[Policies Governing Private Financing of Emergency Facilities, May 1940 to June 1942] [From the U.S. Government Publishing Office, www.gpo.gov] CIVILIAN PRODUCTION ADMIN (STRATTON BUREAU OF DEMOBILIZATION POLICIES GOVERNING PRIVATE FINANCING OF EMERGENCY FACILITIES MAY 1940 TO JUNE 1942 1 HISTORICAL REPORTS ON WAR ADMINISTRATION: WAR PRODUCTIONBOARD Special Study No. 12 23-765 Cover CIVILIAN PRODUCTION ADMINISTRATION John D. Small, Administrator Bureau of Demobilization!, G. Lyle Belsley, Director POLICIES GOVERNING PRIVATE FINANCING OF EMERGENCY FACILITIES May 1940 to June 1942 Prepared under the supervision of JAMES W. FESLER War Production Board Historian by ETHAN P. ALLEN First issued September 20, 1944 Re-issued March 15, 1946 HISTORICAL REPORTS ON WAR ADMINISTRATION: WAR PRODUCTION BOARD SPECIAL STUDY No. 1 2 23-765 Pl bu HISTORICAL REPORTS ON WAR ADMINISTRATION: WAR PRODUCTION BOARD SPECIAL STUDIES SERIES Number Title > i Issu ed ; Re-issued 1,2,3 Not available .... U Evolution of Premium Price Policy for Copper, Lead . and Zinct January 1940 to November 1943 Dec. 10, 1943 Feb. 22, 1946 5 Not available .... 6 Resumption of Production of Domestic Electric Flat Irons: April 1943 to August 1944 Aug. 31, 1944 Mar. 1, 1946 7 Pulp and Paper Policies of the War Production Soard and Predecessor Agencies: 1940 - 1943 Mar. 25, 1944 Mar. 1, 1946 8 Lead and Zinc Policies of the War Production Board and Predecessor Agencies: May 1940 to March 1944 Mar. 31, 1944 Mar. 1, 1946 9 The Closing of the Gold Mines: August 1941 to March 1944 June 1, 1944 Apr. 5, 1946 10 Mercury Policies of the War Production Board and Predecessor Agencies: May 1940 to March 1944 June 3, 1944 Mar. 8, 1946 11 Landing Craft and the War Production Board: April 1942 to May 1941; July 15, 1944 Mar. 8, 1946 12 Policies Governing Private Financing of Emergency Facilities: May 1940 to June 1942 Sept.20, 1944 Mar. 15, 1946 13 Farm Machinery and Equipment Policies of the War Production Board and Predecessor Agencies: May 1940 to September 1944 Nov. 10, 1944 Mar. 15, 1946 14 Concentration of Civilian Production by the War Production Board: September 1941 to April 1943 Nov. 25, 1944 Mar. 22, 1946 15 Development of the Reconversion Policies of the War Production Board: April 1943 to January 1945 Feb. 26, 1945 Mar. 22, 1946 16 Alcohol Policies of the War Production Board and Predecessor Agencies: May 1940 to January 1945 Apr. 21, 1945 Mar. 29, 1946 17 Truck Production and Distribution Policies of the War Production Board and Predecessor Agencies: July 1940 to Deèember 1944 May 23, 1945 Mar. 29, 1946 18 Shipbuilding Activities of the National Defense Advisory Commission and the Office of Production Management: July 1940 to December 1941 July 25, 1945 Apr. 5, 1946 19 The Facilities and Construction Program of the War Production Board and Predecessor Agencies: May 194Q to May 1945 Nov. 2, 1945 Apr. 5, 1946 FOREWORD It was President Roosevelt’s opinion, which President Truman has reaffirmed, that ”we need both for current use and for future reference a full and objective account of the way the Federal Government is carrying out its wartime duties.” The Special Studies constitute one of several series that attempt to meet that need with respect to the War Production Board. Each study endeavors to treat in some detail an area of the War Production Board’s operations that was particularly significant during the war and that has continuing importance for the understanding of administrative and economic problems and for the planning of industrial mobilization. Special Stuciy No. 12, Policies Governing Private Financing of Emergency Facilities: May 1940 to June 1942 was originally issued on September 20, 1944, under the same number and title, as a confidential report for use exclusively within the War Production Board. The original report has been declassified in order that it may be made generally available. Although minor errors of fact and typography have been corrected, the study has not been revised to extend its chronological coverage to the termination of the War Production Board on November 3, 1945, or to take account of any additional documentation that may have become available since completion of the original draft. 23“7«8 P3 WAR PRODUCTION BOARD WASHINGTON, D. C. September 20, 1944 IN REPLY REFER TO: MEMORANDUM . TOs Mr, G. Lyle Belsley Executive Secretary FROM: James W. Fesler, Chief Policy Analysis and Records Branch Office of the Executive Secretary Attached is Report No. 12 of the Policy Analysis and Records Branch, Policies Governing Private Financing of Emergency Facilities, When the defense program was initiated in the summer of 1940, it was taken for granted that an expansion of the productive plant of the nation sufficient to meet the emergency demand for munitions could be financed with private capital. This report traces the efforts of the Advisory Commission to the Council of National Defense and of the Office of Production Management to stimulate the necessary investment. For a variety of reasons, both economic and administrative, it was public financing that came to play the dominant “role in the expansion of facilities, but the principles worked out to govern private investment were important influences in the development of public financing policies. Most significant of these was the principle that facilities costs Aould not be included in the supply contracts let by the Armed Services. The form of contract developed for private financing was also the model which public financing contracts followed. This report is based entirely upon records in the custody of the War Production Board and upon interviews with officials of the Board. It does not purport, therefore, to trace the related activities of other agencies, such as the War and Navy Departments and the Reconstruction Finance Corporation, save as these activities became part of the record of NDAC or OPM. A preliminary draft of this report was prepared on July 12, 1944, and circulated among Board officials who have actively participated in the development of the policies discussed. The comments and suggestions of these officials have been taken into account in the preparation of the study in its present form. All reports of the Policy Analysis and Records Branch are the result of collaboration. Mr. Ethan P. Allen was the staff member with primary responsibility for preparation of this report. 23-76B P8 nobu TABLE OF CONTENTS I, Introduction • 1 Statement of the Problem 1 Reasonable Allowance 4 Loss of Useful Value 6 Vinson-Trammell Act 7 Closing Agreements 8 RFC "Lend-Lease" Plan 8 II. Legislative Action 10 Tax Amortization Proposals 10 The Second Revenue Act of 1940 16 Assignment of Claims Act of 1940 24 III. Protection of Government Interests 26 NDAC-Treasury Plan 26 Emergency Plant Facilities Contract 28 Removable Machinery 34 Modification of Basic Policy 37 IV. Public Ownership DPC Contract Forms 42 NDAC-DPC Relationship 42 Arny-DPC Relationship 44 V. Certification 47 The Henderson Proposal 47 The Nelson Proposal 48 Differences with War and Navy Departments 53 Administrative Problems 55 Tax Certification Procedure 56 Section 124 (i) 60 Policy Questions under Section 124 (i) 63 Certificates of Government Protection 74 Role of the Office of Production Management 78 The SEC Episode 79 Remedial Legislation 81 The End of NDAC - 83 Tax Amortization Committee '87 Repeal of Section 124 (1) 88 Conclusion 88 Appendix A Chronology 90 23-766 *7 n»bu - 1 - I- INTRODUCTION Statement of the Problem.—Foremost among the problems that faced the newly established Advisory Commission to the Council of National Defense in the early summer of 19,40 was the need for a productive plant adequate to a successful rearming of the United States« The actions taken during the months following the creation of the Advisory Commission can be understood only in the context of the events of 1940 and 1941. It will be necessary,therefore, to reconstruct as accurately as possible the general social atmosphere in which basic policies governing the financing of facilities expansions were worked out« The eighteen months preceding Pearl Harbor were months of significant public discussion. During this period the need for arming the nation was seriously questioned by * large segment of the population« Strong and vocal groups insisted that arming was the surest way to guarantee our entry into the "European War«" The full significance of the Fascist threat to democratic institutions was not generally recognized« Uncertainty, confusion, and lack of unity in the public mind regarding proper foreign and domestic policies were widespread« The Spanish Revolution, the swift march of Nazi legions across the face of Europe, the "phony war" of the Maginot Line, the downfall of France, the Battle of Britain—all of these events left the American people confused and undecided« Advice from foreign travelers, newspaper correspondents, engineering technicians, and students of international affairs merely added to the bewilderment already felt« Very few, indeed, were those who saw the picture clearly« A long period of slow recovery from the depths of the depression of 1929, the sharp recession of 1937» the slow climb back toward economic recovery *11 influenced American thinking« Then came the Presidential campaign of 1940, marked as it was by outbursts of strong partisan emotion« Charges of "war mongering" and "isolationism" filled the air with a din in which it was difficult to catch the voice of reason« In May of 1940 the President had set a defense goal of 50,000 aircraft« In June, the Congress appropriated $400,000,000 for the production of 4,000 planes, but seven weeks later the Secretary of War testified that contracts for only 33 planes had actually been made« The Defense' Program got under way slowly and only after months of discussion and planning« In explanation of the delay, two factors deserve particular mention here because they help to explain the governmental policies on.financing of emergency plant facilities: i/ 76th Cong«, 3d Seas., House Committee on Ways and Means and ~ Senate Committee on Finance, Joint Hearings pn Excess Profits Taxation, 1940t p. 22 (August 9, 1940)« - 2 - (1) "‘top-side’* decisions were necessary before production details could be worked out; and (2) industry was beset with fears and doubts that had to be settled before ah "all out" armament production program could be undertaken. Was the defense program to be superimposed upon the peacetime economy? Was the civilian economy to be subordinated to the demands of defense? How much private risk capital could be expected to come into the market to expand facilities needed for the defense program? Into what segments of these expansions could it be expected that private capital would find its way? What would be the area within which governmental investment would be needed? How much public financing would there be? What would be the effect of continued deficit spending upon the total capital structure of the nation? How would these expenditures be repaid? What total public debt could the national economy stand? What was the tax structure to be like, in particulars rather than in generalities? When would the emergency come to an end? Was the country moving into a full-fledged war economy? Would it be patterned after the Anny's widely publicized "M-Day" plan? Would there be an attempt to secure a "third term" for the President? What was our foreign policy? Such questions were of vital importance to the nation in the summer and fall of 1940. They were questions largely beyond the power of the Advisory Commission to decide and yet the answers would determine the area within which the policies of the Commission would have to be fitted. Some of the questions disappeared from public discussion as events moved forward. Others remain unanswered today. Enough were definitely settled to provide broad general definitions within which the Commission could begin its difficult task of equipping the country with the needed industrial capacity to meet the threat of war.. The broad general definitions of policy were, of course, laid down by Congressional action and by Presidential directives, but the views of industry, of agriculture, and of labor also played an important role in the final determination of public policy, with mutual goodwill struggling against mutual suspicion. A survey of selected trade journals indicates clearly that the problem of financing facility expansion was of paramount importance to industry and to the banking fraternity. Private financing of facilities expansion was beset with real difficulties. New contract forms, unexpected delays, clashes in personalities, uncertainty as to the length of the emergency, the "uncertainty" of the risk from the banker's point of view—these and other still more intangible factors influenced the attitude and consequent actions of industrial leaders. Urgency seemed of greater significance to governmental than to industrial and financial agencies. - 3 - Within the broad limits laid down by Congress and the President, the Commission sought to discover means of financing the facility program* Every effort was made to enlist the full aid of private capital,2/ and also to preserve the social gains of the preceding eight years. To the Advisory Commission, "it seemed prudent ... to superimpose the defense load on the regular business of the country where this does not result in loss of speed." William S. Knudsen stated in his radio report on the activities of the Advisory Commission that "it was decided to spread the load of the defense program and to the greatest possible extent employ private industry, business, finance,and engineering in order that the program would be of national scope." This general policy was pointedly emphasized by Knudsen, William L. Batt, Donald 11. Nelson and Leon Henderson in press releases, radio addresses, and speeches before various organizations during the summer and fall months of 1940, Back of these decisions were the facts of unemployed men, unused plant capacity, idle funds—a slack in the economy of the nation that could be taken up without injury to the going economy. "We have idle plant and equipment as well as idle workers" wrote Robert Nathan on May 31, 1940. ¿7 How the defense program might put these unused resources to work in rearming the nation was discussed by the Advisory Commission early in its existence, and continued to occupy much of the time and energy of the Commission during the ensuing year and a half. One other field needs exploration before the development of the NDAC program can be treated in detail: the possible legal means available to the Commission in meeting its basic problem of financing facilities expansion. Differences of opinion regarding the legal David Ginsburg, Speech before the Practicing Law Institute, New York City, March 24, 1941 (OEM Press Release, PM-252), p. 12. J/ Franklin D. Roosevelt, Public Papers and Addressee: 1940 (1941) pp. 237-233. "We must make sure, that there will be no breakdown or cancellation of any of the great social gains we have made in these past years." 4/ William S. Knudsen, Radio Report on Activities of the Advisory Commission, September 20, 1940 (NDAC Press Release, PR-106). 5/ Ibid.; "General Policies Governing Letting of Defense Contracts," developed by the Advisory Commission and issued on September 13, 1940 (PR-97); William S. Knudsen, Speech before the American Legion, Boston, Massachusetts, September 23, 1940 (PR-119); Donald M. Nelson, "Radio Report on the Activities of the Advisory Commission, November IS, 1940 (PR-258); Leon Henderson, "Radio Report on the Activities of the Advisory Commission," November 1, 1940 (PR-221); William L. Batt, Speech to the Annual Industrial Conference, Trenton, New Jersey, November 19, 1940 (PR-260). £/ Memorandum, "Stimulation of Necessary Investment for the Defense Program," May 31, 1940, carrying penciled notation "from Robert Nathan." 23~765 Pll bu - 4 - powers of the Commission, the Treasury Department, and the War and Navy Departments, were of course inevitable. Differing interpretations were placed on the same statutes by industrial and financial leaders, by administrative agencies, and by Congress. Prolonged Congressional debate was necessary before the statutory basis was finally established. While these debates were in progress, the administrative agencies and industry sought to discover means of implementing a tentative program of expansion. Recourse was had to several statutes, but none seemed entirely satisfactory to all parties. Reasonable Allowance.--The Internal Revenue Code provided that, in computing net income, "a reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence* could be taken by the taxpayer. 2/ Since most of the facilities acquired or constructed for the emergency program had an estimated physical life running beyond the expected extent of the emergency, this deduction did not solve the manufacturers1 problem. They wished to amortize the full cost of the expansion during the emergency period. "Senator Vandenberg. In other words the expectation is that these plant expansions for national defense purposes are to be completely amortized within the period of the emergency, whatever the length of the emergency is set. "Mr. Sullivan. That is right, Senator ... "Senator Vandenberg. That is on the theory that the new-plant expansion will not be utilized after the emergency is over. "Mr. Sullivan. That is correct." 8/ A Treasury regulation allowed "a reasonable deduction for obsolescence, in addition to depreciation" where the property in question could be "clearly shown by the taxpayer as being affected by economic conditions that will result in its being abandoned at a future date prior to the end of its normal useful life." 2/ But this same regulation further provided that "no deduction for obsolescence will be permitted merely because in the opinion of the taxpayer the property may become obsolescent at some later date.” The deduction was confined definitely to "such portion of the property on which obsolescence is definitely shown to be sustained." These possibilities were not 7/ Internal Revenue Cod^r Section (1V S/ 76th Cong., 3d Sees., House Committee on Ways and Means and Senate Committee on Finance, Joint Hearings on Excess Profits Taxation. 1940. pp. 77-78 (August 10, 1940). 2/ Treasury Regulation 103, section 12.33 (l)-6. 23-73B *12 tou - 5 - available to the manufacturers because they were seeking protection against abandonment of facilities due not to physical obsolescence nor to the development of the industrial arts, but rather due to loss of markets or the cancellation of contracts« As far as the regulations of the Treasury Department were concerned, obsolescence was not occasioned by mere diminution of earning power on the part of the taxpayer. ’’Senator Vandenberg. . . . The only point I don’t see is how you obviate any of these imponderables by new statute to any greater extent than you could face them under your existing power. Why do you need new law? "Mr. Sullivan. Because that law gives us the particular power in a restricted series of cases to confer special amortization. "Senator George. Oh, yes; so you are relieved of any responsibility. But now, Mr. Sullivan, section 23-L of the Revenue Act, allows you to allow reasonable depreciation? "Mr. Sullivan. That is right, sir. "Senator George. And the same principle is inherent in the depletion allowance? "Mr. Sullivan. Including a reasonable allowance for obsolescence. "Senator George. Reasonable. "Mr. Sullivan. That is right. "Senator George. Very well. Now, why haven’t you the power under existing law to allow reasonable depreciation and obsolescence? You say that it is a guess. Certainly it is a guess. But wouldn’t it be very simple to say that this allowance is subject to readjustment when this emergency passes? "Mr. Sullivan. I don’t think that would be very satisfactory to the taxpayer, and I don’t think it would be strictly honest on our part, sir. If we are not sure enough about it so that we have got to go back and correct it later on—— "Senator George (interposing). You want Congress, then, to say that it is going to be all obsolete and all pass out in 5 years, but you are not willing to take that responsibility? 23-768 P13 bu - 6 - "Mr. Sullivan, I don’t want Congress to say that at all. • • I think we are using ’reasonable* in two different ways. Senator George. •Senator George. I don’t think so." 10/ Loss of Useful Value.-" Under section 23 (e) of the Internal Revenue Code, a deduction was allowed in computing net income for what is known as Nloss of useful value.* Section 19.23 (e)—3 of Regulation 103 explains that "When through some change in business conditions the usefulness in the business of some or all of the capital assets is suddenly terminated so that the taxpayer discontinues the business or discards such assets permanently from use in such business, he may claim as a loss for the year in which he takes such action11 the difference between the adjusted basis or cost of the property and its salvage value. The Regulations go on to say that before a deduction for loss of useful value may be allowed proof must be made of some "unforeseen cause by reason of which the property has been prematurely discarded as, for example, where an increase in the cost or change in the manufacture of any product makes it necessary to abandon such manufacture, to which such special machinery is exclusively devoted, or where new legislation directly or indirectly makes the continued profitable use of the property impossible." The possibility of deduction for "loss of useful value" did not seem to solve the problem because the allowance could not be made until the end of the emergency and the business man wished assurances before he expanded his plant. Even if the manufacturer were willing to wait until the end of the emergency, the deduction could then be claimed only for the year in which the loss was realised. This did not seem adequate protection to the manufacturer who wanted quite naturally deductions while profits were relatively high and not when they were low. In any event, deductions were allowable only if the facilities were permanently abandoned. "Business wanted amortisation with respect to facilities which might or night not be abandoned) all that was known in the summer of 1940 was that now facilities might not bo used to full capacity at the end of the emergency." In view of the uncertainties in the legal situation, the Treasury Department notified the Advisory Commission that it would bo bettor to have the amortisation provisions written into law rather than to attempt to roly on departmental interpretation of existing regulations and legislation. XQ/ 76th Cong , M Seas»/ annate flammittaa an Finance, Hearing9 on th? 3Mthe Treasury Department issued a regulation providing that the determination of proper allowance for obsolescence under the Vinson-Trammell Act (other than normal and in addition to ordinary physical depreciation) would be postponed until the contract had been completed. If, at that time, the Commissioner of Internal Revenue determined that the facilities acquired or constructed to fulfill the contract would not be used, then the entire cost of the facilities, less salvage value, would be allowed as part of the cost of performance. The question here was not what should be the proper deduction for obsolescence, but what part of the cost of the facilities could be charged as expenses in performing the contract. The Treasury was willing to permit a manufacturer to write off against a contract the cost of facilities acquired or constructed to fulfill the contract, provided that it could be shown, upon termination of the contract, that there was no further use for the facilities. Such an arrangement, 12/ 76th Cong., 3d Sees.. Senate Committee on Finance, Hearings on the Second Revenue Act Qf 1940, p. 127 (September 4» 1940). 23*7«8 pl» bu - 8 - however, did not prove satisfactory to business. It was claimed that the regulation created uncertainty because the contractors could not know what the Treasury would do upon termination of the contract. All parties seemed to agree that such uncertainty and delay were principal factors in causing discouragement of plant expansion by private funds. Closing Agreements.—In order to mitigate these factors, the Treasury Department provided for "closing agreements" under Section 3760 of the Internal Revenue Code. This procedure provided that, prior to the execution of a contract subject to the provisions of the Vinson-Trammell Act, the Treasury Department would fix in advance the portion of additional equipment and facilities which might be charged to the contract costs. Such a closing agreement would be entered into only after certification by the Secretary of War or the Secretary of the Navy that the facilities were necessary in the interest of national defense and that, due to technical considerations, the facilities would be partially or totally useless upon completion of the contract. 22/ "There were very few closing agreements for the simple reason that the Secretary of War and the Secretary of the Navy refused to certify what they could not know — and they couldn’t know what part of the facilities would be partially or totally useless after the completion of this single contract. Closing agreements, therefore, were not generally used." 14/ RFC "Lend-Lease" Finn.—David Ginsburg, Leon Henderson’s legal advisor, reported that in July of 1940 it was proposed that the Reconstruction Finance Corporation acquire title to a tract of land and then lease the land to a manufacturer for a short period of time, giving him an option to renew. The manufacturer would then be in a position to borrow from the RFC for the purpose of building a plant to manufacture defense articles. The loan would be repaid out of the proceeds and would be secured by a proper mortgage. It was believed that under such an arrangement the manufacturer would be able to amortize the cost of the plant over the life of the lease on the land. The actual case submitted to the Bureau of Internal Revenue involved a wholly-owned subsidiary of another company. It was stated that the existing facilities of the parent company were modern, efficient, and could easily satisfy the normal civilian demands. The Bureau held that amortization over the life of the lease was possible despite the option to renew. 15/ 13/ Letter, Henry Morgenthau to William H. McReynolds, June 24, 1940, attaching copy of letter sent to the Secretaries of War and Navy "outlining for them the basis on which we are prepared to cooperate with them to promptly clear all contracts coming under the Vinson-Trammell Act." 14/ David Ginsburg, Speech before the Practicing Law Institute, New York City, March 24, 1941 (OEM Press Release, PM-252), p. 10. 25/ Ibid. See also Treasury Department Regulations 103, Section 19.23 (a)-10; and decision of the Bureau of Internal Revenue, IT 3396. 2S-76B P16 - 9 - But this solution was not wholly acceptable to the Defense Commission. "In the first place it assumed that the cost of the facilities would be written off in price over the period of the lease« This meant that the price of the supplies would be artificially inflated« Secondly, removable machinery and equipment was not to revert to the RFC at the end of the lease« If such removables were not fully depreciated, this would mean we were giving property away. In the third place, and this is perhaps the most important Reason, the Defense Commission, last summer, was casting about for methods of financing which would enlist the participation of private capital« The RFC lend-lease plan would have been wholly financed by RFC funds« If accepted as the sole method of financing, therefore, it meant the exclusion of private capital from the defense program. ” 16/ 27 David Ginsburg, Speech before the Practicing Law Institute, New York City, March 24, 1941 (OEM Press Release, PM-252), p. 11. 23*766 Pl? bu -lo- ll. LEGISLATIVE ACTION By the first of July the Advisory Commission to the Council of National Defense found itself in the midst of conflicting claims and counter-claims as to the financial requirements of the defense program. The basic problem, as expressed by John D. Biggers, deputy to Knudsen, "was-a question of getting a simple straightforward formula which will enable a sound and prompt write-off for tax purposes of the facilities ... created for the defense program and for which there is no normal demand*• 17/ It was a problem, in short, of stimulating the investment of private capital. At this early stage of the defense program it was still believed by all officials concerned that extensive investment of public funds would not be necessary or desirable. Such a formula as Biggers called for, in the form of a proposed amendment to the Internal Revenue Code, was drafted by the legal advisors of Commissioners Stettinius, Henderson, and Knudsen. Tax Amortization Proposals.