General Dynamics Corporation and Subsidiaries - Page 6

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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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