Badger Pipe Line Company v. United States

• Decision Date: 18 October 1968
• Docket Number: 95-64.,No. 126-63,126-63
• Citation: 401 F.2d 799
• Parties: BADGER PIPE LINE COMPANY v. The UNITED STATES.
• Court: U.S. Claims Court

401 F.2d 799 (1968)

BADGER PIPE LINE COMPANY v. The UNITED STATES.

Nos. 126-63, 95-64.

United States Court of Claims.

October 18, 1968.

James W. Baldwin, attorney of record, Bartlesville, Okl., for plaintiff; Russell H. Smith and Jerry C. Reed, Tulsa, Okl., of counsel.

Donald T. Fish, Washington, D. C., with whom was Asst. Atty. Gen. Mitchell Rogovin, for defendant; Philip R. Miller and Theodore D. Peyser, Jr., Washington, D. C., of counsel.

Before COWEN, Chief Judge, and LARAMORE, DURFEE, DAVIS, COLLINS, SKELTON, and NICHOLS, Judges.

OPINION

PER CURIAM:

These cases were referred to Trial Commissioner George Willi with directions to make findings of fact and recommendation for conclusions of law under the order of reference and Rule 57 (a). The Commissioner has done so in an opinion and report filed on April 29, 1968. On May 28, 1968 defendant filed a notice of intention to except to the Commissioner's findings of fact and recommended conclusion of law. On August 12, 1968 defendant filed a notice of withdrawal of the notice to take such exceptions. On September 5, 1968 plaintiff filed a motion requesting the court to adopt the Commissioner's recommended opinion, findings, and conclusions of law. Since the court agrees with the Commissioner's opinion, findings, and recommended conclusion of law, as hereinafter set forth, it hereby adopts the same as the basis for its judgment in these cases without oral argument. Plaintiff is, therefore, entitled to recover and judgment is entered for plaintiff with the amounts of recovery to be determined pursuant to Rule 47(c).

OPINION OF COMMISSIONER

WILLI, Commissioner:

Plaintiff is a Delaware corporation whose sole business is the transportation of petroleum products by pipeline from refineries in the East Chicago, Indiana, area to Madison, Wisconsin, and various intermediate points enroute. The total system is approximately 266 miles in length. Except for a 66-mile segment acquired by purchase from the Sinclair Oil Company in 1955, the entire system was built by the plaintiff.

In the construction and operation of its underground pipeline system, it was necessary for the plaintiff to secure access to the lands of others. For this purpose, it secured right-of-way easement grants from the owners of property traversed by the system. Typically, these grants accorded plaintiff the right of access to construct, operate, maintain, and replace a pipeline. In some cases, the grants gave plaintiff the right to install additional lines upon payment of a stipulated fee, usually the same as that payable for the original line. By their terms, the easement grants continued in force for so long as the plaintiff maintained the lines that it installed pursuant to them.

For federal income tax purposes, the plaintiff capitalized the expenses that it incurred in acquiring the right-of-way easements. Foremost among such expenses were the so-called roddage fees paid property owners for the privilege of installing pipe under the surface of their lands. On its federal income tax returns for 1956 and 1958, plaintiff claimed depreciation and amortization¹ deductions in respect to the right-of-way acquisition costs that it had capitalized. Those costs aggregated $452,903.05 and $451,310.05 at the close of plaintiff's 1956 and 1958 tax years, respectively.

Following an audit of the plaintiff's returns, the Commissioner of Internal Revenue disallowed the claimed deductions. The resulting deficiencies were duly paid and timely refund claims thereafter filed. The refund claims were denied in due course and the instant suits were brought.²

As presented by the parties, the issue of the plaintiff's depreciation and amortization rights with respect to its easement acquisition costs turns on a single factual determination, i. e., whether the easement rights that the plaintiff acquired have a reasonably ascertainable useful life. The Commissioner of Internal Revenue concluded that they do not, and this conclusion was the sole basis for his disallowance of the claimed deductions for both depreciation and amortization.

For the reasons that follow, it is held that the plaintiff's capitalized right-of-way acquisition costs are depreciable because their value and life are directly related to and dependent upon the useful life of the pipeline to which they pertain. The Government has traditionally recognized³ that pipe in a pipeline has a reasonably ascertainable life over which the cost of the pipe and its installation may be depreciated for tax purposes. On the facts presented in this record, the useful life of the related right-of-way easements is coterminous with that of the pipe.

