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G.C.M. 39803 (Nov. 16, 1989) (citing section 1.451-3(d)(9)(x)(E),
Income Tax Regs.):
Income and expenses attributable to * * * services
that directly benefit or are performed by reason of a
taxpayer's long-term contract should be accounted for
as part of the long-term contract that is benefited
and, thus, should be accounted for under taxpayer's
method of accounting for the subject matter of the
long-term contract.
* * * * * * *
engineering and design costs that are incidental to and
necessary for the performance of non-extended period
long-term contracts are allocable contract costs.
Respondent counters that section 1.451-3(d)(9), Income Tax
Regs., concerns “extended period long-term contracts” and that
neither Contract 2034 nor Contract 2038 fits within that
category. Respondent also notes that the contracts would have
qualified as extended period long-term contracts under another
regulation section, but the referenced section is applicable for
long-term contracts entered into after December 31, 1982, so that
Contracts 2034 and 2038 do not qualify. See sec. 1.451-3(g)(1),
1.451-3(d)(6), Income Tax Regs. Next, respondent points out that
section 1.451-3(d)(9), Income Tax Regs., is limited in
application to those contracts to which section 1.451-3(d)(6),
Income Tax Regs., applies. Finally, respondent admits that after
all of the above analysis there is an exception provided for in
section 1.451-3(d)(9)(x)(E), Income Tax Regs., which section is
applicable to all long-term contracts. Respondent, however,
contends that section 1.451-3(d)(9)(x)(E), Income Tax Regs.,
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