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necessarily incurred in the normal conduct of a contractor's or subcontractor's business may be allowed.

(s) Excess material (1) Excess material refers to material, in usable condition, which is left over after a contract or subcontract is completed and result

ract is completed and result ing mainly from overpurchases, overproduction, overdrawn stores, or as a result of changes and extras. Excess material should not be confused with scrap which is such material as is produced during the course of construction or manufacture and which has only scrap value. (See paragraph (pp) of this section.)

(2) Material which has been charged to the cost of performing a contract or subcontract and is found in excess of actual requirements and has not been incorporated in the work shall be credited, at the reasonable value thereof, to the cost of performing the contract or subcontract to which it was originally charged.

(3) If such materials credited to cost are reissued for use in performing a contract or subcontract the materials should be charged into costs at amounts not in excess of the value agreed upon as the reasonable credit.

(t) Excess profits. Excess profits paid or repayable to the United States under any contract, whether under the Merchant Marine Act or otherwise, shall not be treated as a deduction or used in any way as a factor in the determination of profit under any other contract.

(u) Expense and income-nonoperating. Expense and income-nonoperating (including such items as Income from Investments, Interest, and Royalties, individually commented upon under their respective captions) ordinarily may not be taken into account in determining recapturable profit. Their inclusion in exceptional cases will be subject to the specific approval of the Administration.

(v) Fees, legal, accounting, and other professional. (1) Fees, Legal, Accounting, and other Professional, for services required in the performance of a contract or subcontract are allowable to the extent deemed reasonable by the Administration.

(2) Generally speaking, legal and accounting fees in connection with the prosecution of claims against the United States, including income tax matters, are not allowable costs. In cases, however, where such fees are incurred and

result in successful adjudication or negotiation of the validity of a claim by & contractor or subcontractor, reasonable expenditures may be taken into account in connection with such contracts or related subcontracts with the Board or the Administration.

(w) Fees of transfer agents and registrars. (1) Fees of Transfer Agents and Registrars of stock or other securities and of trustees under mortgage or similar indentures, regularly employed in and necessary to the normal operation of the business, may be allowed as overhead costs, if reasonable in amount.

(2) Fees for the same purposes, covering the organization or reorganization of a corporation, shall not be allowed.

(x) Fines and penalties. Fines and penalties incurred for violation of law are not allowable in costs of performing a contract or subcontract.

(y) Fuel, lube oil, and fresh water on board vessel on date of delivery. Any quantity of fuel, lube oil, or fresh water remaining aboard on the date the vessel is delivered and accepted which is not covered by a contract specification requiring it to be aboard shall be inventoried and evaluated on the basis of prices at which purchased. The value of the inventory shall be credited to vessel construction costs and billed to the Administration which will pay for any reasonable quantities remaining in excess of construction and trial run needs. This procedure automatically excludes from vessel costs the value of the inventory of the items mentioned.

(z) Guarantee period expenses. Expenses incurred during the guarantee period, for the reconstruction of items determined by the Administration to be the contractor's or subcontractor's responsibility, are allowable as costs of performance of the contract or subcontract.

(aa) Income from investments. In. come from investments shall not be taken into account in determining recapturable profit.

(bb) Inspection services. The reasonable cost of inspection services, such as those normally rendered by the American Bureau of Shipping, may be allowed in determining recapturable profit.

(cc) Insurance. (1) Monies paid into State funds for compensation insurance, and net premiums paid or accrued for payment to insurance companies for in. surance of risks not found by the Administration to be unusual or excessive

coverage or inconsistent with reasonable (6) Reasonable premiums and other and prudent business practice are allow reasonable costs of group insurance plans -able items of cost.

