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1499.1-28 Renegotiation Ruling No. 28: Costs allocable to and allowable against renegotiable business; costs of conversion and reconversion (interprets act section 103(f); §§ 1459.1(b) (3), 1459.10(e) of this chapter). (a) The question is whether a loss in value of tooling abandoned during a contractor's fiscal year, and a writeoff of raw materials, purchased parts, work in process and finished goods during the year, may be allowed as costs of renegotiable business in such year, where the expenses were incurred in connection with business abandoned to make plant space available for the performance of renegotiable contracts.

(b) That the inventory losses might not have occurred but for the acceptance of the renegotiable contracts is too tenuous a basis on which to hold that such losses are costs of converting a plant to production for renegotiable business or are otherwise allocable to the performance of renegotiable contracts within the contemplation of section 103 (f) of the act and § 1459.1 (b) (3) of this chapter.

(c) There likewise seems to be no basis for concluding that any of the losses due to the abandonment of tooling are allocable to renegotiable business. Such losses are too remotely related to the performance of the renegotiable contracts to be deemed renegotiation costs.

(d) The regulations on reconversion provide something in the way of a guide for allocating conversion costs. See § 1459.10 (e) of this chapter. The principle upon which reconversion costs are allocated can be stated as follows: Costs necessary to get the contractor out of renegotiable business will be deemed renegotiable costs in the year of discontinuance, but no part of the cost of getting the contractor back into civilian production will be allowed as a cost of renegotiable business. By the same token, costs necessary to get the contractor into renegotiable production will be allowed as renegotiable, but no part of the costs incurred for the sole purpose of getting the contractor out of civilian production, will be allocated to renegotiable business.

1499.1-29 Renegotiation Ruling No. 29: Consolidated renegotiation of partnership and successor corporation (interprets act sec

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tions 103 (h), 105 (a) and (e)(1); §1451.19 and Part 1464 of this chapter).—(a) A business is operated as a partnership until November 1, at which time it is incorporated, the ownership interests remaining the same. The partnership and the corporation file a single Standard Form of Contractor's Report for the calendar year.

(b) Section 105 (a) of the act and Part 1464 of this chapter do not authorize consolidated renegotiation in these circumstances unless the partnership continued in existence for the balance of the calendar year. Otherwise, the two entities did not exist concurrently at any time. A fiscal year is defined in section 103 (h) of the act and § 1451.19 of this chapter to be the taxable year of the contractor under the Internal Revenue Code. Assuming the partnership did not continue for the balance of the calendar year, its taxable year was the period January 1 to October 31, and the act requires a report to be filed for that period of the partnership. Similarly, the taxable year of the corporation was the 2-month period ended December 31, and the act requires the corporation to file a report for that period.

(c) Thus, a single report covering the operations of both the partnership and the corporation is not authorized. Similarly, consolidated renegotiation of the partnership and the corporation is not authorized.

1499.1-30 Renegotiation Ruling No. 30: Tax credit, Federal; allocation of excessive profits when tax basis of accounting not used for renegotiation (interprets act section 105(b) (8); § 1462.8(a) of this chapter).— (a) This section prescribes the taxable year or years to which excessive profits are to be allocated under the following circumstances: The contractor performed a long-term contract extending over several years. In its Federal income tax returns, filed on the accrual basis of accounting, the contractor reported most of its accruals under the contract as income in Year 4 when large claims in dispute were settled, and lesser amounts in Years 1, 2, and 3. For renegotiation purposes, the contractor used the completed contract, method of accounting, under which the entire contract price was accrued in Year 3,

the year of contract completion. The renegotiation is for Year 3.

(b) Section 1462.8 (a) of this chapter provides as follows:

When the contractor has reported earnings for Federal tax purposes on a basis different from the basis upon which renegotiation is conducted, the excessive profits to be eliminated will, for purposes of computing the allowable tax credit section 1481 of the Internal Revenue Code, be allocated to the contractor's taxable year or years in which the Board determines that such excessive profits were reported as income in the tax returns. This procedure is applicable, for example, when renegotiation has been conducted on a completed contract basis although the contractor has used some other method of accounting for Federal tax purposes in reporting income from some or all of the contracts covered by the renegotiation.

