894 F.2d 1197 (10th Cir. 1990), 86-2451, True v. United States
|Docket Nº:||86-2451, 86-2617.|
|Citation:||894 F.2d 1197|
|Party Name:||USTC P 50,062 H.A. TRUE, Jr.; Jean D. True; Henry A. True, III; Karen S. True; David L. True; Melanie A. True; Donald G. Hatten; Tamma T. Hatten; Diemer D. True; Susan L. True, Plaintiffs, Counter-Claim Defendants-Appellees, Cross-Appellants, v. UNITED STATES of America, Defendant, Counter-Claimant-Appellant, Cross-Appellee.|
|Case Date:||January 29, 1990|
|Court:||United States Courts of Appeals, Court of Appeals for the Tenth Circuit|
David M. Moore, Atty., Tax Div., Dept. of Justice, Washington, D.C. (Roger M. Olsen, Asst. Atty. Gen., Michael L. Paup, Jonathan S. Cohen, and Francis M. Allegra, Attys., Tax Div., Dept. of Justice, Washington, D.C., and Richard Allen Stacy, U.S. Atty., Cheyenne, Wyo., of counsel, with him on the briefs), for defendant, counter-claimant-appellant, cross-appellee.
Claude M. Maer, Jr. of Baker & Hostetler, Denver, Colo. (Fred M. Winner of Baker & Hostetler, Denver, Colo., Richard E. Day of Williams, Porter, Day & Neville, and R. Stanley Lowe and Ronald M. Morris of Casper, Wyo., with him on the briefs), for plaintiffs, counter-claim defendants-appellees, cross-appellants.
Before SEYMOUR, MOORE and BALDOCK, Circuit Judges.
SEYMOUR, Circuit Judge.
Plaintiff taxpayers, a husband, wife, and their four adult children and spouses, were owners of True Oil Company, a general partnership organized under Wyoming's Uniform Partnership Act, and the sole shareholders of Belle Fourche Pipeline Company, an electing corporation under subchapter S of the Internal Revenue Code, 26 U.S.C. Sec. 1361. 1 Plaintiffs brought five suits seeking income tax refunds for the taxable years 1973 through 1975. The actions were consolidated and the numerous issues variously decided by summary judgment, by directed verdict, and in a jury trial. The district court entered judgment for plaintiffs awarding them income tax refunds plus interest. True v. United States, 603 F.Supp. 1370 (D.Wyo.1985). The Government has appealed. We affirm in part, reverse in part, and remand for further proceedings consistent with this opinion. 2
The Government first appeals the district court's holding that Belle Fourche's
surface damage payments to landowners constituted a pipeline construction cost, rather than a cost of acquiring the easements. The facts underlying this issue are not in dispute. Belle Fourche purchased easements from various landowners from 1973 through 1975 to build oil pipelines. Under Belle Fourche's typical "Right-of-Way Contract," the landowner "warrant[ed] and convey[ed]" to it the right to "construct, maintain, inspect, operate, protect, repair, replace ... or remove" a pipeline. See, e.g., rec., vol. I, doc. 94, exh. C. In return, Belle Fourche agreed to pay the landowners a "roddage fee" (a sum based on the length of the right of way obtained), and "to pay any damages which may arise to growing crops, pasturage, fences, or buildings of said Grantors from the exercise of the rights herein granted...." Id. In contemporaneously executed release agreements, the landowners received a specific payment in exchange for their release of Belle Fourche from the liability it assumed under the easement agreement for any damages caused by pipeline construction. The "roddage fees" and damage payments were separately negotiated, but Belle Fourche usually paid both amounts by a single draft or check. Belle Fourche made damage payments totalling $123,494.59 during the taxable years in question.
Whether the damage payments are labeled pipeline construction costs or easement acquisition costs is important because I.R.C. Sec. 38 permits taxpayers to earn tax credit for investments in certain tangible property, but not for intangible property. 3 There is no dispute that oil and gas pipelines are considered tangible property and so are eligible for the tax credits, while pipeline easements are considered intangible property and therefore ineligible. Belle Fourche sought to claim investment credits for the damage payments it made, but these claims were denied by the Commissioner of Internal Revenue.
