B-123906, MAY 15, 1957

B-123906: May 15, 1957

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GENERAL SERVICES ADMINISTRATION: REFERENCE IS MADE TO YOUR LETTER OF MARCH 19. THE LEASE WAS FOR A TERM OF 5 YEARS AND 11 DAYS. IT WAS PROVIDED IN ARTICLE FOURTEEN THEREOF THAT THE LESSEE WAS TO HAVE THE OPTION TO PURCHASE THE LEASED PREMISES AT ANY TIME AFTER THE EXPIRATION OF THREE YEARS FROM THE EFFECTIVE DATE OF THE LEASE. SOLELY BY USE OF SUCH LEASED PREMISES. "/C) IN THE EVENT MATERIALS ARE PROCESSED AT THE LEASED PREMISES ONLY AS FAR AS BILLET OR INGOT FORM (WITHOUT BEING PROCESSED THROUGH THE EXTRUSION PRESSES) THEN. THE MARKET VALUE OF MATERIALS PRODUCED OR PROCESSED ON A TOLL CHARGE BASIS SHALL BE CREDITED AGAINST THE TEN PERCENT (10 PERCENT) LIMITATIONS SET FORTH IN THIS SUBPARAGRAPH BEFORE NET SALES (OR MARKET VALUE IF NOT SOLD) OF BILLETS AND INGOTS ARE SO CREDITED.

B-123906, MAY 15, 1957

TO HONORABLE FRANKLIN G. FLOETE, ADMINISTRATOR, GENERAL SERVICES ADMINISTRATION:

REFERENCE IS MADE TO YOUR LETTER OF MARCH 19, 1957, WITH ENCLOSURES, REQUESTING A DECISION AS TO WHETHER CERTAIN ITEMS PROPERLY MAY BE TAKEN INTO CONSIDERATION IN ARRIVING AT A NET SALES FIGURE FOR USE IN COMPUTATION OF RENTAL PAYABLE FOR A GOVERNMENT-OWNED PLANT LEASED TO THE KAISER ALUMINUM AND CHEMICAL CORPORATION UNDER LEASE NO. GS-OO B/S/-1539, DATED FEBRUARY 22, 1951.

THE LEASE WAS FOR A TERM OF 5 YEARS AND 11 DAYS, COMMENCING ON MAY 21, 1951, AND IT WAS PROVIDED IN ARTICLE FOURTEEN THEREOF THAT THE LESSEE WAS TO HAVE THE OPTION TO PURCHASE THE LEASED PREMISES AT ANY TIME AFTER THE EXPIRATION OF THREE YEARS FROM THE EFFECTIVE DATE OF THE LEASE, OR FROM MAY 21, 1951, AT A MUTUALLY AGREEABLE FAIR VALUE AS OF THE DATE OF EXERCISE OF THE OPTION, WITH NO CREDIT OR ALLOWANCE FOR RENTALS PREVIOUSLY PAID BY THE LESSEE. WITH RESPECT TO RENTAL TO BE PAID UNDER THE LEASE, ARTICLE TWO THEREOF, AS MODIFIED BY AMENDMENT NO. 1, DATED JUNE 1, 1953, TO THE LEASE, PROVIDED, INSOFAR AS MATERIAL, AS FOLLOWS:

"TWO: COMMENCING ON THE EFFECTIVE DATE OF THE LEASE, LESSEE SHALL PAY TO THE LESSOR ANNUAL RENTALS FOR THE LEASED PREMISES DURING THE TERM OF THIS LEASE AND ANY EXTENSIONS THEREOF, TO BE COMPUTED AND PAID IN ACCORDANCE WITH SUBPARAGRAPHS (A), (B), (C), (D), (E), (F), (G) AND (H) OF THIS ARTICLE TWO, SUBJECT TO PAYMENT BY LESSEE TO LESSOR OF THE FOLLOWING SCHEDULE OF MINIMUM ANNUAL RENTALS:

