If all goes as planned, a well-to-do group of passengers will embark this summer on a Hawaiian cruise aboard the SS Monterey, a luxuriously refitted, state-of-the art passenger liner with a staff catering to their every whim.

The ship will have a "show lounge with casino space, disco and swimming pool featuring two Jacuzzi whirlpools . . . a shopping arcade, a theater, and an expandable conference center . . . and jogging track," according to an investment circular.

Passengers will dine on continental cuisine served in the Monterey's spacious dining room under the watchful eye of an internationally trained chef, Stanley Pepperel-Hill.

The Monterey's promotional material describes Pepperel-Hill as one-time chef de cuisine for the royal family at Buckingham Palace and "one of the few Black Hat Chefs in the world. " This is a distinction it says he earned by successfully completing a 10-year training course at an elite Parisian culinary academy.

As all that suggests, the Monterey is specifically targeted to the upscale market. For a one-week cruise, a deluxe suite for two will cost $6,000.

The affluent voyagers who will enjoy life aboard the Monterey can thank American taxpayers for making the cruise possible.

That's because lawmakers who overhauled the income tax code in 1986 excused the Monterey from having to comply with certain new provisions that most everyone else must abide by.

To be sure, the tax law makes no mention of the SS Monterey by name. Rather, it says cryptically:

The amendments made by section 201 shall not apply to a 562-foot passenger cruise ship, which was purchased in 1980 for the purpose of returning the vessel to United States service, the approximate cost of refurbishment of which is approximately $47 million.

That obscure paragraph is worth an estimated $8 million or more to the Monterey by giving it the investment tax credit and accelerated depreciation that the Tax Reform Act eliminated for most other projects.

But ships do not pay taxes. People pay taxes. Or in this case, avoid taxes.

Those who will benefit from the $8 million tax savings, according to partnership records filed in Alexandria, Va., include:

* The Bechtel family in San Francisco, which controls the Bechtel Group Inc., one of the world's leading construction and engineering companies, which last year had revenues of $6.5 billion.

Stephen D. Bechtel Sr., who built the San Francisco-based company into a global colossus employing 25,000 people, and his son, Stephen Jr., are among the 400 richest Americans. Forbes magazine placed their wealth at $400 million each in its last annual tabulation of the super-rich.

* James A. Bakalis of Silver Spring, Md., former proprietor of the Gold Rush, for many years one of the premier strip joints on Washington's famed 14th Street sex corridor, about four blocks from the White House.

A federal judge once described the Gold Rush as a place where customers were solicited "into entertaining fancy ladies with liquor purchased at fancy prices."

* John B. Toomey, president and chairman of the board of VSE Corp., an Alexandria-based engineering company, which derives nearly 90 percent of its revenue from government contracts, including agreements with the Navy Department to maintain vessels.

Toomey is the single largest stockholder in VSE, a company that gained some notoriety as the employer of Arthur J. Walker. A retired Navy lieutenant commander, Walker was convicted and sentenced to three life terms in 1985 for his role in the Walker family spy ring that peddled classified military information to the Soviet Union.

Toomey is also an official of another company that invested in the vessel and a limited-partner investor in the ship in his own right.

* Metropolitan Capital Corp., a federally chartered small-business investment company. A subsidiary of VSE, Metropolitan Capital was established, in VSE's words, as "a vehicle to diversify its business opportunities by participating in the capitalization of promising small businesses. . . . "

According to business records filed with the U.S. Securities and Exchange

Commission, Metropolitan Capital's investments "in small-business concerns . . . are generally speculative in nature. " The company recorded losses of $138 million in 1984. The losses mounted to $298 million in 1985 and $312 million in 1986.

They are a few of the 150 individuals and companies that bought $16.8 million in shares to refurbish the Monterey. The others include an Indianapolis travel agent; a Philadelphia anesthesiologist; a Potomac, Md., dentist; a Washington hospitality lawyer, and an Atlanta financial consultant.

THE COST OF TAX REFORM

The Monterey investors are among thousands of affluent individuals and hundreds of well-connected businesses that will reduce their federal income tax bills over the next several years by upward of $10.6 billion as a result of custom-tailored concessions woven through the Tax Reform Act of 1986.

