Union Electric Co. v. Commissioner of Internal Rev.
| Decision Date | 25 October 1949 |
| Docket Number | 13944.,No. 13949,13949 |
| Citation | 177 F.2d 269 |
| Parties | UNION ELECTRIC CO. OF MISSOURI v. COMMISSIONER OF INTERNAL REVENUE. COMMISSIONER OF INTERNAL REVENUE v. UNION ELECTRIC CO. OF MISSOURI. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Robert J. Keefe, St. Louis, Mo. (Walter S. Alt, John A. Woodbridge, Igoe, Carroll, Keefe & Coburn, St. Louis, Mo., Norris Darrell, John F. Dooling, Jr., Hubert J. DeLynn, and Sullivan & Cromwell, New York City, on the brief), for Union Electric Co. of Missouri.
Harry Marselli, Special Assistant to Attorney General (Theron Lamar Caudle, Assistant Attorney General, and Ellis N. Slack, A. F. Prescott, and Maryhelen Wigle, Special Assistants to Attorney General, on the brief), for Commissioner of Internal Revenue.
Before GARDNER, Chief Judge, and WOODROUGH and THOMAS, Circuit Judges.
The ultimate facts found by the Tax Court or stipulated by the parties are not in dispute.
During the taxable years the Union Electric Company owned and operated an hydroelectric plant on the Osage river, near Bagnell, Missouri. The plant consists of a dam or reservoir, which inundates about 65,000 acres of land, and hydroelectric equipment for the generation and transmission of electricity.
The Osage river at the location of the plant is a navigable stream over which the federal government has control. The plant was constructed under a license from the Federal Power Commission pursuant to authority contained in the Federal Power Act of June 10, 1920, as amended. c. 285, 41 Stat. 1063, 16 U.S.C.A. § 791a et seq. The license is for a term of 50 years, expiring February 25, 1976. The plant was completed and put into commercial operation in 1931.
The controversy relates to the proper annual deductions from gross income for exhaustion and depreciation to which the taxpayer is entitled for the taxable years to recover its costs.
Except for the end abutments, the dam is built across, and rests upon the bed of, the Osage river. This land is not owned by the taxpayer. It acquired other land in fee simple, the cost of which is not involved in this controversy. The various costs to the taxpayer involved here are:
Dam — ...................... $10,353,287.40
Structures and improvements
as of 1/1/39 — ........... 1,023,506.27
Land and flowage rights — .. 10,665,040.24
Easements for transmission
lines to St. Louis — ..... 492,157.21
The cost of land rights and flowage rights referred to includes the cost of replacing inundated highways, bridges and roads; damages to buildings, improvements and other property razed or destroyed in the construction of the reservoir; the expenses of moving bodies from cemeteries; the cost of rights and easements to flood property; the cost of condemnation for flowage rights which revert to the original owners upon non-use for the purpose for which condemned; and the cost of land acquired in fee simple with easements reserved by the grantors to use the surface for any purpose not interfering with the taxpayer's business.
Some of the easements giving the taxpayer the right to flood property were for the 50-year period of the license. Others continued for the duration of the dam or any other dam at or near the same site.
The rights, easements and estates in lands involved have no value except as they are used in connection with the power plant.
It may reasonably be anticipated that the reservoir will contain a considerable amount of silt at the end of 100 years, and silt deposits in the reservoir will probably determine the economic life of the location for an hydroelectric power plant.
The taxpayer, in its income tax returns for the taxable years, claimed deductions under § 23(l) of the Internal Revenue Code, 26 U.S.C.A. § 23(l), calculated to depreciate the cost of the dam, structures and improvements, land and flowage rights, and easements over the 50-year term of the federal license expiring in 1976. The Commissioner, in determining deficiencies, reduced the depreciation on the cost of the dam to an amount based upon a useful life of 100 years; on the cost of structures and improvements to an amount based on a useful life of 60 years; and he disallowed all deductions claimed for exhaustion of the land and flowage rights and easements.
Upon petition of the taxpayer to the Tax Court to redetermine the deficiencies fixed by the Commissioner that Court sustained the determination of the Commissioner on the first two points, that is, the Court determined that the deductions for depreciation on the cost of the dam should be based on a useful life of 100 years and on the cost of structures and improvements on a useful life of 60 years. The Court rejected the Commissioner's action in disallowing all deductions claimed for exhaustion of the cost of land and flowage rights and easements, and held that these costs should be depreciated over a period of 100 years.
In its petition here the taxpayer contends that the Court erred in failing to determine that the cost of the entire project, including the cost of the dam, the cost of the structures and improvements, and the cost of the land and flowage rights should be depreciated over the 50-year term of the license.
The Commissioner in his petition contends that the Court erred in holding that the taxpayer is entitled to deduct for depreciation the cost of "land and flowage rights" and for "easements for transmission lines to St. Louis" over the 100-year useful life of the dam.
The applicable provisions of the Internal Revenue Code, 26 U.S.C.A. § 23, read:
The problem presented here results from the facts that federal income taxes are levied and collected annually and the taxpayer operates under a license from the Federal Power Commission limited to 50 years with conditions, hereinafter referred to, controlling the disposal of, or the future use of the plant. In cases in which the taxpayer is the owner in fee simple of property held for the production of income a deduction for depreciation or exhaustion based upon the useful life of the property is allowable under the statute. The revenue laws, however, give no express directions for determining the annual allowance for exhaustion and depreciation of property used and useful by a licensee under the Federal Power Act other than that such allowance shall be "reasonable." The parties agree that the situation is analogous to, but not identical with, a leasehold or other contract for the use of real estate or other property for a definite period with a right of renewal upon expiration of the term where the tenant places improvements upon the leased property having a useful life extending beyond the term of the lease.
Although the license is analogous in some respects to a leasehold it is not in fact a lease of property rights for the use of which rental is paid. No rentals as such are charged to or paid by the taxpayer for the privilege of constructing its dam in the Osage river.
In order, therefore, to understand and consider the contentions of the parties we note the conditions of the license involved and the Treasury Regulations applicable to leaseholds.
Section 6 of the Federal Power Act, 16 U.S.C.A. § 799, supra, provides * * *"
"Section 14. * * * the United States shall have the right upon or after the exploration of any license to take over * * * any project * * * covered * * * by the license * * * or * * * all property owned and held by the licensee * * * upon the condition that before taking possession it shall pay the net investment of the licensee in the project * * * taken, not to exceed the fair value of the property taken, plus such reasonable damages, if any * * *." 16 U.S.C.A. § 807.
Section 15 provides that if the United States does not exercise its right to take over the project then the Federal Power Commission is authorized to issue a new license to the original licensee "upon such terms and conditions as may be authorized or required under the then existing laws and regulations, or to issue a new license * * * on the condition that the new licensee shall, before taking possession of such project * * *, pay such amount * * * as the United States is required to do in the manner specified in section 14 hereof: * * *
"Provided, that in the event the United States does not exercise the right to take over or does not issue a license to a new licensee, or issue a new license to the original licensee, upon reasonable terms, then the commission shall issue from year to year an annual license to the then licensee under the terms and conditions of the original license until the property is taken over or a new license is issued as aforesaid." 16 U.S.C.A. § 808.
The relevant parts of Section 19.23(a)-10 of Treasury Regulations 103 and of Section 29.23(a)-10 of Treasury Regulations 111 applicable to the taxable years are the same, and they read:
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