B-11756, AUGUST 16, 1940, 20 COMP. GEN. 95

B-11756: Aug 16, 1940

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SUCH BALANCE SHALL BE PAID DURING THE FISCAL YEAR IN WHICH THE CONTRACT IS SO TERMINATED OR COMPLETED. WAR DEPARTMENT AIRCRAFT CONTRACTS MAY PROVIDE THAT UPON THEIR TERMINATION OR COMPLETION ARBITRATORS WILL BE APPOINTED TO DETERMINE THE THEN REASONABLE VALUE OF THE CONTRACTORS' PLANT FACILITIES WHICH WERE PAID FOR BY THE GOVERNMENT AS A PART OF THE CONTRACT CONSIDERATION. WHERE FACILITIES AT THE PLANTS OF WAR DEPARTMENT AIRCRAFT CONTRACTORS ARE TO BE PAID FOR BY THE GOVERNMENT UNDER AN AMORTIZATION PLAN CONTAINED IN THE CONTRACT. ARE TO BE TRANSFERRED TO THE GOVERNMENT. WHERE FACILITIES AT THE PLANTS OF WAR DEPARTMENT AIRCRAFT CONTRACTORS ARE TO BE PAID FOR BY THE GOVERNMENT UNDER AN AMORTIZATION PLAN CONTAINED IN THE CONTRACT.

B-11756, AUGUST 16, 1940, 20 COMP. GEN. 95

AIRCRAFT PURCHASES - PLANT-EXPANSION PROVISIONS UNDER THE NATIONAL DEFENSE ACTS OF JUNE 13, 26, AND 28, AND JULY 2, 1940, WAR DEPARTMENT AIRCRAFT CONTRACTS MAY PROVIDE THAT COST OF CONTRACTOR'S NEW PLANT FACILITIES MAY BE SEGREGATED AND PAID IN INSTALLMENTS EXTENDING BEYOND THE LIFE OF THE CONTRACT INSTEAD OF PAYING SUCH COSTS INDIRECTLY AS A PART OF UNIT PRICES OF THE AIRCRAFT, AND THAT IN CASE OF TERMINATION OF THE CONTRACT, OR FAILURE TO PLACE ADDITIONAL CONTRACTS TO COVER PAYMENTS OF UNAMORTIZED BALANCE OF COST OF THE NEW FACILITIES, SUCH BALANCE SHALL BE PAID DURING THE FISCAL YEAR IN WHICH THE CONTRACT IS SO TERMINATED OR COMPLETED. UNDER THE NATIONAL DEFENSE ACTS OF JUNE 13, 26, AND 28, AND JULY 2, 1940, WAR DEPARTMENT AIRCRAFT CONTRACTS MAY PROVIDE THAT UPON THEIR TERMINATION OR COMPLETION ARBITRATORS WILL BE APPOINTED TO DETERMINE THE THEN REASONABLE VALUE OF THE CONTRACTORS' PLANT FACILITIES WHICH WERE PAID FOR BY THE GOVERNMENT AS A PART OF THE CONTRACT CONSIDERATION, FOR THE PURPOSE OF ESTABLISHING THE PRICE TO BE PAID BY THE CONTRACTOR IF HE DESIRES TO PURCHASE THEM. WHERE FACILITIES AT THE PLANTS OF WAR DEPARTMENT AIRCRAFT CONTRACTORS ARE TO BE PAID FOR BY THE GOVERNMENT UNDER AN AMORTIZATION PLAN CONTAINED IN THE CONTRACT, AND ARE TO BE TRANSFERRED TO THE GOVERNMENT, THE CONTRACTS MAY NOT CONTAIN A PROVISION FOR PAYING THE CONTRACTOR FOR MAINTENANCE AND CARE OF SUCH FACILITIES FOR THE GOVERNMENT FOR A CONTINUING AND INDEFINITE PERIOD AFTER COMPLETION OF THE CONTRACT. WHERE FACILITIES AT THE PLANTS OF WAR DEPARTMENT AIRCRAFT CONTRACTORS ARE TO BE PAID FOR BY THE GOVERNMENT UNDER AN AMORTIZATION PLAN CONTAINED IN THE CONTRACT, AND ARE TO BE TRANSFERRED TO THE GOVERNMENT, THE CONTRACTS MAY NOT PROVIDE THAT THE GOVERNMENT WILL NOT USE THEM FOR COMMERCIAL PURPOSES, OR THAT IF AT ANY TIME THE GOVERNMENT PROPOSES TO SELL OR LEASE THE SAME, A FIRST REFUSAL SHALL BE GIVEN TO THE CONTRACTOR WHO ORIGINALLY BUILDS THE FACILITIES.