—In presenting the proposed amendment to the Commission for consideration, David Ginsburg, on behalf of the lawyers who had participated in its formulation, stated the basic assumptions behind the proposal in the following language: . * 1. There can be no dispute that certain facilities will be required during this emergency period which will have little or no value at the termination of that period. The unknown factor of course was the length of the emergency. Our best judgment was that the emergency would last at least four years. * 2. We took four years as our base, therefore, and concluded that we should permit private investment to be amortized during that period. Since the first or second year of operation might yield little or no profit, we further concluded that the taxpayer should be given some leeway to allocate his deductions over the four years, adjusting the amount claimed to his gross earnings. " 3. If the emergency ended before the expiration of four years, we felt that in fairness the taxpayer should be allowed to allocate the cost of his new facilities ratable over the period between the incurrence of his cost and the end of the emergency. * 4. Although the four-year period may seem short, it represents our best judgment, under present circumstances, of the length of the emergency. Th$ proposed plan, therefore, is logically related to the emergency. By hypothesis the 12/ Minutes, NDAC, July 3, 1940. 28*705 P18 »» - 11 - new facilities will have little or no peacetime value, and if we chose a longer period, we would necessarily assume the risk of a larger number of future adjustments. As much as anything else, we were seeking definiteness and certainty. We discarded other proposals which involved individual negotiation of amortization rates, and invested government departments with large measures of discretion. • 5. We felt thai> rapid amortization would not injure revenue because we assumed the existence of an excess profits tax, and further assumed that taxes would probably enjoy an upward spiral. For this reason, we felt that many business men would undoubtedly prefer to amortize over a longer period than four years." 13/ The draft of the amortization proposal, as presented to the Commission, provided that "buildings, machinery, equipment, or any other capital facilities • • • constructed, erected, installed, or acquired on or after January 1, 1940" and which were certified as "necessary or desirable in the interest of national defense" by the Secretary of War or the Secretary of the Navy, could be amortized over a four-year period. Furthermore "if the emergency declared by the President on September 8, 1939» shall be ended before the expiration of the four-year period • • • the taxpayer xshall • • • be entitled to allocate the cost of such emergency facility ratably over the period between the incurrence of such cost and the end of the emergency ♦" 19/' William H, McReynolds, Donald M. Nelson, and John D, Biggers 20/ were appointed as a committee to discuss the matter with the Secretary of the Treasury, Bigger’s inquiry regarding specific approval of the proposal brought a motion from Stettin!us that "the proposed amendment be approved in principle," The Commission directed two specific changes in the draft: (1) inclusion of a base date of September 8, 1939, the date on which the President had declared a state of unlimited emergency; and (2) designation of the Advisory Commission rather than the Army or the Navy as the certifying agency. The proposal was held over for future consideration by the Commission, 21/ 1#/ Ibid, ~ 12/ Ibid. 20/ McReynolds was Secretary of the Advisory Commission and the President’s Liaison Officer for Emergency Management; Nelson was Coordinator of National Defense Purchases; and Biggers, as previously noted, was Deputy Commissioner for Production. 21/ Ibid. "Mr, Stetiinius moved that the proposed amendment be approved in principle with • • • the further understanding that the amendment would be subject to further changes in form as may be found necessary and would be resubmitted to the Commission for final approval." / aswes bu -12 - At the next nee ting of the Advisory Commission, Biggers reported that the Secretary of the Treasury had agreed "in principle" with the four-year amortization proposal, subject to review by the staff of the Treasury Department» Secretary Morgenthau had then conferred with members of the Congressional Committees through which the legislation would have to dear» He had found them sympathetic, but unwilling to take up the question before the recess scheduled to begin July 11» McReynolds stated that "it was the feeling of the members of the Congressional committees that the amendment would not be cleared by the committees without full knowledge of what was being proposed in the excess profits legislation»" Leon Henderson, who had been added to the Conmittee at the request of the Secretary of the Treasury, explained that the tax amortization plan would be sent to Congress with the excess profits bill, but would be considered separately to avoid delay» 22/ As discussion of the proposal developed, it became obvious that tax amortization of emergency facilities represented but one of the many angles present in the total financial picture» Henderson raised the broader question when he stated that "in connection with the work of the Committee which had been working on the proposed amendment to the Internal Revenue Code, it had become evident that several questions relating to new tax costs, amortization, and financing proposals are interrelated and that the Commission is running the risk of lack of uniformity in the treatment of these matters unless they are all considered together» He said that there was a tentative negotiation with the Reconstruction finance Corporation as to Reconstruction Finance Corporation financing of plant expansion and that he understood from Mr» Biggers that there might be some modification of that 'as far as the place where the assumption of loss may be taken» He added that the proposed amendment to the Internal Revenue Code • • • is one for the amortization of private facilities used in the defense program and there is a question whether the same rapid amortization in relation to taxation should be permitted for plants financed by the Reconstruction Finance Corporation, that there are also the questions of the Vinson-Trammell Act and the excess profits tax in which the Commission has a vital interest» • » » Mr» Henderson added that related questions are the matters of Government-owned and privately operated plants, and prior negotiation of cost items so far as negotiated contracts are concerned, and that it seemed to him that all of these questions tie in together, and that perhaps the committee working on the amendment to the Internal Revenue Code might be assigned the larger task of reviewing all of these things together» He said 22J Minutes, HD AC, July 10, 1940. ————————— ia-?6B PM *® - 13 - that the Army, Navy, the Treasury, and the Advisory Commission all have an interest in such matters, but that »the proper place for coordination seemed to him to be in the Commission." 23/ The discussion resulted in the appointment of Henderson, McReynolds, Nelsqn, Biggers, and Carl E. Adams as a committee to consider the questions raised, and to report its findings for the consideration of the Commission as soon as possible. This committee, aided by the legal staffs of the appropriate Commissioners, carried the responsibility for guiding the development of the financial policies of the Advisory Commission and for drafting these policies into proper legal terminology. John D. Biggers was subsequently selected chairman and through him the committee reported to the Commission, which accepted, modified, or rejected the policies proposed. 24/ This responsibility was reaffirmed by the Commission on July 26, 1940, in order to clarify/ at the request of Biggers, the definition of the functions assigned to the committee. "Mr. Biggers said Mr. Henderson had interpreted the action taken at the meeting on June 10 to mean that the committee appointed at that time,consisting of Messrs. z Henderson, McReynolds, Nelson, Adams, and Biggers, was charged with the duty of studying the whole problem of plant expansion financing, that the minutes justified such interpretation but that he (Biggers) was not sure that had been the intention of the Commission. "It was agreed that the Committee should have this responsibility.* 2$/ Stettinius found it difficult to wait upon the full deliberations of the committee in order to establish Commission policies regarding tax amortization. He was anxious to settle the problem because "the various manufacturers will not begin operations until the question of the rate of amortization on the additional capital equipment required by the /light armor platg/ program has been settled." Congressional leaders, meanwhile, continued to favor consideration of the tax amortization plan as part of the highly controversial excess profits issue. In the interest of prompt action, the Commission pressed for separate treatment. Henderson and Stettinius were named to draft a resolution placing the Commission on record to this effect, 23/ Ibid. yj Minutes, NDAC, August 9» 1940; also, Minutes, NDAC, July 10, 1940. H/ Minutes, NDAC, July-26, 1940. Minutes, NDAC, July 24» 1940. - U - and were instructed to hand this resolution to the President and to the Chairmen of the appropriate Congressional committees* 27/ Biggers reported that "he had been assured that the consideration of the amortization bill as a matter separate from the excess profits bill has not been abandoned, if it is the judgment of the Commission that it should be so handled.” 28/ He was of the opinion that before such a stand was expressed by the Commission, however, it might be desirable to seek some other way of securing more prompt consideration of the amortization bill. The minutes of the Commission do not disclose what alternatives Biggers had in mind. While these questions were being debated by the Commission, the appropriate committees of Congress were holding hearings on the proposed excess profits tax bill. Members of the Commission were called to testify regarding tax amortization and the suspension of the provisions of the Vinson-Trammell Act. The position of the various Commissioners was clear: (1) Suspend for the duration of the defense program, the profit limitations in the Vinson-Trammell Act, and (2) enact the provisions regarding rapid amortization for tax purposes of the capital invested in emergency facilities. The Commissioners were agreed that uncertainty and delay on these matters were seriously hampering the expansion necessary to the defense program. If private capital was to come into the market, it was deemed essential that some special inducements be offered. 29/ The consideration of the total program went ahead without the separation of the excess profits tax bill from the other provisions desired by the Commission. Once thé decision had been made by the legislative and executive arms to proceed in this fashion, no further attempts were made to alter the decision as far as the Commission was concerned. Under prodding from Leon Henderson, the Commission began to look into the excess profits tax bill. It was plain enough that excess profits taxes would have a direct bearing upon private financing and it was therefore of concern to the Commission in its deliberations upon the same subject. Sidney Hillman, however, questioned the wisdom of moving into the general field of public financing: 22/ Minutes, NDAC, July 24, 1940. 28/ Minutes, NDAC, July 26/1940. 29/ 76th Cong., 3d Sees., Subcommittee of the House Committee on Ways and Means, Report on Proposed Excess Profits Taxation and Special Amortization, (Committee Print, 1940): 76th Cong., 3d Sees., House Committee on Ways and Means and Senate Committee on Finance, Joint Hearings on Excess Profits Taxation, Amortization, and Suspension of the Vinson-Trammell Act. August 9, 10, 12, 13, 14, 1940; 76th Cong., 3d Sees., Senate Committee on Finance, Hearings on the Second Revenue Act pf 1940. September 3, 4, 5, 1940. - 15 - •Mr. Hillman raised the question whether the Commission is not going too far out of the field which it was designed to cover and Mr. Henderson replied that he did not believe that is true in this particular matter but that as a general principle he thought we should deal only with the matters specifically charged to us. Mr. Hillman said he would like to examine whether the proposed law affects national defense so directly that the Commission could legitimately claim an interest in the matter, and that he felt the Commission should be careful not to go beyond its appointed field so as to avoid any feeling on the part of other Government bodies that the Commission is taking over the functions of other branches of Government. Mr. Henderson pointed out in this connection that the Treasury had asked for the views of the Commission on the tax bill.w 30/ These differences of opinion did not prevent the appointment of a subcommittee chairmawed by Marion B. Folsom to analyze the draft of the excess profits tax bill and to report back to the Commission at an' early date. 31/ Folsom's analysis was presented to the Commission qn August 14, 1940, and after some discussion, Henderson swung over to Hillman's position that such legislation was beyond the jurisdiction of the HD AC. With this conclusion McReynolds agreed, stating that "it seemed to him the Commission would be getting into a field other than its own if it began to deal with the excess profits tax bill.* 32/ Knudsen wished the Commission to support the entire bill, excess profits tax provisions and all, largely on the ground that "the President had stated that the proposed amortization amendment should be joined with the excess profits tax bill.” 33/ It was finally agreed that the question would be brought up at the next meeting of the Commission with the President, scheduled for the following day. 34/ A resolution, embodying the desire of the Commission for a separate treatment of the two items, was prepared by Henderson, but was not presented because ”certain statements” made by the President seemed to close the issue. 35/ The excess profits tax bill, the suspension of the Vinson-Trammell Act, and the tax amortization proposal, were thereafter regarded as a single legislative program. Final outcome of 30/Minutes, HDAC, August 9, 1940. 31/ Minutes, HDAC, August 9> 1940. 32/ Minutes, HDAC, August 14, 1940. 35/ Minutes, HDAC, August 23, 1940. The statements referred to were those made to the press by the President on July 10, 1940, to the effect that excess profits legislation should be tied to the suspension of the Vinson-Trammell Act and the new tax amortization proposal. «3-785 bu - 16 - the Commission's policies now rested with the legislative branch rather than with the Commission itself. The Second Revenue Act of 1940.—The draft of the bill presented to the Senate Finance Committee contained three main substantive provisions: (1) Excess profits taxes; (2) the suspension of the provisions regarding limitation of profits coming under the Vinson-Trammell Act; and (3) the amortization of emergency facilities. The second and third or these provisions were integral parts of the Advisory Commission's program for the expansion of defense facilities through the use of private funds, but their inclusion in the legislative program did not end the worries of the Commission as to the final outcome, nor did it guarantee their enactment in language substantially the same as that proposed by the Commission. As Henderson commented in a later connection, "consideration of the bill on the floor of the Senate‘probably will reopen several of these matters.* 36/ In its final form the Senate proposal contained some new and apparently unexpected developments, to which serious objections were raised, when the draft of the legislation was made available to the Commission. These objections gave rise to an inter-agency clash of opinion between the Treasury Department and the Advisory Commission. The difference of opinion between the two agencies was one of method rather than of ends desired. It was the contention of the Treasury Department that the policies governing the post-emergency disposition of facilities enjoying tax amortisation should be written into the law, while the Advisory Commission was of the opinion that this problem could best be handled by individual contract provisions. "Senator Clark. Mr. Sullivan, you Indicated before the Ways and Means Committee that the Treasury and the Defense Council were in some disagreement on this matter of amortisation as to what would come—would become of this property that was to be amortised after the amortisation period; that the Treasury thought it ought to be written into the law and the Defense Council thought they ought to be permitted to handle it by contract? "Mr. Sullivan. That is correct, it wasn't so much as to what became of the property but a difference of opinion as to how it should be handled. "Senator Clark. The point I an returning to is—don't you think that that ought to be written into the law? • • • it does seem to ms that on a matter of that importance, as to the disposal of that property, that provision should ba written into the law instead of having it left to contract. Minutes, ND AC, Septeaber 9, 1940. 83-785 bu - 17 - •Mr. Sullivan. I am in thorough accord with the statement . . ." 37/ The line of questioning developed by Senator Clark typified the fear of maxyin the legislative branch that the public interest would suffer through the inclusion of improper terms or procedures should too wide a measure of discretion be left to the administrative agencies. The views of the Advisory Commission, as worked out by Biggers and his collaborators — Henderson, McReynolds, Nelson, and Adam» — were presented to the Senate Committee on Finance on September 5. The statement is quoted in full because of its significance in shaping subsequent events. •This is with further reference to the position of the Advisory Commission to the Council of National Defense regarding subsections (i), (j), and (k) of the amortisation provisions contained in title II of the Second Revenue Act of 1940. Although spokesmen for the Commission have already appeared before the Senate Finance Committee, and have outlined in general the views of the Commission, the tax and finance committee of the Commission herewith submits, for your consideration and approval, a somewhat more detailed analysis of the operation of these subsections. •As you are aware, title II adds two sections, section 124 and section 24 (t), to the Internal Revenue Code, which together authorise the allowance of a tax deduction for the cost of certain facilities necessary in the interest of national defense during the present emergency. Generally speaking, this allowance takes the form of a deduction for amortisation, which in the present context means nothing more than accelerated depreciation, so that the cost of emergency facilities, certified by the Advisory Commission and either the Secretary of War or the Secretary of the Navy, may be written off for tax purposes over a period of five years rather than over the estimated life of the property. Justification for the allowance is found in the emergency character of the facilities and the loss of useful value which will in many oases follow the dose of the emergency. •On July 10, 1940, as Mr. Knudsen has testified, an announcement was made from the White House that the principle of accelerated depreciation for emergency facilities had 3?/ 76th Cong., 3d Sees., Senate Committee on Finance, Hearings on the Second Revenue Act of 1940, pp. 145-46 (September 4> 1940). Pas b« - 18 - been accepted by the President, by the Secretary of the Treasury, the chairman of the Senate Finance Committee, and the chairman of the House Ways and Means Committee« The Advisory Commission, I might point out, had theretofore been active in securing assent to the principle on the ground that it would enlist the participation of substantial amounts of private capital in the defense effort, thereby conserving public funds and credit« That this justification was accepted by the House is already indicated in the statement contained in the House report on H« R. 10413 that ’it is considered desirable to provide special amortization with respect to the facilities necessary in the national defense, in order to encourage the participation of private enterprise in the rearmament program« 1 ... In our view, however, subsections (i), (j), and (k) will defeat this beneficent purpose. •The following analysis may help to clarify our positions •(a) In the first place, and of primary importance, is the fact that the prohibitions of subsection (i) extend to all emergency facilities regardless of whether such facilities are financed by the Government or are financed by private capital without reimbursement of cost by the Government through the price of the product or otherwise« Undoubtedly many facilities will be constructed by private enterprise and paid for, directly or indirectly, by the Government« In such facilities the Government obviously has an interest which we have, through our contracts, made every effort to identify, protect, and value« On the other hand, many facilities will be built by private capital without Government aid of any kind« These will be cases ordinarily in which the contractor foresees a normal peacetime demand for his product and anticipates that he will need the new facilities in the ordinary course of business expansion« Toward such construction the Government will make no advance of capital, nor will it reimburse the contractor directly or indirectly through an increase in the price of supplies« Subsection (i) makes no distinction between these two categories of new facilities« •(b) Under subsection (i) the taxpayer is forbidden not only to 'destroy1 or 'demolish1 any emergency facilities, but without the written consent of the Secretary of War or the Secretary of the Navy, he may not convert or adapt them to ordinary commercial pursuits, for he is also forbidden to 'impair* or 'substantially alter' such facilities« Thus 88*?«S PS8 &u - 19 - although the taxpayer has built an addition to his own plant or purchases new machinery with his own capital, without Government participation of any kind, he may not, without the prior approval of the Army or the Navy, transform his own property to meet civilian needs. Emphasis on the prohibition against demolition is misleading; the real question is whether the taxpayer’s right to alter his own property should be circumscribed by rigid statutory prohibition. If the property is worthless to him and so ready for demolition, but useful to the Government, it could easily enough be given to the Government or sold to the Government at its salvage value. The demolition prohibition, therefore, taken alone, elves rise to no insuperable problems. •(c) The second sentence of subsection (1) provides in addition, that if consent to the alteration or demolition is denied, the Secretary of War or the Secretary of the Navy as the case may be ’shall and he is hereby directed to purchase such facilities at a price which he shall fix not to exceed the adjusted basis but not less than $1. ’ This simply means that if the property has been fully or substantially amortized for tax purposes, it may be purchased by the Army or the Navy for a nominal sum, in the event that the taxpayer’s petition for alteration, etc., is denied. Thus the taxpayer who has invested his own money in new plant and equipment and who has not asked the Government to bear the costs of expansion may be required to transfer that plant and equipment to the Government in consideration of a dollar, notwithstanding the fact that it may be worth far more on the market, or as a going enterprise in his own hands. •(d) Of interest is the manner in which subsection (i) will operate. If once the taxpayer makes application to the Secretary of War or the Secretary of the Navy for permission to transfer his property, and that permission is refused, his ownership is then necessarily terminated. For it is thereafter mandatory on the Secretary of War or the Secretary of the Navy to fix a price and take over the property. Obviously, no taxpayer will ever ask permission to transform or adapt his property for the consequences of denial are not only loss of ownership, but loss of ownership in consideration of a sum which may have no relationship whatsoever to the value of his property. •(e) Since the fifth amendment to the Constitution prohibits the taking of private property for public use without the payment of 'just compensation,’ and since there is serious question whether the 'adjusted-basis-or-$l' formula constitutes just compensation, the taxpayer is required under subsection (j) to file a sworn statement, 23-765 P27 bu - 20 - 'acknowledging, and consenting to the application of, the provision of subsection (i).' Whether this enforced consent avoids the constitutional prohibition may perhaps be open to dispute; but that it will not enlist the wholehearted cooperation of private capital is hardly open to question. Rarely, we suspect, would anybody risk his own capital in new plant and machinery, without Government reimbursement or guaranty, if he knew that that property would thereafter be irrevocably committed to production for Government purposes, and could thereafter be taken from him, if he failed to secure the necessary consent to alteration or demolition, at an arbitrary figure which had no relation whatsoever to his investment or to the value of his property, "(f) One last point deserves mention. If the Secretary of War or the Secretary of the Navy certifies to the Treasury that a taxpayer subject to the provisions of subsection (i) 'has wilfully destroyed, demolished, impaired, or altered substantially any emergency facility' without having first obtained the necessary consents, the taxpayer is liable, under subsection (k), 'to a penalty in an amount equal to the adjusted basis of such facility in the hands of the taxpayer for the purpose of computing gain,1 In other words, the penalty for proceeding without the consent of the Secretary nf War or the Secretary of the Navy, is a sum equal to the original cost of the facility; and the judges authorized to determine whether a violation has occurred are the Secretary of War or the Secretary of the Navy, Thus if a taxpayer cooperates with the Government to the extent of investing $5,000,000 of his own money in new plant and equipment, he may thereafter be penalized $5,000,000 if he ventures to alter such facilities without first securing the appropriate consents. The amount of the penalty, therefore, increases with the degree of cooperation. In our view these subsections, if they become law, will seriously deter the use of private capital in the defense program with the result that new and vastly enlarged responsibilities will be placed in the Reconstruction Finance Corporation and the Treasury, and thus indirectly upon the taxpayer. To the extent that private capital does participate in the program, the risks and burdens laid upon the contractor by these subdivisions will surely be reflected in the increased cost of supplies to the Government, "Our concurrence in the objectives of the provisions has already been recorded. It is fair and proper that all emergency facilities directly or indirectly financed by the Government should be preserved, so far as nay be necessary or appropriate, for national defense. Indeed, we would extend F88 bu - 21 - this principle, to all such facilities, whether or not special tax benefits are conferred or obtained. We are firmly of the opinion, however, that these objectives can best be achieved by appropriate safeguards in individual contracts for supplies and facilities. With the cooperation of the War Department, the Navy Department, and the Reconstruction Finance Corporation we have already undertaken to see that such safeguards for the protection of the Government's interests are included in all future supplies and construction contracts, "In conclusion, may we repeat that our differences with the Treasury on this subsidiary question have been differences of method, not principle. With your permission, we should like to send Mr, Sullivan a copy of this letter. We should be grateful, too, if you would forward a copy, herewith attached, to Senator Barkley,* 38/ The position here expressed had been approved by the Advisory Commission on September 4> 1940, the date on which Biggers testified before the Senate.Finance Committee, The stand taken by the Advisory Commission was completely endorsed by the Secretary of War and the Assistant Secretary of the Navy on the following day, 39/ The Chairman of the Maritime Commission also wrote to the Senate Committee objecting to the inclusion of unnecessarily rigid provisions governing the disposition of privately financed emergency plants, although this action does not seem to have been as closely related to the objections of the Advisory Commission as that taken by the Army and Navy, 40/ On September 6, the day following conclusion of the Senate hearings, Secretary Morgenthau invited Knudsen and members of the Advisory Commission's Committee on Taxation and Finance to meet with him to settle upon a common program, 41/ Biggers stated that: *The Secretary of the Treasury is willing to go along with the Commission and recommend to Congress the elimination of subsection^ (i), (j), and (k) of the Bill provided the Commission will request the Ax ay and the Navy to make 38/ Letter, John D. Biggers, Donald M. Nelson. Leon Henderson, William Ha McReynolds, and C. E. Adams to Hon, Pat Harrison, September 1940, in 76th Cong,, 3d Sess,, Senate Committee on Finance, Hearings on the Second Revenue Act of 1940< pp. 184-86. 