General Dynamics Corporation and Subsidiaries - Page 13

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               The issues under consideration arise in connection with                
          GENDYN and its foreign sales corporations.  One issue concerns              
          the manner in which petitioners compute the amount of commission            
          income that may be deferred or excluded under the foreign sales             
          corporation statutes and regulations.  That issue is one of first           
          impression, involving the interpretation of certain statutes and            
          regulations.  The other issue concerns whether either of two                
          ships is export property under section 993(c)(1) so as to enable            
          petitioners to include it in the computation of commission income           
          under the foreign sales corporation statutes and regulations.  We           
          first consider the former issue.                                            

          I.  Petitioners’ Treatment of Period Costs in Computing Combined            
          Taxable Income                                                              
               Petitioners were on the completed contract method of                   
          accounting for long-term contracts for Federal income tax                   
          purposes.  In the process of computing corporate Federal income             
          tax under the completed contract method, GENDYN, under section              
          1.451-3(d)(5)(iii), Income Tax Regs., elected to expense rather             
          than capitalize certain period expenses.  Normally, under the               
          completed contract method, the income and expenses connected with           
          long-term contracts are not reported or claimed until the                   
          completion of the contract.                                                 
               In computing the allowable amount of deferral or exclusion             
          of DISC or FSC commission income, petitioners did not include the           
          period costs that were deducted in prior years' domestic Federal            

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