General Dynamics Corporation and Subsidiaries - Page 1

                                   108 T.C. No. 9                                     

                               UNITED STATES TAX COURT                                

             GENERAL DYNAMICS CORPORATION AND SUBSIDIARIES, Petitioner                
                   v. COMMISSIONER OF INTERNAL REVENUE, Respondent                    
                 GENERAL DYNAMICS FOREIGN SALES CORP., Petitioner v.                  
                    COMMISSIONER OF INTERNAL REVENUE, Respondent                      

               Docket Nos. 19202-94, 19203-94.        Filed March 26, 1997.           

                    P formed wholly owned corporations (one a DISC,                   
               the other an FSC).  P computed and reported its Federal                
               income using the completed contract method.  P elected,                
               under sec. 1.451-3(d)(5)(iii), Income Tax Regs., to                    
               annually deduct certain period costs.  In computing the                
               base (combined taxable income) for the statutorily                     
               conferred tax benefit to promote exports, P did not                    
               account for period costs, which it had elected to                      
               deduct annually in prior years.  R determined that sec.                
               994 and/or 925, I.R.C., and the regulations thereunder,                
               required P to include prior years' period costs that                   
               are attributable to the gross receipts from foreign                    
               exports in computing the base for P's deferral or                      
               exemption from income.                                                 
                    P manufactured specialized ocean-going vessels for                
               the transport of liquefied natural gas.  Sec. 1.993-                   
               3(d)(2)(i)(b), Income Tax Regs., requires that to                      

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