39/ Minutes, NDAC, September 4, 1940; letter, Henry L. Stimson to the Hon, Pat Harrison, September 5, 1940; letter, James Forrestal to the Hon. Pat Harrison, September 5, 1940. 40/ Letter, E. S. Land to the Hon, Pat Harrison, September 3, 1940, 41/ Minutes, ND AC, September 6, 1940, 33-768 PS9 bu - 22 - public the details of all contracts, except for specifications, as a public safeguard against improper terns or procedures•• 42/ Upon the unanimous recommendation of its Committee on Taxation and Finance, the Commission concurred in the suggestion of the Secretary of the Treasury and directed that the Coordinator of National Defense Purchases transmit the request for publicity to the Secretary of War and the Secretary of the Navy. 43/ The substitute proposed for the legislative protection of the public interest was a certificate of Government protections "Mr. Henderson suggested that, in connection with the request to Congress for the elimination of these subsections in the Bill, the Commission and the Treasury propose incorporation in the Bill of a provision that all contracts and certificates under which it is expected to take advantage of rapid amortization shall contain proper clauses to protect the Government’s interest.• ¡¿J This suggestion was adopted by the Commission, which charged the Committee on Taxation and Finance with its execution. Thereupon, Biggers promptly delegated the charge to Henderson and placed in his hands the responsibility of forwarding the proposal to the appropriate Congressional Committees. Over the week-end Henderson held several conferences with John L. Sullivan, Assistant Secretary of the Treasury, and on the following Monday, September 9, the Senate Finance Committee in Executive Session accepted the compromise, and agreed to drop the objectionable sections from the bill. 45/ As passed by the Senate on September 19, 1940, the revenue bill provided that amortization should not be allowed "If directly or indirectly, the taxpayer has been or will be paid or substantially reimbursed by the Government for all or part of the cost of any emergency facility pursuant to any contract with the Government for the construction or acquisition of any facility, for purchase of supplies or otherwise ..." 42/ Ibid. 42/ 44/ Ibid. 45/ Minutes, HDAC, September 9, 1940. 23-766 1*30 bu - 23- unless a certificate of Government protection was issued« 46/ Subsequently a conference committee substituted a slightly different version which was finally accepted as Section 124(i) of the Internal Revenue Code« This section, in effect, required, as a condition of taking amortisation privileges, that a taxpayer obtain either a Certificate of Government Protection or a Certificate of Non-Reimbursement as to every contract made with the United States. 47/ These certificates were to be issued by the Advisory Commission and either the Secretary of War or the Secretary of the Navy as the case might be. The provisions of the legislation, as finally passed and signed by the President on October 8, 1940, followed the recommendations of the Advisory Commission not only in general policies but in most significant details. The profit limitations of the Vinson-Trammell Act were suspended for the duration of the emergency, as originally proposed; a five-year amortization period was selected in place of the original proposal of four years; the base date was established as June 10, 1940, rather than the original suggestions of either January 1, 1940, or September 8, 1939; ceritiflcation was divided between the Advisory Commission and the Army and Navy, or, more precisely, joint certification was required; the Certificates of Government Protection and Non-Reimbursement were added to the original proposal in place of leaving the administrative agencies completely free in devising means of protecting the public interest. The statutes further provided that only so much of the total cost of the facilities constructed or acquired after the base date, as could be attributed properly to the national interest, could be used as a basis for computing the amount of the deduction allowed. The Defense Commission and either the Secretary of War or the Secretary of the Navy merely certified the facility as constructed "in the national interest11 and the Treasury Department subsequently determined the exact rates applicable to the amortization schedule. The schedule was determined by the statute and certain alternatives in applying wore given to the taxpayer. Acceleration of the rates, providing the emergency ended before the expiration of the statutory period of five years, was also provided for as was the problem .of allowing the taxpayer, should ho so desire subsequent to his original filing, to place his facilities back upon a regular depreciation or obsolescence schedule for purposes of income taxes. 27 76th Cong., 3d Sees., Senate Report No. 2114» KJj Second Revenue Act of 1940, Title III, Sections 301-302, adding Section 124 to the Internal Revenue Code. Subsection (1) of the Second Revenue Act became subsection (1) of Section 124 of the Internal Revenue Code (October 8, 1940). - 24 - Assiffqrent of Qlaire Act pf 1940» »«One other act In addition to the tax amortization program was proposed by the Advisory Commission in an effort to secure the largest possible participation of private finance in the defense program. This was a proposal to make the prohibitions against assignment of money claims arising out of contracts with the United States Government inapplicable during the emergency. The NDAC Committee on Taxation and Finance explored the possibilities involved in the suspension of the century old law prohibiting the assignment of claims against the Ud.ted States. They reached the conclusion that Army and Navy contracts should be exempted from the prohibition as a stimulus to the investment of private funds in the defense program. While the committee was pursuing this problem, it was discovered that the Federal Reserve System had made a study of the question and had drawn up a draft of proposed legislation. Henderson reported to the Advisory Commission on August 2, 1940, that he had talked with John K. McKee, a member of the Board of Governors of the Federal Reserve System, and with Senator Harrison, Chairman of the Senate Finance Committee, who had suggested that Senator Barkley might be willing to introduce such a bill, providing it had been cleared by the Bureau of the Budget. 43/ On the morning that the Commission agreed to the unanimous proposal of its committee'. Senator Barkley indicated to Henderson that he was willing to introduce such legislation providing it secured the approval of the Bureau of the Budget. 49/ Two weeks later, Henderson again brought up the subject at a meeting of the Commission, stating that "the Bureau of the Budget reported to him today that it had made the necessary canvass and had consulted with the Attorney General and also with Members of Congress who have introduced similar bills and that the Attorney General had reported that the draft obtained by the Commission from the Board of Governors of the Federal Reserve System seemed most satisfactory and made the suggestion that rather than limit the proposed bill to War and Navy contracts it be made applicable to all Government contracts." $0/ The proposed draft of the bill had been presented to the President for consideration and "as soon as it receives his clearance and is cleared with Mrc Jesse Jones, Federal Loan Admlnietrstor, the bill will be available* for introduction into the Congress. 51/ Minutes, NDAC, August 2, 1940. ¿2^ Minutes, ND AC, August 16, 1940. - 25 - Hearings were held by the House Judiciary Committee on August 28, 1940, and the Commission's position was presented by David Ginsburg, Henderson’s attorney. The final legislation, known as the Assignment of Claims Act of 1940, permitted the assignment of any moneys due under any Government contract, providing for payments aggregating $1,000 or more, to any bank, trust company or other financial institution, including any Federal lending agency, subject to the following conditions: (a) if, but only if, the contract was entered into prior to October 9, 1940, the consent of the head of the Government department or agency concerned must be obtained; (b) if a contract, entered into on or after October 9, 1940, forbids such assignments, no assignments can be made; and (c) unless otherwise expressly permitted by the contract, an assignment "shall cover all amounts payable but not yet paid under the contract," and could be made to one party only or to an agent or trustee for more than one party. Furthermore, any contract could provide that payments to an assignee were not subject to reduction or setoff for any indebtedness of the contractor to the "United States arising independently of the contract. The legislation also allowed contractors to assign claims for moneys due under their contracts as security for financing needed for the construction of plant or the acquisition of equipment or for working capital. 52/ With the suspension of the Vinson-Trammell Act, the enactment of rapid amortization provisions for emergency facilities, and the passage of the Assignment of Claims Act of 1940, private capital was free to go ahead on the defense program. The Federal Reserve System, after conducting a rapid spot survey of private investment resources, reported that approximately $3,000,000,000 was available for emergency plant construction. 53/ This survey indicated, according to Knudsen, that "these institutions have available and are willing to loan an amount several times that which at present is believed required for building emergency production capacity." ¡¿J 52/ Assignment of Claims. Act of 1940, 55 Stat. 431; see also, memorandum, Blackwell Smith and Frederick M. Baton to Staff Members of Industrial Materials Division and Production Division, October 16, 1940 (mimeographed summary of legislation covering defense financing). 53/ Federal Reserve Bulletin, October, 1940. 54/ ND AC Press Release, PR-126, September 25, 1940. 23**785 P33 bu - 26 III. PROTECTION OF GOVERNMENT INTERESTS NDAC-Treasury Plan.—In the expectation that total plant capacity of the nation could not be increased to the extent necessary with private capital alone, the Advisory Commission to the Council of National Defense made early plans to provide public funds for this purpose. These plans were far enough advanced to be discussed with Treasury officials early in June. As summarized by E. H. Foley, Jr., Treasury Counsel, after conferences with Knudsen, "The Treasury Department agrees to the principle that plants built or equipment furnished in the emergency shall be titled to the manufacturer and handled through the R.F.C. on a loan basis. The cost of such plants and equipment shall be spread over the total requirements in numbers of pieces. The amortization charge will be a legitimate part of the price per unit, but will carry no profit to the manufacturer. The funds obtained through this method will be remitted to the R.F.C. as units are sold. "This is applicable to domestic or foreign business with the proviso, however, that foreign orders must be standard American material. No material of special design can be included. The assumption is that Government will assume loss due to cancellation before completion of the orders." 55/ In presenting this proposal for the consideration of the Secretary of the Treasury, Foley understood Knudsen*s plan to mean that the Reconstruction Finance Corporation would make defense loans for the purpose of financing facilities expansion (or construction) and also for the purpose of providing working capital for materials and payroll costs. The sales price of the units produced for the Government of the United States, or appropriate foreign governments, would include the pro rata share of the indebtedness represented by the RFC loan. The manufacturer, in turn, would repay the loan in quarterly installments based upon the number of units produced and sold. Security for the loan was established through an appropriate mortgage on the machinery, facility, or land, title to which would be vested in the manufacturer. Foreclosure was possible, of course, in case of default. In the event of cancellation of Government orders prior to the time of the complete repayment of the loan, the unpaid balance allocated to the cancelled units was to be forgiven by the lending agency. To the extent that the machinery or Memorandum, E. H. Foley, Jr., to Secretary Morgenthau, June 14, 1940, and attachments. 23“76a P34 bu - 27 - plant had a residual or salvage value, the debt was to be repaid or the Government would be able* tc foreclose and take over the abandoned property. The basic policy involved in this proposal was summarized by Foley in the following language: "The manufacturer would not take any risk of loss since the loan would be repaid solely from the earnings of the plant and equipment acquired with the proceeds of the loan and no recourse could be had to the general assets of the manufacturer« "It may be well to point out that the amount of the debt forgiven, if the contracts should be cancelled, would be taxable income. However, if the plant or equipment were permanently discarded there would be an. offsetting allowance for loss of useful value equal to the difference between the cost of the plant and its salvage value. Depreciation and obsolescence under the income tax law and under the Vinson-Trammell Act are not involved. "The limitation of 12% contained in the Vinson-Trammell Act would apply on bales to the United States and existing regulations would be applicable«* 56/ The Advisory Commission first considered the plan at its meeting on June 21, 1940, after a tentative agreement with the Treasury and the RFC had been reached by Knudsen« "A discussion of the depreciation and obsolescence of facilities in war time industries ensued and Mr. Knudsen outlined the plan which had been tentatively agreed upon by the Treasury, the Reconstruction Finance Corporation, and him to be followed in meeting the situation. He stated that no new legislation was needed for the proposed plan and that no formal action was necessary by the Commission at this time.* 57/ The whole question was left in the hands of the legal staffs of thf various Commissioners until the special Committee on Taxation and Finance was appointed in July, with responsibility for developing the NDAC financial program« 58/ That part of the program dealing with Government financing came to be known as the Emergency Plant Facilities Contract, or EPF Contract« The details were worked out by the Commission, guided by Biggers and his committee, over a period of several months« > 56/ Ibid« 57/ Minutes, NDAC, June 21, 1940. 5$/ See p« 13 above« S3—705 »3 5 bu - 28 - ^WierFenny Plant Facilities Contract»--On August 9, Biggers told the Commission that his committee had «completed a draft of the contract provisions which it is believed are desirable for the protection of Government interests in plants financed directly or indirectly with Government fluids, that these provisions have been cleared in principle with the War Department, and that, through Mr. McReynolds, the Committee was attempting to clear them with the Comptroller General and also the Navy Department this afternoon so that that inportant element in the whole contract picture is well under way.* 59/ It was understood, furthermore, that Biggers would make copies of the proposed contract provisions available to the various commissioners. The copies were distributed on the same day with a covering memorandum stating that although the committee had «consulted general counsel of the Comptroller General and the Judge Advocate General's office of the War Department, this has not yet been formally cleared by either, so must be held in confidence until further notice." 60/ The memorandum circulated to the Commissioners dealt specifically with those facilities falling between the two extremes of outright Government construction and complete private financing with the owner assuming all risk. Because this draft provided the basis for future discussion and subsequent modifications in detail, it is reproduced here in full. "Price, under normal circumstances, includes a relatively small charge for loss of useful value due to physical deterioration. This is generally called depreciation. But under emergency conditions which require the construction of new and special types of facilities, price is likely to include a large and extraordinary charge for amortization, in order to pay for the cost of such facilities during the period of emergency. Justification for the charge is that the clofe of the emergency may end the useful life of the facilities. In the first case invested capital is not fully recovered until plant is theoretically worthless; in the other case invested capital is fully recovered while productive capacity still exists. Rapid amortization, therefore, simply identifies a process whereby the purchaser, in this case 59/ Minutes, NDAC, August 9, 1940. £0/ Memorandum, John D. Biggers to the members of the Advisory Commission, August 9» 1940. 23-788 P36 bu - 29 - the government, through an addition to the normal price, reimburses the contractor for new or enlarged plant facilities over a short period of time. In such facilities the government has an interest. The Committee on Taxation and Finance recommends to the Commission and to the War and Navy Departments the following procedure which recognizes and protects the government's interest in such facilities and deals fairly with the contractor. •If it is contemplated that the contractor shall be reimbursed by the government for the cost of the additional plant , the contract shall provide specifically therefor rather than have such amount included in the price which the government shall pay for the new supplies. The contractor shall be reimbursed for his entire cost in five equal annual installments. Upon completion or termination of the contract9 the government and the contractor shall.each appoint an arbitrator to determine the then fair value of such facilities to the contractor. If these two are unable to agree a third arbitrator shall be appointed by the Senior Circuit Judge of the Circuit in which the facilities are located. The decision of any two arbitrators shall be controlling, but if no two agree the decision of the arbitrator appointed by the Senior Circuit Judge shall be final. The contractor may pay such amount to the government and thereafter the government shall have no interest in the facilities. •If9 however9 the contractor is for any reason unwilling to pay the arbitrated amount or does not wish to retain the facilities he may transfer them to the government. The government shall thereupon remove any facilities which are located on the contractor's property restoring the contractor's premises to their pre-contract condition, providing that the government may leave in place the whole or any part of such facilities which do not materially impede the contractor's operations under pre-contract conditions. If there is at any time disagreement as to whether the operations of the contractor are materially impeded this question shall be subject to arbitration, as set forth above. The contractor shall have the right to use such facilities left in place if and to the extent that such facilities have replaced other facilities of the contractor and are necessary to enable him to conduct operations under precontract conditions. The contractor may make such additional use of such facilities upon such terms and conditions as may be agreed upon between him and the government. The contractor shall maintain and care for such facilities as stand-by capacity, but all expenses of necessary accounting, M-76B PS? bu - 30- maintenance and care (including the repair thereof) other than such expenses incident to the use of such facilities by the contractor shall be paid by the government. Such facilities as may be left in place may be removed by the government at any time upon restoring the contractor’s premises to their pre-contract condition, ■ If the contract is terminated prior to its completion, the government will pay to the contractor the difference between that part of the cost of the new facilities for which the contractor had not been reimbursed and the then fair value of the facilities to the contractor determined by arbitrators as above. If as a result of such determination, there should be a balance owing to the government the contractor shall make payment accordingly. * The contractor may, if the award of the arbitrators is unacceptable, or if he does not wish to retain the facilities, transfer the facilities to the government, in which case the alternatives described above shall be available to the contractor and the government. If the facilities are transferred to the government, the government will reimburse the contractor for the unpaid balance of his costs. The annual payments by the government will continue until after award and until settlement so that the contractor will not be embarrassed if he has obligations which must be met out of such payments, ■For contract purposes fair value means the value which the facilities have to the contractor without regard to their original cost and considering only the prospective earning power which they will add to the contractor’s entire plant under conditions then existing, making due allowance for the expense which the contractor must incur if they are to be adapted or converted to the contractor’s normal peacetime activities; provided that if the arbitrators find as a fact that any removable facilities have a higher value in an open market sale than under the foregoing standard, such items may be valued at such open market value. The foregoing definition of fair value shall constitute a guide to the arbitrators. The contractor, however, shall have the further option of purchasing the government’s interest in any such facilities, without arbitration, at their original cost less normal depreciation, which sum shall also be regarded as their fair value. ■The government will agree that it will not use any facilities which are transferred to it for commercial purposes. If at any time the government proposes to sell or lease the same, a first refusal shall be given to the contractor who originally built the facilities. P»t bn - 31 - "As indicated above, the foregoing provisions shall only be inserted in government supply contracts where the contractor will be reimbursed for a substantial part of the cost of new facilities, or where the contractor desires protection against loss on such construction in the event of termination of the contract. In cases where only ordinary depreciation is reflected in prices (irrespective of the rate of depreciation taken for tax purposes) and the contractor is willing to take his chances in the event of termination of the contract prior to its completion, the contractor shall be entitled to the unrestricted use of the new facilities which he has constructed. However, in order to guide the contracting officers, it is suggested that in any case where the contractor in order to perform his contract is required to build substantial additions to his plant, the contracting officer shall assume that there will be included in the price of thé article an extraordinary amount to reimburse the contractor for the cost of the new facilities. If the contractor is unable to satisfy the contracting officer that such is not the case the contracting officer shall consult with his Chief of Service before entering into any contract which fails to include the provisions referred to above, protecting the interest of the government.* 61/ This outline of policies, while meeting with the general approval of the Commissioners, called forth various modifications in detail. On August 15, David Ginsburg sent to the Committee on Taxation and Finance a revised draft which contained "all the revisions" suggested. "In the interests of expedition I suggest that you review the changes and return the draft to me with your comments. Thereafter, I shall send an approved draft to Mr. Biggers for clearance with the Commission." 62/ Revision of language and substantive changes occurred only in the third paragraph of the August 8 draft. For that paragraph the following substitute was proposedt "If, however, the contractor is for any reason unwilling to pay the arbitrated amount or does not wish to retain the facilities he may transfer them to the Government. Thereupon, the Government shall exercise one of the following options: ¿1/ Memorandum, "Suggested contract procedure for financing and"“ disposition of emergency plant facilities," August 8, 1940. 62/ Memorandum, David Ginsburg to the Taxation and Finance Committee, August 15, 1940. 23-ra5 P39 tu - 32 - “(1) If the facilities constitute a self-contained operating unit, and are located on the contractor's land, the Government may (a) remove such facilities, restoring the contractor's premises to their pre-contract condition; or (b) purchase the land on which the facilities are located from the contractor at a price determined by arbitration, as set forth above* • (2) If the facilities are intermingled with the contractor's plant, the Government may (a) remove such facilities, restoring the contractor's premises to their pre-contract condition; (b) purchase the contractor's interest in the entire plant at its arbitrated fair value, as set forth above, provided that the Government's investment in the entire plant represents 50 percent or more of the total investment in such plant, and provided further that such fair value shall in no event be less than the contractor's actual Investment minus ordinary depreciation (as distinguished from amortization) ; or (c) leave the whole or any part of such facilities in place, provided that such facilities do not materially Impede the contractor's operations under precontract conditions* If there is at any time disagreement as to whether the operations of the contractor are materially Impeded this question shall be submitted to arbitration, as set forth above* The contractor shall have the right to use such facilities left in place if and to the extent that such facilities have replaced other facilities of the contractor and are necessary to enable him to conduct operations under pre-contract conditions* The contractor may make such additional use of such facilities upon such terms and conditions as may be agreed upon between him and the government* The contractor shall maintain and care for such facilities as stand-by capacity, but all expenses of necessary accounting maintenance and care (including the repair thereof) other than such expenses incident to the use of such facilities by the contractor - 33 - shall be paid by the government. Such facilities as nay be left in place nay be removed by the government at any time upon restoring the contractor's premises to their pre-contract condition." 63/ The next development cane on August 21, when Biggers reported to the Advisory Commission that the Committee on Taxation and Finance, "after considerable study of the problem of a standardized procedure in connection with the financing and disposition of emergency plant facilities required by the Government," had worked out a proposal which, in the opinion of Commissioners Stettinius and Henderson should be presented to the other members of the Commission without waiting for Congress to act on the amortization proposals. Approval from the War and Navy Departments had been secured for the proposed contract procedures and clearance had been secured from the Office of the Comptroller General. A proposed press release, outlining the program, was presented for consideration. It was agreed that the material would be studied by the individual Commissioners and that action would be taken on the subject at the next meeting of the Commission, August 23, 1940. When the time came, however, Biggers explained that the final draft of the statement on contract procedure had not been sent out until that morning. In the meantime the Comptroller General had given to the papers his version of the story, and in order to complete the record the Committee on Taxation and Finance had scheduled a press conference to be held immediately following the meeting of the Comission. 65/ Under the circumstances, the Commission offered no objections, and both the proposed contract procedure and the press release developed by the Biggers committee were unanimously approved,66/ The statement accepted by the Commission differs from the revision of August 15, as quoted above, only in that the following note was added to paragraph (b) of the second option available to the Governments "(Notes This provision will be used only if it is apparent to the Contracting Officer that the emergency • ¿3/ Memorandum, "Suggested contract procedure for financing and disposition of emergency plant facilities," Revised Draft, August 15, 1940. 