method of accounting employed by the contractor in determining net income for Federal income tax purposes does not, in the opinion of the Board, properly reflect such income or costs, and the contractor and the Board are unable to agree upon a method which does properly reflect such income or costs.

(2) Cost accounting standards. The Board was designated a "relevant Federal agency" by Cost Accounting Standards Board regulation, § 331.2, 4 CFR 331.2, issued under Pub. L. 91-379 (84 Stat. 796, approved August 15, 1970), 50 U.S.C. App. 2168. Accordingly, the Board extends recognition to cost accounting standards promulgated by the Cost Accounting Standards Board, and in filing financial statements with the Renegotiation Board, contractors are required to comply with such standards as provided herein.

(i) Fiscal years beginning after December 31, 1974. For fiscal years beginning after December 31, 1974, contractors with any renegotiable contracts or subcontracts subject to one or more cost accounting standards are required to file financial statements with the Renegotiation Board in conformance with these standards for that portion of their renegotiatiable business subject to such standards, with the remaining portion of their renegotiable business to be reported in such financial statements in accordance with the provisions of paragraph (b)(1) of this section, except as provided in paragraphs (b)(2) (ii) (a), (b) and (c) of this section.

(ii) Extended application of cost accounting standards. For fiscal years beginning after December 31, 1974, contractors subject to cost accounting standards for a portion of their renegotiable business who file financial statements with the Renegotiation Board as provided in paragraph (b)(2)(i) of this section, may extend the application of such cost accounting standards in the following manner:

(a) In addition to that portion of the renegotiable business that is subject to one or more cost accounting standards and required to be reported for renegotiation purposes in accordance with such standards, contractors may report all other renegotiable business within the same profit center (as defined in § 351.30 of the Cost Accounting Standards Board regulations, 4 CFR 351.30) in accordance with such cost accounting standards.

182

(b) In addition to that portion of the renegotiable business that is subject to one or more cost accounting standards and required to be reported for renegotiation purposes in accordance with such standards, or any renegotiable business reported as provided in paragraph (b) (2) (ii) (a) of this section, contractors, with Board approval, may report any other renegotiable business in accordance with such standards.

(c) Financial statements filed with the Renegotiation Board pursuant to paragraphs (b) (2) (ii)(a) or (ii) (b) of this section shall conform with all other requirements of this part of the regulations, including the requirement that on item will be allowed as a cost of renegotiable business to the extent that such item has, in a previous renegotiation under the act, been allowed as a cost of renegotiable business (see RBR § 1459.1 (c) (8)); and the requirement that any reporting practice followed pursuant to (b) (2) (ii) (a) or (b) must be followed in subsequent fiscal years (see, for example, RBR § 1459.1 (c) (1)).

(iii) Accounting period. The Renegotiation Board has been excepted from certain provisions of Cost Accounting Standard No. 406, "Cost Accounting Period." Thus, where the contractor's cost accounting period is different from its fiscal year under the Act, the latter shall be used.

(3) Differing accounting methods. (i) The Board will permit a contractor to adopt for renegotiation purposes a method of accounting other than that used by the contractor for Federal income tax purposes, provided That:

(a) The method of accounting to be adopted is not in conflict with the contractor's obligation under 50 U.S.C. App. 2168 or paragraph (b)(2) of this section to comply with the cost accounting standards.

(b) The Board finds that the method of accounting employed by the contractor for Federal income tax purposes is manifestly unsuitable for the purpose of renegotiation because it does not clearly reflect the profits attributable to the contractor's performance of renegotiable contracts for the fiscal year under review, and the method of accounting to be adopted does clearly reflect such profits; and

(c) The contractor enters into a written agreement with the Board before the conclusion of

the renegotiation proceedings for the year under review, providing among other things substantially as follows:

(1) That the contractor will employ such different method of accounting for the purposes of the renegotiation proceedings for the year under review and all subsequent years, whether such proceedings are concluded by agreement or order;

(2) That no cost or expense recognized in the renegotiation proceedings for the first year covered by the agreement will be recognized in any subsequent renegotiation proceeding; and

(3) That the computation of losses, if any, in preceding fiscal years (see § 1457.9 of this chapter) will be made on the basis of such different method of accounting.

(ii) Under this section, a contractor may adopt a different method of accounting for the purpose of determining all amounts received or accrued and costs paid or incurred in a fiscal year, as in the case of a change from a cash receipts and disbursements method of accounting to an accrual method of accounting; or it may adopt a different method of accounting for a particular item of cost or for a particular class of items of cost which would result in recognizing such item or items in one fiscal year rather than another.

