Government. As used herein the phrase "acquired it for the account of the Government" means acquired pursuant to an arrangement between the Government and the purchaser of such machinery, whereby title to such machinery will, or may, at the option of the Government, vest in the Government.

(c) Comment. The scope of the collateral items exemption as it applied prior to January 1, 1951, excluded from renegotiation all subcontracts for items which did not become a part of the end product or of a component incorporated therein. This exemption excludes from renegotiation a narrower group of subcontracts. The termination of the exemption which applied prior to January 1, 1951, has the effect of bringing back within the scope of renegotiation all subcontracts for items of machinery, equipment, and materials which operate directly on an end product or of an article incorporated therein by chemical, physical, or mechanical methods, such as shaping, cutting, constructing, combining, refining, assembling, testing, or inspecting. Furthermore, all subcontracts for components of such machinery, equipment, or materials will likewise be subject to renegotiation. For example, if an aircraft manufacturer buys a machine on or after January 1, 1951, for use in performing a renegotiable contract, the purchase of that machine will be a subcontract subject to renegotiation. Furthermore, purchases made by the manufacturer of the machine of components to be incorporated therein will likewise be subject to renegotiation if such purchases are made on or after January 1, 1951.

7. The Secretary of Defense on June 14, 1948, exempted from the application of the Renegotiation Act of 1948 that portion of the Supplemental National Defense Appropriation Act of 1948, Public Law 547, 80th Congress, entitled "Department of the Army-Military Functions, Corps of Engineers, Engineer Service, Army".

8. Blind-made products-Exemption. All contracts subject to the Renegotiation Act of 1948 entered into in the fiscal years 1950 or 1951 for procurement of supplies at prices determined by the Committee on Purchases of Blind-Made Products, pursuant to the provisions of sections 46-48, inclusive, of Title 41 of the United States Code (52 Stat. 1196), from any non-profit making agency for the blind organized under the laws of the United States or of any State, and subcontracts thereunder.

9. Exemption. All subcontracts subject to the Renegotiation Act of 1948 entered into on or after January 1, 1949, which are for items customarily purchased for stock in the normal course of the purchaser's business, except when such items are specially purchased for use in performing a contract or higher tier subcontract subject to the Renegotiation Act of 1948.

10. Exemption. All contracts entered into in the fiscal year 1950 by the General Services Administration on behalf of the Department

of Defense (including the Departments of the Army, Navy, and Air Force) for furnishing tires and tubes under Class 8 of the Federal Supply Schedule, and each subcontract thereunder. There are included in this exemption all purchase or delivery orders issued by the Department of Defense (including the Departments of the Army, Navy, and Air Force) in pursuance of such

contracts.

[15 F. R. 170, Jan. 12, 1950, 15 F. R. 451, Jan. 26, 1950, as amended at 15 F. R. 2417, Apr. 28, 1950, 15 F. R. 4717, July 22, 1950, 15 F. R. 4942, Aug. 2, 1950, 15 F. R. 6473, Sept. 26, 1950, 15 F. R. 9514, Dec. 30, 1950, 16 F. R. 282, Jan. 11, 1951; 17 F. R. 7218, Aug. 8, 1952]

Subpart F-Limitations on Commencement and Completion of Renegotiation

§ 1423.361 Statutory provision.

Section 202 of the Renegotiation Act of 1951 provides as follows:

No proceeding under the Renegotiation Act of 1948 to determine the amount of excessive profits for any fiscal year shall be commenced more than one year after the mandatory statement required by the regulations issued pursuant to such Act is filed with respect to such year, or more than six months after the date of the enactment of this title, whichever is the later, and if such proceeding is not so commenced (in the manner provided by the regulations prescribed pursuant to such Act), all liabilities of the contractor or subcontractor under such Act for excessive profits received or accrued during such fiscal year shall thereupon be discharged. If an agreement or order determining the amount of excessive profits under such Act is not made within two years following the commencement of the renegotiation proceeding, then upon the expiration of such two years all liabilities of the contractor or subcontractor for excessive profits with respect to which such proceeding was commenced shall thereupon be discharged, except that (1) such two-year period may be extended by mutual agreement, and (2) if within such two years such an order is duly issued pursuant to such Act, such two-year limitation shall not apply to the review of such order by any renegotiation board duly authorized to undertake such review.

