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(b) Losses with respect to certain tangible molishing, protecting, storing and selling, if the property and land-(1) What this paragraph expenditure of such costs contributes to minidoes. This paragraph explains the circum mizing the loss upon disposition of such propstances under which a contractor may claim, as erty, to the extent that such costs are deductible a cost of performing renegotiable business, under such Code for the fiscal year. Such costs losses resulting from the sale or disposition of, shall be added to and considered part of each or damage to, certain tangible property and related loss for the purpose of allocation under land. This paragraph also treats costs re subparagraph (5) of this paragraph. lated to such losses. This paragraph does not (4) What gains are considered in allocating affect the allocation to renegotiable business of losses.-Gains upon the sale or exchange, and losses with respect to other kinds of property from the compulsory or involuntary conversion, (inventories, patents, etc.) which may be used of property of the character described in subin performing renegotiable business.

paragraph (2) of this paragraph are not renego(2) Kinds of property.~This paragraph tiable income but are used to offset losses under applies to the following kinds of property when subparagraph (5) of this paragraph. Such used in performing renegotiable prime con gains include (i) those which may be properly tracts and subcontracts:

included in the computation under section 1231 (i) Tangible property with respect to which of the Internal Revenue Code for the fiscal depreciation is allowable under section 167 year or, in the case of gains which may not be of the Internal Revenue Code;

so included for the reason that the property in(ii) Emergency facilities with respect to volved was not held for more than six months, which amortization is allowable under section those which are taken into account in the com168 of such Code; and

putation of gross income under such Code for (iii) Land other than an emergency facility. the fiscal year; and (ii) gains described in sec

(3) What losses are dealt with.-The fol tions 1238 and 1239 of such Code: Provided, lowing losses and related costs with respect to however, That related costs of disposing of such the kinds of property described in subpara property, as described in subparagraph (3) of graph (2) of this paragraph are allocable to this paragraph, shall be deducted from the renegotiable business to the extent provided in amounts of such gains on respective items of subparagraph (5) of this paragraph:

property, and the net amount, if any, shall be (i) Losses resulting from the sale or ex considered the whole of the gain with respect to change, and from the compulsory or involun each such item of property for the purpose of tary conversion (as a result of destruction in subparagraph (5) of this paragraph. whole or in part, theft or seizure, or an exercise (5) How to allocate losses to renegotiable of the power of requisition or condemnation or business.—(i) Losses will be allocated to renethreat or imminence thereof) of such property gotiable business to the extent that the sum of to the extent that such losses may be properly the renegotiable portions thereof exceeds the included in the computation under section 1231 sum of the renegotiable portions of gains: Proof the Internal Revenue Code for the fiscal vided, however, That gains in respect of land year or, in the case of losses which may not be other than an emergency facility will be considso included for the reason that the property ered only to the extent of the renegotiable porinvolved was not held for more than 6 months, tions of losses in respect of such property. The to the extent that such losses are taken into

renegotiable portions of losses and gains shall account in the computation of net income under be determined in accordance with subdivision such Code for the fiscal year;

(ii) or (iii), as the case may be, of this sub(ii) Losses with respect to such property, paragraph. other than from sales, exchanges and conver (ii) The renegotiable portion of a loss or gain sions, to the extent that such losses are deduct with respect to depreciable or amortizable propible under section 165 of such Code for the fiscal

erty is that portion which bears the same ratio year; and

to the whole of such loss or gain as the aggregate (iii) Related costs of disposing of such prop amount of depreciation or amortization on such erty, such as costs of moving, dismantling, de property allocable to renegotiable business un

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renegotiable profits, is determined. The unad for a succeeding fiscal year is measured by the justed excessive profits are deducted from such income of the contractor for the fiscal year total profits to obtain the contractor's tenta under review, an adjustment pursuant to section tive retained profits. The unadjusted excessive 103 (f) of the act will be made on account of profits are also deducted from the renegotiable such tax in eliminating excessive profits for the profits to obtain the non-excessive renegotiable fiscal year under review, except that if the fiscal profits.