"SUBJECT TO THE ABOVE MINIMUM RATES, PRODUCTION RENTALS SHALL BE PAID BY LESSEE ON THE BASIS OF THE PRODUCTION ACCOMPLISHED BY THE LESSEE AT THE LEASED PREMISES, COMPUTED AND PAYABLE AS FOLLOWS:

"/A) FIVE PERCENT (5 PERCENT) OF NET SALES FOR ALL PRODUCTS PROCESSED OR PRODUCED AT THE LEASED PREMISES, OTHER THAN THOSE SPECIFIED IN SUBPARAGRAPH (C) HEREOF, SOLELY BY USE OF SUCH LEASED PREMISES.

"/C) IN THE EVENT MATERIALS ARE PROCESSED AT THE LEASED PREMISES ONLY AS FAR AS BILLET OR INGOT FORM (WITHOUT BEING PROCESSED THROUGH THE EXTRUSION PRESSES) THEN, IN LIEU OF THE RENTAL PROVIDED IN SUBPARAGRAPHS (A) AND (B) ABOVE, THE RENTAL SHALL BE FIVE PERCENT (5 PERCENT) OF THE INCREASE IN VALUE OF SUCH MATERIALS RESULTING FROM THE PROCESSING AT THE LEASED PREMISES, PROVIDED THAT, TO THE EXTENT THE AGGREGATE NET SALES PRICE (OR MARKET VALUE IF NOT SOLD) OF SUCH BILLETS AND INGOTS IN ANY LEASE YEAR, PLUS THE AGGREGATE MARKET VALUE OF MATERIALS PROCESSED ON A TOLL CHARGE BASIS IN SUCH LEASE YEAR, EXCEEDS TEN PERCENT (10 PERCENT) OF THE NET SALES PRICE (OR MARKET VALUE IF NOT SOLD) OF ALL OTHER PRODUCTS PRODUCED AT THE LEASED PREMISES IN SUCH YEAR, THE RENTAL PAYABLE ON SUCH EXCESS SHALL NOT APPLY AGAINST THE MINIMUM ANNUAL RENTALS PROVIDED FOR BY ARTICLE TWO OF THIS LEASE. FOR PURPOSES OF THE COMPUTATIONS REQUIRED BY THIS SUBPARAGRAPH, THE MARKET VALUE OF MATERIALS PRODUCED OR PROCESSED ON A TOLL CHARGE BASIS SHALL BE CREDITED AGAINST THE TEN PERCENT (10 PERCENT) LIMITATIONS SET FORTH IN THIS SUBPARAGRAPH BEFORE NET SALES (OR MARKET VALUE IF NOT SOLD) OF BILLETS AND INGOTS ARE SO CREDITED. LESSEE SHALL NOT, WITHOUT LESSOR'S PRIOR WRITTEN CONSENT PRODUCE OR PROCESS ON A TOLL CHARGE BASIS MATERIALS HAVING A MARKET VALUE IN EXCESS OF TEN PERCENT (10 PERCENT) OF THE NET SALES PRICE (OR MARKET VALUE IF NOT SOLD) OF ALL OTHER PRODUCTS (EXCLUDING BILLETS AND INGOTS) PRODUCED AT THE LEASED PREMISES IN SUCH LEASE YEAR.

"/D) AS USED ABOVE, THE TERMS "NET SALES" AND "INCREASE IN VALUE" SHALL HAVE THE MEANING SET FORTH BELOW:

"/1) THE TERM "NET SALES" SHALL BE DEEMED TO MEAN GROSS SALES LESS TRADE DISCOUNTS AND RETURN ALLOWANCES, AS CUSTOMARILY COMPUTED IN ACCORDANCE WITH GOOD ACCOUNTING PRACTICE, DURING THE LEASE YEAR OF PRODUCTS PRODUCED OR PROCESSED BY THE LEASED PREMISES; PROVIDED THAT, IF MATERIALS NOT OWNED OR PRODUCED BY LESSEE ARE PROCESSED AT THE LEASED PREMISES ON A TOLL CHARGE BASIS, NET SALES FOR SUCH PRODUCTS SHALL BE DEEMED TO MEAN THE TOLL CHARGE CHARGED BY LESSEE FOR PROCESSING SUCH MATERIAL.

