for the taxable year involved have been filed less than one year before the request for tax credit computation is made, a photostatic or certified copy of each such return shall be submitted with such request to the Director of Internal Revenue. There shall be attached to each such return a statement, signed by the taxpayer or by a responsible official of the taxpayer, certifying that the copy so submitted is a true and complete copy of the return as signed, except (if such is the case) that schedules not pertinent to the tax credit computation are omitted.

(3) The contractor shall mail to the Board a copy of each request made to the Director of Internal Revenue. Copies of tax returns will not be enclosed with copies of requests so mailed to the Board.

1462.4 Determination of Federal Federal tax credit for partnerships and joint ventures.(a) Since a partnership files only an information return and the Federal tax is imposed on the individual income of the partners, the tax credit to which a partnership is entitled under section 3806 for the taxable year under renegotiation is the aggregate amount of the separate credits to which the individual partners are entitled, because their shares of the partnership's income are reduced by the elimination of the excessive partnership profit. A request for a credit computation shall be made for each part

ner.

(b) For example, if A and B are partners with 60 percent and 40 percent interests, respectively, and the partnership has realized excessive profits of $1,000,000 for a prior taxable year, the elimination of $1,000,000 excessive profits of the partnership will reduce the taxable income of A for the year by $600,000 and that of B by $400,000. Upon request for a determination of credit under section 3806, the Director of Internal Revenue will determine the amount by which the elimination of those excessive profits would reduce the individual income taxes of A and B for the year. The aggregate amount of such reductions in the individual Federal income taxes of A and B will represent the credit to be allowed, under section 3806, against the partnership's obligation to refund excessive profits of $1,000,000.

1462.5 Determination of Federal tax credit for sole proprietor, partnership and

joint venture in community property States. If a portion of the excessive profits received or accrued by a sole proprietor, partner, or joint venturer in any taxable year was included in the Federal income tax return of his or her spouse, by virtue of the community property laws of the State in which they were domiciled during such year, the tax credit allowed under section 3806 will include the amount, as determined by the Director of Internal Revenue, by which the tax of the spouse is decreased by the elimination of the excessive profits. In such cases, both the husband and the wife shall submit to the Director of Internal Revenue a written request for a determination of tax credit.

1462.6 Determination of Federal tax credit in the case of a joint return by husband and wife. If all or a portion of the excessive profits received or accrued by a sole proprietor, partner, or joint venturer was included in a Federal income tax return made jointly with his or her spouse and the tax is computed with respect thereto under section 12(d) of the Internal Revenue Code, the tax credit allowed under section 3806 will be the amount, as determined by the Director of Internal Revenue, by which the tax of the spouses under the joint return is reduced by reason of the elimination of the excessive profits. In such cases, both spouses shall submit to the Director of Internal Revenue a written request for a determination of tax credit.

1462.7 Renegotiation before filing of Federal tax returns.-(a) Exclusion of excessive profits from returns.-(1) When, as a result of renegotiation, the amount of excessive profits is determined for a period for which Federal income tax returns have not yet been filed, such amount of excessive profits may be excluded from the contractor's income tax returns for the period.

(2) The amount of excessive profits eliminated for a particular taxable year may not be deducted or excluded from taxable income for any other taxable year.

(3) For the tax effect of renegotiation for periods for which Federal income tax returns have not been filed, see I. T. 3577, I. T. 3611 and I. T. 3671 (secs. 1499.31 to 1499.33 of this subchapter).

(b) Effect of tentative tax return.-When a contractor has filed a tentative return for the year involved and has been granted an extension of time for filing its completed return, the provisions of I.T. 3577, I.T. 3611 and I.T. 3671 as noted in paragraph (a) (3) of this section will apply if the renegotiation takes place before the filing of the complete return.

1462.8 Special allocations of excessive profits elimination required for Federal tax purposes. (a) When the contractor has reported earnings for Federal tax purposes on a basis different from the basis upon which renegotiation is conducted, the excessive profits to be eliminated will, for purposes of computing the allowable tax credit under section 3806 of the Internal Revenue Code, be allocated to the contractor's taxable year or years in which the Board determines that such excessive profits were reported as income in the tax returns. This procedure is applicable, for example, when renegotiation has been conducted on a completed contract basis although the contractor

has used some other method of accounting for Federal tax purposes in reporting income from some or all of the contracts covered by the renegotiation.

