SUBPART A-FISCAL YEARS ENDING BEFORE JUNE 30, 1953 Sec.

1454.1 Statutory provision.

1454.2 Application of act to subcontracts for new durable productive equipment.

1454.3 Basis and purpose of exemption. 1454.4 What constitutes subcontract for new durable

productive equipment.

1454.5 Components of new durable productive equipment.

1454.6 Equipment purchased for account of Government.

1454.7 Pool orders or similar commitments. 1454.8

Subcontracts related to subcontracts for new durable productive equipment. AUTHORITY: Sections 1454.1 to 1454.8 issued under section 109, Pub. Law 9, 82d Cong. Interpret or apply section 106, Pub. Law 9, 82d Cong.

1454.1 Statutory provision.-With respect to fiscal years ending before June 30, 1953, section 106 (c) of the act provides as follows:

(1) In general. The provisions of this title shall not apply to receipts or accruals (other than rents) from subcontracts for new durable productive equipment, except to that part of such receipts or accruals which bears the same ratio to the total of such receipts or accruals as five years bears to the average useful life of such equipment as set forth in Bulletin F of the Bureau of Internal Revenue (1942 edition) or, if an average useful life is not so set forth, then as estimated by the Board.

(2) Definitions.-For the purpose of this subsection

(A) the term "durable productive equipment” means machinery, tools, or other equipment which does not become a part of an end product acquired by any agency of the Government under a contract with a department, or of an article incorporated therein, and which has an average useful life of more than five years; and

(B) the term "subcontracts for new durable productive equipment” does not include subcontracts where the purchaser of such durable productive equipment has acquired such equipment for the account of the Government, but includes pool orders and similar com

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mitments placed in the first instance by a Department or other agency of the Government when title to the equipment is transferred on delivery thereof or within one year thereafter to a contractor or subcontractor.

1454.2 Application of act to subcontracts for new durable productive equipment.-The foregoing exemption has the effect of making the act applicable to subcontracts for new durable productive equipment only to the extent of that part of the amounts received or accrued in a fiscal year ending before June 30, 1953 after the effective date applicable to the related 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 Bureau of Internal Revenue (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 bcome 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 equip

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ment 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 15year equipment, one-third; for 20-year equipment, onequarter; 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 commit ments.-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 durable productive equipment. The extent to which the act applies to receipts or accruals from such subcontracts will be determined according to the provisions of § 1456.5 of this subchapter.

SUBPART B-FISCAL YEARS ENDING ON OR AFTER JUNE 30, 1953

1454.22 Purpose of exemption. 1454.23 Application of exemption. 1454.24 What constitutes prime contract for new durable productive equipment.

1454.25 What constitutes subcontract for new durable productive equipment.

1454.26 Components of new durable productive equipment.

1454.27 Prime contracts and subcontracts related to prime contracts for new durable productive equipment. 1454.28 Limitation on exemption of prime contracts for new durable productive equipment. AUTHORITY: §§ 1454.21 to 1454.28 issued under sec. 109, 65 Stat. 22; 50 U. S. C. App. 1219.

1454.21 Statutory provision.--With respect to fiscal years ending on or after June 30, 1953, section 106 (c) of the act provides as follows:

(1) In general. The provisions of this title shall not apply to receipts or accruals (other than rents) from contracts or subcontracts for new durable productive equipment, except (4) to that part of such receipts or accruals which bears the same ratio to the total of such receipts or accruals as five years bears to the average useful life of such equipment as set forth in Bulletin F of the Bureau of Internal Revenue (1942 edition) or, if an average useful life is not so set forth, then as estimated by the Board and (B) to receipts and accruals from contracts for new durable productive equipment in cases in which the Board finds that the new durable productive equipment covered by such contracts cannot be adapted, converted, or retooled for commercial use. [Matter in italics added by Pub. Law 764, 83d Cong., approved September 1, 1954.]

(2) Definition.-For the purpose of this subsection, the term "durable productive equipment" means machinery, tools, or other productive equipment which has an average useful life of more than five years. [Matter in italics added by Pub. Law 216, 84th Cong., approved August 3, 1955, which also deleted "which does not become a part of an end product, or of an article incorporated therein, and" after "other equipment". The words "acquired by any agency of the Government under a contract with a department" after "product" were deleted by Pub. Law 764, 83d Cong., approved September 1, 1954.]

