected by a majority in interest of all Owners at the time of election. The Board will have the power to adopt a budget for the maintenance, operation, crewing, supply, and insuring of those yachts which are the subject of the bareboat charters assigned to the Owners Association. Each Owner will be assessed for his or her pro rata share of such costs and expenses. The Board will have the right, on behalf of the Owners Association, pursuant to the bareboat charter agreements assigned to it, to hire and fire crews and other personnel necessary to operate the fleet of yachts and the reservation system, set ports of departure for all periods of Owner usage as well as promulgate and amend use and occupancy rules and regulations from time-to-time to assure that the Owners Association is operating in full compliance with the terms of the bareboat charter agreements and any applicable laws and regulations.

Yachts that are foreign built and under foreign flag and those that are U.S. built yachts and under foreign flag will operate in U.S. waters pursuant to cruising licenses, provided they are from flag states which provide reciprocal privileges to U.S. flag yachts. Use will be for recreation or pleasure only by the Owner and his or her family and/or guests. No fee or charge shall be collected to convey or transport any person during any use period by any Owner nor will any yacht transport any goods or merchandise to be loaded at one U.S. port and discharged at another as cargo.

During the time any Owner is on board, such individual Owner shall exercise full management control over the yacht. The Owner shall have the right to select and choose the yacht's destination and times of departure and arrival; provided, the Owner will be required, pursuant to its reservation confirmation, to return the yacht to a pre-determined port at a predetermined time. The captain and crew shall be under the direction and control of the Owner while on board, provided, however, the captain, in carrying out its [sic] duties, may refuse to execute any order or direction given by such Owner if such order or direction conflicts with any applicable U.S. or foreign laws and regulations including those of the yachts flag state. The captain shall also have the right to make decisions concerning the safe operation and navigation of the vessel based upon his or her experience and qualifications. An

Owner, when on board a bareboat chartered yacht, may unreservedly request the removal and replacement of any crew member.

In carrying out the duties and obligations imposed upon it pursuant to the terms of the bareboat charter, the Owners Association will enter into a management agreement with a management company to provide yacht management services and administrative and hospitality management services as agent of the Owner's Association. Such services will include managing the reservations by Owners and ensuring that crews, engaged by such management company and paid for by the Owners Association, are available for all yachts used by an Owner. The initial management company will be Smith Stearn Yachts Management Company, LLC, a Florida limited liability company ("Management Company"), which is an affiliate of Holding Company, pursuant to a management agreement in substantially the form attached hereto as Attachment 4. After the expiration of the original term of this management agreement or in the event of a default, Management Company may be replaced by the Board with another management company if the Board so determines.

The Board will exercise oversight of the Management Company and will approve on an annual basis the proposed operating budget for each yacht under the control of the Owners Association. Annual budgets shall be prepared and are to reflect the complete cost estimated for the yearly operation of each yacht, specifically, the cost for crewing each vessel, vessel repairs and maintenance, supplies, fuel, and stores, as well as the cost for hull and protection and indemnity insurance, and any required regulatory inspections or surveys. The Board will, based upon such budget information, assess the Owners for their pro rata share of the operating cost. The Board shall retain at all times the right to reject or have removed and or fired any crew members supplied by the Management Company.

If, during any particular year, there is any unreserved time not reserved by an Owner, the Board may permit the Management Company to make the yachts available for charter by non-Owners Association parties. However, such use by the Management Company shall be based upon the contractual obligation that any foreign built or U.S. built yachts under foreign flag or reflagged U.S. documented yachts, foreign-built, will not be used to transport any passengers wholly within U.S. waters or between U.S. ports even though the use for each yacht shall be only for pleasure or recreation.

We note the following facts which are indicated on the chart you supplied with respect to the various entities and their relationships. The Owners Association will transfer all membership interests to Smith Stearn Fleet Company, LLC ("Fleet Company") in return for Fleet Company's contribution/assignment of bareboat charters to Owners Association. The chart indicates that Messrs. Smith and Stearn are the sole owners of Smith Stearn Yachts Holding Company, LLC ("Holding Company"), Fleet Company, and Smith Stearn Yachts Management Company, LLC ("Management Company"). You state that Messrs. Smith and Stearn are among the equity owners of Smith Stearn Yachts Asset Company, LLC ("Asset Company").

ISSUE:

Whether or not the Facts describe a bona fide bareboat charter agreement for purposes of compliance with 46 U.S.C. App. 289.

LAW AND ANALYSIS:

Generally, the coastwise laws prohibit the transportation of passengers or merchandise between points in the United States embraced within the coastwise laws in any vessel other than a vessel built in, documented under the laws of, and owned by citizens of the United States. Such a vessel, after it has obtained a coastwise endorsement from the U.S. Coast Guard, is said to be “coastwise qualified.”

The coastwise laws generally apply to points in the territorial sea, which is defined as the belt, three nautical miles wide, seaward of the territorial sea baseline, and to points located in internal waters, landward of the territorial sea baseline.

The coastwise law applicable to the carriage of passengers is found in 46 U.S.C. App. 289 and 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 $300 for each passenger so transported and landed.

Section 4.50(b), Customs Regulations (19 CFR 4.50(b)) provides as follows:

A passenger within the meaning of this part is 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 as applied to the transportation of passengers, U.S. Customs and Border Protection ("CBP") has ruled that the carriage of passengers entirely within territorial waters, which include the internal waterways of the United States, 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 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 (29 O.A.G. 318 (1912)).

