1457.9 Carryforward of renegotiation losses. (a) Statutory provision.-Section 103 (m) of the act provides as follows:

(m) Renegotiation loss carryforwards.-(1) Allowance. Notwithstanding any other provision of this section, the renegotiation loss deduction for any fiscal year ending on or after December 31, 1956, shall be allowed as an item of cost in such fiscal year, under regulations of the Board.

(2) Definitions. For the purposes of this subsection

(A) The term "renegotiation loss deduction"

means

(i) for any fiscal year ending on or after December 31, 1956, and before January 1, 1959, the sum of the renegotiation loss carryforwards to such fiscal year from the preceding 2 fiscal years; and

(ii) for any fiscal year ending after December 31, 1958, the sum of the renegotiation loss carryforwards to such fiscal year from the preceding 5 fiscal years (excluding any fiscal year ending before December 31, 1956).

(B) The term "renegotiation loss" means, for any fiscal year, the excess, if any, of costs (computed without the application of this subsection and the third sentence of subsection (f)) paid or incurred in such fiscal year with respect to receipts or accruals subject to the provisions of this title over the amount of receipts or accruals subject to the provisions of this title which were received or accrued in such fiscal year, but only to the extent that such excess did not result from gross inefficiency of the contractor or subcontractor.

(3) Amount of carryforwards to 1956, 1957, and 1958. For the purposes of paragraph (2) (A) (i), a renegotiation loss for any fiscal year (hereinafter in this paragraph referred to as the "loss year") shall be a renegotiation loss carryforward to the first fiscal year succeeding the loss year. Such renegotiation loss, after being reduced (but not below zero) by the profits derived from contracts with the Departments and subcontracts in the first fiscal year succeeding the loss year, shall be a renegotiation loss carryforward to the second fiscal year succeeding the loss year. For the purposes of the preceding sentence, the profits derived from contracts with the Departments and subcontracts in the first fiscal year succeeding the loss year shall be computed as follows:

(A) If such first fiscal year ends on or after December 31, 1956, such profits shall be computed by determining the amount of the renegotiation loss deduction for such first fiscal year without regard to the renegotiation loss for the loss year.

(B) If such first fiscal year ends before December 31, 1956, such profits shall be computed without regard to any renegotiation loss for the loss year or any fiscal year preceding the loss year.

(4) Amount of carryforwards to fiscal years ending after 1958. For the purposes of paragraph (2) (A)(ii), a renegotiation loss for any fiscal year (hereinafter in this paragraph referred to as the

"loss year") ending on or after December 31, 1956, shall be a renegotiation loss carryforward to each of the 5 fiscal years following the loss year. The entire amount of such loss shall be carried to the first fiscal year succeeding the loss year. The portion of such loss which shall be carried to each of the other 4 fiscal years shall be the excess, if any, of the amount of such loss over the sum of the profits derived from contracts with the Departments and subcontracts in each of the prior fiscal years to which such loss may be carried. For the purposes of the preceding sentence, the profits derived from contracts with the Departments and subcontracts in any such prior fiscal year shall be computed by determining the amount of the renegotiation loss deduction without regard to the renegotiation loss for the loss year or for any fiscal year thereafter, and the profits so computed shall not be considered to be less than zero. (This subsection (m) added by Pub. Law 870, 84th Cong., approved Aug. 1, 1956, as amended by Pub. Law 86-89, approved July 13, 1959.)

(b) In general. Except as provided in this section, losses on renegotiable business in fiscal years prior to the fiscal year under review shall not be allowed as an item of cost in the fiscal year under review. The rules set forth in this section, although stated in terms of the 5-year loss carryforward provided in section 103 (m) (2) (A) (ii) and (4) of the act, are also applicable to the 2-year loss carryforward provided in section 103 (m) (2) (A) (i) and (3) of the act.

(c) Interpretation.-(1) The amount of a "renegotiation loss" carried forward to the fiscal year under review from a "loss year" is a "renegotiation loss carryforward" to the fiscal year under review. The sum of the renegotiation loss carryforwards to the fiscal year under review is the "renegotiation loss deduction" for such fiscal year and is the amount which, under these regulations, is allowed as an item of cost in the fiscal year under review.

(2) If a contractor has a renegotiation loss in the first year, renegotiable profits in the second year, and renegotiable profits in the third year, the loss of the first year is first absorbed by the profits of the second year; the amount of loss remaining, if any, is then carried forward and applied against the profits of the third year; and so on until the loss is wholly absorbed by renegotiable profits in the five fiscal years following the loss year.

(3) If a contractor has renegotiation losses in 2 consecutive years, and renegotiable prof

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Sec.

Part 1459 Costs Allocable to and Allowable Against

Renegotiable Business

1459.7

1459.8 1459.9

Selling and advertising expenses.
Other costs, expenses and reserves.
Taxes measured by income ("State income
taxes").

1459.10 Costs incident to discontinuance of a re-
negotiable operation.

AUTHORITY: Sections 1459.1 to 1459.9 issued under section 109, Pub. Law 9, 82d Cong. Interpret or apply section 103, Pub. Law 9, 82d Cong.