As The Inquirer reported in earlier articles, the 1986 act, proclaimed as a model of fairness by congressional tax writers, actually contained the largest number of tax giveaways in the 75-year history of the federal income tax.

The special deals exempted select individuals and businesses from certain provisions in the new act that all other taxpayers were compelled to comply with - an act that raised taxes for millions of middle-class individuals and

families.

Now the tax-writing committees, the House Ways and Means Committee and the Senate Finance Committee, are preparing to do it all over again. A new round of special-interest provisions already has been drafted and is ready to be spliced into a tax bill that Congress soon will take up.

And scores of additional deals are in the process of being written. Their backers hope they will be inserted in the legislation, a technical-corrections bill designed, in theory, to correct typographical, clerical and spelling errors in the 1986 tax act.

Depending upon how much public attention is focused on the process, the tax writers may delay final action on the tax breaks until after the November election, rather than risk antagonizing the great mass of taxpaying voters who are denied such favored treatment.

Among the private provisions in the pending legislation is one that grants a Monterey-like exemption to a pair of 250-passenger ships to be built at a boatyard near Seattle.

According to those familiar with the provision, the ships are a project of Robert Giersdorf, a Seattle cruise-line executive who has long been active in Democratic Party politics on the West Coast. It would allow investors to escape payment of taxes that others must pay.

Another custom-tailored provision that has been drafted and is waiting to be spliced into the tax bill would give an $11 million tax break to FMC Corp., a Chicago-based chemical manufacturer and defense contractor.

The provision, which a friendly lawmaker plans to insert in the bill, would give FMC a special tax break in computing deductions on its foreign income. With revenues of $3 billion in 1986, FMC has plants in 25 states and 15 foreign countries.

FMC had profits of $189.9 million in 1986, and paid taxes at a rate of 19 percent on its U.S. income, a study by Tax Analysts, a Washington tax research organization, shows. That is below the top 28 percent rate imposed this year on millions of middle-income individuals and families.

The Monterey's investors, like the beneficiaries of almost all congressional tax breaks, share at least two economic characteristics: an adjusted gross income that places them in the upper 5 percent of all taxpayers and a need for tax deductions.

INVESTORS SOUGHT

A confidential memorandum to potential investors offering units in the SS Monterey Limited Partnership gave a picture of the type of investor being wooed. According to the memoradum, which was obtained by The Inquirer:

"Units will be sold to persons representing in writing that, among other things, they have a net worth (exclusive of home, home furnishings and automobiles) in excess of five times the amount of their investment. "

The memorandum continues:

"Only persons whose income is subject to high rates of income taxation will derive the full economic benefit of the tax losses or deductions that may be realized by the partnership, if any. "

The Monterey's concession is especially at odds with the rhetoric of tax reformers during the congressional debate over the 1986 tax bill, for the ship is precisely the type of project the tax writers contended that they wanted to stop subsidizing through the Internal Revenue Code.

Tax reform was, in the words of Sen. John Glenn (D., Ohio), to encourage ''more and more business decisions to be made on the basis of their economic merit rather than on their tax considerations. "

But in the case of the Monterey, the project to refurbish the vessel might well have foundered without the special tax break voted by Congress.

Because of the private provision for the ship inserted in the tax act, ''the project is now real," John Broughan, chief operating officer for Aloha Pacific Cruises, which will manage the ship, said in an interview with The Inquirer shortly after the bill passed. "It probably would have been a 50-50 proposition otherwise. "

Once the pride of the U.S. Pacific passenger fleet, the mothballed cruise ship, built in 1952, has been a financial albatross to virtually every owner who sought to recommission it over the last 10 years.

For its most recent previous owner, the 8,000-member International Association of Masters, Mates and Pilots, the Monterey had been a financial and political nightmare.

The ship ran up multimillion-dollar deficits, forced union leaders to impose a special assessment to cover payroll and operating costs, and sparked a lawsuit by dissident members who alleged, in part, that their pension fund had been raided to cover red ink generated by operation of the ship.

In all, the union poured nearly $10 million into the rusting vessel just to keep it in drydock - more than six times its 1979 selling price.

Now, courtesy of Congress and the Tax Reform Act of 1986, U.S. taxpayers will pour at least $8 million more into it as a federal bailout.

To justify individually crafted tax breaks, lawmakers contend that they are only trying to be fair - that the tax breaks, called transition rules, are needed to smooth the way from one set of tax rules to another.

