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tiation under this section even though the services in question are not subject to regulation. For example, a prime contract entered into by a railroad for freight carriage at a rate negotiated under section 22 of the Interstate Commerce Act is exempt since section 22 permits a railroad to negotiate contracts with the Government at special rates which are below the public rates.

(ii) If, under a contract at unregulated rates, the Government furnishes any benefits to the contractor or otherwise relieves the contractor from furnishing any of the services for which a rate has been published or filed with, fixed, approved or regulated by a public regulatory body, the contract is not exempt under this section unless the contract rate, aggregated with the prorated fair value of such benefits or other advantages, does not exceed the regulated rate.

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Esample. An airline agrees to carry freight or personnel at charges below the regulated general or charter tariff rate for carrying simlar loads for like distances. The services for which the tariff rate was established do not include the utilization by the airline of Government bases, facilities or ground personnel. The contract, however, provides that the airline may utilize Government bases, facilities and ground personnel, and thus the alrline is not required to furnish services necessarily incident to the transportation for which the tarift rate was established. When the prorated fair value of the benefits thus provided by the Government is added to the contract rate, 11 the resulting aggregate exceeds the regulated rate, the contract is not exempt under this section.

(5) any contract or subcontract with an organization exempt from taxation under section 101(6) of the Internal Revenue Code, but only if the income from such contract or subcontract is not includible under section 422 of such code in computing the unrelated business net income of such organization;

(b) Related statutory provisions. For the text of sections 101(6) and 422 of the Internal Revenue Code, see sections 1499.10 and 1499.11 of this subchapter, respectively.

(c) Limitation.—The exemption provided in paragraph (5) of section 106(a) of the act is limited to prime contracts or subcontracts for the procurement of materials or services from organizations exempt from taxation as prescribed in said paragraph (5). Subcontracts for the procurement of materials or services by such organizations from other persons are not exempt under such provision; such subcontracts are also specifically excluded from the subcontract exemption provided in section 106(a) (7). See $ 1453.6.

1453.5 Contracts that do not have a direct and immediate connection with the national defense.-(a) Statutory provision. Subsection 106(a)(6) of the act exempts the following:

(6) any contract which the Board determines does not have a direct and immediate connection with the national defense. The Board shall prescribe regulations designating those classes and types of contracts which shall be exempt under this paragraph; and the Board shall, in accordance with regulations prescribed by it, exempt any individual contract not falling within any such class or type if it determines that such contract does not have a direct and immediate connection with the national defense.

In designating those classes and types of contracts which shall be exempt and in exempting any individual contract under this paragraph, the Board shall consider as not having a direct or immediate connection with national defense any contract for the furnishing of materials or services to be used by the United States, a Department or agency thereof, in the manufacture and sale of synthetic rubbers to a private person or to private persons which are to be used for nondefense purposes. If the use by such private person or persons shall be partly for defense and partly for nondefense purposes, the Board shall consider as not having a direct or immediate connection with national defense that portion of the cono tract which is determined not to have been used for national defense purposes.

The method used in making such determination shall be subject 10 approval by the Board. Notwithstanding section 108 of this title, regulations prescribed by the Board under this para. graph, and any determination of the Board that a contract is or is not exempt under this paragraph, shall not be reviewed or redetermined by the Tax Court or

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(3) Unregulated rates substantially as favorable as regulated rates.-If a public utility furnishes services to Departments and to other consumers at rates which are unregulated but which are substantially as favorable as regulated rates for comparable services, a contract for the furnishing of such services is exempt under this section. For example, a gas company delivers gas to a Department in a state where gas sales are unregulated. The rates charged under the contract are the same as or lower than the rates offered by the contractor to the public generally and such public rates are substantially as favorable to consumers as comparable regulated rates in comparable arens. The contract with the Department is exempt from renegotiation under this section. 1453.4 Contracts subcontracts

with tax-exempt charitable, religous and educa- . tional institutions.-(a) Statutory

provision.-Section 106(a)(5) of the act exempts the following:

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tion that such prime contract be determined to be exempt from renegotiation under section 106(a)(6) of the act, through the Department entering into such prime contract.

(g) Synthetic rubber. Under section 106 (a) of the act, the Board is required and empowered to determine the extent to which materials or services furnished under a contract with a Department are used in the manufacture of synthetic rubber for sale thereof to a private person or to private persons for nondefense purposes. In the absence of specific information concerning the extent to which materials and services furnished under any such contract are to be so used, the Board will apply the industry percentages set forth from time to time in Renegotiation Staff Bulletin No. 21 and supplements thereto, which Bulletin and supplements are hereby made a part of these regulations.

