must be to perform services generally similar to those performed by the prime contractor or subcontractor as a common carrier or public utility. A contract which meets the tests prescribed herein qualifies for the exemption even though it is a contract by a common carrier for private carriage or is a contract by a public utility on terms not offered to the general public. (d) Common carriers by water—(1) Fiscal years ending before December 31, 1953.-Removed to Appendix. upon application of the contractor, that the (2) Fiscal years ending on or after Decem- (a) All prime contracts for transportation by (ii) This exemption does not apply to time, voyage or bareboat charters. (3) Exemption of individual prime contracts.-The Board will exempt any individual prime contract with a common carrier for transportation by water when the Board finds, (e) Exempt rates: Regulated and unregu lated.-Section 106 (a) (4) of the act exempts prime contracts and subcontracts of a public utility or a common carrier only if the rates charged thereunder fall into one of the three following types: (i) Rates filed with, fixed, approved or regulated by a public regulatory body; (ii) unregulated rates charged for services for which published rates are filed with, fixed, approved or regulated by a public regulatory body and which unregulated rates are not in excess of such regulated rates; (iii) unregulated rates which are not in excess of unregulated rates offered generally by such a public utility which are substantially as favorable to users and consumers as are comparable regulated rates. (1) Published rates.-If a common carrier or public utility enters into a prime contract or subcontract to be performed at rates published or filed with, fixed, approved or regulated by a public regulatory body, State, Federal, or local, such prime contract or subcontract is exempt. Example: A prime contract entered into by a railroad for transporting Government personnel at rates not in excess of the tariff rates available to the general public is exempt from renegotiation under this section. (2) Unregulated rates not in excess of regulated rates.-(i) If a common carrier or public utility enters into a contract for the furnishing of services which are the same as those for 69 which a rate has been published or filed with, fixed, approved, or regulated by a public regulatory body and the rate provided by the transaction for such services is not in excess of such regulated rate, the contract is exempt from renegotiation 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. Example. An airline agrees to carry freight or personnel at charges below the regulated general or charter tariff rate for carrying similar 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 airline is not required to furnish services not necessarily incident to the transportation for which the tariff rate was established. When the prorated fair value of the benefits thus provided by the Government is added to the contract rate, if the resulting aggregate exceeds the regulated rate, the contract is not exempt under this section. (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 areas. The con tract with the Department is exempt from renegotiation under this section. 1453.4 Contracts or subcontracts with tax-exempt charitable, religious and educational institutions.-(a) Statutory provision.-Section 106 (a) (5) of the act exempts the following: (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.-Sections 501 (c) (3) and 512 of the Internal Revenue Code of 1954 correspond with sections 101 (6) and 422 of the Internal Revenue Code of 1939. These provisions are set forth at page xxxix of this manual. (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 (6) any contract which the Board determines does 1 for the performance of services of the type commonly performed by brokers and manufacturers' agents (see Part 1490 of this subchapter), or other personal services. (c) Brokers' commissions.-Commissions paid or payable to brokers or agents, if estimated to be deductible under the Internal Revenue Code, will be allowed as a cost in renegotiation to the extent allocable to renegotiable business. In estimating whether a commission is deductible under the Internal Revenue Code, consideration will be given to whether the commission was paid pursuant to a legally binding arrangement made in good faith in the ordinary course of business, and to the reasonableness of the commission arrangement at the time it was agreed upon. If the arrangement was reasonable when made but the commissions payable thereunder have become excessive through change in circumstances, consideration will be given to whether the contractor has taken advantage of any opportunity afforded to terminate or modify the arrangement. In no event will a commission paid or payable by a prime contractor be allowed in renegotiation if the payment thereof contravenes a provision of a contract with a Department which prohibits the payment of such commission. product or service, or type of business, the depreciation, maintenance, etc., of such facilities as are being maintained in idle status will be allocated between renegotiable and non-renegotiable business according to the principles established in section 1459.1(b). Depreciation and maintenance charges on properties which are not in use but which are being maintained in an idle status pursuant to written request by or on behalf of an authorized official of a Department may be allocated as a charge against renegotiable business. (d) Pension, annuity, stock bonus and profit sharing plans.