tion of ample to the cus may rder able -ac in be of will enable a segregation to be made sufficiently accurate for the purposes of renegotiation. The Board will not disapprove any method if it is satisfied that such method, under all the circumstances, affords the best basis for reasonably precise determination. (5) If the subcontractor is unable to determine to its satisfaction the extent of its renegotiable business by the methods in subparagraphs (1) to (4) of this paragraph, or any others, such subcontractor should report this fact to the Board. 1456.4 How to determine receipts or accruals subject to renegotiation; new durable productive equipment.-(a) Prime contracts. -(1) Provision applicable to fiscal years ending before June 30, 1953 removed to Appendix. (2) With respect to fiscal years ending on or after June 30, 1953 (see Subpart B of Part 1454 of this subchapter), receipts and accruals under prime contracts for new durable productive equipment shall be determined in the following manner: equipment of such type, the seller shall estimate the average useful life of the equipment in question, taking into consideration the average useful life of comparable equipment as set forth in Bulletin F. It should be noted that equipment having an average useful life of 5 years or less is not covered by the partial mandatory exemption of prime contracts for new durable productive equipment. (i) The seller shall first classify such equipment according to whether it can or cannot be adapted, converted or retooled for commercial use. When the seller knows or ascertains that any such equipment cannot practicably be so adapted, converted, or retooled, its sales of such equipment are not within the partial mandatory exemption but are wholly renegotiable and are not to be included in the calculation made pursuant to this subparagraph. Upon the request of the Board, the seller shall furnish such information and data available to the seller as the Board may require to enable it to determine whether the equipment can or cannot practicably be adapted, converted or retooled for commercial use. (iii) The seller shall then determine the amount of receipts or accruals referable to each class of equipment having the same average useful life. The seller may make this determination on an over-all basis or on a contract by contract basis. (iv) The seller shall next apply to the receipts or accruals determined in the manner set forth in subdivision (iii) of this subparagraph, with respect to each group of equipment having the same average useful life, a ratio equal to the ratio that 5 years bears to the average useful life of such equipment. The aggregate of the resulting figures represents the amount of the seller's renegotiable receipts or accruals from prime contracts for new durable productive equipment. (ii) Having determined which equipment can practicably be adapted, converted or retooled for commercial use, the seller shall then classify such equipment according to the average useful life thereof. Average useful life of new durable productive equipment shall be determined by reference to Bulletin F of the Bureau of Internal Rvenue (1942 edition). If the average useful life of equipment of a particular type is not set forth in Bulletin F and if the Board has not yet made an estimate of the average useful life of (b) Subcontracts-(1) Segregation according to use.-Receipts and accruals under subcontracts for new durable productive equipment, before the application of the partial mandatory exemption discussed in Part 1454 of this subchapter, will be segregated according to the use of such equipment (i.e., whether the use is for renegotiable or non-renegotiable production). Reasonable over-all methods of the types described in section 1456.3 may be used in making this segregation. The extent to which such equipment is used or to be used in renegotiable production shall be determined, with respect to each category of equipment classified as described in subparagraph 2 (i) of this paragraph, according to the percentage of time that the equipment is used or to be used in renegotiable as compared to non-renegotiable production during the first twelve months following the delivery of the equipment to the user. For the purposes of this computation, periods during which the equipment is idle shall not be taken into consideration. When the seller does not know or it is not practicable for the seller to ascertain the extent of renegotiable use 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 shall make such determination on the basis of estimates, supported so far as practicable by information available to the seller at the time of the delivery of the equipment or at any time thereafter. (Next sentence removed to Appendix.) -- (2) Application of partial mandatory exemption. Having segregated its receipts or accruals under subcontracts for new durable productive equipment in accordance with the provisions of subparagraph (1) of this paragraph, the seller of such equipment shall then apply the partial mandatory exemption set forth in section 106 (c) of the act to that portion of such receipts or accruals