(c) The allocation required by § 1462.8 (a) of this chapter is not made by prorating the contractor's sales after renegotiation to the years involved on the basis of receipts or accruals reported for tax purposes for such years, respectively, but is made by prorating the excessive profits to the taxable year or years for which the profits reported for tax purposes exceeded nonexcessive profits, as measured by the level of profits allowed in the renegotiation determination. After such allocation, the ratio of retained renegotiable profits to adjusted sales for each year to which excessive profits are allocated should be the same.

(d) This allocation method has been the established practice in renegotiation since it was first adopted by the War Contracts Price Adjustment Board under the Renegotiation Act of 1943 and published in section 444 of the regulations under that Act. It is not an allocation on a sales ratio basis or on a profit ratio basis, but on an excessive profits ratio basis. It is designed to avoid injustice to the contractor.

1499.1-31 Renegotiation Ruling No. 31: Consolidated renegotiation; elimination of intercompany transactions (interprets act section 105(a); §§ 1464.6 and 1470.3 (h) of this chapter). (a) This section considers the propriety of eliminating, in consolidated renegotiation proceedings, intercompany commissions applicable to exempt sales of standard commercial articles. The commissions

are paid by a manufacturing corporation to
its own sales affiliate for selling such articles.
Such subcontract commissions are subject to
renegotiation because the exemption of con-
tracts for standard commercial articles does
not extend to related subcontracts.

(b) Section 105(a) of the act authorizes renegotiation "on a consolidated basis." Consolidated renegotiation proceeds upon the theory that the consolidated entities are to be treated as one. It follows that the income of the group is the income received or accrued from outside sources only, and does not include amounts received or accrued by any member of the group from any other member. By the same token, the costs incurred by the group are the amounts paid or payable to outside sources only (including salaries and wages to employees), and does not include amounts paid or payable by any member of the group to any other member. In short, consolidated renegotiation necessarily requires the elimination of intercompany transactions.

(c) Consistently with these principles, § 1470.3 (h) of this chapter, provides in part as follows:

*** A consolidated Standard Form of Contractor's
Report shall include (1) a statement of the con-
solidated financial information of the group made
in the same manner as if the group were a single
contractor, and (2) * * *. [Italics added]

(d) If a manufacturing company were to do its own selling-i.e., if the two companies were in fact a single entity-the standard commercial article sales of that entity would be exempt. These two companies have chosen, for renegotiation purposes, to be treated as one by consolidation. Once consolidation is approved, § 1464.6 of this chapter prescribes that the proceeding shall "remain consolidated for all purposes" connected with the renegotiation. Accordingly, the Board will give effect to all the proper attributes of consolidation, including the total elimination of intercompany transactions.

1499.1-32 Renegotiation Ruling No. 32: Standard commercial article exemption; composition of standard commercial class of articles (interprets act section 106(e) (2) and (4) (f); §§ 1467.47, 1467.48, and 1467.51 of this chapter).—(a) This section explains the

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proper composition of a standard commercial class of articles (section 106 (e) (2) of the act), in the following circumstances: The contractor files an Application for Commercial Exemption of its Group 3 fasteners. The contractor manufactures six basic groups of fasteners. Each group consists of fasteners of various sizes. All are offered for sale at stated list prices. The contractor is unable to supply sales data on individual articles.

(b) The questions presented by this application are these:

(1) May the contractor select as a class any limited group of articles meeting the statutory requirements of kind, content and price, or must he include in such class all articles that he sells which meet those requirements?

(2) Contrariwise, may the Board limit the class to a certain of such articles?

(3) May the Board deny an application for the class exemption whenever it appears that the contractor is able, either with or without undue effort or expense, to isolate and submit separate sales figures for each article in the class?

(c) Clearly, the Group 3 fasteners constitute more than a single "article." Each is a separate article (see § 1467.4 of this chapter). Since the contractor is unable to supply sales data on each article separately, he cannot self-apply the exemption for standard commercial articles (see § 1467.48 of this chapter).