64/ Minutes, NDAC, August 21, 1940. 65/ Minutes, NDAC, August 23, 1940« Indicative of the pressure under which the Commission approved the general statement, is the fact that the copy carrying Knudsen's familiar blue penciled "K" has the following notation as an addition to the third paragraphs "... but subject to approval by the Secretary of Army and Navy." The copy from Henderson's files contains no alterations, nor does that found in the files of Stettinius. The press release was exactly as read to, and approved by the Commission and recorded in the Minutes. It did not contain the proviso added by Knudsen. 83-765 *41 - 34 - plant facilities contracted for will constitute 50% or more of the entire investment in the plant«)1* 67/ Removable Machinery.—“Subsequent to this public announcement of general policy, refinements and modifications were suggested to and approved by the Commission« In a memorandum entitled "The Government's Interest In Removable Machinery and Other Equipment," David Ginsburg reopened the policy question as far as removable machinery and other equipment were concerned« 68/ "Since this change is being proposed after our general policy has been announced, a question may be raised regarding the propriety of revision at this time," Ginsburg wrote« His answer was short, but was long enough to indicate that there were significant differences of opinion within the Commission: "In response, I suggest that no contract has yet been negotiated on the basis announced, so that no contractor can complain of discrimination; certainly no such negotiation has been authorized or approved« But even if matters were crystallized far more than they are, we should still be under an obligation to revise our policy at once — if we have bound the Government to a one-sided bargain« The choice between consistency at public expense and fairness to both parties, should not be difficult«" 69/ The position taken by Ginsburg is best expressed in his own language: "The essential fact, as I see it, is that the Government will pay for every cent of the cost of such facilities, and will assume every element of risk on the construction contract« Yet because the Government proposed to pay for the machinery and equipment on the installment plan, over a five-year period, rather than through outright cash purchase, we propose to require the Government to sell its interest in such facilities for whatever they may be worth to the contractor, or whatever they would bring on the market« 67/ Revised draft of Memorandum, "Suggested contract procedure for financing and disposition of emergency plant facilities," August 20, 1940« This note is not contained in the draft dated August 19, 1940« It does appear, however, in the reproduction of the agreed statement in the Minutes of the NDAC for August 23, 1940, in NDAC Document 114, and in the Press Release of August 23, 1940, PR-80« 68/ This memorandum is in multilithed form and presumably circulated with Henderson's approval although it is signed by Ginsburg« It is dated September 4, 1940« 69/ David Ginsburg, Memorandum, "The Government's Interest in Removable Machinery and Other Equipment," September 4, 1940« 88~T6B *43 - 35 - ■« • • What would such facilities bring on the market? Unquestionably, the answer is little or nothing, as World War experience plainly shows« Thus, although we have labored to sift the cost of machinery and equipment out of the price of supplies and have at least illuminated the fact that the Government has an interest in facilities financed through an increase in the cost of supplies, we propose to demand the sale of the Government's interest, so belatedly recognized, at a price set in the trough of a glutted market« To regard .this as 'striking progress in the evolution of Government procurement' phrase used by Mr« Biggerg/is to confuse form with substance« In my opinion, we would still be giving away plant and equipment« •Conceivably there may be deep rooted reasons of policy why this machinery and equipment should be given away« If there are, I have not heard them discussed in any of our meetings« Of one thing, I am reasonably certain: that fairness to the contractor does not require, in addition to — (1) a reasonable profit; (2) a bankable contract; and (3) assurance against risk of loss on new construction, a capital subsidy to the contractor in the form of free machinery and equipment« •I have argued • • • that an absolute option to the contractor to purchase removable facilities under our 'fair value' formula will in fact operate to enable him to purchase at a depressed price; and that . • • considerations of equity do not require this sacrifice of the Government's interest« • • • Unless this formula is revised « • • our work will have been substantially fruitless« •To meet this problem, Mr« Nelson has suggested that in the case of standardized machinery we should preserve our formula of value to the contractor or market value, whichever is higher; but that in case of specialized machinery we should refuse to give the contractor an option to buy, thus obviating the need for any appraisal or any formula to determine value« ■Although I agree with Mr« Nelson, I am not sure that his solution covers the whole problem« ■Accordingly, I make the following recommendations: Ss-iis P43 *>u - 36 - (1) That so far as possible, removable facilities should be purchased outright by the Government, instead of on a five-year installment basis; (2) That on termination or completion, in the case of removable facilities, the contractor be given an option to buy at original cost less depreciation.* *70/ Five days after this memorandum was circulated, Knudsen outlined to his legal advisor, Frederick M. Eaton, a basis for possible modification of the original policy. In the case of complete plant and machinery, he wrote, ■(1) It is agreed by the Government that the contractor can buy property fully paid for by Government at cost less regular depreciation (Figured to average 10% per annum.); or "(2) The Government can offer to negotiate a price for the facilities commensurate with the market value of the facilities to the contractor, but acceptance of the negotiated value by either party is not mandatory. * Where the Government’s investment in plant and equipment is only part of the total cost — so-called "scrambled facilities'* — Knudsen argued that "the Government must sell to the contractor at negotiated value to the contractor or restore the premises to their original status before expansion." 71/ On September 10, Knudsen circulated the following statement of policy for the consideration of the members of the Commissions "The memorandum which was adopted by the Commission and released to the Press, would permit the manufacturer to own 'Emergency Facilities', both attached plants and equipment and separate complete plants and equipment, after the emergency is over by paying to the Government the then fair value as established by the arbitrators provided for in the memorandum. But in no event would the manufacturer have to pay more than cost less normal depreciation. "The only changes recommended by us as to the above provisions are these: 1. Normal depreciation should be definitised and described as depreciation at the rate of 10% per annum. 22/ Atf. 21/ Eenorandun, W.S.Knudeen to F.M.Eaton, September 9, 1940. 33-76S p44 Bu - 37 - 2. The Government has the right to refuse to accept the arbitrated fair value of a separate complete plant and equipment as being too low»11 72/ After discussing Knudsen's proposition with Leon Henderson, Eaton made a "further concession" in the direction of Henderson's position* 73/ The concession consisted of a third paragraph added to Knudsen's draft which read: "The Government also has the right to refuse to accept the arbitrated value of standard machinery in attached plants as being too low." Modification of Basic Policy.—The matter came before the Commission on Friday, September 13, and "after considerable discussion," Knudsen's suggestion of a single formula based upon a negotiated rather than an arbitrated price was accepted by the Commission. The proposal, as summarized in the minutes of that date, was as follows: "The contractor shall have the dominant right to buy any facilities at original cost less equitable depreciation as agreed upon by the contracting officer and the contractor at the time the contract is entered into, or at a negotiated price which,is subject to the approval of the highest contracting officers of the Army and the Navy. If, in the case of 'scrambled' facilities, the Government does not accept the negotiated price for the additional facilities, it will remove them and return the plant to its original state." 74/ The rephrasing of the proposal in legal terminology was left to Henderson's staff, after which it was to be cleared with the individual Commissioners "in order to complete this contract form and procedure for immediate use." On the 18th Henderson reported that the language had been cleared as agreed, and that the standard contract form had been changed accordingly. 75/ It was not until the 20th, however, that the minutes of the Commission formally recorded the incorporation of "Mr. 22/ This note was secured from the Knudsen files, and was not dated nor was it addressed to anyone. It was identified by Knudsen's familiar blue penciled "K" and dated by cross reference to material subsequently discussed. 22/ A copy of a revised draft of Knudsen's statement in Stettinius' . file, and a similar copy in Knudsen's file, each carry the notation in Eaton's hand "This is a further concession offered today.* Stettinius' copy carries the additional note "Ed: This represents my latest talk with Leon. He said he would think about it and call me this morning. F.M.Eaton." The draft is dated September 12, 1940. 24/ Minutes, NDAG, September 13, 1940. 25/ Minutes, NDAC, September 18, 1940. P48 bu - 38 - Knudsen's Statement the Commission's Agreement Regarding Disposition of Emergency Plant Facilities* into the records, although the changes were apparently circulated in finished form to the members of the legal staff on September 13, the date of their adoption« 76/ In its final form, the text of the statement was as follows: "The contractor shall have the right to purchase any facilities paid for by the Government at original cost less depreciation, or loss of value due to its use for defense purposes« This latter amount to be agreed upon at the time of signing the contract« The general guide for this amount to be regular depreciation for this class of facilities« •In the case of a complete plant, if the contractor is unwilling tc purchase the facilities on terms as stated above, he may negotiate with representatives of the contracting Government Department and arrive at the fair value of the facilities« This agreement, however, to be subject to approval of the Secretary of War or Navy, as the case may be« •In the case of intermingled facilities, the same procedure applies, except that the contractor failing to arrive at an agreement may require the Govei^jment to remove the facilities and restore his property to its original state." 77/ The changes accepted by the Commission on September 13 were incorporated in the Emergency Plant Facilities Contract Form dated September 16, 1940« By October 10 the contract also contained specific terms making it bankable as provided for under the Assignment of Claims Act of 1940, and clarifying gross income for Federal tax purposes so as to exclude reimbursements made under the contract for capital expenditures. The contract draft of October 10 was sent to the several Commissioners, to all Division Executives, Group Executives, Assistant Group Executives, and to the Legal, Statistical, Liaison and Secretarial offices of the Commission, with a covering mamorandun quntd ng the Commission's statement of September 20. The significance of the Assignment of Claims Act of 1940 was also stressed. "It should be noted that Federal legislation has now been passed which enables a contractor to hypothecate a contract such as the attached with a hank or other private loaning agency as security for borrowed money." 78/ F.M. Eaton, memorandum, "Modification of New Plant Facilities Financing Procedure Adopted by the Advisory Commission," September 13, 1940. 2Z/ Minutes, ND AC, September 20, 1940; also Advisory Commission Document 109-b. 22/ Memorandum, W.L.Batt, Deputy Commissioner for Industrial Materials, to E.R.Stettinius, Jr., Gano Dunn, Thomas McCabe, C.E.Adams, Division Executives, Assistant Division Executives, Group and Section Executives, "Emergency Facilities," October 16, 1940. 28-788 P46 - 39 - On October 16, tho same day that saw the circulation of the revised contract form, Blackwell Smith and Frederick M. Eaton, legal advisors to Stettinius and Knudsen, sent to the Industrial Materials and Production Divisions a joint memorandum in which they discussed the effect and interrelationship of the Assignment of Claims Act of 1940, the Emergency Plant Facilities Contract and the amortization deductions permitted by the Second Revenue Act of 1940. The summary given in this memorandum of the contents of the Emergency Plant Facilities Contract Form is instructive: "The contract form which has been developed by the Defense Commission and the War and Navy Departments, provides for Government reimbursement to the Contractor in sixty equal monthly installments of the amnunt of the Contractor's capital expansion cost. This cost will then be excluded as a factor in fixing the price of the supplies furnished under his supplies contract. Thus, the cost of the supplies and the cost of capital expansion are separated and the Contractor or his bank is relieved of the risk involved in adding fixed assets useful only for the emergency, but the Contractor still absorbs, through his contract for supplies, the ordinary risk involved in production. "The contract contains provisions whereby the Contractor may continue to use the facilities after they have served their purpose in connection with the emergency defense needs, by repaying to the Government an amount equal to cost less depreciation at predetermined rates. If this amount is too high then the Contractor may negotiate for a lower price or for a lease. The contract contains protection to the Government, such as (1) a requirement for adequate insurance, maintenance and repairs, and the payment of taxes thereon, by the Contractor; (2) the right in the Government to receive title to such facilities if the Contractor does not make the repayment to the Government referred to above. "It specifically permits the assignment of monies due to the Contractor as security for loans. "This contract form has three purposes - (a) to expedite the signing of supply contracts by the Army and Navy in cases where the Contractor must have additional facilities in order to fulfill the supplies contract and wishes to be assured against heavy loss of capital through the construction or acquisition of such facilities which may have little, if any, peace-time use to him — (b) to safeguard the Government's interest in such facilities on termination or completion of the contract by avoiding a gift thereof to the Contractor — (c) to facilitate the financing of such construction or acquisition by the Contractor through credit from private sources. 23-7BR P4.7 bu - 40 - "The combination of the Plant Facilities Contract and of the Assignment Act which permits the assignment provision, furnishes a bankable contract which should encourage and enable contractors, who cannot themselves finance their expansion for defense purposes, to obtain financial aid from other sources.* 79/ While the contract was being put into acceptable shape the problem of establishing depreciation rates was being studied by the Commission's Committee on Taxation and Finance. By the end of November, the Committee was prepared to submit for the consideration of the Commission a table of rates deemed equitable, 80/ but formal action on the question was delayed until after the first of the year. It was February 5, 1941 before a chart showing proposed depreciation rates to be used in connection with the Emergency Plant Facilities Contracts was approved by the Commission and transmitted to the War and Navy Departments and to the Reconstruction Finance Corporation for their information. 81/ The rates as approved were not substantially different from those proposed by the Committee on Taxation and Finance on November 30, 1940. »We have made our recommendation,* wrote David Ginsburg and his collaborators at that time, *in accordance with the following formula. If Treasury normal rates do not exceed 3i percent, we have recommended 5 percent; if Treasury rates range from 3£ up to percent, we have recommended 8 percent; if from up to 12^ percent, 12 percent; and for all facilities having a Treasury rate in excess of 12^ percent we have recommended the 50 (15) percent rate.* 82/ 79/ Memorandum. Blackwell Smith and Frederick M. Eaton to Staff members of Industrial Materials Division and Production Division, October 16, 1940 (mimeographed). 80/ Memorandum, David Ginsburg, David Cobb, and Carl Auerbach to Donald Nelson, "Recommended Depreciation Rates for Purposes of the Emergency Plant Facilities Contract," November 30, 1940; Memorandum, David Cobb to Donald Nelson, "Recommended Depredation Rates for Purposes of the Emergency Plant Facilities Contract,* November 30, 1940; see also, Memorandum, Douglass V. Brown to E. R. Stettin!us, Jr., "Memorandum on Depreciation Rates in EPF Contracts," December 7, 1940, in which Brown suggests that Nelson "will present this memorandum to the Commission for its approval at an early date" and recommends that Stettinius approve the rates when they are "presented to the Commission." 81/ Minutes, ND AC, February 5, 1940. 82/ Memorandum, David Ginsburg, David Cobb, Carl Auerbach to Donald M. Nelson, "Recommended Depreciation Rates for Purposes of the Emergency Plant Facilities Contract," November 30, 1940 (NDAC Document 133-k, February 3, 1941)» 83-765 P48 bu - 41 - The EPF type of contract became obsolete, for all practical purposes, as soon as the Defense Plant Corporation began operations* The contribution of the EPF fora developed by the commission is found in establishing the principle that the cost of a facility was not to be included in the price of goods covered by a supply contract» Incidentally, though of considerable importance, the EPF form served as a stimulant to the development of other contract forms embodying similar basic policies» 88-788 P49 bu - 42 - IV. PUBLIC OWNERSHIP At the request of the Advisory Commission to the Council of National Defense, the Defense Plant Corporation was created by the Reconstruction Finance Corporation on August 22, 1940. The DPC was a wholly owned subsidiary of the parent corporation, and was established under authority granted by an amendment to the original RFC Act. The amendment, approved June 25, 1940, provided in parti wIn order to aid the Government of the United States in its national-defense program, the Corporation is authorised — *(1) To make loans to, or, when requested by the Federal Loan Administrator with the approval of the President, purchase the capital stock of, any corporation (a) for the purpose of producing, acquiring, and carrying strategic and critical materials as defined by the President, and (b) for plant construction, expansion and equipment, and working capital, to be used by the corporation in the manufacture of equipment and supplies necessary to the national defense, on such terms and conditions and with such maturities as the Corporation may determine; . . ." 83/ DPÇ Contract Forms.—The lend-lease proposal mentioned earlier in this report formed the basis of Defense Plant Corporation financing. Its activities enlisted no private financing and the plants erected with its funds were wholly Government-owned plants, leased to the contractor for 11.00 a year. Title, of course, remained with the Government. The dominant option to retain the facilities at the expiration of the emergency remained with the War or Navy Department, as the case might be, but if this option was not exercised the manufacturer might then follow substantially the same procedure as provided for in the standard contract form developed by the Commission. If the manufacturer did not wish to purchase the facilities under any condition, they remained in the hands of the Government. Obviously, no tax amortization problems were involved because the plants were Government-owned. 84/ With the further development of the Defense Plant Corporation contract, however, this original position, as will be pointed out shortly, was abandoned. NDAC-DPÇ Relationship.—The relationship, on an operating and procedural basis, between the Defense Plant Corporation and the Advisory Commission was formalized and clarified by an exchange of correspondence between Emil Schram, Chairman of the Board of Directors of the Reconstruction Finance Corporation, and W. L. Batt, Deputy ¿3/ 54 Stat. 572, Seo. 5 ¿June 25, 1940). 84/ Minutes, NDAC, October 23, 1940. 83-785 P50 - 44 - the National Defense Advisory Commission and Reconstruction Finance Corporation is correctly set out," 86/ Army-DPC Relationship.—In the interim between Batt’s letter and Schram’s reply, the Production Division submitted for the records of the Advisory Commission a communication sent to the Reconstruction Finance Corporation by the Assistant Secretary of War "on or about October 23, 1940." 87/ This communication was in the form of memorandum on the subject of "Plant Expansion by use of Emergency Plant Facilities Contract or Defense Plant Corporation Plan." The memorandum set forth the principles which would be followed by the War Department in opening negotiations with contractors for the construction or acquisition of new facilities necessary for the production of supplies needed by the Armed Services. Whether an Emergency Plant Facilities Contract or a Defense Plant Corporation Contract would be used would depend upon the following groups of instances: "1. Where ,an entire separate complete plant at an approved strategic location is involved, the contractor may, at his election, follow either the Emergency Plant or Defense Plant method. ... "2. Where machinery only is involved, regardless of location,, the contractor may, at his election, follow either method. "3. Where both buildings and machinery are involved, either in a separate complete plant at a non-strategic location, or in an addition to an existing plant, the Emergency Plant method will be used; except that in special situations like the Bendix case where wide subcontracting activities are involved and where the expansion in large measure serves others besides the Government, the Defense Plant method with return of the investment through a real rental will be appropriate. "The method having been selected, the procurement branch will negotiate each Emergency Plant Facilities contract, and each Defense Plant Corporation contract will be negotiated by Reconstruction Finance Corporation in collaboration with the procurement branch involved and the Office of the Assistant Secretary of War. "Where the Emergency Plant method is negotiated, the project to be financed by bank loans, Reconstruction Finance Corporation will, in cases where satisfactory credit standing exists, provide temporary loan financing to the contractor 86/Letter, Emil Schram to W. L. Batt, October 29, 1940. 82/ Minutes, NDAC, November 8, 1940. 23*768 p03 bu - 45 - on the basis of the Emergency Plant contract.* 88/ This recommendation was not followed, however, since the EPF contract was discarded, for all practical purposes, as soon as the Defense Plant Corporation began operating. This seems to have been due, primarily, to the flexibility of the DPC in meeting different types of situations without legislative limitations on contractual terms. Three general programp had been worked out by the Advisory Commission for the full development of the financing deemed essential to the defense program: (1) private ownership of the facilities with no Government interest; (2) private ownership with governmental interest; and (3) outright governmental ownership. 89/ The first group was intended to cover those cases where the manufacturer desired to own the facilities outright and excluded from his price any accelerated or abnormal depreciation or amortization charges. Facilities in this group were to be financed with private funds or with money borrowed from the RFC. Title remained with the manufacturer and no special reimbursement to the contractor was made by the Government. If properly approved, such facilities could be certfied as necessary in the interests of national defense, and the manufacturer would then be entitled to the privileges provided under the Second Revenue Act of 1940. The manufacturer assumed the risk of excess capacity at the end of the emergency although the cost of the facility could be provided for under the terms of the supply contract. These provisions did not stimulate large private expenditures. Indeed, in volume, privately financed plant expansion declined in industries converting to munitions. The bulk of private financing was to be found in the second general category established by the Commission. Here the manufacturer wished to preserve a future interest in the facilities but was unwilling or unable to assume the full risks involved, in possible excess capacity or over-extended financial obligations. The funds for this-type of facility were to be secured from private sources, or from the RFC, and title remained with the manufacturer. The Government, however, agreed to pay the manufacturer for the full.cost of the facilities. Payment was to be made in five annual instalments unless the emergency ended prior to the end of the five-year period in which case the payments were to be accèlerated, The Government also agreed to speed-up payment of facilities costs to the manufacturer in case 88/ Memorandum. Assistant Secretary of War to the Reconstruction Finance Corporation, circa October 23, 1940; Minutes, NDAC, November 8, 1940J NDAC Document 114 “d. 89/ Letter, John D. Biggers and others to the Hon. Pat Harrison, September 5, 1940; NDAC Circular, "Recommended Methods of Procuring New Facilities," September 30, 1940. 23-765 P53 bu - 46 - the supply contract ran out, was not renewed, or was terminated prior to the completion of the facilities contract» The cost of the facilities, in return, was not to be taken into account in determining the prices charged the Government under supply contracts. The manufacturer retained the right to purchase the facilities, should he so desire, at the end of the emergency. If he did not elect to so purchase, title passed to the Government and no further rights were retained by the manufacturer* Because of the limited types of conversion to which this type of contract had appeal and because of the magnitude of the individual plants required by the procurement agencies, this arrangement was used only in the early stage of the emergency. The third general classification concerned those oases where the facilities were built by or for the Government, were financed by Government funds, and in which the manufacturer had no future interest. Funds of the Army, Navy, Maritime Commission, or the Defense Plant Corporation were used in this financing. Title remained with the Government and the facilities were leased to private manufacturers for operation. With this class of facility capital expansion costs could not be taken into account in price determination, and tax amortization or reimbursement provisions were not applicable. The facilities were to be returned to the Government upon the termination of the lease unless other provisions for the disposition of the property were made in the contract. The situation, however, was different than that involved in the second classification for the Government owned the facilities and options to purchase were subject to the conditions pre-determined by the Army, Navy, Maritime Commission, or the Defense Plant Corporation. 3i*7C5 p54 bu - 47 - V. CERTIFICATION The Henderson Proposal.—Anticipating the passage of the Second Revenue Act of 1940, Leon Henderson submitted to the Advisory Comission a proposal for formalizing the responsibilities to be placed upon the Commission by the Act* 90/ He proposed that certification responsibilities be "centralized in the Office of the Coordinator of Purchases," that Donald M. Nelson "be directed forthwith" to establish procedure and organization to handle the job, and "be authorized to issue such certificates on behalf of the Commission." The Commission accepted Henderson's general proposal, but substituted McReynolds, the Secretary of the Commission, as the issuing officer in place of Nelson. 91/ This action placed Nelson in the operating position, but kept the formal or legal authority technically in the hands of the full Commission acting through its Secretary — a situation that gave rise to considerable subsequent organizational confusion. Henderson recommended that "no member of the Commission should carry the entire responsibility and accompanying burden of detail" imposed by statute on the NDAC as a whole, but he wanted each Commissioner to "advise and cooperate so that all needed information will be readily available." 