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renegotiable receipt the amount of such reimbursement or the amount received from the joint venture as its distributive share of the profits of the joint venture.

(f) It is recognized that a joint venture may contract with one or more of its members individually. For example, it may lease equipment from a member when the furnishing of such equipment is no part of the member's capital contribution or other obligation as a participant in the venture. If a genuine subcontract is shown to exist between a joint venture and one of its members, the operations of the member under such subcontract must be included in its own separate renegotiation report.

(g) If a corporation (or any other contractor) obtains a renegotiable contract which thereafter is subcontracted to and performed by a joint venture of which it is a member, the joint venture must make a filing. But the corporation must file, too, even though its report may show a complete "wash" of its sales and costs on the contract, with zero profits.

(h) The assignment of a Government contract is prohibited by law (41 U.S.C. 15). However, in certain limited circumstances the Government will recognize a third party as the successor in interest to a Government contract (see, for example, Armed Services Procurement Regulation, § 1-1602 (a) (32 CFR 1-1602 (a)). Except when a third party has been so recognized by the contracting Department, a purported "assignment” of a Government contract will not be recognized by the Board.

1499.1-19 Renegotiation Ruling No. 19: Renegotiation loss carryforward; effect on, when loss sustained on sales below the floor (interprets act sections 102(a), 103(m), 105(f) (1) and (2); § 1457.9 of this chap ter). (a) This section concerns the propriety of carrying forward a renegotiation loss sustained in a fiscal year, when the aggregate renegotiable sales of the contractor in such year are below the minimum amount or "floor" prescribed for renegotiation in section 105 (f) (1) or (2) of the Renegotiation Act of 1951, as amended.

(b) The term "renegotiation loss' is defined in section 103 (m) of the act as mean

ing, for any fiscal year, "the excess, if any, of costs *** 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 ***" Receipts or accruals are subject to the provisions of the act whenever they are derived from contracts with any of the Departments named in or designated under section 102 (a), or related subcontracts. Pursuant to section 105 (f) (1) and (2), receipts or accruals may not "be renegotiated" when they do not exceed the applicable minimum amount provided in such section, but this involves the jurisdiction of the Board, not the coverage of the act.

(c) It follows that the right to carry forward a renegotiation loss is not affected by the fact that the loss is sustained in a fiscal year in which the renegotiable receipts or accruals of the contractor aggregate less than the minimum amount prescribed for renegotiation in section 105 (f) (1) or (2) of the act.

1499.1-20 Renegotiation Ruling No. 20: Common control; consolidated renegotiation of related contractors; effect of voting trusts (interprets act section 105 (a) and (f); §§ 1458.6 and 1464.4 (c) of this chapter).— (a) This section involves two questions relating to trusts: (i) The qualification of contractors for consolidated renegotiation under section 105 (a) of the act and § 1464.4 of this chapter, and (ii) the existence of common control for the purposes of the floor provisions of section 105 (f).

(1) Consolidation. Consolidated renegotiation of related contractors pursuant to § 1464.4 of this chapter permits commonly owned economic interests to be treated as a unit. Consolidation is allowed when at least 80 percent of the stock of each of two or more corporations is owned by the same person or group of persons. The trustee's interest in stock held in a voting trust is limited to legal title, coupled with voting power. The economic interest is in the depositing shareholders, not the trustee. Accordingly, under § 1464.4 (c) of this chapter, in determining the ownership of stock for pur

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poses of consolidation, the Board recognizes the depositing shareholders as the owners of stock held in a voting trust.

(2) Control. Different principles apply in determining control of a corporation under § 1458.6 of this chapter, when shares of corporate stock held in a voting trust are sufficient for control, either alone or with other shares. Such a determination may be necessary in order to decide whether the corporation is under common control with another contractor for purposes of the floor.

(b) Generally, if the voting trust is revocable by the shareholders, or if the trustee is governed by their instructions, control of the stock will rest in the shareholders. When the trust is irrevocable and it is evident that the trustee acts independently of the shareholders, the trustee generally will be found to control the stock. The Board will decide each case on the facts of that case. Among the matters that may be relevant in a given case are the terms of the trust agreement and the purposes of the trust; whether the trust is coupled with an interest (as when a bank requires a voting trust, to protect a loan); revocability; the powers granted to the trustee and those reserved by the depositing shareholders; the family relationships, if any, between the depositing shareholders or between any of them and the trustee; and the manner in which the trust is operated, including written or unwritten instructions to or understandings with the trustee.

