'(B) any contract or subcontract for the product of a mine, oil or gas well, or other mineral or natural deposit, or timber, which has not been processed, refined, or treated beyond the first form or state suitable for industrial use "(3) In the case of a contractor or subcontractor who produces or acquires the product of a mine, oil or gas well, or other mineral or natural deposit, or timber, and processes, refines, or treats such a product to and beyond the first form or state suitable for industrial use * * *, the Board shall prescribe such regulations as may be necessary to give such contractor or subcontractor a cost allowance substantially equivalent to the amount which would have been realized by such contractor or subcontractor if he had sold such product at such first form or state. B. The changed provisions in section 106 (H. R. 1724), subdivisions (a) (3) and (b), insofar as material, read as follows: "(a) Mandatory exemptions.-The provisions of this title shall not apply to * * * (3) Any contract or subcontract for the product of a mine, oil or gas well, or other mineral or natural deposit, which has not been processed, refined, or treated beyond the ordinary treatment processes normally applied by producers in order to obtain the first commercially marketable product, but only if such contract or subcontract is with the owner or operator of the mine, well, or deposit from which such product is produced. The term "ordinary treatment processes" means, in the case of the product of a mine, well, or deposit with respect to which an allowance for percentage depletion is provided by section 114 (b) (3) or (4) of the Internal Revenue Code, those processes which are taken into account under such section in computing gross income from the property, and in the case of any other product such term means such similar processes as may be prescribed under regulations promulgated by the Board * * (b) Cost Allowance. In the case of a contractor or subcontractor who produces * * * the product of a mine, oil or gas well, or other mineral or natural deposit, or timber, and processes, refines, or treates such a product beyond the first commercially marketable state provided in paragraph (3) of subsection (a) * the Board shall prescribe such regulations as may be necessary to give the contractor or subcontractor a cost allowance substantially equivalent to the amount which would have been realized by such contractor or subcontractor if he had sold the product in the form or state provided in paragraph * * (3) of subsection (a) * II. EXEMPTIONS SPECIFIED IN THE EXISTING LAW AND THE REASONS THEREFOR The exemption standard of "first form or state suitable for industrial use" was adopted in 1942 after Congress had devoted much time to the development of some readily administerable principle, the application of which would enable it to authorize the adjustment of those contracts and subcontracts which had been entered into by the United States or its instrumentalities with contractors during the early part of World War II for the supply of war materials. In many of such cases new materials and facilities were involved and there was no way to determine a fair price for the products. The original contract prices were, of necessity, fixed (by bid or negotiation) at a sufficiently high rate to encourage unusual effort, with the result that in many cases the profits, on mass production or with improved practices and techniques, became excessive and entirely beyond expectations of the contracting parties. Following extended discussions between all concerned, the theory of renegotiation was proposed, developed and eventually enacted into law. As a result of its consideration of the problem, Congress recognized from the beginning that mining and other wasting-asset industries did not fall within the class to which renegotiation was intended to apply. Accordingly, the Revenue Act of 1942 (section 801) provided an exemption from renegotiation of any contract or subcontract for the product of a mine or other mineral or natural deposit which had not been "processed, refined or treated beyond the first form or state suitable for industrial use." Such limitation was intended not only to protect the special position of the mining industry (which uses up or exhausts its assets through its operations), but also to prescribe a cut-off from such exemption when the mining industry had completed its treatment of the raw material and had thus made it suitable for industrial use. Congress affirmed and reaffirmed its declaration in this respect by reenacting such identical exemption for the mineral industry in the Military Appropriations Act of 1943, the Revenue Act of 1943 (approved February 25, 1944) and in the so-called Renegotiation Act of 1948, which was a part of the Supplemental National Defense Appropriation Act, 1948 (Public Law 547, 80th Cong.) and is now the controlling law on this subject. Such reiteration of a sound, administrable principle should not be disturbed when, as in this case, there is no justifiable reason therefor. In this exemption for the mineral industry the cut-off point, as repeatedly reenacted in the law, was definitely and specifically fixed for the two-fold purpose of (a) permitting the mineral industry to mine, treat and refine its raw products to the point where such products were suitable for the first time for industrial use for war and defense purposes-to which point it was recognized there was no occasion for renegotiation; and (b) making renegotiation applicable to any manufacturing or industrial operation beyond the cut-off point, whether performed by the producer or by a subsequent fabricator to whom the product was sold. Among