Under its accounting practice, petitioner set up an account receivable due from General Electric when each item was billed at the current purchase order price. The sales account was credited with the full amount so billed at the time of the billing.

The following entries were made on petitioner's books as of January 31, 1959, the last day of its fiscal year:

1964 U.S. Tax Ct. LEXIS 18">*27 43 T.C. 182">*186 Petitioner reported gross sales on its income tax return for the taxable year ended January 31, 1959, in the amount of $ 10,513,239.40, which represents gross sales reduced by the amount of $ 866,783.26, the balance of the "Provision for contract readjustment." Thus, gross sales prior to the adjustment were $ 11,380,022.66.

Petitioner reduced the accounts receivable on its books by $ 866,783.26, the amount of its "Reserve for contract readjustment."

The $ 55,649.02 item entered on petitioner's books represents initial proposals made by petitioner to General Electric for refunds under price redeterminable contracts. The amount was calculated by petitioner's cost accountant, whose primary functions were the preparation and submission of the price redetermination proposals on price redeterminable contracts and the preparation and submission of claims pertaining to canceled Government contracts. In reaching his determination, the cost accountant made an analysis of the total cost, including profit, that had been incurred on specific jobs. He took into consideration the cost of direct labor, direct material, outside purchases, outside services, charges for overhead, and profit.

1964 U.S. Tax Ct. LEXIS 18">*28 The $ 811,134.24 item entered on petitioner's books is an amount which petitioner estimated would have to be refunded to General Electric under price redeterminable contracts. None of this amount had been proposed by petitioner to General Electric as refundable as of January 31, 1959.

The amounts entered on its books represented petitioner's unilateral proposals and estimates of refunds which it would have to make under its price redeterminable contracts with General Electric.

Fixed price redeterminable contracts, such as petitioner had with General Electric, are used with respect to new items where the Government or a prime contractor is uncertain at the time of the making of the contract as to the production costs of the item and is unable to make a reasonable estimate of such costs. No negotiations took place between petitioner and General Electric and no refunds were made in regard to any of the reserve in issue here during petitioner's fiscal year ended January 31, 1959.

Refund proposals submitted by petitioner to General Electric in price redetermination negotiations subsequent to January 31, 1959, with respect to contracts to which the reductions here involved related were1964 U.S. Tax Ct. LEXIS 18">*29 larger than the amount of the reserve established by petitioner as of January 31, 1959.

The $ 866,783.26 here involved related to 64 original purchase orders of which 34 were dated subsequent to January 1, 1958, and 30 were dated prior to January 1, 1958.

Petitioner entered amounts in a "Reserve for contract readjustment" account on its ledger for years prior to and subsequent to its fiscal year here in issue.

43 T.C. 182">*187 The balance in petitioner's "Reserve for contract readjustment" account on February 1, 1958, was $ 14,003.20. On August 15, 1960, petitioner filed a claim for refund of taxes paid in the amount of $ 157,842.36 for its fiscal year ended January 31, 1958, based upon its agreement to refund $ 303,543 to General Electric "on selling prices changed in the fiscal year ended January 31, 1958."

Petitioner made refunds of undisclosed amounts with respect to its billings to General Electric during its fiscal year ended January 31, 1959, on undisclosed dates subsequent to January 31, 1959.

Respondent in his notice of deficiency increased petitioner's income as reported on its return for its fiscal year ended January 31, 1959, by the amount of $ 866,783.26 with the following 1964 U.S. Tax Ct. LEXIS 18">*30 explanation:

Reserve for contract readjustment on completed contracts that are subject to price redetermination, where no fixed or determinable amount has been agreed upon, held not deductible. No deduction would be allowed under Section 1482 of the Internal Revenue Code, without repayment.

OPINION

Petitioner contends that the "Reserve for contract readjustment" account set up on its books was a proper method of accounting in accord with accepted accounting principles and clearly reflected its net income. Petitioner concludes from this premise that under sections 446 and 451 of the Internal Revenue Code of 1954, ¹ it properly reduced its gross sales by the amount of this reserve in computing its taxable income.

1964 U.S. Tax Ct. LEXIS 18">*31 Respondent argues that sections 1341 and 1482² set forth an exclusive 43 T.C. 182">*188 congressional scheme for handling price redeterminable contracts involving Government procurement and that petitioner is therefore required to report the full amount of the contract prices. Respondent states that the Internal Revenue Code contains no provision for a reserve for repayments being considered in determining taxable income.

