Treasury in agreement with the Secretary of the Navy and made available to the public. The method initially fixed upon shall be so determined on or before June 30, 1934: Provided, That in any case where an excess profit may be found to be owing to the United States in consequence hereof, the Secretary of the Treasury shall allow credit for any Federal income taxes paid or remaining to be paid upon the amount of such excess profit. or subcontracts for the construction and/ | shall be determined by the Secretary of the or manufacture of any complete aircraft or portion thereof completed by the particular contractor or subcontractor within any income taxable year, such net loss or deficiency in profit shall be allowed as a credit in determining the excess profit, if any, during the next succeeding four income taxable years, and that the method of ascertaining the amount of excess profit, initially fixed upon shall be determined on or before June 30, 1939: Provided further, That if such amount is not voluntarily paid the Secretary of the Treasury shall collect the same under the usual methods employed under the internal-revenue laws to collect Federal income taxes: Provided further, That all provisions of law (including penalties) applicable with respect to the taxes imposed by Title I of the Revenue Act of 1934, and not inconsistent with this section, shall be applicable with respect to the assessment, collection, or payment of excess profits to the Treasury as provided by this section, and to refunds by the Treasury of overpayments of excess profits into the Treasury: And provided further, That this section shall not apply to contracts or subcontracts for scientific equipment used for communication, target detection, navigation, and fire control as may be so designated by the Secretary of the Navy, and the Secretary of the Navy shall report annually to the Congress the names of such contractors and subcontractors affected by this provision, together with the applicable contracts and the amounts thereof: And provided further, That the income-taxable years shall be such taxable years beginning after December 31, 1935, except that the above provisos relating to the assessment, collection, payment, or refunding of excess profit to or by the Treasury shall be retroactive to March 27, 1934. (c) To make no subdivisions of any contract or subcontract for the same article or articles for the purpose of evading the provisions of this Act, but any subdivision of any contract or subcontract involving an amount in excess of $10,000 shall be subJect to the conditions herein prescribed. (d) That the manufacturing spaces and books of its own plant, affiliates, and subdivisions shall at all times be subject to inspection and audit by any person designated by the Secretary of the Navy, the Secretary of the Treasury, and/or by a duly authorized committee of Congress. (e) To make no subcontract unless the subcontractor agrees to the foregoing conditions. The report shall be in form prescribed by the Secretary of the Navy and shall state the total contract price, the cost of performing the contract, the net income, and the per centum such net income bears to the contract price. A copy of such report shall be transmitted to the Secretary of the Treasury for consideration in connection with the Federal income tax returns of the contractor for the taxable year or years concerned. The method of ascertaining the amount of excess profit to be paid into the Treasury The contract or subcontracts referred to herein are limited to those where the award exceeds $10,000. Pursuant to the authority prescribed by section 14 of the Act of April 3, 1939 and section 3 of the Act of March 27, 1934, as amended, the regulations in this part are hereby prescribed.*+ *§§ 16.0 to 16.18, inclusive, issued under the authority contained in sec. 3, 48 Stat. 505, 49 Stat. 1926, 53 Stat. 560; 10 U.S.C., Sup., 311, 312, 34 U.S.C., Sup. 496. †The source of §§ 16.0 to 16.18, inclusive, is Treasury Decision 4909, Secretary of the Treasury, Secretary of the Navy, June 28, 1939; 4 F.R. 2733. § 16.1 Definitions. As used in the regulations in this part the term— (a) "Act" means the Act of April 3, 1939 (53 Stat. 560; 10 U.S.C., Sup., 311, 312, 34 U.S.C., Sup., 496), together with the applicable provisions of section 3 of the Act of March 27, 1934 (48 Stat., 505; 34 U.S.C. 496) as amended by the Act of June 25, 1936 (49 Stat. 1926; 34 U.S.C., Sup., Sup. IV, 496) and as further amended by the Act of April 3, 1939 (53 Stat. 560; 34 U.S.C., Sup., 496). (b) "Person" includes an individual, a corporation, a partnership, a trust or estate, a joint-stock company, an association, or a syndicate, group, pool, joint venture or other unincorporated organization or group, through or by means of which any business, financial operation or venture is carried on. (c) "Contract" means an agreement made by authority of the Secretary of War for the construction or manufacture of any complete aircraft or any portion thereof for the Army. (d) "Contractor" means a person entering into a direct contract with the Secretary of War or his duly authorized representative. (e) "Subcontract" means an agreement entered into by one person with another person for the construction or manufacture of any complete aircraft or any por