The courts are divided on whether surface damage payments should be characterized as costs of easement acquisition or costs of pipeline construction. Two courts have held them to be part of the cost of the easement. Both courts reasoned that the obligation to pay for surface damages was part of the easement acquisition agreement and thus was part of the acquisition cost. In Commonwealth Natural Gas Corp. v. United States, 266 F.Supp. 298, 302 (E.D.Va.1966), aff'd on other grounds, 395 F.2d 493 (4th Cir.1968), the court concluded that the surface damage payments were easement acquisition costs because the "[d]amages were really the payment of deferred purchase price determined after the landowner had an opportunity to see the consequences of his grant to the taxpayers." 4 The Fifth Circuit also found the damage payments to be acquisition costs, reasoning that "the key lies in the fact that the damage amounts are paid to the landowner for utilization of the contractual easement." Tenneco, Inc. v. United States, 433 F.2d 1345, 1349 (5th Cir.1970) (emphasis omitted). 5 The court observed that "the obligation to pay such amounts is incurred in the easement contract" and that the damages incurred "result from utilization of the easement for which taxpayers contracted." Id. Naturally, the Government urges us to follow these decisions. 6
Plaintiffs just as naturally invoke Mapco, Inc. v. United States, 556 F.2d 1107, 214 Ct.Cl. 389 (1977), which held that surface damage payments are attributable to the costs of pipeline construction. 7 The court noted that the purchase of an easement and the payment of compensation for surface damages usually are "entirely separate transaction[s]--and [are] chronologically removed" from one another. Id. 556 F.2d at 1114. The court also focused on the fact that the easement vests in the pipeline company at the time the easement contract is executed, and is in no way contingent on actual construction of the pipeline. Moreover, the court emphasized that the pipeline company "becomes obligated to pay the landowner ... for the damages occasioned by the construction" only if and when the easement is actually used. Id.
We join the courts in Commonwealth Natural Gas and Tenneco and conclude that attributing surface damage payments to the cost of acquiring an easement is the sounder conceptual approach. In Mapco, in the above cases, and in this case, the easement agreement itself created the easement holder's obligation to pay for surface damages. In addition, the agreement recited that this obligation constitutes a part of the consideration given to acquire the easement. The occurrence of damages leading to a payment of money in no way altered the obligation. It was merely the occurrence of a contingency creating in the landowners the right to demand performance under the obligation.
In the present case, the landowners sold their rights to compensation for surface damages they had obtained under the easement agreement in a release in lieu of collecting damages as they occurred. In both situations the payments were premised on the same underlying obligation to pay for surface damages, an obligation which the easement holder assumed in the easement agreement. 8 The crucial determination
is whether the parties created the obligation to pay as part of the conveyance. It is only the determination of the precise quantum of damages that is left for subsequent events, be it pipeline construction or settlement by means of a release agreement.
As part of the consideration offered to obtain the easement, the surface damage payments are part of the costs of its acquisition. We conclude that the district court's reliance on Mapco is misplaced and hold that it erred when it concluded that Belle Fourche's surface damage payments to various landowners were part of the cost of construction. 9 Consequently, we reverse this portion of the district court's order.
The Government also appeals the district court's finding that Belle Fourche could deduct a civil penalty it paid. The facts relating to this issue are not in dispute. Belle Fourche paid a civil penalty in the amount of $1,200.00 during the fiscal year ending March 31, 1975. The penalty, assessed under section 311(b)(6) of the Federal Water Pollution Control Act ("FWPCA" or "Act"), 33 U.S.C. Sec. 1321(b)(6) (Supp. II 1972), 10 was imposed because oil leaked from some of Belle Fourche's pipelines in violation of section 311(b)(3) of the Act, 33 U.S.C. Sec. 1321(b)(3). 11 Belle Fourche deducted this payment under I.R.C. Sec. 162(a), but the Commissioner disallowed the deduction under the exception for any "fine or similar penalty" in section 162(f) of the Code, 26 U.S.C. Sec. 162(f), and Treasury Regulation section 1.162-21 (1975).
Code section 162(a) permits deduction of "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." Section 162(f) excepts from this general rule "any fine or similar penalty paid to a government for the violation of any law." Treasury Regulation section 1.162-21, implementing section 162(f), defines the statutory language "fine or similar
penalty" to include moneys "[p]aid as a civil penalty imposed by Federal, State, or local law." Treas.Reg. Sec. 1.162-21(b)(1)(ii). 12 The regulation provides several examples of civil penalties not deductible under section 162(f), including one which both parties acknowledge is dispositive of the issue before this court:
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