- 39 -
agreement, and such other factors as customary
commercial practice, the dealings between parties to
the contract, the nature of the subject matter of the
contract, the total number of units to be constructed,
manufactured, or installed under the contract, and the
contemplated time between the completion of each unit.
[Sec. 1.451-3(e)(1)(ii), Income Tax Regs.]
“[S]eparate delivery or separate acceptance of portions
* * * [of long-term contract items] does not necessarily require
severing”. Sec. 1.451-3(e)(1)(iii), Income Tax Regs.
Section 1.451-3(e)(1)(iv), Income Tax Regs., explains the
role of differing price arrangements:
One agreement may be severed, or several agreements may
be aggregated, based upon the pricing formula of such
agreements. For example, in the case of a multi-unit
agreement for several similar items, if the price to be
paid for similar units is determined under different
terms or formulas (for example, if some units are
priced under a cost-plus incentive fee arrangement, and
later units are to be priced under a fixed-price
arrangement), then the difference in the pricing terms
or formulas may indicate that the agreement should be
treated as several contracts.
Section 1.451-3(e)(1)(v), Income Tax Regs., provides:
An agreement generally will be treated as several
contracts where there is no business purpose for
entering into one agreement rather than several
agreements. A factor which may evidence that no such
business purpose exists is that the agreement covers
two or more subject matters, none of which readily can
be determined to be the primary subject matter of the
contract * * * ; such factor must be considered along
with other factors indicating the presence or absence
of business purpose.
Finally, section 1.451-3(e)(1)(viii), Income Tax Regs.
provides:
If the number of items to be supplied is increased (as
by the exercise of an option or the issuance of a
Page: Previous 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 NextLast modified: May 25, 2011