John M. Cameron and Caroline D. Cameron, and John P. and Teena G. Broadaway - Page 8

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          'correcting' the 'C' corporation earnings and profits if the                
          figures as of the date of the conversion were inaccurate."                  
               Petitioners' contention that retroactive adjustments are               
          necessary if earnings and profits are to perform their intended             
          function would be more persuasive if no other means of correcting           
          inaccuracies in the accrual of long term contract revenue under             
          the percentage of completion method were available.  That is not            
          the case, however.  The percentage of completion method has a               
          built-in mechanism for correcting mistaken estimates; it differs            
          from the mechanism that petitioners propose.  See Herwitz,                  
          "Accounting for Long-term Construction Contracts:  A Lawyer's               
          Approach", 70 Harv. L. Rev. 449, 465 & n.49 (1957); H. Rept. 99-            
          426, at 630 (1986), 1986-3 C.B. (Vol. 2) 1, 630.  For each year,            
          the cumulative amount of contract revenue that has already been             
          reported in prior years is subtracted from the cumulative amount            
          of contract revenue that is otherwise reportable as of the close            
          of the current year.  If in year 1 the taxpayer reports too much            
          revenue and overstates earnings and profits as a result of                  
          underestimating the amount of its costs to complete contracts in            
          progress, there will be correspondingly less revenue that remains           
          to be reported for those contracts in succeeding years.  The                
          overstatement of earnings and profits in the earlier year may               
          cause shareholders to report a larger amount of any distribution            
          in that year as a dividend.  But the lower revenues and higher              
          costs generated in completion of the contracts will reduce                  




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