(b) After the date of approval of this Act no contract shall be made for the construction or manufacture of any complete naval vessel or any Army or Navy aircraft, or any portion thereof, under the provisions of this section or otherwise, unless the contractor agrees, for the purposes of section 3 of the Act of March 27, 1934 (48 Stat. 505; 34 U. S. C. 496), as amended

(1) to pay into the Treasury profit in excess of 8 per centum (in lieu of the 10 per centum and 12 per centum specified in such section 3) of the total contract prices of such contracts within the scope of this subsection as are completed by the particular contracting party within the income taxable year;

(2) that any profit in excess of 8.7 per centum of the cost of performing such contracts except prime contracts made on a cost-plus-a-fixed-fee basis as are completed by the contracting party within the income taxable year shall be considered to be profit in excess of 8 per centum of the total contract prices of such contracts; and

(3) that he will make no subcontract which is within the scope of such section 3, unless the subcontractor agrees to the foregoing conditions.

(b) Section 14 of the act entitled "AN ACT To provide more effectively for the national defense by carrying out the recommendations of the President in his message of January 12, 1939, to the Congress," approved April 3, 1939, 53 Stat. 560 (10 U. S. C., Sup., 311), reads in part as follows:

SEC. 14. All the provisions of section 3 of the Act of March 27, 1934, as amended (48 Stat. 505; 49 Stat. 1926), and as amended by this section shall be applicable with respect to contracts for aircraft or any portion thereof for the Army to the same extent and in the same manner that such provisons are applicable with respect to contracts for aircraft, or any portion thereof for the Navy: Provided, That the Secretary of War shall exercise all functions under such section with respect to aircraft for the Army which are exercised by the Secretary of the Navy with respect to aircraft for the Navy * *

(c) Section 3 of the act entitled "AN ACT To establish the composition of the United States Navy with respect to the categories of vessels limited by the treaties signed at Washington, February 6, 1922, and at London, April 22, 1930, at the limits prescribed by those treaties; to authorize the construction of certain naval vessels; and for other purposes," approved March 27, 1934, 48 Stat. 505 (34 U. S. C. 496), as amended by the act of June 25, 1936, 49 Stat. 1926 (34 U. S. C., Sup., 496) and as further amended by section 14 of the act of April 3, 1939, 53 Stat. 560 (34 U. S. C., Sup., 496), reads as follows:

SEC. 3. The Secretary of the Navy is hereby directed to submit annually to the Bureau of the Budget estimates for the construction of the foregoing vessels and aircraft; and there is hereby authorized to be appropriated such sums as may be necessary to carry into effect the provisions of this Act: Provided, That no contract shall be made by the Secretary of the Navy for the construction and/or manufacture of any complete naval vessel or aircraft, or any portion thereof, herein, heretofore, or hereafter authorized unless the contractor agrees―

(a) To make a report, as hereinafter described, under oath, to the Secretary of the Navy upon the completion of the contract.

(b) To pay into the Treasury profit, as hereinafter provided shall be determined by the Treasury Department, in excess of 10 per centum of the total contract prices for the construction and/or manufacture of any complete naval

vessel or portion thereof, and in excess of 12 per centum of the total contract prices for the construction and/or manufacture of any complete aircraft or portion thereof, of such contracts within the scope of this section as are completed by the particular contracting party within the income taxable year, such amount to become the property of the United States, but the surety under such contracts shall not be liable for the payment of such excess profit: Provided, That if there is a net loss on all such contracts or subcontracts for the construction and/or manufacture of any complete naval vessel or portion thereof completed by the particular contractor or subcontractor within any income taxable year, such net loss shall be allowed as a credit in determining the excess profit, if any, for the next succeeding income taxable year, and that if there is a net loss, or a net profit less than 12 per centum, as aforesaid on all such contracts or subcontracts for the construction and/or manufacture of any complete aircraft or portion thereof completed by the particular contractor or subcontractor within any income taxable year, such net loss or deficiency in profit shall be allowed as a credit in determining the excess profit, if any, during the next succeeding four income taxable years, and that the method of ascertaining the amount of excess profit, initially fixed upon shall be determined on or before June 30, 1939: Provided further, That if such amount is not voluntarily paid the Secretary of the Treasury shall collect the same under the usual methods employed under the internal-revenue laws to collect Federal income taxes: Provided further, That all provisions of law (including penalties) applicable with respect to the taxes imposed by Title I of the Revenue Act of 1934, and not inconsistent with this section, shall be applicable with respect to the assessment, collection, or payment of excess profits to the Treasury as provided by this section, and to refunds by the Treasury of overpayments of excess profits into the Treasury: And provided further, That this section shall not apply to contracts or subcontracts for scientific equipment used for communication, target detection, navigation, and fire control as may be so designated by the Secretary of the Navy, and the Secretary of the Navy shall report annually to the Congress the names of such contractors and subcontractors affected by this provision, together with the applicable contracts and the amounts thereof: And provided further, That the income-taxable years shall be such taxable years beginning after December 31, 1935, except that the above provisos relating to the assessment, collection, payment, or refunding of excess profit to or by the Treasury shall be retroactive to March 27, 1934.

