or any such subcontractor shall be held by him for the account of the United States and shall be paid only upon a direction issued by or pursuant to the authority of a Secretary of a Department. The act indemnifies each person against all claims on account of amounts so withheld and paid over to the United States.

(c) Action to withhold under prime contracts and subcontracts may be taken upon default in the elimination of excessive profits determined by agreement as well as in cases of determinations of excessive profits made by unilateral order.

(d) Any withholding or recovery under any prime contract with any Department or agency, or related subcontract, when claims under such prime contract or subcontract have been assigned to any bank, trust company, or other financing institution, shall be subject to the applicable provisions of section 105 (b) (5) of the act and also to the applicable provisions of the Assignment of Claims Act of 1940, as amended.

1461.5 Administration of determinations by agreement or order.-(a) The Secretary of each of the Departments is authorized to eliminate, by any of the methods set forth in section 105 (b) of the act, all excessive profits which he is directed by the Board to eliminate.

(b) When an agreement is made or an order is issued and entered, determining excessive profits, the Board will direct the Secretary of one of the Departments to eliminate such excessive profits by any of the methods set forth in section 105 (b) of the act.

(c) Pursuant to each direction referred to in paragraph (b) of this section, in the case of an agreement, the Secretary shall first endeavor to effect the collection of the amount of excessive profits determined by such agreement in accordance with the terms and con

ditions of the agreement and to secure the performance by the contractor of any other provisions which may be included therein. If the contractor does not pay the full amount of such excessive profits in accordance with the terms and conditions of the agreement, the Secretary may use such of the other methods for the elimination of excessive profits set forth in section 105 (b) of the act as he in his discretion shall deem necessary or appropriate to effect the collection of the amount unpaid. If, however, within the time provided in § 1474.6 of this subchapter, the contractor has made a timely request for an extension of time to pay any amount due and payable under the agreement, the Secretary will not, before such request is acted upon by the Board, use any of such collection methods other than the withholding of such amount, or any part thereof, from amounts otherwise due to the contractor unless the Secretary in his discretion deems the use of any other of such collection methods to be necessary to protect the interests of the Government.

(d) Pursuant to each direction referred to in paragraph (b) of this section, in the case of an order, the Secretary ordinarily shall demand that the full amount of the excessive profits determined by such order to be paid by the contractor not later than the thirtieth calendar day after the date of the order; but when, in the discretion of the Secretary, such procedure shall be considered inadequate to protect the interests of the Government in a particular case, the Secretary shall endeavor to effect the collection of such excessive profits by any of the methods set forth in section 105 (b) of the act as he shall deem necessary or appropriate. The Secretary shall also endeavor to secure the performance by the contractor of any other provisions which may be included in the order.

Sec.

1462.1 Scope of part.

1462.2 Statutory provisions.

1462.3 Renegotiation after filing of Federal tax returns.

1462.4 Determination of Federal tax credit for partnerships and joint ventures.

1462.5 Determination of Federal tax credit for sole proprietor, partnership and joint venture in community property States. 1462.6 Determination of Federal tax credit in the case of a joint return by husband and wife. 1462.7 Renegotiation before filing of Federal tax returns. 1462.8 Special allocations of excessive profits elimination required for Federal tax purposes, AUTHORITY: Sections 1462.1 to 1462.8 issued under section 109, Pub. Law 9, 82d Cong. Interpret or apply section 105, Pub. Law 9, 82d Cong.

1462.1 Scope of part.-This part deals with the effect of renegotiation upon a contractor's Federal income tax.

1462.2 Statutory provisions.-(a) Section 105(b) (8) of the act provides as follows:

In eliminating excessive profits, the Secretary shall allow the contractor or subcontractor credit for Federal income and excess profits taxes as provided in section 3806 of the Internal Revenue Code.

(b) Section 1481 of the Internal Revenue Code of 1954 (corresponding with Section 3806 of the Internal Revenue Code of 1939) requires, as a general rule, that the amount of a contractor's Federal income tax, which has been assessed for the taxable year under renegotiations in respect of excessive profits realized in such year, be allowed as a credit against the total excessive profits to be eliminated.

1462.3 Renegotiation after filing of Federal tax returns.—(a) Allowance of credit for Federal taxes.-(1) The allowance of a credit for Federal taxes is provided by section 1481 of the Internal Revenue Code for the purpose of relieving contractors from double payments of excessive profits to the United States, once in the form of taxes and again as excessive profits, and to avoid the necessity for tax refunds by the Treasury.

(2) When excessive profits are determined for a taxable year for which complete Federal income tax returns, as distinguished from tentative returns, have been filed, the difference between the amount of Federal income tax assessed in respect of the contractor's income for the period (including the excessive profits) and the amount of Federal income tax which would have been assessed if the excessive profits had been excluded from the returns, is allowed as a credit against the excessive profits determined.

(3) The amount of the credit is based upon the amount of taxes assessed before the credit computation. If the assessment based upon the return filed has not been revised by the Internal Revenue Service, the credit is computed upon the basis of such assessment. If such assessment has been revised, the credit is computed upon the basis of the revised

assessment.

(4) Adjustments of a contractor's returns to reflect the reduction of taxable gross and net income and the amount of tax are made by the Internal Revenue Service after tax credits have been allowed. Any subsequent changes in the contractor's net income or tax liabilities are based upon these adjusted figures. Amended returns are not to be filed.