year under review is the first year in which the (2) The State tax on the tentative retained

contractor does business in the State and a tax profits is computed as though such profits were measured by the income for such year is paythe only profits of the contractor.

able for such year, an adjustment will be made (3) The tax attributable to the non-excessive

on account of the tax payable for such year renegotiable profits will then be the amount

but no adjustment will be made on account of which bears the same ratio to the tax computed

the tax payable for the succeeding year. in subparagraph (2) of this paragraph as the

Example. State X imposes a franchise tax amount of non-excessive renegotiable profits

for the privilege of doing business in the State bears to the tentative retained profits.

for a taxable year. The tax is based upon the

taxpayer's net income for the preceding year, (4) The tax attributable to the non-excessive renegotiable profits computed in subparagraph

except that the tax for the first year in which

the taxpayer does business in the State is based (3) of this paragraph is deducted from the unadjusted excessive profits to obtain the amount

upon its income in that year. Assume that a of excessive profits to be eliminated.

contractor incorporated in State X pays a fran

chise tax of $10,000 for Year 1, measured by its (5) If the contractor has a loss on non-re net income for Year 1. The contractor's tax for negotiable business, the tax attributable to the

Year 2 is again $10,000, since it is also measured non-excessive renegotiable profits will be the

by the income for Year 1. For Year 3, the conamount of tax computed on the tentative re

tractor pays a tax of $15,000, measured by its tained profits determined as provided in sub

Year 2 income. In renegotiation, if excessive paragraph (1) of this paragraph.

profits are determined for each year, the con(d) Multiple State income taxes.-A con tractor will be allowed a State tax adjustment tractor doing business in more than one State in the amount of $10,000 for Year 1, and $15,000 may be subject to more than one income tax.

for Year 2. The adjustment for Year 3 will be In such event, the adjustment will be made by the amount paid in Year 4, measured by the an accurate determination of the tax attrib

Year 3 income. utable to the non-excessive renegotiable profits (f) Adjustment for State income tax of conimposed by each State, if such a computation is tractor operating as a partnership or sole profeasible. If an exact computation is not feas prietorship.-(1) A contractor doing business ible, the adjustment will be made upon the best as a partnership or sole proprietorship is enestimate of the Board and the contractor, made

titled to an adjustment for State income tax in good faith and with reasonable care. This based upon the tax liability of the individual estimate may take the form of a pro rata appli

partners or of the proprietor. In general, the cation to each State of the non-excessive rene

same procedure will be followed as stated above.

Thus, in the case of a partnership, adjustment gotiable profits based upon the profits before re

will be made for the aggregate of the State negotiation attributable to each State, if no

taxes attributable to each partner's share of more accurate method is available. If all such

non-excessive renegotiable profits. taxes are imposed at flat rates, a composite rate

(2) Normally, a State income tax is imposed may be obtained by dividing total State income

upon individuals on a graduated basis. Refertaxes by total profits, and this composite rate

ence is therefore made to section 1459.9(c). may be applied to the non-excessive renegoti

(3) If the contractor is a partnership or sole able profits.

proprietorship and is subjected to an unincor(e) State income tax measured by income porated business tax measured by income, adfor preceding year. When a State income tax justment will be made therefor as well as for

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the State income taxes of the partners or the reasonably necessary for the performance of a proprietor.

renegotiable operation; and (4) If a so-called "salary allowance" is made (ii) A portion of the costs of moving, disin renegotiation for the services of partners or mantling, demolishing, protecting, storing, or proprietors, the amount of such "salary” al disposing of tangible property, the original cost lowed to each partner or to the proprietor will

of which was deducted as an expense rather than be deducted from the partner's or proprietor's

treated as a capital expenditure, which portion share of non-excessive renegotiable profits

shall be determined on the basis of the use of before calculation of the State income tax at

the property in the performance of a renegotitributable to such non-excessive renegotiable

able operation. profits. Such "salary allowance” will also be

(2) Losses and costs under this paragraph deducted before calculating any such unincor

are allocable to renegotiable business to the exporated business tax adjustment.

