(2) Receipts or accruals representing reimbursement to the contractor by the Government for expenses incurred on behalf of the latter, may be reported separately or included with other receipts or accruals from renegotiable contracts. In the latter event, a footnote to the statement of income should state the estimated amount of such reimbursed costs.

(3) Agency, commission and brokerage fees received from other contractors in connection with vessel operations should be shown separately, together with a statement of the estimated costs and expenses deemed allocable to such revenue.

(g) Costs and expenses allocable to renegotiable business—(1) In general. Costs and expenses relating to vessel operations should be allocated to renegotiable and nonrenegotiable business in accordance with the contractor's established cost accounting method (§ 1459.1 (b) (3) of this chapter). If, in accordance with such method, the contractor records direct vessel operating costs on the terminated voyage basis, they should be so reported for renegotiation. All other expenses, including general and administrative expenses, interest, and vessel depreciation, should be accounted for as period costs and allocated on an appropriate basis.

(2) Inactive vessel expenses. Inactive vessel expenses may be allocated to renegotiable business to the extent that they are incurred in connection with the performance of such business.

(3) Branch office, traffic solicitation, entertainment and advertising expenses. The extent to which branch office, traffic solicitation, entertainment, and advertising expenses may be allocated to renegotiable business should be determined in accordance with the provisions of § 1459.7 of this chapter.

(4) Vessel repairs. Included in direct expenses are costs of vessel repairs not covered by insurance. Except in cases where the practice of equalizing repair costs is followed, such costs are charged directly to a particular voyage of a vessel. Under this method of accounting, the cost of repairs may exceed or be less than the amount properly allocable to the voyage for renegotiation purposes. In such case there should be allocated to renegotiable charter operations reason

able repair costs, based on experience for the particular type of vessel used in such service.

(5) General and administrative expenses. (i) General and administrative expenses should be allocated to vessel and other operations, such as cargo handling, tug and lighterage, agency services, and terminal and nonshipping operations, on a basis most nearly reflecting the costs attributable to such operations.

(ii) General and administrative expenses applicable to vessel operations should be allocated to renegotiable and nonrenegotiable business on the basis of voyages terminated during the period. A method commonly employed for this purpose is based on weighted vessel days. This method is predicated on the assumption that overhead expenses accrue on a time basis to each vessel. In cases involving operations of owned or bareboat chartered vessels, each such ship is assigned a value of 1 for each vessel day. Vessels time chartered from others, where the operating functions are performed by the owner, are assigned a value of one-third for each vessel day. Vessels time chartered to others, where the owner is relieved of the functions of traffic solicitation and cargo handling, are assigned a value of two-thirds for each vessel day.

(6) Interest expense. Interest expense is allowed in accordance with the provisions of § 1459.6 of this chapter and generally should be allocated to voyages on the same basis as general and administrative expenses, except that interest on vessel mortgages may be allocated on the basis of accrual to the operations of each vessel subject to a mortgage. Interest on vessel mortgages should be shown separately from other interest.

(7) Depreciation. Vessel depreciation should be allocated to renegotiable and nonrenegotiable voyages on the basis of the number of terminated voyage days multiplied by the effective daily rate of depreciation for each vessel. The difference between the aggregate amount thus determined and the total amount of vessel depreciation recorded on the annual basis for the vessels involved should be assigned to nonrenegotiable business. Vessel depreciation applicable to idle status periods should be allocated to renegotiable and nonrenegotiable business on the same basis as other inactive vessel expenses.

§ 1499.2-9 Renegotiation Bulletin No. 9: Deferred payment of excessive profits pursuant to agreement.

(a) Section 1461.2(a) of this chapter states that a refund of excessive profits pursuant to an agreement may be made by the contractor in a single payment or in installments, as the agreement may provide. Deferred single payment or payment in installments will be permitted, upon request of the contractor, only when such terms are necessary to avoid undue hardship on the contractor and will not affect adversely the interests of the Government.

(b) Normally, an agreement will require the repayment of excessive profits in a single lump sum. The payment normally will be required within 40 days after the date of the agreement (i.e., the date upon which the agreement is executed on behalf of the Government), except that if the contractor makes prompt application, within the time stipulated in the agreement, for a computation from the Internal Revenue Service of the tax credit to which the contractor is entitled under section 1481 of the Internal Revenue Code, the payment will be due within 40 days after the date of the agreement or within 30 days after the contractor receives such tax credit computation, whichever is later. It will be only in the exceptional case that any further grace will be allowed to the contractor by the Board or by the Regional Board to which the case has been assigned.

(c) Contractors requesting provision for deferred payments should note that they may be required to pay interest thereon. Normally, under § 1461.2 of this chapter interest will not accrue on excessive profits to be refunded by agreement unless and until a default occurs in the payment of the refund. However, when the refund is to be made in installments, interest is required upon each such installment (other than the first installment payable under the agreement) which is provided to be paid more than 2 years after the close of the fiscal year to which the agreement relates. In such case, interest will begin to accrue on the first day of the third year following the close of the fiscal year to which the agreement relates, or on the due date of the first installment, whichever is later. Similarly, when a contractor requests

postponement of its entire refund obligation to a date beyond such 2-year period, the contractor may be required to pay interest as a condition to the granting of such extended terms.

(d) A contractor believing itself in need of installment or other deferred terms of payment should request such relief and must be prepared to establish to the Board or the cognizant Regional Board that payment in accordance with the provisions customarily included in agreements would impose undue hardship upon the contractor. In order that the existence and extent of the claimed need may be properly evaluated and the risks to the Government carefully weighed, the contractor in its request shall state the terms desired and show that such terms are no more than are reasonably necessary to avoid undue hardship. The contractor shall also file with its request the following information and data:

(1) Latest available audited balance sheet and income statement.

(2) Current unaudited balance sheet and income statement.

(3) Cash flow statement, by years, through end of proposed period of payment.

(4) Sources and amounts of credit currently utilized and available.

(5) Description of long-term debt obligations, including retirement or conversion provisions and any additions contemplated during proposed period of payment.

(6) List of amounts, if any, due from officers, stockholders, or partners or related entities, with information on the collectibility thereof; and amounts, if any, owing to officers, stockholders or partners or related entities, with description of provisions for retirement thereof during proposed period of payment.

(7) In addition to the foregoing, in the case of a partnership or joint venture, a current balance sheet for each of the principal partners or joint ventures.

(e) Upon request, the contractor shall also furnish such other or additional information and data as the Board or the Regional Board may specify in the particular case.

[34 F.R. 7414, May 7, 1969, as amended at 35 F.R. 4329, Mar. 11, 1970]

§ 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.

(5) 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 representatives of the cotton textile industry and have been approved by the Board with respect to fiscal years ending on or after December 31, 1953.

50-078-71—21

§ 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 the contractor's renegotiable products. To this end, variations in the iron content of different renegotiable products must be taken into account. Where the contractor uses one of the general

(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, 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.

as

(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.