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it would be difficult to sever a contract if profit for the
severed period was not determinable with reasonable certainty.
The annualized amounts of income respondent determined in
the notice of deficiency are based on or in reference to the
projected profit for each program year reflected in the Contract
Cost and Profit Summaries (CCPS’s) prepared by petitioner on
December 31, 1984, 1985, and 1986, respectively. CCPS’s were not
used to determine petitioner’s profit with respect to Contract
2034, either for tax or for financial accounting purposes.12
CCPS’s were derived from, and contained essentially the same
information as, the Cost Performance Reports (CPR’s) required to
be provided to the Air Force. The Air Force used the CPR’s as
program management tools, not as accounting reports. There was
testimony to the effect that the CPR’s could not be used as cost
pricing data for negotiating subsequent contracts because the
CPR’s were not sufficiently accurate to be certified under the
Truth in Negotiations Act, Pub. L. 87-653, 76 Stat. 528 (1962).
Significantly, all progress payments made under Contract 2034
12 Petitioner used the percentage completion method for
financial accounting purposes. Under that method, the gross
income recognizable from long-term contracts is that proportion
which corresponds to the percentage of the total contract
completed during the taxable period. Accordingly, petitioner’s
financial income reported on the percentage completion method
would not comport with an annualized version of CCM, as
determined by respondent. As previously noted, the percentage
completion method is mandatory for petitioner’s reporting of its
long-term contracts entered into after the 1986 tax year. During
the years under consideration, however, respondent concedes that
petitioner is entitled to use CCM.
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