(d) But the contractor can supply sales figures o nthe entire assortment of fasteners comprising Group 3. When, in assembling a group of articles for purposes of this exemption, the contractor reaches the first point at which his accounting records will yield sales data on a collective group basis, he has established a "class of articles" within the meaning and purpose of the act. More precisely, he has reached the first point at which he can apply the requirement of the statute that at least 55 percent of his sales of all articles in the class in the fiscal year be nonrenegotiable. To obtain the exemption, he must also demonstrate that at least one of the articles in the group is customarily

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maintained in stock or offered for sale in accordance with a price schedule regularly maintained; that all are of the same kind, are made of the same or substitute materials, and are sold at reasonably comparable prices; and that all were sold at a price or prices not in excess of the contractor's lowest commercial price for a similar quantity. With such proof, he has established a standard commercial class of articles, and is entitled to the exemption (see § 1467.51 of this chapter). It does not matter that he may make and sell other articles which are similar in kind and content and comparable in price to the articles in that class.

(e) Specifically, in the case at hand, it does not matter that the Group 1 fasteners might be shown to be similar in kind and content and comparable in price to those in Group 3. The statute does not require the contractor to claim the exemption for such other articles-his right to waive the exemption to any desired extent established the opposite. Nor does the statute compel him to include such other articles in the class for the purposes of the 55 percent computation. Finally, the statute does not reqire the Board to explore the entire roster of a contractor's products and to compress into a single class all such products which are found to possess the statutory similarity.

(f) On the other hand, if instead of limiting the class to Group 3 fasteners the contractor claimed exemption for a larger class consisting of Group 3 and one or more other groups, and submitted sales figures for such enlarged class, the Board would not reject his application merely on the ground that he had gone beyond the first point at which group figures were available. The Board would proceed to determine whether the added types were articles which met the statutory criteria of kind, content and price. When articles in a submitted class range. widely in price, the Board may find not only that the prices are not all reasonably comparable, but also that the articles are not all of the same kind.

(g) Finally, if individual articles sales figures are available, but will not all pass the 55 percent test separately, the contractor may assemble two or more such articles and

apply for the class exemption. Although the primary purpose of the class exemption was to relieve the contractor who does not maintain sales records of individual articles the statutory provision is not limited to such a person, and no such limitation can properly be read into it under any accepted rule of statutory construction. The class exemption is available to any contractor, regardless of his accounting system, who sells two or more articles which satisfy the several requirements prescribed in section 106 (e) (4) (F). These criteria furnish adequate assurance against unreasonable classification.

1499.1-33 Renegotiation Ruling No. 33: Standard commercial service exemption; scope of term "service" (interprets act section 106(e) (4) (C); § 1467.52 of this chapter). (a) This section considers the applicability of the standard commercial service exemption provided in section 106 (e) of the act under the following circumstances:

(1) The services performed by the contractor consist of maintenance, reconditioning and incidental repair of typewriters, under GSA Federal Supply Schedule contracts. The maintenance and reconditioning work, referred to generally as servicing consists of cleaning, oiling, adjusting, and otherwise keeping the machines in first-class operating condition. The incidental repair work consists of fixing or replacing worn, defective or missing parts where needed. Under certain contract items, replacement parts are billed separately; under others, they are included in the flat price, which is considerably higher.

(2) More than 55 percent of the contractor's receipts or accruals under these contracts are nonrenegotiable. Therefore, if the work performed by the contractor is a "service" as that term is defined in the act, it is a "standard commercial service."

(b) The term "service" is defined in the act to mean "any processing or other operation performed by chemical, electrical, physical, or mechanical methods directly on materials owned by another person." The exemption of standard commercial services was first enacted when the act was extended through December 31, 1956. In reporting the provision, the Senate Committee on Finance

said in part (S. Rep. No. 582, 84th Cong., first session 3): "It was brought to the attention of the committee that the standard commercial article exemption was limited to the sale of goods and thus excluded contractors or subcontractors who performed processing services of a standard commercial character upon goods belonging to other perprocessing services of a standard commercial sons. Examples of this are textile finishing, heat treating, and plating."

(c) The term "processing" denotes a progressive action or a series of acts or steps in the regular course of making or performing something. The servicing of typewriters at a preestablished contract rate per machine involves such a series of steps, and is therefore a processing. Generally, typewriter overhaul is accomplished manually; the contractor does not execute identical actions with every machine in turn, as in the case of a mechanical manufacturing service performed by machinery. But there is nothing in the statute that restricts the exemption to operations characterized by a rigid and unvarying sequence of actions. The examples given by the Finance Committee do not involve such uniformity. The statutory definition of "service" embraces any systematic, repetitive action performed by chemical, electrical, physical, or mechanical methods directly on materials owned by another person.