92/ The proposal, as originally set forth, placed in Nelson's hands full responsibility for the processing, certification and issuance of Certificates of Necessity for the Commission. The legality of this arrangement was questioned by Stettinius* legal advisor, Blackwell Smith, sho argued in a memorandum to William L. Batt, dated September 19, that the Henderson proposal provided insufficient "protection to the taxpayer who relies upon Commission certification." 93/ He went on to state that he had raised the same point in preliminary discussion of the subject a week earlier, but "apparently, due to a force majeure of some kind or other, the documents stayed in your office until yesterday, when we inquired as to what had happened* Under the circumstances, the minimum change in the Henderson memorandum should be sought*" A week later, Smith again urged upon Batt the importance of clarifying the certification procedure* To Batt's explanation that "certificates will be cleared by the Secretary of the Commission with 22/ "Responsibilities of the Commission under the Second Revenue Act of 1940" (NDAC Doc* 109-a); Minutes, NDAC, September 13, 1940* 21/ Minutes, NDAC, September 13, 1940. 22/ "Responsibilities of the Commission under the Second Revenue Act of 1940" (NDAC Doc* 109-a)* 23/ Memorandum, Blackwell Smith to W. L* Batt, "Emergency Facilities," September 19, 1940* 24/ Note attached to a memorandum originally sent to Batt by Smith on September 19, 1940, and returned to him on September 23, 1940* 23“768 P55 - AB - individual Commissioners but that Mr. Nelson will issue certification,* 94/ Smith replied that *if the record of the Commission shows that each Commissioner has passed on the clearance, and if the certificates are actually issued in the name of the Commission, the matter is probably all right, even though mechanically Nelson passes the certificates out, but it should definitely be issued in the name of the Commission and the delegation to Nelson should be clearly of record merely as a ministerial or mechanical act and not placing discretion in him.* 95/ The Nelson Proposal.—This legal problem, together with Henderson's suggestion that all of the Commissioners cooperate to make the necessary information available, was probably responsible for Nelson*s proposal that a committee be established on which each Commissioner should be represented and which could act on behalf of the Commission in certification matters. A draft of Nelson's proposal, under date of September 27, is important enough to warrant extensive quotation at this point. "It is proposed that the Commission jointly with the Departments of War and Navy issue a Notice of Procedure providing that (1) applications for certificates shall be submitted to the Office of the Coordinator of National Defense Purchases, acting on behalf of the Commission, and also to either the Office of the Secretary of War or of the Navy, and (2) an applicant for a certificate as to the necessity for emergency facilities shall use an application form which will be prepared jointly by the Commission and the Departments of War and the Navy. *It it suggested that the Commission establish a Committee on Certification which will be comprised of one member appointed by each Commissioner. This Committee will meet Mondays and Thursdays and will be authorized, on behalf of the Commission by majority vote (five members of the Committee constituting a quorum), to take action with respect to the issuance of certificates by approving or disapproving recommendations made by the Coordinator of National Defense Purchases. The Coordinator's Office ordinarily will make its recommendation to the Committee on Certification on the basis of (1) the application which is required to be corroborated by a Procurement Officer of the War or Navy Department, (2) the factual report of the Procurement Officer, and (3) the recommendation of the War or Navy Department. The Committee's action will be final regardless of the nature of the recommendations of 95/ Memorandum, Blackwell Smith to W. L. Batt, "Emergency Facilities," September 26, 1940. m-?m pm - 49 - the Coordinator's Office, except as the Committee may deem it advisable to refer any matter to the Commission. "If the Committee on Certification approves the issuance of a certificate it will be signed and issued by the Secretary of the Commission. Copies of the certificate will be transmitted to the applicant and to the Commissioner of Internal Revenue. If the Committee on Certification disapproves the issuance of a certificate» the Secretary of the Commission will notify the applicant and the Secretary of War or the Navy that a certificate has not been issued.* 96/ In its final form, as submitted to the Commission on October 4, 1940, the proposal contained some change of position, though no apparent alteration of basic policy. The final proposal is reproduced here in full. 97/ "It is proposed that the Commission jointly with the Departments of War and the Navy issue a Notice of Procedure providing that (1) applications for certificates shall be submitted to the Office of the Coordinator of National Defense Purchases, acting on behalf of. the Commission, and also to either the Office of the Secretary of War or of the Secretary of the Navy 98/1 and (2) an applicant for an Emergency Facilities Certificate shall use an application form which will be prepared jointly by the Commission and the War Department and the Navy Department. "It is suggested that the Commission establish a Committee on Certification to act on its behalf with respect to the 96/ Memorandum. Coordinator of National Defense Purchases to all Commissioners, "Procedure for Certification under Section 124 of the Internal Revenue Code," September 27, 1940 (NDAC Doc.l09-c). 22/ Memorandum, Office of the Coordinator of National Defense Purchases to all Commissioners, "Procedure for Certification under Section 124 of the Internal Revenue Code," October 4» 1940 (NDAC Doc. 109-j). . Footnotes appearing in the original document have been retained as footnotes, but have been renumbered and put in quotation marks. 28/ "It is contemplated that the Secretary of War and the Secretary of the Navy will each designate a single office for all matters pertaining to the issuance of certificates." 23-768 P87 bu - 50 - issuance of certificates* 99/ This committee will be comprised of one member appointed by each Commissioner, will meet Mondays and Thursdays, and will take action by majority vote (five members of the Committee constituting a quorum). To initiate action by the committee the Coordinator’s Office will make recommendations to the committee on the basis of (1) the application for the certificate, (2) the report of the Procurement Officer, and (3) the recommendation of the War or the Navy Department. The Committee’s action, however, will be final regardless of the nature of the recommendations of the Coordinator’s Office, except as the Committee may deem it advisable to refer any matter to the Commission. "If the Committee on Certification approves the issuance of a certificate, it will be signed and issued by the Secretary of the Commission. Copies of the certificate will be sent to the applicant and to the Commissioner of Internal Revenue. If the Committee on Certification disapproves the Issuance of a certificate, the Secretary of the Commission will notify the applicant and the Secretary of War or the Secretary of the Navy that the application has been rejected. "The mechanics to aid the Committee on Certification will be as follows: *1. The Emergency Facilities Certificate "Upon receipt of an application for an Emergency Facilities Certificate, the Coordinator’s Office will Immediately tranamit a copy of the application to each member of the Committee on Certification 100/* will notify either the War or the Navy Department of the receipt of the application and in so doing will request (1) a report by the Procurement Officer, and (2) the recommendation of the Department as to the action to be taken. 22/ “The same committee will also be authorized to act for the Commission in approving or disapproving plant sites.* 100/ "Applications for Emergency Facilities Certificates will be submitted with sufficient copies to supply one to each commi ttee member." 28-7®» bu - 51 - •The application will be required to be corroborated by a Procurement Officer. Ordinarily this will be done before the application is submitted by the applicant. The report of the Procurement Officer will merely supplement his corroboration by stating any facts he may have relating to the necessity for the facilities. If the application does not carry the corroboration of a Procurement Officer 101/. the Coordinator will also request the War or the Navy Department to secure such corroboration. 102/ ■Upon receipt of the above, the Coordinator will present to the Committee on Certification for its action (1) the corroborated application, (2) the report of the Procurement Officer, (3) the recommendation of the War or the Navy Department, and (4) his recommendation. ■2. Certificate of Government Protection •Upon receipt of an application for a Certificate of Government Protection, the Coordinator’s Office will notify either the War or the Navy Department of the receipt of the application and request (1) a report 103/ by the Procurement Officer with respect to the provisions in the contract relating to the disposition of the facilities and the agreed depreciation rates incident thereto, the maintenance and care of the facilities, and termination of the contract, and (2) the recommendation of the Department as to the action to be taken. 101/ •Ordinarily applications for Emergency Facilities Certificates which will not be corroborated by a Procurement Officer before submission by the applicant will relate to emergency facilities which were constructed or acquired after June 10, 1940, and prior to the enactment of the Second Revenue Act of 1940, without the participation of either the War or the Navy Department.” 102/ *If for any reason a Procurement Officer is unable to corroborate an application, he may give the reasons therefor in his report." 103/ "The report will be made upon a form which will be prepared jointly by the Commission and the War Department and the Navy Department.• S 788 Pu# hu - 52 - •Upon receipt of the above the Coordinator will present to the Committee on Certification for its action (1) the application, (2) the report of the Procurement Officer, (3) the recommendation of the War or the Navy Department, and (4) his recommendation» "3. Certificate of Non-Reimbursement •Up on receipt of an application for a Certificate of Non-Reimoursement, the Coordinator^ Office will notify either the War or the Navy Department of the receipt of the application and request (1) a report by the Procurement Officer with respect to the factors that were used in the fixing of the price to be paid by the United States for supplies and a statement 104/ by him that return of cost of the facilities greater than normal depreciation was not used as a factor in the fixing of such prices; 105/ and (2) the recommendation of the Department as to the action to be taken. •Upon receipt of the above the Coordinator will present to the Committee on Certification for its action (1) the application, (2) the report and statement of the Procurement Officer, (3) the recommendation of the War or*the Navy Department, and (4) his recommendation. • 124/ "The report and statement will be made upon a form which will be prepared jointly by the Commission and the War Department and the Navy Department»• 125/ "1^ for any reason the Procurement Officer is unable to make such a statement, he may give the reasons therefor in his report.• p«0 • 53 - This significant proposal was not formally acted upon by the Advisory Commission at the time it was submitted for consideration. The minutes of the Commission for October 4 report only that "It was understood this procedure would be cleared by the Commissioners individually with Mr. Nelson in order that it could be made effective promptly since requests are now on hand for certification." 106/ But even this informal clearance was not secured until October 31, and was not made a matter of record until November 8, 1940. 107/ No formal action to validate the entire proposal was taken until February 19, 1941, after the establishment of the Office of Production Management — a fact which throws some light on the struggles of the closing months of 1940. The results of the individual clearances seem none too certain, judging from the records available. What seems to have happened was the establishment of an Emergency Facilities Committee on which each Commissioner, together with Nelson, appointed a representative. This committee made its recommendations to the Commission. After the establishment of OPM, William Jay Hoff of the Legal Division stated on February 19, 1941> that the representation of Nelson on the committee could "be traced to the lack of any central organization in the Commission, and the Commission's apparent desire to place the administration of the work in hands of someone serving the whole Commission, rather than any one department." 108/ Be that as it may, the committee did begin to hold meetings and, interestingly enough, Colonel Hiram S. Brown, Nelson's representative, was selected as chairman. The committee began its deliberations by discussion of proper procedures to be followed in certification and by an attempt to clarify terms. Differences with War and Navy Departments.--On October 23, Nelson reported to the Commission that differences between the War Department.and himself were delaying completion of a detailed statement on procedures for processing applications for Certificates. According to Nelson, "the procedure the War Department suggested would have vested in the Commission what amounted practically to a veto power to be exercised within a 2-hour period.* 109/ Such an arrangement, of course, would not allow for any independent appraisal of the application by the staff of the Advisory Commission and would reduce the Commission's role in the process to a rubber stamping of military actions. Nelson hoped, however, to be able to present to the Commission at Its next meeting a more desirable proposition. The Minutes for the next meeting on October 25, make no mention of 106/ Minutes, NDAC, October 4» 1940. 107/ Minutes, NDAC, November 8, 1940. 108/ Memorandum, W. Jay Hoff to John Lord O'Brian, "Procedure for Certification Under Section 124 of Internal Revenue Act," February 19, 1941* 109/ Minutes, NDAC, October 23, 1940. 28-76B Pfll bu - 54 - the matter, but on October 30, Nelson presented two specific cases to the Commission which illustrated the problems involved in interagency responsibilities of this sort. One case involved depreciation rates in supply contracts and the other had to do with certification of accelerated depreciation rates included in an Emergency Plant Facilities Contract. In each instance the Armed Services presented to the Commission an accomplished fact and requested concurrence from the Commission. In each instance, concurrence was secured together with a restatement of the Commission’s legal responsibilities. 110/ Discussion of the possibilities involved in the proposal of the Navy for an alternative basis of tax certification was undertaken by the Commission’s Committee on Taxation and Finance. Because the Committee could not agree upon a formula, Henderson and Biggers joined in seeking an Executive Session of the Commission at which both the Army and the Navy would present their position and their problems. Ui/ It was Henderson’s opinion that the proposal of the Navy Department did not protect adequately the Government’s Interests in the residual value of the facilities. 112/ The Commission agreed to meet in Executive Session on November 25 for the purposes suggested by its committee. Henderson subsequently reported that it was his understanding that the Attorney General had said "the Navy proposal could not be used as a basis of tax certification under the Second Revenue Act of 1940, and apparently this decision removes from the picture both this proposal of the Navy and a similar one of the Ordnance Division of the War Department.” 113/ Evidently the Executive Session failed to satisfy all parties concerned even though the position of the Attorney General seems to have been in support of the position taken by Henderson. The interagency dispute was obviously of more Importance than mere procedural detail; it was a disagreement over basic policy regarding the disposition of emergency facilities at the end of the emergency. Positive action was delayed again and again by external conflict, internal differences of opinion, and plain lack of information. 110/ Minutes, NDAC, October 30, 1940; letter. Under Secretary of the Navy to W. S. Knudsen, October 25, 1940, and Knudsen’s reply, dated October 30, 1940. Ill/ Minutes, NDAC, November 20, 1940. 112/ Ibid. 113/ This report is contained in the Minutes of the Commission for November 29, 1940, in response to an inquiry by Knudsen as to "what had happened in connection with the Navy Department's alternative proposal for tax certification. ” It would seem that Knudsen was not present at the executive session of November 25, 1940. aa-rea Pea *>“ - 55 - The confusion of the period on the "top side1* was reflected in the slow development of policies and procedures by the Committee on Certification. As William Jay Hoff expressed it in February, 1941, "there was a great deal of discussion, both at the committee meetings and between various individuals, regarding the theory of necessity, government protection, and non-reimburse-ment. Unfortunately, no one in a position to coordinate work on the solution of the problems did so, and those who were most fruitful of ideas were in no position to straighten the situation out. However, during this period a rough procedure grew up whereby the War Department and the Navy Department were to process the applications, and the Advisory Commission do little more than pass on them as presented.11 114/ Gradually, however, a more definite procedure for clearance was developed which allowed time for a minimum of scrutiny of the applications by an appropriate specialist attached to the staff of the Advisory Commission. Administrative Problems.—On October 16, 1940, Geoffrey S. Smith, one of Stettinius* legal advisors, dictated a memorandum for the files in which he pointed out that the application forms were "being held up pending clearance by the War Department11 and that until these forms were cleared and agreed upon no notice on the procedure for obtaining the certificates could be released to industry. The legal staff of the Price Stabilization Division, however, was handling the main legal work involved, which is not surprising in the light of Henderson's dominant position on the Commission's Committee on Taxation and Finance. David Cobb, one of the Price Stabilization Division attorneys, was then working on the application forms and "the submission of data" by the War and Navy Departments. 115/ It was nevertheless Donald Nelson's office that was responsible for the development and institution of procedures and forms regarding certification, and this waiver in favor of Henderson's staff is understandable only in the light of the casual informality which characterized the Advisory Commission period. The pressure of a multitude of important administrative details and the need for establishing and clarifying general policies resulted in conflicting demands upon the time of top officials, and the resulting delays in some programs often brought sharp protests from those who themselves were under equal pressures in other areas. 1J^ Memorandum, W. Jay Hoff to John Lord O'Brian, "Procedure for Certification under Section 124 of the Internal Revenue Act," February 19 > 1941« 115/ Memorandum, Geoffrey S. Smith to the files, "RE. Tax Amortization and Certification Procedures," October 16, 1940. 23-785 Pfl3 bu - 56 - On October 29, 1940, Geoffrey S. Smith addressed a sharply worded memorandum to W. L. Batt protesting the long delay in publishing the procedures and forms necessary for tax certification. Batt forwarded the memorandum to Stettinius with the red-penciled notation •important.* Discussion, in the meantime, had been progressing between Nelson's office and the*Armed Services, and on November 8, 1940, Nelson submitted to the Commission two documents which had been cleared by the individual Commissioners on October 31, 1940, prior to their release. 116/ The intensity of the struggle with the Armed Services may well have obscured the certification issue in the minds of some staff members. The instructions were released under date of November 1, 1940. They contained full information as to when, where, and how to file applications for Certificates of Necessity, Certificates of Government Protection, and Certificates of Non-Reimbursement, together with sample application forms. The instructions were released jointly by the War and Navy Departments and the Advisory Commission. Applications were to be sent directly to the appropriate office of the Armed Services rather than to the Ad/isory Commission, as proposed earlier by Nelson. Otherwise the externals were approximately as originally drawn up. Release of the outline of procedure to the general public, however, did not end the troubles of the Advisory Commission, for there seemed to be no particular rush of applicants. On December 11, 1940, the Commission issued a statement of some length to the press in which the procedure was reviewed and stress was laid upon the statutory “deadline" for applications. 117/ Tax Certification Procedure.—The difficulties encountered in establishing proper procedures for certification were not made easier by the slow disintegration of the Advisory Commission. The circumstances made it difficult "to get policy determinations made by the Commission even on specific issues raised by individual cases," and "impossible to get any policy determinations on the broad problems," 118/ With the creation of the Office of Production Management, January 7, 1941, the Advisory Commission was forced, by sheer necessity as well as by statutory responsibility, to attempt a clarification of procedure and delegation of authority. The problem was raised on January $9, 1941, when Knudsen submitted a memorandum on Tax Certification Procedure, pursuant "to the Commission action of September 13, 1940 ... assigning to the Coordinator of Defense Purchases the responsibility for handling applications for Certificates under the Second Revenue Act of 1940 and the subsequent abolishing of the Office of 116/ Minutes / NDAC. November 8, 1940 (NDAC Doc. 109-d) 117/ NDAC Press Release, PR-302, December 11, 1940. 118/ Memorandum, W. Jay Hoff to John Lord 0’Brian, "Procedure for Certification Under Section 124 of the Internal Revenue Act," February 19, 1941. 23-78B P«4 bu - 57 - the Coordinator of National Defense Purchases by Executive Order No* 8629, and the transfer of those functions to the Division of Purchases in the Office of Production Management," 119/ Copies of the proposal were to be made available to the various Commissioners for their study, and it was agreed that Robert B. Eichholz, who had succeeded Col, Brown as Nelson's representative, would continue to act as chairman of the existing committee pending a final determination by the Commission as to its future disposition. 120/ The Assistant Secretary of the Commission, Sidney Sherwood, was directed, in the absence of McReynolds, to draw up a document which would officially recognize the Emergency Facilities Committee and to present this to the Commission for their consideration at the next meeting. 121/ This was done and on February 12, 1941» the Commission approved the following statement of policies and organization: "1. The function of Tax Certification shall be placed in the Office of the Secretary. *2. The Emergency Facilities Committee shall continue, in the Office of the Secretary, to perform the same duties as heretofore, acting both for the Advisory Commission and Office of Production Management. "3. The Chief of the Tax Certification Section shall attend all regular meetings of the Commission, to present the recommendation of the Committee on applications for certificates and all questions of policy with the Committee's recommendations. "4. 0PM will be concerned only with certification as to necessity. All questions which relate to activities of OPM shall be transmitted to 0PM through a designated individual who shall refer to the various branches of OPM all such matters as may require action or attention, with his recommendations if required. The recommendations and conclusions of the appropriate divisions and sections of OPM shall be transmitted to the Chief of the Tax Certification Section. "5. All records of the Emergency Facilities Committee shall be retained by that Committee in the Office of the Secretary and all records of Tax Certification Heretofore kept by the Divisions now embraced in OPM, other than those in the Office of the Coordinator of National 119/Minutes, NDAC, January 29, 1941« 120/ Ibid« 121/ Minutes, NDAC, February 5, 1941« aa-ree Pea *>u - 58 - Defense Purchases, shall be consolidated in the office of a designated individual and a unified record there maintained.“ 122/ Upon adoption of this policy, McReynolds reminded the Commission that the Tax Certification Committee, which had come to be known as the Emergency Facilities Committee, had never been approved by formal action of the Commission. He suggested to the Commission that Robert B. Eichholz be asked to prepare a memorandum showing the history of the committee and the scope of its activities so that such a report could be incorporated into the formal minutes of the Commission. This suggestion was accepted 123/ and at the following meeting the Commission considered and approved the report which statedt “On September 13, 1940, the Commission placed the responsibility for formulating the procedure for handling tax certificates with Mr. Donald Nelson. In pursuance of this directive, Mr. Nelson presented to the Commissioners on October 4» 1940, a memorandum outlining procedure and stating in part as follows : •It is suggested that the Commission establish a Committee on Certification to act on its behalf with respect to the issuance of certificates. This committee will be comprised of one member appointed by each Commissioner, will meet Mondays and Thursdays and will take action by majority vote (five members of the Committee constituting a quorum).1 “The Emergency Facilities Committee was set up accordingly and has functioned in line with the procedures set forth in Mr. Nelson*s memorandum; however, there has been no formal Commission approval of the committee. Therefore, it is proposed that the record show formal approval of the Emergency Facilities Committee which will function henceforth in accordance with the procedure adopted at the Commission Meeting February 12, 1941.* At the following meeting, a week later, the “question of additional personnel for the Tax Certification Section was discussed.* 125/ 122/Memorandum, Sidney Sherwood to Advisory Commission, “Tax Certi-fication Procedure,” February 11, 1941 (NDAC Doc. 109-j); minutes, NDAC, February 12, 1941. 123/ Minutes, NDAC, February 12, 1941. 124/ Memorandum, Robert B. Eichholz to the Advisory Commission, “Emergency Facilities Committee,“ February 19, 1941 (NDAC Doc. 109-j/J Minutes NDAC, February 19, 1941. 125/ Minutes, NDAC, February 26, 1941. 28*705 Pae bu - 59 - Further delegation of authority to the Committee was approved by the Commission on March 12, 1941» when it directed that in cases where there was unanimous approval by the Committee "and full concurrence on the part of the War and Navy Departments,1* the Secretary of the Commission could sign the certificates on behalf of the Commission. The minutes of the Commission were to list all certificates so granted and all cases where unanimous approval was not secured were to be presented separately for the special consideration of the Commission« 126/ The procedure worked out for the circulation of the certificates prior to their formal issuance seems to have been as follows: 1. An application was received by either the War or Navy Department as stated in the release of instruction on November 1, 1940. 2. The application was processed in the War or Navy Department with concurrent dispatch of a copy to the office of Robert B. Eichholz, Head of the Tax Certification Section of the Advisory Commission and chairman of the Emergency Facilities Committee. 3« Eichholz*s office referred a copy of the application to the office of Judge Mark W. Norman who headed the corresponding section in the Production Division of 0PM and was responsible for the circulation of applications within the Office of Production Management« 4. Judge Norman then referred a copy of the application to a specialist in the Production Division or to the office of Douglass Brown who was responsible for clearance within the Materials Branch. 