tion thereof for the Army, the prime | subcontract entered into after the encontract for such aircraft or portion actment of the Act of April 3, 1939, if thereof having been entered into between a contractor and the Secretary of War or his duly authorized representative. (f) "Subcontractor" means any person other than a contractor entering into a subcontract. (g) "Contracting party" means a contractor or subcontractor as the case may be. (h) "Contract price" or "total contract price" means the amount or total amount to be received under a contract or subcontract as the case may be. (i) "Income-taxable year" means the calendar year, the fiscal year ending during such calendar year, or the fractional part of such calendar or fiscal year, upon the basis of which the contracting party's net income is computed and for which its income tax returns are made for Federal income tax purposes.* † at the time or prior to the time such contract or subcontract is made it is designated by the Secretary of War as being exempt under the provisions of the Act pertaining to scientific equipment used for communication, target detection, navigation, and fire control.*† § 16.4 Completion of contract defined. The date of delivery of the aircraft or portion thereof covered by the contract or subcontract shall be considered the date of completion of the contract or subcontract unless otherwise determined jointly by the Secretary of War and the Secretary of the Treasury or their duly authorized representatives. Except as otherwise provided in the preceding sentence, the replacement of defective parts of delivered articles or the performance of other guarantee work in respect of such articles will not operate to extend the date of completion. As to the treatment of the cost of such work as a cost of performing a contract or subcontract, see § 16.8 (h). As to a refund in case of curred additional costs, see § 16.18. If a contract or subcontract is at any time cancelled or terminated, it is completed at the time of the cancellation or termination.*† § 16.2 Contracts and subcontracts under which excess profit liability may be incurred. Except as otherwise provided with respect to contracts or sub-adjustment due to any subsequently incontracts for certain scientific equipment (see § 16.3), every contract awarded for an amount exceeding $10,000 and entered into after the enactment of the Act of April 3, 1939 for the construction or manufacture of any complete aircraft or § 16.5 Manner of determining liability. any portion thereof for the Army, is The first step in the determination of the subject to the provisions of the Act reexcess profit to be paid to the United lating to excess profit liability. Any sub- States by a contracting party with recontract made with respect to such a spect to contracts and subcontracts comcontract and involving an amount in ex-pleted within an income-taxable year is cess of $10,000 is also within the scope of the Act. If a contracting party places orders with another party, aggregating an amount in excess of $10,000, for articles or materials which constitute a part of the cost of performing the contract or subcontract, the placing of such orders shall constitute a subcontract within the scope of the Act, unless it is clearly shown that each of the orders involving $10,000 or less is a bona fide separate and distinct subcontract and not a subdivision made for the purpose of evading the provisions of the Act.** § 16.3 Contracts or subcontracts for scientific equipment. No excess profit liability is incurred upon a contract or to ascertain the total contract prices of all contracts and subcontracts completed by the contracting party within the income-taxable year. As to total contract prices, see § 16.7. The second step is to ascertain the cost of performing such contracts and subcontracts and to deduct such cost from the total contract prices of such contracts and subcontracts as computed in the first step. See § 16.8. The amount remaining after such subtraction is the amount of net profit or net loss upon the contracts and subcontracts completed within the income-taxable year. The third step, in case there is a net profit upon such contracts and subcon tracts, is to subtract from the amount of such net profit as computed in the second step the sum of (1) An amount equal to 12 percent of the total contract prices of the contracts and subcontracts completed within the income-taxable year; (2) The amount of any net loss sustained in a prior income-taxable year and allowable as a credit in determining the excess profit for the income-taxable year (see § 16.9); and (3) The amount of any deficiency in profit sustained in a prior income-taxable year and allowable as a credit in determining the excess profit for the income-taxable year (see § 16.9). The amount remaining after such subtraction is the amount of excess profit for the income-taxable year. The fourth step is to ascertain the amount of credit allowed for Federal income taxes paid or remaining to be paid upon the amount of such excess profit (see § 16.10) and then subtract from the amount of such excess profit the amount of credit for Federal income taxes. The amount remaining after this subtraction is the amount of excess profit to be paid to the United States by the contracting party for the income-taxable year.