1499.1-21 Renegotiation Ruling No. 21: Accounting methods; completed contract basis; time of accrual (interprets act section 103(f); §§ 1458.2(c) and 1459.1(b) of this chapter. (a) This section concerns the time when the amount payable under a contract is an accrual to a contractor employing the completed contract method of accounting for renegotiation under the following circumstances: The A Company, a partnership, in its fiscal year ended December 31, 1959, had renegotiable sales aggregating only $123,456, all made to B Corporation, a commonly controlled company. During the calendar year 1959 B Corporation, which uses the completed contract method of accounting for renegotiation purposes, received or accrued

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$654,321 on renegotiable contracts. In November 1958, B completed a long-term shipbuilding contract at a total contract price in excess of $22 million. The fiscal year of B Corporation ends on September 30.

(b) The question is whether the $22 million shall be deemed to have been received or accrued by B at the time of the contract completion in November 1958, or whether such amount should be evenly distributed throughout the entire fiscal year of B in which such completion date fell, i.e., the fiscal year ended September 30, 1959. If the amount is to be prorated over B's entire 1959 fiscal year, a substantial portion thereof would fall within the same 12 months which comprised A's 1959 fiscal year and A would be subject to renegotiation (see § 1458.2 (c)). Otherwise, after eliminating intercompany sales, the renegotiable receipts or accruals of A and B during A's 1959 fiscal year aggregated only $654,321 and A would not be subject to renegotiation for that period.

(c) The completed contract method of accounting is a method of deferred accounting of profits pursuant to which all amounts received or accrued under a contract are deemed to have been received or accrued during the fiscal year of the contractor in which such contract is completed. This does not mean that the total receipts or accruals under the contract are to be distributed over the fiscal year of completion; the definition merely prescribes the fiscal year in which the receipts or accruals are reportable for tax and renegotiation purposes.

(d) It follows that no portion of the contract price may be deemed to have been accrued by B at any time other than on the date of the completion of the contract. Therefore, no portion of the contract price may be deemed to have been accrued during A's fiscal year ended December 31, 1959, and that company is not subject to renegotiation for such fiscal year.

1499.1-22 Renegotiation Ruling No. 22: Final completion and acceptance; completed contract method of accounting; long-term contracts (interprets act section 103(i); § 1459.1(b)(2)(iii) of this chapter).-(a) This section concerns the time when a longterm contract will be deemed "finally com

pleted and accepted" for the purpose of applying the completed contract method of accounting in renegotiation proceedings before the Renegotiation Board.

(b) A diversity of opinion exists on this subject. Section 1.451-3. Income Tax Regulations, provides that, under the completed contract method of accounting, gross income derived from longterm contracts "may be reported for the taxable year in which the contract is finally completed and accepted." The regulation does not define "finally completed and accepted." The term is given literal application by the courts of appeals for the Sixth and Ninth Circuits (see E. E. Black, Limited v. Alsup, 211 F. 2d 879 (9th Cir. 1954), and Thompson-King-Tate, Inc. v. United States, 296 F. 2d 290 (6th Cir. 1961)). However, in the Tax Court of the United States a rule of substantial performance is employed. Thus, in the case of Hooper Construction Company v. The Renegotiation Board, 35 T.C. 837 (1961), the Tax Court said at page 847:

* *

* Finally completed and accepted means when the contractor has substantially performed his contract even though some minor particulars such as remedying defects may yet remain to be done. EhretDay Co., 2 T.C. 25 (1943); Standard Paving Co., 13 T.C. 425 (1949), 190 aff'd. F. 2d 330 C.A. 10, 1951), certiorari denied 342 U.S. 860, 190 A. D. Irwin, 24 T.C. 722 (1955), aff'd. 238 F. 2d 874 (C.A. 3, 1956).