(iii) Subject to the foregoing conditions, the Board will also permit a contractor to adopt for renegotiation purposes the completed contract method of accounting for contracts to be performed over a period of more than one fiscal year, which, because of circumstances of performance, would require estimates of performance and allocation of income and cost. that could result in material distortion in accounting on an interim basis prior to completion. Such contracts may include contracts for construction of major facilities or major units (such as a vessel or group of vessels) when the profits can best be determined upon completion.

(iv) If a contractor employs, for the purposes of a renegotiation proceeding relating to the year under review, a method of accounting different from that which it employed for the purposes of a renegotiation proceeding relating to the preceding fiscal year, whether pursuant to this section or otherwise, it will be required

to employ such different method of accounting for the purposes of all subsequent renegotiation proceedings, and the amounts received or accrued and costs paid or incurred which have been recognized in prior renegotiation proceedings will not be recognized in the proceedings relating to the year under review.

(4) Allocation of costs. In general, except as provided in paragraph (b)(2) of this section, the costs paid or incurred with respect to renegotiable business in the fiscal year under review will be the costs allocated to such business and such year by the contractor's established cost accounting method if that method reflects recognized accounting principles and practices. If in the opinion of the Board there is no adequate or effective cost accounting method in use, or if the method employed does not properly reflect such costs because there are unjustified or improper allocations of items of cost in the accounting records or in the reports or statements filed for the purpose of renegotiation, costs will be allocated in accordance with such method as in the opinion of the Board does properly reflect such costs. The fact that all receipts and accruals during a fiscal year are classifiable as renegotiable does not necessarily mean that all items of cost estimated to be deductible in that year are allocable to renegotiable business.

(5) Tax deductions. When an item of cost is allocable in whole or in part to renegotiable business, the Board will estimate the amount allowable as a deduction or exclusion under chapter 1 of the Internal Revenue Code, and such estimated amount will be allowed as a cost of renegotiable business in the fiscal year under review to the extent that it is allocable to such business and such year in accordance with the principles set forth in this paragraph (b). No such item of cost will be allowed in an amount less than or in excess of that estimated to be deductible or excludable from income under the Internal Revenue Code, and all items of cost will be allocated to the fiscal year in which they are allowable in the determination of taxable income under said Code, except as otherwise provided in this paragraph (b). When it is clear that a contractor's deductions and exclusions under the Internal Revenue Code result in allowable costs of renegotiable business

which are in the aggregate either high or low on a comparative basis, this circumstance will be considered in connection with the factor of the "reasonableness of costs" of the contractor and the determination of the amount of any profit adjustment to be required of the contractor. In estimating amounts allowable as deductions or exclusions under chapter 1 of the Internal Revenue Code, due consideration will be given to any pertinent action by the Internal Revenue Service. Published rulings of the Internal Revenue Service on matters of general application will be adhered to in making such estimates. However, the allowance of items as costs is not required merely because they have been or are expected to be allowed for tax purposes by particular revenue agents or other field representatives of the Internal Revenue Service. Occasionally cases may be encountered in which revenue agents will have allowed salaries or other items as deductions for tax purposes which the Board concludes are not properly allowable under the Internal Revenue Code or are properly allowable in a different amount or for a different year. In such cases the action of the revenue agents is not regarded as conclusive. Similarly, disallowances by such officials are not conslusive. The Board will exercise independent judgment on whether and to what extent and for what year items are allowable as deductions or exclusions under the Internal Revenue Code. Such judgment will be based upon an estimate of what the courts would do if the deductibility or excludability of the items were the subject of litigation.

(6) Effect of cost principles promulgated by other agencies. Agreements for the allowance or disallowance of costs entered into by a contractor with another agency of the Government, either by specific contractual provision or by acceptance (expressed or implied) of Government regulations or policies, are not controlling with respect to recognition of such costs for renegotiation purposes. Thus, a cost properly disallowed in accordance with the Armed Services Procurement Regulation, in connection with a contract to which such regulation is applicable, will nevertheless be recognized for renegotiation purposes if such cost is a proper Federal income tax deduction. Similarly, an item allowable as a "cost" by such regulation

or by specific contractual agreement will not be allowed unless it is a proper Federal income tax deduction. Furthermore, a specific agreement that additional proper costs incurred in performing a contract will not be claimed as an addition to the contract price, will not result in the non-recognition of such cost for renegotiation purposes.

