1423.389-7 State income tax of contractor operating as a partnership or sole proprietorship. AUTHORITY: The provisions of this Part 1423 issued under sec. 8, 62 Stat. 259; 50 U.S.C. App. 1193. SOURCE: The provisions of this Part 1423 appear at 14 F.R. 1635, Apr. 7, 1949, unless otherwise noted. Subpart A-Fiscal Year Basis for Re negotiation and Exceptions § 1423.300 Scope of subpart. This subpart deals with the application of the fiscal year basis for renegotiation, and exceptions to it. § 1423.301 Fiscal year basis for renegotiation. § 1423.301-1 Statutory provisions. Subsection (b) of the act provides in part as follows: * The powers hereby conferred upon the Secretary shall be exercised with respect to the aggregate of the amounts received or accrued under all such contracts and subcontracts by the contractor or subcontractor during his fiscal year or upon such other basis as may be mutually agreed upon; * ** § 1423.301-2 Application of statutory provisions. (a) Renegotiation will be conducted on the basis of the amounts received or accrued by a contractor from his renegotiable contracts and subcontracts for a fiscal year. Accordingly, excessive profits will be determined by examining the contractor's financial position and the profits from such 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 as between each contract and subcontract, allows the contractor to offset the results of one contract against the results of another, and simplifies administration. (b) Since renegotiation will be conducted on a fiscal year basis, losses or inadequate profits in any year preceding the year being renegotiated shall not be used as an offset or adjustment in the determination of excessive profits for the year which is the subect of renegotiation. However, a loss on renegotiable business in a prior year subject to the Renegotiation Act of 1948 is a factor which may be considered in determining the reasonableness of profits for a later year. § 1423.302 Differing accounting meth ods. If there be employed in a renegotiation for any fiscal year a method of employed in renegotiation for the fiscal computing profit different from that year immediately preceding, the renegotiating agency must make adequate provision in the agreement or otherwise so that renegotiable business will not escape renegotiation because of the change. The interest of the Government with respect to the year which is the subject of renegotiation and future years must also be protected, and no item of cost which has been allowed in a previous renegotiation will be allowed in any subsequent renegotiation. Under ordinary circumstances a contractor will be renegotiated on the same basis as that used for the determination of his income for Federal income tax purposes and, where a contractor requests and is allowed to renegotiate on some other basis, he will be required to agree that future renegotiations will be conducted on the same basis unless the Policy and Review Board approves a variation therefrom by reason of unusual circumstances. With reference to special accounting procedures in the case of particular identified items see separate consideration may be given in renegotiation of such cost-plus-fixed-fee contracts. [Amdt. 1, 14 F. R. 3080, June 8, 1949] If two or more parties enter into an arrangement for the performance jointly of one or more 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 contracts or subcontracts within the scope of the act is a "contractor" or "subcontractor" within the meaning of the act. § 1423.306 § 1423.307 [Reserved] Treatments of contracts with price adjustment provisions. § 1423.307-1 Subject to renegotiation. Certain contracts contain incentive provisions or provide for escalation, redetermination or other revision of the contract price during the life of the contract. These contracts are subject to renegotiation unless otherwise exempted, but their provisions necessitate special treatment. The method of handling certain situations arising in connection with such contracts is discussed in § 1423.307-2. § 1423.307-2 Method of renegotiation. Upon over-all renegotiation involving such contracts, if the price for the period under review is expected to be retroactively reduced after the completion of the renegotiation proceedings and if excessive profits are determined by agreement, then in determining excessive profits the contractor may be permitted to set up a reasonable reserve to cover the estimated refund under the contract for the period under review. Similarly, if the contract clause is expected to result in a retroactive upward revision of the price for the period under review, adjustment therefor may be made on the basis of reasonable estimates and included in the renegotiable income of the contractor. § 1423.308 Treatment of receipts or accruals under termination claims. § 1423.308-1 Subject to renegotiation. Termination compensation received or accrued under a subject contract or subcontract is renegotiable unless (a) received or accrued with respect to a terminated contract or subcontract which is exempt or has been exempted from renegotiation or (b) the termination settlement is exempted from renegotiation. § 1423.308-2 When received or accrued. For purposes of renegotiation amounts payable to a contractor or subcontractor on account of any termination claim under a contract or 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. § 1423.308–3 Separate consideration. Any contractor may, and in any case in which the aggregate of the amounts received or accrued under 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 renegotiating agency may deem necessary. § 1423.309 Renegotiation of commonly owned entities. § 1423.309-1 When consolidated basis authorized. Renegotiation of commonly owned entities which desire to be consolidated for the purposes of renegotiation may, upon the application of such entities and, in the discretion of the Policy and Review Board, be conducted on a consolidated basis. An application for consolidation will be granted only if (a) less than 25% of the interest in any entity is owned by an outside minority group; (b) all such entities requesting consolidation have the same fiscal year for accounting purposes; (c) common