Harry J. Defoe — testimony (printed pages 618–628)

House Naval Affairs Committee — Investigating the Progress of the War Effort

Thursday, June 17, 1943
House of Representatives, Naval Affairs Committee, Washington, D.C.

The committee met at 10:18 a.m., pursuant to adjournment on June 16, 1943, in room 313, Old House Office Building, Representative Warren G. Magnuson, Washington, presiding.

Present: Representatives Warren G. Magnuson, Washington; Patrick H. Drewry, Virginia; Michael J. Bradley, Pennsylvania; Ed. V. Izac, California; Melvin J. Maas, Minnesota; W. Sterling Cole, New York; William E. Hess, Ohio; James Wolfenden, Pennsylvania; William W. Blackney, Michigan; Robert A. Grant, Indiana.

Also present: Robert E. Kline, Jr., general counsel; Richard H. Wels, special counsel.

Present for the Navy Price Adjustment Board: Kenneth H. Rockey, Chairman.

The ACTING CHAIRMAN. The committee will come to order. Mr. Defoe, of the Defoe Shipbuilding Co., testified yesterday, and we will try to get through with him this morning so that we can put Mr. Hawley on and devote the rest of the morning to his testimony.

Mr. KLINE. Mr. Chairman, before Mr. Defoe begins I would like to read into the record a statement of figures which we asked about yesterday but did not have, which now Mr. Rockey has prepared for me.

(The statement was received, and marked “Exhibit No. 628,” and is as follows:)

The ACTING CHAIRMAN. Yes.

Testimony of Harry J. Defoe, Defoe Shipbuilding Co., Bay City, Mich. (Resumed)

The ACTING CHAIRMAN. Mr. Defoe, I asked you a question and for the purpose of the record we ought to clear it up again. I asked you whether or not in your opinion you believed that regardless of capital investment and regardless of certain other factors that are taken into consideration in renegotiating profits, you felt that a company, your company or any other company, should be entitled to a certain reasonable profit percentage on the gross sales of the company, and it is my understanding that yesterday you answered me that you did think that was so.

Mr. DEFOE. I think that the percentage of profit should be based on gross sales.

The ACTING CHAIRMAN. On gross sales?

Mr. DEFOE. On sales.

The ACTING CHAIRMAN. On sales, regardless of whether or not—

Mr. DEFOE (interposing). Regardless of investment.

The ACTING CHAIRMAN. Regardless of investment and regardless of whether or not those sales are wholly and purely war contracts?

Mr. DEFOE. No. War contracts, yes; I include only war contracts.

The ACTING CHAIRMAN. So that if you had an investment, which you have, at the beginning of this, let us say, of $600,000, which your figures show, if the necessities of the war required that the Government give you contracts to the extent of some two hundred million dollars, which you say is your backlog—

Mr. DEFOE. One hundred million dollars.

The ACTING CHAIRMAN. $111,000,000. You feel you are still entitled to a percentage of profit, you roughly estimated it at 3 percent yesterday, but let’s say 2 for the sake of the record, on that gross percentage?

Mr. DEFOE. Yes, I do, Mr. Chairman.

The ACTING CHAIRMAN. And that if that gross percentage of 2 percent on $100,000,000 amounted to over $2,000,000 on war contracts alone, you think you would be entitled to your partnership—a profit of $2,000,000, well over $2,000,000 on an original investment of $600,000. Is that correct?

Mr. DEFOE. It sums up to just that, Mr. Chairman, but to leave it there doesn’t make a fair picture.

The ACTING CHAIRMAN. Well, you can amplify anyway you wish to the committee.

Mr. DEFOE. I’m afraid I can’t.

The ACTING CHAIRMAN. Why isn’t that a fair picture? I will be glad to hear your views on that. What was your original investment in the company?

Mr. DEFOE. It has grown up greatly over 38 years from nothing at all. As far as this some one hundred million dollars is concerned, that will all be charged off. It is taken out of the job against a certificate of necessity, and it will all be charged off and be practically useless after the war job is over. It is a special plant up there for special work, and that is not an accumulation of wealth there at all. It will all be gone.

The ACTING CHAIRMAN. I appreciate that. I am speaking of what you as an individual partner take out of these war contracts.