[17 F. R. 7218, Aug. 8, 1952]

§ 1423.362 Commencement of renegotiation proceedings.

[17 F. R. 7218, Aug. 8, 1952]

§ 1423.362-1 Period of commencement.

Under 1422.241 of this subchapter, renegotiation proceedings are commenced by mailing of a notice to that effect, by registered mail, to the contractor or subcontractor. Unless rene

gotiation proceedings are commenced within one year after the Standard Form of Contractor's Report prescribed in § 1422.222-1 of this subchapter is filed with respect to any fiscal year, the liability of the contractor or subcontractor for excessive profits received or accrued during such fiscal year is discharged. For the purposes of this paragraph, the filing of the Standard Form of Contractor's Report is considered to be the filing of the mandatory statement referred to in section 202 of the Renegotiation Act of 1951.

[17 F. R. 7218, Aug. 8, 1952]

§ 1423.362-2

Effect of false statement in Standard Form of Contractor's Report.

The Standard Form of Contractor's Report provides the information upon the basis of which it is determined whether the contractor or subcontractor will or will not be renegotiated under the act. If the purported Standard Form of Contractor's Report filed by any contractor or subcontractor for any fiscal year contains a false statement of a material fact, either fraudulently or negligently made, the filing of such purported statement will not be regarded as a filing of the Standard Form of Contractor's Report, sufficient to start the one-year period of limitations running as prescribed in section 202 of the Renegotiation Act of 1951, and even if the renegotiation is not commenced within one year after the filing thereof, the liability of the contractor or subcontractor for excessive profits received or accrued during the fiscal year involved is not discharged.

[17 F. R. 7218, Aug. 8, 1952]

§ 1423.381-4

[Reserved] [Reserved]

Profit, cost allocation and allowance; general.

(a) Accounting methods. In connection with renegotiation on an over-all fiscal-year basis, income received or accrued (sales, etc.) and costs paid or incurred will be considered as having been received or accrued or paid or incurred in the fiscal year to which such items are to be attributed in accordance with the method of accounting employed by the contractor or subcontractor in determining net income for Federal income tax purposes or in accordance with such other method of accounting as the contractor and the renegotiating agency may agree upon pursuant to the provisions of §§ 1423.301 to 1423.301-2 and 1423.381-6.

(b) Allocation of costs. In general the costs paid or incurred with respect to renegotiable contracts and subcontracts will be those costs allocated thereto by the contractor's established cost accounting method if that method reflects recognized accounting principles and practices. If, in the opinion of the renegotiating agency there is no adequate or effective cost accounting method in use, or if the method employed does not properly reflect such costs because there are unjustified or improper allocations of items of cost in the accounting records or in the reports or statements filed for the purpose of renegotiation, costs shall be determined in accordance with such method as in the opinion of the renegotiating agency properly reflects such costs. The fact that all receipts and accruals during a fiscal year are classifiable as renegotiable does not necessarily mean that all items of cost estimated to be deductible in that year are allocable to renegotiable business.

(c) Tax deductions. Costs allocable to renegotiable business shall be determined in accordance with the principles set forth above. Where the full amount of an item of cost is allocable to renegotiable business, it shall be allowed in the amount estimated by the renegotiating agency to be allowable as a deduction or exclusion under Chapter 1 of the Internal Revenue Code. No such item of cost shall be allowed in an amount less than or in excess of that which is estimated to be deductible or excludible from income under the Internal Revenue Code, and all items of cost shall be attributed to the fiscal year in which they are allowable in the determination of taxable income under said Code except as provided in § 1423.381-6. Where only a portion of an item of cost is allocable to renegotiable business, the renegotiating agency shall estimate the total amount allowable to the contractor as a deduction or exclusion under Chapter 1 of the Internal Revenue Code, and the portion of this estimated amount which is allocable to renegotiable business in accordance with the principles set forth above shall be allowed as a cost of renegotiable business. Where it is clear that a contractor's deductions and exclusions under the Internal Revenue Code result in allowable costs of renegotiable business which are either high or low on a comparative basis, this circumstance shall be considered in connection with the factor of the "reasonableness of costs" of the contractor

