Senator BUTLER. They are not exempted, are they, under this bill? Mr. ROBERTS. Not until and unless the Board under the right granted in this bill takes such action.

Senator BUTLER. I think the suggestion should be made that the exemption covering communication and transportation, just as well as public utilities, should be included, because they are certainly controlled.

Mr. ROBERTS. Indeed, they are controlled. It is a question of the committee's judgment, whether it should be in what we call the mandatory exemptions with which we are dealing now, or whether it should be left to the Board under what we call the permissive exemptions. It is now under the language of the permissive exemptions.

The CHAIRMAN. Mr. Roberts, let me ask you this: If a taxpayer has a negotiated contract for 1 year, on which he makes a profit, and he has a negotiated contract for the subsequent year on which he has a loss, he is not allowed, you do not take into account nor allow any adjustment for that, if the loss occurs in two different years; is that correct?

Mr. ROBERTS. Mr. Chairman, the language of this bill says that there will be no carry-forward or carry-back of a loss. However, the bill provides standards, that is, seven standards which shall be used to evaluate or determine whether or not there exist excessive profits. Under those standards, a man's prior year's loss operation would certainly weigh on the mind of anybody making a determination of an excessive profit in a following year.

I wish to make this distinction, that there is no provision to mathematically add the 2 years together.

The CHAIRMAN. I know that is true. I was just thinking_of, particularly, when you are dealing with raw farm products. The operation from one year, covering the same product, may show a profit, and the subsequent year or season may show a definite loss. There is such a vital connection, actually, in that economic picture of the producer of products, that is, raw farm products, there ought to be some leeway, some chance for that. You say these standards do permit you to look at that picture?

Mr. ROBERTS. Yes, sir.

The CHAIRMAN. They would do it?

Mr. ROBERTS. We have been against adding more than a year, adding 2 years or more together. During the late stages of World War II renegotiation, there was quite a body of thought that you should add all of the war years together and strike an average on them. The CHAIRMAN. Yes.

Mr. ROBERTS. We concluded against that, and we are still of that opinion.

The CHAIRMAN. Can a contractor, a taxpayer, offset a loss for a nonrenegotiable contract against a gain from a renegotiable contract? Mr. ROBERTS. No, sir; not the way we have applied the present renegotiation act.

The CHAIRMAN. You do not allow that?

Mr. ROBERTS. No, sir.

The CHAIRMAN. In figuring out cost, do you allow any adjustment for stepped-up depreciation or amortization; is that allowable under the bill?

Mr. ROBERTS. Under this bill, interpreting the cost allowances, it would be just as it was under the 1943 Act.

The CHAIRMAN. It would be?

Mr. ROBERTS. Yes, sir.

The CHAIRMAN. All right, thank you. You may proceed.

Mr. ROBERTS. I wish to qualify that, Mr. Chairman. I think that the people administering it would have the right to say that some portion of it was not allocable to the contracts. I merely want to state that if the same reasoning follows in the administration of this act as was followed in the wartime act, it would be allowed. I recall reading definitely the history of the hearings before the Senate in connection with the allowance of amortization, and the 1943 Renegotiation Act allowed it, after careful discussion with this body of the Congress.

The CHAIRMAN. Yes, sir; we did have that question up.

Can the Department under this bill renegotiate a contract which is not a defense contract, not related to that, not directly related to a defense contract?

Mr. ROBERTS. Under this bill, all of the contracts by a named department. Let us illustrate that, the Department of Commerce is a named department, and all of their

The CHAIRMAN. All of its contracts

Mr. ROBERTS. Are subject to this bill.

The CHAIRMAN. Are subject to renegotiation?

Mr. ROBERTS. Yes, sir.

The CHAIRMAN. Whether they relate directly to the defense or not? Mr. ROBERTS. That is right.

The CHAIRMAN. I wanted to get that clear. All right. You may proceed now.