Mr. DEFOE. If we do the work, if we do the same work that a yard with an investment of several million dollars does, produce the same ships with the same man-hours—as a matter of fact we have produced with ’way less man-hours than any of our competitors—I say that we are entitled to the same price and the same profit that they are.

The ACTING CHAIRMAN. Do you make any differentiation in that philosophy as between peacetime commercial contracts and war contracts?

Mr. DEFOE. The difference that is made for all other companies. I just want to go along with the rest.

The ACTING CHAIRMAN. Let’s just give a better example; maybe I can make myself clearer. Last year the five partners, three of whom are new, have been taken in since the war contracts began, ended up after taxes with approximately $700,000. Is that correct?

Mr. DEFOE. Yes. May I go on from there, though?

The ACTING CHAIRMAN. Let me see if we can’t get ourselves clear. That is one year. That is approximately one-hundred-some thousand dollars apiece, a little over if it were equally divided. What was your share, for instance, of the $700,000?

Mr. DEFOE. I don’t even know, Mr. Chairman. But here is the picture.

The ACTING CHAIRMAN. You don’t know how much you made—

Mr. DEFOE. How much of that is mine; no. It doesn’t mean a thing; it doesn’t mean a thing, Mr. Chairman.

The ACTING CHAIRMAN. It means that the Government paid $700,000 to your company. It means something to the taxpayers who pay it. It has come out of our pocket. What you do with it—

Mr. DEFOE (interposing). I haven’t it. Here we are, in the midst of an enormous big job up there for us to handle. The pay roll is $200,000 a week. Now, what is $700,000 in that picture? It doesn’t meet a month’s pay roll. It is just there, floating around with the rest in our attempt to do a job, and we are doing it. We have got to build these boats; we have got to build the 28; we have got to build more; we are doing the best we can; and all we want is that fund to be left intact until we get the job done. You can do as you please with it afterward, but I can’t build ships in that way.

The ACTING CHAIRMAN. But, Mr. Defoe, that money is paid to you; that is your share. You can give it away; I don’t know what you are going to do with it, but it is paid to you in one year. Now, I want to ask you whether or not you think that any man, under war contracts, should come out at the end of the war—this is one year’s payment; supposing the war goes on for 5 years that would be over $3,000,000—with $3,000,000 profit. What you do with it is beside the point. It comes out of the Treasury.

Mr. DEFOE. If I were done and could put that in my pocket and go home with it, your argument would count, but we are only started; that money is in the game to help finish the job. But you want to take it out. All right, go ahead, we’ll see what happens to the job.

Mr. KLINE. You have taken your salary out; haven’t you?

Mr. DEFOE. No, sir. The five of us have drawn $70,000 this last year.

The ACTING CHAIRMAN. You raised your salary because of war contracts from $25,000 to $75,000, and all you are doing is war business.

Mr. KLINE. I understood him to say he hadn’t taken the salary out.

The ACTING CHAIRMAN. If it doesn’t mean anything, what does he raise it for?

Mr. DEFOE. I explained that yesterday. As a partnership a salary doesn’t mean a thing. It is tossed in the rest of the pool and it doesn’t mean a thing.

Mr. MAAS. From your standpoint that may be your point of view but, Mr. Rockey, let me ask you in renegotiating a partnership of this type, what weight would you give to salaries that were listed? Would you approach them as items of cost, or would you have the same attitude that Mr. Defoe has himself, that they have no bearing on the matter at all?

Mr. ROCKEY. We scrutinize them very carefully and examine their reasonableness in respect to the amount which should be included in the cost of doing this Government work.

Mr. MAAS. Your initial approach, then, would be that they are items of cost. You would examine them in the light of their reasonableness, but you would approach them as a cost.

Mr. ROCKEY. That is right.

Mr. MAAS. So it does have some effect whether they are set up or not.

Mr. ROCKEY. Yes.

Mr. KLINE. What did you do with them in this particular case, Mr. Rockey? Did you allow them in whole or in part?

Mr. ROCKEY. We allowed them in whole.

Mr. MAAS. That is the best answer, Mr. Defoe, that they did have a bearing.

Mr. DEFOE. I see what you mean, that they went in as part of cost on the job.

Mr. MAAS. That is right.

