1942 (56 Stat., 226), as amended, or whether any Government contractor, acting upon his own initiative and desirous of refunding direct to the United States profits he has realized under a Government contract, or a subcontract thereunder, may effect a repayment of such profits in a manner coming within the provisions of section 3806 of the Code, as amended. Section 3806 (a) (1) (A) of the Code provides as follows:

"The term 'renegotiation' includes any transaction which is a renegotiation within the meaning of section 403 of the Sixth Supplemental National Defense Appropriation Act (Public 528, 77th Cong., 2d sess.) or such section, as amended, any modification of one or more contracts with the United States or any agency thereof, and any agreement with the United States or any agency thereof in respect of one or more such contracts or subcontracts thereunder."

It will be noted that the above-quoted provision of the Code includes within the term "renegotiation"— "any modification of one or more contracts with the United States or any agency thereof, and any agreement with the United States or any agency thereof in respect of one or more such contracts or subcontracts thereunder."

It is held that the term "renegotiation," for the purposes of section 3806 of the Internal Revenue Code, as amended, is not limited to a renegotiation within the meaning of section 403 of the Sixth Supplemental National Defense Appropriation Act, 1942, as amended, supra (which section is cited as the Renegotiation Act). It includes an agreement in writing made in respect of one or more Government contracts or subcontracts thereunder, and may be effected by an exchange of correspondence which embodies a binding agreement by both parties as to the amount repaid or to be repaid and the year to which the repayment relates. A Government contractor, acting upon his own initiative and desirous of refunding direct to the United States, profits he has realized under a Government contract, or a subcontract thereunder, should, however, get in touch with the renegotiating agency as to the form of agreement in writing which may be employed.

1499.34 Internal Revenue Service: Rev. Rul. 144.-Section 187: Partnership returns. Advice is requested respecting the effect on a partnership, for Federal income tax purposes, of the death, withdrawal, substitution, or addition of a partner.

As defined in section 3797 (a) (2) of the Internal Revenue Code, the term "partnership" for tax purposes is broader than the term under common law, the Uniform Partnership Act, or individual State laws. Accordingly, the Federal tax consequences of transactions involving partnerships and interests in partnerships will be determined upon the basis of their substance and in accordance with the Federal tax laws without regard to the technical refinements of State laws. (See Commissioner v. Francis E. Tower, 827 U. 8. 280; Ct. D. 1670, C. B. 1946-1, 11, and Heiner v. Mellon, 304 U. 8. 271; Ct. D. 1345, C. B. 1938-1, 349.)

Sections 187 and 188 of the Code, which refers to the “taxable year” of the partnership, recognizes a partnership as a unit for the purpose of filing returns. These sections do not contemplate that a partnership may terminate its taxable year and thus change its accounting period by the mere act of admitting or retiring a partner, nor that the Commissioner may force a change of accounting period under such circumstances.

Accordingly, it is held that a change in the membership of a partnership resulting from the death, withdrawal, substitution, or addition of a partner, or a shift of interests among existing partners does not, in itself, effect a termination of a partnership for Federal income tax purposes. Ordinarily, a partnership will be treated as continuing where the business of the partnership, or a substantial portion thereof, is continued. The returns of a continuing partnership should continue to be filed on the basis of the annual accounting period previously established by the partnership.

1499.35 Internal Revenue Service: Rev. Rul. 54-82.-Section 3806: Mitigation of Effect of Renegotiation of War Contracts or Disallowance of Reimbursement.

INTERNAL REVENUE CODE

The provisions of section 3806 of the Internal Revenue Code will not apply to a subcontractor, who, at the direction of the Government agency that was the issuing office for the prime contract, makes a refund to the prime contractor, unless such payment to the prime contractor is made under circumstances which meet the conditions of that section requiring payment to the United States.

Where the provisions of section 3806 of the Code are applicable to a prime or a subcontractor and the excessive profits, applicable to the prior as well as the current year, are repaid, such repayment of excessive profits to the United States Government shall be allocated to the applicable years in the absence of the application of section 3806 (a) (4) of the Code. In the event that excessive profits have been repaid without benefit of a tax credit, where such credit is allowable under section 3806 (b) of the Oode, the credit shall be treated as an overpayment of tam for the prior taxable year. Such overpayment is considered made at the time the payment, repayment or offset was made, for the purpose of computing interest under section 3771 (b) of the Oode.

Advice is requested as to the application of Rev. Rul. 53, C. B. 1953-1,479, to price redetermination cases under the following sets of circumstances:

(A) A subcontractor to a prime Government contractor, had a subcontract prime redetermination made by the Government agency that was the issuing office for the prime contract, and, at its direction, made a contract price readjustment refund to the prime contractor. A refund was made in 1951, the year in which the applicable subcontract income was accrued. Under the same circumstances a refund

was made in 1952, but such refund to the prime contractor covered subcontract income which was accrued in 1951 and 1952.