ACTING COMPTROLLER GENERAL ELLIOTT TO THE SECRETARY OF WAR, AUGUST 16, 1940:

I HAVE YOUR LETTER OF AUGUST 12, 1940, AS FOLLOWS:

I SHOULD APPRECIATE YOUR OPINION REGARDING TWO QUESTIONS, SET FORTH BELOW, WHICH ARISE FROM CERTAIN PROVISIONS PROPOSED TO BE INCLUDED IN ONE OR MORE CONTRACTS FOR THE DELIVERY OF AIRCRAFT PRIOR TO JULY 1, 1942. THE CONTRACTS WILL BE SIGNED BY THE WAR DEPARTMENT PURSUANT TO AUTHORITY CONFERRED UPON THE SECRETARY OF WAR BY PUBLIC NO. 671 AND PUBLIC NO. 703; THE RELEVANT APPROPRIATIONS AND CONTRACT AUTHORIZATIONS ARE CONTAINED IN MILITARY APPROPRIATIONS ACT, 1941, AND THE FIRST SUPPLEMENTAL NATIONAL DEFENSE APPROPRIATION ACT, 1941.

YOU ARE OF COURSE AWARE THAT MANY VITAL SUPPLY CONTRACTS WILL REQUIRE THE CONSTRUCTION BY THE MANUFACTURER OF NEW AND SPECIAL TYPES OF MANUFACTURING FACILITIES. SINCE THE MANUFACTURER WILL IN MANY INSTANCES BE REIMBURSED FOR THE COST OF SUCH NEW FACILITIES THROUGH THE PRICE OF THE PRODUCT, QUESTIONS ARISE AS TO THE PERIOD OVER WHICH THAT COST SHOULD BE AMORTIZED AND AS TO POSSIBLE MEANS BY WHICH THE MANUFACTURER MAY BE REQUIRED TO PAY TO THE GOVERNMENT THE FAIR VALUE OF THE FACILITIES IN THE EVENT HE WISHES TO USE THEM AFTER THE EMERGENCY IS OVER FOR HIS NORMAL OPERATIONS.

IN ORDER TO AVOID ANY UNDUE DRAIN UPON THE TREASURY, OR PRESSURE UPON THE PRICE STRUCTURE, AND IN ORDER TO SIMPLIFY THE APPLICATION AND OPERATION OF THE PROPOSED TAX AMORTIZATION STATUTE (WHICH WOULD AUTHORIZE THE DEPRECIATION OF NEW FACILITIES OVER A PERIOD OF FIVE YEARS), WE HAVE TENTATIVELY CHOSEN FIVE YEARS AS THE SHORTEST PERIOD OVER WHICH THE COST OF NEW FACILITIES MAY BE AMORTIZED THROUGH PRICE. IN ORDER CLEARLY TO REVEAL THE FACT THAT THE GOVERNMENT IS FINANCING THE EXPANSION, AND IN ORDER TO AVOID COMPLEX BOOKKEEPING AND UNCERTAIN ESTIMATES OF PRODUCTIVE CAPACITY, WE PROPOSE TO AMORTIZE THAT COST IN FIVE EQUAL ANNUAL INSTALLMENTS RATHER THAN IN SMALL ADDITIONS TO THE UNIT PRICE. AS A FAIR METHOD OF DETERMINING THE AMOUNT WHICH THE MANUFACTURER MUST PAY TO THE GOVERNMENT, IN THE EVENT THE FACILITIES HAVE VALUE TO THE MANUFACTURER AFTER THEY HAVE BEEN FULLY AMORTIZED, WE HAVE TENTATIVELY DECIDED UPON THE CUSTOMARY COMMERCIAL ARBITRATION. FACILITIES FOR WHICH THE MANUFACTURER IS NOT WILLING TO PAY THE FAIR VALUE WILL BE RETAINED BY THE GOVERNMENT AS A SOURCE OF SUPPLY FOR THE MILITARY AND NAVAL FORCES OF THE COUNTRY. THIS, IN BRIEF, IS THE BACKGROUND OF THE FOLLOWING SPECIFIC INQUIRIES:

