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in section 994 because that method yielded the largest
commission. On certain rare occasions, the 4-percent gross
receipts method of section 994 was utilized.
Petitioners computed combined taxable income for each long-
term contract under the 50-percent method, as follows:
(a) Add: gross receipts from the contract as determined
under the completed contract method of accounting;
(b) Less: direct costs allocated to the contract under
section 1.451-3(d)(5)(i), Income Tax Regs.;
(c) Less: indirect costs allocated to the contract under
section 1.451-3(d)(5)(ii), Income Tax Regs.;
(d) Less: period costs incurred in the year of completion
allocated to the contract under section 1.451-3(d)(5)(iii),
Income Tax Regs.
In computing combined taxable income, petitioners did not
make a reduction for period costs, as defined in section 1.451-
3(d)(5)(iii), Income Tax Regs., incurred and allocated to the
contract prior to the year of contract completion. Respondent
determined that petitioners incorrectly computed combined taxable
income under the 50-percent method. In particular, respondent
determined that petitioners were required to aggregate and
deduct, in the year of completion of each long-term contract, all
period costs allocated to the contract, including those deducted
for prior years.
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