(b) When renegotiation is conducted on a consolidated basis, excessive profits to be eliminated will be allocated between the entities so consolidated. (See sec. 1464.8 of this subchapter.)

(c) The allocation of excessive profits will be made by the Board and not by the contractor. The contractor may, however, furnish or be required to furnish such supplementary information in explanation of the sources of taxable income reported for any year as may be pertinent to such allocation.

(d) Allocations of excessive profits to be eliminated under paragraphs (a) and (b) of this section will be set forth in the renegotiation agreement or in the unilateral order determining excessive profits and shall also be set forth in any request to a Director of Internal Revenue for tax credit computation.

Sec.

1463.1

Introduction.

1463.2 What constitutes interim prepayment of ex

cessive profits.

1463.3 Procedure for acceptance of interim prepayment of excessive profits.

1463.4 Treatment of interim prepayments for Federal income tax purposes.

FORMS

1463.90 Letter agreement transmitting interim prepayment of excessive profits before close of fiscal year.

1463.91

Letter agreement providing for prepayment of excessive profits after close of fiscal year. 1463.92 Letter agreement for voluntary prepayment of excessive profits likely to be received or accrued.

AUTHORITY: Sections 1463.1 to 1463.92 issued under section 109, Pub. Law 9, 82d Cong. Interpret or apply section 105, Pub. Law 9, 82d Cong.

1463.1 Introduction.-Excessive profits are determined under the act only pursuant to a renegotiation proceeding commenced and conducted in the manner prescribed by the regulations in this subchapter. Profits refunded before renegotiation will be deemed to be excessive profits determined within the meaning of the act only if such refund is made in the manner prescribed in section 1463.3 as an interim prepayment of excessive profits to be determined by the Board in a subsequent renegotiation and only to the extent that the amount of such prepayment is determined in such renegotiation to constitute excessive profits within the meaning of the act. It is the purpose of this part to set forth: (a) The circumstances under which the Board will agree that such prepayments will be accepted as interim prepayments of excessive profits; and (b) the method by which such interim prepayments may be made. Reference is made to section 1460.12 (b) (3) of this subchapter for a discussion of the effect of refunds made before renegotiation upon the statutory factor of risk.

1463.2 What constitutes interim prepayment of excessive profits.—(a) Repricing of specific contracts.-In any case in which a specific prime contract or subcontract is amended

to reduce the price charged, no refund paid as a result of such amendment will be treated as a payment or prepayment of excessive profits.

(b) Voluntary refunds.-A prime contractor or subcontractor may wish to refund a portion of its profits to the Government before renegotiation without making any prior binding agreement or prior non-binding statement of policy to make such refunds. Such a refund will, subject to the conditions set forth in section 1463.3 be accepted as an interim prepayment of excessive profits.

(c) Voluntary refunds of excessive profits likely to be received or accrued.-A prime contractor or subcontractor may wish to enter into an agreement with the Board to pay a portion of its profits from renegotiable business to eliminate excessive profits likely to be received or accrued. Such prepayments will, subject to the conditions set forth in section 1463.3, be accepted as interim prepayments of excessive profits likely to be received or accrued.

1463.3 Procedure for acceptance of interim prepayment of excessive profits.-A refund made under the circumstances set forth in section 1463.2 (b) will be accepted subject to the following conditions:

(a) Each prepayment shall be made pursuant to a letter agreement in the form prescribed as follows:

(1) If the refund is made before the close of the fiscal year to which it relates, a letter agreement in the form set forth in section 1463.90 shall be used.

(2) If the refund is made after the close of the fiscal year to which it relates, but before the Federal tax return for such year has been filed, a letter agreement in the form set forth in section 1463.90 shall be used, except that the word "ending" appearing in the first sentence of such form shall be changed to "ended".