which is attributable to the renegotiable use of the equipment, in the following manner: (i) The seller shall first classify such equipment according to the average useful life thereof. Average useful life of new durable productive equipment shall be determined by reference to Bulletin F of the Bureau of Internal Revenue (1942 edition). If the average useful life of equipment of a particular type is not set forth in Bulletin F and if the Board has not yet made an estimate of the average useful life of equipment of such type, the seller shall estimate the average useful life of the equipment in question, taking into consideration the average useful life of comparable equipment as set forth in Bulletin F. It should be noted that equipment having an average useful life of 5 years or less is not covered by the partial mandatory exemption of subcontracts for new durable productive equipment. (ii) Of the receipts or accruals determined under subparagraph (1) of this paragraph to be attributable to renegotiable use of the equipment, the seller shall then determine the amount referable to each class of equipment having the same average useful life. The seller may make this determination on an over-all basis as illustrated in subparagraph (3) of this paragraph, or on a contract by contract basis. (iii) The seller shall next apply to the receipts or accruals determined in the manner set forth in subdivision (ii) of this subparagraph, with respect to each group of equipment having the same average useful life, a ratio equal to the ratio that five years bears to the average useful life of such equipment. The aggregate of the resulting figures represents the amount of the seller's renegotiable receipts or accruals from subcontracts for new durable productive equipment. (3) The following examples illustrate the method of determining renegotiable receipts or accruals under subcontracts for new durable productive equipment. Assume that a seller, employing the accrual method of accounting, delivers during its fiscal year $1,000,000 worth of new durable productive equipment having an average useful life of 10 years to a purchaser who manufactures both combat cars for military use and trucks for civilian use. (i) If the purchaser advises the seller that during the 12 months following delivery the equipment was used exclusively in the manufacture of combat cars, the seller's renegotiable accruals are 5/10th of $1,000,000, or $500,000. (ii) If the purchaser advises the seller that during the 12 months following delivery the equipment was used exclusively in the manufacture of trucks for civilian use, the seller's renegotiable accruals are nil since the contract of sale with the purchaser did not constitute a subcontract within the meaning of section 103 (g) of the act (see sec. 1452.4 of this subchapter). (iii) If, at the time of delivery, the purchaser does not know the use to which the equipment will be put, but subsequently advises the seller that during the 12 months following delivery 40 percent of the equipment was used exclusively in the manufacture of combat cars and 60 percent exclusively in the manufacture of trucks for civilian use, the seller's renegotiable accruals are 5/10ths of 40 percent of $1,000,000, or $200,000. (iv) If the purchaser advises the seller that during the 12 months following delivery the entire equipment was used 40 percent of the time Fiscal Year Basis for Renegotiation and 1457.1 Fiscal year basis for renegotiation. —(a) Statutory provision.-Section 105 (a) of the act provides in part as follows: The Board shall exercise its powers with respect to the aggregate of the amounts received or accrued during the fiscal year (or such other period as may be fixed by mutual agreement) by a contractor or subcontractor under contracts with the Departments and subcontracts, and not separately with respect to amounts received or accrued under separate contracts with the Departments or subcontracts, except that the Board may exercise such powers separately with respect to amounts received or accrued by the contractor or subcontractor under any one or more separate contracts with the Departments or subcontracts at the request of the contractor or subcontractor. (b) Application of statutory provision.This provision requires the Board to renegotiate on a fiscal year basis (or such other period as may be fixed by mutual agreement). It also requires that renegotiation be conducted on an over-all basis unless the contractor and the Board agree that renegotiation be conducted with respect to its contracts separately or as two or more groups. Generally, renegotiation will be conducted on the basis of the amounts received or accrued by a contractor from its renegotiable prime contracts and subcontracts for a fiscal year. Under this method, excessive profits are determined by examining the contractor's financial position and the profits from such prime contracts and subcontracts taken as a whole for a particular fiscal year rather than on an individual contract basis. This avoids problems of allocation of costs and profits to each prime contract and subcontract, allows the contractor to offset the results of one contract against the results of another and simplifies administration. Any other procedure may be employed only if authorized by the Board pursuant to these regulations. 