Letters, telegrams, statements, etc., submitted for the record by-Con. National Association of Manufacturers, law department: Statement-- National Sand and Gravel Association and the National Industrial Sand Association, Vincent P. Ahearn, executive secretary: State- Pickands, Mather & Co., H. C. Jackson, partner, Cleveland, Ohio: Reconstruction Finance Corporation: Report on H. R. 1724- Rockwell, Col. Willard F., Rockwell Manufacturing Co., Pittsburgh, Pa.: Annual report, Timken-Detroit Axle Co., Detroit, Mich. Rushlight, W. A., W. A. Rushlight & Co., Portland, Óreg.: State- Snyder, Chadwell & Fagerburg, D. F. Fagerburg, Chicago, Ill.: Stow Manufacturing Co., C. F. Hotchkiss, president, Binghamton, Timken-Detroit Axle Co., Detroit, Mich.: Annual report, 1950.. United States Beet Sugar Association, Robert H. Shields, president and general counsel, Washington, D. C.: Statement. West, Sid Y., Memphis, Tenn.: Telegram to Senator McKellar.. RENEGOTIATION OF CONTRACTS WEDNESDAY, JANUARY 31, 1951 UNITED STATES SENATE, The committee met, pursuant to notice, at 10 a. m. in room 312 Senate Office Building, Senator Walter F. George (chairman) presiding. Present: Senators George, Byrd, Hoey, Frear, Butler of Nebraska, Martin, and Williams. Also present: Mrs. Elizabeth B. Springer, chief clerk. The CHAIRMAN. The committee will come to order. We will proceed with the hearing on H. R. 1724, the Renegotiation Act of February 25, 1944, as amended. (H. R. 1724 is as follows:) [H. R. 1724, 82d Cong., 1st ses.] AN ACT To provide for the renegotiation of contracts, and for other purposes. Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That this Act may be cited as the "Renegotiation Act of 1951". TITLE I-RENEGOTIATION OF CONTRACTS SEC. 101. DECLARATION OF POLICY. It is hereby recognized and declared that the Congress has made available for the execution of the national defense program extensive funds, by appropriation and otherwise, for the procurement of property, processes, and services, and the construction of facilities necessary for the national defense; that sound execution of the national defense program requires the elimination of excessive profits from contracts made with the United States, and from related subcontracts, in the course of said program; and that the considered policy of the Congress, in the interests of the national defense and the general welfare of the Nation, requires that such excessive profits be eliminated as provided in this title. SEC. 102. CONTRACTS SUBJECT TO RENEGOTIATION. (a) IN GENERAL.-The provisions of this title shall be applicable (1) to all contracts with the Departments specifically named in section 103 (a), and related subcontracts, to the extent of the amounts received or accrued by a contractor or subcontractor on or after the first day of January 1951, whether such contracts or subcontracts were made on, before, or after such first day, and (2) to all contracts with the Departments designated by the President under section 103 (a), and related subcontracts, to the extent of the amounts received or accrued by a contractor or subcontractor on or after the first day of the first month beginning after the date of such designation, whether such contracts or subcontracts were made on, before, or after such first day; but the provisions of this title shall not be applicable to receipts or accruals attributable to performance, under contracts or subcontracts, after December 31, 1953. (b) RENEGOTIATION ACT OF 1948.-The Renegotiation Act of 1947 shall not apply with respect to any receipts or accruals subject to renegotiation under this title. If a contractor or subcontractor, during the same fiscal year in which he has receipts or accruals subject to renegotiation under this title, has other receipts 1 or accruals from contracts or subcontracts subject to renegotiation under the Renegotiation Act of 1948, the provisions of this title shall, notwithstanding subsection (a), apply to such other receipts or accruals if the Board and such contractor or subcontractor agree to such application of this title; and in the case of such an agreement the provisions of the Renegotiation Act of 1948 shall not apply to such other receipts or accruals of the fiscal year. (c) SUSPENSION OF CERTAIN PROFIT LIMITATIONS.-Notwithstanding any agreement to the contrary, the profit-limitation provisions of the Act of March 27, 1934 (48 Stat. 503, 505), as amended and supplemented, shall not apply to any contract or subcontract if any of the receipts or accruals therefrom are subject to this title. SEC. 103. DEFINITIONS. For the purpose of this title (a) DEPARTMENT.-The term "Department" means the Department of Defense, the Department of the Army, the Department of the Navy, the Department of the Air Force, the Department of Commerce, the General Services Administration, the Atomic Energy Commission, and such other agencies of the Government exercising functions in connection with the national defense as the President shall designate. (b) SECRETARY.-The term "Secretary" means the Secretary of Defense, the Secretary of the Army, the Secretary of the Navy, the Secretary of the Air Force, the Secretary of Commerce, the Administrator of General Services, the Atomic Energy Commission, and the head of any other agency of the Government which the President shall designate pursuant to subsection (a) of this section. (c) BOARD.-The term "Board" means the Renegotiation Board created by section 107 (a) of this Act. (d) RENEGOTIATE AND RENEGOTIATION. The terms "renegotiate" and "renegotiation" include a determination by agreement or order under this title of the amount of any excessive profits. (e) EXCESSIVE PROFITS.