5« The specialists in the two branches thereupon made their reports and recommendations to the office of Judge Norman« 6« Judge Norman then transmitted the application and the reports to Eichholz« 7« At more or less the same time, the Armed Services transmitted either the signed certificate or a request for Commission action to Eichholz« 8. Eichholz prepared the agenda for the Emergency Facilities Committee in the form of recommendations and summaries and distributed these among the committee members•' 9« The committee then acted upon the recommendations of Eichholz who placed the recommendations of the committee in proper form for transmittal to the Advisory Commission. 126/ Minutes, NDAC, March 12, 1941« aa~7«5 - 60 - 10« The Advisory Commission, as outlined above, then acted upon the recommendations of the committee« 11« Issuance of the certificates was in the hands of the Secretary of the Advisory Commission acting in a ministerial capacity« Once acted upon the certificate, if granted, and the refusal, if such was the case, was sent to the original receiving office« 12« The War or Navy Department then forwarded the approved certificate to the Bureau of Internal Revenue and a copy of the approval to the applicant« In the case of refusal, the applicant was notified by the Armed Services« 127/ Section 124 (1)«—Not long after the Second Revenue Act of 1940 became law, there developed basic differences of opinion regarding its proper interpretation« Subsection (i), which the final statute substituted for sections (i), (j), and (k) to which the Advisory Commission had successfully protested, contained a compromise worked out by Render so*h, on behalf of the Commission, and Senator Pat Harrison, Chairman of the Senate Finance Committee, as described earlier in this study« On October 28, within three weeks after the passage of the act, the War Department sought a clarification of the applicability of this section to certain of its contracts« Such clarification was "urgently needed to enable this Department to close a large number of contracts now pending," The Assistant Secretary of War then proceeded to place his full case before the Attorney General for a rulings "This Department believes that in many cases the interest of the United States, with reference to the future use and disposition of the facility, will be adequately protected, by a contract provision that the contractor will retain and maintain the facility for a stated period after the termination of the contract« This Department is convinced that in many cases a consideration of adequate national defanse is better protection to the United States than a monetary or property Interest in the facility« "Accordingly, your opinion is requested as to whether subsection of Section 302 of the 'Second Revenue Act of 1940' requires the Secretary of War to refuse a Certificate of Government Protection, because there is no provision in the contract for a monetary or property interest in the facility for the Government, although it is his opinion that other 127/ Memorandum, W. Jay Hoff to John Lord O'Brian, "Procedure for Certification Ihider Section 124 of the Internal Revenue Act," February 19, 1941. 23*785 P«8 bu - 61 - provisions in ths contract adequately protect the Government with reference to the future use and disposition of the facility. • A week later the Assistant Secretary of War wrote again to the Attorney General, stating the case in still more specific terms: ■If the facilities are left in place at the contractor's plant, they will be available as stand-by capacity for the future use of the United States. An agreement with a contractor to retain and maintain these facilities in serviceable condition at its own expense will make the facilities readily available for the immediate production of the product for which they are constructed when required in the interest of national defense. It is proposed to insert an additional article in such contracts, in appropriate cases, providing in substance, that if the contractor applies for certification under the provisions of Section 302 of the Second Revenue Act of 1940 (Public No. 801, 76th Congress), the contractor agrees to retain and maintain the facilities sought to be certified in serviceable condition and without cost to the Government, for a period of five years after the completion of the contract. ... ■• . .if the provision suggested above is inserted in this class of contracts, can the Secretary of War make the certificate required by subsection (1) to the effect that such provision adequately protects the United States with reference to the future use and disposition of such emergency facilities?" 129/ The opinion of the Attorney General was forwarded to the War Department on November 25, 1940. It held in effect that "as a general policy contracts of the kind outlined in the Assistant Secretary's letters of October 28 and November 5, 1940" should not "be used as basis for certificates required" by the statute. Additionally, the Attorney General reminded the War Department that ■The disposition of an emergency facility in connection with which a certificate as issued under said provisions of subsection (i) of Section 302 of the Second Revenue Act of 1940 is not now a natter for the Secretary alone, but one for joint action by him and the Advisory Comnission to the Council of National Defense. This is necessarily true, since they must jointly certify that the contract which provides 1^8/ Letter, Robert P. Patterson, Assistant Secretary of War, to Robert H. Jackson, Attorney General, October 28, 1940. 1^9/ Letter, Assistant Secretary of War Patterson to Attorney General Robert H. Jackson, November 5, 1940. • 62 for such disposition ’adequately protects the United States* with reference thereto*• 130/ This opinion did not satisfy the War Department and on November 28, 1940, the Secretary of War wrote the Attorney General stating that •it was not the intention of this Department to seek approval of this plan for general application11 and requesting a specific ruling on a particular set of circumstances* 131/ The Attorney General agreed that if certain very specific additional protections were thrown around the interests of the Government, the stand-by provisions recommended by the War Department would be valid and fall within the requirements of the Second Revenue Act of 1940* He reminded the War Department, however, that •concurrence in this finding by the Advisory Commission to the Council of National Defense is necessary, since the statute requires that Commission to join with you in the issuance of the certificate*11 132/ While the procedure finally developed provided machinery for the orderly review of the applications, the Anny-Navy-Defense Commission differences regarding the full meaning of section 124 (i) were reflected in the discussions of the Emergency Facilities Committee* Likewise, the relationship between the functions of the Advisory Commission and the newly established Office of Production Management regarding the various certificates required under the section needed clarification* If the Advisory Commission utilized the facilities of OPM to secure recommendations on Certificates of Necessity, did OPM aIra assume responsibilities regarding Certificates of Government Protection and Certificates of Non-Reimbursement? Under what conditions were the latter to be Issued? How much authority had been delegated by the Advisory Commission to its Committee on Certification and how much had been delegated to OPM? These issues were not made easier of settlement by the fact that the Treasury Department, the Department of Justice, the Armed Services, and the Advisory Commission seemed to possess varying interpretations of the meaning of subsection (i)* The disputed section reads as follows: •PROTECTION OF THE UNITED STATES.—If the taxpayer has been or will be reimbursed by the Uhited States for all or a part of the cost of any emergency facility pursuant to any contract with the United States, either — 1^30/ Opinion of the Attorney General with Respect to Government Protection under Section 302 (i) of the Second Revenue Act of 1940, November 25, 1940, p. 13. 12V Letter, Secretary of War to the Attorney General, November 28. 1940. 133/ Letter, Attorney General Robert H. Jackson to Secretary of War Henry L. Stimson, November 30, 1940. P70 - 63 - (1) directly, by a provision therein dealing expressly with such reimbursement, or (2) indirectly, because the price paid by the United States (insofar as return of cost of the facility is used as a factor in the fixing of such price) is recognized by the contract as including a return of cost greater than the normal exhaustion, wear and tear, no amortization deduction with respect to such emergency facility shall be allowed for any month after the end of the month in which such contract is made, unless, before the expiration of ninety days after the making of such contract or one hundred and twenty days after the date of the enactment of the Second Revenue Act of 1940, whichever of such periods expires the later, the Advisory Commission to the Council of National Defense, and either the Secretary of War or the Secretary of the Navy certify to the Conmis-sioner ¿pi Internal Revenue/ that such contract adequately protects the United States with reference to the future use and disposition of such emergency facilities* A certificate by the Advisory Commission to the Council of National Defense and either the Secretary of War or the Secretary of the Navy, made to the Commissioner ¿of Internal Revenue/ before the expiration of 90 days after the making of a contract or 120 days after the date of the enactment of the Second Revenue Act of 1940, whichever of such periods expires the later, to the effect that, under such contract, reimbursement for all or a part of the cost of any emergency facility is not provided for within the meaning of clause (1) or clause (2), shall be conclusive for the purpose of this subsection* “The terms and conditions of contracts with reference to reimbursement of the cost of emergency facilities and the protecting of the United States with reference to the future use and disposition of such emergency facilities should be made available to the public." 133/ Policy Questions Under Section 124 (i)*—These provisions came to be known as “policy provisions" in that they imposed certain penalties and protections to be thrown around the issuance of the Certificate of Necessity which made income tax deductions possible for the corporation acquiring or building emergency plant facilities* As is inevitable in cases of compromise, these provisions gave rise to basic questions of policy* 133/ Subsection (i) of section 302 of the Second Revenue Act of 1940 (section 124 (1) of the Internal Revenue Code), 54 Stat* 1002-3. as-rea *71 bu - 64 - (1) When is a proposed facility in the interest of national defense? For example, were facilities constructed to take care of British orders eligible for certification under the provisions of the act? The Emergency Facilities Committee and the Advisory Commission thought so and adopted the policy of certifying such facilities» 134/ But this was accomplished only after the desirability of getting an opinion from the Attorney General had been suggested and rejected upon the insistence of both Henderson and McReynolds» "Mr. Henderson stated that this was a matter of policy which the Commission should decide, and recommended first, that no opinion be requested of the Attorney-General, and secondly, that the Commission authorize Mr. Nelson and the Emergency Facilities Committee to handle these applications for rapid anprtization on the basis of the facts, recommending certification in those instances where, although the expansion is primarily for British orders at the present time, it nevertheless is necessary for this country’s defense. The Commission concurred in Mr. Henderson’s recommendations and Mr. Nelson was so directed.** 135/ (2) Was land to be amortized under the provisions of the Act? This question was answered in the affirmative, particularly in view of the language of the Act which included land within its definition Of an emergency facility. 136/ This decision, however, was made only after Eichholz, Judge Norman, and Nelson all approved the step» Even then, the recommendation of the Tax Certification Committee was circulated to all of the Commissioners for individual action. 137/ This formalization of specific statutory definition required two weeks of effort and was accomplished five months after the passage of the Act by Congress. It is instructive to note, however, that the policy established by the Commission was a restrictive rather than an expansive definition of the statute. "The Tax Committee of the Commission recommends that amortization certificates be given for land, However, the Committee feels that this certificate should be granted only in very exceptional cases.” 1^8/ In accepting this recommendation, the Commission agreed that Certificates should "be issued in these cases only after very careful consideration." 139/ (3) Should Certificates of Necessity be issued if the existing capacity of a plant was sufficient to take care of military demands but expansion was necessary if civilian or domestic needs were to be 134/ Minutes, NDAC. December 6, 19Z0- 115/ Ibid. This represented a reversal of the position taken on December 4, 1940, where it was agreed to seek an opinion. 136/ Section 124, (e) (1) of the Internal Revenue Code, 1940. 137/ Memorandum, Donald Nelson to all the Commissioners, February 26, 1941. 138/ Ibid, 139/ Minutes, NDAC, February 26, 1941. 81-788 P?a bu - - 65 - met in addition to military orders? 140/ It seems strange that this question should have been raised some six months after the public announcement of the policy to superimpose the defense program upon the domestic economy. Such reopening of the question might be explained in terms of changing personnel and the press of specific cases. This problem was settled apparently without action on the part of the Advisory Commission for no formal record of action on it appears in the Minutes of the Commission. (4) Is it proper to issue a Certificate of Necessity when the plant is operating but one shift a day and increased production could be secured from existing plant facilities by operating two or more shifts a day? This question, again, received partial answer in the labor statement cleared through the Commission in connection with supply contracts. At any rate, it was not included in the specific questions* certified by the Committee for Commission action and no formal Commission decision on it is to be found in the records. Solution of the problem was left to the operating officials as they reviewed the individual applications. (5) What interpretation was to be placed upon the statutory provision requiring a Certificate of Non-Reimbursement which stated that the taxpayer has not or will not be reimbursed by the United States for all or a part of the cost of any emergency facility constructed or acquired pursuant to any contract with the United States? This certificate was required whether the reimbursement was direct, by a provision in the contract dealing expressly with such reimbursement, or indirect, "because the price paid by the United States . . • is recognized by the contract as including a return of cost greater than the normal exhaustion, wear and tear." What was the meaning of the phrase "recognized by the contract"? This question was first raised by Eichholz in January 1941, and it was brought before the Advisory Commission on March 5, 1941. The minutes of the Commission for that date state: "Mr. Batt pointed out the need for a clear legal interpretation of the language of the statute with respect to NonReimbursement and Government Protection Certificates. He stressed the importance of obtaining such an interpretation immediately, suggesting that it would be desirable, for tax purposes, to have it by March 15. He proposed, because of the incidental advantage of War and Navy concurrence, that the Commission request the Office of Production Management to make the legal determination and submit it for Commission consideration. Mr. Hamm offered a counter-proposal that the Memorandum, Robert Eichholz to Donald M. Nelson,, "Some policy-questions concerning certificates which should be determined by the commission," January 3, 1941« 83-788 pts bu - 66 - determination be made by a Committee composed of one legal representative from each of the Commissioners and a repre-sentative from each the War and Navy Departments, After considerable discussion, Mr, Batt's proposal was accepted and Mr. McReynolds was directed to make the request of the Office of Production Management immediately and to suggest to the General Counsel,of that office that he get in touch with lawyers on the staffs of the various commissioners who will be interested in entering into the consideration,• 141/ Two days after this action, Batt directed a memorandum to John Lord O'Brian, General Counsel of the Office of Production Management, stating that "As you know, I was very anxious that the Defense Comission ask your opinion on the tax certification problem, "In order to expedite this matter, Mr, McReynolds will distribute your opinion to the Commissioners as soon as he receives it. Furthermore, he will call a special meeting of.the Commissioners if that will save time,” O'Brian, after careful and thorough consultation not only with the legal staffs involved but also with the various operating agencies concerned, forwarded his opinion to the Advisory Commission under date of March 24, 1941* This memorandum was confined to a consideration of the problems involved in Certificates of Non-Reimbursement, Certificates of Government Protection being left for separate and subsequent treatment, "Subdivision (2) prescribes no standards for the exercise of discretion and the phrase 'is recognized by the contract' is not a term of fixed legal signification. Instead of attempting to construe this Section from the standpoint of strictly legal abstractions it should, I think, be approached from the standpoint of seeking some sound common-sense rule based on standards which fall within the intent and the apparent scope of power invoked by this Section. It is agreed that, by this section, taken with other sections, Congress intended: (1) to induce contractors to provide new facilities where needed in order to supply promptly and adequately the needs of national defense; and (2) to prevent a contractor who is receiving any reimbursement for new facilities through his contract from also receiving indirect reimbursement through the allowance of rapid amortization, unless the interest of the Government in the facilities is adequately protected. In my view, the phrase 'recognized by the contract,' read in its context, means 141/ Minutes. ND AC, March 5. 19Al- ■ 142/ Memorandum, W. L. Batt to John Lord O'Brian, March 7, 1941, - 67 - 'taken into account at the time of making the contract«1 • • • With this in mind, it is my view that Congress did not intend to prescribe as requisite for the test of reimbursement a costaccounting analysis made subsequent to the making of the contract« At best, such an analysis • • • could only be evidence bearing on the intent of the parties at the earlier time of making the contract« "On the other hand, the phrase ’recognized by the contract1 does not mean that the contract must necessarily indicate on its face that the price paid includes at least some reimbursement. Whatever the contract, it speaks for itself. If Congress had meant that the test be limited to the wording of the contract, it could have so provided • • • "The question is primarily one of intent as reflected in the price: Did the contractor and the contracting officer for the Government intend that the price agreed upon include no amount for reimbursement for facilities and does it appear that the price provided for, viewed as of the time of making the contract, is reasonably in line with the intention? A mere statement to this effect does not, of course, preclude the possibility that one of the two contracting parties believed or intended that the price did include an element of reimbursement. Nevertheless, the first prerequisite of granting a certificate of non-reimbursement should be the procurement of sufficiently detailed, verified statements from the contracting officer ... and also from the contractor that the price set in the contract did not recognize • • • a return of cost for facilities greater than normal exhaustion, wear and tear. In my opinion, however, the ascertainment of fact required by the Section should not be confined solely to the procurement of these sworn statements. Practical experience demonstrates that the interest of the Government requires at least some substantial amount of confirmation and it may fairly be assumed that the Congress had this in mind." 143/ The opinion of the General Counsel for the Office of Production Management, after establishing the legal problems involved, then proceeded to a discussion of standards by which it might be determined whether "reasonable judgment" had been exercised by the contracting officers in certifying that no reimbursement was included in the contract price« In conclusion O’Brian stated: "In short, this Section does not require cost-accounting nor should the decision be rested simply on the formal affidavits of the contracting parties. If, after applying 143/ John Lord O’Brian, Memorandum, "Certificates of Non-Reimbursement," March 24 > 1941* M-7ea Pro - 68 - the type of tests above indicated, it is a reasonable conclusion that at the time of making the contract the price did not include the element of reimbursement, the certificate should be granted. This rule should be determinative of most cases. In the smaller group which present wholly unique problems, as to which none of the above types of tests are applicable, unless other satisfactory proof can be produced it will be necessary to deny the certificate." The opinion was forwarded to the various Commissioners for their consideration just prior to the Commission meeting called for March 26, 1941« 144/ In the course of the discussion Henderson referred to "several conclusions in the opinion with which he was not in agreement" and it was suggested that, inasmuch as the Commissioners had not had the opportunity for the careful consideration which the opinion deserved, it be carried over "to the next meeting." This was agreed upon and the matter was put over until the meeting of April 2, 1941« 145/ Henderson wrote to Donald Nelson on March 29 that "a further reading of Mr. O'Brian's opinion ... convinces me that it would be unwise for the Advisory Commission to adopt as its own the opinion in its present form." His letter is of significance great enough to warrant reproduction in full, particularly in light of subsequent action by the Commission. "A further reading of Mr. O'Brian's opinion conqerning adequate standards for the issuance of Certificates of NonReimbursement under Section 124 (i) of the Internal Revenue Code convinces me that it would be unwise for the Advisory Commission to adopt as its own the opinion in its present form. If we are to have an intelligent procurement policy for the future, under which the Service Departments will require cost estimates from prospective contractors and a segregation of capital outlays from other costs of performance, it is important that past contracts should not be certified upon the mere representation of the contracting officer that the contract price was a reasonable one. objection to Mr. O'Brian's opinion is that it seems to proceed upon the assumption that in the majority of instances there will be no record of cost breakdowns in the War and Navy Departments. The opinion is an attempt to justify the issuance of Certificates of Non-Reimbursement in the absence 244/A note attached to the copy secured from the files of Stettinius . states: "Mrs. Arnold in Mr. Sherwood's office phoned to say that Mr. O'Brian's memorandum on Certificates of Reimbursement would be discussed at the 11:00 o'clock Commission meeting today in the Federal Reserve Board Room. ... She said the had been sent over with a special tag on it." This note is dated March 26, 1941, 10:00 A.M. one hour before the scheduled meeting. 145/ Minutes, NDAC, March 26, 1941. 83-788 P78 - 69 - of such cost breakdowns by relying upon other factors which in the opinion of the procurement officers may be relevant« “In my view, if we are to carry out our assurances to the Congressional Committees at the time the amortization provisions were enacted by the Congress, a Certificate of Non-ReimburSement should not issue unless the applicant can show from his cost sheets reasonable grounds for our forming the opinion that reimbursement was not a factor in the determination of the contract prices The burden of proving his case would thus be upon the applicant, and certificates would not issue except in reasonably clear cases. “Attached hereto is a re-draft of Mr. O’Brian's opinion which is mere in line with what I believe to be the proper standards by which an application for a Certificate of NonReimbursement should be judged. If this view prevails, it will require that contracts be checked by cost accountants and by purchasers familiar with procurement problems. I do not believe that a detailed cost audit will be necessary in any but the most difficult cases, but the estimates of cost should be examined by personnel adequately equipped to make a rough determination of the likelihood of the presence of reimbursement for additional facilities. The determination of questions of this nature bears an intimate relationship to the work of your Division. It would therefore seem to me to be advisable that several competent cost accountants and buyers be detailed by you to Mr. Eichholz' staff to investigate applications for Certificates of Non-Reimburse-ment. This procedure would have the additional advantage of familiarizing your staff with past procurement situations in the War and Navy Departments. "There is a further aspect of present certification procedure which gives me great concern. I am informed that because of the mistaken belief that tax certification is an unimportant aspect of the defense program which is likely to terminate in the near future, the Tax Certification Section has been somewhat orphaned and neglected. It is understaffed and operating under an inadequate budget, with the result that it is not only difficult to procure additional adequate personnel but, what is even more serious, it is difficult to retain existing personnel. In addition, the office is about to be removed to quarters in which working conditions are particularly impossible. "The work on pending applications for Certificates of Necessity is about fifty per cent, completed. However, there are now on file applications for Certificates of NonReimbursement covering 16,509 contracts, and applications are being received daily covering an average of about 180 aa-tea p*?? - 70 - contreats. If certification of these contracts is to have the importance which we believe it should have, it is essential that the Tax Certification Section be properly staffed, adequately budgeted, properly quartered, and its policies properly coordinated with those of the Purchasing Division of the Office of Production Management. The Commission should either accept the implications of its responsibility with respect to tax certification or it should ask the Congress to relieve it of any responsibility whatsoever on these questions.* 146/ When the Commission met to consider O'Brian's opinion, David Ginsburg, acting for Leon Henderson, presented to the Commission Ifir. Henderson's views and suggestions regarding the procedure to be followed* in issuing Certificates of Non-Reimbursemertt together with the redraft prepared by Henderson's legal staff. 147/ After considerable discussion it was agreed that, if Ginsburg would make copies of the correspondence and the memorandum available to the various Commissioners, final consideration would be given to the entire matter at the following meeting of the Commission. 148/ The several Commissioners turned Henderson's redraft over to their legal staffs for review and comment and met one week later to settle the matter of Certificates of Non-Reimbursement. Stettinius took the lead, stating that *he believed the interpretation as revised by Mr. Henderson meets the situation adequately.* The Commission approved the revision and instructed the Secretary to transmit this action to the Office of Production Management. 149/ The proposal adopted by the Commission followed the O'Brian opinion almost verbatim down to the point where legal problems were passed and policy and administrative problems became of basic significance. The opinion of the General Counsel thus served the Commission as a means of announcing a fundamental policy in relation to Certificates of Non-Reimbursement rather than as an instrument for settling the problem of the proper legal interpretation of the disputed section. The basic sentence in the redrafted statement as approved by the Commission read as follows: *It would seem reasonable, in every instance in which the contracting officer for the Government has not available evidence on which to rest a reasonable judgment, to call upon the applicant to support his application with evidence." 