Page:United States Statutes at Large Volume 100 Part 3.djvu/551

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2359

"(1) DIRECT AND CERTAIN INDIRECT COSTS.—In the case of a long-term contract, all costs (including research and experimental costs) which directly benefit, or are incurred by reason of, the long-term contract activities of the taxpayer shall be allocated to such contract in the same manner as costs are allocated to extended period long-term contracts under section 451 and the regulations thereunder. "(2) COSTS IDENTIFIED UNDER COST-PLUS AND CERTAIN FEDERAL

CONTRACTS.—In the case of a cost-plus long-term contract or a Federal long-term contract, any cost not allocated to such contract under paragraph (1) shall be allocated to such contract if such cost is identified by the taxpayer (or a related person), pursuant to the contract or Federal, State, or local law or regulation, as being attributable to such contract. "(3) ALLOCATION OF PRODUCTION PERIOD INTEREST TO CONTRACT.—

"(A) IN GENERAL.—Except as provided in subparagraphs (B) and (C), in the case of a long-term contract, interest costs shall be allocated to the contract in the same manner as interest costs are allocated to property produced by the taxpayer under section 263A(f). "(B) PRODUCTION PERIOD.—In applying section 263A(f) for purposes of subparagraph (A), the production period shall be the period— "(i) beginning on the later of— "(I) the contract commencement date, or "(II) in the case of a taxpayer who uses an accrual method with respect to long-term contracts, the date by which at least 5 percent of the total estimated costs (including design and planning costs) under the contract have been incurred, and "(ii) ending on the contract completion date. "(C) APPLICATION OF DE MINIMIS RULE.—In applying section 263A(f) for purposes of subparagraph (A), paragraph (l)(B)(iii) of such section shall be applied on a contract-bycontract basis; except that, in the case of a taxpayer described in subparagraph (B)(i)(II) of this paragraph, paragraph (l)(B)(iii) of section 263A(f) shall be applied on a property-by-property basis. "(4) CERTAIN COSTS NOT INCLUDED.—This subsection shall not apply to any— "(A) independent research and development expenses, "(B) expenses for unsuccessful bids and proposals, and "(C) marketing, selling, and advertising expenses. "(5) INDEPENDENT RESEARCH AND DEVELOPMENT EXPENSES.—

For purposes of paragraph (4), the term 'independent research and development expenses' means any expenses incurred in the performance of research or development, except that such term shall not include— "(A) any expenses which are directly attributable to a long-term contract in existence when such expenses are incurred, or "(B) any expenses under an agreement to perform research or development. "(d) FEDERAL LONG-TERM CONTRACT.—For purposes of this section—

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