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One significant foundation of respondent’s argument on brief
is the premise that “the total number of F-16 aircraft and
support equipment to be manufactured and delivered by petitioner
under the contract was increased in annual increments by
unilateral contract modifications”. This argument assumes that
the contract modifications under which annual funding was added
were “change orders” within the meaning of section 1.451-
3(e)(1)(viii), Income Tax Regs. Respondent's position is
weakened by the fact that any change to a Government contract,
without regard to its magnitude, required a contract
modification. The act of modification, by itself, has no
particular meaning and does not automatically place a long-term
contract within the influence of section 1.451-3(e)(1)(viii),
Income Tax Regs. That section is more dependent upon whether
each such addition increased the obligation for the number of
aircraft ordered under the long-term contract.
Respondent also argues that the Air Force's rights under
terms of a multiyear contract most closely resemble those of a
priced option to acquire additional units. The evidence does not
support respondent's contention that Contract 2034 was, in
effect, a series of option contracts. The parties to Contract
2034 did not intend to enter into an option contract. The cost
benefits sought and obtained by the Air Force and petitioner
under Contract 2034, in part, resulted from interdependent
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