-The term "excessive profits" means the portion of the profits derived from contracts with the Departments and subcontracts which is determined in accordance with this title to be excessive. In determining excessive profits there shall be taken into consideration the following factors: (1) Efficiency of contractor, with particular regard to attainment of quantity and quality production, reduction of costs, and economy in the use of materials, facilities, and manpower; (2) Reasonableness of costs and profits, with particular regard to volume of production, normal earnings, and comparison of war and peacetime products; (3) Reasonableness of return on net worth, with particular regard to the amount and source of public and private capital employed; (4) Extent of risk assumed, including the risk incident to reasonable pricing policies; (5) Nature and extent of contribution to the defense effort, including inventive and developmental contribution and cooperation with the Government and other contractors in supplying technical assistance; (6) Character of business, including source and nature of materials, complexity of manufacturing technique, character and extent of subcontracting, and rate of turn-over; (7) Such other factors the consideration of which the public interest and fair and equitable dealing may require, which factors shall be published in the regulations of the Board from time to time as adopted. (f) PROFITS DERIVED FROM CONTRACTS WITH THE DEPARTMENTS AND SUBCONTRACTS. The term "profits derived from contracts with the Departments and subcontracts" means the excess of the amount received or accrued under such contracts and subcontracts over the costs paid or incurred with respect thereto and determined to be allocable thereto. All items estimated to be allowable as deductions and exclusions under chapter 1 of the Internal Revenue Code (excluding taxes measured by income) shall, to the extent allocable to such contracts and subcontracts, be allowed as items of cost, except that no amount shall be allowed as an item of cost by reason of the application of a carry-over or carry-back. Such costs shall be determined in accordance with the method of cost accounting regularly employed by the contractor or subcontractor in keeping his books, but, if no such method of cost accounting has been employed, or if the method so employed does not, in the opinion of the Board, or, upon redetermination, in the opinion of The Tax Court of the United States, properly reflect such costs, such costs shall be determined in accordance with such method as in the opinion of the Board, or, upon redetermination, in the opinion of The Tax Court of the United States, does properly reflect such costs. Irrespective of the method employed or prescribed for determining such costs, no item of cost shall be charged to contracts with the Departments or subcontracts or used in any manner for the purpose of determining such costs, to the extent that, in the opinion of the Board, or, upon redetermination, in the opinion of The Tax Court of the United States, such item is unreasonable or not properly chargeable to such contracts or subcontracts. In determining the amount of excessive profits to be eliminated, proper adjustment shall be made on account of the taxes measured by income, other than Federal taxes, which are attributable to the portion of the profits which are not excessive. (g) SUBCONTRACT.—The term "subcontract" means (1) any purchase order or agreement (including purchase orders or agreements antedating the related prime contract or higher tier subcontract) to perform all or any part of the work, or to make or furnish any materials, required for the performance of any other contract or subcontract; (2) any contract or arrangement covering the right to use any patented or secret method, formula, or device for the performance of a contract or subcontract; and (3) any contract or arrangement (other than a contract or arrangement between two contracting parties, one of whom is found by the Board to be a bona fide executive officer, partner, or full-time employee of the other contracting party) under which (A) any amount payable is contingent upon the procurement of a contract or contracts with a Department or of a subcontract or subcontracts; or (B) any amount payable is determined with reference to the amount of a contract or contracts with a Department or of a subcontract or subcontracts; or (C) any part of the services performed or to be performed consists of the soliciting, attempting to procure, or procuring a contract or contracts with a Department or a subcontract or subcontracts. Nothing in this subsection shall be construed (i) to affect in any way the validiy or construction of provisions in any contract with a Department or any subcontract, heretofore at any time or hereafter made, prohibiting the payment of contingent fees or commissions; or (ii) to restrict in any way the authority of the Board to determine the nature or amount of selling expense under subcontracts as defined in this subsection, as a proper element of the contract price or as a reimbursable item of cost, under a contract with a Department or a subcontract. (h) FISCAL YEAR.-The term "fiscal year" means, except in the case of a partnership as defined in section 3797 (a) (2) of the Internal Revenue Code, the taxable year of the contractor or subcontractor under chapter 1 of such code. In the case of a partnership as so defined the term "fiscal year" means such period as the Board by regulations may prescribe. (i) RECEIVED OR ACCRUED AND PAID OR INCURRED.-The terms "received or accrued" and "paid or incurred" shall be construed according to the method of accounting employed by the contractor or subcontractor in keeping his books, but if no such method of accounting has been employed, or if the method so employed does not, in the opinion of the Board, or, upon redetermination, in the opinion of The Tax Court of the United States, properly reflect his receipts or accruals or payments or obligations, such receipts or accruals or such payments or obligations shall be determined in accordance with such method as in the opinion of the Board, or, upon redetermination, in the opinion of The Tax Court of the United States, does properly reflect such receipts or accruals or such payments or obligations. (j) PERSON.-The term "person" shall include an individual, firm, corporation, association, partnership, and any organized group of persons whether or not incorporated. (k) MATERIALS.-The term "materials" shall include raw materials, articles, commodities, parts, assemblies, products, machinery, equipment, supplies, components, technical data, processes, and other personal property. (1) AGENCY OF THE GOVERNMENT.-The term "agency of the Government" means any part of the executive branch of the Government or any independent establishment of the Government or part thereof, including any department (whether or not a Department as defined in subsection (a) of this section), any corporation wholly or partly owned by the United States which is an instrumentality of the United States, or any board, bureau, division, service, office, officer, employee, authority, administration, or other establishment of the Government which is not a part of the legislative or judicial branches. SEC. 104. RENEGOTIATION CLAUSE IN CONTRACTS. Subject to section 106 (a), the Secretary of each Department specifically named in section 103 (a) shall insert in each contract made by such Department thirty days or more after the date of the enactment of this Act, and the Secretary of each Department designated by the President under section 103 (a) shall insert in each contract made by such Department thirty days or more after the date of such designation, a provision under which the contractor agrees (1) to the elimination of excessive profits through renegotiation; (2) that there may be withheld by the United States from amounts otherwise due the contractor, or that he will repay to the United States, if paid to him, any excessive profits; (3) that he will insert in each subcontract described in section 103 (g) a provision under which the subcontractor agrees― (A) to the elimination of excessive profits through renegotiation; (B) that there may be withheld by the contractor for the United States from amounts otherwise due to the subcontractor, or that the subcontractor will repay to the United States, if paid to him, any excessive profits; (C) that the contractor shall be relieved of all liability to the subcontractor on account of any amount so withheld, or so repaid by the subcontractor to the United States; (D) that he will insert in each subcontract described in section 103 (g) provisions corresponding to those of subparagraphs (A), (B), and (C), and to those of this subparagraph; (4) that there may be withheld by the United States from amounts otherwise due the contractor, or that he will repay to the United States, as the Secretary may direct, any amounts which under section 105 (b) (1) (C) the contractor is directed to withhold from a subcontractor and which are actually unpaid at the time the contractor receives such direction. The obligations assumed by the contractor or subcontractor under paragraph (1) or (3) (A), as the case may be, agreeing to the elimination of excessive profits through renegotiation shall be binding on him only if the contract or subcontract, as the case may be, is subject to this title. A provision inserted in a contract or subcontract, which recites in substance that the contract or subcontract shall be deemed to contain all the provisions required by this section shall be sufficient compliance with this section. Whether or not the provisions specified in this section are inserted in a contract with a Department or subcontract, to which this title is applicable, such contract or subcontract, as the case may be, shall be considered as having been made subject to this title in the same manner and to the same extent as if such provisions had been inserted. SEC. 105. RENEGOTIATION PROCEEDINGS. (a) PROCEEDINGS BEFORE THE BOARD.-Renegotiation proceedings shall be commenced by the mailing of notice to that effect, in such form as may be prescribed by regulation, by registered mail to the contractor or subcontractor. The Board shall endeavor to make an agreement with the contractor or subcontractor with respect to the elimination of excessive profits received or accrued, and with respect to such other matters relating thereto as the Board deems advisable. Any such agreement, if made, may, with the consent of the contractor or subcontractor, also include provisions with respect to the elimination of excessive profits likely to be received or accrued. If the Board does not make an agreement with respect to the elimination of excessive profits received or accrued, it shall issue and enter an order determining the amount, if any, of such excessive profits, and forthwith give notice thereof by registered mail to the contractor or subcontractor. In the absence of the filing of a petition with The Tax Court of the United States under the provisions of and within the time limit prescribed in section 108, such order shall be final and conclusive and shall not be subject to review or redetermination by any court or other agency. The Board shall exercise its powers with respect to the aggregate of the amounts received or accrued during the fiscal year (or such other period as may be fixed by mutual agreement) by a contractor or subcontractor under contracts with the Departments and subcontracts, and not separately with respect to amounts received or accrued under separate contracts with the Departments or subcontracts, except that the Board may exercise such powers separately with respect to amounts received or accrued by the contractor or subcontractor under any one or more separate contracts with |