-Payments on account of plans for pensions, annuities, stock bonuses, or profit sharing, estimated to be deductible 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 section 1459.1 (b). If the amount of the item of cost is material and the compensation plan is in controversy with or under review by the Internal Revenue Service, the Board may make a conditional allowance of the item (see sec. 1459.1(b) (6)) if it is unable to estimate the amount properly deductible under the Internal Revenue Code. (b) Depreciation.-Facilities representing permanent capital additions for the manufacture of renegotiable products or materials are depreciable for the purposes of renegotiation at the rates estimated to be deductible under the Internal Revenue Code. 1459.3 Amortization and depreciation.(a) Allocation.-General depreciation, maintenance and other such charges will be allocated between renegotiable and non-renegotiable business according to the principles established in section 1459.1(b). Where stand-by facilities are customary or necessary to a particular (c) Emergency facilities.-Amortization of emergency facilities with respect to which a Necessity Certificate has been issued and which is deductible for Federal income tax purposes under section 168 of the Internal Revenue Code, will be allocated between renegotiable and nonrenegotiable business according to the principles established in section 1459.1(b). 1459.4 Conversion to renegotiable production. (a) Cost of conversion of facilities.The cost of converting facilities to production for renegotiable business, which does not represent a capital expenditure, will be allowed in renegotiation for the year in which it is incurred to the extent estimated to be deductible under the Internal Revenue Code. 1459.5 Losses.-(a) Losses in prior or subsequent years.-Section 172 of the Internal Revenue Code authorizes a taxpayer, under certain prescribed rules, to take a deduction for a taxable year by a "carry-over" or "carry-back" of net operating losses for certain preceding or subsequent taxable years. No such deduction is allowable in renegotiation as an item of cost or as a deduction or exclusion from excessive profits. Under certain circumstances, however, there will be allowed as a cost in a fiscal year ending after December 31, 1958, the sum of the "renegotiation loss carry forwards" to such fiscal year from the preceding 5 fiscal years. (See $1457.9 of this chapter.) (b) Losses with respect to certain tangible property and land-(1) What this paragraph does. This paragraph explains the circumstances under which a contractor may claim, as a cost of performing renegotiable business, losses resulting from the sale or disposition of, or damage to, certain tangible property and land. This paragraph also treats costs related to such losses. This paragraph does not affect the allocation to renegotiable business of losses with respect to other kinds of property (inventories, patents, etc.) which may be used in performing renegotiable business. (2) Kinds of property.-This paragraph applies to the following kinds of property when used in performing renegotiable prime contracts and subcontracts: (i) Tangible property with respect to which depreciation is allowable under section 167 of the Internal Revenue Code; (ii) Emergency facilities with respect to which amortization is allowable under section 168 of such Code; and (iii) Land other than an emergency facility. (3) What losses are dealt with.-The following losses and related costs with respect to the kinds of property described in subparagraph (2) of this paragraph are allocable to renegotiable business to the extent provided in subparagraph (5) of this paragraph: (i) Losses resulting from the sale or exchange, and from the compulsory or involuntary conversion (as a result of destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation or threat or imminence thereof) of such property to the extent that such losses may be properly included in the computation under section 1231 of the Internal Revenue Code for the fiscal year or, in the case of losses which may not be so included for the reason that the property involved was not held for more than 6 months, to the extent that such losses are taken into account in the computation of net income under such Code for the fiscal year; (ii) Losses with respect to such property, other than from sales, exchanges and conversions, to the extent that such losses are deductible under section 165 of such Code for the fiscal year; and (iii) Related costs of disposing of such property, such as costs of moving, dismantling, de molishing, protecting, storing and selling, if the expenditure of such costs contributes to minimizing the loss upon disposition of such property, to the extent that such costs are deductible under such Code for the fiscal year. Such costs shall be added to and considered part of each related loss for the purpose of allocation under subparagraph (5) of this paragraph. (4) What gains are considered in allocating losses.