period, the contractor may be required to pay interest as a condition to the granting of such extended terms.

§ 1499.2-10 Renegotiation Bulletin No. 10: Treatment of shorts and seconds in segregation of subcontractors' sales in the textile industry.

(a) It is the practice in the textile industry for manufacturers to purchase fabrics in excess of amounts needed to perform specific Government contracts, due to the fact that during the course of manufacture some of the purchased fabrics are, or will become unsuitable for incorporation in end products delivered under renegotiable contracts. Such unsuitable fabrics are described as "shorts" if they are not of sufficient length to meet Government specifications, and, as "seconds" if they fail to meet Government specifications for any other reason than for length.

(b) Generally, shorts and seconds, while not accepted by the Government, have a commercial value substantially equivalent to the value of fabrics which are not defective in any respect. Therefore, even though they are originally purchased to perform defense contracts, they represent no loss to the purchaser of the type which he would charge against such defense contracts if they were of no use other than as scrap or waste.

(c) The Board has decided that, until further notice, it will permit contractors who make renegotiable sales of any of the fabrics specified below, to deduct from the receipts or accruals derived from such sales any amounts referable to fabrics which are diverted from the renegotiable contracts of their purchasers because the fabrics proved to be shorts or seconds.

(d) Since the computations necessary to determine the proper amount of such deductions would be complex in many cases, due to the fact that many sellers of fabrics have a substantial number of customers, the Board has also decided, at the request of representatives of the textile cotton industry, to permit any contractor selling cotton yarns to reduce its receipts or accruals by the percentage factors listed in the column headed "Grey" and to permit any contractor selling cotton grey goods to reduce its receipts and accruals by the percentage factors listed in the column headed "Mill finish." These factors have been developed on the basis of a survey made by

§ 1499.2-11 Renegotiation Bulletin No. 11: Computation of cost allowance for pig iron.

(a) Scope. Pursuant to section 106(b) of the act, § 1453.2 (c) of this chapter provides a cost allowance for a contractor which, in the performance of renegotiable business, is engaged in an integrated process treating the product of a mine, oil or gas well, etc., to and beyond the last form or state in which the product is exempt as a raw material. This bulletin explains how an integrated steel producer should compute its cost allowance for pig iron and how the Board will apply the statutory factors to a contractor which is permitted such a cost allowance. However, the same principles may be applied to computation of an integrated steel producer's cost allowance for ferro-alloys such as ferromanganese,

ferrosilicon, etc.

(b) Segregation of materials to which cost allowance is applicable. The cost allowance is computed separately with respect to each exempt material going into an end product, taking into consideration the fair market value of each. It is necessary, therefore, to determine the total quantity of each kind of material used in performing renegotiable business, with respect to which the cost allowance will be computed. Segregation of total quantity of a material according to the ratios of sales, between renegotiable and nonrenegotiable end products, is not acceptable for this purpose unless products and prices are the same. Normally, the cost allowance for pig iron must be based on the best separate estimate of the pig iron content of each of

(d) Costs in excess of fair market value. A contractor whose total costs, as shown above, exceed the fair market value of pig iron will be allowed to charge its costs to renegotiable business in accordance with Part 1459 of this chapter without limitation with respect to fair market value. The cost allowance benefits conferred by section 106(b) of the act would not be applicable in such a case. Where the contractor is engaged in processing iron ore in several plants, any excess of costs over fair market value ascertained with respect to one or more plants will, in the absence of unusual circumstances, be offset against the allowable amounts ascertained with respect to other plants in determining the net amount of the cost allowance for pig iron.

(e) Application of statutory factors. Generally, if a contractor's allowable costs are enhanced by the integrated producer's cost allowance, all processing up to the exemption line is regarded, in application of the statutory factors, as if it were nonrenegotiable business. § 1499.2-12 Renegotiation Bulletin No. 12: Guide to the partial mandatory exemption for new durable productive equipment.

(a) This section states certain principles adopted by the Renegotiation Board in connection with the partial mandatory exemption of prime contracts and subcontracts for new durable productive equipment (section 106 (c) of the Renegotiation Act of 1951, as amended). In addition to the regulations set forth in Part 1454 and § 1456.4 of this chapter, this section may be used as a guide to the application of the exemption.

(1) "New". The term "new," as used in the Act, does not refer to the age of the equipment, but only to its use. For the purposes of this exemption, equipment is new when it is unused, without regard to the date when it was manufactured.