1453.6 Subcontracts under exempt contracts and subcontracts.-(a) Statutory provision. Section 106 (a) (7) of the act exempts the following:

(7) any subcontract directly or indirectly under a contract or subcontract to which this title does not apply by reason of any paragraph, other than paragraph (1), (5), or (8) of this subsection; (Matter in italics added by sec. 5 (a) of Pub. Law 764, 83d Cong., approved September 1, 1954, as amended by sec. 8 (a), Pub. Law 870, 84tli Cong., approved August 1, 1956. The latter amendment added the reference to paragraphs (1) and (5) and applies only with respect to subcontracts made after June 30, 1956.)

(6) Interpretation and application. (1) The foregoing exemption applies only when the subcontract is under a prime contract or subcontract exempted by any paragraph of section 106 (a) of the act other than paragraph (1), (5), or (8). Thus, a subcontract under a prime contract or subcontract for a standard commercial article or service exempted under paragraph (8) is not exempt under paragraph (7); a subcontract made after June 30, 1956, under a prime contract with, for example, a State or municipal corporation exempted under paragraph (1), is not exempt under paragraph (7); and a subcontract made after June 30, 1956, under a prime contract or subcontract with, for example, a tax-exempt charitable institution exempted under paragraph (5), is not exempt under paragraph (7). The exemption in para

graph (7) does not apply to subcontracts under prime contracts or subcontracts for (i) standard commercial articles or services exempted under section 106 (e), or (ii) new durable productive equipment partially exempted under section 106 (c) of the act.

(2) Subcontracts for the furnishing of packaging materials and containers in which there are delivered materials or products pursuant to prime contracts or subcontracts which are exempt under any paragraph of section 106 (a) of the act, except paragraph (1), (5), or (8) thereof, are subcontracts under exempt contracts, and are exempt from renegotiation.

(3) Certain subcontracts related to prime contracts which the Board has exempted pursuant to section 106 (d) of the act, have also been exempted by the Board. (See 8 1455.7 of this subchapter.)

1453.7 Construction contracts awarded as a result of competitive bidding.–(a) Statutory provision.—Section 106 (a) (9) of the act (added by Pub. Law 216, 84th Cong., approved August 3, 1955) exempts the following:

(9) any contract, awarded as a result of competitive bidding, for the construction of any building, structure, improvement, or facility, other than a contract for the construction of housing financed with a mortgage or mortgages insured under the provisions of title VIII of the National Housing Act, as now or hereafter amended.

[The statutory provision set forth above applies only to contracts with the Departments made after December 31, 1954.)

(b) Scope of exemption.-(1) It is considered that a prime contract is exempt under paragraph (a) of this section, if it meets all of the following conditions:

(i) The contract was made after December 31, 1954.

(ii) The contract is for the construction or installation of the whole or any integral part of a building, structure, improvement or similar facility, and is not one for the construction of housing financed with a mortgage or mortgages insured under the provisions of title VIII of the National Housing Act, as now or hereafter amended.

(iii) The contract was awarded in conformity with the requirements for procurement by formal advertising set forth in section 3 of the Armed Services Procurement Act of 1947. See Report of Senate Committee on Finance

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((1955) S. Rept. 582, 84th Cong. 3, to accom- wise modified to increase the price stated therepany H. R. 4904.)

in, but the aggregate of the price increases (c) Application of exemption. The exemp- provided in all such supplemental or other tion does not apply to contracts for the sale or

modifying instruments does not exceed onefurnishing of machinery and equipment, even if

third of the price stated in the original contract, such machinery or equipment is to be used in

then all such supplemental or other modifying the construction of a building, structure, im

instruments are likewise exempt. If such agprovement or similar facility, or is to be installed therein. Such contracts are subject to

gregate does exceed one-third of the original renegotiation under the provisions of $ 1452.5

contract price, the supplemental or other mod(b) (2) of this subchapter. When the construc- ifying instruments are not exempt, and the tion or installation of the whole or any integral

entire amount of the price increases provided part of a building, structure, improvement or therein is subject to renegotiation. similar facility, and the furnishing or the fur- (e) Limitation.—The exemption provided in nishing and installation of machinery or equip- paragraph (9) of section 106(a) of the act is ment are embraced within a single contract, limited to prime contracts meeting the requirewhether or not the consideration for each of

ments prescribed in said paragraph (9); related such undertakings is separately stated therein, subcontracts for construction, even if awarded that part of the receipts or accruals under the as a result of competitive bidding, are not excontract attributable to the construction or in

empt under such provision. However, such a stallation of the facility will be deemed to be subcontract is exempt under paragraph (7) of within the exemption, and that part of the re- section 106(a) of the act (see $ 1453.6); except ceipts or accruals under the contract attribut- that, if the prime contract is exempt only in part able to the furnishing or the furnishing and under section 106(a) (9) by reason of the proinstallation of the machinery or equipment will visions of paragraph (c) or (d) of this section be excluded from the exemption.

of these regulations, such subcontract is exempt (d) Price increases. If a prime contract only if and to the extent that it relates to the which is exempt under the provisions of section exempt portion of the prime contract. 106(a) (9) of the act is supplemented or other

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