1459.1 Statutory provisions and general regulations. (a) Determination of costs.Section 103 (f) of the Act provides as follows:

The term "profits derived from contracts with the Departments and subcontracts" means the excess of the amount received or accrued under such contracts and subcontracts over the costs paid or incurred with respect thereto and determined to be allocable thereto. All items estimated to be allowed as deductions and exclusions under chapter 1 of the Internal Revenue Code (excluding taxes measured by income) shall, to the extent allocable to such contracts and subcontracts, be allowed as items of cost, except that no amount shall be allowed as an item of cost by reason of the application of a carry-over or carry-back. Notwithstanding any other provision of this section, there shall be allowed as an item of cost in any fiscal year ending before December 31, 1956, subject to regulations of the Board, an amount equal to the excess, if any, of costs (computed without the application of this sentence) paid or incurred in the preceding fiscal year with respect to receipts or accruals subject to the provisions of this title over the amount of receipts or accruals subject to the provisions of this title which were received or accrued in such preceding fiscal year, but only to the extent that such excess did not result from gross inefficiency of the contractor or subcontractor. For the purposes of the preceding sentence, the term "preceding fiscal year" does not include any fiscal year ending prior to January 1, 1951. Costs shall be determinated in accordance with the method of accounting regularly employed by the contractor or subcontractor in keeping his records, but,

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if no such method of accounting has been employed, or if the method so employed does not, in the opinion of the Board, or, upon redetermination, in the opinion of The Tax Court of the United States, properly reflect such costs, such costs shall be determined in accordance with such method as in the opinion of the Board, or, upon redetermination, in the opinion of The Tax Court of the United States, does properly reflect such costs. In determining the amount of excessive profits to be eliminated, proper adjustment shall be made on account of the taxes measured by income, other than Federal taxes, which are attributable to the portion of the profits which are not excessive. [Matter in italics added by Pub. Law 870, 84th Cong., approved August 1, 1956; and see section 103 (m) of the act (§ 1457.9 of this subchapter) for allowance of losses incurred in fiscal years ending on or after December 31, 1956.]

(b) Profits, cost allocation and allowance; general.-(1) Accounting methods.-In connection with renegotiation on an over-all fiscal year basis, except as otherwise provided in these regulations, income received or accrued 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 in determining net income for Federal income tax purposes or in accordance with such other method of accounting as the contractor and the Board may agree upon pursuant to the provisions of subparagraph (2) of this paragraph. Nothing in the preceding sentence shall affect the authority of the Board under section 103 (f) and (i) of the Act to determine the income received or accrued or the costs paid or incurred by the contractor with respect to renegotiable business in a fiscal year in accordance with such method of accounting as, in the opinion of the Board, properly reflects such income or costs, if the method of accounting employed by the contractor in determining net income for Federal income tax purposes does not, in

the opinion of the Board, properly reflect such
income or costs, and the contractor and the
Board are unable to agree upon a method
which does properly reflect such income or
costs.

(2) Differing accounting methods.-(i)
The Board will permit a contractor to adopt
for renegotiation purposes a method of ac-
counting other than that used by the contrac-
tor for Federal income tax purposes, provided
that:

(a) The Board finds that the method of accounting employed by the contractor for Federal income tax purposes is manifestly unsuitable for the purpose of renegotiation because it does not clearly reflect the profits attributable to the contractor's performance of renegotiable contracts for the fiscal year under review, and the method of accounting to be adopted does clearly reflect such profits; and

(b) The contractor enters into a written agreement with the Board before the conclusion of the renegotiation proceedings for the year under review, providing among other things substantially as follows:

(1) That the contractor will employ such different method of accounting for the purposes of the renegotiation proceedings for the year under review and all subsequent years, whether such proceedings are concluded by agreement or order;

(2) That no cost or expense recognized in the renegotiation proceedings for the first year covered by the agreement will be recognized in any subsequent renegotiation proceeding; and

(3) That the computation of losses, if any, in preceding fiscal years (see section 1457.8 of this subchapter) will be made on the basis of such different method of accounting.

(ii) Under this section, a contractor may adopt a different method of accounting for the purpose of determining all amounts received or accrued and costs paid or incurred in a fiscal year, as in the case of a change from a cash receipts and disbursements method of accounting to an accrual method of accounting; or it may adopt a different method of accounting for a particular item of cost or for a particular class of items of cost which would result in recognizing such item

or items in one fiscal year rather than another.

(iii) Subject to the foregoing conditions, the Board will also permit a contractor to adopt for renegotiation purposes the completed contract method of accounting for contracts to be performed over a period of more than one fiscal year, which, because of circumstances of performance, would require estimates of performance and allocation of income and cost that could result in material distortion in accounting on an interim basis prior to completion. Such contracts may include contracts for construction of major facilities or major units (such as a vessel or group of vessels) when the profits can best be determined upon completion.

(iv) If a contractor employs, for the purposes of a renegotiation proceeding relating to the year under review, a method of accounting different from that which it employed for the purposes of a renegotiation proceeding relating to the preceding fiscal year, whether pursuant to this section or otherwise, it will be required to employ such different method of accounting for the purposes of all subsequent renegotiation proceedings, and the amounts received or accrued and costs paid or incurred which have been recognized in prior renegotiation proceedings will not be recognized in the proceedings relating to the year under review.

(3) Allocation of costs.-In general, the costs paid or incurred with respect to renegotiable business in the fiscal year under review will be the costs allocated to such business and such year by the contractor's established cost accounting method if that method reflects recognized accounting principles and practices. If in the opinion of the Board 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 will be allocated in accordance with such method as in the opinion of the Board does properly reflect such costs. The fact that all receipts and accruals during a fiscal year are classifiable as renegotiable does not necessarily mean that