other expenditures which the Maritime Administration determines to be properly capitalizable as part of the cost of acquisition. There shall not be included therein commissions paid officers or directors of, or stockholders having a substantial stock interest in, the operator or a related company, or adjustments attributed to restricted trade or other provisions (if any) in contracts under which such vessels were acquired. The cost of vessels acquired by the operator from the builders, directly or through the Maritime Administration or predecessor agencies (except a vessel the price of which is adjusted under section 9 of the Merchant Ship Sales Act of 1946), shall include interest accrued during the period of construction on borrowed capital (less interest earned thereon) used to make payments on account of construction (including interest charged by the Maritime Administration on payments made to the builder) and such other expenditures which the Maritime Administration determines to be properly capitalizable.

(2) For consideration other than cash or equivalent. The cost of acquisition of any vessel acquired by the operator from other than its predecessor or a related company for any consideration, the cash value of which, in the opinion of the Maritime Administration, cannot be determined definitely, shall be the fair value of such vessel at the date of acquisition, as determined by the Maritime Administration. The cost of acquisition of any vessel acquired by the operator from the Maritime Administration or predecessor agencies (except a vessel the price of which is adjusted under section 9 of the Merchant Ship Sales Act of 1946) shall be the agreed purchase price for such vessel plus any other expenditures which the Maritime Administration determines to be properly capitalizable as part of the cost of acquisition, notwithstanding the fact that part of the consideration paid to the Maritime Administration or predecessor agencies may consist of mortgage notes of the operator. In general, the Maritime Administration will not undertake to place a value upon securities for the purpose of evaluating a vessel acquired in exchange therefor. No valuation by the Maritime Administration of a vessel acquired in whole or in part for securities shall be deemed to be a determination by the Maritime Administration of the value of such securities.

(3) Vessels subject to section 9, Merchant Ship Sales Act of 1946. The cost of acquisition of a vessel, the price of which is adjusted under section 9 of the Merchant Ship Sales Act of 1946, shall be the statutory sales price of the vessel, computed in accordance with section 3(d) of said Act, as of March 8, 1946 if the vessel was acquired by the operator on or before that date or as of the date of the original delivery of the vessel to the operator if contracted for prior to but delivered after March 8, 1946.

(c) Acquisition from a predecessor or related company. The cost of acquisition of any vessel acquired by the operator from its predecessor or from any person who at any time prior to the date of acquisition of such vessel by the operator was a related company, shall be the cost of acquisition (determined as hereinabove set forth) of such vessel from the nearest person in the chain of title who was not at any time prior to the date of his transfer of the vessel either the predecessor to or a related company of the operator or the predecessor to or a related company of the person to whom he transferred title to said vessel, adjusted for the period from the date of such prior acquisition to the date of acquisition by the operator, in the manner hereinafter set forth.

(d) Basing valuation upon "fair value" when deemed necessary. Nothing herein contained shall preclude the Maritime Administration from basing the valuation of any vessel upon the fair value (as determined by the Maritime Administration) of such vessel at the date of acquisition by the operator in any case in which the Maritime Administration shall deem such method to be necessary for the proper determination of valuation.

(e) Adjustments for betterments, reconstruction, or reconditioning. For the purpose of (1) determining the value of the vessel as of any date subsequent to the date of acquisition by the operator, or (2) determining the adjustments to be made for the period between the date of acquisition by the predecessor or a related company of the operator and the date of acquisition by the operator (when in accordance with the provisions of this part such cost of prior acquisition is properly applicable), allowance shall be made for the net cost of all

capitalizable betterments, reconstruction, or reconditioning made by the operator, or made during the period of such prior ownership, as the case may be, after making such allowance as the Maritime Administration may deem proper for substantial removals and replacements. No adjustments shall be made, however, with respect to expenditures which are not capitalized, such as those which are treated as deferred charges to operations.

(f) Adjustments for depreciation. (1) On and after January 1, 1960 (with respect to vessels delivered by the shipbuilder on or after January 1, 1946) adjustments shall be made for depreciation on the basis of a twenty-five year economic life of the vessel (twenty years for vessels delivered by the shipbuilder prior to January 1, 1946) computed from the date of final delivery upon completion of the vessel by the shipbuilder to the first owner thereof (except that with respect to a wholly or partially reconstructed or reconditioned vessel the life expectancy of which has been determined to be otherwise jointly by the Secretary of the Treasury and the Secretary of Commerce depreciation shall be computed on the life expectancy so determined) and after deducting from the cost of acquisition the residual value of such vessel, which residual value shall be deemed to be 22 percent of the original construction cost (meaning the full domestic shipyard construction cost insofar as vessels constructed under Title V or Title VII of the Merchant Marine Act, 1936, are concerned); Provided, however, That the residual value shall in no event exceed the cost of acquisition to the operator, determined as herein set forth; And provided further, That the residual values of war-built vessels acquired from the Maritime Administration or predecessor agencies by purchase under section 4 or exchange under section 8 of the Merchant Ship Sales Act of 1946 or with respect to which the prior sales price is adjusted pursuant to section 9 of that Act shall be deemed to be 22 percent of the prewar domestic cost thereof, as established under the Merchant Ship Sales Act of 1946 and published in the FEDERAL REGISTER.