ownership existed for the entire period for which consolidation is requested, and (d) all such entities have agreed that the $100,000 limitation will be applied to the aggregate receipts or accruals of all such entities in the same manner as though a single contractor were involved (see §§ 1423.347-2 and 1423.347-3). [14 F. R. 1635, Apr. 7, 1949, as amended by Amdt. 10, 15 F. R. 6987, Oct. 19, 1950] § 1423.309-2 Allocation of excessive profits in cases of consolidated renegotiation. (a) Excessive profits must be allocated among the entities included in the consolidated renegotiation, and the renegotiation agreement must disclose the allocation. The excessive profits must be so allocated even though some or all of the members of the consolidated group participate in filing a consolidated Federal tax return. (See § 1424.444 (b) of this subchapter.) If excessive profits have been realized and if the renegotiation agreement were to impose liability generally on the entire consolidated group for the profits found to be excessive, without fixing the separate liability, then the members of the group might not be allowed a deduction from their income for Federal tax purposes for the unallocated amounts of excessive profits to be eliminated under the agreement, or appropriate tax credits under section 3806 of the Internal Revenue Code. (b) For this reason, even where a consolidated basis has been authorized, each of the entities included in the group must submit a standard form of contractors report covering its renegotiable business in addition to the consolidated report. To make the necessary allocations of the excessive profits, a review of the unconsolidated financial statements of each member of the group must be made. The renegotiating agency will require that fair and reasonable methods be employed in segregating costs and income among the entities included in the consolidated renegotiation, and will give particular attention to those cases in which the type of business conducted by one entity is materially different from the business conducted by others in the consolidated group. (c) The form of the renegotiation agreement and method of execution in the case of a consolidated renegotiation is described in § 1425.502-11 (b) of this subchapter. § 1423.310 Fiscal year beginning in 1950 and ending in 1951. In the case of a fiscal year beginning in 1950 and ending in 1951, as in the case of any other fiscal year, renegotiation will generally be conducted on the fiscal year basis (see § 1423.301). However, no proceeding under the 1948 act will include any amounts received or accrued by the contractor after December 31, 1950 from its renegotiable prime contracts and subcontracts. Upon request of any contractor, the Board will enter into an agreement for combined renegotiation pursuant to section 102(c) of the Renegotiation Act of 1951 in any case of a fiscal year beginning in 1950 and ending in 1951 when such contractor has receipts or accruals before January 1, 1951 from prime contracts and subcontracts subject to the 1948 act and also has receipts or accruals after December 31, 1950 subject to the 1951 act, but only when, if no such agreement were made, a contractor would be renegotiated under one or both of such acts. Regulations pertaining to such agreements, including the form thereof, are set forth in § 1457.2 of the Renegotiation Board Regulations issued under the 1951 act. [17 F. R. 7218, Aug. 8, 1952] Subpart B Methods of Segregating Sales Between Renegotiable and Non-Renegotiable Business. § 1423.320 Scope of subpart. The Renegotiation Act of 1948, section 401 of the Second Deficiency Appropriation Act, 1948, section 622 of the National Military Establishment Appropriation Act, 1950, and section 618 of the General Appropriation Act, 1951, prescribe what contracts and subcontracts are subject to renegotiation, and also under what circumstances certain of such contracts and subcontracts may be exempted from renegotiation. Subparts C and D of this part discuss in detail the principles for determining whether or not particular contracts and subcontracts are subject to the act, and Subpart E of this part covers permissive exemptions from renegotiation. This subpart deals with the methods of segregating sales and gross receipts so as to determine the amount of such sales and gross receipts which apply to contracts and subcontracts subject to renegotiation. [14 F. R. 1635, Apr. 7, 1949, as amended by Amdt. 10, 15 F. R. 6987, Oct. 19, 1950] The contractor has the primary responsibility for determining the sales subject to renegotiation and the allocable costs applicable thereto. A portion of these data is called for by the "Standard Form of Contractor's Report" required to be filed by contractors and subcontractors (see §§ 1422.222 to 1422.222-7 of this subchapter). These reports, and such additional data as may be requested by the renegotiating agency (see § 1422.224 of this subchapter) or otherwise submitted by the contractor, must be executed by him. He is also required to furnish an explanation of the methods used in determining the amount of sales and costs allocated to renegotiable contracts or subcontracts. The segregation of sales and allocation of costs upon which a determination is based must be satisfactory to the agency which concludes the renegotiation proceedings. Such agency shall afford reasonable assistance in suggesting methods of segregation and allocation. § 1423.322 Methods of segregating sales. § 1423.322-1 Basic approach. (a) The act requires the inclusion of the Renegotiation Article set forth therein in certain contracts and subcontracts (including purchase orders) under the circumstances specified in § 1423.331-1. Therefore, as a preliminary approach, a tabulation shall be made of receipts and accruals of the fiscal year under consideration (hereinafter in this section referred to as sales) applicable to contracts and subcontracts which contain the renegotiation article. (b) As pointed out in §§ 1423.332-1 and 1423.334-1, the absence of the renegotiation article from a contract or subcontract does not preclude the application of the Act if the contract or subcontract should have contained the article. The contractor shall include