(2) The risk assumed by the contractor as a result of its pricing policy will be given particular consideration. A contractor, having initial prices calculated to yield a reasonable profit, who revises such initial prices downward periodically when circumstances warrant, will be given more favorable treatment under this factor than a contractor who does not follow such policy. In order that proper consideration may be given, it is suggested that contractors, when making such periodic price revisions, notify the Board of the action taken in this respect.

(3) Consideration of the pricing policy of the contractor frequently involves the question of refunds made before renegotiation under the act. As stated in Part 1462, such refunds may be made as an integral part of the repricing policy of the contractor or as prepayments of excessive profits. In either event, the effect upon the risk assumed by the particular contractor depends entirely upon the facts of each case, including the manner in which the refund is made. For example, a contractor who executes a legally binding agreement to pay the Government a rebate on articles delivered during a particular period of time, has incurred a greater risk than a contractor who gives the Government a nonbinding "statement of intention" or "statement of policy" indicating that it will make refunds, even though the final profit position of the two contractors at the end of the fiscal year is the same. On the other hand, a contractor who makes a refund pursuant to such a "statement of intention" or "statement of policy" may have incurred a greater risk than one who simply makes a refund. Similarly, a contractor who makes a refund near the beginning of its current fiscal year has incurred a greater risk than one who makes a refund near the end of its fiscal year. The effect of the refund must, therefore, be weighed in the light of all pertinent facts.

(b) Comment.-Consideration will be given to the nature and extent of the contractor's contribution to the defense effort through its defense business. Favorable consideration for unusual contributions will be possible only when the contribution is exceptional. Experimental and developmental work of high value to the defense effort and new inventions, techniques, and processes of unusual merit are examples of special contributions. The extent to which a contractor cooperates with the Government and with other contractors in developing and supplying technical assistance to alternative or competitive sources of supply is a factor which will be given favorable consideration and the effect of such sharing of knowledge on such contractor's future business will also be taken into account.

1460.14 Character of business.-(a) Statutory provision.-Section 103 (e) of the act provides that in determining excessive profits there shall be taken into consideration the following factor:

(5) Character of business, including source and nature of materials, complexity of manufacturing technique, character and extent of subcontracting, and rate of turn-over.

(b) Comment.-(1) Consideration will be given to the character of the business of the contractor. The manufacturing contribution will vary with the nature of the product and the degree of skill and precision required in the work performed by the contractor. The relative complexity of the manufacturing technique and the relative integration of the manufacturing process are the basic considerations in evaluating this factor.

(2) A contractor who uses customer-furnished materials generally is not entitled to as large a dollar profit as the dollar profit to which such contractor would have been entitled had it furnished the materials itself. In the latter case, the contractor would have expended effort in finding or acquiring materials, would have invested capital in the materials and would have assumed the risks of obsolescence, spoilage, or other loss inherent in owning such materials. Although the aggregate dollar profit allowed the contractor in the former case should not be as great as it would be if such contractor furnished its own materials, nevertheless the dollar

profit allowed will usually result in a larger percentage of sales than the dollar profit which would have been allowed if the materials had been purchased by the contractor and, therefore, included in its sales and costs.

(3) (i) Defense production needs and the policy of Congress require that subcontracting, particularly to small business concerns, be used to the maximum extent practicable. Although a contractor who subcontracts work may not reasonably expect to be allowed as large a profit thereon as if it had done the work itself, subcontracting of the kind described in this subparagraph, especially the extent to which subcontracts are placed with small business concerns, will be given favorable consideration in the renegotiation of the contractor.

(ii) A contractor will be given favorable treatment when, by subcontracting, it utilizes in the defense effort facilities and services, particularly of small business concerns, which might otherwise have been overlooked or passed by; when it has demonstrated its efficiency and ingenuity in finding appropriate opportunities for subcontracting; when the amount of subcontracting so accomplished is substantial; when the amount or complexity of technical, engineering and other assistance rendered by the contractor to the subcontractor is substantial; and when the price negotiated with the subcontractor is reasonable in view of the character of the components produced.