and the determination of the amount of the profit adjustment to be required of the contractor. The renegotiating agency will allow as items of cost, to the extent allocable to renegotiable contracts and subcontracts, all items estimated to be allowable as deductions and exclusions under Chapter 1 of the Internal Revenue Code. In making any such estimate due consideration will be given to any pertinent action by the Bureau of Internal Revenue. Published rulings of the Bureau on matters of general application should be adhered to in estimating the deductibility or excludibility of items under the Internal Revenue Code. However, the allowance of items as costs is not required merely because they have been or are expected to be allowed for tax purposes by particular revenue agents or other representatives of the Bureau of Internal Revenue. Occasion

ally cases may be encountered where revenue agents have allowed salaries or other items as deductions for tax purposes which the renegotiating agency concludes are not properly allowable under the Internal Revenue Code or are properly allowable in a different amount. In such cases the action of the revenue agents need not be regarded as conclusive. The renegotiating agency may and should exercise independent judgment as to whether and to what extent the items are allowable as deductions or exclusions under the Internal Revenue Code. Such judgment should be based upon an estimate of what the courts would do if the deductibility or excludibility of the item were the subject of litigation.

(d) Conditional allowance of cost. The estimate of the renegotiating agency as to whether an item is allowable as a deduction or exclusion under Chapter 1 of the Internal Revenue Code will, with the exception discussed hereafter in this paragraph, be final for the purposes of renegotiation. However, in a few special cases it may be impossible for the renegotiating agency to make any reasonable estimate as to whether or to what extent a particular item is allowable as a deduction or exclusion under the Internal Revenue Code for the fiscal year under renegotiation. In such special cases where the item is substantial in relation to the profits to be eliminated, the agency may, subject to the restrictions set forth below, allow the item as a cost in renegotiation on the condition that a provision is made whereby the contractor will refund as additional excessive

profits, the amount so allowed as a cost of renegotiable business which is finally determined to be not allowable as a deduction or exclusion under the Internal Revenue Code for the fiscal year in which it was so allowed in renegotiation.

(1) The Division, prior to making the conditional allowance, shall transmit to the Policy and Review Board a statement setting forth the approximate amount of excessive profits to be finally eliminated and the amount of the item to be conditionally allowed in determining such excessive profits, a full description of the facts and the reasons why the Division is unable to determine whether the item should be allowed or disallowed as a cost, together with its recommendations concerning any measures which should be taken to insure payment by the contractor of any amounts which may become due in the future because of such conditional allowance of cost.

(2) The Policy and Review Board, in its discretion, may authorize the conditional allowance and the use of a special clause, or may advise the Division that the item should be unconditionally allowed or disallowed as a cost in renegotiation, or may instruct the Division to treat the item in such other manner as the Policy and Review Board may consider appropriate.

(e) Costs previously allowed in renegotiation. No item of cost shall be deemed allocable to renegotiable business to the extent that such item has, in a previous renegotiation under this act, been allocated to renegotiable business in determining excessive profits, notwithstanding that such item may be a deduction or exclusion under Chapter 1 of the Internal Revenue Code in computing taxable net income for the taxable period corresponding to the fiscal period covered by the current renegotiation.

(f) Replacement of inventory involuntarily liquidated. Under section 22 (d) (6) of the Internal Revenue Code, a taxpayer using the last in, first out inventory method may, for any year in which it involuntarily liquidated any part of its base stock inventory, elect to adjust retroactively its net income for tax purposes for such year by reference to costs of replacing in a subsequent year the inventory so involuntarily liquidated. The excess of such replacement costs over base stock costs is neither an exclusion nor a deduction under the Internal Revenue

Code but is merely a retroactive adjustment of net income, and no part thereof will be allowed as a cost in determining profits under renegotiable contracts and subcontracts. Similarly, no adjustment is required in renegotiation on account of any excess of base stock costs over replacement costs. It should be noted, however, that for the purposes of determining to what extent a contractor's profits are excessive, the low production costs, resulting from use of low-priced base stock inventory, are to be taken into account under the provisions of § 1424.411 of this subchapter. Such consideration shall be given in the appraisal of reasonableness of costs whether or not use of the low-priced base stock inventory constitutes involuntary liquidation under the provisions of the Internal Revenue Code.

§ 1423.381-5 Costs allocable to uncompleted portions of terminated contracts and subcontracts.