(1) UNDER THE STATUTORY PROVISIONS REFERRED TO ABOVE, MAY THE WAR DEPARTMENT LEGALLY ENTER INTO A CONTRACT FOR THE DELIVERY OF AIRCRAFT WHICH CONTAINS SUBSTANTIALLY THE FOLLOWING ROVISIONS: (A) THAT THE COST OF ADDITIONAL NEW PLANT FACILITIES REQUISITE TO PERFORMANCE SHALL BE INCLUDED IN THE PRICE WHICH THE GOVERNMENT SHALL PAY FOR THE AIRCRAFT; (B) THAT, FOR PURPOSES OF PAYMENT, SUCH PART OF THE PRICE SHALL BE SEGREGATED AND PAID TO THE MANUFACTURER AT THE RATE OF 20 PERCENT OF COST PER YEAR; (C) THAT IF THE CONTRACT IS TERMINATED PRIOR TO ITS COMPLETION, OR IF ADDITIONAL CONTRACTS TO COVER THE PAYMENT TO THE MANUFACTURERS OF THE UNAMORTIZED BALANCE ARE NOT PLACED WITH THE MANUFACTURER PRIOR TO THE COMPLETION OF THE CONTRACT, THE UNAMORTIZED BALANCE OF THE COST OF SUCH FACILITIES SHALL BE PAID, AS THE CASE BE, DURING THE FISCAL YEAR IN WHICH THE CONTRACT IS TERMINATED, OR DURING THE FISCAL YEAR IN WHICH THE CONTRACT IS COMPLETED.

(2) MAY THERE BE INCLUDED IN ANY SUCH CONTRACT PROVISIONS FOR THE ARBITRATION OF THE FAIR VALUE OF SUCH FACILITIES, AFTER FULL AMORTIZATION OF COST OR UPON ANY EARLIER TERMINATION OF THE CONTRACT OR CONTRACTS, SUBSTANTIALLY AS FOLLOWS: (A) THAT UPON FULL AMORTIZATION OR EARLIER TERMINATION EACH PARTY SHALL APPOINT AN ARBITRATOR TO DETERMINE THE THEN FAIR VALUE OF SUCH FACILITIES TO THE CONTRACTOR, IN ACCORDANCE WITH A FORMULA FOR THE DETERMINATION OF SUCH "FAIR VALUE" CONTAINED IN THE CONTRACT; (B) THAT IF THESE TWO ARE UNABLE TO AGREE A THIRD ARBITRATOR SHALL BE APPOINTED BY THE SENIOR CIRCUIT JUDGE OF CIRCUIT COURT OF APPEALS OF THE CIRCUIT IN WHICH THE FACILITIES ARE LOCATED (OR SOME OTHER EQUALLY RESPONSIBLE AND DISINTERESTED PERSON); (C) THAT THE DECISION OF ANY TWO ARBITRATORS SHALL BE CONTROLLING, BUT THAT IF NO TWO AGREE THE DECISION OF THE ARBITRATOR APPOINTED BY THE SENIOR CIRCUIT JUDGE SHALL BE FINAL.

FOR YOUR FURTHER INFORMATION I AM ENCLOSING A CONFIDENTIAL MEMORANDUM DESCRIBING THIS PROCEDURE IN GREATER DETAIL PREPARED BY THE COMMITTEE ON TAXATION AND FINANCE OF THE ADVISORY COMMISSION TO THE COUNCIL OF NATIONAL DEFENSE.

IN VIEW OF THE CRITICAL NEED FOR IMMEDIATE DISPOSITION OF THESE PROBLEMS, I SHOULD BE DEEPLY GRATEFUL FOR AN OPINION AT YOUR EARLIEST CONVENIENCE.

THE MILITARY APPROPRIATION ACT, 1941, PUBLIC, 611, APPROVED JUNE 13, 1940, 54 STAT. 364, MAKES AN APPROPRIATION UNDER THE HEADING " AIR CORPS, ARMY," OF $265,886,418 FOR, INTER ALIA,"THE PURCHASE, MANUFACTURE, AND CONSTRUCTION OF AIRPLANES AND BALLOONS, INCLUDING INSTRUMENTS AND APPLIANCES OF EVERY SORT AND DESCRIPTION NECESSARY FOR THE OPERATION, CONSTRUCTION (AIRPLANES AND BALLOONS), OR EQUIPMENT OF ALL TYPES OF AIRCRAFT, AND ALL NECESSARY SPARE PARTS AND EQUIPMENT CONNECTED THEREWITH," AND, IN ADDITION, AUTHORIZES CONTRACTS PRIOR TO JULY 1, 1941, IN THE FURTHER AMOUNT OF $103,300,000, FOR "THE PROCUREMENT OF NEW AIRPLANES AND FOR THE PROCUREMENT OF EQUIPMENT, SPARE PARTS, AND ACCESSORIES FOR AIRPLANES.'

