- 8 -
'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
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 Next
Last modified: May 25, 2011