Panhandle Eastern Pipe Line Co. v. United States

• Decision Date: 14 March 1969
• Docket Number: 166-60,400-61.,No. 547-58,547-58
• Citation: 408 F.2d 690
• Parties: PANHANDLE EASTERN PIPE LINE CO. v. The UNITED STATES.
• Court: U.S. Claims Court

408 F.2d 690 (1969)

PANHANDLE EASTERN PIPE LINE CO. v. The UNITED STATES.

Nos. 547-58, 166-60, 400-61.

United States Court of Claims.

March 14, 1969.

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John P. Lipscomb, Jr., Washington, D. C., for plaintiff, Thomas E. Jenks, Washington, D. C., and John P. Persons, of counsel.

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

J. D. Durand, Washington, D. C., for amicus curiae, Association of Oil Pipe Lines.

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

OPINION

COWEN, Chief Judge, delivered the opinion of the court:^*

The petitions in these three consolidated actions assert that plaintiff is entitled to recover a total of $4,054,532.38 in federal income taxes, plus deficiency interest, paid for the calendar years 1952 through 1956, and statutory interest thereon.

Four principal issues are raised for decision. The first issue is the right of plaintiff to deductions from its gross income during the years 1954, 1955, and 1956, for depreciation of its investment in its main-line transmission system's rights-of-way.

The second and third issues involve the proper method of determining, for the purpose of computing deductions for percentage depletion allowance, plaintiff's gross income from the production of natural gas from properties (wells) in which it had an economic interest located in (a) the Hugoton Embayment in the States of Kansas, Oklahoma, and Texas, during all of the years in suit, i. e., 1952 through 1956; and (b) the Howell Field, Michigan, during the year 1952. While these issues are basically interrelated, they are treated separately since they present different questions.

The fourth issue is raised by defendant's claimed setoff. For the years 1954 through 1956, plaintiff claimed and was allowed to depreciate its investment in gathering lines' rights-of-way on the double declining balance method. Defendant claims this depreciation should have been computed by the straight line method.

Preliminary to outlining the positions and relevant contentions of the parties with respect to the above issues, the detailed findings of fact, infra, will be summarized in order to provide a background for the discussion that follows.

Plaintiff is a Delaware corporation with its principal business office located in Kansas City, Missouri. At all times material here, plaintiff was an interstate natural gas company under the Act of Congress dated June 21, 1938, known as the "Natural Gas Act," 15 U.S.C. ? 717 et seq. As such, a substantial portion of plaintiff's operations was subject to the jurisdiction of the Federal Power Commission (FPC). Plaintiff is principally engaged in the business of producing, purchasing, transporting by pipeline, and selling natural gas to utility companies for resale and directly to industries for their own use. It was so engaged during all the years in question and the major part of the gas produced by plaintiff was sold to gas distribution companies for resale. Plaintiff also operates a natural gasoline plant and other facilities for the separation of heavier hydrocarbons from raw natural gas both at central points and on its producing properties. In addition to these sources of income, plaintiff derives revenue from other companies for the separation by them of such hydrocarbons from plaintiff's raw natural gas stream. It also is engaged in the production and sale of oil.

As of December 31, 1956, plaintiff's principal natural gas transmission system extended a distance of approximately 1,200 miles starting from the Hugoton Embayment in the Panhandle of Texas, and going through Oklahoma, Kansas, Missouri, Illinois, Indiana, Ohio, to Detroit, Michigan. This system consisted of three parallel lines, two of which extended along the entire 1,200 miles. The third line extended from plaintiff's compressor station at Liberal, Kansas, to a point 78 miles from Detroit. As of December 31, 1951, and December 31, 1956, respectively, plaintiff's transmission system consisted of 4,758 miles and 4,961 miles (round figures), respectively, of main-line pipe of various sizes ranging from 20 to 30 inches in diameter.

As of the same last above-mentioned dates, plaintiff's gathering systems, which extended out from the main transmission line into the various producing fields and moved the gas to the main line, consisted of 509 miles and 1,174 miles (round figures), respectively, of various sizes of pipe ranging from 3 to 20 inches in diameter.