in renegotiable business sales applicable to such contracts and subcontracts. In most cases, it is expected that the contractor will be able to make such inclusion in renegotiable sales because of his knowledge of the ultimate end use of the product involved, or of the prime contract under which he is a subcontractor. (c) It must also be recognized that a contract or subcontract which contains the renegotiation article may, despite such article, be exempt from renegotia tion (see § 1423.331-3). The information as to whether such a contract or subcontract is subject to renegotiation generally will be more readily available to the contractor than to the renegotiating agency. Therefore, in such cases, it is the responsibility of the contractor to submit a list of such contracts or subcontracts together with an explanation of the basis of his opinion as to their non-renegotiability. Reference should be made to Subpart E of this part for a discussion of contracts which have been exempted pursuant to statutory authority. NOTE: In an effort to inform contractors and subcontractors as to which prime contracts are subject to renegotiation and thus assist them in segregating sales, the Policy and Review Board will cause a list of the numbers of such prime contracts together with the names of the contractors holding such contracts to be published in the FEDERAL REGISTER. The publication of the contract numbers and names will be brought up to date periodically. Such publication is only for the purpose of disseminating information and although every effort will be made to have the lists complete and accurate the omission of the number of a contract subject to the act will not thereby relieve the contractors and subcontractors thereunder from renegotiation. Controversely, the inclusion in the published list of the number of a contract which is not subject to the act will not make the contractor holding such contract and subcontractors thereunder subject to renegotiation. Furthermore, contractors and higher-tier subcontractors should assist their subcontractors in making segregations by advising such subcontractors of the prime contract number under which such contractors and subcontractors are operating. [14 F. R. 1635, Apr. 7, 1949, as amended by Amdt. 5, 15 F. R. 169, Jan. 12, 1950] § 1423.322-2 Segregation other than specifically by contract or subcon tract. (a) If a contractor's business is such that a segregation of sales can be made with reasonable accuracy without according specific consideration to separate contracts and subcontracts such other method may be employed if satisfactory to the renegotiating agency. For example, if a subcontractor's business is entirely with an enterprise known to be engaged in production under subject contracts or subcontracts, it may not be necessary to require the subcontractor to review his subcontracts and purchase orders separately. Similarly, it may be possible to omit such separate considera tion of contracts and subcontracts for segments of the business, if sales and costs data for such segments are available. (b) It is not possible to specify with exactitude all of the methods which may be employed to segregate sales without examination and consideration of each separate contract and subcontract. The contractor is best equipped to appraise the need for and practicability of general approaches to the problem. The contractor should feel free to consult the renegotiating agency involved as to these problems, and the renegotiating agency is authorized to accept segregations based on general approaches which are not contrary to the interests of the Government. However, general methods of segregation will be acceptable only if it is determined that analysis of separate contracts and subcontracts would be burdensome, or if it appears from the particular circumstances that detailed analysis by contracts and subcontracts could not result in a segregation materially different. (c) The general approaches referred to in the subparagraph immediately preceding may include one or more of the following methods of classifying or analyzing sales: (1) By industry, customer, or customer groups; (2) By product or product group; (3) By division, department or plant of the contractor, for separate and possibly different consideration of each as to renegotiable business; (4) By use of Government, trade association, or other reports independently prepared, by which end use of products may be determined; (5) By use of spot checks of detailed transactions of part of the fiscal year, after prior discussion with, and approval by, the renegotiating agency of the acceptability of the statistical procedure. § 1423.322-3 Overall consideration of segregation. Regardless of the methods employed by the contractor in segregating sales, the renegotiating agency must determine that the result is reasonable on an overall basis, having regard to such of the general approaches outlined in § 1423.322-2 as are applicable, and also to segregations determined for other contractors and subcontractors known or believed to be comparable to the subject contractor as to pattern of business. 66-078-72- -3 § 1423.323 Segregation and exclusion of exempt contracts. Sales and costs allocable to any contract or portion thereof which is exempt from renegotiation under subsection (i) (1) of the Renegotiation Act of February 25, 1944, as amended, or which is exempted by the Secretary of Defense or his delegatee pursuant to subsection (d) of the Renegotiation Act of 1948, shall be entirely excluded from consideration in determining whether excessive profits have been realized and the amount thereof. (However, see § 1423.385-4 for treatment of losses from the sale or exchange of facilities used in performing renegotiable contracts or subcontracts.) Sales under contracts and subcontracts which are individually exempted by the Secretary of a Department under the permissive exemption authority contained in subsection (d) of the act shall be included in applying the $100,000 limitation or the $100,000 "floor." §§ 1423.347-2 and 1423.347-3.) [Amdt. 6, 15 F.R. 1136, Mar. 2, 1950] Subpart C-Contracts and Subcontracts Within the Scope of the 1948 Act § 1423.330 Scope of subpart. (See |