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F E D E R A L R E G I S T E R , Saturday , July 1, 1939
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 any portion thereof for the Army, is subject to the provisions of the Act re lating to excess profit liability. Any sub contract made with respect to such a contract and involving an amount in ex cess of $10,000 is also within the scope of the Act. I f 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 subcon tract 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 subcon tract and not a subdivision made for the purpose of evading the provisions of the A ct.!
16.3 Contracts or subcontracts for scientific equipment. No excess profit liability is incurred upon a contract or subcontract entered into after the en actment of the Act of April 3, 1939, if at the time or prior to the time such contract or subcontract is made it is designated by the Secretary of W ar as being exempt under the provisions of the Act pertaining to scientific equipment used for communication, target detec tion, 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 W ar and the Secretary of the Treasury or their duly authorized representatives. Except as otherwise provided in the preceding sen tence, 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 treat ment of the cost of such work as a cost of performing a contract or subcontract, see section 16.8 h of these regulations.
As to a refund in case of adjustment due to any subsequently incurred addi tional costs, see section 16.18 of these regulations. I f a contract or subcontract is at any time cancelled or terminated, it is completed at the time of the can cellation or termination.!
16.5 Manner of determining liability.
The first step in the determination of the excess profit to be paid to the United States by a contracting party with re spect to contracts and subcontracts com pleted within an income-taxable year is to ascertain the total contract prices of all contracts and subcontracts completed by the contracting party within the in come-taxable year. As to total contract prices, see section 16.7 of these regula tions.
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The second step is to ascertain the cost of performing such contracts and sub contracts and to deduct such cost from the total contract prices of such contracts and subcontracts as computed in the first step. See section 16.8 of these regula tions.
The amount remaining after such sub traction is the amount of net profit or net loss upon the contracts and subcon tracts completed within the income-tax able 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 sus tained in a prior income-taxable year and allowable as a credit in determining the excess profit for the income-taxable year see section 16.9 of these regulations;
and 3 The amount o f any deficiency in profit sustained in a prior income-tax able year and allowable as a credit in de termining the excess profit for the in come-taxable year see section 16.9 of these regulations.
The amount remaining after such sub traction 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 section 16.10 of these regula tions and then subtract from the amount of such excess profit the amount of credit for Federal income taxes.
The amount remaining after this sub traction 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 provi sions of section 16.5 of these regulations may be illustrated by the following example:
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 second at a cost of $45,000. During the year 1939 the B Corporation sustained a net loss of $2,500 and a deficiency in profit of $1,000 on contracts and subcon tracts entered into after April 3, 1939
and completed within the income-

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taxable year 1939. For purposes of the Federal income tax, the net income of the B Corporation for the year 1940
amounted to $96,000, which included the total net profit of $40,000 upon the two contracts. For the year 1940 the B Cor poration paid a Federal income tax of $13,240 upon its entire net income. The excess profit liability is $6,700 computed as follows:
Total contract prices:
Contract No. 1_____ $200,000
Contract No. 2_____
40,000
--------------- $240,000
Less: Cost of performing contracts :
Contract No. 1_____
155,000
Contract No. 2_____
45,000

200,000

Net profit on contracts_____________

40,000

Less: 12 percent of total contract prices 12 per cent of $240,000______
Net loss from 1939
Deficiency in proft from 1939__________

$28, 800
2, 500
1,000

32,300
7,700

Excess profit fo r year 1940________
Less: Credit fo r Federal income taxes Federal income tax on $7,700 at the rates for 1940___

1,000

Amount of excess profit payable to the United States_________ I ______

6,700

t 16.7 Total contract price. The total contract price of a particular contract or subcontract see section 16.1 of these regulations may be received in money or its equivalent. I f 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. Bo nuses 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 re spect of a contract or subcontract per formed by such party are also to be deducted in determining the true total contract price of such contract or sub contract.!
16.8 Cost of performing a contract or subcontract a General rule. The cost of performing a particular contract or subcontract shall be the sum of 1
the direct costs, including therein ex penditures for materials, direct labor and direct expenses, incurred by the con tracting party in performing the con tract or subcontract; and 2 the proper proportion of any indirect costs includ 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 gen eral, the elements of cost may be defined fo r purposes of the Act as follows: