Rev. Rul. 56-282

Advice has been requested as to the effect of the decision of the Tax Court of the United States in the case of Aluminum Company of America v. Commissioner , 23 T.C. 189, on the ruling in I.T. 3822, C.B. 1946-2, 186, relating to the profit-limiting provisions (section 3) of the Vinson Act, 48 Stat. 503 at 505, 34 U.S.C. 495, as amended, with respect to contracts and/or subcontracts for naval vessels and Army or Navy aircraft, or any portion thereof, following the repeal of the excess profits tax imposed by Subchapter E of Chapter 2 of the Internal Revenue Code of 193-9, as amended.

With the repeal of such excess profits tax by section 122(a) of the Revenue Act of 1945, C.B. 1945, 546, at 557, effective as to taxable years beginning after December 31, 1945, the profit-limiting provisions of the Vinson Act, supra , were again brought into effect. I.T. 3822, supra , dealt with the application of such provisions to contracts and subcontracts entered into in taxable years beginning after December 31, 1945, without differentiating between subcontracts entered into under exempt prime contracts and subcontracts entered into under prime contracts subject to the profit-limiting provisions.

In the Aluminum Company case, however, the court held that where subcontracts were entered into in the calendar year 1946 under a prime contract entered into in 1945, a taxable year to which the excess profits tax was applicable, the profit-limiting provisions of the Vinson Act did not apply to such subcontract. The court stated that the applicability of the profit-limiting provisions of the Vinson Act to a subcontract depends upon whether they apply to the prime contract. Acquiescence by the Commissioner in this decision is indicated on page 3 of this Bulletin.

Accordingly, it is held that a prime contract for the construction or manufacture of any naval vessel or any Army or Navy aircraft, or any portion thereof, entered into during a taxable year of the contractor to which the excess profits tax provided in Subchapter E of Chapter 2 of the Internal Revenue Code of 1939 is applicable, is exempt from the profit-limiting provisions of the Vinson Act. A subcontract entered into under such a prime contract is also exempt from such provisions even though such a contract was entered into in a taxable year of the subcontractor to which such excess profits tax was not applicable.

I.T. 3822, supra , is hereby modified to the extent that it is inconsistent with the foregoing.