(iii) The portion of the renegotiable business of the contractor which is subcontracted will be a part of its total sales, and separate consideration must be given in applying to this portion the factors of risks assumed, capital employed, and reasonableness of costs and profits.

(iv) The subcontractor, of course, will receive favorable consideration in renegotiation for the successful employment of its own facilities and production skill.

(4) The rate of turn-over will indicate the use of plant, materials, and net worth. A low rate of turn-over may indicate more complete integration in production or may be related to the type of the product and the nature of the manufacturing process. A high rate of turnover may indicate a relatively smaller manufacturing contribution or, by comparison with other manufacturers of similar products, a relatively greater efficiency.

1460.15 Additional factors.-(a) Statutory provision.-Section 103 (e) of the act provides that in determining excessive profits there shall be taken into consideration the following:

(6) Such other factors the consideration of which the public interest and fair and equitable dealing may require, which factors shall be published in the regulations of the Board from time to time as adopted.

(b) Factors adopted by the Board.—No additional factors have been adopted by the Board to the date of the publication of the regulations in this part.

206

Sec.

Part 1461

1461.1 Collection authority.

1461.2 Recovery of refund pursuant to agreement. 1461.3 Reserved.

1461.4 Withholding as a method of recovery. 1461.5 Administration of determinations by agreement or order.

AUTHORITY: Sections 1461.1 to 1461.5 issued under section 109, Pub. Law 9, 82d Cong. Interpret or apply section 105, Pub. Law 9, 82d Cong.

1461.1 Collection authority.-Section 105 (b) of the act provides in part as follows:

(1) In general.-Upon the making of an agreement, or the entry of an order, * * * determining excessive profits, the Board shall forthwith authorize and direct the Secretaries or any of them to eliminate such excessive profits

(A) by reductions in the amounts otherwise payable to the contractor under contracts with the Departments, or by other revision of their terms;

(B) by withholding from amounts otherwise due to the contractor any amount of such excessive profits;

(C) by directing any person having a contract with any agency of the Government, or any subcontractor thereunder, to withhold for the account of the United States from any amounts otherwise due from such person or such subcontractor to a contractor, or subcontractor, having excessive profits to be eliminated, and every such person or subcontractor receiving such direction shall withhold and pay over to the United States the amounts so required to be withheld;

(D) by recovery from the contractor or subcontractor, or from any person or subcontractor directed under subparagraph (C) to withhold for the account of the United States, through payment, repayment, credit, or suit any amount of such excessive profits realized by the contractor or subcontractor or directed under subparagraph (C) to be withheld for the account of the United States; or

(E) by any combination of these methods, as is deemed desirable.

1461.2 Recovery of refund pursuant to agreement.-(a) In general.-The elimination of excessive profits ordinarily will be effected pursuant to an agreement providing for a refund in renegotiation proceedings with respect to a completed fiscal period. Such refund may be made by the contractor in a single payment or in installments as the agreement may provide.

(b) Interest—(1) In general.—Except as set forth in this paragraph, and in the absence of unusual circumstances, renegotiation agree

ments will not provide for the payment of interest on any refund of excessive profits.

(2) Installment payments.-When a renegotiation agreement provides for a refund of excessive profits in installments, the agreement will require the payment of interest at the rate of 4 per centum per annum upon the amount of any such installment (other than the first installment payable under the agreement) which is provided to be paid more than two years after the close of the fiscal year to which the agreement relates, such interest to accrue and be payable from and after the date which is two years after the last day of the fiscal year to which the agreement relates, or from and after the date on which the first installment is due and payable, whichever is later.

(3) Default.-Pursuant to section 105 (b) (2) of the act, in cases of default, interest at the rate of 4 per centum per annum shall accrue and be paid on any amount due and unpaid under a renegotiation agreement from the date of such default to the date of payment. Such interest shall accrue and be paid whether or not the agreement contains a provision for the payment of interest.