Mr. ROBERTS. (3) Contracts and subcontracts 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. Here, again, unlike the World War II exemption of raw materials contracts, this exemption applies only if such contracts or subcontracts are made with the owner or operator of the producing property. In the case of mines, wells and deposits, the term "ordinary treatment processes" is defined to mean those processes which are considered in computing gross income from the property for the purpose of the percentage depletion allowance provided by section 114 (b) (3) or (4) of the Internal Revenue Code. In the case of other products, the term is stated to mean such similar processes as the Board may by regulations prescribe. In this respect the exemption of raw materials is narrower than that contained in the World War II Renegotiation Act.

Senator BUTLER. I was going to ask you that question. Apparently, the language of this bill is entirely different from the old law. Mr. ROBERTS. Yes; in those respects.

Senator BUTLER. Do you tell us in your explanation just why that change?

Mr. ROBERTS. I will attempt to do it. It is a very difficult thing to do.

Senator BUTLER. It is natural to assume that during the process of the operation of the previous law, everyone affected got pretty well

accustomed to the rules and the regulations. So far as I know, they were adjusted so that business went along the same way. Now we are changing the rules. Will that be beneficial?

Mr. ROBERTS. I do not know that it will be beneficial. It will apply renegotiation to some processes that were not renegotiated under the World War II act. I believe what we are getting at is the difficulty that may be encountered in the administrative processes, laying aside the fact, of course, that no one wants to be renegotiated, what obvious objection would be there to any broadening of the coverage of renegotiation.

Senator BUTLER. We are getting ourselves into a rather complicated position, I think, as a Government. In my own State, which is not a mineral State, of course, we are now producing some oil, but speaking of the minerals in general, which we do not have, I am familiar with the fact that we are all of the time concerned about subsidies in order to get the production from our mines. We are turning right around here and providing new rules, so that if any of them happen to make any profits, it may all be taken away from them.

Mr. ROBERTS. I would like to point out that being subject to renegotiation should not imply that warranted profits would be removed in the process.

Senator BUTLER. In some of our bills we pass on mineral subsidies: It is provided that the payment from the Government is not taxable. Mr. ROBERTS. Yes, sir.

The CHAIRMAN. We have made certain exemptions; yes, sir.

Mr. ROBERTS. The second point I would like to make on that is that we are also short of airplanes, also short of tanks. If that reasoning applies, why then perhaps we should not renegotiate those other categories of items.

Senator BUTLER. There are some critical items that we positively have to have. A situation could arise where it might be difficult, if not impossible, to get them from abroad. We have to develop our local resources to the limit, under the circumstaaces that face us today. I am concerned only to see that on the one hand we do not encourage production, and on the other hand we discourage it.

Mr. ROBERTS. To the extent renegotiation is feared, I would say that it would discourage production to anybody to which it applies; but I see no distinction between the maker of aircraft, tanks, guns, or other items, and the person producing a mineral. I wish to clarify that, if I may. My statement necessarily involves this proposition, that the renegotiation people will have enough ability and enough judgment to make due allowance for any consideration such as you have indicated.

The CHAIRMAN. Under the prior act, your renegotiation commenced, did it not, when the mineral was ready for industrial use?

Mr. ROBERTS. Yes, sir.

The CHAIRMAN. Now you are going back beyond that. Of course, you have to have new rules and regulations, and you write them all out. Is it not your opinion that that may retard the procurement of some of the necessary vital minerals and metals that we so badly need at this time? Did you have a great deal of trouble with the prior act on this question, on this point?

Mr. ROBERTS. No. I would want to be sure to make clear that it is not being moved back because of administrative difficulty in apply

ing it at the former level. There were some administrative difficulties, of course.

The CHAIRMAN. There is that, in anything.

Mr. ROBERTS. I wish to be sure to make clear that it is operable at the old wartime level. It is moved back at the suggestion of people who have testified before the Senate committee investigating the national defense program. The concensus of opinion and, I believe, the recommendation of that committee, was that there should be very few, if any, exemptions from renegotiation in another emergency. They may have had in mind that if we get into an actual conflagration, such as we were in before-there may be a distinction there.

Senator MARTIN. Mr. Roberts, was pig iron exempted in the prior law?

Mr. ROBERTS. Pig iron was the first stage of industrial use, the first state of the operation that was considered, and so it was exempted up through pig iron.

