Southern Natural Gas Company v. United States

• Decision Date: 20 June 1969
• Docket Number: No. 479-58.,479-58.
• Parties: SOUTHERN NATURAL GAS COMPANY v. The UNITED STATES.
• Court: U.S. Claims Court

412 F.2d 1222 (1969)

SOUTHERN NATURAL GAS COMPANY v. The UNITED STATES.

No. 479-58.

United States Court of Claims.

June 20, 1969.

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COPYRIGHT MATERIAL OMITTED

John P. Lipscomb, Washington, D. C., attorney of record, for plaintiff. C. Rudolf Peterson, George W. Beatty, and Michael Mulroney, Washington, D. C., of counsel.

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

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

OPINION

PER CURIAM:

This case was referred to Trial Commissioner Saul Richard Gamer 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 January 23, 1969. A notice of intention to except was filed by both plaintiff and defendant. On April 25, 1969, plaintiff and defendant each filed a motion for leave to withdraw its notice of intention to take exception to the report and each moved that the court adopt the trial commissioner's report as the basis for its judgment in this case. With slight modifications, the court agrees with the commissioner's opinion, findings and recommended conclusion of law, as hereinafter set forth, and hereby grants the parties' motions for leave to withdraw the notices of intention to except and adopts the commissioner's opinion, findings and recommended conclusion of law as the basis for its judgment in this case without oral argument.

In adopting the commissioner's opinion, as modified, we emphasize the trial commissioner's statement that, under the facts of this case, it is unnecessary to decide whether the taxpayer's right-of-way easements constitute intangible property, because the use of the double declining method of depreciation is not in issue. We adhere to our holding in Panhandle Eastern Pipe Line Co. v. United States, 408 F.2d 690, 187 Ct.Cl. 129, decided March 14, 1969. Therefore, nothing contained in the trial commissioner's opinion should be interpreted as a modification of that decision, or as a holding by the court that the right-of-way easements involved in this case are tangible assets for income tax purposes.

Therefore, plaintiff is entitled to recover, to the extent indicated in the opinion, on (1) the issue involving the depreciability of costs of surveys and of acquiring, clearing, and grading the transmission line rights-of-way; (2) the issue involving the acquisition of property with bonds issued at below par (to the limited extent indicated); (3) the excess profits tax issue involving the allocation of amortization on emergency facilities to its natural gas property; (4) the issue involving the depreciation basis of property purchased with preferred stock; (5) the issue involving the Alabama Natural Gas Corporation note; (6) the pooling expense issue; (7) the capitalization of depreciation issue (to the limited extent indicated); and (8) the issue concerning the loss on the sale of the compressor, together with interest as provided by law. Judgment is entered for plaintiff accordingly with the amount of recovery to be determined pursuant to Rule 47(c). Plaintiff is not entitled to recover on the interest during construction issue, and with respect to this aspect of the case, as well as all the other claims which are set forth in the petition but which were not thereafter submitted to the court for adjudication and are not, therefore, hereinabove enumerated, the petition is dismissed.

Commissioner Gamer's opinion, as modified by the court, is as follows:

As part of its business as an interstate natural gas company, plaintiff, after purchasing and producing such gas, transports it by an underground pipeline system. Its petition herein seeks recovery of approximately $1,880,000 representing claimed overpayments of its income taxes for the calendar years 1941-1953, and its excess profits taxes for 1941 and 1943. The claim is composed of several separate items, which, for convenience, will here be considered in the same order as presented by the parties in their briefs.

The original transmission system was constructed in 1929 and 1930 by plaintiff's predecessor, the Southern Natural Gas Corporation. Plaintiff acquired the predecessor's assets in 1935. "Plaintiff" will be used herein as referring to either the predecessor or the plaintiff where distinction is not essential to the matter being discussed.

DEPRECIABILITY OF COSTS OF SURVEYS AND OF ACQUIRING, CLEARING, AND GRADING THE TRANSMISSION LINE RIGHTS-OF-WAY

At the end of 1941, plaintiff's transmission line system consisted of 1,339 miles of pipe. By the end of 1953, it had expanded to 3,795 miles of pipe. Plaintiff also has gathering lines originating in its producing gas fields. These lines convey the gas to its trunk transmission lines.

