Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 54-82

1954-1 C.B. 286

Sec. 1481

Caution:Amplified by Rev. Rul. 58-342

IRS Headnote

The provisions of section 3806 of the Internal Revenue Code will not apply to a subcontractor, who, at the direction of the Government agency that was the issuing office for the prime contract, makes a refund to the prime contractor, unless such payment to the prime contractor is made under circumstances which meet the conditions of that section requiring payment to the United States.

Where the provisions of section 3806 of the Code are applicable to a prime or a subcontractor and the excessive profits, applicable to the prior as well as the current year, are repaid, such repayment of excessive profits to the United States Government shall be allocated to the applicable years in the absence of the application of section 3806(a)(4) of the Code. In the event that excessive profits have been repaid without benefit of a tax credit, where such credit is allowable under section 3806(b) of the Code, the credit shall be treated as an overpayment of tax for the prior taxable year. Such overpayment is considered made at the time the payment, repayment or offset was made, for the purpose of computing interest under section 3771(b) of the Code.

Full Text

Rev. Rul. 54-82

Advice is requested as to the application of Rev. Rul. 53j, C.B. 1953-1, 479, to price redetermination cases under the following sets of circumstances:

(A) A subcontractor to a prime Government contractor, had a subcontract price redetermination made by the Government agency that was the issuing office for the prime contract, and, at its direction, made a contract price readjustment refund to the prime contractor. A refund was made in 1951, the year in which the applicable subcontract income was accrued. Under the same circumstances a refund was made in 1952, but such refund to the prime contractor covered subcontract income which was accrued in 1951 and 1952.

(B) The prime contractor had a price redetermination made in 1952 and made refund to the Government agency in 1952. Income under the prime contract was accrued in 1951 and 1952. The prime contractor treated such refund, in 1952, as a reduction of sales for such year. No tax credits have been allowed under section 3806 of the Code since the refunds paid were in the amount of the determination.

With respect to (A), above, section 3806(a)(1) states in part as follows:

In the case of a contract with the United States or any agency thereof, or any subcontract thereunder, which is made by the taxpayer, if a renegotiation is made in respect of such contract or subcontract and an amount of excessive profits for a taxable year * * * is eliminated, and * * * the taxpayer is required to pay or repay to the United States or any agency thereof * * *.  Italics supplied.

Since section 3806(a) deals only with payments or repayments required to be made to the United States or any agency thereof, payments made directly to a prime contractor by a subcontractor at the direction of the Government agency do not fall within the provisions of section 3806 of the Code or Rev. Rul. 53, supra , unless the payment is made to the prime contractor as an agent of the subcontractor to transmit the payment to the United States and the payment is actually transmitted to the United States by the prime contractor, or unless the payment is made under circumstances which make the prime contractor a trustee of the payment for the benefit of the United States. It is not sufficient, for the purpose of treating such repayments under section 3806 of the Code, that the refund is made to the prime contractor with the understanding that such refund will be taken into consideration when a price redetermination or renegotiation is made in the case of the prime contractor.

With respect to (B), above, since the repayment of excessive profits was made by the prime contractor to the United States Government, the provisions of section 3806 of the Code are applicable to the prime contractor. In the absence of the application of section 3806(a)(4) of the Code to the case, the excessive profits should be properly allocated between 1951 and 1952 in order to comply with the provisions of section 3806(a)(3) of the Code, which reads:

(3) DEDUCTIONS DISALLOWED.-The amount of payment, repayment, or offset described in paragraph (1) or paragraph (2) shall not constitute a deduction for the year in which paid or incurred.

If the excessive profits have been repaid  without the benefit of a tax credit, where such credit is allowable under 3806(b), section 3806(c) of the Code provides in part as follows:

(c) CREDIT IN LIEU OF OTHER CREDIT OR REFUND.-* * * If the amount allowable as a credit under subsection (b) exceeds the amount allowed under such subsection, the excess shall, for the purposes of the internal revenue laws relating to credit or refund of tax, be treated as an overpayment for the prior taxable year which was made at the time payment, repayment, or offset was made .  Italics supplied.

Accordingly, the provisions of section 3806 of the Internal Revenue Code will not apply to a subcontractor, who, at the direction of the Government agency that was the issuing office for the prime contract, makes a refund to the prime contractor, unless such payment is actually transmitted in full to the United States by the prime contractor as agent for the subcontractor, or unless the prime contractor becomes a trustee of the payment for the benefit of the United States.

Where the provisions of section 3806 of the Code are appliable to a prime or a subcontractor and the excessive profits, applicable to the prior as well as the current year, are repaid, such repayment of excessive profits to the United States Government shall be allocated to the applicable years in the absence of the application of section 3806(a)(4) of the Code. In the event that excessive profits have been repaid without benefit of a tax credit, where such credit is allowable under section 3806(b) of the Code, the credit shall be treated as an overpayment of tax for the prior taxable year. Such overpayment is considered as made at the time the payment, repayment, or offset was made, for the purpose of computing interest under section 3771(b) of the Code.