CBP has consistently held that 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 the owners are not considered “passengers” within the meaning of 46 U.S.C. App. 289 and 19 CFR 4.50(b), the charterer is not prohibited by 46 U.S.C. App. 289 from using the vessel during the charter for pleasure purposes only. A pleasure vessel chartered under a bareboat charter would be in violation of 46 U.S.C. App. 289 if the bareboat charterer used the vessel to transport individuals other than bona fide guests; such individuals would be considered “passengers.” A vessel chartered under a charter arrangement other than a bareboat charter, e.g., a time or voyage charter, is considered to be transporting “passengers,” and is subject to the prohibition of 46 U.S.C. App. 289. A vessel chartered under a bareboat charter would also be subject to penalties if the bareboat charterer used it in the coastwise trade, e.g., to transport passengers (other than bona fide guests) between coastwise points or entirely within territorial waters.

In our review of charter arrangements to determine whether or not they are bareboat charters, we have generally held the following. The nature of a particular charter arrangement is a question of fact to be determined from the circumstances of each case. Under a bareboat charter, the owner relinquishes complete management and control of the vessel to the charterer. On the other hand, 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 key fact is whether complete management and control have been 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 may on its face appear to be a bareboat or demise charter, the manner in which its covenants are carried out and the intention of the parties to relinquish or assume complete management and control are factors to be considered.

In Guzman v. Pichirilo, 369 U.S. 698 (1962), the Supreme Court stated in pertinent part as follows:

To create a demise the owner of the vessel must completely and exclusively relinquish "possession, command, and navigation" thereof to the demise. United States v. Shea, 152 U.S. 178 (1894); Leary v. United States, 14 Wall. 607 (1872); Reed v. United States, 11 Wall. 591 (1871). See generally Gilmore & Black, The Law of Admiralty, 215-219; Robinson, Admiralty, 593-601; Scrutton, Charterparties (16th ed., McNair & Mocatta), 4-7. It is therefore tantamount to, though just short of, an outright transfer of ownership. . . .

The owner who attempts to escape his normal liability for the unseaworthiness of his vessel on the ground that he has temporarily been relieved of this obligation has the burden of establishing the facts which give rise to such relief. Thus, assuming arguendo that a demise charter party would isolate the owner from liability, the owner has the burden of showing such a charter. This burden is heavy, for courts are reluctant to find a demise when the dealings between the parties are consistent with any lesser relationship. E.g., Reed v. United States, supra, at 601. [All emphases supplied.]

In Reed v. United States, supra, the Supreme Court stated:

Courts of justice are not inclined to regard the contract as a demise of the ship if the end in view can conveniently be accomplished without the transfer of the vessel to the charterer . . .

In the factual situation which underlies your ruling request, Messrs. Smith and Stearn dominate the arrangement. They are the shareholders (and apparently the sole shareholders) of Holding Company, Fleet Company, and Management Company. Messrs. Smith and Stearn will own an interest in Asset Company. Pursuant to the chart which accompanies your request, Fleet Company will make a contribution/assignment of the purported bareboat charter to Owners Association which will in turn transfer all of its membership interests to Fleet Company.

As pointed out by the Court in Guzman and Reed, supra, the owner of the vessel has a heavy burden in attempting to prove a demise or bareboat charter.

We have carefully reviewed your request. We are not satisfied that the proposed series of transactions represents the complete and exclusive
relinquishment of possession and control of the vessels from Messrs. Smith and Stearn. Messrs. Smith and Stearn dominate the proposed series of transactions. As stated above, Messrs. Smith and Stearn own Holding Company, Fleet Company, and Management Company. They are among the equity owners of Asset Company.

We therefore find that the factual situation which you present does not represent the bona fide bareboat charter of the vessels. Accordingly, individuals traveling on the vessels will be considered passengers within the meaning of 46 U.S.C. App. 289 and 19 CFR 4.50(b).

We offer the following comments with respect to the additional issues which you raise.

Pursuant to 19 CFR 4.94(b), foreign-built yachts and U.S.-built, foreign-flagged yachts may obtain cruising licenses if they are flagged under a country which is listed in that regulation, i.e., a country which grants reciprocal privileges to yachts of the U.S., as found by the Secretary. Cruising licenses may be valid for a stated period not to exceed one year.

Foreign-built and U.S.-built yachts, which are U.S.-flagged, and used only for pleasure and recreation, may cruise in U.S. waters and between U.S. ports without cruising licenses. Pursuant to 19 U.S.C. 1441(4), any U.S. documented vessel with a recreational endorsement or any undocumented U.S. pleasure vessel not engaged in trade is not required to make formal vessel entry pursuant to 19 U.S.C. 1434 or to obtain clearance pursuant to 46 U.S.C. App. 91 if: the vessel complies with the report of arrival requirement in 19 U.S.C. 1433 and the customs and navigation laws of the U.S.; the vessel has not visited a hovering vessel; and any article required by law to be entered or declared is reported to CBP immediately upon arrival.

Yachts brought into the U.S. for sale or charter to U.S. residents are dutiable pursuant to the provisions of the Harmonized Tariff Schedule of the United States ("HTSUS"). They are classified under heading 8903, HTSUS.

HOLDING:

The proposed series of transactions does not represent the complete and exclusive relinquishment of possession and control of the vessels from Messrs. Smith and Stearn. We therefore find that the factual situation presented does not represent the bona fide bareboat charter of the vessels. Therefore, individuals traveling on the vessels will be considered passengers within the meaning of 46 U.S.C. App. 289 and 19 CFR 4.50(b).

Sincerely,

Glen E. Vereb
Chief
Entry Procedures and Carriers Branch

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