THE FIRST SUPPLEMENTAL NATIONAL DEFENSE APPROPRIATION ACT, 1941, PUBLIC, 667, APPROVED JUNE 26, 1940, 54 STAT. 599, MAKES A SUPPLEMENTAL AND ADDITIONAL APPROPRIATION OF $293,330,282 FOR THE AIR CORPS, ARMY, AVAILABLE FOR THE OBJECTS SPECIFIED IN THE MILITARY APPROPRIATION ACT, 1941, SUPRA, AND AUTHORIZES CONTRACTS IN ADDITION THERETO PRIOR TO JULY 1, 1941, IN THE FURTHER AMOUNT OF $109,259,597, FOR THE PROCUREMENT OF NEW AIRPLANES, EQUIPMENT, SPARE PARTS, AND ACCESSORIES. THE SAID FIRST SUPPLEMENTAL NATIONAL DEFENSE APPROPRIATION ACT, 1941, MAKES A FURTHER APPROPRIATION OF $150,000,000, UNDER THE HEADING " EXPEDITING PRODUCTION," FOR PURPOSES STATED, IN PART, AS FOLLOWS:

TO ENABLE THE SECRETARY OF WAR, UPON THE RECOMMENDATION OF THE COUNCIL OF NATIONAL DEFENSE AND THE ADVISORY COMMISSION THEREOF, AND WITH THE APPROVAL OF THE PRESIDENT, AND WITHOUT REFERENCE TO SECTION 3709, REVISED STATUTES, TO EXPEDITE THE PRODUCTION OF EQUIPMENT AND SUPPLIES FOR THE ARMY FOR EMERGENCY NATIONAL DEFENSE PURPOSES, INCLUDING ALL OF THE OBJECTS AND PURPOSES SPECIFIED UNDER EACH OF THE APPROPRIATIONS AVAILABLE TO THE WAR DEPARTMENT DURING THE FISCAL YEAR 1941, FOR PROCUREMENT OR PRODUCTION OF EQUIPMENT OR SUPPLIES, FOR ERECTION OF STRUCTURES, OR FOR ACQUISITION OF LAND; THE FURNISHING OF GOVERNMENT-OWNED FACILITIES AT PRIVATELY OWNED PLANTS; * * *

SECTION 4 OF PUBLIC, NO. 671, APPROVED JUNE 28, 1940, 54 STAT. 677 ENTITLED " AN ACT TO EXPEDITE NATIONAL DEFENSE, AND FOR OTHER PURPOSES," PROVIDES:

SEC. 4. IN THE CASE OF EVERY CONTRACT OR SUBCONTRACT FOR THE CONSTRUCTION OR MANUFACTURE OF ANY COMPLETE NAVAL VESSEL OR ARMY OR NAVY AIRCRAFT OR ANY PORTION THEREOF WHICH IS ENTERED INTO (WHETHER BEFORE OR AFTER THE DATE OF APPROVAL OF THIS ACT), THE SECRETARY OF WAR OR THE SECRETARY OF THE NAVY, AS THE CASE MAY BE, AFTER AGREEMENT WITH THE CONTRACTOR OR SUBCONTRACTOR, SHALL CERTIFY TO THE COMMISSIONER OF INTERNAL REVENUE AS TO (A) THE NECESSITY AND COST OF SPECIAL ADDITIONAL EQUIPMENT AND FACILITIES ACQUIRED TO FACILITATE, DURING THE NATIONAL EMERGENCY DECLARED BY THE PRESIDENT ON SEPTEMBER 8, 1939, TO EXIST, THE COMPLETION OF SUCH NAVAL VESSEL OR ARMY OR NAVY AIRCRAFT OR PORTION THEREOF IN PRIVATE PLANTS; AND (B) THE PERCENTAGE OF COST OF SUCH SPECIAL ADDITIONAL EQUIPMENT AND FACILITIES TO BE CHARGED AGAINST SUCH CONTRACT OR SUBCONTRACT. FOR ALL PURPOSES OF SECTION 3 OF THE ACT OF MARCH 27, 1934, (48 STAT. 505; 34 U.S.C. 496), AS AMENDED, SUCH CERTIFICATION SHALL BE SUBJECT TO SUCH REGULATIONS AS THE PRESIDENT MAY PRESCRIBE, BUT SHALL BE BINDING UPON THE COMMISSIONER OF INTERNAL REVENUE, UNLESS, WITHIN FIVE DAYS AFTER RECEIPT OF SUCH CERTIFICATION, HE MAKE FORMAL OBJECTION THERETO TO THE SECRETARY OF THE NAVY OR THE SECRETARY OF WAR AS THE CASE MAY BE. THE PART OF SUCH COST CHARGEABLE AGAINST THE CONTRACT OR SUBCONTRACT IN PURSUANCE OF SUCH CERTIFICATION, SHALL, FOR THE PURPOSES OF SUCH SECTION 3, BE CONSIDERED TO BE A REDUCTION OF THE CONTRACT PRICE OF THE CONTRACT OR SUBCONTRACT. THE AMOUNT CHARGED AGAINST THE CONTRACT OR SUBCONTRACT IN PURSUANCE OF SUCH CERTIFICATION SHALL, FOR THE PURPOSES OF SUCH SECTION 3, BE APPLIED AGAINST AND REDUCE THE COST OR OTHER BASIS OF SUCH SPECIAL ADDITIONAL EQUIPMENT AND FACILITIES AS OF THE DATE OF INSTALLATION THEREOF: PROVIDED, THAT THE SECRETARY OF WAR OR THE SECRETARY OF THE NAVY, AS THE CASE MAY BE, SHALL REPORT TO THE CONGRESS, EVERY THREE MONTHS, THE COST OF SUCH SPECIAL ADDITIONAL EQUIPMENT AND FACILITIES TO BE BORNE BY THE GOVERNMENT UNDER EACH CONTRACT.