(B) The prime contractor had a price redetermina tion made in 1952 and made refund to the Government agency in 1952. Income under the prime contract was accrued in 1951 and 1952. The prime contractor treated such refund, in 1952, as a reduction of sales for such year. No tax credits have been allowed under section 3806 of the Code since the refunds paid were in the amount of the determination.

With respect to (A), above, section 3806 (a) (1) states in part as follows:

In the case of a contract with the United States or any agency thereof, or any subcontract thereunder, which is made by the taxpayer, if a renegotiation is made in respect of such contract or subcontract and an amount of excessive profits for a taxable year is eliminated, and the taxpayer is required to pay or repay to the United States or any agency thereof ***. [Italics supplied.]

Since section 3806 (a) deals only with payments or repayments required to be made to the United States or any agency thereof, payments made directly to a prime contractor by a subcontractor at the direction of the Government agency do not fall within the provisions of section 3806 of the Code or Rev. Rul. 53, supra, unless the payment is made to the prime contractor as an agent of the subcontractor to transmit the payment to the United States and the payment is actually transmitted to the United States by the prime contractor, or unless the payment is made under circumstances which make the prime contractor a trustee of the payment for the benefit of the United States. It is not sufficient, for the purpose of treating such repayments under section 3806 of the Code, that the refund is made to the prime contractor with the understanding that such refund will be taken into consideration when a price redetermination or renegotiation is made in the case of the prime contractor.

With respect to (B), above, since the repayment of excessive profits was made by the prime contractor to the United States Government, the provisions of section 3806 of the Code are applicable to the prime contractor. In the absence of the application of section 3806 (a) (4) of the Code to the case, the excessive profits should be properly allocated between 1951 and 1952 in order to comply with the provisions of section 3806 (a) (3) of the Code which reads:

(3) DEDUCTIONS DISALLOWED.-The amount of paymen, repayment, or offset described in paragraph (1) or paragraph (2) shall not constitute a deduction for the year in which paid or incurred.

If the excessive profits have been repaid without the benefit of a tax credit, where such credit is allow

able under 3806 (b), section 3806 (c) of the Code provides in part as follows:

(c) CREDIT IN LIEU OF OTHER CREDIT OB REFUND.* If the amount allowable as a credit under subsection (b) exceeds the amount allowed under such subsection, the excess shall, for the purposes of the internal revenue laws relating to credit or refund of tax, be treated as an overpayment for the prior taxable year which was made at the time payment, repayment, or offset was made. [Italics supplied.]

Accordingly, the provisions of section 3806 of the Internal Revenue Code will not apply to a subcontractor, who, at the direction of the Government agency that was the issuing office for the prime contract, makes a refund to the prime contractor, unless such payment is actually transmitted in full to the United States by the prime contractor as agent for the subcontractor, or unless the prime contractor becomes a trustee of the payment for the benefit of the United States.

Where the provisions of section 3806 of the Code are applicable to a prime or a subcontractor and the excessive profits, applicable to the prior as well as the current year, are repaid, such repayment of excessive profits to the United States Government shall be allocated to the applicable years in the absence of the application of section 3806 (a) (4) of the Code. In the event that excessive profits have been repaid without benefit of a tax credit, where such credit is allowable under section 3806 (b) of the Code, the credit shall be treated as an overpayment of tax for the prior taxable year. Such overpayment is considered as made at the time the payment, repayment, or offset was made, for the purpose of computing interest under section 3771 (b) of the Code.

1499.50 Delegation by The Renegotiation Board to Regional Boards.

DELEGATION OF AUTHORITY WITH RESPECT TO CERTAIN FUNCTIONS, POWERS AND DUTIES

Pursuant to section 107 (d) and (f) of the Renegotiation Act of 1951:

1. For the purpose of this delegation:

(a) The term "Board" means The Renegotiation Board.

(b) The term "Regional Board" means a Regional Board created by the Board.

2. The Board hereby delegates to each Regional Board the following functions, powers, and duties:

(a) To conduct renegotiation under the Renegotiation Act of 1948 and the Renegotiation Act of 1951 with the contractor or subcontractor in any case which is assigned by the Board to such Regional Board.

(b) To make a determination of excessive profits with respect to any such contractor or subcontractor.

(c) To issue clearances and enter into refund agreements embodying determinations of excessive profits made by such Regional Board in cases designated by the Board as Class A cases, Provided, That the Board in each case has advised the Regional Board that the Board is in accord with such determination.

(d) Subject to such review as may be prescribed by the Board by regulations, to issue clearances, enter into

refund agreements, or issue unilateral orders embodying determinations of excessive profits made by such Regional Board in cases designated by the Board as Class B cases.

3. No function, power or duty herein delegated shall be redelegated.

4. This delegation is subject to revocation or modification in whole or in part at any time.