150/ 146/ Letter, Leon Henderson to Donald M. Nelson, March 29, 1941" 147/ Minutes, 1C)AC, April 2, 1941. 148/ Ibid, 149/ Minutes, NDAC, April 9, 1941. 150/ "Statement of the Commission's Policy on Certificates of Non-Reimbursement," April 9> 1941 (NDAC Doc. 138-d). 23-766 P7R t»u - 71 - The intention of the revised statement was to place the burden of proving the intent of non-reimbursement upon the contractor rather than upon the Government. 151/ Henderson made this point unmistakably clear in a letter to Nelson under date of April 2, 1941« "I feel,“ he wrote, “that the burden of establishing non-reimbursement should be passed to the contractor as soon as the sufficiency of the records of our contracting officers comes into doubt.* 152/ Henderson rested his case on the assurances given by the Advisory Commission to Congress at the time the bill was passed, that adequate protection would be accorded if discretion was left in the hands of the administrative agencies. 153/ The statement of the Advisory Commission as approved is reproduced at this point. •The following interpretative statement of the provisions )f Section 124 (i) of the Second Revenue Act of 1940 relating to Certificates of Non-Reimbursement has been agreed upon by the Advisory Commission to the Council of National Defense for a twofold purpose* First, to aid in formulating an immediate administrative policy for handling the large number of applications for certificates now pending, and Second, to aid in revising procurement methods to facilitate the handling of applications for certificates in the future. •Before issuing this statement the Commission requested an opinion with respect to the meaning of the statute from Mr. John Lord O'Brian, General Counsel of the Office of Production Management. This opinion has been carefully considered and in large measure incorporated in the following statement. •The Statutory Provisions •Section 124 (i) of the Second Revenue Act of 1940 provides that: 'If the taxpayer has been or will be reimbursed by the United States for all or a part of the cost of 151/ Memorandum. W. Jay Hoff to John Lord O'Brian, April 4> 1941. 152/ Letter, Leon Henderson to Donald M. Nelson, April 2, 1941« 153/ The formal presentation of Henderson's views was contained in a letter to Donald M. Nelson written subsequently to the one quoted in extengo just above. The language was a little more conciliatory yet militant. Otherwise it covered the same ground and was presented to the Commission by Ginsburg as described above. 23-766 ?79 bu - 72 - any emergency facility pursuant to any contract with the United States, either — •(1) directly, by a provision therein dealing expressly with such reimbursement, or '(2) indirectly, because the price paid by the United States .(insofar as return of cost of the facility is used as a factor in the fixing of such price) is recognized by the contract as including a return of cost greater than the normal exhaustion, wear and tear, 'no amortization deduction • • • shall be allowed • • • unless, . . . ¿certification is tdbAb/ that such contract adequately protects the United States with reference to the future use and disposition of such emergency facility . . .' "The Section also provides that if the taxpayer is not being 'reimbursed' for any part of the cost of the facilities, a certificate of 'non-Reimbursement' may be issued to him, which is conclusive of that fact for the purposes of this subsection. *Interpretation "The phrase 'is recognized by the contract' is not a term of fixed legal signification. Instead of attempting to construe this Section from the standpoint of strictly legal abstractions it should be approached from the standpoint of seeking some sound common-sense rule based on standards which fall within the intent and the apparent scope of power invoked by this Section. It is agreed that, by this Section, taken with other Sections, Congress intended: (1) to induce contractors to provide new facilities where needed in order to supply promptly and adequately the needs of national defense; and (2) to prevent the contractor who is receiving any reimbursement for new facilities through his contract from also receiving indirect reimbursement through the allowance of rapid amortization, unless the interest of the Government in the facilities is adequately protected. "It is also agreed that Congress did not intend to prescribe as requisite for the test of reimbursement a costaccounting analysis, or other examination into results of the contract price, made subsequent to the making of the contract. Congress did not here adopt a test similar to that of the repealed Vinson-Trammel Act under which it 23*785 P«0 bu - 73 - might have withheld the benefits of rapid amortization where later on it might be established that after allowing for a fair profit the contractor still received a substantial amount from the Government which could represent reimbursement for all or part of the cost of the facilities« At best, such an analysis after the fact could only be evidence bearing on the intent of the parties at the time of making the contract» "On the other hand, the phrase 'recognized by the contract1 does not itean that the contract states in its terms that the price paid includes at least some reimbursement. If Congress had meant that the test should be limited to the wording of the contract, it could have so provided and probably would have made this clear by an amplification of the first subdivision» "The question is primarily one of intent as reflected in the price: Did both the contractor and the contracting officer for the Government intend that the price agreed upon include no amount for reimbursement for facilities and does it appear that the price provided for, viewed as of the time of making the contract, is reasonably in line with the intention? A mere statement to this effect does not, of course, preclude the possibility that one of the contracting parties believed or intended that the price did include an element of reimbursement» Nevertheless, unless the facts are otherwise ascertainable, the first prerequisite of granting a certificate of non-reimbursement should be the procurement of sufficiently detailed statements from the contracting officer (including within that term any other suitable representative of the War or Navy Department) and also from the contractor that the price set in the contract did npt recognize (i»e», was not intended to take into account) a return of cost for facilities greater than normal exhaustion, wear and tear» "Further, it is agreed that this ascertainment of fact required by the Section should not be confined solely to the procurement of these statements» Practical experience demonstrates that the interest of the Government requires at least some substantial amount of confirmation and it may fairly be assumed that the Congress had this in mind» The conclusion expressed in affidavits should be corroborated at least to the extent of determining by the exercise of expert judgment whether the price fixed was such as to indicate that reimbursement was not intended to be included in the price» 23-76B »« - 74 - "In some cases such corroboration may be obtained from records made by the contracting parties at the time of negotiating the contract, for instance, records of agreed estimates of prospective cost and of past experience with similar procurement problems, of market prices generally and of competitive conditions, and other factors bearing on the reasonableness of the parties1 intention as to price» But in any case in which the records made at the time the contract was negotiated are not sufficient to corroborate the avowed Intention of the parties, the application for the certificate may serve to bring forth adequate corroboration. In this connection, it is agreed that the burden of establishing whether or not the contract recognized reimbursement plainly does not fall alone upon the contracting officer for the Government. It would seem reasonable, in every instance in which the contracting officer for the Government has not available evidence on which to rest a reasonable judgment, to call upon the applicant to support his application with evidence. The intention of the contractor, particularly where he is able to support it with cost estimates, is certainly good evidence that a contract does not recognize reimbursement.* 154/ Certificates of Government Protection,—The only major question that arose in connection with Certificates of Government Protection was as to whether the existence of an EPF contract constituted sufficient evidence to warrant granting the certificate. Eichholz raised the question in a memorandum to Nelson dated January 3, 1941: "Presumably the E.P.F. Contract is the standard form worked out for protection of the Government in cases in which the contractor will be reimbursed by the Government. The question arises whether the mere existence of an E.P.F. Contract is sufficient evidence both of necessity and of government protection to warrant granting the appropriate certificates. If the standard form of E.P.F. contract has been negotiated with the applicant, should judgment be exercised by the Emergency Facilities Committee as to the adequacy of the depreciation rates therein provided in protecting the Governments interests? If there are variations from the standard form in the contract negotiated with the applicant, to what extent should independent judgment be exercised as to the adequacy of these variations in protecting the Governments interests? 154/ "Statement of the Commissions Policy on Certificates of Non-Reimbursement," approved April 9, 1941 (NDAC Doc. 138-d). The version quoted is the revised draft of May 7, 1941 (OPM Doc. 25a). - 75 - "If it is deemed advisable to go beyond the mere existence of an E.P.F. Contract, it would be necessary not only to secure a list of all such contracts negotiated, but to examine the provisions of each such contract. . . ." 155/ On January 29, 1941, the Advisory Commission established two principles in partial answer to this question. It was agreed that the provisions of the standard Emergency Plant Facilities Contract "would be acceptable as pvtective of the interests of the Government* and that "substantial compliance* with the standard Emergency Plant Facilities Contract would be enough to "warrant recommending to the Commission the issuance of a Certificate of Government Protection. * 156/ The question of depreciation rates, as raised in the quoted material just cited, was left to a future date and has been previously treated in this study. On April 10, 1941? William Jay Hoff sent to the General Counsel a memorandum on the subject of Certificates of Government Protection, which was incorporated practically in toto in O'Brian's memorandum on the «ame subject to the Commission dated May 6. Section 124 (i) of the Seconu Revenue Act of 1940 provided that if a taxpayer had been or would be reimbursed by the United States for the cost of emergency facilities no amortization deduction could be allowed unless "the Advisory Commission to the Council of National Defense and either the Secretary of War or the Secretary of the Navy certify to the Commissioner ¿pt Internal Reveni»/ that such contract adequately protects the United States with reference to the future use and disposition of such emergency facility." O'Brian's opinion established two categories within which the determination of government protection might be made: "(1) Where the ’Contract is an Emergency Plant Facilities Contract "Where the certification is sought for an Emergency Plant Facilities Contract, the inquiry should merely be addressed to whether the standard form has been followed, to whether the depreciation rates provided are reasonable, and to whether the other variables as a whole are fair to the Government. Where these conditions are met, the Emergency Plant Facilities Contract, through its standard provisions, purchase options and rights, should, in my opinion, be considered as protecting the United States 155/ Memorandum, Robert B. Eichholz to Donald M. Nelson, "Some policy questions concerning certification which should be determined by the Commission," January 3, 1941« 156/ Minutes, NDAC, January 29, 1941. 28*714 P«3 bu - 76 - adequately with reference to the future use and disposition of the emergency facility involved and consequently certification should be made, “If there are material departures from the standard form, these should be considered on their merits to determine whether the contract, as drawn, does in fact adequately protect the United States. ■(2) Where the Contract is not an Emergency Plant Facilities Contract "(a) Where the facilities, or any part of them, can, as practical matter, be conveyed to the United States — Insofar as the facilities constitute an entire plant, or insofar as they are tools or movable fixtures, or as a practical matter they could be separated from the contractor's plant without seriously disrupting it as a going concern, then the Supplies Contract should provide that the contractor will adequately maintain such facilities and while he may use them, he must be ready to make them available for the Government's use at any time during the emergency period or for five years, whichever is longer. In addition, with respect to the facilities which could, as a practical matter, be conveyed to the United States, the Supplies Contract should provide options and rights similar to the Emergency Plant Facilities Contract to become available at the end of the period. "(b) Where the facilities, either in whole or in part, cannot as a practical matter be conveyed to the United States — Insofar as the emergency facilities for which the contractor is being reimbursed are so intertwined with his plant as a whole that segregation and separation is impractical, or if only partial reimbursement is involved, then I believe the statutory requirements will be met if the contractor agrees to maintain such facilities adequately and, while being free to use them, to be ready to make them available for the Government's use for the duration of the emergency period or for five years, whichever is longer, and thereafter, for a period equivalent to the then unexpired serviceable life of the facilities as determined according to normal depreciation tables continue to hold them subject to such use and disposition as may be required by the Government. If desired by the contractor and if the amount of the reimbursement is specified or a method of determining it provided, the S3—780 *84 bu - 77 - contract might also include a provision that the contractor at any time may exercise an option to satisfy the Government's interest by paying to the United States a sum representing the Government's original interest in the facility, or part thereof, less an agreed-upon depreciation, or any lesser ¿mount mutually agreed upon. This right of the contractor to buy out the Government's interest in a plant should protect him from any hardship arising out of the fact that only a slight amount of reimbursement was involved* Where feasible, the contract should specify the amount of reimbursement given the contractor* "Of course, in both of these agreements it is necessary that the facilities should not be mortgaged, or disposed of, and the contractor must also agree that the price provided in any future contracts which the Government places with him calling for the use of the facilities will not include any amount attributable to that portion of the cost of the facilities for which the Government has reimbursed him* "The above is a brief outline of what seems to be one way of providing adequate protection for the Government in the future use of emergency facilities for which it has paid in whole or in part* Each case, however, must be looked at in the light of its individual and peculiar circumstances. What may constitute Government protection in one situation may fall short of it in another. The formula above set forth will probably not be applicable to all situations* It should always be borne in mind, however, that so long as, and to the extent that any facility represents an investment of the United States, the Government must remain in a position to avail itself of the facilities should it so choose to do*" 157/ When this opinion was presented to the Advisory Commission for its consideration on May 14, 1941, Eichholz noted that it had not been cleared with the Emergency Facilities Committee* It "was understood that he ^ichholz/ would bring it to the attention of the Emergency FeciH ties Committee and report the conclusions of the committee to the Commission," 158/ A report was made two weeks later to the effect that the Committee "thought it Unwise at this time to issue a statement of policy," but the Committee was in accord with O'Brian's view that 157/ Memorandum, John Lord O'Brian to the Advisory Commission, "Issuance of Certificates of Government Protection," May 6, 1941 (NDAC Doc. 138-g). 158/ Minutes, NDAC, May 14, 1941. S3-735 Pg# b«» - 78 - cases should be dealt with as they arose, 159/ The minutes do not indicate any action beyond that taken on January 29, 1941« Role of the Office of Production Management.--While these policy problems were being discussed, other activities of significance were taking place. During the spring and summer months of 1941, clarification of the certifying responsibilities of the Office of Production Management and the Advisory Commission was accomplished. The Office of Production Management was to be. responsible for the review of Certificates of Necessity only. Certificates of Non-Reimbursement and Certificates of Government Protection remained the full responsibility of the Advisory Commission and its staff, 160/ The appearance of the Office of Production Management caused some confusion on this point of certification responsibilities until it was clarified by the Commission's action just referred to. On December 27, 1940, Biggers directed a memorandum to all section directors in which all three types of certificates were made the responsibility of the division under the general supervision of Judge Norman, At the time of issuance this memorandum was certainly correct. But the Office of Production Management appeared within two weeks and a month later a new division of labor was agreed upon. Such changes must have been disconcerting to operating officials. Even Judge Norman's instructions, issued on February 5, 1941, a week prior to formal Commission action on the proposal he had helped to formulate, seem confused. The subject of the memorandum was "Tax Certification" and, after setting forth internal clearance procedures and factual data needed from the examiners, Judge Norman directed the attention of the 0PM Production Division Staff to "the memorandum from Mr. John D, Biggers relative to necessity certificate policy of the Division under date of December 27, 1940, (Disregard reference to the processing procedure then applicable)." 161/ The Biggers memorandum stated: "We have the problem of promptly approving tax certificates for Government contractors who have provided new facilities. There are three types of certificates: (1) certificates of necessity; (2) certificates of Government protection; (3) certificates of non-reimbursement, 159/ Minutes, ND AC, May 28. 1941. 160/ Memorandum, Donald M. Nelson to the Advisory Commission, "Tax Certification Procedure," February 5, 1941 (I©AC Doc. 109-j), This memorandum embodied a statement, of procedure prepared by Frederick M, Eaton, Judge Mark W. Norman, Geoffrey Smith, Douglas Brown, and R. C. Bell, dated January 27, 1941. On the same day that Nelson submitted it to the Advisory Comission, Knudsen transmitted a copy to Hillman for approval. The Advisory Commission approved it on February 12, The document has been discussed beginning on page 57 above, 161/ Memorandum, Mark W. Norman to Staff, Production Division, "Tax Certification," February 5, 1941» 83-T8B Pae 611 - 79 - Certificate (1) is required in all cases; either (2) or (3) is required according to the circumstances in the individual case,* 162/ Would it seem reasonably clear that the examiners would assume that two of the certificates mentioned did not come under the subject of Tax Certification, the subject matter of Judge Norman’s memorandum? Presumably the action of the Advisory Commission was communicated to the operating officials concerned. Confusion, however, seemed to be in the air for Judge Norman sent a memorandum to William S. Knudsen stating that the action of the Advisory Commission as recorded in the minutes was correct, that he knew of the detailed procedure agreed upon, and that other advice "indicating a revision is in error," 163/ This was forwarded to Knudsen a full week after action to clarify the relationship had been taken by both the Office of Production Management and the Advisory Commission, The SEC Episode,—A second activity tending to take attention of the Commissioners from the problem of placing the administration of certification on a more vigorous footing, was a memorandum from the President to the Advisory Commission, dated November 29, 1940, in which the President called the attention of the Commission to the "desirability of availing yourself of the exceptional technical facilities of the Securities and Exchange Comission for the preparation of such financial, engineering, and industrial reports of a factual nature as you may find necessary, I know that the Securities and Exchange Comission will be glad to furnish such reports•" Furthermore, the President suggested that the Commission "designate a member of your Commission to confer with the Secretary of War and the Secretary of the Navy, and the Chairman of the Securities and Exchange Commission, to the end of working out a method of availing yourselves of the facilities of the Securities and Exchange Comission," 164/ This memorandum apparently did not reach the office of the Secretary of the Commission until the afternoon of December 3 when it was immediately placed upon a supplemental agenda for the Commission meeting scheduled for the following day, December 4, 1940, 165/ 162/ Memorandum, John D, Biggers to Section Directors, December 27, 1940. 163/ Memorandum, Mark W, Norman to William S, Knudsen, February 18, 1941 164/ Memorandum, The President to the Advisory Commission to the Council of National Defense, November 29, 1940 (NDAC Doc, 109-e). 16$/ Supplemental Agenda for Commission Meeting, Wednesday, December 4, 1940, typed 3:15 p,m., December 3, 1940. #3-766 P87 - 80 - The proposal of the President seems to have caught Henderson, who was a member of the Securities and Exchange Commission, unprepared, for he stated that "he wanted to take this opportunity to inform the Comission that he had no knowledge the President was going to suggest this use of the Securities and Exchange Commission facilities and that the Securities and Exchange Commission had not requested him to make this proposal, but he believed this Commission should avail Itself of the services and facilities of any and all Governmental agencies able to be of assistance." 166/ The Advisory Commission directed Nelson to confer with the officials designated by the President and to report back to the Comission. It was the feeling of the group that the President had not intended that the "certification procedure which had been established was to be reopened by this group.* 167/ As a consequence of this action, Robert B. Eichholz, Chairman of the Emergency Facilities Committee, worked out an arrangement whereby particular questions might be referred to the SEC where it was thought by the Committee that the facilities of the SEC could be particularly helpful. Batt reported to Stettinius, on January 7, that the Emergency Facilities Committee "unanimously requested that Mr. Nelson report to the Advisory Commission its recommendation that the facilities of the Securities and Exchange Commission be utilized in checking or supplying information through its field personnel with respect to particular questions relating to particular applications where corroboration or further information was felt necessary either by this Committee, Mr. Eichholz or the War or Navy Department. It was definitely felt, however, that applications should not be referred out of the Commission, but that Mr. Eichholz, on behalf of the Advisory Commission, should request specifically the information which might be supplied if possible to do so within a stated limit of time. The Committee was unanimous in its absolute opposition to any procedure which would require a factual or other statement by the Securities and Exchange Commission as a condition precedent to the issuance of certificates, either in general, or in oases where specific questions might be referred to it." 168/ 166/Minutes, NDAC, December 4, 1940. 167/ Minutes, NDAC, December 4» 1940. 168/ Memorandum, W. L. Batt to E. R. Stettinius, Jr., "Use of the Securities and Exchange Commission for Tax Certification," January 7, 1940. 83-768 *88 bu - 81 - On December 20, the Commission carried over this problem at the request of Stettinius who stated that he was not familiar with it, and on the same day Col. Hiram S. Brown circulated to the various Commissioners the proposal of the Emergency Facilities Committee. 169/ On January 3, 1941, the position of the Committee was agreed to by the Commission with Henderson asking that he be recorded as not voting in view of his dual position as member of the Securities and Exchange Commission and member of the Advisory Commission. 170/ J A week later, Nelson asked the Commission to reconsider its position. He agreed with the Committee's recommendation that the approval of the Securities and Exchange Commission should not be made a prerequisite for issuance of the certificates, but he could not agree that the files of the Commission should not be made available to the SEC. Chester C. Davis had raised this same point a week earlier. 171/ The Commission seems to have taken action only by asking for further consideration from the Emergency Facilities Committee on this point and suggesting that future action could be taken if necessary. Shortly thereafter, new discussions were undertaken between the Office of Production Management and the Armed Services as to the procedural relationships involved in the issuance of the various certificates. 172/ No further record appears in the minutes of the Commission on this matter. Remedial Legislation.—A third problem, growing partly out of the confusion of the period and partly out of the growing back-log of applications, was that of extending the time period within which certificates could be issued. When the problem of certificate issuance was discussed with the representatives of the Army and Navy on December 12, 1940, the Commission came to the conclusion that the Committee on Taxation «nd Finance should be authorized to act for the Commission in the following manner: ■(a) Request Congress at this session to extend the date for issuing Certificates beyond the 120 day limitation now in the Act; ■(b) Cooperate with the War and the Navy Departments in determining the need for, and developing the necessary factual information as a basis for, presenting 169/ Memorandum, H. S. Brown, Assistant to the Coordinator of ' National Defense Purchases, to all Commissioners, December 20, 1940 (NDAC Doc. 109-f). 170/ Minutes, NDAC, January 3, 1941« 171/ Minutes, NDAC, January 8, 1941« 172/ Letter, Julius H. Amberg, Special Assistant to the Secretary of War, to William S. Knudsen and Sidney Hillman. February 13, 1941; Minutes, 0PM, January 31, 1941« 39-700 1*89 bu 82 - to Congress a recommendation for a more flexible basis for tax certification under this Act." 173/ The responsibilities placed upon the Commission’s Committee on Taxation and finance were not light. On December 20, 1940, however, a draft of proposed changes in the statute was circulated to the members of the committee by David Ginsburg. On January 3, 1941, Henderson reported for the Committee on Taxation and Finance. Referring to the draft already in circulation, he indicated that "a further change had appeared desirable, namely, an amendment which would allow Certificates to be applied for at any time within 90 days after construction had started. Mr. Henderson stated that the Committee members believe the amendment concerning the 120-day provision is essential and should not be jeopardized in any way, but that the second amendment is desirable if it can be obtained without complicating the situation. He agreed to confer with Congressman Doughton and Senator Harrison on this 90-day amendment also if the Commission authorized the Committee on Taxation and Finance to proceed with it." 174/ The Commission accepted Henderson*□ proposal and authorized its Committee to request, "if practicable" an amendment to permit applications for certification to be filed any time within 90 days after construction had started. 