SECTION 1 OF PUBLIC, NO. 703, APPROVED JULY 2, 1940, 54 STAT. 712, ENTITLED " AN ACT TO EXPEDITE THE STRENGTHENING OF THE NATIONAL DEFENSE," PROVIDES IN PART AS FOLLOWS:

THAT (A) IN ORDER TO EXPEDITE THE BUILDING UP OF THE NATIONAL DEFENSE, THE SECRETARY OF WAR IS AUTHORIZED, OUT OF THE MONEYS APPROPRIATED FOR THE WAR DEPARTMENT FOR NATIONAL-DEFENSE PURPOSES FOR THE FISCAL YEAR ENDING JUNE 30, 1941, WITH OR WITHOUT ADVERTISING, (1) TO PROVIDE FOR THE NECESSARY CONSTRUCTION, REHABILITATION, CONVERSION, AND INSTALLATION AT MILITARY POSTS, DEPOTS, STATIONS, OR OTHER LOCALITIES, OF PLANTS, BUILDINGS, FACILITIES, UTILITIES, AND APPURTENANCES THERETO (INCLUDING GOVERNMENT-OWNED FACILITIES AT PRIVATELY OWNED PLANTS AND THE EXPANSION OF SUCH PLANTS, AND THE ACQUISITION OF SUCH LAND, AND THE PURCHASE OR LEASE OF SUCH STRUCTURES, AS MAY BE NECESSARY), FOR THE DEVELOPMENT, MANUFACTURE, MAINTENANCE, AND STORAGE OF MILITARY EQUIPMENT, MUNITIONS, AND SUPPLIES, AND FOR SHELTERS; (2) TO PROVIDE FOR THE DEVELOPMENT, PURCHASE, MANUFACTURE, SHIPMENT, MAINTENANCE, AND STORAGE OF MILITARY EQUIPMENT, MUNITIONS, AND SUPPLIES, AND FOR SHELTER, AT SUCH PLACES AND UNDER SUCH CONDITIONS AS HE MAY DEEM NECESSARY; AND (3) TO ENTER INTO SUCH CONTRACTS (INCLUDING CONTRACTS FOR EDUCATIONAL ORDERS, AND FOR THE EXCHANGE OF DETERIORATED, UNSERVICEABLE, OBSOLESCENT, OR SURPLUS MILITARY EQUIPMENT, MUNITIONS, AND SUPPLIES FOR OTHER MILITARY EQUIPMENT, MUNITIONS, AND SUPPLIES OF WHICH THERE IS A SHORTAGE), AND TO AMEND OR SUPPLEMENT SUCH EXISTING CONTRACTS, AS HE MAY DEEM NECESSARY TO CARRY OUT THE PURPOSES SPECIFIED IN THIS SECTION; * * *