(3) If the refund is made after the Federal tax return has been filed for the fiscal year to which the refund relates, a letter agreement in the form set forth in section 1463.91 shall be used. In this latter case, it will be necessary

261

for the contractor to request a tax credit under section 3806 of the Internal Revenue Code.

(4) If the contractor desires to pay excessive profits likely to be received or accrued, it may enter into a letter agreement in the form set forth in section 1463.92, or in such other form as the Board and the contractor may agree upon.

(b) If the contractor who makes a prepayment is thereafter renegotiated for the particular fiscal year and excessive profits are determined, the prepayment will be included in the renegotiable receipts or accruals; excessive profits, if any, will be determined upon such basis, and the prepayment will be applied in elimination of the excessive profits so determined.

(c) If the contractor, for any reason, is not renegotiated for the particular fiscal year, the prepayment will not be refunded to the contractor, but such prepayment will not be deemed to be excessive profits determined within the meaning of the act.

(d) If the contractor is renegotiated for the particular fiscal year but if the amount of excessive profits determined is less than the prepayment, such prepayment will be applied in elimination of the excessive profits determined, but the excess of such prepayment over the amount of excessive profits determined will not be deemed to be excessive profits determined within the meaning of the act. However, such excess will not be refunded to the contractor. 1463.4 Treatment of interim prepayment for Federal income tax purposes.-Any prepayment, if made pursuant to the letter agreement set forth in section 1463.90 or section 1463.91 or section 1463.92, is intended to constitute an elimination of excessive profits within the meaning of section 3806 of the Internal Revenue Code, and is to be treated as a reduction of taxable income for the year to which the prepayment relates. This is true whether or not, under section 1463.3, the prepayment is ultimately deemed to be excessive profits determined within the meaning of the

act.

FORMS

1463.90 Letter agreement transmitting interim prepayment of excessive profits before close of fiscal year.

THE RENEGOTIATION BOARD,

(Date)

Washington 25, D.C.

GENTLEMEN: There is herewith (or has been) transmitted to you a check, payable to the Treasurer of the United States, in the amount of $ ------, representing profits received or accrued in our fiscal year ending (hereinafter referred to as "such fiscal year") derived from prime contracts and/or subcontracts subject to the provisions of the Renegotiation Act of 1951.

This prepayment is made on the understanding (1) that such amount shall be deemed to be a payment in elimination of "excessive profits" within the meaning of such term as defined in section 3806 of the Internal Revenue Code; and (2) that such amount will not be included in income in the computation of taxable income for such fiscal year under the Internal Revenue Code and, accordingly, no tax credit is allowable against such amount. The undersigned represents that this payment is not made in satisfaction or discharge, in whole or in part, of any legally binding obligation heretofore existing.

It is agreed that acceptance of this prepayment does not constitute a commencement of renegotiation pursuant to the Renegotiation Act of 1951 and that, except as provided herein, renegotiation may be conducted in all respects as though this prepayment had not been made. It is further agreed that if renegotiation pursuant to the Renegotiation Act of 1951 shall hereafter be concluded with respect to such fiscal year, (1) the amount of this prepayment will, for the purpose of such renegotiation, be included in renegotiable receipts or accruals, (2) upon such basis, excessive profits, if any, will be determined under the Renegotiation Act of 1951 and the regulations promulgated thereunder and (3) upon such determination of excessive profits, the prepayment will be applied in elimination of the excessive profits so determined, and, to the extent so applied, this prepayment will be deemed to be excessive profits determined within the meaning of the Renegotiation Act of 1951. It is intended that, if any amount of excessive profits so determined is less than the amount of this prepayment, or if for any reason renegotiation pursuant to the Renegotiation Act of 1951 shall not be concluded with respect to such fiscal year, then the excess of the prepayment or the full amount thereof, as the case may be, shall constitute a payment in elimination of "excessive profits" as such term is defined in section 3806 of the Internal Revenue Code even though not constituting an elimination of excessive profits determined within the meaning of the Renegotiation Act of 1951.

It is further agreed that no part of this prepayment shall be refunded to the undersigned, provided, however, that if this prepayment, or a portion thereof, shall be deemed to be excessive profits determined within the meaning of the Renegotiation Act of 1951,