tent that the sum thereof exceeds the sum of

non-renegotiable gains and other income from 1459.10 Costs incident to discontinuance

the sale or other disposition of inventories or of a renegotiable operation.-(a) In gen

other tangible property of the character deeral.-Costs paid or incurred upon the phys

scribed in subparagraph (1) of this paragraph. ical termination of a renegotiable operation

The amounts of such gains and other income will be allocated to renegotiable business to the

shall be determined in the same manner as losses extent provided in this section. The term “rene

and costs are determined under said subparagotiable operation", as used in this section,

graph (1). means an operation which constitutes the per

(c) Severance pay. Payments made upon formance, in whole or in part, of one or more

separation of employees, which payments are renegotiable prime contracts or subcontracts.

required by law, contract or the custom of the (b) Inventories and certain other tangible

business, are allocable to renegotiable business property.-(1) The following losses and costs

to the extent that salaries and wages of such will be allocated to renegotiable business to the employees were allocable thereto under the proextent provided in subparagraph (2) of this visions of 88 1459.1 (b) and 1459.2 and paraparagraph:

graph (d) (3) of this section during the period (i) Losses established through the writedown of time immediately preceding separation which or sale of, and costs of protecting and handling is equal to the average tenure of the separated inventories acquired for the purposes of, and employees.

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Part 1460 Principles and Factors in

Determining Excessive Profits

to the contractor's business will be fully
1460.1 General considerations.

developed. 1460.2 Specific considerations.

1460.2 Specific considerations.-(a) Prof1460.3 Adjustment of sales. 1460.4 Overextended contractors.

its before taxes.-In renegotiation the amount 1460.5 Minimum refund.

of excessive profits is determined before pro1460.6 Reserved

vision for Federal taxes on income. In determin1460.7 Uncompleted portions of terminated

ing the existence or amount of excessive profits, tracts.

the effect of Federal income taxes on the re1460.8 Application of statutory factors; general policy.

tained profits will not be considered. 1460.9 Efficiency of contractor.

(b) Separate consideration of certain types 1460.10 Reasonableness of costs and profits.

of contracts.-While renegotiation will be con1460.11 Capital employed.

ducted with respect to the aggregate of the con1460.12 Extent of risk assumed.

tractor's renegotiable business for the fiscal 1460.13 Contribution to the defense effort. 1480.14 Character of business.

year, separate consideration will be given to 1480.15 Additional factors.

cost-plus-a-fixed-fee contracts and other costAUTHORITY : Sections 1460.1 to 1460.15 issued under type contracts and to contracts, whether fixed section 109, Pub. Law 9, 82d Cong. Interpret or apply price or cost-plus-a-fixed-fee, which contain insection 103, Pub. Law 9, 820 Cong.

centive provisions or provide for escalation, 1460.1 General considerations. In mak redetermination, or other revision of the coning determinations in renegotiation, the Board tract price during the life of the conwill proceed generally as follows:

tract. Patent royalty income will also be (a) All the information necessary to a sound separately considered. determination will be obtained.

(c) Comparisons.--In evaluating the con(b) The contractor will be given an oppor

tractor's performance, comparisons will be tunity to develop and present whatever infor made with the prices, costs and profits of other mation is available to it which the contractor

contractors engaged in the production of the may consider pertinent to the determination.

same or similar products or using the same or

similar processes.
(c) Requests for additional information and
the number of meetings held with the contrac-

(d) Significance of settlements or profits or

losses in prior years.--Renegotiation settle tor or its representatives will be kept to a

ments for prior years are not controlling preceminimum.