Mr. DEFOE. It doesn’t make a bit of difference to the taxpayer or anybody else, it doesn’t make any difference to me whether I call that salary or my share in the business.

Mr. MAAS. It might make a difference in the renegotiation, Mr. Defoe, because it is all yours; you own the firm; you and your brothers and nephew and sons own the firm. Now, if the $75,000 salary charged to you is allowed as an item of cost, but there is a dispute as to the balance of your income from that partnership, and they decide that you are only allowed to make, we will say, 5 percent, but they have already first credited the first $75,000 as an item of cost, certainly it is going to make a difference to the taxpayers and to you, because they will only renegotiate on the balance of your income out of what is left and allow you 5 percent of that, the $75,000 already having been allowed as an item of cost; that, you have put in your pocket. Of course it makes a difference.

Mr. DEFOE. I put about $7,500 of it in my pocket.

Mr. MAAS. When the thing was over and done you would have $75,000 that wasn’t renegotiated.

Mr. DEFOE. Taxed down to $7,500. All right, I see your point, Mr. Maas; let it go.

The ACTING CHAIRMAN. The Government has let it go, the taxpayers let it go. It is yours. Go ahead.

Mr. MAAS. I want to ask Mr. Defoe if he thinks there is any way outside of renegotiation that his profits could be readjusted with the Government under the directive of Congress that there be no exorbitant profits made out of war work. Do you know any other way other than renegotiation that your profits would be readjusted?

Mr. DEFOE. I don’t know, Mr. Maas. I haven’t gone into that far enough to see.

Mr. MAAS. Excess profits wouldn’t touch you because they don’t apply to you.

Mr. DEFOE. No.

Mr. MAAS. So unless your profits out of your partnership were renegotiated under a law there would be no way under which there could be any assurance or any compulsion that they would be renegotiated.

Mr. DEFOE. Don’t forget, partners pay the full tax, and that is why we are not saddled with the excess-profits tax, because we pay the full tax right on the whole amount, the year that we get it.

Mr. KLINE. But divided six ways, too.

Mr. MAAS. Yes; you have all the allowances for six ways, or five at least.

The ACTING CHAIRMAN. And earned income credit for five people.

Mr. DEFOE. When you come to that in a volume like this, the division five ways means practically nothing. There is no saving on division five ways, because that profit ran up into three to five million.

Mr. MAAS. Mr. Chairman, I suggested we have the businessman before us to give his views. We are not renegotiating your contracts or any other contracts. Mr. Rockey is going to do that.

Mr. DEFOE. That surprises me. I didn’t know I was going to face anything like this.

Mr. MAAS. We are trying to get at the fundamentals for the committee. You do believe in renegotiation; you think there is necessity for fairness by this law; is that correct?

Mr. DEFOE. No, sir.

Mr. MAAS. Is your answer “No” to my question or in agreement?

Mr. DEFOE. I haven’t taken the stand that the renegotiation law is all wrong. I said in the opening of my statement that if the law were let to stand, certain changes should be made.

Mr. MAAS. Would you indicate to us what changes you think ought to be made?

Mr. DEFOE. I named them and read them into the record yesterday.

The ACTING CHAIRMAN. Yes; he named them.

Mr. MAAS. Some of the members weren’t here. Without reading your statement again, can you tell us, 1, 2, 3, what you think the changes should be?

Mr. DEFOE. I stated our belief that if the renegotiation law is let to stand it should be amended so that price adjustment should definitely be based on profits after taxes; that a floor for profits after taxes should be set below which renegotiation should not go; that definite consideration should be given for extra efficiency on the part of the contractor; and that there should be a provision for post-war reconversion.

Mr. MAAS. That is fine. I think that is a good statement and I am pretty much in agreement with your fundamentals. However, I can’t agree with you that profits should be based upon volume when volume is purely the Government itself and not in relation to invested capital.

The ACTING CHAIRMAN. That is exactly the same problem we had up here with the so-called war brokers downtown. The profits were based upon sales because of the war. Let me ask you this question, Mr. Defoe. I think that we ought to inquire into the philosophy of this. If the Government is spending 100 some million dollars with your company; if you were renegotiated down below the figure that you feel you should be renegotiated to; and if the renegotiation board threw out gross sales because they are war contracts, and gave you, let’s say, 10 percent profit, or 15 or 20 percent profit on your original investment, would you still continue building ships for the Government?