Sen. David L. Boren (D., Okla.) explained the reasoning behind the concessions:

"We realize and we have written into the Constitution, in fact, as it applies to the criminal code, that we shall not have ex-post-facto legislation. In other words, it is not fair to change the rules in the middle of the game. It is not right. "

In truth, the special rules illustrate a growing double standard in the tax system - one set of regulations for middle-income taxpayers, another for wealthy individuals, special interests and the influential.

Or put another way: It is permissible to change a tax law retroactively when it is applied to some people and businesses, but not to others.

When Congress approved the 1986 Tax Reform Act, for example, it ended the investment tax credit. And it did so, Boren's constitutional argument notwithstanding, retroactively to Jan. 1, 1986.

Many large corporations anticipated the change and adjusted for it. Many small businesses and individuals did not.

Rep. Terry L. Bruce (D., Ill.) pointed to one of them:

"A farmer in Edgar County, Illinois, bought a $38,000 tractor in February of this year (1986), expecting to get an investment tax credit to offset the cost of that purchase. How do I tell that man that he's out of luck because the Congress of the United States retroactively changed the rules he was operating under? "

While Bruce's farmer was out of luck, as were most other taxpayers, Congress designated certain individuals and corporations that could continue to claim both the investment tax credit and accelerated depreciation, another tax advantage that was eliminated by the new law.

Among the lucky recipients of the exemption was the SS Monterey, now undergoing renovations at a shipyard in Finland.

Built as a freighter in 1952, the ship, two football fields in length, was converted to a passenger liner in 1956 and placed in service in the Pacific, where it hosted luxury cruises from San Francisco to as far west as Australia.

But by 1978, soaring costs and foreign competition forced the ship's owner, Pacific Far East Lines, into bankruptcy court. After the Monterey's last voyage that year, the ship was mothballed on the San Francisco waterfront. A year later, the ship was sold for $1.5 million to a private investor at a bankruptcy auction. But it remained out of service.

Soon afterward, the Masters and Mates union, one of the unions hit hard by the demise of American shipping, conceived a plan to get the Monterey sailing again.

The leadership of the small union, whose members serve as captains, mates and other licensed deck officers of seagoing vessels, proposed to acquire the ship, seek investors to refurbish it and place it in service in the Hawaiian Islands market.

By cruising in Hawaii, the union sought to take advantage of a special U.S. maritime law - the Jones Act - that allows only U.S.-flag passenger ships to cruise between U.S. ports. As such, the law effectively bars foreign cruise ships from inter-island service in Hawaii.

The plan was controversial within the union from the start. The strongest objection centered on the economics of the deal.

The union was prepared to pay $3 million for the ship - or double the price paid for the vessel at a bankruptcy auction a little more than a year earlier.

Critics in the union questioned why the ship had increased so much in value in such a short time. Others questioned whether the number of jobs created by the Monterey would justify the cost of buying and renovating the vessel.

John N. Hayes, a vice president of the Masters and Mates union, was among the early critics.

"I didn't think it was a prudent investment for us. The risks and the rewards weren't in line," said Hayes, who was suspended by the union's executive board, in part for his opposition to the Monterey and other

investments. (He later was reinstated by court order. )

Despite the opposition, Capt. Robert J. Lowen, the president, and other union leaders saw the Monterey as a way to breathe new life into the declining U.S. shipping industry, and the union bought the Monterey in 1980 for $3 million.

The union's newspaper described the move in bold headlines in its November 1980 edition:

"MM&P Saves SS Monterey. Union Action Keeps 500 Jobs Here. "

To finance the purchase, the Masters and Mates took out $3 million in bank loans. A subsidiary, American Maritime Holdings Inc., was created to hold title to the ship and oversee renovation.

Complications thwarted the plan from the start. High interest rates and a lack of venture capital kept the Monterey berthed in San Francisco, running up millions of dollars in expenses for maintainance, security and debt service.

From 1981 through 1986, according to annual union reports filed with the U.S. Department of Labor, the union advanced $5.7 million to cover the ship's upkeep.

An additional $700,000 to $900,000 in pension funds was funneled to the Monterey for architectural and market studies by the pension fund's investment adviser, as part of an abortive plan to sell the ship.