"/2) "INCREASE IN VALUE" RESULTING FROM PROCESSING OF PRODUCTS AT THE LEASED PREMISES SHALL BE DEEMED TO MEAN THE DIFFERENCE BETWEEN (A) THE MARKET VALUE AT THE LEASED PREMISES OF THE COMPONENT MATERIALS PRIOR TO PROCESSING AT THE LEASED PREMISES, AND (B) NET SALES (AS DEFINED IN SUBPARAGRAPH (1) ABOVE, OF THE FINISHED PRODUCT IF SOLD AS FINISHED IN THE FORM AFTER SUCH PROCESSING, OR, IF THE PRODUCT IS NOT SOLD AS FINISHED IN THE FORM AFTER SUCH PROCESSING, THE MARKET VALUE OF THE PRODUCT IN THE FORM AFTER SUCH PROCESSING AT THE LEASED PREMISES.'

IT APPEARS FROM THE RECORD THAT THE LESSEE EXERCISED ITS OPTION TO PURCHASE THE LEASED PREMISES IN ACCORDANCE WITH THE TERMS OF ARTICLE FOURTEEN AS OF APRIL 11, 1955, AT WHICH TIME GSA MADE AN AUDIT OF THE LESSEE'S RECORDS IN ORDER TO DETERMINE THE RENTAL REMAINING DUE AND SUBSEQUENTLY INVOICED THE LESSEE FOR THE NET AMOUNT OF $37,114.04. THE LESSEE DISPUTED THE CLAIM WITH RESPECT TO ALL BUT THE AMOUNT OF $938.45 FOR REASONS INDICATED IN ITS LETTER OF AUGUST 22, 1956.

THE ITEMS WHICH THE LESSEE CONTENDS SHOULD BE EXCLUDED FROM THE BASE USED IN COMPUTING THE NET SALES FIGURE, AND WITH RESPECT TO WHICH YOU HAVE REQUESTED A DECISION, ARE AS FOLLOWS:

A. TERMINATION INVENTORIES - BILLETS AND WORK-IN-PROCESS

B. TERMINATION INVENTORIES - FINISHED GOODS

C. DIE CHARGES

D. CANCELLATION CHARGES

E. SALE OF DROSS AND SCRAP

F. COMMISSION ON CONSIGNMENT SALES

G. DISCOUNT ON WAREHOUSE SALES MADE TO LESSEE'S SUBSIDIARY

H. FREIGHT CHARGES ON RETURNED MATERIALS

IN OUR OPINION, THE AMOUNT OF RENTAL WHICH THE GOVERNMENT IS ENTITLED TO RECEIVE UNDER THE LEASE (EXCLUDING THE MINIMUM RENTAL STIPULATED) IS LIMITED BY THE ABOVE-QUOTED TERMS OF THE INSTRUMENT TO FIVE PERCENT OF NET SALES EXCEPT IN THE CASE OF PRODUCTS PROCESSED OR PRODUCED AT THE LEASED PREMISES FALLING WITHIN THE CATEGORY OF THOSE SPECIFIED IN SUBPARAGRAPH (C), SUPRA. THIS CONCLUSION WOULD SEEM TO FOLLOW FROM THE FACT THAT NET SALES, AS DEFINED IN THE LEASE, WAS SET FORTH THEREIN AS THE ONE AND ONLY MEDIUM FOR MEASURING THE AMOUNT OF RENTAL TO BE PAID, WITH THE EXCEPTION NOTED.