in existence on the date the contract (2) If the contractor or subcontractor or subcontract was awarded and consistassumes its own insurable risks (1) for ently administered are allowable. No compensation payable to employees for costs under group insurance plans efinjuries received in the performance of fective after such date will be allowed their duties, or (ii) for unemployment unless the plan is specifically approved risks in States where insurance is re by the Administration. quired, or (iii) for other risks not found (dd) Interest. (1) Interest received, by the Administration to be excessive or paid, or accrued for receipt or payment unusual coverage or inconsistent with will not be taken into account in deterreasonable and prudent business prac mining profit except that reasonable tice, there may be allowed in costs the amounts of interest on bank loans of a charges set up for such self-insurance contractor for construction, reconditionunder a system of accounting regularly ing or reconstruction of a ship obtained and consistently employed by the con for the purpose of discounting bills or tractor or subcontractor, at rates not for current working funds, which loans exceeding the lawful or approved rates mature not later than six months after of insurance companies for such insur the date of delivery of the last vessel ance reduced by amounts representing covered by the contract, may be allowed the "acquisition cost” (i. e., commissions, to the extent attributable to the confixed expenses and excess losses) in such tract: Provided, That interest on such companies and after giving effect to any loans shall not be allowed unless the credits for safety provisions, experience, contractor shall show to the satisfacetc., to which the contractor or subcon tion of the Administration the necessity tractor would be entitled in determining for such loans. such rates, but losses actually sustained (2) Similarly, interest on bank loans must be charged only to the reserves cre of other types of contractors and subconated by such self-insurance charges. tractors (for example, suppliers of direct

(3) If the contractor or subcontractor materials), when deemed by the Adminassumes its own insurable risks and does istration to be reasonable and for the not record current charges to operations purposes enumerated in the preceding in the manner contemplated by sub subparagraph of this paragraph, shall be paragraph (2) of this paragraph, losses allowed to the extent attributable to persustained from such risks during the formance under the contract or subconperformance of the contract or sub tract: Provided also, That such loans contract shall be allowable only by such mature not later than six months after means and to such extent as the Admin the date of timely delivery of the last istration considers equitable under the material or timely performance of the circumstances attendant upon a specific last service, excluding provisions of the case.

guarantee clause. (4) If the contractor or subcontractor (ee) Intracompany and intercompany assumes its own insurable risks and its charges. (1) Intracompany transfers practice with respect to charges therefor between plants or divisions must be made is not covered by the principles set forth at cost, excluding any internal or interin subparagraphs (1), (2) and (3) of this mediate profit. paragraph, the contractor or subcon (2) Transactions with subsidiary, aftractor shall submit the matter to the filiated or controlled companies covering Administration for determination at the material purchases or transfers, services, earliest practicable date after execution expense allocations or any other type of of the contract or subcontract, and such charge must be disclosed fully. The net charges shall be taken into account in allowable cost of intercompany transsuch manner as the Administration shall actions may not exceed the cost of comdetermine.

parable goods or services from alterna(5) Premiums covering insurance on tive outside sources. the lives of corporate officers, partners, (ff) Launching expense ceremonial. proprietors, or other executives or em The following is prescribed as a general ployees, where the contractor or the sub guide, in connection with vessels concontractor is the beneficiary directly or structed by the Administration for Govindirectly, shall not be allowed in deter- ernment use, to the nature of expenses mining recapturable profit.

incidental to launching ceremonies

which will be regarded as not excessive and, consequently, chargeable to performance costs.

(1) In particular instances where a budget or a program for launching ceremonies has been approved by the Administration, or where special instructions with respect thereto have been issued by the Administration, such budget, program, or instructions will govern.

(2) In other cases, expenses not deemed to be excessive would include such items as the erection of launching platform and decorations, erection and use of public address system, christening champagne and preparation of bottle, but would not include expenses of reception, banquets, transportation and entertainment of guests, sponsor's gift and other incidental expenses. In general, traveling and hotel expenses of the sponsor and escort, and cost of invitations are unallowable unless otherwise designated by the Administration in specific instances.

(gg) Liquidated damages. Liquidated damages paid by a contractor or subcontractor for failure to meet contract or subcontract requirements are not allowable costs of performance.

(hh) Losses or profits under other contracts and subcontracts. In the determination of excess profit under the provisions of contracts executed under the authority of the Merchant Marine Act, 1936, as amended, and under subcontracts related thereto, such contracts and subcontracts, completed in a taxable year, shall be grouped for the determina. tion of excess profit: Provided, however, That there shall not be grouped with any such contracts or subcontracts any contracts authorized under acts other than the Merchant Marine Act, 1936, as amended, or any subcontracts there

pairs should be submitted to the Administration before such work is undertaken or while it is in progress, for & determination as to whether or not the costs may properly be charged to current operations. Major plant and equipment maintenance or repair expenditures, the orders for which are not so submitted before or while the work is in progress, will be deemed to be capital expenditures or chargeable to depreciation reserve unless it shall be shown otherwise to the satisfaction of the Administration.