1457.2 Fiscal years beginning in 1950 and ending in 1951.-Removed to Appendix. 1457.3 Performance prior to July 1, 1950. -Removed to Appendix. 1457.4 Joint venture contracts.-If two or more parties enter into an arrangement for the performance jointly of one or more prime contracts or subcontracts, the combination resulting from such arrangement is commonly referred to as a "joint venture." Such a joint venture is regarded as an entity which, with respect to its prime contracts or subcontracts within the scope of the act, is a prime contractor or subcontractor within the meaning of the act. 1457.5 Treatment of contracts with price adjustment provisions. (a) Renegotiation status of such contracts.-Certain contracts contain incentive provisions or provide for escalation, redetermination or other revision of the contract price during or after the completion of performance of the contract. Such contracts are subject to renegotiation unless otherwise exempted. (b) Allocation of price revision to fiscal year or years affected thereby.-(1) Price revision allocable solely to fiscal year under review.—If the price adjustment provisions of a contract apply to the receipts or accruals of the contractor solely in the year under review, the amount of such price revision will be deemed allocable wholly to the fiscal year under review. (2) Price revision allocable to more than one fiscal year.-If the price adjustment provisions of a contract apply to the receipts or accruals of the contractor in more than one fiscal year, and if no special agreement shall have been made with the contractor for any other method of allocation, the amount of such price revision will be allocated to each such fiscal year as follows: (i) If the contract provides a method for such allocation, the allocation will be made in accordance therewith. (ii) If the contract does not provide any method for such allocation, the allocation will be made in such manner as the Board shall determine to be fair and equitable. (3) Price revision not disclosed in renegotiation of allocable fiscal year. Notwithstanding any other provisions of this section, if in the renegotiation of the fiscal year under review the contractor does not disclose to the Board either the occurrence or the possible future occurrence of an upward contract price revision relating in whole or in part to such fiscal year, the amount of any such price. increase which is otherwise allocable to such fiscal year may be allocated, at the election of the Board, to the fiscal year in which the contract is modified to provide for such upward price revision. (c) When price revision precedes renegotiation. When, pursuant to the price adjustment provisions of a contract applicable in whole or in part to the fiscal year under review, the price payable by the Government to the contractor under such contract is decreased before the completion of renegotiation of the contractor for such fiscal year, the amount of such price decrease allocable to the fiscal year under review will be treated as a reduction of the renegotiable income of the contractor for such fiscal year, in accordance with the provisions of section 3806 of the Internal Revenue Code. When, pursuant to the price adjustment provisions of a contract applicable in whole or in part to the fiscal year under review, the price payable by the Government to the contractor under such contract is increased before the completion of renegotiation of the contractor for such fiscal year, the amount of such price increase will, notwithstanding the provisions of §§ 1459.1 (b) (1) and 1466.4 (c) (2) and (3) of this subchapter, be included in the renegotiable income of the contractor for the fiscal year under review in order properly to reflect the renegotiable income and profits of the contractor of such fiscal year. (d) Special treatment required when renegotiation precedes price revision.-(1) Refund cases. (i) If it is anticipated, pursuant to the price adjustment provisions of a contract applicable in whole or in part to the fiscal year under review that the price payable under such contract will be retroactively increased or decreased after the completion of renegotiation for such fiscal year, the amount of such anticipated price revision will be estimated and adjustment will be made as hereinafter provided for any portion thereof which is determined to be allocable to the fiscal year under review pursuant to the provisions of paragraph (b) of this section. (ii) In any case in which an agreement is made for the elimination of excessive profits, if a retroactive downward price revision is anticipated, the contractor will be permitted to set up a reserve to cover the refund of the portion of the estimated price revision which is allocable to the fiscal year under review and to charge the amount of such reserve against renegotiable business for such fiscal year: Provided, That, if the amount of such reserve is substantial, there