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prime contract (see section 1452.2 of this subchapter) which bears the same ratio to the total of such amounts received or accrued as five years bears to the average useful life of such equipment as set forth in Bulletin F of the Internal Revenue Service (1942 edition) or, if an average useful life is not so set forth, then as estimated by the Board. A description of the methods of determining the amount of renegotiable business under subcontracts for new durable productive equipment is set forth in section 1456.4 (b) of this subchapter.

1454.3 Basis and purpose of exemption.The basis and purpose of this exemption were stated as follows by the Senate Committee on Finance in its report on the act:

The cost of long-lived equipment which does not become property of the Government is ordinarily reimbursed to the owner over a period of years in the form of the depreciation charge for the use of the equipment on Government work. Reimbursement is completed, therefore, only when the entire service life of the equipment is exhausted in such work. Where only a fraction of the life is so consumed, reimbursement through ordinary means is also partial. It is therefore considered proper that renegotiation should apply only to that portion of the profit which corresponds to the portion of the service life of the equipment that is exhausted in the performance of renegotiable contracts and subcontracts.

The method adopted in your committee bill to effectuate this principle is to invoke an arbitrary assumption calculated to work substantial over-all justice and at the same time to provide a workable rule. The assumption made is that the first 5 years of the service life of equipment originally acquired for defense production will be devoted entirely to such work, and that the remainder of the service life will be devoted to ordinary commercial work. Proceeding upon this assumption, the renegotiable portion of the sales of such equipment by suppliers is stated to be the proportion which 5 years is of its normal service life. Thus, for 10-year equipment, one-half of the receipts, or accruals would be subject to renegotiation; for 15-year equipment, one-third; for 20-year equipment, one-quarter; and so forth. To apply this rule, Bulletin F issued by the Bureau of Internal Revenue is designated as the measure of normal service life of durable equipment. Where Bulletin F does not specify such life for particular equipment, the Board is to estimate the same.

1454.4 What constitutes subcontract for new durable productive equipment; in general. A purchase order or agreement for new durable productive equipment is a subcontract subject to the act if such equipment is

required for the performance of a prime contract or subcontract subject to the act. (See sec. 1452.4 of this subchapter.)

1454.5 Components of new durable productive equipment.-In order for a subcontract to qualify as a subcontract for new durable productive equipment, it is immaterial whether the equipment is used directly in the processing of an end product or of an article incorporated therein, or is incorporated in another item of such equipment.

1454.6 Equipment purchased for account of Government.-There is excluded from the definition of "subcontracts for new durable productive equipment" subcontracts under which the purchaser has acquired such equipment for the account of the Government. A purchaser is considered to have acquired equipment for the account of the Government if he has acquired it pursuant to an arrangement between the Government and the purchaser whereby title to such equipment will, or may, at the option of the Government, vest in the Government.

1454.7 Pool orders or similar commitments. Prime contracts for new durable productive equipment are not exempt from renegotiation since the exemption relates only to subcontracts. However, a pool order or similar commitment placed in the first instance by an agency of the Government is included within the definition of "subcontracts for new durable productive equipment" when title to the equipment is transferred on delivery thereof or within one year thereafter to a prime contractor or subcontractor.

1454.8 Subcontracts related to subcontracts for new durable productive equipment. -The extent to which the act applies to receipts or accruals from subcontracts for new durable productive equipment which is incorporated in another item of such equipment will be determined by reference to the average useful life of the equipment in question and not by reference to the life of the equipment of which it becomes a part. Subcontracts for equipment or other materials which are not new durable productive equipment are not covered by the exemption set forth in this part even though the equipment or other materials are incorporated in new

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(b) Exemption through June 30, 1956.Subject to the limitation provided in paragraph (c) of this section, the Board has exempted from the provisions of the act, with respect to amounts received or accrued to and including June 30, 1956, the following:

(1) All prime contracts and subcontracts for materials or construction, and services connected therewith, or for maintenance, repair or rehabilitation, whenever (i) performance and delivery are to be effected outside. the United States, its territories and possessions, and (ii) the prime contractor or subcontractor is a foreign corporation or a foreign national or is a partnership or joint venture, all the members of which are foreign corporations or foreign nationals.

(2) All prime contracts of the Panama Canal Company and the Canal Zone Government, and related subcontracts, whenever such prime contracts of subcontracts are for products manufactured in the Republic of Panama.

(c) Limitation on exemption.-No prime contract or subcontract of any class or type set forth in paragraph (b) of this section is exempt under section 106 (d) (1) of the act if, upon the recommendation of the Department making the prime contract involved, the Board determines before October 1, 1954, that such prime contract or subcontract shall not be exempt under paragraph (b) (1) of this section. A recommendation of a Department pursuant to the provisions of this paragraph shall be made by the head of such Department or by a person responsible directly to such head and specifically authorized to make such recommendation.

1455.4 Contracts when contractual provisions adequate to prevent excessive profits.

(b) Exemptions.-Pursuant to the foregoing authority, the Board has exempted from renegotiation the following:

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(2) Defense Minerals Exploration Administration. All exploration project contracts entered into by the Defense Minerals Exploration Administration of the Department of Interior, pursuant to delegation from the Defense Materials Procurement Administration, under the authority of section 303 of the Defense Production Act of 1950, as amended, 50 U.S.C. App. 2093, and Defense Minerals Exploration Administration Order No. 1 (17 F.R. 2090).

(3) Small Defense Plants Administration. -All prime contracts entered into by the Small Defense Plants Administration under the authority of section 714 (b) (1) (B) of the Defense Production Act of 1950, as amended, 50 U.S.C. App. 2163 (b) (1) (B) with any of the Departments named in or designated pursuant to section 103 of the act. This exemption shall not extend to subcontracts related to such prime contracts.

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U.S. GOVERNMENT PRINTING OFFICE: 1969 0-327-388

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