Mr. DEFOE. I could not.

The ACTING CHAIRMAN. You would have no incentive to go on.

Mr. DEFOE. Not incentive; I wouldn’t have the means.

Mr. KLINE. You get your costs.

The ACTING CHAIRMAN. You get the costs; the Government pays all that.

Mr. DEFOE. What do you think it takes to meet the $200,000 a week pay roll?

The ACTING CHAIRMAN. The Government pays you; you aren’t losing money on your ships. The Government pays that. That is part of the cost of the ship.

Mr. DEFOE. Pays it, yes; it doesn’t mean a thing until the job is done.

Mr. MAAS. You get progress payments, don’t you?

Mr. DEFOE. What?

Mr. MAAS. Don’t you get progress payments?

Mr. DEFOE. Why, yes.

The ACTING CHAIRMAN. Of course you do.

Mr. MAAS. So that your statement that it doesn’t mean a thing until the contract is completed isn’t quite correct because you don’t have to meet the entire cost of the construction of that ship yourself until the contract is completed. You get periodic payments from the Government to assist you in meeting the cost.

Mr. DEFOE. I know, but heavens, we have to run on our credit at times, up to 2 and 3 million dollars, and if our creditors didn’t know that we were all right it would stop in a minute.

The ACTING CHAIRMAN. The Government has contracted for it. You know you are going to get paid for the cost of the ships when you deliver them.

Mr. DEFOE. That is right.

The ACTING CHAIRMAN. Did I understand you to say you would have no incentive to continue building ships?

Mr. DEFOE. I don’t think you understood me to say such a thing.

Mr. MAAS. He said no means. He didn’t say incentive.

Mr. DEFOE. This doesn’t make any difference. I am going back to finish the job if you will let me out of here today.

The ACTING CHAIRMAN. We will let you out. I should think you would want to go back and finish the job—seventy-five thousand dollars a year and seven hundred thousand dollars; I should think you would want to get back on a six hundred thousand dollar investment.

Mr. DEFOE. I might, but I don’t. I am not in there for seven hundred thousand dollars, seventy-five thousand dollars a year, or anything else. Gentlemen, I am trying to do a job.

The ACTING CHAIRMAN. Let’s sit down and keep calm.

Mr. DEFOE. I can’t.

The ACTING CHAIRMAN. We are asking you just legitimate questions and we want you to answer them.

Mr. DEFOE. I don’t know anything about this business.

The ACTING CHAIRMAN. This is the taxpayers’ money that is involved and we have a right to inquire into it and what is happening. That is our duty.

Mr. DEFOE. I am not spending the taxpayers’ money, not a penny of it.

The ACTING CHAIRMAN. If you will sit down and be calm we will ask you questions and you can answer them.

Mr. KLINE. Mr. Rockey, what was your best offer to Mr. Defoe which has not been accepted yet?

Mr. ROCKEY. We suggested a refund for the year 1941 of $600,000 and a refund of 2½ million dollars for 1942. That would reduce his margin of profit on adjusted sales in the year 1941 to 16.3 percent and in 1942 to 14.2 percent.

Mr. KLINE. On sales?

Mr. ROCKEY. On adjusted sales.

Mr. MAAS. Would that impair his working capital while he is carrying on his contract?

Mr. ROCKEY. I do not think so.

Mr. DEFOE. Who knows any better than I? And again I say it is unfair to read those percentages before taxes. They are a little over one-tenth of that, and we pay those taxes flat. Why do you talk in those figures? I have got to do business on what is left.

Mr. MAAS. That is correct. What is profit to you is what is left after all of the agencies of the Government get through taking it away from you. I agree with you on that.

Mr. DEFOE. We are not within seeing distance of profit. I took this last job on figures—I was just called down and told to take an $89,000,000 job. The Government turned over the buying to the Bethlehem Shipbuilding Co.; they buy at their own price and I pay the price.

Mr. MAAS. Let me ask you, Mr. Defoe, if you accepted Mr. Rockey’s proposal for 1941 and 1942 and then after you paid your taxes, how would your net return to you compare on your investment with what it was prior to 1941?