IN ITS LETTER OF DECEMBER 19, 1956, THE LESSEE HAS DRAWN ATTENTION TO THE FACT THAT, DURING THE COURSE OF NEGOTIATIONS OF THE DEFINITIVE LEASE AGREEMENT, PROPOSALS FOR COVERAGE OF RENT UPON TERMINATION INVENTORIES AND INCIDENTAL SCRAP AND SALVAGE DISPOSALS WERE MADE BY GSA'S INTERNAL AUDIT DIVISION, BUT THAT SUCH PROPOSALS WERE REVIEWED BY THE DIRECTOR, NATIONAL INDUSTRIAL RESERVE DIVISION, PN, AND WERE REJECTED FOR REASONS STATED IN A MEMORANDUM DATED JUNE 23, 1952. SAID MEMORANDUM, WHICH ALSO DEALS WITH ANOTHER ITEM HERE INVOLVED, READS, IN PERTINENT PART, AS FOLLOWS:

"/B) ITEM 6; THE SUGGESTED PROVISION TO MAKE RENTAL RATES APPLICABLE TO "SALES OF SCRAP AND SALVAGE MATERIALS" IS NOT CONSIDERED EQUITABLE.

"/D) ITEM 6; THE SUGGESTED PROVISION FOR PAYMENT OF RENTAL IN RELATION TO COMPLETED AND UNCOMPLETED PRODUCTS NOT SOLD AT EXPIRATION OR EARLIER TERMINATION OF LEASE APPEARS TO HAVE MERIT, BUT PREVIOUS LEASES HAVE NOT REQUIRED THIS PROVISION AND THE SUBJECT HAS NOT BEEN DISCUSSED WITH THE LESSEE. SUCH INCLUSION IS THEREFORE CONSIDERED DEPENDENT UPON LEGAL REQUIREMENT.

"/E) ITEM 7; THE SUGGESTED REFERENCE TO RENTAL RATES IN RELATION TO INTERCOMPANY OR INTERPLANT SALES IS NOT CONSIDERED NECESSARY, AS THE LEASE DOES NOT PROVIDE FOR SAME ON A COST BASIS. THEREFORE, THE NET SALES PRICE FOR ANY INTERCOMPANY OR INTERPLANT SALES SHOULD BE COMPUTED ON SAME BASIS AS SALES TO OTHERS.'

THUS, THE OFFICIALS OF THE GOVERNMENT CHARGED WITH THE RESPONSIBILITY OF GIVING FINAL APPROVAL TO THE TERMS OF THE LEASE DID SO WITH THE UNDERSTANDING THAT THE TERMS OF THAT INSTRUMENT AS EXECUTED DID NOT REQUIRE SALES OF SCRAP AND SALVAGE MATERIALS TO BE INCLUDED IN "NET SALES" FOR THE PURPOSE OF COMPUTING RENTAL PAYMENTS DUE THEREUNDER. ALSO, THEY GAVE THEIR FINAL APPROVAL TO THE TERMS OF THE LEASE WITH THE UNDERSTANDING THAT IT CONTAINED NO GENERAL PROVISION FOR THE PAYMENT OF RENTAL IN RELATION TO COMPLETED AND UNCOMPLETED PRODUCTS NOT SOLD AT THE EXPIRATION OR EARLIER TERMINATION OF THE LEASE, AND WITH THE UNDERSTANDING THAT THE NET SALES PRICE WITH RESPECT TO ANY INTERCOMPANY OR INTERPLANT SALES WAS TO BE COMPUTED FOR THE PURPOSE OF DETERMINING RENTAL ON THE SAME BASIS AS WERE NET SALES TO OTHERS. IN VIEW THEREOF, AND SINCE THE TERMS OF THE LEASE PROPERLY MAY NOT BE SAID TO REQUIRE SALES OF SCRAP AND SALVAGE MATERIALS, OR COMPLETED AND UNCOMPLETED PRODUCTS GENERALLY, NOT SOLD AT THE EXPIRATION OF THE LEASE, TO BE INCLUDED IN THE BASE USED FOR THE PURPOSE OF COMPUTING RENTAL PAYMENTS, OR TO REQUIRE NET SALES TO THE LESSEE'S SUBSIDIARY TO BE COMPUTED ON ANY DIFFERENT BASIS THAN IN THE CASE OF SALES MADE TO OTHERS, FOR THE PURPOSE OF DETERMINING RENTAL PAYMENTS, ITEMS (E) AND (G), ABOVE, SHOULD BE EXCLUDED IN COMPUTING THE LESSEE'S NET SALES, AND ITEMS (A) AND (B) SHOULD BE EXCLUDED TO THE EXTENT THAT THE COMPONENTS OF THE TERMINATION INVENTORIES DO NOT COME WITHIN THE CATEGORY OF THOSE DELINEATED IN ARTICLE TWO (C) OF THE LEASE, SUPRA. THIS WOULD AUTOMATICALLY EXCLUDE MATERIALS WHICH HAVE BEEN PROCESSED THROUGH THE EXTRUSION PRESSES.