(7) Conditional allowance of cost. If an occasion should arise in which the Board is unable to make a reasonable estimate of whether or the extent to which a particular item is allowable as a deduction or exclusion under the Internal Revenue Code for the year under review and the item is material in relation to the excessive profits to be eliminated, the Board may allow the item as a cost in renegotiation, provided, That the contractor agrees to refund as additional excessive profits the amount so allowed to the extent that such amount may finally be determined to be not allowable as a deduction or exclusion under the Internal Revenue Code for the year under review.

(8) Costs previously allowed in renegotiation. No item will be allowed as a cost of renegotiable business to the extent that such item has, in a previous renegotiation under the act or under any other renegotiation law, been allowed as a cost in determining excessive profits, notwithstanding that such item may be a deduction or exclusion under chapter 1 of the Internal Revenue Code in computing taxable net income for the taxable period corresponding to the fiscal period covered by the current renegotiation.

(9) Replacement of inventory involuntarily liquidated. Under section 1321 of the Internal Revenue Code, a taxpayer using the last in, first out inventory method may, for any year in which it involuntarily liquidated any part of its base stock inventory, elect to adjust retroactively its net income for tax purposes for such year by reference to the costs of replacing in a subsequent year the inventory so involuntarily liquidated. The excess of such replacement costs over base stock costs is neither an exclusion nor a deduction under the Internal Revenue Code, but merely a retroactive adjustment of net income. For purposes of renegotiation, there will be allowed as a cost and allocated between renegotiable and non-renegotiable business according to the principles set forth in this paragraph the base stock costs and the excess of

replacement costs, or of the estimated replacement value in the fiscal year in which the involuntary liquidation occurred, over the base stock costs. Similarly, the cost of renegotiable business will be reduced, to the extent allocable thereto, by any excess of base stock costs over replacement costs, or over the estimated replacement value in the fiscal year in which the involuntary liquidation occurred. Such cost allowance or reduction will be made whether or not the use of the base stock inventory constitutes involuntary liquidation under the provisions of the Internal Revenue Code and even though such inventory is not actually replaced until a subsequent year.

(c) Costs allocable to uncompleted portions of terminated contracts and subcontracts.-(1) Allowed in renegotiation.-Costs allocable to the uncompleted portion of any terminated contract or subcontract which is subject to renegotiation will be allowed as costs in renegotiation. (See sec. 1457.6(a) of this subchapter.) Such costs will be allowed however, only to the extent that, and for the fiscal year for which, they are estimated to be deductible in the computation of taxable income under the Internal Revenue Code (see section 1.451-1 and Internal Revenue Service Mimeograph No. 5897) and will not be allowed to the extent theretofore allowed as items of cost in any previous renegotiation under the act or under any other renegotiation law.

(2) Segregation of costs allocable to uncompleted portions of terminated contracts and subcontracts. Costs allocable to the uncompleted portions of terminated contracts and subcontracts shall be segregated from other costs. pertaining to renegotiable business, unless the costs allocable to such uncompleted portions of

contracts and subcontracts do not constitute a material portion of the contractor's total renegotiable costs. Such segregation may be required to be made in such general or such detailed manner as the Board may deem necessary.

(3) Effect of waiver of termination claims.The principles stated in subparagraphs (1) and (2) of this paragraph withe respect to the allowance of costs allocable to the uncompleted portions of terminated contracts and subc ntracts and the segregation of such costs are equally applicable whether or not the contrar has waived all or any part of the compensation to which it might be entitled.

1459.2 Salaries, wages, and other compensation. (a) Allocation.-Salaries, wages and other compensation which are estimated to be deductible for Federal income tax purposes will be allocated between renegotiable and nonrenegotiable business according to the principles established in section 1459.1(b).

(b) Allowances.-Under section 162 of the Internal Revenue Code, salaries or other compensation for personal services are allowed to the extent found "reasonable." In determining whether any salaries or other compensation paid by a contractor to its officers or employees are reasonable, consideration will be given to the nature of the work, extent of responsibility, experience and effectiveness of the officer or employee, recent compensation record, and such other factors as may be pertinent. Comparison will be made when possible with the compensation of officers or employees in similar positions in other companies within the particular industry. When the contract of employment is an arm's length transaction, reasonableness of compensation may be determined only