(2) Vessel depreciation shall be written off proportionately for the period between the date of acquisition with respect to which the cost of acquisition is determined pursuant to the provisions

of this part to the end of the economic life of the vessel determined pursuant to the provisions of this part, except with respect to a vessel which, when purchased, was of a type which required substantial modification, thereby modifying the original purpose of the vessel, depreciation shall be computed and written off on the basis stated in subparagraph (3) of this paragraph. In the case of a vessel the price of which is adjusted under section 9 of the Merchant Ship Sales Act of 1946, the date of acquisition shall for the purpose of this paragraph be March 8, 1946, if the vessel was acquired by the operator on or before that date or the date of the original delivery of the vessel to the operator if contracted for prior to but delivered after March 8, 1946. The actual net cost of capitalizable betterments, reconstruction, or reconditioning shall be depreciated proportionately during the period between the end of the month during which such betterments, reconstruction, or reconditioning was completed and the end of the economic life of the vessel.

(3) Vessel depreciation on the purchase cost of a vessel shall accrue from date title is taken and shall be written off proportionately over the remaining economic life of the vessel in accordance with this part and allocated in the same manner as is the equity in the vessel for capital necessarily employed purposes, except that with respect to a vessel which when purchased was of a type which required substantial modification thereby modifying the original purpose of the vessel (as, for example, conversion of a cargo vessel to a combination or passenger vessel), the properly capitalizable acquisition and modification costs shall be depreciated from the date the vessel is delivered to the owner in its modified state from the shipyard and shall be written off over the remaining economic life of the vessel in accordance with this part.

(4) As to any changes in the revision of subparagraphs (1) and (2) of this paragraph (f) which have been included pursuant to Public Law 86-518, the said changes can not be recognized in the administration of this part until after the applicable contracts of the subsidized Operator involved have been modified, following the filing of an appropriate application by such Operator.

It is the intent that the regulations in this part shall be fairly and equitably applied in each case, and that the determination of financial outcome under a contract or subcontract shall be consistent with applicable laws, the prime contract, the regulations in this part, and, to the extent not controlled by the foregoing, generally accepted accounting practice.

$285.3 Disposition of questions.

(a) Questions arising with respect to statutory authority pursuant to which a contract and subcontracts thereunder are awarded, the grouping of contracts, subcontracts, or both for the purpose of determining financial outcome thereunder for a particular income taxable year, subcontracts not subject to profit-limiting provisions, allowability of costs and accounting methods, or any other matters relating to a determination of profit or loss, should be referred to the Administration for disposition.

(b) In the event provisions of a contract are in conflict with any provisions of the regulations in this part, the provisions of the contract shall prevail.

§ 285.4 Acceptance of statements and certificates.

Acceptance by the Administration or its agent or representative of any statement or certificate shall not constitute a waiver by the Administration of its right to examine the books, files, and records of the contractor or subcontractor, if it shall deem such examination to be necessary or appropriate to a proper finding with respect to the contractor's or subcontractor's profit.

construction, reconditioning or reconstruction of a ship or ships) the Administration will ordinarily designate an auditor or auditors to be stationed at the shipyard of the contractor during performance of the contract.

(c) In the case of contracts or subcontracts for materials or commodities of a general commercial character not especially designed or manufactured for the particular purpose of becoming a part of the ship or for materials or commodities with respect to which there is an established or readily ascertainable open market price, the Administration may in its discretion accept, subject to the right of audit, the notarized statement of a responsible officer or independent public accountants in the form prescribed by the Administration setting forth the total contract or subcontract price, the total cost of performance thereof, the total amount of overhead charged to such cost, the net profit and the percentage such net profit bears to the contract or subcontract price, and certifying that the profit so reported is the true profit as reflected by the books of the contractor or subcontractor and was determined in accordance with generally accepted accounting practice and with the principles of profit determination prescribed in this part.

(d) In the case of other contracts and subcontracts (those involving items especially manufactured for the particular purpose of becoming a part of a ship) the Administration will ordinarily either station an auditor or auditors at the contractor's or subcontractor's plant or, in its discretion, provide for periodic visits by its auditors.