the reasons for adopting this cut-off point were the following: (a) The standard metals in their first form suitable for industrial use are the same regardless of their source. Such products from one mine are in competition with those from others. Whatever may have been the differences in the ores or the processing, the refined product available for industrial use is necessarily the same. There is no distinction whatsoever between the refined metals to be used on civilian contracts and those to be used on defense contracts. There is no particular process or other operation specially required to turn out refined metals for defense purposes as distinguished from those for other purposes. The reasons for requiring renegotiation of manufacturing and other contracts which yield special articles or products for defense purposes do not warrant attempting renegotiation of mineral products before they reach the stage of being suitable for industrial use. (b) The form in which the mineral product (from a metal mine) becomes suitable for industrial use is the point at which the metal consuming industries purchase the product from the mining industry, and thus, in the commercial world, fix a market or standard price for the product which permits a clear demarcation between the processing or refining of the product, and its industrial or manufacturing use. This pricing basis is a suitable, natural, and appropriate standard for use in renegotiation. The point to which exemption from renegotiation was to be allowed and the point beyond which it could not be applied were thus coordinated with great care and precision so as to encourage the greatest production of raw materials possible, for the benefit of the United States, and at the same time to make any profitswhether by the mining industry or otherwise-resulting from manfuacturing or industrial efforts beyong that point, with respect to defense contracts, subject to renegotiation. The line of demarcation was carefully and thoughtfully planned, with a thorough understanding of its effect and its practical administration. III. THE PROPOSED CHANGE AND THE REASONS WHY IT SHOULD NOT BE ADOPTED The difference in effect between the proposed provisions of H. R. 1724 relating to mineral raw materials and those which have represented the law to date are(a) As the law was enacted in 1942, 1943, 1944, and 1948, the cut-off with regard to the product of a mine or other mineral or natural deposit was that, in order to be exempted, the treatment of such product shall not have been carried beyond the first form or state suitable for industrial use, whereas (b) Under the present proposal the cut-off point is to be established according to certain indicated processes which in many cases will not have yielded a product which is suitable for industrial use. The existing law uses the standard of "the first form or state suitable for industrial use." This point of cut-off represents, generally, the termination of the treatment processes by the mining industry which are necessary to make the mining product suitable for industrial use. The cut-off thus has significance and conforms with the practice of the mining industry in disposing of its products. It also conforms with the practice of the brass, wire, and other metal consuming industries which acquire the mineral products in the first form in which industrial processes can be applied thereto to yield a manufactured product. It is a standard which is simple and can be readily interpreted and applied by those charged with renegotiating defense contracts-as evidenced by the satisfactory experience under the existing law. The standard of the proposed bill with regard to metals, etc., would not look to any finished product of the mining industry. It would adopt, for purposes of renegotiation, the cut-off point now fixed by the revenue act for determining percentage depletion. However, the treatment processes specified in the depletion provisions (section 114 (b) (3) or (4), I. R. C.) are only certain of the steps which are necessary in order to obtain an industrial product; i. e., the product of the mine, under the new proposal, would be only in an intermediate form of processing by the mining industry. As to metal mines genera ly, the specified processes result only in a crude product such as ore or concentrates, for which there is no industrial market or use. To cover this point more specifically it should be noted that the contained metals will, at this intermediate stage, exist in a conglomerate mass, requiring further processing or refining before they can be brought to any form appropriate for industrial use, and before they can be identified as metals which will be the subject of any renegotiable contract or subcontract. It will generally be impossible at that stage to determine to what, if any, extent such products or the metals to be derived from them will ever find an end-use in defense contracts. Only a part of the total metal production of the country is expected to be used in the contracts or subcontracts which will be subject to renegotiation. It is only when the metals have reached a form suitable for industrial use that their use is determined, and consequently it is impossible prior thereto (particularly when the metals are in crude or partly processed form) to make any serious endeavor to determine or trace them through to a possible end use in defense contracts. Any attempt to go behind that stage (in the treatment process) where the mining product is ready for industrial use will lack any factual basis or reasonable standard for determination.2 As we have stated, the pending bill would adopt as a standard the cut-off point fixed by the revenue