Report on the Renegotiation Act of 1951

Pursuant to the request of Mr. Wilbur D. Mills, chairman of the House Committee on Ways and Means, the staff of the Joint Committee on Internal Revenue Taxation prepared this report on the Renegotiation Act of 1951 to assist the Committee on Ways and Means in evaluating the act.

In preparing this report, the staff collected information and materials from a number of sources. Information was obtained regarding the procurement activities in recent years from the Government departments and agencies named in the act. With regard to procurement practices and policies, the staff was assisted by the studies which have been made by the Special Investigations Subcommittee of the House Armed Services Committee, by the Subcommittee on Federal Procurement and Regulation of the Joint Economic Committee, and by the Subcommittee on Economy in Government of the Joint Economic Committee. In August 1967, the Special Investigations Subcommittee began an overall review of military procurement policies, procedures, and practices. To date the subcommittee has held two sets of hearings and has issued two interim reports: "Part ITruth in Negotiations," and "Part II-Small Purchases." The Subcommittee on Federal Procurement and Regulation held hearings on Government procurement, and issued two reports on the subject in 1966: "Background Material on Economic Impact of Federal Procurement" (March 1966), and "Economic Impact of Federal Procurement-1966" (May 1966). The Subcommittee on Economy in Government held hearings during 1967 on Government procurement and issued three reports recently: "Background Material on Economy in Government-1967" (April 1967), "Economy in Government" (July 1967), and "Economy in Government-1967: Updated Background Material" (November 1967).

The Renegotiation Board furnished the staff with data and materials relating to its operations and activities and to the application of the act.

The departments and agencies named in the act also furnished the staff with their views on the Renegotiation Act and its applicability to contracts awarded by them.

In addition, Representative Gonzalez furnished the staff with the materials he assembled on the Renegotiation Act and the activities of the Renegotiation Board.

In response to a request for comments contained in a press release issued by Chairman Mills, a number of interested individuals and organizations submitted their comments and views on the Renegotiation Act and the various pending bills to extend and/or modify the act.

The staff's report is intended as a discussion of the more important aspects of renegotiation and of the framework within which it functions, rather than as a discussion in detail of the renegotiation process.

As a result of its study, the staff makes the following recommendations:

(1) The Renegotiation Act should be extended for at least 2 years. In addition, the committee may wish to give consideration to extending the act for a 4-year period in view of a number of factors: the continuing procurement buildup associated with the Vietnam conflict; the timelag between procurement and renegotiation with respect to a contract; and the time required in order to meaningfully evaluate the effectiveness of new procurement methods and practices in preventing excessive profits.

(2) The committee may also wish to give consideration to revising the exemption for standard commercial articles and services in order to insure that goods and services qualifying for the exemption are, in fact, commercial items.

If the committee desires to take action in this area, the staff recommends three modifications in the exemption. First, the percentage of the sales of an article or service (or class of articles) which must be nonrenegotiable for the exemption to apply could be raised from 35 to 50 percent. Second, contractors who "selfapply" the exemption for a standard commercial article could be required to report the application, and its basis, to the Board. Third, it could be provided that for the exemption to apply, a standard commercial article (or service) must be sold to the Government at a price which is reasonably comparable to the price charged a commercial purchaser for an order of similar quantity.

(3) The Renegotiation Board should develop and maintain various additional types of information which are needed for an adequate analysis of some of the more fundamental aspects of renegotiation.

(4) The Renegotiation Board should reevaluate its position regarding the treatment in renegotiation of amounts received under incentive-type contracts and report the results of this reevaluation to the committee. This report might place particular emphasis on the manner in which amounts received under incentive contracts awarded by the National Aeronautics and Space Administration are treated.

SECTION 1. THE RENEGOTIATION PROCESS

A. OUTLINE OF THE RENEGOTIATION PROCESS

Renegotiation is a process whereby the Government, acting through an independent establishment in the executive branch known as the Renegotiation Board, may require a contractor to refund that portion of profits on Government contracts or related subcontracts which are determined to be "excessive." In making this determination, consideration is given to amounts received or accrued by a contractor during his fiscal year (or such other period as may be fixed by mutual agreement) on contracts or on related subcontracts with Government departments named in the act. Amounts received under such renegotiable contracts and subcontracts are sometimes referred to as "renegotiable sales," "renegotiable business," and "renegotiable receipts or accruals." The departments named in the act are the Department of Defense, the Departments of the Army, Navy, and Air Force, the Maritime Administration, the Federal Maritime Board, the General Services Administration, the National Aeronautics and Space Administration, the Federal Aviation Agency, and the Atomic Energy Commission.

A determination of "excessive profits" by the Renegotiation Board is subject to redetermination by the Tax Court of the United States, and the decision of the court is subject to review by the U.S. courts of appeals on material questions of law.

Under the Renegotiation Act of 1951 as amended to date, the Renegotiation Board is composed of five members appointed by the President, by and with the advice and consent of the Senate. The Secretaries of the Army, the Navy, and the Air Force, respectively, subject to the approval of the Secretary of Defense, and the Administrator of General Services, each recommend to the President, for his consideration, one person from civilian life to serve as a member of the Board. The President, at the time of appointment, designates one member to serve as Chairman. No member is permitted to actively engage in any business, vocation, or employment other than as a member of the Board. The principle office of the Board (frequently referred to as the headquarters office) is in Washington, D.C. Under authority granted to it by the act, the Board has established two regional boards located in Washington, D.C., and Los Angeles, California.

The act does not apply to amounts attributable to contracts exempt from its provisions under section 106 (providing for "mandatory" and "permissive" exemptions), or to those amounts which are below the minimum amount subject to renegotiation specified in section 105(f). This minimum amount presently is $1 million, and it is commonly referred to as the "floor." Under the act, renegiotation may not be conducted with respect to individual contracts, but must be conducted with respect to all amounts received or accrued by a contractor during his fiscal year (or such other period as may have

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Report on the Renegotiation Act of 1951, Volumen36