(2) "Durable". (i) Under the act, equipment is durable when it “has an average useful life of more than 5 years." The act provides that the average useful life of equipment is as set forth in Bulletin F of the Internal Revenue Service (1942 edition) or, if not so set forth, then as estimated by the Board.

(ii) In making such estimates, the Board considers all available evidence bearing upon the usable life of the equipment to users, including evidence of actual length of use, physical deterioration and economic obsolescence. The accounting practices of users in depreciating the equipment are also taken into consideration.

(3) "Productive". (i) For the purposes of this exemption, equipment sold under either a prime contract or a subcontract will be deemed productive if:

(a) It is used or designed to be used by the purchaser to manufacture tangible materials; or

(b) It has substantial industrial use and its principal industrial use is to manufacture tangible materials; or

(c) It is used or designed to be used to supply motive power directly to equipment which qualifies under either (a) or (b) above.

(ii) In determining whether equipment is productive, it is the equipment as sold that will be considered. For the purposes of (b) of subdivision (i) of this subparagraph, minor differences between the equipment as sold and other equipment with which it is compared will be disregarded.

(iii) The industry use test referred to in (b) of subdivision (i) of this subparagraph does not apply to any equipment with respect to which, at the time the seller is required to file its Standard Form of Contractor's Report for the fiscal year in which it has received or accrued payment for the equipment, the seller knows that the equipment has been or is intended to be used by the purchaser for purposes other than to manufacture tangible materials and in such a manner as to render the equipment incapable of being used thereafter to manufacture tangible materials.

(iv) An equipment part (see subparagraph (4) of this paragraph) is deemed productive if the equipment into which it is to be incorporated is productive under the principles stated above.

(4) "Equipment”. (i) The term "equipment" includes not only machines fully equipped for actual operation, but all the parts of a machine as well. For reasons of adminstrative feasibility, standard materials (such as nuts, bolts, screws, etc.) having uses other than as parts of productive equipment, are excluded.

(ii) The rule of the Board with respect to the exemption of equipment parts is as follows:

A new durable accessory, component, subassembly or other portion of an item of productive equipment will qualify for the partial mandatory exemption if:

(a) It is to be physically incorporated in or attached to such other item, it is necessary to or customarily employed in the operation of such other item, and it has no other commercial or industrial use; or

(b) It is to be used to supply motive power to such other item.

It will be noted that an equipment part, to qualify for exemption, must, among other requirements, be durable. Section 1454.27 provides that the extent to which the act applies to a part "will be determined by reference to the average useful life of the equipment in question and not by reference to the life of the equipment of which it becomes a part."

and

(5) "Convertible" to commercial use. (i) Section 106(c) of the act § 1454.28 of this chapter, read together, provide that prime contracts for new durable productive equipment are excluded from the exemption when the Board finds that the equipment cannot practicably be adapted, converted, or retooled for commercial use. This limitation does not apply to subcontracts.

(ii) The practicability of conversion to commercial use includes, in the opinion of the Board, both economic and engineering feasibility, as well as a willingness on the part of buyers generally to acquire the equipment. The Board has therefore adopted the following principles:

(a) When equipment can be applied to commercial use in its existing form or can be adapted to such use with only minor modifications, the Board will not make a finding that the equipment cannot practicably be adapted, converted, or retooled for commercial use unless the facts show that the equipment could not reasonably be expected to be used commercially in substantial quantity.

(b) When equipment cannot be applied to commercial use either in its existing form or with only minor modifications, the Board will not make a finding that the equipment cannot practicably be adapted, converted, or retooled for commercial use unless the facts show:

(1) That the engineering or other changes required to convert the equipment to commercial use are not feasible;

or

(2) That the cost of making such changes would be unreasonable in relation to the cost of similar new equipment;

or

(3) That the equipment in its converted state could not reasonably be expected to be used commercially in substantial quantity.

(iii) Important: Whenever a contractor believes that the partial mandatory exemption is applicable to any of its prime contracts or subcontracts for a fiscal year, the contractor is requested to submit to the Board, with its filing for such year, sufficient information and data to support its claim for exemption under the principles set forth in this bulletin. This will help the Board to make a proper and expeditious decision on the applicability of the exemption. The cooperation of contractors in this respect is solicited in their own interest.

§ 1499.2-13 Renegotiation Bulletin No. 13: Voluntary refunds and interim prepayments.