See also Luther G. Turner, 17 CCH Tax Ct. Mem. 914 (1958); N. Wohlfeld, 17 CCH Tax Ct. Mem. 677 (1958); Ben C. Gerwick, Inc., 13 P-H Tax Ct. Mem. 314 (1954); Mesta Machine Co., 12 B.T.A. 523 (1928).

(c) It will be noted that the prior decisions of the Tax Court relied upon by that court to support its holding in the Hooper case included two decisions which had been affirmed by the Courts of Appeals for the Third and Tenth Circuits, respectively.

(d) The Board adheres to the principles of substantial performance prevailing in the Tax Court, where a contractor aggrieved by a decision of the Board may petition for a redetermination of excessive profits. Thus, for the purposes of the completed contract method of accounting, the Board considers a long-term contract to be finally completed and accepted when it has been substantially

performed, even though minor work of repair, cleanup, or rearrangement remains to be done, or minor defects remain to be remedied. In determining whether a contract or subcontract has been substantially performed, an important consideration will be whether the building, installation or other subject-matter of the contract or subcontract is capable of the use intended.

1499.1-23-Renegotiation Ruling No. 23: Special accounting agreement; status of agreement with merged contractor or predecessor partnership (interprets act section 103(f); § 1459.1 (b) (2) (i) (b) of this chapter). (a) If a special accounting agreement is made under section 103 (f) of the act and § 1459.1 (b) (2) (i) (b) of this chapter between X Corporation and the Government, and thereafter merges into Y Corporation and becomes the X Division of Y Corporation, the special accounting agreement still applies to all renegotiation proceedings conducted with respect to receipts or accruals of the former X Corporation. However, the agreement does not apply to business performed by the X Division of Y Corporation.

(b) Similarly, a special accounting agreement with a partnership is not applicable to the business of a corporation which the partners thereafter form to incorporate the business.

1499.1-24 Renegotiation Ruling No. 24: Government-furnished materials (interprets act sections 102(a) and 103 (f)).-(a) This section pertains to the treatment of Government-furnished materials in renegotiation proceedings.

b) Section 102 (a) of the act subjects to renegotiation contracts with named Departments and related subcontracts "to the extent of the amounts received or accrued by a contractor or subcontractor" from such contracts and subcontracts.

(c) Section 103 (f) of the act defines profits under renegotiable contracts and subcontracts as "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."

(d) When a contractor receives materials from the Government for his use in perform

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ing a renegotiable contract, the contractor generally does not become the owner of the furnished materials. His acquisition of the materials is not a purchase, and he does not incur a cost in the amount of their value; and since his return of the materials in the form of a finished product is not a sale of the materials, the return transaction does not result in a receipt or accrual in the amount of their value.

(e) It follows that a contractor is not entitled to include the value of Governmentfurnished materials in renegotiable sales or costs. Ellis Coat Co. v. Secretary of War, 9 T.C. 1004 (1947); Stoner Manufacturing Corp. v. Secretary of War, 21 T.C. 200, 209 (1953). Further, a contractor may not use the value thereof for the purpose of overall allocation of overhead and other expenses between renegotiable and nonrenegotiable business. See Ellis Coat Co., supra. However, costs incurred by the contractor which are directly chargeable to the furnished materials, and items of indirect costs which are properly allocable thereto, are allowable.

(f) Under certain procurement practices, the contractor includes in his bid the value of the furnished materials he estimates he will need, and such amount is deducted in his invoices; final adjustment is made at the end of the contract, with the contractor realizing an increased profit for materials saved or a decreased profit for excess materials consumed. The contractor may be required to pay charges arising from the shipment of the Government materials, and he may be held liable for any loss or damage thereto from the time the materials are delivered to the carrier at the point of origin until they are returned to the Government. However, the contractor does not invest capital in the materials; he does not expend effort in finding and purchasing the materials; and legal title remains in the Government. Since the contractor does not purchase, and at no time owns, the Government-furnished materials, his return of the finished product does not constitute a sale of such materials. Therefore, the value of the furnished materials may not be included in renegotiable sales or costs.

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(g) The Board will, however, give appropriate consideration in each case to the method of procurement employed, in evaluating the contractor's performance under the statutory factors. See Part 1460 of this chapter.

