an allowable deduction under the Internal Revenue Code, and as such will be allowed for renegotiation as a cost in the fiscal year under review.

1499.1-40 Renegotiation Ruling No. 40: Accounting methods; allowable depreciation costs for assets replacing those involuntarily converted (interprets act section 103 (f); §§ 1452.5(a), 1455.3(b)(2), 1459.1(b)(2) and 1459.5(b)(4) of this chapter).-(a) Internal Revenue Code Section 1033 permits a taxpayer under certain conditions to elect not to recognize the gain on assets involuntarily converted and replaced. In lieu of recognizing gain, the taxpayer reduces the cost basis of the replacement assets by the amount of the gain, thereby reducing subsequent allowable depreciation expense.

(b) Section 1459.1(b) (2) of this chapter provides that the Board may enter into an agreement with a contractor to adopt a method of accounting other than that used by the contractor for Federal income tax purposes when the method used for tax purposes is manifestly unsuitable for renegotiation.

(c) Unless the contractor whose property is involuntarily converted is permitted to depreciate replacement property on the basis of its full acquisition cost, even though for tax purposes he reduces the basis of the new property by the gain on the involuntarily converted property, he would be unfairly penalized for availing himself of the tax relief provided in such circumstances. For although the gain on the involuntarily converted property is not renegotiable (see §§ 1452.5 (a), 1455.3(b)(2), and 1459.5 (b) (4) of this chapter), to reduce the depreciation base by the amount of an unrecognized gain from an involuntary conversion would be tantamount to including the gain in renegotiable income. Accordingly, the Board will consider favorably a contractor's request for a special accounting agreement to permit the contractor to compute depreciation on the acquisition cost of property replacing involuntarily converted property when the contractor has elected for Federal income tax purposes to reduce the cost basis of the new property by the amount of the gain on the involuntarily converted property.

1499.1-41 Renegotiation Ruling No. 41: Consolidated renegotiation; requirement of

ownership during fiscal year (interprets act section 105(a); §§ 1464.4(c) and 1464.7(b) of this chapter).-(a) P Corporation and two subsidiaries acquired subsequent to the fiscal year under review a request for consolidated renegotiation. During the review year P Corporation did not own any stock in either of the other two corporations, nor did either of such corporations own any stock in the other.

(b) The request for consolidated renegotiation must be denied because P Corporation owned no voting stock in any member of the group at any time during the fiscal year under review. The 80 percent stock ownership requirement of § 1464.4 (c) relates, as do the comparable Federal income tax regulations, to the fiscal year for which consolidation is requested and not to the fiscal year in which the consolidation request is made. The subsidiary corporations themselves, since they were wholly unrelated prior to their acquisition by P Corporation, do not qualify for consolidated renegotiation with each other for the fiscal year under review.

1499.1-42 Renegotiation Ruling No. 42: Interest expense (interprets act section 103(f); § 1459.6(b)(2) of this chapter).-(a) This ruling relates to the allowance of interest claimed as a cost by a contractor who reports both interest expense and interest income.

(b) Interest received or accrued on investments is not renegotiable. On the subject of interest paid or payable on borrowed funds, § 1459.6 (b) (2) of this chapter provides as follows:

if a contractor has an amount of unrestricted current funds, or marketable securities obviously in excess of the reasonable working capital needs of its business, or if there is a significant amount of assets not directly related to those operations of the contractor which result in renegotiable business, consideration will be given to these circumstances in the allocation of interest expense to renegotiable business.

(c) The fact that funds are available for investment is evidence of capital in excess of current working needs. When excess capital is used to acquire an asset on which interest is earned, instead of being used to reduce or eliminate interest-bearing debt, the interest earned is the equivalent of a return of interest paid or incurred on such debt. Considered in this manner, it offsets to a corresponding

extent the amount so paid or incurred. The interest allowable as a cost in renegotiation is arrived at, therefore, by deducting interest income from interest expense and then allocating the balance in accordance with the method of allocation deemed appropriate in the particular case. It has been the consistent practice in renegotiation to "net" interest income and expense in this manner.

(d) The above rule is not affected by the fact that when the provisions of a debt instrument do not permit prepayment, free funds cannot be used to reduce the debt and thus reduce the interest payable thereon. However, the fact that such funds are available for investment indicates an excess of capital within the scope of § 1459.6(b)(2) of this chapter and supports the application of the netting procedure described above.