1461.3 Recovery of refund pursuant to unilateral order.-Pursuant to section 105 (b) (2) of the act, interest at the rate of 4 per centum per annum shall accrue and be payable on the amount of excessive profits determined from the thirtieth calendar day after the date of the order of the Board or, in Class B cases (see § 1471.2 (b) of this subchapter), if the Board does not initiate a review of a determination made by a Regional Board, from the thirtieth calendar day after the date that the order embodying such determination is deemed to be the order of the Board pursuant to the provisions of § 1475.3 (b) (3) or (4) of this subchapter, respectively.

tractor thereunder, to withhold for the account of the United States amounts otherwise due from such person or such subcontractor to a prime contractor, or subcontractor, having excessive profits to be eliminated. Excessive profits to be eliminated by such direction shall include the interest thereon, if any, as provided by section 1461.2 (c).

(b) Withholding by any person having a contract with any agency of the Government, or by any subcontractor thereunder, will be effected by such person or such subcontractor upon a direction issued by a Secretary of a Department or pursuant to his authority. No amounts shall be withheld, in accordance with the provisions of this section, by any such person or any such subcontractor other than by authority of a direction issued by, or pursuant to the authority of, a Secretary of a Department. Any amount so withheld by any person or any such subcontractor shall be held by him for the account of the United States and shall be paid only upon a direction issued by or pursuant to the authority of a Secretary of a Department. The act indemnifies each person against all claims on account of amounts so withheld and paid over to the United States.

(c) Action to withhold under prime contracts and subcontracts may be taken upon default in the elimination of excessive profits determined by agreement as well as in cases of determinations of excessive profits made by unilateral order.

(d) Any withholding or recovery under any prime contract with any Department or agency, or related subcontract, when claims under such prime contract or subcontract have been assigned to any bank, trust company, or other financing institution, shall be subject to the applicable provisions of section 105 (b) (5) of the act and also to the applicable provisions of the Assignment of Claims Act of 1940, as amended.

1461.5 Administration of determinations by agreement or order.-(a) The Secretary of each of the Departments is authorized to eliminate, by any of the methods set forth in section 105 (b) of the act, all excessive profits which he is directed by the Board to eliminate.

(b) When an agreement is made, or when the Board makes and enters an order determining excessive profits, or when an order of a Regional Board determining excessive profits is deemed

to be the order of the Board pursuant to the provisions of section 1475.3 (b) (3) or (4) of this subchapter, respectively, the Board will direct the Secretary of one of the Departments to eliminate such excessive profits by any of the methods set forth in section 105 (b) of the act.

(c) Pursuant to each direction referred to in paragraph (b) of this section, in the case of an agreement, the Secretary shall first endeavor to effect the collection of the amount of excessive profits determined by such agreement in accordance with the terms and conditions of the agreement and to secure the performance by the contractor of any other provisions which may be included therein. If the contractor does not pay the full amount of such excessive profits in accordance with the terms and conditions of the agreement, the Secretary may use such of the other methods for the elimination of excessive profits set forth in section 105 (b) of the act as he in his discretion shall deem necessary or appropriate to effect the collection of the amount unpaid. If, however, within the time provided in § 1474.6 of this subchapter, the contractor has made a timely request for an extension of time to pay any amount due and payable under the agreement, the Secretary will not, before such request is acted upon by the Board, use any of such collection methods other than the withholding of such amount, or any part thereof, from amounts otherwise due to the contractor unless the Secretary in his discretion deems the use of any other of such collection methods to be necessary to protect the interests of the Government.