THUS IT APPEARS THAT, AS TO MONEYS APPROPRIATED FOR THE WAR DEPARTMENT FOR NATIONAL-DEFENSE PURPOSES FOR THE FISCAL YEAR ENDING JUNE 30, 1941, THE SECRETARY OF WAR IS EXPRESSLY AUTHORIZED BY THE ACT OF JULY 2, 1940, SUPRA, TO PROVIDE FOR THE NECESSARY CONSTRUCTION, ETC., OF PLANTS, BUILDINGS, FACILITIES, ETC., FOR THE DEVELOPMENT, MANUFACTURE, MAINTENANCE AND STORAGE OF MILITARY EQUIPMENT, MUNITIONS AND SUPPLIES, INCLUDING GOVERNMENT-OWNED FACILITIES AT PRIVATELY OWNED PLANTS AND THE EXPANSION OF SUCH PLANTS; TO PROVIDE FOR THE PURCHASE, MANUFACTURE, ETC., OF MILITARY EQUIPMENT, MUNITIONS, AND SUPPLIES "AT SUCH PLACES AND UNDER SUCH CONDITIONS AS HE MAY DEEM NECESSARY," AND "TO ENTER INTO SUCH CONTRACTS * * * AS HE MAY DEEM NECESSARY" TO CARRY OUT SUCH PURPOSES, AND THAT, SO FAR AS CONTRACTS FOR THE CONSTRUCTION OR MANUFACTURE OF ANY ARMY AIRCRAFT, OR PORTION THEREOF, INTER ALIA, DURING THE EXISTING NATIONAL EMERGENCY ARE CONCERNED, SECTION 4 OF THE ACT OF JUNE 28, 1940, SUPRA, RECOGNIZES THAT THE CONTRACT PRICE MAY INCLUDE THE COST OF ADDITIONAL EQUIPMENT AND FACILITIES REQUIRED TO FACILITATE THE COMPLETION OF SUCH AIRCRAFT AND PARTS IN PRIVATE PLANTS, AND, IN EFFECT, AUTHORIZES AND REQUIRES THE SEGREGATION OF SUCH ADDITIONAL COSTS FROM THE BALANCE OF THE CONTRACT PRICE FOR THE PURPOSE OF DETERMINING EXCESS PROFITS UNDER SECTION 3 OF THE VINSON-TRAMMELL ACT OF MARCH 27, 1934, AS AMENDED. MOREOVER, THERE CAN BE NO DOUBT THAT WHERE A CONTRACTOR MUST INCUR COSTS FOR THE EXPANSION OF HIS PLANT FACILITIES FOR THE PERFORMANCE OF A PARTICULAR CONTRACT, OR PARTICULAR CONTRACTS, AND THE EXPANDED FACILITIES ARE, OR MIGHT BE, OF LITTLE OR NO EXPECTED FUTURE USE OR VALUE OTHERWISE TO THE CONTRACTOR, SUCH COSTS NATURALLY WOULD BE INCLUDED IN THE CONTRACT PRICE, AND, IF NOT SEGREGATED AS A SEPARATE ITEM, WOULD BE INCLUDED IN THE FORM OF INCREASED PRICES FOR THE CONTRACT SUPPLIES. IN VIEW OF THESE CONSIDERATIONS, THIS OFFICE PERCEIVES NO LEGAL OBJECTION TO PROVISIONS IN SUCH CONTRACTS FOR THE SEGREGATION OF SUCH COSTS AND FOR THE SEPARATE PAYMENT THEREOF, AS A PART OF THE CONTRACT CONSIDERATION, INSTEAD OF PAYING SUCH COSTS INDIRECTLY AS A PART OF THE UNIT PRICES OF THE EQUIPMENT OR SUPPLIES TO BE FURNISHED, PARTICULARLY AS THE GOVERNMENT MAY THEREBY BE PROTECTED BY THE PROPOSED CORRELATIVE PROVISION WHICH, IN EFFECT, WOULD REQUIRE THE CONTRACTOR (1) TO REBATE TO THE GOVERNMENT THE REASONABLE VALUE TO THE CONTRACTOR OF THE EXPANDED FACILITIES UPON COMPLETION OF THE CONTRACT OR CONTRACTS, OR (2) TO TRANSFER SUCH FACILITIES TO THE GOVERNMENT. EXPANSION COSTS ARE INCLUDED IN THE CONTRACT UNIT PRICES, THE GOVERNMENT WILL INDIRECTLY PAY FOR THE EXPANSION BUT WILL OBTAIN NO INTEREST IN THE FACILITIES SO PAID FOR, WHEREAS, BY SEGREGATING SUCH COSTS FOR DIRECT PAYMENT AS PROPOSED, THE GOVERNMENT'S EQUITABLE INTEREST IN SUCH FACILITIES WILL BE RECOGNIZED AND FIXED, AND WHATEVER MAY SUBSEQUENTLY BE RECOUPED THEREFROM WILL BE JUST SO MUCH ADDITIONAL ADVANTAGE TO THE GOVERNMENT, WITHOUT BEING UNFAIR TO THE CONTRACTOR. SUCH PROCEDURE OF SO APPORTIONING THE EQUITIES IN ADVANCE AND AGREEING ON A PROCEDURE FOR SUBSEQUENT ADJUSTMENT WOULD APPEAR BENEFICIAL TO BOTH PARTIES BY LARGELY REMOVING FROM SUCH TRANSACTIONS THE ELEMENT OF RISK AS TO FUTURE VALUE TO THE CONTRACTOR OF THE REQUIRED INCREASE OF PLANT FACILITIES.