Mr. DEFOE. I haven’t any idea, Mr. Maas.

The ACTING CHAIRMAN. I can give you the figures. They are right here in the statement.

Mr. DEFOE. I haven’t stopped to think of those things.

Mr. MAAS. Those are the things this committee is interested in. We have got to make certain that nobody is getting rich out of the war. We want you to make a legitimate profit; we want you to keep your private enterprise going; we want you to make a profit comparable to what you were making before your war contracts. Now, if you can’t tell us that, then I can’t see that the witness can give us any information.

Mr. IZAC. I think, Mr. Chairman, it is very pertinent that we know what he was customarily making before the war, before these Government contracts.

Mr. KLINE. We have that right here.

Mr. MAAS. Can anybody answer my question as to how his net profits compare, because they are not profits until net.

Mr. KLINE. Do you know his position on profits, Mr. Rockey?

Mr. ROCKEY. His position for the year 1942 after the payment of the taxes by the members of the partnership, would total somewhat over $350,000.

Mr. MAAS. How does that compare with the return to the partners prior to 1941?

The ACTING CHAIRMAN. When was the first Navy business, Mr. Defoe, what year, ’39, ’40, or ’41?

Mr. DEFOE. ’40.

The ACTING CHAIRMAN. ’40?

Mr. DEFOE. ’41, really, before settlements began to be made.

Mr. KLINE. The profits were in ’41.

Mr. MAAS. That is why I asked for ’40 or any time prior to ’41, what was the net return to the partners.

Mr. DEFOE. Have you got it?

Mr. ROCKEY. I have the figure here before taxes. It was $198,000 before taxes.

Mr. MAAS. And now the partners would have how much after taxes, three hundred and some thousand dollars?

Mr. ROCKEY. Over $350,000 after taxes.

Mr. MAAS. That is if they accepted your proposal.

Mr. ROCKEY. That is correct.

Mr. KLINE. They would have much more than that if they didn’t, if they were allowed to keep the present profit. It would be $700,000 on the present profit.

Mr. MAAS. I can’t see that that is any very great hardship or that you are being treated unfairly unless there is an impairment of working capital in the meantime.

Mr. DEFOE. There is, and aside from that, doesn’t it mean anything, gentlemen, that we took that problem, took that job, did it, gave the Government 38 ships from Pearl Harbor at a contract price of some 22 million dollars, took it on what we had there and put it through. Doesn’t that mean a thing?

Mr. MAAS. Not in that proportion it doesn’t, because we have naval officers doing the same thing in Government navy yards. We haven’t increased their pay any five or six hundred percent. They are doing a job too. We expect you to contribute more work and put in a good deal more work and a good deal more effort to help win this war. I want to see you make a legitimate, reasonable profit, and I would like to see it reasonable.

The ACTING CHAIRMAN. Let’s understand the figures correctly. In 1940, as I understand it, before taxes, this partnership, without the other three people in it, made $198,000.

Mr. ROCKEY. That is correct.

The ACTING CHAIRMAN. Before taxes. After taxes, the figure would be somewhat less. After they got the war contracts, the partnership on a $600,000 investment made, after your renegotiable figures and after taxes, some three hundred-odd-thousand dollars. Is that correct?

Mr. ROCKEY. Yes; in excess of $350,000.

The ACTING CHAIRMAN. And of that figure—three of the partners are new in the business, some of them just come of age—the share of one of the boys, the 23-year-old boy, would be some $110,000, approximately, according to Mr. Defoe’s testimony.

Mr. ROCKEY. That is before renegotiation.

The ACTING CHAIRMAN. Before renegotiation.

Mr. KLINE. And with no additional contribution of capital, of course.

The ACTING CHAIRMAN. With no additional contribution of capital. In other words, he gets more money than the President of the United States for his contribution to the war effort.

Mr. IZAC. Perhaps he is a genius at getting money.

The ACTING CHAIRMAN. Are there any further questions by the committee members?

Mr. GRANT. Mr. Chairman, I wanted to ask one question of Mr. Rockey. Mr. Rockey, I know you have told us many times that you renegotiate before taxes and don’t consider the tax factor, but do you, when you renegotiate a partnership, take into consideration the fact that there is a different tax rate applying there than would be the case if it were a corporate entity?

