General Dynamics Corporation and Subsidiaries, (1997)
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General Dynamics Corporation and Subsidiaries, (1997)
T.C. Memo. 1997-420
UNITED STATES TAX COURT GENERAL DYNAMICS CORPORATION AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent GENERAL DYNAMICS FOREIGN SALES CORP., Petitioner v.COMMISSIONER OF INTERNAL REVENUE, Respondent Docket Nos. 19202-94, 19203-94. Filed September 22, 1997.David C. Bohan, Richard T. Franch, James M. Lynch, Philip A. Stoffregen, Francis J. Wirtz, David D. Baier, Lawrence S. Schaner, Gregory S. Gallopoulos, and Debbie L. Berman, for petitioners.William H. Quealy, Jr., Alice M. Harbutte, Jeffrey A. Hatfield, Thomas C. Pliske, and William T. Derick, for respondent.MEMORANDUM FINDINGS OF FACT AND OPINION GERBER, Judge: General Dynamics Corp. and its consolidated subsidiaries (GENDYN) (docket No. 19202-94) and its foreign sales corporation, General Dynamics Foreign Sales Corp. (GENDYN/FOREIGN) (docket No. 19203-94), are the petitioners in these consolidated cases. Respondent determined corporate income tax deficiencies for GENDYN in the amounts of $26,118,976 and $291,218,973 for its 1985 and 1986 taxable years, respectively. With respect to GENDYN/FOREIGN, respondent determined a $586,533 corporate income tax deficiency for its 1986 taxable year. These cases are consolidated and related for purposes of briefing and opinion, and the issues have been divided into two generalized categories: domestic and foreign. This opinion addresses the domestic issues involving GENDYN.1 The issues for our consideration here pertain to GENDYN's accounting methods for Federal income tax purposes. With respect to Government contract numbered F33657-82-C-2034 (Contract 2034 or 2034), the parties agree that GENDYN was entitled to use the completed contract method.2 GENDYN reported the income and related deductions based on the premise that its Government contract was a 48-month contract (multiyear) for delivery of 480 aircraft. Respondent determined that 2034 should be treated as four separate agreements, each for the delivery of 120 aircraft.With respect to Government contract numbered F33657-82-C-2038 (Contract 2038 or 2038), GENDYN allocated the income and expenses to multiyear Contract 2034 so that Contract 2038 was reported under the completed contract method for Federal income tax purposes. Respondent determined that the income and expenses from 2038 were not part of the completed contract reporting for Contract 2034. Consequently, respondent also determined that Contract 2038 should have been separately accounted for under the accrual method of accounting.FINDINGS OF FACT3GENDYN was incorporated on February 21, 1952, and, at all relevant times, was the common parent of a group of corporations that filed consolidated corporate Federal income tax returns. At the time the petitions were filed in these cases, GENDYN's and GENDYN/FOREIGN's principal places of business were in Falls Church, Virginia. GENDYN engineered, developed, and manufactured various products for the U.S. Government and, to a lesser extent, foreign Governments, including military aircraft, missiles, gun systems, space systems, tanks, submarines, and electronics, and produced and/or provided other miscellaneous goods and services. GENDYN was also involved in other business activities, including the design, engineering, and manufacture of commercial aircraft; the mining of coal, lime, limestone, sand, and gravel; the manufacture and sale of ready-mix concrete, concrete pipe, and other building products; production of commercial aircraft subassemblies; the design, engineering, and manufacture of commercial space launch vehicles; and shipbuilding.GENDYN, for the taxable years 1977 through 1986 (concerning the contracts under consideration), used the completed contract method (CCM) for reporting Federal income tax and the percentage of completion method for its financial accounting purposes. In 1976, GENDYN applied to respondent for permission to change its accounting method to the completed contract method for reporting income from its long-term contracts for all of its divisions. GENDYN advised respondent that CCM would not be used for financial reporting purposes. In 1977, respondent approved GENDYN's use of CCM for all its long-term contracts.During 1980, an Internal Revenue Service examining agent challenged GENDYN's use of CCM. The agent submitted a request for a technical advice memorandum to respondent's National Office. The agent argued, inter alia, that GENDYN's use of CCM resulted in the unreasonable deferral of income. In a technical advice memorandum released in 1983, the National Office rejected the agent's arguments and affirmed GENDYN's permission to use CCM.GENDYN manufactured the F-16, a tactical military aircraft. Originally designed as a "dog fighter", the F-16 evolved into a multirole aircraft, capable of performing air-to-air comba...See the full content of this document
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