Tenneco, Inc. v. United States

• Citation: 433 F.2d 1345
• Decision Date: 13 November 1970
• Docket Number: No. 28097.,28097.
• Parties: TENNECO, INC., Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

433 F.2d 1345 (1970)

TENNECO, INC., Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

No. 28097.

United States Court of Appeals, Fifth Circuit.

November 13, 1970.

Anthony J. P. Farris, U. S. Atty. James R. Gough, Asst. U. S. Atty., Houston, Tex., Johnnie M. Walters, Asst. Atty. Gen., Lee A. Jackson, Atty., Tax Division, U. S. Dept. of Justice, Washington, D. C., John O. Jones, Atty., Tax Div., Dept. of Justice, Fort Worth, Tex., George R. Pain, Asst. U. S. Atty., Houston, Tex., Robert I. Waxman, Atty., Tax Div., Dept. of Justice, Washington, D. C., Fred B. Ugast, Acting Asst. Atty. Gen., William A. Friedlander, Atty., Department of Justice, Washington, D. C., for appellant.

Robert K. Jewett, William C. Griffith, Houston, Tex., Baker, Botts, Shepherd & Coates, Houston, Tex., of counsel for appellee.

Before GEWIN, GOLDBERG and SIMPSON, Circuit Judges.

SIMPSON, Circuit Judge:

This appeal presents the question of whether costs incurred by the taxpayer (Tenneco), a transporter of natural gas by pipeline, in obtaining right-of-way easements for the construction of pipelines, qualify for accelerated depreciation under Section 167(b) of the Internal Revenue Code of 1954.¹ The district court held that such costs did so qualify for acceleration of depreciation, and the government appeals that ruling. Although we reach the view that the taxpayer has made a case against Section 167 which might merit Congressional review, we conclude that under the law as now written the easement costs in issue do not qualify for accelerated depreciation. Accordingly we reverse and remand.

At issue are claimed refunds of federal income taxes paid in the amounts of $292,508 and $317,932, for the years 1959 and 1960, plus interest. The taxpayer is engaged in the business of purchasing, transporting via pipeline, and selling natural gas both to utility companies for resale and directly to industrial users. The pipelines owned by Tenneco were constructed for it by independent contractors across property owned by others, under right-of-way agreements obtained from the landowners.

For depreciation purposes Tenneco has maintained a single composite account for its transmission system. All of the amounts paid to the pipeline contractors and property owners are included in this composite account. These costs include: payments for rights-of-way, other acquisition costs, damages, surveying costs, and clearing and grading expense. For rate-making purposes, Tenneco depreciates its transmission costs on a straight line method over a life of 32½ years. For federal income tax purposes, Tenneco uses accelerated depreciation and a life of 28½ years.

We discuss briefly the nature of the costs which are at issue here:

(a) Initial Easement Costs — In order to build the pipeline, the taxpayer must first obtain the right to lay the line over and through the land of others. Sometimes this is done by voluntary contractual easement while at other times it is necessary that Tenneco exercise its power of condemnation. For these easements Tenneco customarily pays a specified sum for each rod of land used (a roddage fee) and an additional amount to compensate the landowner for damages resulting from granting the easement. The amounts of these fees depend on the nature and value of the land crossed by the pipeline.

(b) Other Acquisition Costs — These costs include salaries and travel expenses of employees and land agents, legal fees paid for title work and condemnation suits, abstracts and recording fees, and other miscellaneous expenses.

(c) Damages — These damages usually occur at the time the pipeline is laid, and include compensation for injuries to growing crops, temporary disruption of the fertility of the land, and the destruction of timber. The obligation to pay such damages is usually spelled out in the easement agreement, and the payment for damages is normally tendered after the actual injury is incurred by the landowner. In some cases, however, landowners require that damages be estimated and paid in advance. Often damages are again incurred to be paid when the taxpayer finds it necessary to repair or replace a damaged line. Tenneco also incurred expense in this category for legal fees and salaries and expenses of employees in the settlement of damage claims.

(d) Preliminary Survey Costs — These are the costs necessarily expended to ascertain the dimensions and location of the needed easements.