dents. Consideration will be given to profits or (d) Financial and factual information will

losses in prior years only to the extent provided be reviewed with the contractor and its agree

elsewhere in these regulations. Except to that ment to the accuracy of such information will

extent, determinations of excessive profits will be obtained.

be predicated on the facts and circumstances of (e) The contractor will be given every rea the year under review. sonable assistance and all necessary information (e) Reserves for possible renegotiation rewith respect to the technical requirements of

fund. It is recognized that sound accounting renegotiation, the act, and the regulations in principles may make it desirable for contracthis subchapter.

tor's to establish reserves for possible renegotia(f) The facts and conclusions with respect tion refunds and that the amount of such

excessive profits with respect to individual members of the group may be made in amounts less than the applicable minimum provided in paragraph (a) of this section: Provided, That the aggregate of the determinations for all members of the group equals or exceeds such applicable minimum.

(d) Short fiscal years. If in any case the fiscal year of a contractor is a fractional part of 12 months, the applicable minimum provided in paragraph (a) of this section will be reduced to the same fractional part thereof.

reserves established in individual situations will vary widely depending upon the policy of the particular contractor concerned. Neither the existence nor the amount of such reserves is to be considered directly or indirectly in connection with the determination of excessive profits. The Board recognizes that conservative practice may result in setting up such reserves in excess of the anticipated liability and will not permit such a practice to prejudice the contractor in any way.

1460.3 Adjustment of sales.—The amount
of excessive profits is always deducted from the
renegotiable receipts or accruals, as well as
from the profit thereon, for the purposes of de-
termining the relation of retained profits to

1460.4 Overextended contractors.-A con-
tractor's lack of adequate working capital will
not be taken into consideration in determining
excessive profits to be eliminated.
1460.5 Minimum refund.

(a) In general. Except as otherwise provided
in this section, and in the absence of unusual
circumstances, no determination of excessive
profits for a fiscal year will be made in an
amount less than $40,000 or, in the case of sub-
contracts described in section 103(g) (3) of the
act, in an amount less than $10,000, in each
instance before adjustment for taxes measured
by income, other than Federal taxes (see
§ 1459.9 of this chapter).

(b) "Floorcases. If the excessive profits of the contractor equal or exceed the applicable minimum provided in paragraph (a) of this section, a determination will be made in the amount of the excessive profits realized, even though the amount thereof that can be eliminated is limited by the provisions of section 105 (f) (1) or (2) of the act and $ 1458.3 (a) or (b) of this chapter. For example, if renegotiable receipts or accruals are $1,028,000, and the excessive profits are $100,000, a determination in the amount of $100,000 will be made, although the amount that will be eliminated is $28,000.

(c) Related contractors. In the renegotiation of an affiliated or related group of contractors, whether or not consolidated, determinations of

1460.6 Reserved.

1460.7 Uncompleted portions of terminated contracts.—(a) Separate consideration. When a segregation of the items allo cable to the uncompleted portions of terminated prime contracts and subcontracts is made in accordance with the principles set forth in sections 1457.6 and 1459.1 (c) of this subchapter, separate consideration will be given to such items in the light of the applicable factors in determining excessive profits. The evaluation of the contractor's performance with respect to the uncompleted portions of terminated prime contracts and subcontracts will be considered in connection with the evaluation of the contractor's performance of the completed portions of such prime contracts and subcontracts and with that of other prime contracts and subcontracts in determining the excessive profits, if any, for the period involved in the renegotiation.

(b) Evaluation of performance.—The evaluation of the contractor's performance with respect to the uncompleted portions of terminated prime contracts and subcontracts will be measured by the nature and extent thereof. The more nearly the nature and extent of such performance approximate the nature and extent of the contractor's performance of completed contracts and subcontracts of the same type, the more nearly the evaluation of such performance will approach that given to t'e contractor's performance of the completed prime contracts and subcontracts. On the other hand, if the contractor's performance under the uncompleted portions of terminated prime contracts and subcontracts has consisted largely of the acquisition


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