Penalty For Private Use Cover With Misplaced Notice

This is sort of an unusual placement of a "Penalty For Private Use" notice. Does it make the stamped envelop a Pre-Cancel?

Not really. These show up on obsolete, demonetized, or otherwise returned stamped envelopes that could still be re-used as envelopes. Similar penalty overprints can be found on other stationery.

I bought a collection of these. Whoever created the collection seemed to put some kind of catalog numbers on them. Perhaps there is a catalog for them. There were an array of stamped envelopes which received the marking making them useful only for official business (in this case of the Post Office Department or POD). I bet there are very few who actively collect these today, though I am always open to acquiring more, especially those that show they were issued in Minnesota.

So, if there is a return address that is blacked out, does that mean the government/post office purchased the envelope for its own use?

The latest edition of the Penalty Overprinted Stamped Envelopes, Wrappers and Postal Cards of the United States and Possessions was published in 2016. See http://www.upss.org/code/publications.php

". . . some kind of catalog numbers on them. Perhaps there is a catalog for them."

According to the catalog referenced above, the overprint in the OP is of type XIe.

"So, if there is a return address that is blacked out, does that mean the government/post office purchased the envelope for its own use?"

The government didn't purchase them, per se. Excess stocks were overprinted for government internal use, blanking out any return addresses on them.

Thank you for the explanation.

I believe that in many instances, these envelopes with the blacked out corner card and the Penalty imprint were made from Special Request Envelopes which had been ordered by a customer but which were returned because the Post Office Dept made an error when printing his name and return address.

Since the customer did not want them, the Post Office Dept simply used them rather than discarding the envelopes. Something of a "recycling" effort.

Recycling the returned envelope makes sense, too. With regards to the original question, if the envelope was used by the government/ post office, would it have been cancelled?

"if the envelope was used by the government/ post office, would it have been cancelled?"

All of the used penalty overprints in my collection have normal cancellation markings (i.e., as if mailed by a non-government customer).

Thanks, again!