(5) The effect of this credit provision is to require precisely the same aggregate amount of payments to the Government (as taxes and excessive profits) when renegotiation occurs after the filing of Federal tax returns, as would have been required if the gross amount of the excessive profits had been repaid to the Government before the filing of the Federal fax returns and no Federal taxes had been assessed.

(b) Computation of credit for Federal taxes. (1) The Internal Revenue Service computes the credit allowable under section 1481 of the Internal Revenue Code for Federal income taxes assessed for a prior taxable year. The contractor shall submit a written request for such computation directly to the Director of

Internal Revenue where the contractor filed its tax returns for the taxable year involved. Such request shall state that such tax returns include as income the amount with respect to which a tax credit is claimed.

(2) If the original or any amended returns for the taxable year involved have been filed less than one year before the request for tax credit computation is made, a photostatic or certified copy of each such return shall be subImitted with such request to the Director of Internal Revenue. There shall be attached to each such return a statement, signed by the taxpayer, or by a responsible official of the taxpayer, certifying that the copy so submitted is a true and complete copy of the return as signed, except (if such is the case) that schedules not pertinent to the tax credit computation are omitted.

(3) The contractor shall mail to the Board a copy of each request made to the Director of Internal Revenue. Copies of tax returns will not be enclosed with copies of requests so mailed to the Board.

1462.4 Determination of Federal tax credit for partnerships and joint ventures.— (a) Since a partnership files only an information return and the Federal tax is imposed on the individual income of the partners, the tax credit to which a partnership is entitled under section 1481 for the taxable year under renegotiation is the aggregate amount of the separate credits to which the individual partners are entitled, because their shares of the partnership's income are reduced by the elimination of the excessive partnership profit. A request for a credit computation shall be made for each partner.

(b) For example, if A and B are partners with 60 percent and 40 percent interests, respectively, and the partnership has realized excessive profits of $1,000,000 for a prior taxable year, the elimination of $1,000,000 excessive profits of the partnership will reduce the taxable income of A for the year by $600,000 and that of B by $400,000. Upon request for a determination of credit under section 1481, the Director of Internal Revenue will determine the amount by which the elimination of those excessive profits would reduce the individual income taxes of A and B for the year. The aggregate amount of such reductions in the in

dividual Federal income taxes of A and B will represent the credit to be allowed, under section 1481, against the partnership's obligation to refund excessive profits of $1,000,000. 1462.5 Determination of Federal Federal tax credit for sole proprietor, partnership and joint venture in community property States. If a portion of the excessive profits received or accrued by a sole proprietor, partner, or joint venturer in any taxable year was included in the Federal income tax return of his or her spouse, by virtue of the community property laws of the State in which they were domiciled during such year, the tax credit allowed under section 1481 will include the amount, as determined by the Director of Internal Revenue, by which the tax of the spouse is decreased by the elimination of the excessive profits. In such cases, both the husband and the wife shall submit to the Director of Internal Revenue a written request for a determination of tax credit.

1462.6 Determination of Federal tax credit in the case of a joint return by husband and wife. If all or a portion of the excessive profits received or accrued by a sole proprietor, partner, or joint venturer was included in a Federal income tax return made jointly with his or her spouse and the tax is computed with respect thereto under section 2 of the Internal Revenue Code, the tax credit allowed under section 1481 will be the amount, as determined by the Director of Internal Revenue, by which the tax of the spouses under the joint return is reduced by reason of the elimination of the excessive profits. In such cases, both spouses shall submit to the Director of Internal Revenue a written request for a determination of tax credit.

1462.7 Renegotiation before filing of Federal tax returns.-(a) Exclusion of excessive profits from returns.-(1) When, as a result of renegotiation, the amount of excessive profits is determined for a period for which Federal income tax returns have not yet been filed, such amount of excessive profits may be excluded from the contractor's income tax returns for the period.

(2) The amount of excessive profits eliminated for a particular taxable year may not be deducted or excluded from taxable income for any other taxable year,

(3) For the tax effect of renegotiation for periods for which Federal income tax returns have not been filed, see I.T. 3577, I.T. 3611 and I.T. 3671 (pages xlii to xlv).

(b) Effect of tenative tax return.-When a contractor has filed a tentative return for the year involved and has been granted an extention of time for filing its completed return, the provisions of I.T. 3577, I.T. 3611 and I.T. 3671 as noted in paragraph (a) (3) of this section will apply if the renegotiation takes place before the filing of the complete return.

1462.8 Special allocations of excessive profits elimination required for Federal tax purposes. (a) When the contractor has reported earnings for Federal tax purposes on a basis different from the basis upon which renegotiation is conducted, the excessive profits to be eliminated will, for purposes of computing the allowable tax credit under section 1481 of the Internal Revenue Code, be allocated to the contractor's taxable year or years in which the Board determines that such excessive profits were reported as income in the tax returns. This procedure is applicable, for example, when re

negotiation has been conducted on a completed contract basis although the contractor has used some other method of accounting for Federal tax purposes in reporting income from some or all of the contracts covered by the renegotiation.

(b) When renegotiation is conducted on a consolidated basis, excessive profits to be eliminated will be allocated between the entities so consolidated. (See sec. 1464.8 of this subchapter.)

(c) The allocation of excessive profits will be made by the Board and not by the contractor. The contractor may, however, furnish or be required to furnish such supplementary information in explanation of the sources of taxable income reported for any year as may be pertinent to such allocation.

(d) Allocations of excessive profits to be eliminated under paragraphs (a) and (b) of this section will be set forth in the renegotiation agreement or in the unilateral order determining excessive profits and shall also be set forth in any request to a Director of Internal Revenue for tax credit computation.