1964 U.S. Tax Ct. LEXIS 18">*32 We agree with respondent that the enactment of sections 1482 and 1341 was a congressional expression that price redeterminable subcontracts should be handled in the manner outlined therein. It is apparent from the congressional reports accompanying the Technical Amendments Act of 1958 ³ that the new sections were designed to give "relief" to subcontractors, which relief would not have been necessary had Congress contemplated that subcontractors could set up reserves for refunds estimated to be due another under price redeterminable contracts and adjust income thereby for Federal income tax purposes. ⁴

1964 U.S. Tax Ct. LEXIS 18">*33 Sections 1341 and 1482 are the only provisions of the Internal Revenue Code relating directly to the treatment of price redeterminable subcontracts where the refund is to someone other than a governmental agency.

In Overlakes Corporation, 41 T.C. 503">41 T.C. 503 (1964), we held that a contractor under a renegotiable Government contract was not entitled to deduct a similar reserve for amounts refundable to the U.S. Government under such contract. In that case we stated (p. 515):

43 T.C. 182">*189 we have before us a situation where petitioner was attempting to anticipate a price adjustment under a Government contract which was subject to a price redetermination under the Armed Services Procurement Act. That Act, in conjunction with the provisions in the 1939 Code as will be discussed hereinafter, provides for a specific method of relief for handling refunds under Government contracts such as we have here and we do not believe that petitioner is entitled to depart from that scheme and attempt to handle the adjustments by claiming a deduction for a reserve for the recapture of excessive profits on Government contracts. ⁵

1964 U.S. Tax Ct. LEXIS 18">*34 As to contracts entered into after January 1, 1958, petitioner contends that, since section 1482 was enacted to provide substantially the same benefit to subcontractors making repayments to a party other than a governmental agency as section 1481 provides for contractors and subcontractors who make refunds directly to the United States or one of its agencies, section 1481(a)(4) ⁶ should be considered applicable to section 1482. Since section 1482 which was enacted after section 1481 contains no provision similar to section 1481(a)(4), petitioner's contention is without foundation. In any event in the instant case, petitioner has not established "to the satisfaction of the Secretary or his delegate that a different method of accounting * * * clearly reflects income." Also, petitioner has failed to show how much of the "reserve" in issue is attributable to contracts entered into after January 1, 1958.

1964 U.S. Tax Ct. LEXIS 18">*35 The fact that petitioner is an accrual basis taxpayer does not remove it from the provisions of sections 1341 and 1482 or justify its deduction of a reserve for an amount which had not become a fixed liability. 41 T.C. 503">Overlakes Corporation, supra. In Holmes Projector Co. v. United States, 105 F. Supp. 690">105 F. Supp. 690 (Ct. Cl. 1952), certiorari denied 344 U.S. 912">344 U.S. 912, rehearing denied 345 U.S. 914">345 U.S. 914, the court, in discussing that taxpayer's contention that the amounts due under renegotiable contracts did not accrue until the renegotiation was completed, stated (p. 693):

We think there can be no question as to the authority of Congress to tax the full amount of earnings from contracts subject to renegotiation as income for the year in which such amounts were paid or payable under the terms of such contracts, subject to proper adjustments for such year in the event of renegotiation and the reduction in a subsequent year of the total receipts or profits. * * *

43 T.C. 182">*190 Section 1482(a)(1) specifically refers to the amount "received or accrued."

Petitioner accrued the amounts due under the 1964 U.S. Tax Ct. LEXIS 18">*36 terms of the contracts as gross sales on its books when it billed General Electric and it does not specifically contend that this was not proper. Rather, it claims not to have "earned" the amounts it placed in reserve. Petitioner had established a legally enforceable right to receive the amounts as fixed payments for sales under the contracts. Commissioner v. Hansen, 360 U.S. 446">360 U.S. 446 (1959). In fact, insofar as the evidence in this case shows, petitioner may have actually received the payments. But see 360 U.S. 446">Commissioner v. Hansen, supra.While petitioner had made a unilateral determination that amounts would have to be refunded, the claim was contingent and unenforceable. 41 T.C. 503">Overlakes Corporation, supra.By far the largest part of the reserve was at best an estimate arrived at by applying "cost factors." Until negotiations or the other procedures provided for under the contracts were completed, and the amounts refundable definitely fixed, the amount of refunds was uncertain.

The fact that petitioner's establishment of a reserve for contract refund may have been in accord with generally accepted1964 U.S. Tax Ct. LEXIS 18">*37 accounting principles is not necessarily determinative in accounting for income for Federal income tax purposes where the statutory scheme requires a different method. American Automobile Association v. United States, 367 U.S. 687">367 U.S. 687 (1961), and Schlude v. Commissioner, 372 U.S. 128">372 U.S. 128 (1963).

Decision will be entered for respondent.