will be included in the renegotiation agreement a clause providing that, in the event the final downward price revision is less than the amount of such reserve, the difference between the amount of such final price revision and the amount of such reserve shall be deemed to be additional profits for the fiscal year under review to be eliminated pursuant to the act. As used in this section, the word "reserve" refers only to the amount agreed upon and allowed to the contractor at the time of renegotiation as a provision for reasonably anticipated net downward price revision under contracts containing price adjustment provisions, irrespective of any provision the con 7-15-67 On of al 1 partments named in or pursuant to section 102 (a) of the Act, as amended, are subject to the procedures set forth in paragraphs (b), (c) and (d) of this section. 1457.6 Treatment of receipts or accruals under termination claims.-(a) Subject to renegotiation.-Termination compensation received or accrued under a subject prime contract or subcontract is renegotiable unless (1) received or accrued with respect to a terminated prime contract or subcontract which is exempt or has been exempted from renegotiation or (2) the termination settlement is exempted from renegotiation. (b) When received or accrued.-For purposes of renegotiation, amounts payable to a prime contractor or subcontractor on account of any termination claim under a prime contract or a subcontract will be deemed to have been received or accrued to the extent, and in the fiscal year for which, such amounts are estimated, upon the basis of the circumstances existing at the time of renegotiation, to be includible in the computation of taxable income. Renegotiation will not be postponed or delayed pending the settlement of a termination claim, whether by a "no-cost" waiver or otherwise. (c) Separate consideration.-Any contractor may, and in any case in which the aggregate of the amounts received or accrued under prime contracts and subcontracts includes any substantial amount on account of termination claims the contractor shall be required to, reflect in the financial and other data upon which the renegotiation is based the receipts. or accruals on account of termination claims separately from other receipts or accruals subject to renegotiation. Such segregation may be required to be made in such general or such detailed manner as the Board may deem necessary. 1457.7 Fiscal year of partnerships.— (a) Statutory provision.--Section 103 (h) of the act provides as follows: The term "fiscal year" means the taxable year of the contractor or subcontractor under chapter 1 of the Internal Revenue Code, except that where any readjustment of interests occurs in a partnership as defined in section 3797 (a) (2) of such code, the fiscal year of the partnership or partnerships involved in such readjustment shall be determined in accordance with regulations prescribed by the Board. 7-15-67 (b) Application of statutory provision.The fiscal year of a partnership is the taxable year thereof under chapter 1 of the Internal Revenue Code. If the composition of the partnership changes before the completion of a full fiscal year by reason of the death, withdrawal, substitution, or addition of a partner, or a shift of interests among the partners, but the partnership business, or a substantial portion thereof, is continued, the fiscal year of the partnership shall continue to be the taxable year previously established by the partnership, unless the Board determines otherwise. [Remainder of this paragraph removed to Appendix.] (c) Comment.-Originally this section, following the rulings of the Internal Revenue Service, provide that, when a partnership before the completion of a full fiscal year had a readjustment in interests by reason of the death, withdrawal, substitution, or addition of a partner, or a shift of interests among the partners, the fiscal year of such partnership terminated on the date such readjustment occurred and a new fiscal year for the partnership commenced if the business continued. By Revenue Ruling 144 (Int. Rev. Bull. 1953-16, 29, dated August 3, 1953), set forth, in part, in § 1499.34 of this subchapter, the Internal Revenue Service declared that such readjustment did not, of itself, effect a termination of the partnership for Federal income tax purposes; and that, when the business of the partnership, or a substantial portion thereof, continued, the returns of such partnership should continued to be filed on the basis of the annual accounting period previously established by the partnership. This section has been amended as set forth in paragraph (b) of this section to conform the practice of the Board with that of the Internal Revenue Service. The ruling is not limited in its retroactive effect, and therefore, with the exceptions indicated, the Board will give it effect in all open cases under the 1951 Act. The former provisions of this section remain effective as to any cases concluded thereunder. 1457.8 Losses on renegotiable business in other years: extent allowable in fiscal years ending before December 31, 1956.-Removed to Appendix. |