(jj) Material operations departmental. In cases where a contractor or subcontractor manufactures for stores. or for direct charge to a contract or subcontract items such as rivets, paint, acetylene, etc., such items may be charged upon a fixed price basis, provided that proper adjustments approved by the Administration are made to such charges at reasonably frequent accounting intervals so as to reflect their actual cost.

(kk) Organization and reorganization expenses. Costs incident to the formation or refinancing of corporations, partnerships, or proprietorships such as the issuance of capital stock, bonds or other securities, taxes on the issue or transfer of securities, discounts on securities sold, bankers' commissions, or other like inancial costs, legal and accounting fees involved in developing organizations or reorganizations, shall not be allowed in reorganizations, determining recapturable profit.

(ll) Pension and retirement payments. Pension and retirement payments to employees and payments made into trust funds for pension and retirement purposes: Provided, That such trust funds are alienated from the contractor's own. ership, may be allowed in the determination of recapturable profit. The Administration shall, in every case, be satisfied that the payments are reasonable in amount and are consistently and equitably distributed.

(mm) Reserves. Charges resulting in the creation or increase of reserves for general contingencies or other reserves which are not properly chargeable to current operations shall not be allowed.

(nn) Royalties. (1) Income from royalties shall not be taken into account in determining recapturable profit under contracts or subcontracts.

(2) In some cases, royalty expense in connection with material or equipment furnished under a contract or subcontract is not properly chargeable inas

profit under the provisions of contracts executed under the authority of acts other than the Merchant Marine Act, 1936, as amended, such contracts and related subcontracts may be grouped only when the provisions of the respective contracts and subcontracts so stipulate.

01 Maintenance and repair costs. Maintenance and repair costs which are of such a nature and extent as under generally accepted accounting practice are chargeable to depreciation reserve or capitalized may not be taken into account except through proper charges for depreciation. Job orders for such major plant and equipment maintenance or re

much as the Government may have & render services that are as important and royalty-free license for such material essential when products are sold to the or equipment. Under the Royalty Ad- Government as when they are sold to justment Act of 1942, the Government other customers. has negotiated a number of agreements (3) Special premiums, bonuses, comproviding for the waiver of, or reduction missions, etc., paid in connection with in, royalties. As some agreements are negotiations for or the procurement of a in force and others may be executed, contract are not allowable in determinall royalty agreements should be referred ing the cost of performing the contract. to the Administration.

(4) Selling expenses which represent (00) Salaries. (1) Contracts, and the cost of marketing an article, as dissubcontracts thereunder, ordinarily limit tinguished from the cost of producing the per annum rate of salary for the an article, are not to be considered a part purpose of determining profit. The lim. of the cost of performing a contract. itation applies to the full time of an (5) Reasonable selling expenses conindividual. Accordingly, when an in sistent with the normal and usual pracdividual devotes only a portion of his tice of a subcontractor may be allowed time to a contractor or subcontractor, in determining the cost of performing a the limitation will be reduced propor subcontract. tionately.

(rr) Taxes. (1) Income and excess (2) "Salary" is construed in its broad profit taxes and surtaxes, Federal, State est sense to include a bonus, director's and other, are not allowed as contract fee, and all other forms of compensation or subcontract performance costs; such Charges or accruals for salaries, year-end taxes merely represent a payment of a bonuses, vacation pay, or other compen part of the net profits to the Governsation, not actually paid at the date of ment. completion of a contract or subcontract (2) Franchise and excise taxes, propmust be approved by the Administration erty taxes (except taxes on property held as to allowability.

in reserve or for investment, or for other (pp) Scrap. Scrap is such material extraneous purposes), social security as is produced during the course of con taxes and the like (not including paystruction or manufacture and having ments deducted from or chargeable to only scrap value and should not be con employees, including corporate officers) fused with excess material (see para- are allowable cost items. In those cases graph (s) of this section). Scrap must where a State franchise tax is in lieu of a be credited at the price obtained when State income tax, the portion thereof sold, or at the current market price it deemed to be paid for the exercise of the used by the contractor or subcontractor right to do business and the portion or held for sale beyond the period of the thereof deemed to be a tax on income contract or subcontract. If practicable, shall be determined by the Administra. the credit should be given to the job from tion. which the scrap was derived, otherwise (3) Taxes for which exemptions are credit should be given through distribut

available are not allowable costs. able overhead at reasonably frequent

(ss) Towing. Where the contractor intervals.