(d) Pursuant to each direction referred to in paragraph (b) of this section, in the case of an order, the Secretary ordinarily shall demand that the full amount of the excessive profits determined by such order to be paid by the contractor not later than the thirtieth calendar day after the date of the order; but when, in the discretion of the Secretary, such procedure shall be considered inadequate to protect the interests of the Government in a particular case, the Secretary shall endeavor to effect the collection of such excessive profits by any of the methods set forth in section 105 (b) of the act as he shall deem necessary or appropriate. The Secretary shall also endeavor to secure the performance by the contractor of any other provisions which may be included in the order.

Sec.

1462.1 Scope of part.

1462.2 Statutory provisions.

1462.3 Renegotiation after filing of Federal tax returns.

1462.4 Determination of Federal tax credit for partnerships and joint ventures.

1462.5 Determination of Federal tax credit for sole proprietor, partnership and joint venture in community property States. 1462.6 Determination of Federal tax credit in the case of a joint return by husband and wife. 1462.7 Renegotiation before filing of Federal tax returns. 1462.8 Special allocations of excessive profits elimination required for Federal tax purposes. AUTHORITY : Sections 1462.1 to 1462.8 issued under section 109, Pub. Law 9, 82d Cong. Interpret or apply section 105, Pub. Law 9, 82d Cong.

1462.1 Scope of part. This part deals with the effect of renegotiation upon a contractor's Federal income tax.

1462.2 Statutory provisions.-(a) Section 105 (b) (8) of the act provides as follows:

In eliminating excessive profits, the Secretary shall allow the contractor or subcontractor credit for Federal income and excess profits taxes as provided in section 3806 of the Internal Revenue Code.

(b) Section 3806 of the Internal Revenue Code requires, as a general rule, that the amount of a contractor's Federal income tax, which has been assessed for the taxable year under renegotiations in respect of excessive profits realized in such year, be allowed as a credit against the total excessive profits to be eliminated. (For the text of sec. 3806 of the Internal Revenue Code, see sec. 1499.30 of this subchapter.)

1462.3 Renegotiation after filing of Federal tax returns.—(a) Allowance of credit for Federal taxes.-(1) The allowance of a credit for Federal taxes is provided by section 3806 of the Internal Revenue Code for the purpose of relieving contractors from double payments of excessive profits to the United States, once in the form of taxes and again as excessive profits, and to avoid the necessity for tax refunds by the Treasury.

(2) When excessive profits are determined for a taxable year for which complete Federal

5-1-53

income tax returns, as distinguished from tentative returns, have been filed, the difference between the amount of Federal income tax assessed in respect of the contractor's income for the period (including the excessive profits) and the amount of Federal income tax which would have been assessed if the excessive profits had been excluded from the returns, is allowed as a credit against the excessive profits determined.

(3) The amount of the credit is based upon the amount of taxes assessed before the credit computation. If the assessment based upon the return filed has not been revised by the Bureau of Internal Revenue, the credit is computed upon the basis of such assessment. If such assessment has been revied, the credit is computed upon the basis of the revised assessment.

(4) Adjustments of a contractor's returns to reflect the reduction of taxable gross and net income and the amount of tax are made by the Bureau of Internal Revenue after tax credits have been allowed. Any subsequent changes in the contractor's net income or tax liabilities are based upon these adjusted figures. Amended returns are not to be filed.

(5) The effect of this credit provision is to require precisely the same aggregate amount of payments to the Government (as taxes and excessive profits) when renegotiation occurs after the filing of Federal tax returns, as would have been required if the gross amount of the excessive profits had been repaid to the Government before the filing of the Federal tax returns and no Federal taxes had been assessed.

(b) Computation of credit for Federal taxes. (1) The Bureau of Internal Revenue computes the credit allowable under section 3806 of the Internal Revenue Code for Federal income taxes assessed for a prior taxable year. The contractor shall submit a written request for such computation directly to the Director of Internal Revenue where the contractor filed its tax returns for the taxable year involved. Such request shall state that such tax returns include as income the amount with respect to which a tax credit is claimed.

(2) If the original or any amended returns

241