This section sets forth the rules adopted by the Board for determining when voluntary refunds by contractors and subcontractors shall be treated as reductions of renegotiable sales. Each type of voluntary refund is dealt with separately below. For convenience, the year in which the amount represented by a voluntary refund was originally received or accrued by the contractor will be referred to herein as "the related year." A voluntary refund made during such year, or at any time before the filing of the contractor's Federal income tax return for such year, will be referred to herein as a "current refund"; if made after the close of such year, and after the filing of the contractor's Federal income tax return for such year, it will be referred to herein as a "post-year refund."

(a) Interim prepayment by prime contractor or subcontractor to The Renegotiation Board. (1) A voluntary refund allocable to a given fiscal year, made by either a prime contractor or a subcontractor to The Renegotiation Board in the manner prescribed in Part 1463 of this chapter, is an interim prepayment of excessive profits for such fiscal year. When the prepayment is made during the related year, the amount is not included in income in the computation of the taxable income of the contractor for such fiscal year, and accordingly no tax credit is allowable thereon (see § 1463.90 of this chapter). When the prepayment

is made after the close of the related year, by the use of the letter agreement set forth in § 1463.91 of this chapter, the contractor obtains a tax credit computation from the Internal Revenue Service and the prepayment made is the gross amount, less the amount of the tax credit so computed.

(2) In either case, if renegotiation is thereafter conducted with the contractor for the related year, the amount of the gross prepayment is included in renegotiable sales; upon such basis, excessive profits, if any, are determined; and upon such determination, the gross prepayment is applied in the elimination of the excessive profits so determined. The tax credit allowed to the contractor who made a prepayment after the close of the related year is, of course, the aggregate of the credit applicable to the prepayment and the credit applicable to the balance of the excessive profits so determined.

(b) Refund by prime contractor or subcontractor to the procuring Department. (1) When a prime contractor makes a voluntary refund to a Department, the payment is usually accomplished either by modification of the prime contract or contracts to which the refund relates, or (see I.T. 3671, set forth in 1944 C.B. 456 of the Bureau of Internal Revenue) by an exchange of correspondence between the contractor and the Department. Of course, in the case of a refund by a subcontraetor direct to a Department, only the latter method is available. Either of these transactions, whether current or postyear, is a "renegotiation" as that term is used in section 1481 of the Internal Revenue Code of 1954. The contractor is, accordingly, entitled to a tax benefit on the amount so refunded. To obtain this benefit, in the case of a refund made after the related year, the contractor either obtains a tax credit computation in advance of the payment and then pays only the net amount after application of that credit, or pays the gross amount and then applies under section 1481 (c) of the Internal Revenue Code of 1954 for a refund of taxes paid thereon. The amount of a current refund is excluded from taxable income.

(2) Such refunds are not interim prepayments of excessive profits. Thus, § 1463.2 of this chapter provides that no refund paid as a result of an amendment of a specific prime contract or subcontract will be treated as a payment or pre

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payment of excessive profits. A refund made by an exchange of correspondence, since not made in the manner prescribed in § 1463.3 of this chapter, is likewise not an interim prepayment (see § 1463.1 of this chapter). The renegotiation treatment is as follows:

(3) When a refund to a Department is made pursuant to a specific contract amendment, the gross amount before tax credit, if any, is treated in renegotiation as a reduction of sales for the related year. If the contractor is thereafter renegotiated for that year, the renegotiation is conducted on such reduced sales basis and the contractor is allowed a tax credit against any amount of excessive profits determined in the proceeding. No tax credit is allowable in the renegotiation on any amount voluntarily refunded during the related year, such amount having been excluded from taxable income. In the case of a postyear refund, the contractor is entitled to a tax credit, as indicated above.

(4) When a current or postyear voluntary refund to a Department is effected by a mere exchange of correspondence, without contract modification, here too the amount refunded will be treated in renegotiation as a reduction of renegotiable sales for the related year. As with refunds reflected by specific contract amendments, the contractor is entitled to a tax credit for a postyear refund (see subparagraph (3) of this paragraph (b)). In the case of a current refund, no tax credit is involved, the amount having been excluded from taxable income and no tax having been paid thereon.

(5) When, in accordance with the foregoing, renegotiable sales for the related year are reduced by the amount of a refund made to a procuring Department, the record will clearly reflect such action. This will preclude the amount being allowed a second time as a reduction of sales, or otherwise, for the fiscal year in which the amount was actually paid to the Department.

(c) Refund by subcontractor to customer. (1) When a refund is made by a subcontractor to a prime contractor or a higher tier subcontractor before the close of the related year, the amount is excluded in computing the taxable income of the subcontractor for the related year. Renegotiable sales for the related year are similarly reduced. The rule is the same whether or not the refund is made in connection with the amendment of a specific subcontract. No