THE FACTS RELATING TO ITEMS (C) AND (F) ARE SET FORTH IN THE LESSEE'S LETTER OF AUGUST 22, 1956, AS FOLLOWS:

"DIE CHARGES

"THE DIE SERVICE CHARGE IS A CHARGE MADE TO THE CUSTOMER FOR THE USE OF DIES OWNED BY KAISER ALUMINUM AND CHEMICAL CORPORATION. THE STANDARD TERMS AND CONDITIONS APPEARING ON THE REVERSE SIDE OF ALL OF KAISER ALUMINUM'S SALES ORDER FORMS PROVIDE THAT ANY DIES WHICH KAISER ALUMINUM CONSTRUCTS OR ACQUIRES FOR USE EXCLUSIVELY IN THE PRODUCTION OF GOODS FOR THE CUSTOMER SHALL REMAIN KAISER ALUMINUM'S PROPERTY, AND IN ITS POSSESSION AND CONTROL, AND ANY CHARGES THEREFOR SHALL BE MADE FOR THE USE OF SUCH EQUIPMENT ONLY. WITH RESPECT TO EXTRUSION DIES, NO CHARGE IS MADE FOR ORDERS OF 30,000 POUNDS' USAGE PER DIE. THE DIE CHARGES ARE AMORTIZED ON A BASIS OF 30,000 POUNDS' USAGE PER DIE OVER A TWELVE-MONTH PERIOD. GSA HAS INCLUDED IN ITS COMPUTATION OF SALES DIE CHARGES IN THE AMOUNT OF $7,712, WHICH WERE REFUNDED BY KAISER ALUMINUM TO THE CUSTOMER DURING THE TWELVE-MONTH PERIOD FOLLOWING APRIL 11, 1955. IN COMPUTING SALES FOR THE CORPORATION'S ACCOUNTING RECORDS, DIE CHARGES ARE NOT INCLUDED AS A SALE BUT ARE LISTED AS AN OFFSET AGAINST COST OF GOODS SOLD. THIS APPLIES TO THE PLANT RECORDS, AS WELL AS ALL OF THE CORPORATION'S PUBLISHED FINANCIAL STATEMENTS. THE DIE CHARGES ARE NOT ESTABLISHED SO AS TO PROVIDE A PROFIT TO KAISER ALUMINUM AND CHEMICAL CORPORATION BUT INSTEAD TO PROVIDE A REFUND OF A PORTION OF THE COST OF PRODUCING DIES IN THE CASE OF SMALL ORDERS. WHILE THE HALETHORPE PLANT HAS ITS OWN DIE SHOP, FREQUENTLY THE PLANT WAS UNABLE TO MAKE ALL THE REQUIRED DIES, AND THESE WERE MANUFACTURED BY OUTSIDE SOURCES. NO DISTINCTION HAS BEEN MADE BY GENERAL SERVICES ADMINISTRATION WITH RESPECT TO DIES WHICH WERE MADE AT HALETHORPE PLANT OR BY OUTSIDE FIRMS, ALTHOUGH OVER THE PERIOD OF THE LEASE, DIES MADE BY OUTSIDE FIRMS REPRESENTED $92,980 IN DIE CHARGES. THESE CHARGES WERE CERTAINLY NOT FOR PRODUCTS PROCESSED OR PRODUCED AT THE LEASED PREMISES.