Senator MARTIN. I notice in your statement here, and I was looking over the law-I have not had time to go into it as carefully as should like to-but it would seem to me that, in this new law, pig iron would not be exempted.

Mr. ROBERTS. That is right.

. Senator MARTIN. I was wondering whether that will not retard this. Pig iron is really a raw material. That is a process that you have to make it less expensive, and transportation, and so forth. I just wondered why the change was made.

Mr. ROBERTS. It was made before the Committee on Ways and Means. I would like to say this: The bill sent up to the Congress last summer, introduced by Mr. Vinson, which was the stand-by legislation, had no exemptions in it.

Senator MARTIN. I do not want to take the time of the committee now. I will make a little further study of it; but, from first impression-I just got hold of this in the last hour; I want to make a further study-but it seems to me that it probably would retard things, because pig iron is really a raw material. There is not any use that you can make out of pig iron until it is processed.

Senator BUTLER. Agricultural crops are raw materials, too, but they have them covered now.

Mr. ROBERTS. Up to their salable state, they are not subject to renegotiation.

Senator MARTIN. Pig iron is not salable except in use for making steel and various things that you would manufacture from it. The idea of making pig iron is to make it easier to transport and to handle, and so forth. I will not take any further time with it now, until I have had time to study it further.

The CHAIRMAN. I think it is very important here. Mr. Roberts, nobody wants people to make exorbitant and excessive profits out of the war effort. Everybody is agreed on that. We start in full agreement. And, yet, applying pure theory, you may defeat the very purpose of every type of legislation that we do enact to meet these emergencies; in other words, you may just so hamper the whole operation that you just will not get your production. That is what we have to keep in mind, also. You see, you are restricting it. You not only reduce the amount. I very well remember Judge Patterson, who appeared before this committee, the Secretary of War, who urged us

to up the exemption from $100,000, or suggested that we do it, to $500,000, for this important reason: that it would enable the renegotiators to devote more time to the large contracts where there is an immense amount of money involved and not spend so much time on little contracts where there could not be any tremendous amount of excess profits in individual contracts, although there might come, of course, the exceptional situations in cases where an aggregate of small contracts would run into an excess profits that ought not to be allowed. Of course, under the old law, on this question of minerals, we started renegotiation at the time that the mineral or metal was ready for commercial use. And we did not limit, in the case of farm products and, to my recollection, mineral products, these products to the producer; these contracts did not exempt the contracts to the producer. We recognize that there were necessary operations beyond the producer, and before you got into the commercial use or industrial use of many of these things, especially raw materials and raw products. Now you are making it much narrower for the purpose, of course, I can very well see, in theory, of making it more difficult for somebody to make an excess profit; but, by the same token, you are making it very much more difficult to procure what you need to meet a real

emergency.

I submit these things to you because we will be looking at them later on; and, if amendments are suggested, why, we want you to look at those amendments.

I have one here already suggested on this very question of minerals. It may be too broad, but it indicates, of course, the trouble that we may be running into.

You may proceed.

Mr. ROBERTS. The line of exemption provided by this bill is, in effect, the depletion line or its equivalent. The exemption line drawn by the World War II act was at the point where the material had not been processed, refined, or treated beyond the first form or state suitable for the industrial use. Such first form or state was considered for the purposes of World War II renegotiation to be the state at which a substantial portion of a product was used by the ultimate consumer or by industries other than the industry of origin. For example, in the case of iron ore, the first such form or state was pig iron, which is higher up the scale of processing than is the state taken into consideration for purposes of the depletion allowance.

(4) Contracts and subcontracts for timber which has not been processed beyond the form of logs-but, again, only if such contracts or subcontracts are made with the owner of the timber property or with the producer of the logs.

(5) All subcontracts directly or indirectly under contracts or subcontracts in any of the four categories just described.

In short, the subcontracts under those exempt contracts are likewise exempt.

To insure equitable treatment of integrated producers of exempted products, the Board is required in subsection (c) to prescribe by regulation a cost allowance substantially equivalent to the amount which would have been realized by them had they sold such products in their exempted form or state.

That is the same as the World War II and as the present practice. I might add, that is the only place where this problem really comes,