As noted earlier, Tenneco placed all of the above-described costs in one composite pipeline account, and depreciated the account for income tax purposes over the accelerated period of 28½ years. The Commissioner of Internal Revenue contested the acceleration of depreciation on these costs, maintaining that they represented the cost basis of intangible assets (the easements) and as such were subject to straight line depreciation. The Commissioner assessed the claimed deficiency which the taxpayer paid. Claims for refund were filed followed by the action in the lower court seeking refund. The district court held for the taxpayer, ruling that the costs were to be added to the composite account for pipeline construction and were eligible for accelerated depreciation.²

To restate the problem, the taxpayer has treated the easements and the costs attributable thereto not as a separate intangible asset, but rather merely as a part of the cost of a greater tangible asset, that is, the gas transmission system. Accordingly, all of the costs attributable to the acquisition of the easements have been consolidated into the composite account, added to the adjusted basis of the gas transmission system, and accelerated depreciation has been taken on the entire account. The question is whether such practice comports with the law as established by Section 167.³

Counsel for the taxpayer first argues with skill and considerable force that the decided cases dictate a result favorable to the taxpayer. At this juncture we note that the accelerated depreciation provisions of Section 167 were first introduced into the Revenue Code in 1954. For this reason we do not find relevant the cases cited by taxpayer which were decided prior to the enactment of the provisions in question. Respecting post-1954 cases, we are cited to United States v. Regan, 9 Cir. 1969, 410 F.2d 744; Connecticut Light and Power Co. v. United States, 1966, 368 F.2d 233, 177 Ct.Cl. 395, and Willow Terrace Development Company v. Commissioner of Internal Revenue, 5 Cir. 1965, 345 F.2d 933. These cases are far from persuasive upon the question of whether the costs in question qualify for accelerated depreciation. Willow Terrace, supra, written by Judge Bell for this Court, involved the question of whether the costs of a water and sewerage system were properly allocated to the costs of constructed homes for the purpose of computing the basis which a real estate developer held in the homes. Whether the costs of the system were allocable to the homes for the purpose of taking accelerated depreciation was not an issue. Connecticut Light and Power, supra, concerned the question of whether damages incurred in acquiring flowage rights should be treated by a hydroelectric plant as an expense or as a capital expenditure allocable to the utility's composite account for depreciation. This case did involve the allocation of the costs to a composite account, and the taking of accelerated depreciation on the account. But Connecticut Light and Power has been closely limited to its facts by a subsequent decision of the Court of Claims. Panhandle Eastern Pipeline Company v. United States, Ct. Cl. 1969, 408 F.2d 690, at page 698, fn. 5. Regan, supra, centered on the issue of whether the expenses incurred in building an access road to timber lands were capital expenditures. We do not find Regan to have involved the issue of accelerated depreciation.

The taxpayer further argues that unlike some intangible assets the easements here in question have no value separate and apart from the pipeline, and therefore economic realities and generally accepted principles of accounting command inclusion of the easements and their costs as capital expenditures in the construction of the pipeline. At trial the taxpayer introduced testimony of a certified public accountant to the effect that accounting principles dictate that all costs, tangible as well as intangible, which are incurred in order to construct a physical asset are treated as the cost of that asset if such cost must be reincurred with each reconstruction of such asset or if such costs have no measurable values separate and apart from such physical asset and if the reconstruction of such asset is speculative. The government counters Tenneco's argument by noting that Congress acknowledged that the taking of accelerated depreciation on some assets would require the maintenance of separate accounting records for income tax purposes only. Senate Finance Committee Report, S.Rep. No. 1622, 83rd Cong. 2 Sess., p. 204, 3 U.S.C.Cong. and Adm. News, pp. 4621, 4839 (1954).

We are not persuaded that we should or can ignore the plain, unambiguous language of the statute in favor of accounting principles which, while salutary in nature, lack the effect of law. Conceding putative merit to the proposition that based upon economic realities the easements in question should be depreciated at an accelerated rate, we suggest that this argument addresses itself to the Congress rather than the courts. The legislative history indicates that while Congress may not have considered the exact situation at hand, it did...