1454.22 Purpose of exemption.-The purpose of the amendments contained in the foregoing exemption was stated as follows in the report of the Senate Committee on Finance ((1954) S. Rept. 643, 83d Cong. 3, to accompany H. R. 6287):

The fact that many Government purchases of machine tools at the present are for stockpiling purposes makes this amendment essential. By making sales of this type to the Government, the industry is, in effect, destroying the future market for its products because the eventual release of the Government stockpile will serve to satisfy normal demand. Thus, the amendment merely requires recognition of the fact that defense use can be expected to represent only a portion of the useful life of the equipment sold under prime contracts.

1454.23 Application of exemption.-(a) Prime contracts.-The foregoing amended exemption has the effect of making the act applicable to prime contracts for new durable productive equipment only to the extent of that part of the amounts received or accrued in any fiscal year ending on or after June 30, 1953, 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 Bullein F of the Bureau of Internal Revenue (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 prime contracts for new durable productive equipment is set forth in § 1456.4 (a) of this subchapter.

(b) Subcontracts.-With respect to subcontracts for new durable productive equipment, amounts received or accrued in fiscal years ending on or after June 30, 1953, are exempt to the same extent as amounts received or accrued in fiscal years ending before that date. However, with respect to fiscal years ending on or after June 30, 1953, subcontracts under which the purchaser of new durable productive equipment has acquired such equipment for the account of the Government are not excluded from the term "subcontracts for new durable productive equipment", and therefore are within the partial exemption.

1454.24 What constitutes prime contract for new durable productive equipment; in general. A prime contract for new durable productive equipment is a contract with a Department for such equipment. The term includes pool orders and similar commitments.

1454.25 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 § 1452.4 of this subchapter.)

1454.26 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. In order for a prime contract to qualify as a prime contract for new durable productive equipment, it is immaterial whether or not the equipment is incorporated by the Government in another item of such equipment.

1454.27 Prime contracts and subcontracts related to prime contracts for new durable productive equipment.-The extent to which the act applies to receipts or accruals from

prime contracts and 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. Prime contracts and 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 durable productive equipment. The extent to which the act

applies to receipts or accruals from such prime contracts and subcontracts will be determined according to the provisions of § 1456.5 of this subchapter.

1454.28 Limitation on exemption of prime contracts for new durable productive equipment.-Prime contracts for new durable productive equipment are not covered by the exemption set forth in this part when such equipment cannot practicably be adapted, converted or retooled for commercial use. (See § 1456.4 (a) (2) (i) of this subchapter.)

Bec.

1455.2 Prime contracts and subcontracts to be performed outside of the United States. 1455.3 Contracts under which profits can be determined at time contract price is established. 1455.4 Contracts when contractual provisions adequate to prevent excessive profits.

1455.5 Contracts and subcontracts of a secret nature. 1455.6 Subcontracts as to which it is not administratively feasible to segregate profits. 1455.7 Subcontracts related to exempt prime contracts and subcontracts.

1455.8 Renegotiation clause in exempt contracts.

AUTHORITY: Sections 1455.1 to 1455.8 issued under section 109, Pub. Law 9, 82d Cong. Interpret or apply section 106, Pub. Law 9, 82d Cong.

1455.1 Introduction.-Section 106 (d) of the act authorizes the Board in its discretion to exempt from some or all of the provisions of Title I of the act certain prime contracts and subcontracts described therein both individually and by general classes or types. This part sets forth the specific statutory authority to make such permissive exemptions and describes the prime contracts and subcontracts which have been exempted by the Board thereunder.

1455.2 Prime contracts and subcontracts to be performed outside of the United States. (a) Statutory authority.-Section 106 (d) (1) of the act authorizes the Board in its discretion to exempt from some or all of the provisions of Title I of the act the following:

(1) any contract or subcontract to be performed outside of the territorial limits of the continental United States or in Alaska;

(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.

(c-1) Exemption after June 30, 1956.—(1) The Board has exempted from the provisions of the act, with respect to amounts received or accrued after June 30, 1956, all prime contracts and subcontracts wholly performed outside the United States by any person who is not engaged in a trade or business in the United States and is

(i) An individual who is not a national of the United States;

(ii) A partnership or joint venture in which individuals who are not nationals of the United States or corporations which are not domestic corporations are entitled to more than 50 percent of the profits; or

(iii) A corporation (other than a domestic corporation) more than 50 percent of the voting stock of which is owned directly or indirectly by persons described in subdivisions (i) and (ii) of this subparagraph,

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