RESPECTING THE PROPOSED ARBITRATION PROVISIONS, IF, AS IS UNDERSTOOD FROM YOUR SUBMISSION, THEY GO NO FURTHER THAN TO PROVIDE FOR A DETERMINATION OF THE FACT OF REASONABLE VALUE, WITHOUT IMPOSING ANY OBLIGATION ON THE GOVERNMENT, AND LEAVE NO QUESTIONS OF LEGAL LIABILITY FOR DETERMINATION BY ARBITRATORS, THEY, ALSO, DO NOT APPEAR LEGALLY OBJECTIONABLE UNDER THE CIRCUMSTANCES HERE INVOLVED.

ACCORDINGLY, YOUR SPECIFIC INQUIRIES (1) AND (2) ARE ANSWERED IN THE AFFIRMATIVE. IT IS TO BE UNDERSTOOD, HOWEVER, WITH RESPECT TO THE SUGGESTED PROCEDURE OF PAYING THE SEGREGATED COST OF REQUIRED ADDITIONAL FACILITIES AT THE RATE OF 20 PERCENT A YEAR, THAT IS, IN FIVE EQUAL ANNUAL INSTALLMENTS, THAT AS THE AMOUNTS OF SUCH PAYMENTS WILL, OF COURSE, BE AN OBLIGATION UNDER THE CURRENT APPROPRIATIONS, AND AS SECTION 5 OF THE ACT OF JUNE 20, 1874, 31 U.S.C. 713, REQUIRES THAT ALL UNEXPENDED BALANCES OF APPROPRIATIONS, WITH CERTAIN EXCEPTIONS NOT HERE MATERIAL, REMAINING UPON THE BOOKS OF THE TREASURY FOR TWO FISCAL YEARS SHALL BE CARRIED TO THE SURPLUS FUND AND COVERED INTO THE TREASURY, SUCH CONTRACT APPROPRIATIONS WILL NOT BE AVAILABLE FOR PAYMENT OF THE LATER INSTALLMENTS, EXCEPT BY SETTLEMENTS OF THIS OFFICE REPORTED TO THE CONGRESS AS CERTIFIED CLAIMS, FOR REAPPROPRIATION OF THE NECESSARY FUNDS PURSUANT TO SECTION 4 OF THE ACT OF JUNE 14, 1878, 31 U.S.C. 714, UNLESS, IN THE MEANTIME, OTHER PROVISION IS MADE BY LAW FOR THE PAYMENT OF SUCH OBLIGATIONS.

THE MEMORANDUM SUBMITTED WITH YOUR LETTER DESCRIBING THE PROPOSED PROCEDURE IN GREATER DETAIL CONTAINS A CONTEMPLATED PROVISION TO THE EFFECT THAT IF UPON COMPLETION OR TERMINATION OF THE CONTRACT THE CONTRACTOR IS UNWILLING TO PAY THE ARBITRATED AMOUNT OR DOES NOT WISH TO RETAIN THE FACILITIES AND TRANSFERS THEM TO THE GOVERNMENT, THEY MAY BE REMOVED, OR LEFT IN PLACE AS STAND-BY EQUIPMENT, IN WHICH LATTER EVENT THE CONTRACTOR SHALL MAINTAIN AND CARE FOR SUCH FACILITIES "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 SHALL BE PAID BY THE GOVERNMENT.' THIS PROVISION WOULD PURPORT TO IMPOSE ON THE GOVERNMENT A CONTINGENT AND CONTINUING OBLIGATION TO REIMBURSE THE CONTRACTOR FOR MAINTENANCE AND CARE OF SUCH FACILITIES FOR AN INDEFINITE PERIOD AFTER COMPLETION OF THE CONTRACT. SUCH PROVISION, IN THAT RESPECT, WOULD BE IN CONTRAVENTION OF SECTIONS 3679 AND 3732, REVISED STATUTES, WHICH PROHIBIT ANY DEPARTMENT OF THE GOVERNMENT FROM INVOLVING THE GOVERNMENT IN ANY CONTRACT FOR THE FUTURE PAYMENT OF MONEY IN EXCESS OF APPROPRIATIONS MADE FOR THE PARTICULAR FISCAL YEAR, AND PROHIBIT THE MAKING OF ANY CONTRACT OR PURCHASE ON BEHALF OF THE UNITED STATES UNLESS THE SAME IS AUTHORIZED BY LAW OR IS UNDER AN APPROPRIATION ADEQUATE TO ITS FULFILLMENT. SEE LEITER V. UNITED STATES, 271 U.S. 204; GOODYEAR V. UNITED STATES, 276 U.S. 287.