(c) To make no subdivisions of any contract or subcontract for the same article or articles for the purpose of evading the provisions of this Act, but any subdivision of any contract or subcontract involving an amount in excess of $10,000 shall be subject to the conditions herein prescribed.

(d) That the manufacturing spaces and books of its own plant, affiliates, and subdivisions shall at all times be subject to inspection and audit by any person designated by the Secretary of the Navy, the Secretary of the Treasury, and/or by a duly authorized Committee of Congress.

(e) To make no subcontract unless the subcontractor agrees to the foregoing conditions.

The report shall be in form prescribed by the Secretary of the Navy and shall state the total contract price, the cost of performing the contract, the net income, and the per centum such net income bears to the contract price. A copy of such report shall be transmitted to the Secretary of the Treasury for consideration in connection with the Federal income tax returns of the contractor for the taxable year or years concerned.

The method of ascertaining the amount of excess profit to be paid into the Treasury shall be determined by the Secretary of the Treasury in agreement with the Secretary of the Navy and made available to the public. The method initially fixed upon shall be so determined on or before June 30, 1934: Provided, That

in any case where an excess profit may be found to be owing to the United States in consequence hereof, the Secretary of the Treasury shall allow credit for any Federal income taxes paid or remaining to be paid upon the amount of such excess profit.

The contract or subcontracts referred to herein are limited to those where the award exceeds $10,000.

(d) Sections 3, 4, and 12 of the act of June 28, 1940, approved June 28, 1940 (Public, No. 671, 76th Cong., 3rd Sess.), read, respectively, as follows:

SEC. 3. The provisions of section 3 of the Act of March 27, 1934 (48 Stat. 505), as amended by the Acts of June 25, 1936 (49 Stat. 1926), and April 3, 1939 (53 Stat. 560; U. S. C., Supp. V, title 34, sec. 496), and as made applicable to contracts for aircraft or any portion thereof for the Army by such Act of April 3, 1939, shall, in the case of contracts or subcontracts entered into after the date of approval of this Act and during the period of the national emergency declared by the President on September 8, 1939, to exist, be limited to contracts or subcontracts where the award exceeds $25,000.

SEC. 4. In the case of every contract or subcontract for the construction or manufacture of any complete naval vessel or Army or Navy aircraft or any portion thereof which is entered into (whether before or after the date of approval of this Act), the Secretary of War or the Secretary of the Navy, as the case may be, after agreement with the contractor or subcontractor, shall certify to the Commissioner of Internal Revenue as to (a) the necessity and cost of special additional equipment and facilities acquired to facilitate, during the national emergency declared by the President on September 8, 1939, to exist, the completion of such naval vessel or Army or Navy aircraft or portion thereof in private plants; and (b) the percentage of cost of such special additional equipment and facilities to be charged against such contract or subcontract. For all purposes of section 3 of the Act of March 27, 1934 (48 Stat. 505; 34 U. S. C. 496), as amended, such certification shall be subject to such regulations as the President may prescribe, but shall be binding upon the Commissioner of Internal Revenue, unless, within five days after receipt of such certification, he make formal objection thereto to the Secretary of the Navy or the Secretary of War as the case may be. The part of such cost chargeable against the contract or subcontract in pursuance of such certification, shall, for the purposes of such section 3, be considered to be a reduction of the contract price of the contract or subcontract. The amount charged against the contract or subcontract in pursuance of such certification shall, for the purposes of such section 3, be applied against and reduce the cost or other basis of such special additional equipment and facilities as of the date of installation thereof: Provided, That the Secretary of War or the Secretary of the Navy, as the case may be, shall report to the Congress, every three months, the cost of such special additional equipment and facilities to be borne by the Government under each contract. SEC. 12. The provisions of all preceding sections of this Act shall terminate June 30, 1942, unless the Congress shall otherwise provide.

Pursuant to the authority prescribed by section 2 (b) of the act of June 28, 1940 (Public, No. 671, 76th Cong., 3rd Sess.), section 14 of the act of April 3, 1939, and section 3 of the act of March 27, 1934, as amended, the following regulations are hereby prescribed: 1

Sec. 26.1. Definitions. As used in these regulations the term—

(a) "Act" means the act of June 28, 1940 (Public, No. 671, 76th Cong., 3rd Sess.).

