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The parties approach the independent pricing factor from
differing perspectives. Respondent emphasizes that Contract 2034
is funded on an annual basis and is more like an annual option
contract. Respondent also points out that the number of aircraft
under Contract 2034 was, at some point, increased beyond the
original 480. Respondent contends that these attributes make
Contract 2034 more like the option-type agreement referenced in
section 1.451-3(e)(1)(viii), Income Tax Regs., which, in relevant
part, provides:
If the number of items to be supplied is increased (as
by the exercise of an option or the issuance of a
“change order”), the supplying of such additional items
generally results in the agreement being changed into
several agreements. See � 1.451-3(e)(1)(i).
The cross-reference indicates that subdivision (viii) is to be
interpreted consistent with the facts and circumstances test of
section 1.451-3(e)(1)(ii), Income Tax Regs.
Petitioner contends that Contract 2034 was a fixed-price
incentive contract with a single pricing formula for the 480
aircraft in question. Petitioner points out that the final price
could not have been determined until after the 480th aircraft was
delivered. Petitioner faced significant and continuing risks
during the performance of Contract 2034 that could have increased
its costs and affected the projected profit of already delivered
aircraft. As the delivery of the last or 480th aircraft
approached, however, the potential risk and the likelihood of
such an occurrence were reduced. As production and delivery of
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