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petitioner would not have been able to determine its profits by
aircraft or for a particular program year.
The parties argue about the relevance of Example (2) under
section 1.451-3(e)(2), Income Tax Regs. Respondent focuses on
the fact that the submarine contractor was willing to enter into
a contract to build one submarine for a minimal profit because a
second submarine would produce substantial profit. Respondent
contends that Example (2) contains a situation where the price is
truly dependent, whereas the price in Contract 2034, at least
initially, was not. Respondent’s contention is factually flawed
because the ultimate price for the 480 aircraft was
interdependent, and petitioner did not agree to a fixed price for
the first year only and/or subsequently negotiate a price for
later program years under Contract 2034.
Petitioner also counters that respondent's argument is
dependent on “average pricing” and that there is no mention in
Example (2) of “average pricing”. Petitioner instead construes
the key facts in Example (2) as being: “These agreements are the
product of a single negotiation” and that “A reasonable business
person would not have entered into the agreement to construct the
first submarine for the price specified without entering into the
agreement to construct the second submarine.” Following through,
petitioner contends that all 480 aircraft were priced in one
single negotiation, which resulted in one pricing formula for all
480 aircraft. No reasonable person would have agreed to build
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