The Army and Economic Mobilization

By R. Elberton Smith | Go to book overview

CHAPTER XVI Renegotiations: Principles and Policy

The broad principles of contract renegetiation as developed by the War Department fell into two categories: (1) principles used in determining--for purposes of renegotiation the amount of profit earned by each contractor; (2) criteria for determining how much of this profit was "excessive" and therefore recoverable by the government. Since policies in both categories had a direct bearing upon the amount of profit ultimately retained by business, both were the subject of continuous and spirited controversy. The technicalities of renegotiation were so complex that the precise issues rarely received adequate treatment in the press or in public discussion generally.1


Definition and Measurement of Renegotiable Profits

In general, profit for purposes of renegotiation was determined in accordance with standard accounting practice as adapted by the Bureau of Internal Revenue for tax purposes. In a number of specific matters, however, differences Between the basic purposes of renegotiation and those of taxation compelled a difference in treatment The most controversial issues in defining renegotiable profits were treatment of income taxes, reserves for reconversion, tax amortization allowances, and various exemptions from renegotiation. The first three concerned, in principle, the task of distinguishing between cost and profit for purposes of renegotiation. The last was a problem of distinguishing between two classes of profit--profit which was subject to renegotiation and that which was not.


Income and Profit Taxes

Throughout the life of renegotiation, industry spokesmen urged that corporation income and profit taxes were part of the costs of doing business and that only profits remaining "after taxes" should be subject to renegotiation. It was their contention that after reduction by wartime taxes at unprecedented rates profits in most cases would clearly not be excessive and that, in any case, profits before taxes gave a grossly exaggerated view of true earnings available for retention or distribution to stockholders. Virtually every representative of industry who testified before Congressional committees on renegotiation strenuously urged the "after taxes" basis.2

____________________
1
The reader interested in renegotiation principles omitted from this discussion, as well as in greater elaboration of the step-by-step development of all matters of renegotiation policy, may find much additional information in the various documents and sources cited in the previous chapter, especially those referred to above in notes 28 and 33, pages 360 and 362.
2
The most extensive collection of the views of industry in this matter is found in the 1,100-page document Renegotiation of War Contracts, H. Com. on Ways and Means, 78th Cong., 1st Sess., Hearings on H. R. 2324, H. R. 2698, and H. R. 3015

-370-

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