or subcontractor uses its own tugs or (qq) Selling expenses. (1) Generally,

other floating equipment in the performexpenses incurred for the distribution of

ance of a contract or subcontract, reason. the products of a contractor through us

able charges therefor are allowable. ual trade and business channels and

(tt) Travel expenses. (1) The actual methods are not regarded as allowable

costs of authorized business trips such as costs under contracts for the reason that

transportation, maintenance, communisuch expenses are not incident to or nec

cation and other necessary business costs essary in doing business with the

of the traveler during his period of Government.

travel may be allowed to the extent such (2) Ordinary selling expenses should

costs are shown to the Administration not be confused with technical, consult

to be reasonable and equitably charged ing and other services of the application

to a contract or subcontract. and adaptation of products to the uses

(2) The Administration may accept in and requirements of the customer. Man. ufacturers' emplovees attached to sales lieu of such actual costs a reasonable aldepartments, who are primarily tech- lowance agreed upon by the traveler nicians and product service engineers, prior to his departure if such allowance

is deemed to be warranted by the circumstances, conditions, and nature of the assignment involved.

(uu) Unclaimed wages. Unclaimed wages charged to contracts and subcontracts shall be adjusted by an allowance for future claims against unclaimed moneys and the remainder shall be ratably credited to the cost of performing the contracts and subcontracts. The allowance and the credit must be satisfactory to the Administration.

(vv) Unreasonable charges. Excessive or unreasonable payments, as for example, exorbitant compensation to anyone, expenditures for the personal benefit of oficers of the contractor or subcontractor, payments in excess of reasonable market values of any kind including payments to affiliates and payments to individuals who are associated with the contractor or subcontractor through directorship or employment, whether in cash, stock, or other property, shall not be allowed as costs in determining recapturable profit.

(ww) Welfare expense-employee. Welfare expense employee is allowable as a part of overhead, subject to proper distribution, provided the contractor or subcontractor shall, if required, show the reasonableness thereof to the satisfaction of the Administration.

FILING OF REPORTS 8 285.61 Contractors.

A contractor for the construction, reconditioning or reconstruction of a ship shall file with the Administration a notarized Shipbuilder's Report of Profit with respect to each contract, in the form prescribed from time to time by the Administration (see accompanying Form MA-250), within 90 days after the expiration of the guarantee period prescribed by the contract, unless the time for filing such report be extended by the Administration. Other contractors shall file on the form prescribed from time to time by the Administration (see accompanying Form MA-251)' as soon as possible after the completion of the contract or the expiration of the guarantee period but in no event later than 90 days after the date upon which the contractor is required to file Federal income tax returns

1 Filed as part of the original document with the Office of the Federal Register; requests for copies should be addressed to the Coast Directors or Maritime Administration, Department of Commerce, Washington, D.C. 20235.

(or as extended). Such reports shall reflect all information indicated in the prescribed forms. (G.O. 30, Rev., 17 F.R. 7594, Aug. 20, 1952, as amended at 33 F.R. 2944, Feb. 17, 1968) § 285.62 Subcontractors.

Each subcontractor whose subcontract is subject to a profit-limiting provision shall file with the Administration as soon as possible after the completion of the subcontract or the expiration of the guarantee period, but in no event later than 90 days after the date upon which it is required to file its Federal income tax return (or as extended), a report, notarized, with respect to each such subcontract completed by it within the income taxable year, setting forth in the form prescribed from time to time by the Administration (see accompanying Form MA-252)’ the total contract price, the total cost of performing the subcontract, the amount of overhead charged to such cost and such other information as indicated upon the report form. § 285.63 Transmittal.

All reports made by a contractor for the construction, reconditioning or reconstruction of a ship or other contractor or by a subcontractor, should be mailed to the Maritime Administration, Department of Commerce, Washington, D.C. § 285.64 Revision of report forms.

The Administration may from time to time revise the form of reports required in this part. Contractors and subcontractors should obtain current forms from the Administration.

PART 2 8 6 — ESTABLISHMENT AND MAINTENANCE OF THE STATUTORY CAPITAL AND SPECIAL RESERVE FUNDS AND DETERMINATION OF “CAPITAL NECESSARILY EMPLOYED IN THE BUSINESS"

AND "NET EARNINGS" Sec. 286.1 Order. 286.2 Creation and maintenance of statu

tory reserve funds. 286.8 Capital necessarily employed in the

business. 286.4 Net earnings. 286.6 Preliminary compliance with reserve

and recapture requirements. 286.6 Statement of purposes and reserve

tions.

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