In order to construct its pipeline transmission system, including lateral or sales lines, plaintiff has over the years obtained from the owners of the land through which the lines are laid, right-of-way grants or agreements. In most instances, it has been able to reach an agreement with the landowners involved. However, in the few cases in which this was not possible, plaintiff has had to exercise its power of condemnation which permits the laying of a single pipeline for the transportation of natural gas, only, through an owner's land.

Plaintiff's procedure in obtaining right-of-way agreements may be summarized as follows: Its engineering department gives a map or sketch, indicating the route of the pipeline, to the right-of-way division which prepares a certificate of title describing each of the tracts of land to be traversed. These are sent to outside abstracters who supply the name of the latest owner of record and how title was obtained. From this information, the right-of-way division prepares the agreements and related papers which are sent to agents who negotiate with the landowners. After an agreement is secured, it is acknowledged, checked, and recorded.

By these agreements, plaintiff acquired the right to lay one or more pipelines across the grantor's land, and the right to go thereon for the purpose of operating, maintaining, repairing, and replacing the line or lines. The agreements generally contain a stated nominal consideration of $1. They also provide for a payment to the landowner of a fixed amount per linear rod crossed over the land in the course of construction of the pipeline. This payment, known as a "roddage fee," is usually made at the time the pipelines are actually laid. while the roddage fee rate is specified and varies from 25? in the older agreements up to $5 being paid currently, depending upon the area to be crossed, plaintiff usually pays the "going price" as set up by other pipeline companies.

In some of the states through which plaintiff's transmission and gathering systems extend, the right-of-way agreements permit the "transportation of oil, gas, or other substances." In other states such agreements provide only for the "transportation of natural gas."

The agreements normally do not have an expiration date and thus are for an indefinite period of time.

Less than 10 percent of the 6000 separate right-of-way agreements held by plaintiff during the period 1952 through 1956, specified the width of the right-of-way granted or limited the number of pipelines plaintiff was permitted to lay across the landowner's property. Despite the lack of width designation in such agreements, plaintiff, as a matter of practice, confines its operations to the route of the pipeline and within a specified width of its own determination, normally about 25 feet. Agreements which do not specify the width of the right-of-way or limit plaintiff to laying but one pipeline are known as "multiple line" agreements. Plaintiff prefers, and attempts to obtain, a multiple line agreement. The principal advantage of such type of an agreement is that it eliminates the need for instituting a condemnation action if plaintiff desires to lay additional pipelines and the landowner refuses to enter into a new agreement. Another but secondary advantage of relative unimportance is that when additional lines are required, plaintiff does not have to pay the nominal consideration uniformly stated in both the single and multiple line types of agreements, or incur the expense of recording fees which run from $1 to $2 per instrument.

Plaintiff acquired some of its right-of-way agreements from predecessor corporations which were named as the grantees in these agreements and were the parties that obtained the agreements from the landowners. All of plaintiff's right-of-way agreements are transferable.

In addition to right-of-way agreements, plaintiff has to obtain licenses or permits when its pipelines cross a state highway, county road, railroad, or navigable stream.

In the acquisition of its rights-of-way, plaintiff incurs or pays, in addition to the stated consideration, roddage fees, and expenses of obtaining necessary licenses and permits, various other costs, including notary, abstract, recording and legal fees, office, clerical and secretarial expenses, the expenses of negotiating the right-of-way agreements, and legal expenditures and other expenses relating to condemnation proceedings. During the years in question, plaintiff's investments in its transmission lines' rights-of-way (exclusive of its gathering lines' rights-of-way¹) covering the above-mentioned items ranged from $1,914,490.11 on December 31, 1951, to $2,365,744 on December 31, 1956.² Plaintiff capitalized these investments on its books of account and for federal income tax purposes.

During the years 1952 through 1956, plaintiff produced natural gas from wells in which it had an economic interest in the States of Kansas, Oklahoma, and Texas in the Hugoton Embayment. Most of this gas was transported away from the wellhead through plaintiff's gathering and main-line transmission systems prior to sale. In the year 1952, plaintiff also produced natural gas from 14 wells in which it had an economic (lease) interest located in Howell Field, Michigan.³ Plaintiff sold all of this production to one customer for...