*† § 16.6 Computation of excess profit liability. The application of the provisions of § 16.5 may be illustrated by the following example: If § 16.7 Total contract price. The total contract price of a particular contract or subcontract (see § 16.1) may be received in money or its equivalent. something other than money is received, only the fair market value of the thing received, at the date of receipt, is to be included in determining the amount received. Bonuses earned for bettering performance and penalties incurred for failure to meet the contract guarantees are to be regarded as adjustments of the original contract price. Trade or other discounts granted by a contracting party in respect of a contract or subcontract performed by such party are also to be deducted in determining the true total contract price of such contract or subcontract.** Example. On September 1, 1939, the B Corporation which keeps its books and makes its Federal income tax returns on a calendar year basis entered into a contract coming within the scope of the Act, the total contract price of which was $200,000. On March 10, 1940, the corporation entered into another such contract, the total contract price of which was $40,000. Both contracts were completed within the calendar year 1940, the first at a cost of $155,000 and the § 16.8 Cost of performing a contract second at a cost of $45,000. During the or subcontract-(a) General rule. The year 1939 the B Corporation sustained a cost of performing a particular contract net loss of $2,500 and a deficiency in or subcontract shall be the sum of (1) profit of $1,000 on contracts and subcon- the direct costs, including therein extracts entered into after April 3, 1939 penditures for materials, direct labor and and completed within the income- direct expenses, incurred by the contaxable year 1939. For purposes of the tracting party in performing the conFederal income tax, the net income of❘ tract or subcontract; and (2) the proper proportion of any indirect costs (includ-| (2), and (3) of this paragraph, as for ing therein a reasonable proportion of management expenses) incident to and necessary for the performance of the contract or subcontract. (b) Elements of cost. No definitions of the elements of cost may be stated which are of invariable application to all contractors and subcontractors. In general, the elements of cost may be defined for purposes of the Act as follows: (1) Manufacturing cost, which is the sum of factory cost (see paragraph (c) of this section) and other manufacturing cost (see paragraph (d) of this section); (2) Miscellaneous direct expenses (see paragraph (e) of this section); (3) General expenses, which are the sum of indirect engineering expenses, usually termed "engineering overhead" (see paragraph (f) of this section) and expenses of distribution, servicing and administration (see paragraph (g) of this section); and (4) Guarantee expenses (see paragraph (h) of this section). (c) Factory cost. Factory cost is the sum of the following: example, royalties which the contracting party pays to another party and which are properly chargeable to the cost of performing the contract or subcontract (but see paragraph (d) of this section). (5) Indirect factory expenses. Items, termed "factory overhead," usually which are not directly chargeable to the factory cost of performing the contract or subcontract but which are properly incident to and necessary for the per formance of the contract or subcontract and consist of the following: expended for (i) Labor. Amounts factory labor, such as supervision and inspection, clerical labor, timekeeping, packing and shipping, stores supply, services of tool crib attendants, and services in the factory employment bureau, which are not chargeable directly to productive labor of the contract or subcontract. (ii) Materials and supplies. The cost of materials and supplies for general use in the factory in current operations, such as shop fuel, lubricants, heat-treating, plating, cleaning and anodizing supplies, nondurable tools and gauges, stationery (such as time tickets and other forms), and boxing and wrapping materials. (1) Direct materials. Materials, such as those purchased for stock and sub- (iii) Service expenses. Factory exsequently issued for contract operations penses of a general nature, such as those and those acquired under subcontracts, for power, heat and light (whether purwhich become a component part of the chased or produced), ventilation and airfinished product or which are used di- conditioning and operation and mainterectly in fabricating, converting or proc-nance of general plant assets and faciliessing such materials or parts. (2) Direct productive labor. Productive labor, usually termed "shop labor," which is performed on and is properly chargeable directly to the article manufactured or constructed pursuant to the contract or subcontract, but which ordinarily does not include direct engineering labor (see subparagraph (3) of this paragraph). (3) Direct engineering labor. The compensation of professional engineers and other technicists (including reasonable advisory fees), and of draftsmen, properly chargeable directly to the cost of the contract or subcontract. ties. (iv) Fixed charges and obsolescence. Recurring