act for determining percentage depletion. This is not an appropriate standard for renegotiation. The percentage depletion_cut-off point for historic reasons which are not here material is determined by defining certain processes which will be considered as falling within the mining operations (extending generally to the "concentrate" stage), as distinguished from the futher and often more costly processes which are necessary to produce a product of the mining industry suitable for industrial use. The standard for any sale of the metal-bearing products at this intermediate or "concentrate" stage is not based on any fixed value which they have for use in that form, but rather it is based on the value of the metals which can be obtained therefrom by processing them to the first form or stage at which they are ready for industrial use. It is the recoverable metals therein which are paid for, less an appropriate charge or deduction for their further processing and handling. The product in the form of concentrates, etc., may be considered marketable in the sense that, assuming treatment capacity is available, it could be sold to others who have the plants for its further processing and this is the basis adopted under the percentage depletion formula. However, the product in such form is not one suitable for industrial use and is not one for which there is a general market for purchase and sale or for which there is a recognized or quoted price. It is the product in form for industrial use which has a competitive market or standard price. The determination of profits thereafter earned is a reasonable possibility for the authorities charged with the duty of renegotiation and affords a basis under which the metal mining industry can intelligently operate. ** * A further objection to the bill (H. R. 1824) is that it introduces a new limitation by providing for exemption "only if such contract or subcontract is with the owner or operator of the mine This is unduly restrictive and serves no useful purpose. There may be technical differences in the ownership and operation of the mines and the ownership and operation of certain mixing or blending facilities or of the further processing plants which will turn out the metal in its 2 Example: In the case of copper, the first form or state suitable for industrial use under the existing law is "refined copper"-ingots, wirebars, billets, cakes, etc. This is the form in which brass mills, wire mills and other manufacturing plants require copper. Under the new proposal, the cut-off would be "concentrates"-a mud-like product of a concentrator-which has no industrial utility until smelted in a smelter, resulting in blister copper (an impure form of copper), which in turn is refined in a refinery to produce refined copper. At the several stages between the concentrates and the refined copper, much additional copper-bearing material, originating from various sources-domestic and foreign, primary and secondary (scrap)-is mixed together in the treatment; the copper from these various sources losing its identity and becoming merged in the final product. It is clearly impossible, at the concentrate stage, to make any realistic determination as to what, if any, of the products in that form will ever find their way into defense contracts. "first form or state suitable for industrial use." These differences of ownership are not pertinent so far as renegotiation is concerned, since they do not affect the form or price of the metal as it goes to industry. The product will meet the same tests as to nature and price as a product which is carried through from the initial mining to production of the usable metal by a single owner or operator. In short, this proposed provision is not necessary in the interests of renegotiation, would be quite unfair in many cases, and would create severe administrative difficulties. IV. SUMMARY In conclusion we may then note 1. Congress, in 1942, recognized that the mineral industry is not the type of business to which renegotiation should apply in principle. It therefore provided an exemption in the 1942 law on this subject, which was reenacted in 1943, 1944, and 1948. H. R. 1824 again recognizes that the mining industry should be exempted from renegotiation but proposes a different cut-off point at which renegotiation should become effective. Such change is objectionable and inequitable to the mining industry. 2. The existing law provides a well-founded, reasonable, appropriate cut-off point to which exemption shall extend and where renegotiation shall begin. Appropriate regulations thereunder exist, which have been applied in recognized procedures. They have proven satisfactory in practice. No justification exists and no ground has been established for throwing aside those carefully considered conclusions of Congress, as repeated, reasserted, and reenacted. For that reason, such exemptions in the existing law should remain undisturbed in the enactment of any new renegotiation law. 3. The cut-off point proposed in the pending bill is neither appropriate nor practicable as to the metal mining industry because it attempts to utilize as a standard a tax formula which has no application to renegotiation. The existing law uses as the cut-off point that at which the mining product moves into industry, thus providing as a cut-off basis not only a finished product of the mining industry but also one for which a standard recognized market price exists-which is a necessary basis for proper renegotiation. In contrast, the proposed cut-off point in H. R. 1724 is fixed with respect to products which are not in a form suitable for industrial use, and are not at that point the subject of general openmarket purchase and sale. It thus fails to provide a clear-cut, practical basis for the exemption. 