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be determined in accordance with subdivision

allocation of interest expense to renegotiable

(ii) or (iii), as the case may be, of this sub-

(3) Premium or discount reflected in tax-
(ü) The renegotiable portion of a loss or gain able income as the result of redemption or re-
with respect to depreciable or amortizable prop- tirement of debt obligations will be reflected in
erty is that portion which bears the same ratio interest expense for allocation purposes if such
to the whole of such loss or gain as the aggregate redemption or retirement is part of a normal
amount of depreciation or amortization on such program of debt reduction provided by the debt
property allocable to renegotiable business un- agreement or in accordance with a debt reduc-
der the 1951 act and all prior renegotiation stat- tion program previously followed by the con-
utes for all fiscal years of the contractor to the tractor. However, premium, or discount on
date of such loss or gain bears to the total extraordinary debt retirement, or loss on pur-
amount of depreciation or amortization on such chase of debt obligations at a premium beyond
property allowable under section 23(1) or 124A the normal past practice of the contractor, will
of the Internal Revenue Code, as the case may not be allowed as a cost of renegotiable business,
be, for all taxable years of the contractor to the (c) Interest on tax deficiencies.

Interest on
date of such loss or gain.

deficiencies in taxes measured by income (in-
(iii) The renegotiable portion of a loss or cluding Federal income and excess profits
gain with respect to land other than an emer- taxes) is not deemed allocable in any part to
gency facility is determined as follows:

renegotiable business. Accordingly, such in-
(a) Allot an equal share of the loss or gain terest is not allowable as a cost of renegotiable
to each fiscal year beginning with the year of ac- business, notwithstanding that such interest is
quisition and including the year of the loss or deductible in the computation of taxable in-

come under the Internal Revenue Code.
(6) For each such fiscal year, determine ap- 1459.7 Selling and advertising expenses.
proximately the percentage of use of the land (a) Selling.-(1) Selling expense will be al-
in performing prime contracts and subcontracts located to renegotiable business only to the ex-
subject to the 1948 and 1951 acts;

tent that (i) it relates in major part to techni-
(c) Apply the appropriate percentage of use cal, consulting and other services performed
to each share determined under step (a) of this

in connection with the application and adapta-
subdivision; and

tion of products comprising the renegotiable
(d) Add the amounts determined under step business to the uses and requirements of the
(c) of this subdivision. The sum of such Government or other contractors; or (ii) it re-

lates to the maintenance of offices or agencies
amounts is the renegotiable portion of the loss
or gain.

engaged in the servicing of products comprising 1459.6 Interest.(a) Allowance. Interest the renegotiable business; or (iii) it relates to on borrowed capital is deductible under the

the sale of products or services comprising the Internal Revenue Code and will, therefore, be

renegotiable business which are of the type ordiallowed in renegotiation to the extent allocable narily sold or rendered by the contractor and to renegotiable business.

which are sold or rendered through the dis(b) Allocation.--(1) Interest on borrowed

tribution system normally used by the confunds will be allocated to renegotiable business

tractor; or (iv) it is a commission of the type according to the general principles set forth in

allowed in section 1459.2(c). section 1459.1(b).

(2) The allocation of selling expenses to re(2) However, if a contractor has an amount

negotiable business will be in accordance with of unrestricted current funds, or marketable

the method of accounting found by the Board securities obviously in excess of the reasonable

to be acceptable under section 1459.1(b). working capital needs of its business, or if there

(b) Advertising in fiscal years ending on is a significant amount of assets not directly

or before March 31, 1962.-Removed to Aprelated to those operations of the contractor pendix. which result in renegotiable business, consideration will be given to these circumstances in the

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(e) Advertising in fiscal years ending after March 31, 1962.-(1) Items of advertising ex


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pense incurred solely for (i) the recruitment ucts sold under such subcontracts are substanby the contractor of personnel required for the tially the same as those sold in such performance by the contractor of obligations subcontractor's normal commercial business. In arising under a renegotiable contract or sub

the allocation of such advertising expense concontract, (ii) the procurement of scarce items sideration will be given to (a) the volume of required by the contractor for the performance nonrenegotiable business in the year under reof a renegotiable contract or subcontract, or

view as contrasted with the subcontractor's (iii) the disposal to scrap or surplus materials normal volume of commercial business, and (8) acquired by the contractor in the performance the total amount of such advertising expense in of a renegotiable contract or subcontract, are the year under review as contrasted with the recognized as costs allocable to renegotiable subcontractor's normal advertising expense. business in accordance with the method of ac- (ii) In cases in which it can be demonstrated counting found by the Board to be acceptable that a prime contractor or subcontractor enunder $ 1459.1 (b). The costs of publishing gaged in renegotiable business to the detriment catalogues, technical pamphlets, house organs of its normal commercial business in the year and other similar publications are not, for the under review, and thereby incurred the risk purposes of this paragraph, considered adver- of loss of its competitive position in the industry tising expenses; for the treatment of such ex- concerned, the Board will allocate to renegotipenses, see § 1459.8(f).