charges with respect to property used for manufacturing purposes of the contract or subcontract, such as premiums for fire and elevator insurance, property taxes, rentals and allowances for depreciation of such property, including maintenance and depreciation of reasonable stand-by equipment; and depreciation and obsolescence of special equipment and facilities necessarily acquired primarily for the performance of the contract or subcontract. In making allowances for depreciation, consideration shall be given to the number and length (4) Miscellaneous · direct factory of shifts. charges. Items which are properly (v) Miscellaneous indirect factory exchargeable directly to the factory cost penses. Miscellaneous factory expenses of performing the contract or subcontract but which do not come within the classifications in subparagraphs (1), not directly chargeable to the factory cost of performing the contract or subcontract, such as purchasing expenses; (e) Miscellaneous direct expenses. Miscellaneous direct expenses as used in paragraph (b) of this section include ordinary and necessary expenses of re- may be allowed as a part of the cost arranging facilities within a department of performing the contract. or plant; employees' welfare expenses; premiums or dues on compensation insurance; employers' payments to unemployment, old age and social security Federal and State funds not including payments deducted from or chargeable (1) Cost of installation and constructo employees or officers; pensions and tion. Cost of installation and conretirement payments to factory em-struction includes the cost of materials, ployees; factory accident compensation labor and expenses necessary for the (as to self-insurance, see paragraph (g) erection and installation prior to the of this section); but not including any completion of the contract and after amounts which are not incident to serv- the delivery of the product or material ices, operations, plant, equipment or manufactured or constructed pursuant facilities involved in the performance to the contract or subcontract. of the contract or subcontract. (d) Other manufacturing cost. Other manufacturing cost as used in paragraph (b) of this section includes items of manufacturing costs which are not properly or satisfactorily chargeable to factory costs (see paragraph (c) of this section) but which upon a complete showing of all pertinent facts are properly to be included as a cost of performing the contract or subcontract, as for instance, payments of royalties and amortization of the cost of designs purchased and patent rights over their useful life; and "deferred" or "unliquidated" experimental and development charges. For example, in case experimental and development costs have been properly deferred or capitalized and are amortized in accordance with a reasonably consistent plan, a proper portion of the current charge, determined by a ratable allocation which is reasonable in consideration of the pertinent facts, may be treated as a cost of performing the contract or subcontract. In the case of general experimental and development expenses which may be charged off currently, a reasonable portion thereof may be allocated to the cost of performing the contract or subcontract. If a special experimental or development project is carried on in pursuance of a contract, or in anticipation of a contract which is later entered into, and the expense is not treated as a part of general experimental and development expenses or is not otherwise allowed as a cost of performing the contract, there clearly appearing no reasonable prospect of an additional contract for the type of article involved, the entire cost of such project (2) Sundry direct expenses. Items of expense which are properly chargeable directly to the cost of performing a contract or subcontract and which do not constitute guarantee expenses (see paragraph (h) of this section) or direct costs classified as factory cost or other manufacturing cost (see paragraphs (c) and (d) of this section), such as premiums on performance or other bonds required under the contract or subcontract; State sales taxes imposed on the contracting party; freight on outgoing shipments; fees paid for wind tunnel and model basin tests; demonstration and test expenses; crash insurance premiums; traveling expenses. In order for any such item to be allowed as a charge directly to the cost of performing a contract or subcontract, (1) a detailed record shall be kept by the contracting party of all items of a similar character, and (2) no item of a similar character which is properly a direct charge to other work shall be allowed as a part of any indirect expenses in determining the proper proportion thereof chargeable to the cost of performing the contract or subcontract. As to allowable indirect expenses, see paragraphs (c) (5), (f), (g) and (j) of this section. (f) Indirect engineering expenses. Indirect engineering expenses, usually termed "engineering overhead," which are treated in this section as a part of general expenses in determining the cost of performing a contract or subcontract (see paragraph (b) of this section), comprise the general engineering expenses which are incident to and necessary for the performance of the contract or subcontract, such as the following: |