4. Under the existing law, with its clear, basic standards, the industry can understand its problems with regard to renegotiation, and the records habitually maintained by the industry accord with the requirements of the law. The new proposal because its standards do not conform with those on which the industry conducts its business--would not permit of this simple, workable application in the industry's renegotiation problems. This is further emphasized by the fact that the producer cannot, at the proposed cut-off point, have any basis for determining whether his product will or will not go to Government use. His whole effort and concern at this point should be its conversion into products for which there will be industrial use, but if the issue is confused by the problem of renegotiation his operational difficulties will be increased. The Government administration under the proposal would also be more difficult because its standards would not be those used by the industry in conducting its ordinary business. To cope with these unnecessary complications would undoubtedly necessitate larger Government staffs than under present procedure. 5. The bill improperly proposes to limit the renegotiation exemption only to owners or operators of a mine. In excluding those other members of the mining indus ry, whose differences in position are not material from the viewpoint of renego is ion, a serious injustice would be done, for no logical reason. 6. There is neither occasion nor reason to substitute the proposed new rules for exemp ions under renegotiation for those which now exist. The proposed new rules would be unfair, more difficult to administer by the mining industry and by Govern: ent agencies, and less in accord with the nature, purpose and objectives of renego iation as determined by Congress in 1942. 7. The now-existing rules relative to exemption applicable to the mining indus'r should be retained. Specifically, the appropriate provisions of the existing law, as set out on page 2, above, should be substituted in place of section 106 (a) 3) and (b) of H. R. 1724, set out on that same page. In re H. R. 1724. Hon. WALTER F. GEORGE, BRIDGEPORT BRASS CO., Bridgeport, Conn., February 5, 1951. Chairman, Finance Committee, the Senate, Washington, D. C. DEAR SENATOR GEORGE: Your committee is in the process of writing a renegotiation law, and knowing of your desire to have the fullest information possible we wish to bring to your attention certain points affecting the copper and brass industry, which is of such great significance in any defense program. We are sure your committee does not wish to do anything which weakens the smaller independent companies in an industry and strengthens the larger corporations as a result of the operation of any law. Yet this is exactly what happened in World War II. We are the largest independent company in the brass industry, but there are about 35 other small independent companies besides ourselves who have to buy their copper and zinc from the large producers such as Anaconda Copper Mining Co., Kennecott Copper Corp., and Phelps Dodge Corp. At the same time these large producers have important subsidiaries in the brass industry which control approximately 70 percent of the industry. During World War II the copper and zinc producers were exempt from renegotiation. This umbrella protected the capital sources of their subsidiaries, while the smaller independents were subject to renegotiation. This meant that the large mining companies came out of the war very much stronger financially, while some of the smaller brass mills, including ourselves, were forced to become heavy borrowers. During World War II the consolidated earnings of the three copper companies totaled $315,000,000, and their cash position (including marketable securities) improved by $132,222,702. (For details see exhibit I.) By contrast, here are the figures of the Bridgeport Brass Co. for those same years: Bridgeport Brass Co. This company's cash position declined from $4,556,000 at December 31, 1941, to $3,362,000 at December 31, 1945. During the war the company was forced to incur a substantial amount of debt, which at December 31, 1945, amounted to $2,000,000. Since that time, to maintain its position in the industry the company increased its facilities and its working capital. Thus, it was forced to make total long-term borrowings of $13,000,000 as well as to secure short-term loans from time to time. Of course, the consolidated earnings of the producers were mainly from mining operations. For that reason they did not have to be unduly concerned about renegotiation of their brass-mill subsidiaries. However, we and the other independents who bought our metal requirements from these same producers had to exist exclusively on profits we had left after renegotiation and taxes. That is why we believe that World War II renegotiation tended in our industry to strengthen the big and weaken the small. This was certainly not what the committee and the Congress wished to do. In view of the foregoing and to keep us and other independents in the brassmill industry strong, we recommend that the brass-mill industry be exempt from the provisions of the renegotiation law. While we are convinced these reasons are sufficient for your committee to exempt the brass-mill industry from renegotiation, we believe that renegotiation was never meant to apply to cases like the brass-mill industry. Your committee is properly concerned with taking the profits out of war. Congress has devised two instruments to do this in the form of, first, excess-profits |