- 41 -
without entering into the contract to construct the second
submarine. In those circumstances, Example (2) contains the
conclusion that it may be necessary for the Commissioner to
aggregate the two agreements for purposes of applying the
long-term contract method.
Example (3) is a variation of Example (2), where 1 year
after the original contracts are signed the customer issues a
“change order” providing for a third submarine of the same class
to be constructed. The portion of the total contract price
attributable to the “change order” can reasonably be determined,
and a reasonable business person would have entered into the
agreements to construct the first two submarines for the price
specified without regard to whether a third submarine was added.
Under Example (3) the “change order” for the third submarine
is to be treated as a separate contract for purposes of applying
the shipbuilder's CCM. Example (3) also focuses on the
independent pricing factor for its conclusion.
Example (6) emphasizes the importance of independent
pricing, as follows:
T, a calendar year taxpayer engaged in the business of
manufacturing aircraft and related equipment, enters
into an agreement in 1982 with the B government to
manufacture 10 military aircraft for delivery in 1984.
It is anticipated at the time the agreement is entered
into that B may enter into an agreement with T for the
production and sale of as many as 300 of these aircraft
over the next 20 years. In negotiating the price for
the agreement, B and T take into account the expected
total cost of manufacturing the 10 aircraft, the risks
and the opportunities associated with the agreement and
Page: Previous 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 NextLast modified: May 25, 2011