(d) It is important to distinguish between servicing, including incidental repairs, and "primary" repair work. Maintenance or reconditioning is a regular service which comprises a routine series of steps and can be contracted for in advance at fixed rates or charges; it is often accomplished with a check list. Primary repairs, on the other hand, whether of a typewriter or of any other article, are irregular and unique, following no pattern or check list. They differ necessarily from case to case, and so cannot be considered a processing or other similar operation.

1499.1-34 Renegotiation Ruling No. 34: Standard commercial service exemption; application to leased equipment (interprets act section 106(e) (1) (B) and (e)(4)(C); § 1467.52 of this chapter).-(a) This section concerns the applicability of the exemption

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of standard commercial services to leases of copying equipment.

(b) In a typical case, the contractor manufactures and leases the copying equipment. The equipment is used by the lessee on his own premises for the reproduction of anything written, printed, typed, or drawn onto offset masters. The material to be copied is, in each instance, the property of the lessee.

(c) Under these circumstances, the rental receipts are not exempt under section 106 (e) (1) (B) of the act, which provides exemption for "a service which is a standard commercial service."

(d) The term "service" is defined in section 106 (e) (4) (C) of the act to mean "any processing or other operation performed by chemical, electrical, physical, or mechanical methods directly on materials owned by another person." Although the leased equipment processes materials owned by another person, the lease is not an agreement for the processing of such materials. The processing is, in fact, performed by the lessee, not by the contractor.

(e) This conclusion does not rest upon the fact that the operation of the equipment occurs generally on the premises of the lessee rather than in the plant of the contractor. Also, it is immaterial whether the lease rental is a flat sum or a sum computed on a unit basis. The lease provides only for the furnishing of equipment, and that is not a processing, any more than the leasing of a machine tool or machinery.

1499.1-35 Renegotiation Ruling No. 35: Filing of financial statement by sole proprietor of two businesses (interprets act sections 103(j) and 105(e) (1); § 1470.2 of this chapter). (a) Does the sole owner of two unincorporated companies make a single renegotiation filing, or a separate filing for each company?

(b) Under section 105 (e) (1) of the act, every person who holds renegotiable contracts or subcontracts in excess of the stated minimum amount is required to file a financial statement. Most jurisdictions permit an individual to do business under a name other than his own if he chooses to do so, or under more than one name, but that does not make each such business a separate "person", as

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that term is defined in section 103 (j) and § 1451.21 of this chapter. A natural person doing business under two names is thus not only permitted but required to report all his renegotiable business in a single filing.

1499.1-36 Renegotiation Ruling No. 36: Standard Form of Contractor's Report; subcontract classification (interprets act section 105(e) (1); §§ 1470.3 and 1470.90 of this chapter). (a) This section concerns the classification of subcontracts for the purpose of properly reporting renegotiable receipts or accruals.

(b) Receipts or accruals are to be classified for reporting purposes on the basis of the type of subcontract performed by the subcontractor making the report, not the type of contract held by his customer. Thus, if a contractor, holding a fixed-price contract, awards a subcontract on a cost-plus-a-fixedfee basis, the subcontractor reporting receipts or accruals under that subcontract should report them as cost-plus-a-fixed-fee receipts or accruals. Conversely, a subcontractor, awarded a contract on a fixed-price basis by a cost-plus-a-fixed-fee prime contractor or higher-tier subcontractor, should report receipts or accruals under its subcontract as fixed-price receipts or accruals.

1499.1-37 Renegotiation Ruling No. 37: Brokers and manufacturers' agents; full-time employee defined (interprets act section 103 (g)(3) and § 1490.2(a) of this chapter).(a) This section concerns the meaning to be assigned to the term "full-time employee" for the purposes of section 103 (g) (3) of the act.

(b) The term "employee" for the purposes of renegotiation has the same meaning as "employee" under common law principles. This question was settled in the case of A. P. Dowell, Jr. v. Forrestal, 13 T.C. 845 (1949), a case dealing with the meaning of "full-time employee" under the Renegotiation Act of 1943, wherein the Tax Court said, at page 849:

*** We think the purposes of the statute will be served if the term "employee" is given its ordinary and usual interpretation as comprising one who meets the test of the generally established concept of legal relationship of employer and employee. Such a relationship exists where the employer retains the right to direct the manner in which the business is to be done, as well as the result to be

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