1499.1-25 Renegotiation Ruling No. 25: Accounting method, change in; distinguished from change in rate of depreciation (interprets I.R.C. section 446(e) and regulation thereunder, 26 CFR 1.446-1(e) (2) and (3); § 1459.1(b)(4) of this chapter).-(a) This section concerns the acceptability, for renegotiation purposes, of certain changes made by a contractor in the rate and method of computing deductions for depreciation of machinery and equipment.

(b) In the case of certain equipment, which had been depreciated on the basis of 5- to 8-year lives, the change was to a straight 5-year life. With respect to other equipment, the change was from straight-line depreciation to declining-balance depreciation.

(c) Section 446 (e) of the Internal Revenue Code of 1954 requires that "a change in the method of accounting on the basis of which a taxpayer regularly computes his income in keeping his books, shall, before computing taxable income under the new method, be approved by the Secretary of the Treasury or his delegate." Section 1.446-1 (e) (3) (26 CFR 1.446-1 (e) (3)) of the regulations under said code requires a taxpayer proposing to change its method of accounting to file an application therefor with the Commissioner of Internal Revenue within 90 days after the beginning of the taxable year in which the change is to be made.

(d) Under 26 CFR 1.446-1(e) (2) (i), a change in the method of accounting includes a change in the treatment of a material item. As an example of a change requiring the Commissioner's consent, subdivision (ii) of 26 CFR 1.446-1 (e) (2) lists a change involving the method or basis used in the evaluation of inventories.

(e) Applying the foregoing provisions of the code and regulations, it is clear that a change in computing depreciation, from the straight-line method to the declining-balance method, would be a change in the method of

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(1) Items of advertising expense incurred solely for (i) the recruitment by the contractor of personnel required for the performance by the contractor of obligations arising under a renegotiable contract or subcontract, (ii) the procurement of scarce items required by the contractor for the performance of a renegotiable contract or subcontract, or (iii) the disposal of scrap or surplus materials acquired by the contractor in the performance of a renegotiable contract or subcontract, are recognized as costs allocable to renegotiable business in accordance with the method of accounting found by the Board to be acceptable under § 1459.1 (b). The costs of publishing catalogues, technical pamphlets, house organs and other similar publications are not, for the purposes of this paragraph, considered advertising expenses; for the treatment of such expenses, see § 1459.8 (f).

(b) In administering this regulation, the Board does not recognize advertising expenses of the types described as costs of renegotiable business unless, as the language itself indicates, a reasonable relationship is shown to exist between such expenses and such business.

(c) When, for example, "help wanted" advertisements are published in order to recruit employees solely for the manufacture of nonrenegotiable products of a contractor, no part of the expense of such advertising is allocable to renegotiable business. Similarly, advertising expense incurred in procuring scarce items relating solely to nonrenegotiable products of a contractor is allocable in its entirety to nonrenegotiable business; so, too, is the cost of disposing of scrap or surplus materials acquired by a contractor in connection with his nonrenegotiable business only.

(d) When advertising expense of a type described in the regulation is shown to relate to both the renegotiable and nonrenegotiable business of the contractor, an allocation of the amount is made in accordance with the method of accounting found by the Board to be acceptable under § 1459.1 (b) of this chapter.

1499.1-27 Renegotiation Ruling No. 27: Computation of State tax credit for consolidated group; amount attributable to a member when no excessive profits are allocated to such member (interprets act section 103(f); § 1459.9(a) of this chapter).-(a) This section concerns the proper method of computing the State tax credit attributable to a member of a consolidated group when no part of the excessive profits to be eliminated is allocated to such member.

(b) Section 103 (f) of the act and § 1459.9 (a) of this chapter provide that the credit for taxes measured by income, other than Federal taxes, shall be computed on that portion of the renegotiable profits which is determined to be nonexcessive. Assuming that the member of the affiliated group referred to had renegotiable profits, the fact that no part of the excessive profits to be eliminated is allocated to such member indicates that the profits of such member were found to be nonexcessive. That being so, in determining the State tax credit of the consolidated group, there should be included in the aggregate amount thereof the tax credit attributable to all the renegotiable profits of the member to which no part of the excessive profits has been allocated.

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