175/ In addition to the inter-agency relationships involved in this request, there was the additional pressure of applications not acted upon. It will be recalled that when the original notice of procedure was published on November 1, 1940, very little response was secured from the public in terms of applications for certificates. On December 11, 1940, the Commission warned again of the deadlines imposed by statute, and this time the warning was heeded. "As January 7 drew near" wrote Ginsburg, "we were swamped. It soon appeared that even though the certifying agencies had expanded their staffs to meet such an eventuality, it would be impossible to get the certificates out on time if careful consideration was to be given to each application.• 176/ In pursuance of the instructions given to it by the Commission, the Committee on Taxation and Finance went to Representative Doughton and Senator Harrison with its troubles. Both changes were agreed upon by the Congressional leaders and legislation was introduced embodying the changes proposed by the Committee. 177/ A Joint Resolution covering the points in question passed both Houses of Congress without opposition on January 31, 1941, and the procedural changes needed to 173/ Minutes, NDAC, December 12, 1940. 174/ Minutes, ND AC, January 3, 1941» 175/ Ibid. 176/ David Ginsburg, Speech before the Practicing Law Institute, New York City, March 24, 1941 (OPM Press Release PM-252). 177/ H. J. Res. 80, introduced by Mr. Doughton on January 22, 1941. 55 Stat. 4« aa-?®a Pao bu - 83 - allow time for issuance of the certificates were effected. The changes in legislation were made retroactive so that ho burder would be placed upon those who had not received certification by the certifying agencies. The End of the NDAC.-»This legislative gift of time, however, did not solve the problem of issuance for the Commission. Other activities, considered previously in this report, kept the smooth operation of certification procedure almost in the dream stage. By late spring or early summer, it became apparent to those concerned that the functions of the Advisory Commission were rapidly being absorbed into the general over-all concepts of the Office for Emergency Management with its specialized administrative agencies. Soon the only function remaining in the hands of the Advisory Commission was that of certification under the Second Revenue Act of 1940. As early as May 1941» John Lord O'Brian wrote to Herbert Emmerich, Secretary of the Office of Production Management, that ■The National Defense Advisory Commission should be immediately abolished and the approval of the so-called Amortization Certificates should be vested in another and very much smaller group. For many reasons, I am opposed to OPM accepting the responsibility for Issuance of these certificates. ... That responsibility should be centered preferably in a group of three, in which War and Navy would have representation.* 178/ Back of this memorandum was the long struggle with the Armed Services, and the administrative and legal difficulties involved in Issuing the certificates. The minutes of the OPM Council report on May 20, 1941» that ■The Director General pointed out that there has been a delay in passing on Certificates of Non-Reimburseiuent under the Revenue Act of 1940. On May 17» 1941» 1,421 applications covering 20,441 individual contracts had been filed. Only 15 applications had been denied on merit; 49 have been withdrawn; and 20 have passed the Amy and Navy but not the Advisory Commission to the Council of National Defense. Under Secretary Patterson pointed out that the War Department has submitted 17 cases to the Advisory Commission ... for processing and is awaiting a decision before submitting the rest of the docket. . • • General dissatisfaction was voiced with the delay • • • and the 178/ Memorandum, John Lord O'Brian to Herbert Emmerich, May 21, 1941. 23-765 ?91 feu 84 - diffusion of responsibility for passing on Certificates . . . ♦ The Advisory Commission . . . has no other function now except to pass on these Certificates. The Bureau of the Budget has requested the Office of Production Management to make a suggestion on this point, as it desires to suggest legislation which will make it possible to abolish the Advisory Commission . . . .* 179/ It was agreed that the General Counsel of the Office of Production Management would make recommendations designed to eliminate the Advisory Commission. A week later O’Brian reported to the Council that the War and the Navy Departments were drafting a proposal along similar lines and that this would be ready for discussion at the next meeting. 180/ On June 3, Under Secretary Patterson reported to the Council that the legislation agreed upon would drop the Advisory Commission as a clearance agency, would extend the time for filing applications, and would clarify the Government protection clause. 181/ Moreover, it was agreed that the Office of Production Management would take no "initiative in this matter" but "would support the recommendations of the Army and Navy." 182/ Two weeks later Forrestal reported that the Armed Services had "agreed on an amendment to the Revenue Act of 1940 which would have the effect of eliminating the. need of having the Advisory Commission to the Council of National Defense, otherwise inactive, pass on Certificates of Necessity, Government Protection, and Ncn-Reimburse-ment." 183/ The following day, June 17, 1941, Hillman and Knudsen addressed a joint letter to F. J. Bailey, Assistant Director, Bureau of the Budget, in which they stated that the proposed legislation was "in line with the view of the Office of Production Management" and that they were "glad to support the proposal of the Secretaries of War and Navy." 184/ But Leon Henderson, now Administrator of the Office of Price Administration and Civilian Supply, raised some objections to the proposal. 185/ Forrestal reported at the next meeting of the Council that conferences with Henderson would probably result, very shortly, in "a draft of the amendment satisfactory to the Office of Price Administration and Civilian Supply." 186/ In spite of the fact that a joint resolution was prepared and sent to the Speaker of the House, the question was reopened late in 179/ Minutes, OPM, May 20, 1941- ‘ 180/ Minutes, 0PM, May 29, 1940. 181/ Minutes, OPM, June 3, 1941* 182/ Ibid, 183/ Minutes, OPM, June 17, 1941. I84/ Letter, Sidney Hillman and William S. Knudsen to F.J,Bailey, June 17, 1941. 185/ Minutes, OPM, July 8, 1941. 186/ Minutes, OPM, July 15, 1941. 23-765 P92 bu - 85 - August 1941» On August 20, Wayne Coy, Secretary of the Advisory Commission, reported to the Commission that discussions were under way "looking toward more efficient coordination between the Service Departments and the Advisory Commission in the matter of Tax Certification. " 137/ The situation was far from satisfactory and the OPM Council instructed Knudsen and Hillman to "take up with the other members of the Advisory Commission ... a suggestion whereby one person, agreed to by all seven commissioners, would be designated as their representative to pass on tax certification matters." 188/ This step was taken because no legislation had been introduced to eliminate the Advisory Commission from the certification picture and the backlog of applications on certificates of Government Protection and Non-Reimbursement was rapidly becoming of alarming size. As a consequence of a White House conference called on September 3, 1941, and attended by all interested parties, a draft of a joint resolution was prepared for Congressional action and submitted to the Ways and Means Committee of the House on September 15, 1941. H. J. Resolution 235, extending the time for applications and changing the procedure, for certification by the elimination of the Advisory Commission, was formally introduced by Chairman Doughton on September 16. The Ways and Means Committee reported the resolution out on September 18 with minor changes. It passed the House on September 22 without alteration and substantially as proposed by the administration, 189/ and was sent to the Senate where it was referred to the Committee on Finance. A major amendment was added to the resolution by the Senate Committee and the amended resolution was adopted by the Senate on October 2, 1941. The Senate version provided for certification under regulations prepared by the Secretary of War and the Secretary of the Navy "with the approval of the President." The House had provided for certification "subject to such policies and procedures as may be prescribed ... by the President, or by such agency ... as he may designate." The Conference Committee agreed upon the Senate version. On October 13, the Senate accepted the conference report and on October 21, 1941, the House gave its consent. The resolution became effective on October 30, the date on which it received the President’s signature. 190/ A decided change with reference to applications for the various certificates resulted Brom the passage of this Act. As to Certificates 187/ Minutes. ND AC , August 20, 1941, 188/ Minutes, OPM, August 26, 1941. 189/ Minutes, OPM, September 9, 1941. 190/ 55 Stat. 757; OPM Docs. 64, 64a, 64b, 64c, 64a, 64e, 64f. 83-705 P»3 - 86 - of Necessity, applications were no longer made to the Advisory Commission and the time for filing was changed from 60 days to 6 months after the beginning of construction, installation or acquisition of the emergency facilities or before December 1, 1941, whichever was later. Certificates of Non-Reimbursemeht and Certificates of Government Protection were no longer required in the case of contracts for $15,000 or less or contracts made prior to January 1, 1940. Certificates of Government Protection could be issued where the taxpayer had not been or would not be reimbursed or where the taxpayer and the Government disagreed over the fact of reimbursement. This had not been possible under the older statute. The meaning of “indirect reimbursement“ was clarified by providing contract recognition for cost above normal exhaustion in fixing prices. A return of cost greater than normal exhaustion, wear and tear was not to be deemed to have been used as a factor in fixing price "when the contracting officer reports that after a careful consideration he is satisfied that such greater return was not included in the price.“ 191/ These changes were significant in future certification problems. Two days prior to the passage of this Act, John Lord O’Brian reported to the OPM Council that "an agreement regarding tax amortization procedure has been signed by Mr. Wayne Coy, the Liaison Officer for Emergency Management, Colonel Edward S. Greenbaum, Acting Chief of the Tax Amortization Section, War Department, and Mr. H. Struve Hensel, Head of the Procurement Legal Division, Navy Department. Under this agreement responsibility would be placed on the Office of Production Management for supervision over the granting of certificates of Government protection and certificates of reimbursement, whereas in the past it has only been concerned with certificates of necessity, with regard to which it was simply an advisor to the Advisory Commission to the Council of National Defense, and the War and Navy Departments.“ 192/ Judge O’Brian, whose legal interests in the matter had been increased by the administrative responsibility for the Tax Certification Unit, 193/ commented .apropos of this proposal that "work of this character was not properly a function of the Office of Production Management, and it should not be required to undertake responsibility for supervising certificates of Government protection and certificates of reimbursement, particularly because it has neither the information nor the experienced personnel necessary to 1912 Robert H. Montgomery, Excess Profits and Other Federal Taxes on“ Corporations (1941), pp. 577-79. 122/ Minutes, OPM, October 28, 1941. 122/ Minutes, OPM, September 2, 1941. 88*760 *84 - 87 - proper performance of such a function. He also regarded the proposed system of spot checking as impracticable.* 194/ Tax Amortization Committee.—On the same day that O’Brian was stating his position, the President addressed a letter to William S. Knudsen which is reproduced here in full. "In order to give substance to an agreement between the Advisory Commission and the War and Navy Departments concerning the general administration of Section 124 of the Internal Revenue Code as amended, I wish you to appoint a Tax Amortization Committee composed of three members, which will be charged with the responsibility that the Office of Production Management shares with the War and Navy Departments in dealing with policy problems surrounding the granting of the tax amortization privilege. •This committee should be appointed now in order that they may work with the War and Navy Departments in the development of the regulations, as I should like them to pass upon all such regulations prior to ny approval. They will also be expected to recommend to the Secretary of War and the Secretary of the Navy, or to the President, necessary changes in regulations. •In view of the importance of insuring that there is no unnecessary expansion of facilities without exhausting all of the possibilities of subcontracting and conversion, I should like Mr. Floyd Odium, Director, Division of Contract Distribution, to serve as Chairman of the Committee, with Donald Nelson, Director, Supply, Priorities and Allocations Board and Leon Henderson, Director, Civilian Supply, serving as co-members. •Mr. Odium should be authorized to arrange for personnel necessary to carry out the policy determinations of the committee and to maintain liaison with the Departments of War and Navy." 195/ On the day that this letter reached Knudsen he forwarded a short note to Odium stating that he would like to take up this request with him as "soon as you return to the office." Knudsen also informed the President that the committee "will be set up at once in accordance with your wishes•" 196/ The exact position of this committee seemed uncertain under the circumstances surrounding its creation and so, on November 11, 1941, Knudsen wrote the President asking further information upon the status and duties of the committee. 197/ On the 16th, the President replied 194/ Minutes, PPM, October 28, 1941. 195/ Letter, the President to William S. Knudsen, October 28, 1941» 196/ Letter, William S. Knudsen to the President, October 30, 1941. I97/ Letter, William S. Knudsen to the President, November 11, 1941. 23’76# P95 >»u - 88 - by outlining the duties in substantially the language used on October 28, 1941, but adding that the committee would not have any administrative responsibility for the issuance of individual certificates. The committee was to be a policy reviewing committee. 198/ The Director General reported these events to the Council of the Office of Production Management on November 25, 1941« The minutes of that meeting are significant: "The chairman /of the special committed has been given full responsibility for the personnel employed by the committee. The Office of Production Management seems to have no defined responsibility for the work of this committee, and will regard it as an independent body, giving it such assistance in the way of personnel as it may require." 199/ The Army and Navy, meanwhile, had on November 3 submitted to this newly created committee regulations covering the issuance of Certificates of Non-Reimbursement. 200/ It was not until December 18, however, that the committee drafted a proposed set of regulations covering the problem. Agreement was reached upon this set of regulations and the committee recommendations were prepared for transmittal to the President. The agree’ ment was predicated, however, upon the assumption that Section 124(i) of the Internal Revenue Code would be repealed in its entirety. Into this picture of uncertainty, stepped the Council of the Office of Production Management, instructing its General Counsel to "investigate" and "report at the next meeting of the Council." This move followed a suggestion that efforts should be made to secure the Presidents consent to rescind« ing his letter establishing the special committee or to secure the repea' of Section 124 (i) as was provided for by legislation pending before the Ways and Means Committee of the House at the time. 201/ Repeal of Section 124 (i).—The next meeting of the Council was its last as the War Production Board Was created by Executive Order on January 16, 1942. No report from the General Counsel is recorded in the minutes for January 14, 1942, but the assumption of the Committee’s report and the alternative suggestion of the Council, namely, that Section 124 (i) be repealed, was followed. On February 6, 1942, Section 124 (i) of the Internal Revenue Code was repealed by a Joint Resolution "effective as of October 8, 1940," the date of its original enactment. 202/ Conclusion.—During this period of uncertainty, a temporary arrangement was effected whereby a representative of the Office of Production Management was assigned office space in the buildings occupied by the appropriate certifying sections of the Armed Services. This Letter, the President to William S. Knudsen, November 16, 1941. 199/ Minutes, 0PM, November 25, 1941* 200/ Minutes, 0PM, January 7, 1942. 201/ Ibid. 202/ 56 Stat. 50. 83-765 p«6 bu i - 89 - arrangement, however, was terminated prior to the disestablishment of the Office of Production Management and was not reintroduced by the War Production Board. Full responsibility for the issuance of certificates was deposited in the War and Navy Departments by the Congressional action of October 30, 1941« 203/ The committee established by Presidential letter was concerned solely with the problem of developing policies and procedures for the issuance of certificates. This committee, as has been noted above, was looked upon by the Office of Production Management as a separate agency for whose actions it was not responsible. The matter seemed closed with the transmittal by Nelson to the President on May 21, 1942, of regulations which had been *prepared jointly by representatives of the War Department, Navy Department and the Committee” appointed under the letter of request to Knudsen. It was Nelson's opinion that the regulations "appear to properly cover the subject and adequately protect the interests of the Government.” He therefore recommended that they receive the approval of the President. 204/ Two days after this recommendation was forwarded to the President his approval was given to the regulations and they were published in the Federal Register on June 4, 1942. 205/ These regulations dealt solely with Certificates of Necessity and placed the War Production Board in an advisory and consultative position only, leaving it entirely free from the responsibility for the actual issuance of the certificates, a function clearly placed in the hands of the Armed Services by legislative enactment. 203/ 55 U. S. Stat. 757. 204/ Letter, Donald M. Nelson to the President, May 21, 1942. 205/ Federal Register. June 4, 1942, filed on June 3> 1942, 11:49 A.M. - 90 - APPENDIX A Chronology June 14 Knudsen submits first plant financing proposal to RIC. June 21 Advisory Commission holds first discussion on financing expanded plant capacity for the defense program. June 25 Congress amends RFC Act to allow the incorporation of subsidiary corporations. Defense Plant Corporation subsequently developed under this authorization. July 3 Tax amortization proposal presented to the Advisory Commission. July 3 NDAC appoints a Committee, composed of McReynolds, Biggers, and Nelson, to discuss amortization proposals with the Treasury Department. July 10 Advisory Commission appoints a Committee on Taxation and Finance: John D. Biggers, Chairman, Leon Henderson, Donald M. Nelson, Carl E. Adams, and W• H. McReynolds. July 10 The President tells the press that tax amortization should be tied to excess profits legislation and suspension of the Vinson-Trammell Act. August 2 Henderson proposes the bankable contract to the Advisory Commission. August 8 First draft of the Emergency Plant Facilities Contract Form presented for criticism. August 8 Subcommittee on Taxation of the House Ways and Means Committee reports on emergency financing. August 9» 10, 12, 13, 14 House Ways and Means Committee and Senate Committee on Finance hold joint hearings on the Second Revenue Act of 1940. August 9 First draft of policy statement on private financing submitted to the Advisory Commission members for criticism and suggestions. - 91 - 1242 August 15 Revised draft of "Suggested Contract Procedure for Financing and Disposition of Emergency Plant Facilities" circulated to members of NDAC, August 16 Bureau of the Budget completes survey of proposed legislation on the bankable contract proposal. August 19 Third draft of "Suggested Contract Procedure for Financing and Disposition of Emergency Plant Facilities" circulated. August 22 Comptroller General issues press release on financing and disposition of emergency plant facilities. August 23 Advisory Commission releases statement on the financing and disposition of emergency plant facilities. August 23 Advisory Commission decides to take no official position regarding the excess profits tax bill. August 28 House Judiciary Committee holds hearings on the Assign** ment of Claims Act of 1940, September 3, 4, 5 Senate Finance Committee holds hearings on Second Revenue Act of 1940, September 4 David Ginsburg sends memorandum to the Commission on "Government's Interest in Removable Machinery and Other Equipment" reopening policy question on financing and disposition of emergency facilities, September 5 The Advisory Commission's Committee on Taxation and Finance states objections to Section 124 (1)» (j), M of the proposed Second Revenue Act of 1940. September 6 Treasury Department agrees to the position taken by the Advisory Commission and develops, with the Commission, a substitute proposal to protect Government interests in emergency facilities. September 9' Senate Finance Committee in executive session agrees to the substitute proposal developed by the Advisory Commission and the Treasury Department, September 9 Knudsen submits proposal on disposition and depreciation under the Advisory Commission policies of August 23, 23-765 ?99 bu - 92 - 1242 September 13 Single formula based upon negotiation rather than arbitration accepted by the Advisory Commission for the disposition of emergency facilities* September 13 Henderson submits statement on "Responsibilities of the Advisory Commission under the Second Revenue Act of 1940," constituting issuance of certificates required by that act. September 16 Draft of«Emergency Plant Facilities Contract Form presented for Commission consideration. September 19 Senate accepts the recommendation of its Committee on Finance incorporating the substitute proposed by the Advisory Commission and the Treasury Department. September 27 Donald Nelson, acting under Henderson's proposal of September 13, recommends the establishment of a Committee on Certification. September 27 Assignment of Claims Act of 1940 passed. October 4 Procedure on issuance of Certificates of Necessity reaches final form. October 8 Second Revenue Act of 1940 becomes law carrying Section 124 (i) of the Internal Revenue Code as Section 302 of Title III of the Act. October 10 Draft of the Emergency Plant Facilities Contract Form circulated to executives on the staff of the Advisory Commission. October 23 Army-Defense Plant Corporation agreement on plant expansion policies established. October 28 War Department seeks an interpretation of Sectien 124 (1) whereby standby provisions would be interpreted as sufficient to satisfy Government protection requirement of the statute. October 29 Defense Plant Corporation and Advisory Commission relationships established by letter from Emil Schram to W.L.Batt. November 1 Advisory Commission procedures on Emergency Plant Facilities released to the press as joint statement of War and Navy Departments and NDAC. 23-785 P100 bu - 93 - November 5 War Department again requests interpretation of Section 124 (i) from the Attorney General. November 8 Nelson’s proposal on procedures placed in the records of the Advisory Commission with the notation that "it had been cleared with the Commissioners on October 31, 1940,” prior to its release on November 1. November 25 Opinion of the Attorney General on Section 124 (i) requires that War Department and NDAC concur in suggested procedure. -, November 25 Representatives of War and Navy Departments meet with the Advisory. Commission in executive session to discuss the problem raised by the opinion of the Attorney General. November 29 Letter from the President to the Advisory Commission suggests use of the facilities of the Securities and Exchange Commission in the issuance of Certificates required under the Second Revenue Act of 1940. November 30 Table of Rates of Depreciation to be used in Emergency Plant Facilities Contracts prepared for submission to the Advisory Commission.* December 6 Commission rules that facilities expanded to take care of British War Orders are eligible for tax amortization under the Second Revenue Act of 1940. December 11 Press release issued stressing the importance of filing applications for certificates required under the Second Revenue Act of 1940. December 12 The Advisory Commission decides to ask Congress for an extension of time for submission and issuance of certificates required by the Second Revenue Act of 1940. January 3 Robert B. Eichholz makes certain recommendations to Nelson on Certificates of Government Protection. January 3 Advisory Commission leaves the details of relationships between the Emergency Facilities Committee and the Securities and Exchange Commission to the discretion of Eichholz. January 29 Advisory Commission establishes minimum policies on the issuance of Certificates of Government Protection. 23-785 P101 - 94 - January 31 Time for filing and issuing of certificates required under the Second Revenue Act of 1940 extended. February 5 Advisory Commission adopts table of depreciation rates to be incorporated into the Emergency Plant Facilities Contracts. February 12 The organization and responsibilities of the Emergency Facilities Committee established by the Advisory Commission. February 19 The Emergency Facilities Committee formally recognized by the Advisory Commission. February 26 Amortization of land under the Second Revenue Act of 1940 approved by the Advisory Commission. March 5 Certificates of Non-Reimbursement and of Government Protection discussed by the Advisory Commission and clarification of the law requested from the General Counsel of the Office of Production Management. Merch 24 John Lord O'Brian submits opinion on Certificates of NonReimbursement to the Advisory Commission. April 2 Leon Henderson submits a substitute proposal for the opinion of O'Brian on Certificates of Non-Reimbursement. April 9 The Advisory Commission issues policy statement on Certificates of Non-Reimbursement. May 6 John Lord O'Brian submits memorandum to the Advisory Comis- sion on Certificates of Government Protection. May 14 O'Brian's memorandum on Certificates of Government Protec- tion submitted to the Emergency Facilities Committee by the Advisory Commission. May 21 O'Brian proposes the abolition of the Advisory Commission as a certifying agency under the Second Revenue Act of 1940. June 3 Office of Production Management votes to support the proposal of the War and Navy Departments to eliminate the Advisory Commission as a certifying agency for certificates required under the Second Revenue Act of 1940. June 17 Office of Production Management notifies the Bureau of the Budget that it supports the proposal to eliminate the Advisory Commission as a certifying agency. 23-76B P102 bu - 95 - 1941 September 3 Conference on the problems of certification held at the White House. October 28 The President requests the establishment of a Tax Amortization Committee to be composed of Floyd Odium, Chairman, and Henderson and Nelson. October 30 Advisory Commission relieved of its certification duties which are placed in the hands of the War and Navy Departments. November 3 The War and Navy Departments submit procedural suggestions for Certificates of Non-Reimbursement to the Tax Amortization Committee. November 11 The President outlines in a letter to Knudsen, the duties and responsibilities of the Tax Amortization Committee. November 25 The Council of the Office of Production Management disclaims any responsibilities for the work of the Tax Amortization Committee, regarding it merely as another independent agency. January 7 The Council of the Office of Production Management sr^gests repeal of Section 124 (1) of the Internal Revenue Code or the abolition of the Tax Amortization Committee. February 6 Section 124 (1) of the Internal Revenue Code repealed by Congressional action. May 21 Donald M. Nelson transmits recommendation of the Tax Amortization Committee regarding Certificates of Necessity to the President. June 3 The recommendations of the Tax Amortization Committee approved and published in the Federal Register. 83-768 p103 nobu-flnaT