able business that portion of the prime con(2) Other advertising expense is allocable to tractor's or subcontractor's normal advertising renegotiable business as follows:

expense which the Board deems properly attrib(i) In the case of renegotiable business per- utable to the effort by the prime contractor or formed under subcontracts, advertising expense subcontractor to forestall such loss of competiwill be allocated thereto provided that the prod- tive position.

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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.

1460.2 Specific considerations.

1460.2 Specific considerations. (a) Prof1460.3 Adjustment of sales.

its before taxes. In renegotiation the amount
1460.4 Overextended contractors.

of excessive profits is determined before pro-
1460.5 Maximum refund.
1460.6 Reserved

vision for Federal taxes on income. In determin-
1460.7 Uncompleted portions of terminated con-

ing the existence or amount of excessive profits, tracts.

the effect of Federal income taxes on the rem
1460.8 Application of statutory factors; general

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 con-
1460.12 Extent of risk assumed.

tractor's renegotiable business for the fiscal
1460.13 Contribution to the defense effort.
1460.14 Character of business.

year, separate consideration will be given to
1460.15 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, 820 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

made with the prices, costs and profits of other tunity to develop and present whatever information is available to it which the contractor

contractors engaged in the production of the

same or similar products or using the same or may consider pertinent to the determination.

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 settletor or its representatives will be kept to a

ments for prior years are not controlling preceminimum.

dents. Consideration will be given to profits or (a) 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


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reserves established in individual situations will tiation of an affiliated or related group, whether
vary widely depending upon the policy of the or not consolidated, determinations of excessive
particular contractor concerned. Neither the ex- profits with respect to individual members of
istence nor the amount of such reserves is to be the group may be made in amounts less than the
considered directly or indirectly in connection applicable minimum specified in this section:
with the determination of excessive profits. The Provided, That the aggregate of the determina-
Board recognizes that conservative practice tions for all members of the group equals or
may result in setting up such reserves in excess exceeds such applicable minimum. If the fiscal
of the anticipated liability and will not permit year is a fractional part of twelve months, the
such a practice to prejudice the contractor in applicable minimum specified in this section
any way.

shall be reduced to the same fractional part
1460.3 Adjustment of sales. The amount thereof.
of excessive profits is always deducted from the 1460.6 Reserved.
renegotiable receipts or accruals, as well as 1460.7 Uncompleted portions of termi-
from the profit thereon, for the purposes of de- nated contracts.--(a) Separate considera-
termining the relation of retained profits to tion. When a segregation of the items allo

cable to the uncompleted portions of terminated
1460.4 Overextended contractors.A con-

prime contracts and subcontracts is made in tractor's lack of adequate working capital will accordance with the principles set forth in secnot be taken into consideration in determining tions 1457.6 and 1459.1(c) of this subchapter, excessive profits to be eliminated.

separate consideration will be given to such 1460.5 Minimum refund.Except as here- items in the light of the applicable factors in inafter provided, and in the absence of unusual determining excessive profits. The evaluation of circumstances, no determination of excessive

the contractor's performance with respect to the profits shall be made if such excessive profits uncompleted portions of terminated prime conbefore adjustment for State taxes measured by tracts and subcontracts will be considered in income amount to (paragraphs (a) and (b) connection with the evaluation of the contracremoved to Appendix), or (c) less than $40,000 tor's performance of the completed portions of with respect to any fiscal year ending on or after such prime contracts and subcontracts and with June 30, 1953, or (d) less than $10,000 with re- that of other prime contracts and subcontracts spect to any fiscal year in the case of sub- in determining the excessive profits, if any, for contracts described in section 103(g) (3) of the the period involved in the renegotiation. act. If a determination of excessive profits (b) Evaluation of performance. The evalwould be made at or in excess of the applicable uation of the contractor's performance with reminimum amount but for the limitation set