(e) Related to the foregoing is the matter of interest on borrowing made for purposes extraneous to the normal operating activities of the contractor. If, for example, a contractor borrows money in order to finance the purchase of an unrelated investment, interest on such borrowing is not allocable to renegotiable business and should be charged directly to nonrenegotiable business.

1499.1-43 Renegotiation Ruling No. 43: Consolidated renegotiation; related group; meaning of direct or indirect ownership requirement (interprets act section 105(a); § 1464.4(c) of this chapter).-(a) Section 1464.4 (c) of this chapter prescribes the requirements for consolidated renegotiation of a related group. Paragraph (c) provides as follows:

(c) Stock possessing at least 80 percent of the voting power of all classes of stock and at least 80 percent of each class of the nonvoting stock of each corporate member of the group (except the common parent, if any), and the right to at least 80 percent of the profits of each unincorporated member of the group (except the common parent, if any), are owned directly or indirectly by one or more of the other members of the group, or by the same person or persons other than a member or members of the group.

(b) The above-quoted provision connotes a chain of stock ownership or profit entitlement, or a combination thereof, in which the requisite interest in each member of the group is held, directly or indirectly, by another member

or members of the group or by the same outside person or persons.

(c) To illustrate: A, a sole proprietor doing business as A Company, is entitled to 85 percent of the profits of AB Company, a partnership composed of A and B. A also owns 80 percent of the voting power of all classes of stock and 80 percent of each class of the nonvoting stock of C Corporation; and C Corporation owns 80 percent of the comparable classes of stock of D Corporation. All except C Corporation are engaged in renegotiable business. A Company, AB Company and D Corporation request consolidation. A's interest in A Company and AB Company is direct, and his interest in D Corporation is indirect. On these facts, if all other requirements of § 1464.4 of this chapter are satisfied, A Company and AB Company may be granted consolidated renegotiation as a related group. D Corporation does not qualify for membership in the group because A owns indirectly only 64 percent of the stock of D Corporation.

1499.1-44 Renegotiation Ruling No. 44: Consideration of nonrecurring costs of prior years.—(a) This section explains the application of § 1460.10 (b) (5) of this chapter, which provides in part as follows:

(5) The Board will give consideration to certain situations where a contractor had deficient profits on renegotiable sales in a year or years prior to that under review. Where it can be established that deficient profits in prior years resulted from nonrecurring costs in the early stages of production which relate to production in the year under review, the Board will take this into account in reviewing the contractor's renegotiable business in the year under review.

(b) Where it is possible to identify and isolate, in specific amount, nonrecurring costs incurred in a prior fiscal year that relate to performance in the year under review, the Board will transfer such costs to the year under review, usually by special accounting agreement entered into pursuant to § 1459.1 (b) (2) of this chapter, provided that such action would not affect the result reached in the renegotiation of such earlier fiscal year (see § 1499.2-19 (e) of this chapter). If such an adjustment is made, the contractor is not entitled to factor consideration for such costs in the year under review; § 1460.10(b) (5) is not applicable.

(c) On the other hand, if accounting adjustments in precise amounts cannot be made, but nonrecurring costs within a demonstrable range were incurred in the prior year and the Board is satisfied that the other conditions set forth in paragraph (b) of this section exist, the presence of such costs in the prior year is taken into consideration by the Board in reaching a determination for the year under review. It is in such circumstances and in this manner that § 1460.10 (b) (5) operates. The provision does not authorize or contemplate an arithmetical allowance, in the year under review, of the deficiency in profits of the prior year; nor does it authorize or contemplate an averaging of profits of the prior year with those of the year under review, or an averaging of costs on a unit or program basis. It contemplates only that certain nonrecurring costs relating to performance in the year under review were incurred in a prior year; that because of such costs the contractor's profits in the prior year were deficient; that the removal of the costs to the year under review would not disturb the result reached in the renegotiation of the prior year; and that, therefore, such costs should be taken into consideration in evaluating the contractor's profits in the year under review. The consideration to be accorded to such matter in determining excessive profits for the year under review rests within the discretion of the Board, and will depend upon the probative value of the information made available to the Board.