Costs

(a) Allowed in renegotiation. allocable to the uncompleted portion of any terminated contract or subcontract which is subject to renegotiation will be allowed as costs in renegotiation. (See § 1423.308-1.) Such costs will be allowed, however, only to the extent, and for the fiscal year for which, they are estimated to be deductible in the computation of taxable income under the Internal Revenue Code (See § 29.42-1 of Bureau of Internal Revenue Regulations (26 CFR 29.42-1) and see also Bureau of Internal Revenue Mimeograph No. 5897) and will not be allowed to the extent theretofore allowed as items of cost in a previous renegotiation under the Renegotiation Act of 1948.

(b) Segregation of costs allocable to uncompleted portions of terminated contracts and subcontracts. Costs allocable to the uncompleted portions of terminated contracts and subcontracts must be segregated from other costs pertaining to renegotiable business, unless the costs allocable to such uncompleted portions of contracts and subcontracts constitute only a negligible proportion of all the contractor's renegotiable costs. Such segregation may be required to be made in such general or such detailed manner as the renegotiating agency may deem necessary.

Effect of waiver of termination

(c) claim. The principles stated in paragraphs (a) and (b) of this section with respect to the allowance of costs allocable to the uncompleted portions of

terminated contracts and subcontracts and the segregation of such costs are equally applicable whether or not the contractor has waived all or any part of the compensation to which he might be entitled under termination claims.

§ 1423.381-6 Special accounting procedures.

A contractor or subcontractor with whom renegotiation is to be conducted with respect to the aggregate of the amounts received or accrued in the fiscal year may, notwithstanding any other provisions of the regulations in this subchapter, by agreement with the Division, adopt a method of accounting other than the method of accounting employed in determining his net income for Federal income tax purposes: Provided,

That:

(a) The adoption of such method of accounting for purposes of renegotiation shall be approved in writing by the Policy and Review Board as being necessary in order clearly to reflect the profits attributable to the contractor's or subcontractor's performance for the fiscal year under renegotiation;

(b) The method of accounting so adopted for purposes of renegotiation will differ from that employed in determining the net income of the contractor or subcontractor for Federal income tax purposes only to the extent of reporting particular identified items as having been received or accrued, or paid or incurred in a fiscal year or years other than the fiscal year or years in which such items are deemed to have been received or accrued, or paid or incurred under the accounting method employed in determining the net income of the contractor or subcontractor for Federal income tax purposes; and

(c) The contractor or subcontractor shall be bound to employ in all subsequent renegotiation proceedings under the Renegotiation Act of 1948 the method of accounting so adopted for purposes of renegotiation, except with the written consent of the Policy and Review Board. § 1423.382 Salaries, wages and other

compensation.

§ 1423.382-1 Allocation.

Salaries, wages and other compensation should be allocated between renegotiable and non-renegotiable business according to principles established in § 1423.381-4.

(a) Under section 23 (a) of the Internal Revenue Code, salaries or other compensation for personal services are allowed to the extent found "reasonable." In determining whether any salaries or other compensation paid by a contractor to its officers or employees are reasonable, consideration shall be given to the nature of the work, extent of responsibility, experience and effectiveness of the officer or employee, and recent compensation record. Comparison shall be made where possible with the compensation of officers or employees in similar positions in other companies within the particular industry. Reasonableness of compensation may be determined only within broad limits, and weight shall be given to the determination by the contractor of the worth of the services of an officer or employee.

(b) Whether or not the profit and loss statement of a partnership or individual proprietorship includes salaries or drawing accounts for the partners or the individual proprietor as an expense, in determining the amount of excessive profits to be eliminated, a so-called "salary allowance" shall be made for reasonable salaries for such partners as are active in the business or for the individual proprietor if he is active in the business.

§ 1423.382-3

§ 1423.382-4 § 1423.382-5

[Reserved] [Reserved]

Brokers' commissions.

Brokers' commissions will not be allowed except when paid or payable to bona fide commercial or selling agencies maintained by the contractor for the purpose of securing business, and then only to the extent permitted by the provisions of §§ 1423.382-1 and 1423.382-2. § 1423.382-6 Pension, annuity, stock bonus and profit sharing plans.

Payments on account of plans for pensions, annuities, stock bonuses, or profit sharing, estimated to be allowable as deductions under the Internal Revenue Code, will be allowed as items of cost of renegotiable business to the extent allocable thereto under the principles set forth in § 1423.381-4. Inquiry should be made as to whether the provisions of the compensation plan have been reviewed by the Bureau of Internal Revenue. If the amount of deduction is material, and if the compensation plan is in contro