taxes and, second, renegotiation. The excess-profits tax in itself accomplishes this purpose in many cases. The further objective of renegotiation is covered by the statement of the Honorable Carl Vinson in his recent testimony before the House Ways and Means Committee (August 2, 1950, p. 13) where he pointed out that renegotiation has three applications: 1. "First, because haste in procurement made close pricing impossible in the first instance * * * 2. "Second, because of the peculiar nature of the article bought, accurate costs were unknown * * * 3. "Third, because of the vast increases in the procurement of items already in production * * [Emphasis added.] However, none of these three applies to the brass mill industry, and for the following five reasons: 1. The available supply of copper and zinc, which are the raw materials of our industry, is now, and will be, definitely limited Transition from civilian to military end use will not increase the supply of copper and zinc, nor the number of pounds which our industry can produce. For that reason, there will not be any vast increase in volume to the point where accurate costs cannot be known. 2. Use of copper, zinc, and the brass made from them is already controlled. Use of copper by brass mills is governed by NPA Orders M-11 and M-12 dated November 29, 1950, and their use of zine by NPA Order M-9 dated November 16, 1950, and M-15 dated December 1, 1950, as amended on January 15, 1951. 3. Brass-mill prices have been frozen by general price regulation dated January 26, 1951. 4. Brass-mill wages and salaries are controlled by general wage stabilization regulation No. 1 issued January 26, 1951. 5. Brass-mill products are standard items with well-established costs and published list prices which always seek the lowest level. All of the above show that the brass-mill industry is regulated almost as effectively as a public utility, for example, without the public utility's guaranteed profits. The committee may have heard of the bitter experience of many small companies including the brass-mill independents during the World War II renegotiation. Our renegotiation experience was particularly harsh when it was contrasted with the effective efforts made by our company to alert the Government to the need of expanding the brass-mill industry in 1940 and 1941 to be ready for World War II. It also came as a sharp contrast to the six Army and Navy E's which we received as the result of outstanding production during the war. It is a fact that some members of our industry manufacture out of brass such products as cartridge cases, fuzes, and other items. To cover such cases we recommend that there be added to the mandatory exemptions provided in section 106 (a) of H. R. 1724 a specific exemption of contracts which contain a priceredetermination article or a target-price-incentive type of article. You may recall that when renegotiation was originally adopted in World War II, redetermination articles, which, in effect, renegotiate price from time to time during the life of a contract, were not widely used. Hence, the 1942 and 1943 Renegotiation Acts made no specific reference to this advance in procurement procedures. The experience of many contractors was that redetermination during the latter years of World War II inade further renegotiation unnecessary, and we believe that many Government officials charged with procurement and renegotiation arrived at the same conclusion. The target-price incentive type of contract was not adopted until nearly the end of World War II. It was used only by the Navy, and was not used extensively by that Department. However, the experience which was gained will be most helpful to all procurement agencies during the present emergency. As the committee knows, the target-price type of contract provides for the working equivalent of renegotiation on a timely basis. Provision is made for sharing the savings beyond closely estimated costs between the Government and the contractor on a specified basis. This type of contract is now available for use in appropriate instances throughout the Department of Defense. We recommend that the use of either the redetermination or the target-price articles be made subject to mandatory exemption from renegotiation for the following reasons: 1. Effective and tight pricing in the interest of the Government will be insured. 78955-51 -9 2. Greater efficiency and productivity on the part of the contractor will be encouraged. Since price redetermination accomplishes the same objective and safeguards sought by renegotiation, further redetermination of price through renegotiation will unnecessarily duplicate the effective pricing already assured. Duplication which wastes valuable manpower under present circumstances is extravagant and unmindful of our national security. Where tight pricing has been insured, there is no reason for allowing the uncertainty involved in ordinary renegotiation procedures contemplated by H. R. 1724 to undermine a contractor's best productive efforts. At best, the ordinary renegotiation procedure will make it impossible for a contractor to determine his financial position from time to time or to plan his production, engineering, and research with that degree of effectiveness which is to the Government's best interests in a long-term program. During World War II this uncertainty was made particularly disadvantageous where renegotiation was long delayed. At worst, the ordinary renegotiation procedure may cripple important Government suppliers financially. Exemption from renegotiation for producers of copper, zinc, and other natural resources during World War II was justified and kept these important parts of our national economy strong for the present emergency. Since our defense program is being geared for the long run, you will undoubtedly agree that the strength of our productive organizations must be maintained. If industry is kept strong and fair rules govern, we can outproduce the world. Very sincerely yours, BRIDGEPORT BRASS CO., HERMAN W. STEINKRAUS, President and Chairman