General Dynamics Corporation and Subsidiaries - Page 19

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                    (i) Subject to subdivisions (ii) through (v) of                   
               this subparagraph, the taxpayer's method of accounting                 
               used in computing taxable income will be accepted for                  
               purposes of determining amounts and the taxable year                   
               for which items of income and expense (including                       
               depreciation) are taken into account.  * * *                           
                    (ii) Costs of goods sold shall be determined in                   
               accordance with the provisions of section 1.61-3                       
               [Income Tax Regs.].  See sections 471 and 472 and the                  
               regulations thereunder with respect to inventories.                    
               * * *                                                                  
                    (iii) Costs (other than cost of goods sold) which                 
               shall be treated as relating to gross receipts from                    
               sales of export property are (a) the expenses, losses,                 
               and other deductions definitely related, and therefore                 
               allocated and apportioned, thereto, and (b) a ratable                  
               part of any other expenses, losses, or other deductions                
               which are not definitely related to a class of gross                   
               income, determined in a manner consistent with the                     
               rules set forth in section 1.861-8 [Income Tax Regs.].                 
          See sec. 1.925(a)-1T(c)(6)(iii), Temporary Income Tax Regs., 52             
          Fed. Reg. 6446 (Mar. 3, 1987).                                              
               3.  Application of Regulations by the Parties                          
               Petitioners contend that subdivision (i) of the regulation             
          requires the computation of CTI in accordance with the method               
          they use to account for domestic taxable income.  Section 1.451-            
          3(d)(5)(iii), Income Tax Regs., permits a variation from the                
          completed contract method for electing taxpayers to currently               
          deduct period costs even though the related income is not                   
          reportable until a later taxable year when the contract is                  
          completed.  Due to their election to currently deduct period                
          costs, petitioners argue that, in the year of contract                      
          completion, they should not be required to reduce foreign gross             

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