1 See footnote on p. 386.

(b) "Act of March 27, 1934, as amended" means section 3 of the act of March 27, 1934, 48 Stat. 505 (34 U. S. C. 496), as amended by the act of June 25, 1936, 49 Stat. 1926 (34 U. S. C., Sup., 496), and as further amended and made applicable to contracts and subcontracts for Army aircraft by the act of April 3, 1939, 53 Stat. 560 (34 U. S. C., Sup., 496).

(c) "Secretary of the Department concerned" means the Secretary of War or the Secretary of the Navy as the case may be.

(d) "Person" includes an individual, a corporation, a partnership, a trust or estate, a joint-stock company, an association, or a syndicate, group, pool, joint venture or other unincorporated organization or group, through or by means of which any business, financial operation or venture is carried on.

(e) "Contract" means an agreement made by authority of the Secretary of the Department concerned for the construction or manufacture of any complete naval vessel or Army or Navy aircraft, or any portion thereof, entered into after the date of enactment of the act (June 28, 1940) and before July 1, 1942.

(f) "Contractor" means a person entering into a direct contract with the Secretary of the Department concerned or his duly authorized representative.

(g) "Subcontract" means an agreement entered into by one person with another person for the construction or manufacture of any complete naval vessel or Army or Navy aircraft, or any portion thereof, the prime contract for such vessel or aircraft or portion thereof having been entered into between a contractor and the Secretary of the Department concerned or his duly authorized representative after the date of enactment of the act (June 28, 1940) and before July 1, 1942. The term "subcontract" does not include such an agreement even though entered into after June 28, 1940, if the prime contract with respect thereto was entered into on or before June 28, 1940, but does include such an agreement entered into after June 30, 1942, if the prime contract with respect thereto was entered into on or before June 30, 1942.

(h) "Subcontractor" means any person other than a contractor entering into a subcontract.

(i) "Contracting party" means a contractor or subcontractor as the case may be.

(j) "Contract price" or "total contract price" means the amount or total amount to be received under a contract or subcontract as the case may be.

(k) "Income-taxable year" means the calendar year, the fiscal year ending during such calendar year, or the fractional part of such calendar or fiscal year upon the basis of which the contracting party's

net income is computed and for which its income tax returns are made for Federal income tax purposes.1

Sec. 26.2. Scope of regulations.-These regulations deal with liability for excess profit on (1) contracts for the construction or manufacture of any complete naval vessel or Army or Navy aircraft, or any portion thereof, entered into after the date of enactment of the act (June 28, 1940) and before July 1, 1942, and (2) subcontracts made with respect to any such contract. As to contracts for naval vessels and aircraft, entered into on or before June 28, 1940, and subcontracts made with respect to any such contract, see T. D. 4906 (sections 17.0 to 17.19, inclusive, title 26, Code of Federal Regulations, 1939 Sup.). As to contracts for Army aircraft entered into on or before June 28, 1940, and subcontracts made with respect to any such contract, see T. D. 4909 (sections 16.0 to 16.18, inclusive, title 26, Code of Federal Regulations, 1939 Sup.). As to the date of completion of a contract or subcontract within the scope of these regulations, see section 26.5 of these regulations.1

Sec. 26.3. Contracts and subcontracts under which excess profit liability may be incurred.-Except as otherwise provided with respect to contracts or subcontracts for certain scientific equipment (see section 26.4 of these regulations), every contract entered into after June 28, 1940, and before July 1, 1942, is subject to the provisions of the act relating to excess profit liability if—

(1) it is entered into prior to the termination of the period of national emergency declared by the President on September 8, 1939, to exist (see Proclamation No. 2352), and is awarded for an amount exceeding $25,000; or

(2) it is entered into after the termination of such period of national emergency and is awarded for an amount in excess of $10,000. Every subcontract made pursuant to such a contract is subject to the provisions of the act relating to excess profit liabilty if—

(a) it involves an amount in excess of $25,000 and was entered into prior to the termination of such period of national emergency and before July 1, 1942; or

(b) it involves an amount in excess of $10,000 and was entered into after the termination of such period of national emergency or after June 30, 1942, whichever is the earlier.

If a contracting party places orders with another party, aggregating an amount in excess of $25,000 (or $10,000 as the case may be), for articles or materials which are destined to become a component part of a complete naval vessel or Army or Navy aircraft, or any portion thereof, the placing of such orders shall constitute a subcontract within the scope of the act, unless it is clearly shown that each of the orders involving $25,000 (or $10,000 as the case may be) or less is a bona fide

1 See footnote on p. 386.