Section 167(a) of the Internal Revenue Code of 1954 authorizes a depreciation deduction in the amount of "a reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) * * * of property used in the trade or business * * *."

The relevant interpretative Treasury Regulations⁴ provide as follows with respect to the measure of the allowance and the requisite nature of the useful-life characteristics of the asset sought to be depreciated:

Useful life. For the purpose of section 167 the estimated useful life of an asset is not necessarily the useful life inherent in the asset but is the period over which the asset may reasonably be expected to be useful to the taxpayer in his trade or business or in the production of his income. This period shall be determined by reference to his experience with similar property taking into account present conditions and probable future developments. * * * If the taxpayer\'s experience is inadequate, the general experience in the industry may be used until such time as the taxpayer\'s own experience forms an adequate basis for making the determination. * * *

The plaintiff's contention that the installation of pipe pursuant to a particular easement that has been obtained from a property owner transforms the easement right from an intangible asset to a tangible asset, is without merit. The right to install a pipe under the land of another is an intangible asset when obtained and the subsequent exercise of the right does not alter its intangible character. An easement is similar in nature to a license or franchise. As such it is an intangible asset. Kennecott Copper Corp. v. United States, 171 Ct.Cl. 580, 613-614, 347 F.2d 275, 294 (1965).

The Treasury Regulations deal specifically with the requirements governing depreciation of intangible assets. Section 1.167(a)-3 of the regulations provides in part:

If an intangible asset is known from experience or other factors to be of use in the business * * * for only a limited period, the length of which can be estimated with reasonable accuracy, such an intangible asset may be the subject of a depreciation allowance. * * *

Finally, the depreciation of pipeline right-of-way easement acquisition costs has been made the subject of a published Revenue ruling. Rev.Rul. 65-264, 1965-2 Cum.Bull. 53, provides in relevant part:

* * * if the taxpayer can demonstrate in a particular case that certain easement acquisition costs will have a limited life because they will no longer be useful after the expiration of the useful life of a related pipeline, then such costs may be depreciated.

The taxpayer must establish that the intangible assets will not be useful in the construction of additional pipelines. For this purpose, the term "additional pipelines" includes both looplines and any replacement pipeline in the same trench. * * *

The Government relies on two features of the right-of-way easements involved in these cases to establish its contention that the easements have useful lives of indeterminate duration. The first provision is common to all of the easements in issue. It gives the plaintiff the right to replace the pipe initially installed under the easement grant. The second feature relied on is that contained in approximately one-fifth of the easement indentures. In that distinct minority of instances, the plaintiff is given the right to install an additional line on the same right-of-way upon payment to the property owner of the same consideration specified in the agreement for installation of the original line.

That the literal scope of the easement indentures involved in these actions includes the pipe replacement and additional line rights attributed to plaintiff by the Government is not dispositive of the useful-life inquiry and hence the question of entitlement to depreciation.

It has long since been settled that taxation is an "intensely practical matter." Farmers Loan & Trust Co. v. Minn., 280 U.S. 204, 212, 50 S.Ct. 98, 74 L.Ed. 371 (1930); Burnet v. Sanford & Brooks Co., 282 U.S. 359, 51 S.Ct. 150, 75 L.Ed. 383 (1931).

The previously quoted Treasury Regulations emphasize the element of practicality in the availability and determination of depreciation allowances. Thus, the regulations dealing with depreciation generally speak in terms of useful life as being "the period over which the asset may reasonably be expected to be useful to the taxpayer in his trade or business." Further, the same regulations prescribe that a particular taxpayer should calculate useful life for his purposes "by reference to his experience with similar property taking into account present conditions and probable future developments." Finally, the regulations dealing specifically with depreciation of intangible assets authorize the allowance if useful life is of a determinate duration "which can be estimated with reasonable accuracy." Emphasis added.

It is thus apparent from the Treasury's own interpretative pronouncements that the utility and longevity of the easement rights that this plaintiff secured from property owners must be gauged by realistic rather than theoretical considerations.

The evidence adduced in these cases overwhelmingly demonstrates the extreme unlikelihood that to any measurable extent the...