All that was in addition to the $3 million purchase price. Thus, the union's total investment in the ship is nearly $10 million - or more than the total dollar amount of dues collected annually from all its members.

The drain nearly bankrupted the union. In 1981, the Masters and Mates had $4.9 million in its treasury. By the end of 1986, the amount was down to $2.8 million, and some of that was borrowed money.

Because of the Monterey's expenses, the Masters and Mates borrowed $1 million in 1985 from its parent union, the International Longshoremen's Association, to pay union salaries and meet other ordinary expenses.

Even with the loan, the union still faced multimillion-dollar budget deficits. Because of the financial crisis, the union's general executive board levied a $450 special assessment on members that will raise $1.5 million over 18 months.

Not surprisingly, the Monterey, which union critics refer to as "Lowen's lemon," is a hot political issue within the union.

An open letter circulated among members in 1986 by a dissident member said, ''Our investments in the Monterey and similar financial planning have made us the laughingstock of the industry. "

At a union convention, a group of frustrated members introduced a resolution to end the financial drain, according to John Hayes, the union vice president, by "towing the Monterey out to sea and sinking it. "

As the costs mounted and the union's financial condition worsened, so, too, did legal problems and claims arising from the venture.

In 1984, the union ran afoul of the Internal Revenue Service, which claimed it owed $213,627 in back taxes. After subsequently paying the claim, the union reported that it intended to sue the IRS in an effort to recover the money.

Dissident union members filed a lawsuit in U.S. District Court in New York charging trustees of the union's pension fund and the fund's manager, Tower Asset Management, with mismanaging $27 million in pension-fund assets.

According to the complaint, retirement funds were invested in "high-risk" speculative projects "in which one or more of the defendants had ownership or other financial interests. "

Union trustees filed a lawsuit against Tower and obtained a court order compelling the company to pay back $1 million and return securities in a dozen companies.

Court papers show that nearly $1 million in pension-fund assets went to the Monterey to pay for feasibility studies, architectural drawings and marketing surveys as part of an unsuccessful attempt to secure a buyer. Under federal law, pension funds cannot be invested in property owned by the union.

Then the U.S. Department of Labor filed a complaint in U.S. District Court in New York accusing Tower and pension-fund trustees of violating federal pension laws.

Under Tower's management, the Labor Department contended, the asset value of the two union pension plans had declined from $31.5 million to $9.5 million.

As the Monterey sat rusting in San Francisco harbor, James L. Kurtz came to the rescue.

A Washington lawyer specializing in the hospitality field, Kurtz had represented clients from Holiday Inns Inc. to Harrah's Inc. to Steak & Ale before he became active in the Monterey venture.

Kurtz heard about the Monterey, according to published reports, through a client and began putting together a plan to give the vessel a major face lift and place it in inter-island service in Hawaii.

A FINNISH REFURBISHING

To refurbish the ship, Kurtz negotiated an agreement with Wartsila shipyard in Helsinki, Finland, a leading designer and builder of cruise ships, to expand and upgrade the Monterey.

While Wartsila could have managed the project from start to finish, the Jones Act, the U.S. maritime law on which the Monterey's competitiveness rested, required that a portion of the work be performed in the United States.

Wartsila then subcontracted the hull and superstructure work to two U.S. shipyards - Dillingham Corp. in Portland, Ore., and Tacoma Boatbuilding Co. in Tacoma, Wash.

To finance the project, capital would come from two principal sources:

* About $16.8 million would be raised by selling 140 limited partnerships at $120,000 each to wealthy investors.

* An additional $24 million would come from the Finnish Export Credit Ltd., a central lending agency owned by the Finnish government and that nation's banks.

* The Masters and Mates union would receive $4.15 million in cash up front for the Monterey and a $4.35 million mortgage payable over 8 1/2 years - still less than the union had sunk into the ship over the years.

All in all, it was an intricate plan loaded with many variables that Kurtz sought to implement beginning in 1984, when he incorporated American Regency Cruises in Delaware on Aug. 31, listing himself as president.

Next, he, along with two other men, John B. Toomey and Bruno D. Trimpoli, chartered Aloha Pacific Cruises Inc. in Virginia on Jan. 23, 1986.