Mr. ROCKEY. No, sir; we do not.

Mr. COLE. Mr. Chairman, has any testimony been developed indicating the quality of the ships which Mr. Defoe has built? The records apparently indicate that he can build them fast, but I wonder whether he can build them well.

The ACTING CHAIRMAN. There is a confidential statement from the Navy Department regarding the quality of Mr. Defoe’s PC boats.

Mr. COLE. Is there somebody from the Department, or is it your intention to inquire from somebody?

The ACTING CHAIRMAN. I think we will. The committee understands this is confidential information.

Mr. MAAS. Have they been awarded a Navy E?

Mr. DEFOE. We were awarded the Navy E very early in the game and have two stars on it. I wish you would check with Admiral Cochrane, Admiral Miles, Captain Wynkoop, Captain Rawlins, Commander Leahey, or anybody else down the line in the Bureau of Ships as to their opinion of us and our work on quality of ships.

Mr. MAAS. They have given us a confidential opinion.

Mr. DEFOE. I have seen it and know what you mean. There is no foundation to the statement, none whatever.

The ACTING CHAIRMAN. No one is questioning the fact whether or not your company is delivering the product that the Government asks for. That is what you should do. That is what the money is being paid for. We are only trying to go into the question of war profits, and as I said yesterday to you, the only thing that this committee is concerned with is that we want to know what a man, a partnership, or a corporation starts with at the beginning of the war and solely because of war contracts, necessity of the Government, what he ends up with after the war, and if those profits are unconscionable, then this committee is going to do something about it. Your figures look to date as if they are.

Mr. MAAS. Mr. Chairman, I think Mr. Defoe made a point that is important. I can’t agree with him as to the evaluation he places on them, but I do think if a concern, a partnership, or a corporation, can do a war job faster or better than the rest of them he is entitled to a little more consideration in his profits. I can’t quite agree to the extent

The ACTING CHAIRMAN (interposing). Not to this extent.

Mr. MAAS. No; I agree with you. Mr. Rockey, if you take that into consideration, if there is a general level of production of a given article and some one man does it a lot faster or a lot better, in other words, makes a greater contribution to the war effort than the average, do you take that into consideration in allowing his profits?

Mr. ROCKEY. We certainly do. That is one of the main factors we do take into consideration.

Mr. MAAS. So you do recognize and allow an incentive for extra war effort.

Mr. ROCKEY. Yes, sir.

The ACTING CHAIRMAN. I think Mr. MAAS, in Mr. Rockey’s first illustration of a case involving the radio company where they had done such a splendid job, they were allowed a little extra margin of profit, and in the other case where they were doing the same thing they were doing when the war began, the profits were scaled down.

Mr. MAAS. Then you feel, Mr. Rockey, what you offered the Defoe partnership is a little over and above what you would to the average corporation because of the speed with which he has built his ships?

Mr. ROCKEY. In this case, the suggestion that we made to Mr. Defoe was a better deal than we had suggested to anybody else, and it was for two reasons: first, on account of his lower costs; and, secondly, on the rapidity with which he produced these vessels.

Mr. MAAS. Good.

Mr. IZAC. And you recognized, of course, that the vessels were properly constructed? You got that information from the Navy?

Mr. ROCKEY. That is correct.

Mr. IZAC. Then it seems to me, Mr. Chairman, that the offer of the Renegotiation Board is more than fair.

The ACTING CHAIRMAN. Let me ask another question of Mr. Defoe. Have you at all times cooperated with the Price Adjustment Board in giving them access to your books?

Mr. DEFOE. Mr. Chairman, yes. I can’t understand that reference, either. Now, right from the start when we first took that PC contract, the Bureau of Supplies and Accounts sent a group of accountants up there. They had as many accountants on the job as I have, and they kept our books, kept every figure, and when the Board’s representative came up there, he spent 2 days over in the Government accounting office before he came over to our office, and had those records; they are down here now. Every figure that went down in our books is down in the Government books. Now, how can you say that our books were not available? After that, or about that time, in order to make room for these DE vessels, 24 of the PC’s were canceled. That confused the books mightily just at that time because the charges were in there against the job and no credits for shipping that material out to the other builders. Now, that made a set-up on our books that was all in our favor. We told you distinctly so, we all understood it, and nobody could guess what that was going to amount to. That is the only figure that was in the least confused in that whole thing, and remember that the Navy Department kept every figure that we kept, right straight through, and had as large a force of accountants in there as I had in my own organization. How can that statement be made?