1499.2 Renegotiation Bulletins.-This section contains Renegotiation Bulletins, consisting of statements of general policy formulated and adopted by the Board. The bulletins state Board policy with respect to specific provisions of the Renegotiation Act of 1951, as amended, or of these regulations, or other matters related to the conduct of renegotiation; some include interpretations of general applicability. They may be cited by section 'number (e.g., RBR 1499.2-12) or by bulletin number (e.g., R. Bull. No. 12).

(ii) In cases in which it can be demonstrated that a prime contractor or subcontractor engaged in renegotiable business to the detriment of its normal commercial business in the year under review, and thereby incurred the risk of loss of its competitive position in the industry concerned, the Board will allocate to renegotiable business that portion of the prime contractor's or subcontractor's normal advertising expense which the Board deems properly attributable to the effort by the prime contractor or subcontractor to forestall such loss of competitive position.

(b) Application. (1) A contractor will be regarded as having engaged in renegotiable business to the detriment of its normal commercial business when and to the extent that the volume of its normal commercial business decreases or is otherwise adversely affected as a direct result of its having accepted renegotiable prime contracts or subcontracts.

(2) Such a contractor will be regarded as having incurred the risk of loss of its competitive position in the industry concerned when any competitor during the same period continues to manufacture products which fill the same need as those of the contractor.

(3) However, a contractor who sells all or some of its normal commercial production to the Government under renegotiable prime contracts and subcontracts instead of to its customary civilian market will not be considered to have engaged in renegotiable business to the detriment of its normal commercial business, or to have incurred the risk of loss of its competitive position, if all other companies in the same industry have, to substantially the same extent, devoted their facilities to renegotiable business.

(c) Examples. The following are examples of situations in which the Board will allocate to renegotiable business a portion of the contractor's normal advertising expense:

1. A contractor who manufactures Product X has seriously curtailed its normal production in order to perform renegotiable contracts. Other manufacturers manufacturing Product X are not engaged in renegotiable business and continue to serve the civilian market.

2. All domestic manufacturers of Product Y are unable to produce sufficient amounts of Product Y for the civilian market because each one has diverted productive capacity to renegotiable business. Foreign manufacturers of Product Y, however, continue to supply the domestic civilian market.

3. A contractor who manufactures metal Product Z is unable to maintain its normal production thereof

because it has devoted its facilities to renegotiable business. Manufacturers of wooden Product Z serving the same civilian market continue to produce their product, and their volume is not affected by the defense effort.

4. A contractor who manufactures a branded line of high quality kitchenware is unable to maintain its previous high standards and the special features of its normal product because it has devoted its facilities to renegotiable contracts, although it is able to produce as a substitute a lower quality product which partially meets the consumer demand.

1499.2-2 Renegotiation Bulletin No. 2: Use of defense materials system program identification symbols in segregating renegotiable and nonrenegotiable subcontracts.— (a) Section 1456.3 (b) (3) of this chapter indicates that subcontract may be identified as renegotiable if it contains a reference to "an allotment number under the Defense Materials System which can be identified from the symbols used as having been issued by a Department listed in § 1452.2 of this subchapter." This bulletin sets forth such identification symbols and suggests the manner in which they may be used as an aid to the segregation of subcontract sales.

(b) Program identification symbols under the Defense Materials System are issued by the Business and Defense Services Adminis

tration of the Department of Commerce. These symbols are set forth in Schedule II to DMS Reg. 1, as follows:

SCHEDULE II TO DMS REG. 1-AUTHORIZED PROGRAM IDENTIFICATIONS AND ALLOTTING AGENCIES

The program identification symbols listed in this schedule are the only ones authorized for use under the Defense Materials System and must be used in accordance with this regulation and other applicable regulations and orders of BDSA.

The symbols are not listed in alphabetical or numerical sequence but are grouped by Allotting Agencies. Within each group, the Allotting Agencies listed in Column 3 are authorized to make allotments under one or more of the programs listed in Column 2 and to assign allotment numbers and ratings containing one or more of the program identifications listed in Column 1. Communications concerning rating, self-authorization and allotment authority should be addressed to the named agency, its procuring element, or as directed by the procuring element. The full names of the Allotting Agencies shown by initials in the following list are:

AEC-Atomic Energy Commission.
BDSA-Business

tration.

and Defense Services Adminis

CIA-Central Intelligence Agency.
FAA-Federal Aviation Agency.

NASA-National Aeronautics and Space Administration.