"DISTRIBUTOR DISCOUNT ON CONSIGNED STOCK

"KAISER ALUMINUM AND CHEMICAL CORPORATION ("KAISER ALUMINUM") NORMALLY SELLS ITS ALUMINUM PRODUCTS THROUGH A WHOLLY-OWNED SUBSIDIARY, KAISER ALUMINUM AND CHEMICAL SALES, INC. ("SALES") PURSUANT TO A CONTRACT. SALES MAKE CERTAIN SALES THROUGH DISTRIBUTORS UNDER A CONSIGNMENT AGREEMENT. UNDER THIS AGREEMENT ALUMINUM MATERIALS PRODUCED BY KAISER ALUMINUM ARE DELIVERED TO THE DISTRIBUTOR ON CONSIGNMENT FOR SALE. TITLE TO THE MATERIAL REMAINS IN KAISER ALUMINUM UNTIL SOLD BY THE DISTRIBUTOR. PRODUCTS PRODUCED BY THE HALETHORPE PLANT, THE DISTRIBUTOR RECEIVES A 4 PER CENT DISCOUNT ON KAISER'S PUBLISHED PRICES. * * *"

DIE CHARGES APPLICABLE TO DIES MADE AT THE LEASED PLANT MUST BE REGARDED AS A NORMAL ITEM OF COST OF MANUFACTURING THE EXTRUSIONS, OR FINISHED PRODUCTS, PRODUCED THERE AND THEY SHOULD NOT, THEREFORE, BE DEDUCTED FROM THE BASE USED FOR COMPUTING NET SALES. HOWEVER, THE CHARGES APPLICABLE TO THE DIES WHICH WERE PURCHASED FROM OTHERS DO NOT REPRESENT ANY PART OF THE MANUFACTURING COSTS WHICH WERE INCURRED AT THE LEASED PLANT IN CONNECTION WITH THE PRODUCTION OF LESSEE'S PRODUCTS, AND NOT TO ALLOW THE LESSEE CREDIT FOR THEM IN THE MANNER CLAIMED WOULD BE TANTAMOUNT TO DENYING IT CREDIT FOR THE USE OF ITS OWN EQUIPMENT IN THE MANUFACTURE OF EXTRUSIONS, WHICH IS CONTRARY TO THE INTENT OF SUBPARAGRAPH (B) OF ARTICLE TWO OF THE LEASE. ACCORDINGLY, THE CHARGES IN QUESTION SHOULD BE DEDUCTED IN COMPUTING NET SALES WITHIN THIS CATEGORY. THE GENERALLY ACCEPTED DEFINITION OF "TRADE DISCOUNT" APPEARS TO BE THAT SET FORTH IN WEBSTER'S NEW INTERNATIONAL DICTIONARY, WHEREIN THE TERM IS DEFINED AS "A DEDUCTION FROM THE RETAIL OR LIST PRICE OF GOODS ALLOWED BY A MANUFACTURER OR DISTRIBUTOR TO A MERCHANT.'

IN VIEW OF THE BROAD MEANING THUS APPLIED TO THE TERM IN QUESTION, THERE WOULD APPEAR TO BE NO PROPER BASIS FOR DENYING THE LESSEE THE RIGHT TO DEDUCT THE COMMISSION APPLICABLE TO THE CONSIGNMENT SALES IN ARRIVING AT NET SALES, AND, HENCE, ITEM (F) SHOULD BE DEDUCTED FROM THE RENTAL BASE.