Mr. MAAS. Did the Navy discuss with you this confidential memorandum they prepared for the committee?

Mr. DEFOE. No.

Mr. MAAS. How did you get it?

Mr. DEFOE. I saw it after I came here.

Mr. MAAS. How did you happen to see it?

Mr. DEFOE. Somebody handed it to me.

Mr. MAAS. What was the occasion of your seeing it? I have no objection. I would have shown it to you personally.

Mr. DEFOE. I don’t remember who it was. Somebody handed me that sheet, and I was surprised.

The ACTING CHAIRMAN. Mr. Defoe, let me ask you this. A memorandum was put in the record this morning of the investment of the partners in the company as $125,000 and that the growth of the net worth after payment of partners’ salaries has been: 1939, increased to $422,000; 1940, $573,000. Then begins your war contract, 1941, $745,000; and in 1942, $1,379,000. Are those figures correct?

Mr. DEFOE. I imagine they are, but can I explain that again, that when this job is over that will be charged right back to the original amount. That extra investment in there isn’t worth a dime except for the construction of these vessels. I told you we build them differently than any other yard.

The ACTING CHAIRMAN. You mean you are going to come down to the Treasury Department and turn it all back?

Mr. DEFOE. It is charged off under a certificate of necessity. You know what that is.

The ACTING CHAIRMAN. The net worth of the partnership—

Mr. DEFOE (interposing). When we build this frame to build the boats on bottom-up, the Treasury insists and all the accountants insist that we put that in as capital. I don’t feel it is capital, but they make us put it into capital.

Mr. MAAS. It is no good after you construct the ship so it isn’t capital. I agree with you. I think it is an item of cost and I can’t agree with the accountants on that, because it has no value to you or anybody else after the war is over.

The ACTING CHAIRMAN. Mr. MAAS, I merely asked if the figures were correct.

Mr. MAAS. Part of the answer whether they are correct or not is whether that is capital investment or an item of cost. In this case I agree with him it is not a capital investment.

Mr. DEFOE. But I want to tell you that is what that figure is made up from and that is why it is going to be charged off.

The ACTING CHAIRMAN. How many of your partners are silent partners?

Mr. DEFOE. One.

The ACTING CHAIRMAN. Is the item of $700,000 partnership profit after taxes—do you consider that capital investment also?

Mr. DEFOE. I don’t know how that is considered on the books.

The ACTING CHAIRMAN. That belongs to you, doesn’t it?

Mr. DEFOE. Yes.

The ACTING CHAIRMAN. And what your share of that is belongs to you right now, it is yours?

Mr. DEFOE. I wish you wouldn’t put it that way. Of course it does, but it doesn’t belong to me in any sense until this job is done. A slip would take the whole thing in one pay roll, 1 week, and it doesn’t mean a thing to me until this thing is over with.

The ACTING CHAIRMAN. It means $700,000 to the taxpayers, paid out; it is gone.

Mr. MAAS. I think there is an illusion in that $700,000. I don’t think you can treat it all as net increase in his worth by reason of increased capital value or profit.

The ACTING CHAIRMAN. It belongs to him. It is his.

Mr. MAAS. A great deal of it will have no value.

The ACTING CHAIRMAN. It is like saying your salary has no value after they give it to you.

Mr. MAAS. It doesn’t have much after the Government takes taxes out of it.

The ACTING CHAIRMAN. The war is on. Everyone pays taxes. Any further questions of Mr. Defoe? Thank you very much. That is all, Mr. Defoe.

Mr. MAAS. You have the sympathy of the committee.

Mr. DEFOE. I need it.

Mr. MAAS. For the working over he has gotten, he earned half of the $75,000 sitting here.

End of transcript on this page. In the printed hearings the chairman next calls John B. Hawley, Jr. (Northern Ordnance Inc., Fridley, Minn.); that and following testimony on the same day are not included here.