To construct such transmission line system, plaintiff obtained right-of-way or easement grants from the owners of the properties in which the pipes were laid. Certain costs were necessarily incurred in acquiring such right-of-way agreements. These costs included the amounts paid to the landowners, salaries and expenses of plaintiff's employees (landmen) engaged in such acquisition activity, recording and legal fees, and expenditures to obtain highway, railroad, and river-crossing permits from the necessary authorities. Substantial costs were incurred in clearing and grading the rights-of-way. Costs were also incurred in connection with surveying the rights-of-way, as well as in making surveys relating to actual line construction. It is the depreciability of these costs of acquiring, clearing, and grading the transmission line rights-of-way, as well as of said surveying costs, which is at issue in this item.

One of the first steps taken in connection with the construction of a proposed line is the assembling by plaintiff's engineering department of all available pertinent maps and the plotting thereon of the route of the line. These route maps are used in connection with obtaining from the Federal Power Commission (hereinafter referred to as the "FPC") a certificate of public convenience and necessity.¹ If time permits, aerial photographs of the area to be traversed are also taken and used for such purpose.

After a definite decision to build the line has been made and FPC approval obtained, plaintiff, prior to the commencement of actual construction, (1) commences the task of obtaining the necessary rights-of-way, and (2) arranges for the proposed line to be surveyed.

The acquisition of the rights-of-way is handled by plaintiff's land department which begins by using the route maps and, where taken, the aerial photographs. After property ownership is determined, permission is obtained for plaintiff to make a field or land survey.

The survey is normally made in two forms (a) aerial, and (b) field or land. The aerial phase precedes the land and permits the preparation of an initial composite map, as well as the compilation of aerial mosaics (composite maps made from a group of aerial photographs). Plaintiff's engineering department then places all the available construction details on the mosaics, which are furnished to the construction contractor. Such information as where to install casing under railroad and highway crossings and the diameter and thickness of the pipe to be installed at various locations, is indicated. The field or ground survey is made to mark, by means of stakes, the route of the line. The exact location of intervening fences and roads is established. The ground survey data is also placed on the aerial mosaics.

The initial composite map and the aerial mosaics also go to plaintiff's land department for its use in acquiring the necessary right-of-way agreements. The department, however, does not wait for the final maps before commencing the acquisition of the rights-of-way. Where right-of-way agreements cannot be obtained, plat surveys are also made for condemnation purposes.²

The consideration paid to the landowners for the right-of-way agreements is generally in the form of a fee per lineal rod. It is, therefore, referred to as a "roddage" fee. Occasionally, however, a flat amount not based on roddage is paid. In addition to right-of-way agreements, plaintiff must obtain the necessary highway, railroad, and river-crossing permits.

The first actual construction operation is the clearing of a sufficient width on the right-of-way to permit the construction crews to operate. This operation, an expensive one, includes the removal of fences, growing crops, brush, timber, and rocks.

Following the clearing, the right-of-way is then graded to prepare it for the succeeding construction operations. In certain areas grading may be necessary to accommodate the bending tolerance of the pipe. Stream banks may be graded down, and riprapping may be required in marshy areas. Grading is likewise an expensive operation.

In its returns for each of the years in issue, plaintiff included as part of its depreciation base amounts representing the costs³ of obtaining the right-of-way agreements for plaintiff's transmission pipelines, as well as the above-mentioned surveying, clearing, and grading costs. Plaintiff considered such costs as properly includable in the cost of constructing its tranmission system, and therefore depreciable on the same basis as such system.⁴ However, by a notice of deficiency dated February 26, 1958, the Commissioner of Internal Revenue excluded such amounts from plaintiff's depreciation base and disallowed the deductions for depreciation thereon. The amounts so excluded by the Commissioner (after his making certain adjustments in the claimed costs (or other tax basis), which adjustments are not here in issue) totaled, for all the years involved, $10,963,125.80 for the right-of-way acquisition costs,...