SINCE THE TRANSACTIONS WHEREBY THE LESSEE MADE CHARGES TO ITS CUSTOMERS FOR THE CANCELLATION OF THEIR ORDERS MAY NOT BE CONSIDERED AS SALES, ITEM (D) SHOULD BE DEDUCTED FOR THE PURPOSE OF ARRIVING AT NET SALES. IN THIS CONNECTION, IT IS NOTED THAT THE LESSEE STATES IN ITS LETTER OF AUGUST 22, 1956, THAT THE CUSTOMER "PAYS A CHARGE CALCULATED TO RECOVER KAISER ALUMINUM'S COST.'

IT IS STATED IN THE SUPERVISORY AUDITOR'S MEMORANDUM OF DECEMBER 13, 1956, THAT ITEM (H) REPRESENTS FREIGHT CHARGES FOR RETURN SALES ON WHICH FREIGHT HAD PREVIOUSLY BEEN ALLOWED ON THE ORIGINAL SALE AND THAT PERMITTING THE DEDUCTION AS A FREIGHT ALLOWANCE WOULD RESULT IN A DUPLICATE ALLOWANCE ON THE SAME SALE. ACCORDINGLY, THE ITEM SHOULD NOT BE DEDUCTED IN ARRIVING AT NET SALES.

AT THE CONCLUSION OF YOUR LETTER YOU REQUEST OUR VIEWS CONCERNING THE PROPRIETY OF A TRANSACTION BETWEEN THE LESSEE AND THE DEPARTMENT OF THE AIR FORCE INVOLVING THE USE OF THE LEASED PREMISES AND EXPRESS YOUR OPINION RELATIVE TO THE PROPRIETY THEREOF AS FOLLOWS:

"AT THE TIME OF THIS AUDIT IT WAS FOUND THAT THE KAISER ALUMINUM AND CHEMICAL CORPORATION HAD RECEIVED A MONTHLY INCOME OF $276 OVER A PERIOD OF APPROXIMATELY THIRTY-ONE MONTHS, TOTALING $8,408, FROM THE DEPARTMENT OF THE AIR FORCE FOR OFFICE SPACE AND SERVICES UTILIZED IN CONNECTION WITH CONSTRUCTION ACTIVITIES OF A NEW PLANT. ARTICLE SIXTEEN OF THE LEASE PROVIDES FOR PRIOR WRITTEN CONSENT BY THIS ADMINISTRATION AUTHORIZING THE SUB-LETTING OF ANY PART OF THE PREMISES. A DILIGENT SEARCH OF OUR RECORDS FAILS TO REVEAL ANY EVIDENCE OF SUCH AUTHORIZATION.

"THE KAISER ALUMINUM AND CHEMICAL CORPORATION CLAIMS THAT THE ARRANGEMENT WITH THE AIR FORCE WAS NOT A SUBLEASE, AND THAT THE RECEIPTS REPRESENTED REIMBURSEMENT FOR SERVICE COSTS AS OUTLINED IN THEIR LETTER OF NOVEMBER 16, 1956 AND CONFIRMED BY THE AIR FORCE LETTER TO GSA DATED FEBRUARY 18, 1957.

"BASED ON THESE TWO LETTERS, AS WELL AS OTHER ENCLOSURES, WE ARE IN AGREEMENT WITH KAISER IN THIS RESPECT. HOWEVER, WE REQUEST YOUR CONFIRMATION OF OUR VIEWS.'

SINCE IT APPEARS FROM THE CORRESPONDENCE REFERRED TO IN YOUR LETTER THAT THE ABOVE AMOUNT OF $8,408 COVERED REIMBURSEMENT TO THE KAISER ALUMINUM AND CHEMICAL CORPORATION FOR THE APPROXIMATE COST OF CERTAIN SERVICES, INCLUDING UTILITY SERVICES, FURNISHED TO THE AIR FORCE DURING ITS OCCUPANCY OF OFFICE SPACE AT THE LEASED PREMISES, AND THAT NO RENT WAS ACTUALLY CHARGED FOR THE USE OF SAID SPACE, THE PROPRIETY OF THE TRANSACTION NEED NOT BE FURTHER QUESTIONED BY YOUR ADMINISTRATION.

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