of the Board. EXHIBIT I Bridgeport Brass Co. is a long-established Connecticut corporation with its main offices located at Bridgeport, Conn. It is the largest independent company in the brass-mill industry and manufactures a complete line of brass-mill products in the form of sheet, rod, wire, and tube, as well as certain fabricating products. Since World War II it incurred long-term debt of $13,000,000 to maintain its competitive position in the industry by increasing its facilities and its working capital. (This debt has now been reduced to approximately $9,500,000.) Penn Brass & Copper Co. The Phosphor Bronze Corp. Some of the other independent brass companies incurred substantial debt during and after the war, and some have been acquired by copper companies. The complete list of the other independent companies in the brass industry is as follows: Bohn Aluminum & Brass Corp. The Bridgeport Rolling Mills Co. The Bristol Brass Corp. Chicago Extruded Metals Co. The Drawn Metal Tube Co. Wilbur B. Driver Co. Driver-Harris Co. The Plume & Atwood Manufacturing Reading Tube Corp. The Riverside Metal Co. Scovill Manufacturing Co. The Seymour Manufacturing Co. A. H. Wells & Co., Inc. Wolverine Tube Division Western Brass Mills, Division of Olin The three largest domestic copper companies exert a dominating influence on the brass-mill industry. Up to 70 percent of the brass-mill industry is controlled by or closely affiliated with copper companies. The three dominant domestic copper companies are Anaconda Copper Mining Co., Kennecott Copper Corp., and Phelps Dodge Corp. Anaconda Copper Mining Co.'s brass-mill subsidiary is the American Brass Co.; Kennecott Copper Corp.'s is Chase Brass & Copper Co., Inc.; and Phelps Dodge Corp.'s is Phelps Dodge Copper Products Corp. In addition, American Smelting & Refining Co., with large mining interests, exercises a strong influence in the brass-mill industry through the ownership of a substantial share in Revere Copper & Brass, Inc. During World War II, the consolidated earnings of the three copper companies totaled $315,000,000, and the improvement in their cash position (including marketable securities) was as follows: MY DEAR SENATOR: The House renegotiation bill (H. R. 1724) which has passed the House and is now before the Senate contains a provision (subsecs. (a) and (b) of sec. 106) which would result in a terrific and unnecessary hardship on the steel industry in its defense efforts. Under this provision, as we see it, there is no exemption from renegotiation for pig iron but limits the exemption to ore and coal. Moreover, the exemption is available, except under unusual conditions, only to the actual producer of the ore and coal, as distinguished from the person who manufactures coke and pig iron. During the last wartime renego iation, we were permitted to take pig iron into renego iation costs at the market value which had the effect of eliminating from renegotiation any profit on the ore, coal, coke, and pig iron. There is every reason why this exemption should be carried forward into the new renegotiation act especially in view of the fact that the steel companies in World War II and in this emergency have been using up their low-cost, high-grade ore at a rapid rate and should receive additional consideration on that account. The sole object of the mining exemption is to give extra consideration to the matter of depletion and, in the case of iron ore, you do not give the owners any consideration unless you extend the exemption to the manufacturer of pig iron. I enclose herein a brief memorandum explanatory of the problem and also a proposed amendment to H. R. 1724 to restore the pig-iron exemption. The enclosed proposed amendment follows the exact language of the Renegotiation Act of 1942 except that we have followed the order H. R. 1724 which inserts the agricultural exemption before the mining exemption. I respectfully request that you sponsor this amendment with the Senate Finance Committee and do everything possible to secure its adoption in the interest of national defense. I am certain that if the House Ways and Means Committee had had time to weigh the consequence of this last-minute amendment, they would not have added it at the last moment. I would' appreciate an opportunity to discuss this with you in person. RAOUL E. DESVERNINE. P. S. So that you may be advised, I am Washington counsel for National Steel Corp. and its subsidiaries. R. E. D. MEMORANDUM CONCERNING "PIG IRON EXEMPTION" IN RENEGOTIATION The Renegotiation Act of 1942, under which World War II renegotiation was conducted, provided that the renegotiation provisions did not apply to "any contract or subcontract for the product of a mine * * or other minerals * deposit, * * which has not been processed, refined, or treated beyond the first form or state suitable for industrial use." * * * In the case of iron ore, it was held that pig iron was the first form "suitable for industrial use." As a consequence, the production and treatment of ore and coal were not subject to renegotiation; the same exemption extended to the production of pig iron. * * * * * In order to protect producers of pig iron who used the iron in subsequent processing operations, a subsequent section provided that in the case of a contractor "who produces or acquires the product of a mine * or other mineral * * * deposit, * * * 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 * * * if he had sold such product at such first form or state." Under this section, it was held that steel producers could take in their pig iron at market price, in figuring their excessive profits, thereby eliminating from renegotiation any profits which might have been realized in the production of the ore or coal or in the production of pig iron. The 1948 Renegotiation Act, under which we have been thus far operating, provided in subsection (d) that it should not apply to any of the contracts or subcontracts exempted in the prior renegotiation law. As a consequence, "pig iron exemption" was continued. The present House bill, H. R. 