spect to the uncompleted portions of terminated forth in section 105(f) (1) or (2) of the act and prime contracts and subcontracts will be meas§ 1458.3 (a) or (b) of this subchapter, the de- ured by the nature and extent thereof. The more termination will be made in accordance with nearly the nature and extent of such performsuch limitation even though the amount of the ance approximate the nature and extent of the determination is less than the minimum pre- contractor's performance of completed conscribed by this section. For example, if renego- tracts and subcontracts of the same type, the tiable receipts or accruals are $258,000, and more nearly the evaluation of such performance excessive profits would be determined as $20,000 will approach that given to the contractor's perbut for the statutory limitation that the exces- formance of the completed prime contracts and sive profits to be eliminated in such case shall subcontracts. On the other hand, if the contracnot exceed $8,000 (the difference between tor's performance under the uncompleted por$258,000 and $250,000) a determination in the tions of terminated prime contracts and subconamount of $8,000 will be made. In the renego

tracts has consisted largely of the acquisition

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Recovery of Excessive Profits After Determination

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Part 1461

(b) Interestm(1) In general. Except as set
1461.1 Collection authority.

forth in this paragraph, and in the absence of 1461.2 Recovery of refund pursuant to agreement.

unusual circumstances, renegotiation agree-
1461.3 Recovery of refund pursuant to unilateral

ments will not provide for the payment of in-
1461.4 Withholding as a method of recovery.

terest on any refund of excessive profits.
1461.5 Administration of determinations by agree

(2) Installment payments. When a renement or order.

gotiation agreement provides for a refund of AUTHORITY : Sections 1461.1 to 1461.5 issued under

excessive profits in installments, the agreement section 109, Pub. Law 9, 820 Cong. Interpret or apply

will require the payment of interest at the rate section 105, Pub. Law 9, 820 Cong.

of 4 per centum per annum upon the amount 1461.1 Collection authority Section 105

of any such installment (other than the first
(b) of the act provides in part as follows:

installment payable under the agreement)
(1) In general. Upon the making of an agreement, which is provided to be paid more than two
or the entry of an order, * * * determining excessive

years after the close of the fiscal year to which
profits, the Board shall forthwith authorize and direct

the agreement relates, such interest to accrue
the Secretaries or any of them to eliminate such ex-

and be payable from and after the date which
(A) by reductions in the amounts otherwise payable is two years after the last day of the fiscal year
to the contractor under contracts with the Depart- to which the agreement relates, or from and
ments, or by other revision of their terms;

after the date on which the first installment is
(B) by withholding from amounts otherwise due to

due and payable, whichever is later.
the contractor any amount of such excessive profits;

(C) by directing any person having a contract with (3) Default.Pursuant to section 105 (b) (2)
any agency of the Government, or any subcontractor of the act, in cases of default, interest at the
thereunder, to withhold for the account of the United rate of 4 per centum per annum shall accrue
States from any amounts otherwise due from such per-

and be paid on any amount due and unpaid
son or such subcontractor to a contractor, or subcon-

under a renegotiation agreement from the date tractor, having excessive profits to be eliminated, and

of such default to the date of payment. Such every such person or subcontractor receiving such direction shall withhold and pay over to the United interest shall accrue and be paid whether or not States the amounts so required to be withheld; the agreement contains a provision for the pay(D) by recovery from the contractor or subcontrac

ment of interest. tor, or from any person or subcontractor directed under

1461.3 Recovery of refund pursuant to subparagraph (C) to withhold for the account of the United States, through payment, repayment, credit, or

unilateral order.. Pursuant to section 105(b) suit any amount of such excessive profits realized by the (2) of the act, interest at the rate of 4 per contractor or subcontractor or directed under subpara- centum per annum shall accrue and be payable graph (C) to be withheld for the account of the United

on the amount of excessive profits determined States; or

from the thirtieth calendar day after the date (E) by any combination of these methods, as is deemed desirable.

of the order of the Board or, in Class B cases 1461.2 Recovery of refund pursuant to

(see § 1471.2(b) of this subchapter), if the

Board does not initiate a review of a determinaagreement. (a) In general.The elimination of excessive profits ordinarily will be effected

tion made by a Regional Board, from the pursuant to an agreement providing for a re

thirtieth calendar day after the date that the fund in renegotiation proceedings with respect

order embodying such determination is deemed to a completed fiscal period. Such refund may

to be the order of the Board pursuant to the be made by the contractor in a single payment provisions of § 1475.3(b) (3) or (4) of this or in installments as the agreement may provide. subchapter, respectively.

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