THERE ARE NOTED, ALSO, THE CONTEMPLATED PROVISIONS THAT THE GOVERNMENT WILL AGREE THAT IT WILL NOT USE ANY FACILITIES WHICH ARE TRANSFERRED TO IT FOR COMMERCIAL PURPOSES, AND THAT 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. THE FIRST OF THESE PROVISIONS, WITHOUT LEGISLATIVE SANCTION, WOULD APPEAR TO BE OF DOUBTFUL VALIDITY AS ATTEMPTING BY CONTRACT TO RESTRICT THE UNITED STATES IN THE FUTURE USE IT MIGHT MAKE OF ITS OWN PROPERTY, AND THE SECOND PROVISION, INSOFAR AS ANY REAL PROPERTY MIGHT BE INVOLVED, WOULD APPEAR TO BE IN CONFLICT WITH THE ACT OF AUGUST 27, 1935, 49 STAT. 885, AS AMENDED BY THE ACT OF JULY 18, 1940, PUBLIC, NO. 749, 54 STAT. 764, AUTHORIZING THE COMMISSIONER OF PUBLIC WORKS, WITH THE APPROVAL OF THE FEDERAL WORKS ADMINISTRATOR, TO PROVIDE FOR THE DISPOSITION, CONTROL, AND USE OF SURPLUS REAL PROPERTY OUTSIDE OF THE DISTRICT OF COLUMBIA, EXCLUSIVE OF MILITARY OR NAVAL RESERVATIONS, ACQUIRED BY ANY FEDERAL AGENCY.

IN VIEW OF THE SITUATION THAT CONTRACTS OF THE CHARACTER CONTEMPLATED WOULD RECOGNIZE THAT THE GOVERNMENT IS TO PAY FOR THE ADDITIONAL FACILITIES REQUIRED AND WILL BE THE EQUITABLE OWNER THEREOF, THERE IS SUGGESTED FOR ADMINISTRATIVE CONSIDERATION WHETHER THERE SHOULD NOT APPROPRIATELY BE INCLUDED IN SUCH CONTRACTS A COMMITMENT BY THE CONTRACTOR, IN CONSIDERATION THEREOF, THAT FUTURE CONTRACTS FOR FURTHER QUANTITIES OF SIMILAR SUPPLIES OR EQUIPMENT WILL BE ACCEPTED WITHOUT INCREASE OF UNIT PRICES EXCEPT SUCH AS MAY BE SHOWN TO BE NECESSARY BY REASON OF INCREASED LABOR, MATERIAL, OR OTHER DIRECT MANUFACTURING COSTS. OTHERWISE, ALTHOUGH OBLIGATED TO PAY FOR THE ADDITIONAL EQUIPMENT INSTALLED, THE GOVERNMENT WOULD HAVE NO ASSURANCE OF HAVING THE BENEFICIAL USE THEREOF WITH RESPECT TO FUTURE CONTRACTS. IT MAY BE SUGGESTED FOR CONSIDERATION, ALSO, WHETHER IT MIGHT NOT BE MORE PRUDENT TO PROVIDE FOR THREE ARBITRATORS IN ALL CASES, INCLUDING ONE DISINTERESTED PERSON, RATHER THAN LEAVING THE MATTERS IN THE FIRST INSTANCE FOR POSSIBLE DETERMINATION BY A REPRESENTATIVE OF THE CONTRACTOR AND A REPRESENTATIVE OF THE GOVERNMENT WHO, CONCEIVABLY, MIGHT NOT BE AS WELL INFORMED, OR AS ZEALOUS, AS A PROPER PROTECTION OF THE INTERESTS OF THE GOVERNMENT MIGHT REQUIRE.