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payable to the taxpayer after a specified period of
successful performance, the incentive fee is includible
in the total contract price at the time and to the
extent that it can reasonably be predicted that the
performance objectives will be met, for purposes of
both the percentage of completion method and the look-
back method. Similarly, a portion of the contract
price that is in dispute is included in the total
contract price at the time and to the extent that the
taxpayer can reasonably expect the dispute will be
resolved in the taxpayer’s favor (without regard to
when the taxpayer receives payment for the amount in
dispute or when the dispute is finally resolved).
Sec. 1.460-6(c)(2)(vi)(A) and (B), Income Tax Regs. Thus, under
the regulation, the total contract price used in the percentage
of completion calculation includes any amounts attributable to
contingent rights or obligations.
Petitioner argues that (i) the regulation does not implement
the congressional mandate as required under applicable law; (ii)
the regulation attempts to “repeal”, without clear and explicit
congressional support, the all events test, which has been
recognized as a fundamental tax principle; (iii) respondent
attempts to usurp Congress and supersede the look-back method by
issuance of the regulation to address timing differences; and
(iv) the regulation is not reasonable in view of prior law and
usage and is not reasonable in application.3 Respondent argues
that it is reasonable to require a taxpayer to estimate the total
contract price of a long-term contract and, thus, to include a
3 Petitioner is not arguing that income arising out of
contingencies and disputes be excluded from the look-back method.
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Last modified: May 25, 2011