1724, which has been reported to the House by the Ways and Means Committee, is a "clean bill" substituted for H. R. 1270 introduced by Mr. Doughton. Mr. Doughton's original bill contained an exemption of agricultural commodities, as did the World War II renegotiation law, but had no exemption of the products of mines, etc. The House committee did insert a limited exemption, found in section 106 of H. R. 1724, but this exemption does not cover a producer of pig iron, in the opinion of the writer. * * * * * The exemption, in H. R. 1724, declares that the act will not apply to "any contract or subcontract for the product of a mine * or other mineral ** 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 *." The term "ordinary treatment processes" is then defined with respect to the provisions of the Revenue Act of 1950 dealing wih percentage depletion. Such provision of the Revenue Act of 1950 in effect defines ordinary treatment processes as cleaning and beneficiating processes at the mine or at a point within 50 miles of the mine, including transportation to such point. However, for present purposes, it is not necessary to discuss the technical details of this definition, in view of the conclusions reached below. As the writer interprets this exemption, it does not cover steel producers for two reasons: (1) The exemption is limited to the producer of the mineral and (2) the exemption continues only to the point where the first commercially marketable product is obtained, as distinguished from the exemption of the wartime act which carried it through to the point of "first industrial use." It would be the writer's opinion therefore that in the case of ore and coal the exemption would be available only to the mining company and would extend only to the prepared ore or coal because it is then in a state of a commercially marketable product. It may be suggested that where the mining company is an affiliate of the steel producer, the exemption is available because there is another provision of the bill which provides that "by agreement with any contractor or subcontractor, and pursuant to regulations promulgated by it, the Board may in its discretion conduct renegotiation on a consolidated basis." This provision, however, does not improve the situation to any substantial extent for the following reasons: 1. It applies only where the contractor agrees to consolidate renegotiation which it might not want to do for other reasons. 2. Even if such an agreement is made, the Board has the discretion to determine if and on what basis renegotiation will be consolidated: and 3. In any event, in the case of ore and coal, if consolidated renegotiation were used, only profits prior to the production of a salable ore or coal would be eliminated. tor * * * * * * deposit, * * * * * * H. R. 1724 goes on to provide that "in the case of a contractor or subcontracwho produces the product of a mine or other mineral and processes, refines or treats such a product beyond the first commercially marketable state 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 * * * if he had sold the product" in the first commercially marketable state. In the writer's opinion, this does not improve the situation for the reasons indicated above with respect to the "consolidation" privilege. In the first place, unless consolidated renegotiation were applied, the exemption is limited to the producer of the ore or coal, and not the subsequent pig iron manufacturer. In the second place, the exemption, as already emphasized, carries only to the first commercially marketable product which, of course, would be the treated ore or coal. JOHN E. LAUGHLIN, Jr. PROPOSED AMENDMENTS TO H. R. 1724 TO RESTORE THE "PIG IRON EXEMPTION" Amend subsections (a) and (b) of section 106 to read as follows (the new matter is italicized; omitted matter is in brackets): (a) MANDATORY EXEMPTIONS.-The provisions of this title shall not apply to(1) any contract by a Department with any Territory, possession, or State, or any agency or political subdivision thereof, or with any foreign government or any agency thereof, or (2) any contract or subcontract for an agricultural commodity in its raw or natural state, or if the commodity is not customarily sold or has not an established market in its raw of natural state, in the first form or state, beyond the raw or natural state, in which it is customarily sold or in which it has an established market [but only if such contract or subcontract is with the producer of such agricultural commodity]. The term “agricultural commodity" as used herein shall include but shall not be limited to (A) commodities resulting from the cultivation of the soil such as grains of all kinds, fruits, nuts, vegetables, hay, straw, cotton, tobacco, sugarcane, and sugar beets; (B) natural resins, saps, and gums of trees (C) animais, such as cattle, hogs, poultry, and sheep, fish and other marine life, and the produce of live animals, such as wool, eggs, milk, and cream; or (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 first form or state suitable for industrial use; [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;] or (4) any contract or subcontract for timber which has not been processed beyond the form of logs; [, but only if such contract or subcontract is with the owner of the timber property or with the producer of the logs;] or (5) any subcontract directly or indirectly under a contract or subcontract to which this title does not apply by reason of this subsection. (b) COST ALLOWANCE.-In the case of a contractor or subcontractor who produces or acquires an agricultural product and processes, refines, or treats such a product to and beyond the first form or state provided in paragraph (2) of subsection (a), or 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 [commercially marketable state provided in paragraph (3) of subsection (a)] or, in the case of timber, beyond the form of logs, 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 (2) or (3) of subsection (a), or, in the case of timber, in the form of logs. |