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incurred in performance of a program year's requirements might
reach the point of total cost absorption. This argument must
also fail because Contract 2034 did not have separate points of
total cost assumption for individual program years. On the
contrary, petitioner faced very significant risks in performing
Contract 2034 because of the sophistication and integration
aspects of the models of the F-16 to be produced. An example of
such a risk was the incident involving the cracks that developed
in the 446 bulkhead.16 In addition, petitioner relied upon
numerous subcontractors, many of whom manufactured complex parts.
It should also be noted that Contract 2034 was the first
multiyear procurement of a major weapons system, and petitioner
bore substantially more risk than it would have borne under four
annual contracts. Petitioner necessarily assumed the risks of
its subcontractors because petitioner would have incurred
significant costs had a subcontractor failed to perform
satisfactorily.
5. Business Purpose
Respondent stipulated that both petitioner and the Air Force
had valid business purposes for entering into a multiyear
contract, as opposed to four separate contracts. There is no
16 Petitioner also cited the example involving Sierracin
Corp., which manufactured many of the transparencies used in the
F-16's produced under Contract 2034. Petitioner went on to note
that this Court found that Sierracin’s Sylmar division was
subject to substantial risk in producing such transparencies.
Sierracin Corp. v. Commissioner, 90 T.C. 341, 348-349 (1988).
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