(e) All accounts, books, documents, memoranda, minutes, and records of every kind of the contractor or subcontractor involving the cost of performing a contract or subcontract are subject to inspection and audit by the Administration. The authority of the Administration's auditors in this connection shall be respected.'

§ 285.6 Final accounting.

Upon final accounting with respect to profit under any contract or subcontract, the Administration will examine the no

1 The accounts, books, documents, memoranda, minutes and records referred to herein shall be retained two years after the final determination and acceptance of payment by the Maritime Administration.

66-102-67- -10

(c) Board. "Board" means the Federal Maritime Board or its duly authorized representative or representatives.

(d) Contract. "Contract" means any agreement of the Board or Administration the terms of which make the regulations in this part applicable.

(e) Contractor. "Contractor" means any party entering into a contract with the Board or Administration.

(f) Subcontract. "Subcontract" means an agreement (purchase order, requisition, or other form of agreement) between a contractor or a subcontractor and any third party covering construction, reconditioning, or reconstruction of a vessel or portion thereof or for the manufacture or furnishing of any materials, supplies, goods or other personal property or the rendering of any services

directly for such construction, reconditioning or reconstruction.

(g) Subcontractor. "Subcontractor" means any party entering into a subcontract with a contractor or another subcontractor.

[G. O. 30, Rev., 17 F. R. 7594, Aug. 20, 1952, as amended by Amdt. 1, 19 F. R. 5399, Aug. 25, 1954; 19 F. R. 5368, Sept. 10, 1954]

§ 285.21

SUBCONTRACTS

Contract requirement.

A contractor or subcontractor shall obligate subcontractors to the Administration or Board as required by the contract, particularly with respect to the profitlimiting provisions therein.

[G. O. 30, Rev. 17 F. R. 7594, Aug. 20, 1952, as amended by Amdt. 1, 19 F. R. 5399, Aug. 25, 1954]

§ 285.22 Failure to effect contract requirements.

In the event a contractor or subcontractor fails to secure the agreement of a subcontractor of such contractor or subcontractor to the recapture of profits provisions or the agreement referred to in § 285.23, such contractor or subcontractor shall pay to the Administration as damages for such failure, a sum equal to the excess profits, as determined by the Administration, under the subcontract, from which the referred to recapture provisions were omitted or a sum equal to the excess profit, as determined by the Administration, of the subcontracts which are deemed to be a single subcontract under the provisions referred to in § 285.23; Provided, That if the Administration is, by reason of such failure to include the recapture provisions or the provisions referred to in § 285.23, unable to audit the subcontractor's books to determine the excess profit under such subcontract or subcontracts the damages to be paid the Administration, as provided above, shall be a sum equal to fifteen percent (15%) of the adjusted price of such subcontract or subcontracts.

[19 F. R. 5399, Aug. 25, 1954]

§ 285.23 Series of subcontracts.

All subcontracts of a subcontractor for the same article or articles for the performance of the contract, shall be deemed to be a single subcontract subject to the recapture of profits provisions of the contract; every subcontract shall include the agreement of the subcontractor that all such subcontracts

shall be deemed to be a single subcontract.

[19 F. R. 5399, Aug. 25, 1954]

§ 285.24 Same article or articles.

The term "same article or articles" as used in this part, shall include articles of like general description when supplied by a single subcontractor, as for example, steel, whether plates, shapes, or forms, fans without regard to construction or capacity, valves without regard to type or size, furniture without regard to kind of furniture.

[19 F. R. 5399, Aug. 25, 1954]

Subcontracts for equipment designated by the Administration or Board as scientific equipment used for communication and navigation are not subject to profit-limiting provisions. A designation of equipment furnished under a particular contract or subcontract shall not be construed as designation under any other contract or subcontract unless, with respect to designations still in effect, the Administration or Board shall concur in a claim that equipment being furnished under the subsequent contract or subcontract is of the nature, kind and utility entitling said equipment to exemption under a designation previously made by the Administration or Board. § 285.26 A.B.S. inspection, intangibles, and professional fees.

Subcontracts for American Bureau of Shipping inspection, or for such intangibles as insurance, surety and the like, or subcontracts for expert or professional services (including the furnishing of technical information or data) are not subject to profit-limiting provisions.

§ 285.27 Availability to Administration.

Contractors and subcontractors shall make available to the Administration all subcontracts, purchase orders, or other agreements, and shall furnish copies of such instruments when requested.

[G. O. 30, Rev., 17 F. R. 7594, Aug. 20, 1952, as amended by Amdt. 1, 19 F. R. 5399, Aug. 25, 1954]