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A “long-term contract” is defined in section 1.451-
3(b)(1)(i), Income Tax Regs., as a building, installation,
construction, or manufacturing contract which is not completed
within the taxable year in which it is entered into. Contract
2038 does not meet that definition. Contract 2038 provided for
services under MSIP, an engineering and development program, viz,
it was in essence a contract for the performance of services.
Petitioner’s argument, in essence, is that Contract 2038 is
incidental to and necessary for performance of Contract 2034.
Petitioner relies on a labyrinth of related regulation sections
involving CCM, section 1.451-3(a)(1), 1.451-3(d)(5)(i) or (6)(i),
1.451-3(d)(5)(iii), 1.451-3(a)(3), and 1.451-3(d)(5), Income Tax
Regs., in support of its position. Petitioner contends that
certain indirect costs and expenses attributable to long-term
contracts, including direct labor costs and direct material costs
that are incidental to and necessary for the performance of a
long-term contract, should be allocated to that contract.
Based on the above regulations, petitioner argues that
respondent has sanctioned petitioner’s position by interpreting
section 1.451-3(d)(5), Income Tax Regs., in a manner that would
permit research expenses that are incidental to and necessary for
the performance of a long-term production contract to be
allocated to and accounted for with a long-term contract.
Petitioner directs our attention to the following language from
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