Toomey is president and chairman of the board of VSE Corp. Trimpoli is president of Inter Financial Insurance Consultants Inc., an Atlanta insurance and financial firm, which the Monterey's investment circular described as being in the business of "arranging for the credit enhancement of tax-exempt bonds and for surety bonds for limited partnerships. "

Kurtz then formed the Aloha Pacific Cruises Limited Partnership, also in Virginia, on May 13, 1986. At that time, the House had passed its version of the Tax Reform Act, scaling back the investment tax credit and accelerated depreciation benefits considered so important to attract investors. And the Senate was about to take similar action.

Kurtz and an Indianapolis travel agent, Othmar Grueninger Inc., became general partners. They, in turn, sold shares, ranging in price from $25,000 to $50,000, to six individuals, one of whom was James Bakalis, the owner of the former Gold Rush.

A MANAGER FOR MONTEREY

The Aloha partnership would manage the Monterey's cruise operations, in return for which it would receive 10 percent of the ship's gross cruise revenue. Even before the vessel sails, Aloha will receive $1.65 million for pre-cruise operations.

Early in 1986, Kurtz and the Masters and Mates union reached a tentative agreement to sell the Monterey. In June of that year, Aloha Pacific Cruises circulated a "private placement memorandum" to prospective investors who could buy limited partnership units in the Monterey venture for $120,000 each.

Not just anyone could invest, the memo cautioned, but only investors who could "satisfy" certain requirements. Among them: a net worth of at least $1 million or an annual income of $200,000 or more.

As has always been the case with tax shelters, it was not necessary for investors to put up the full $120,000. In fact, they could buy a unit with as little as $12,000 in cash.

The partnership arranged for Nutmeg Financial Services Inc. of Norwalk, Conn., a firm that specialized in assisting high-net-worth people to structure tax-avoidance packages, to finance the balance of $108,000.

An added bonus gave investors "a one-week cruise package for two to be used on an 'as available' basis during the first two years of cruise operations. "

While the Monterey backers were lining up financial support during the summer of 1986, they also were working quietly on Capitol Hill to secure an exemption from the tax reform bill wending its way through Congress.

When the legislation finally emerged and was passed in September, the Monterey's private tax break was buried in the fine print of the 925-page Tax Reform Act - just as were similar measures, all arranged by friendly members of Congress and benefiting thousands of wealthy investors and hundreds of businesses.

Everyone seemed to emerge a winner.

The Masters, Mates and Pilots union was spared from having to pour additional millions of dollars from its dwindling treasury into the ship's upkeep.

James Kurtz, the Washington lawyer who came up with the tax-based investment package, received nearly $1.2 million as "reimbursement of startup costs. " He will receive an additional $500,000 during a three-year period after cruises begin.

Workers in Finland's Wartsila shipyard were guaranteed employment for the months that it would take to overhaul the vessel.

Investors in the venture could reduce their personal and corporate tax bills by claiming the investment tax credit and accelerated depreciation eliminated for most everyone else by the Tax Reform Act.

But as was the case with all the other private provisions in the act - no matter how well-intentioned - there was one loser: the average taxpayer who would have to make up the lost tax revenue.

As might be expected, no one wants to talk much about the Monterey tax concession.

A spokesman for the Bechtel Group Inc. declined to comment about the family's ownership share in the Monterey.

According to documents filed in Alexandria, Va., Sequoia Ventures Inc. of San Francisco is among the limited partners. Larry Miller, the Bechtel spokesman, would only acknowledge that Sequoia "is the Bechtel family's private investment arm. "

Kurtz, who put together the Monterey project, has refused to answer calls

from The Inquirer.

When Bakalis, the former owner of the Gold Rush, was asked if he knew how the tax break came about, he answered:

"I'm not acquainted with it. I just did that (invested) on the advice of my accountant. He told me about it, and I was reasonably interested in it, of course, to just invest a little bit in it. . . . Other than that, I'm not really that well versed in it. "

Bruno Trimpoli, an Atlanta insurance executive and a director of Aloha Pacific Cruises, which will manage the ship, said he thought the provision had been obtained by the law firm representing the Masters and Mates union.

"There were all kinds of deals by corporations protecting their ITCs (investment tax credits)," Trimpoli said. "The SS Monterey was just one of those projects, and it was done through . . . the law firm that represents the seaman's union. All we did was jump on the bandwagon."