-Gains upon the sale or exchange, and from the compulsory or involuntary conversion, of property of the character described in subparagraph (2) of this paragraph are not renegotiable income but are used to offset losses under subparagraph (5) of this paragraph. Such gains include (i) those which may be properly included in the computation under section 1231 of the Internal Revenue Code for the fiscal year or, in the case of gains which may not be so included for the reason that the property involved was not held for more than six months, those which are taken into account in the computation of gross income under such Code for the fiscal year; and (ii) gains described in sections 1238 and 1239 of such Code: Provided, however, That related costs of disposing of such property, as described in subparagraph (3) of this paragraph, shall be deducted from the amounts of such gains on respective items of property, and the net amount, if any, shall be considered the whole of the gain with respect to each such item of property for the purpose of subparagraph (5) of this paragraph. (5) How to allocate losses to renegotiable (ii) The renegotiable portion of a loss or gain S renegotiable profits, is determined. The unadjusted excessive profits are deducted from such total profits to obtain the contractor's tentative retained profits. The unadjusted excessive profits are also deducted from the renegotiable profits to obtain the non-excessive renegotiable profits. (2) The State tax on the tentative retained profits is computed as though such profits were the only profits of the contractor. (3) The tax attributable to the non-excessive renegotiable profits will then be the amount which bears the same ratio to the tax computed in subparagraph (2) of this paragraph as the amount of non-excessive renegotiable profits bears to the tentative retained profits. (4) The tax attributable to the non-excessive renegotiable profits computed in subparagraph (3) of this paragraph is deducted from the unadjusted excessive profits to obtain the amount of excessive profits to be eliminated. (5) If the contractor has a loss on non-renegotiable business, the tax attributable to the non-excessive renegotiable profits will be the amount of tax computed on the tentative retained profits determined as provided in subparagraph (1) of this paragraph. for a succeeding fiscal year is measured by the income of the contractor for the fiscal year under review, an adjustment pursuant to section 103 (f) of the act will be made on account of such tax in eliminating excessive profits for the fiscal year under review, except that if the fiscal year under review is the first year in which the contractor does business in the State and a tax measured by the income for such year is payable for such year, an adjustment will be made on account of the tax payable for such year but no adjustment will be made on account of the tax payable for the succeeding year. Example. State I imposes a franchise tax for the privilege of doing business in the State for a taxable year. The tax is based upon the taxpayer's net income for the preceding year, except that the tax for the first year in which the taxpayer does business in the State is based upon its income in that year. Assume that a contractor incorporated in State X pays a franchise tax of $10,000 for Year 1, measured by its net income for Year 1. The contractor's tax for Year 2 is again $10,000, since it is also measured by the income for Year 1. For Year 3, the contractor pays a tax of $15,000, measured by its Year 2 income. In renegotiation, if excessive profits are determined for each year, the contractor will be allowed a State tax adjustment in the amount of $10,000 for Year 1, and $15,000 for Year 2. The adjustment for Year 3 will be the amount paid in Year 4, measured by the Year 3 income. (d) Multiple State income taxes.-A contractor doing business in more than one State may be subject to more than one income tax. In such event, the adjustment will be made by an accurate determination of the tax attributable to the non-excessive renegotiable profits imposed by each State, if such a computation is feasible. If an exact computation is not feasible, the adjustment will be made upon the best estimate of the Board and the contractor, made in good faith and with reasonable care. This estimate may take the form of a pro rata application to each State of the non-excessive renegotiable profits based upon the profits before renegotiation attributable to each State, if no more accurate method is available. If all such taxes are imposed at flat rates, a composite rate may be obtained by dividing total State income taxes by total profits, and this composite rate may be applied to the non-excessive renegotiable profits. (e) State income tax measured by income for preceding year. When a State income tax (f) Adjustment for State income tax of contractor operating as a partnership or sole proprietorship.-(1) A contractor doing business as a partnership or sole proprietorship is entitled to an adjustment for State income tax based upon the tax liability of the individual partners or of the proprietor. In general, the same procedure will be followed as stated above. Thus, in the case of a partnership, adjustment will be made for the aggregate of the State taxes attributable to each partner's share of non-excessive renegotiable profits. (2) Normally, a State income tax is imposed upon individuals on a graduated basis. Reference is therefore made to section 1459.9 (c). (3) If the contractor is a partnership or sole proprietorship and is subjected to an unincorporated business tax measured by income, adjustment will be made therefor as well as for |