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 Buie 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 Buie 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 amortization 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 Bevenue 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.
As presented by tlie parties, tbe 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 recognized 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 Regulations 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 develop- meats. If tlie taxpayer's experience is inadequate, tlie 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, 613-14, 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 hi 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 oí 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 (1930) ; Burnet v. Sanford & Brooks Co., 282 U.S. 359 (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 value of the easement rights purchased by plain tiff for the installation of a particular pipeline will outlive that line. Viewed in realistic perspective, subsisting easement value beyond that point is so negligible as to be irrelevant to a useful-life determination for depreciation purposes.
To support its right to a depreciation allowance for easement acquisition costs consonant with that accorded the pipe related to such easements, the plaintiff need not prove to a mathematical certainty that the economic value of the easement rights will be totally exhausted on the expiration date of the useful life ascribed the pipe. Such weight of evidence as would reasonably support a verdict for a plaintiff in an ordinary action for the recovery of money fairly may be deemed sufficient. Burnet v. Niagara Falls Brewing Co., 282 U.S. 648, 654-55 (1931).
In rejecting the pipe replacement feature as a basis for denial of depreciation, the court recognizes both that the indentures in suit give the plaintiff the unqualified right to replace pipe and that there have been instances where pipeline carriers have effected a pipe size increase by replacement under indenture language similar to that involved here. See, e.g., Reid v. Washington Gas Light Co., 194 A.2d 636 (Md. Ct. App. 1963), where a gas company replaced a 12-inch transmission line of unspecified length with a 16-inch line in the same trench.
The evidence in this record shows not only that the plaintiff has never effected any point-to-point replacement of pipe but that it would not be economically feasible for it to do so.
Continuity of service is the overriding concern and consideration in the design and operation of a transportation system such as plaintiff's. To increase transportation capacity between two service points by digging up an existing line and replacing it in the same trench with a larger one would inescapably entail an extended interruption of pipeline service between those points. The understandable ill will of affected customers and the very real risk of permanent loss of their patronage are more than sufficient to relegate large-scale pipe replacement to the status of last resort in plaintiff's plans for increasing system capacity. Admittedly, there is the possibility that the best available overall routing for a new line would unavoidably involve a portion of that line traversing a heavily congested area that presented no reasonable alternative to utilization of an existing trench. That in such conceivable but infrequent circumstances the plaintiff could find itself constrained to exercise its pipe replacement privileges for a particular segment of a new and more efficient line, does not make the right of pipe replacement a relevant factor of general applicability in assessing the useful life of plaintiff's easement rights on a system-wide basis. Because of the service implications and economic consequences of any significant quantity of pipe replacement, it must be concluded that replacement rights are more abstract than real in the useful-life context.
With respect to the additional line right provision found in approximately one-fifth of plaintiff's easement indentures, the record in these cases discloses that again we are dealing with a matter of more theoretical than real dimensions where the question is resultant effect on useful life.
The Government's theory is that the useful life of an easement containing an additional line clause extends beyond that of the original line because the carrier has acquired not only the right to install that line but the right to install another one in the future on the same right-of-way upon payment of the same consideration as that specified for the first.
Whatever the conceptual appeal of the Government's argument, the facts in these cases show that the residual value of such additional line privileges as plaintiff secured in its original dealings with property owners is too inconsequential to measurably affect a useful-life determination for the easements in question.
The uncontradicted evidence establishes the following facts regarding the plaintiff's easements with additional line rights.
In negotiating for an original easement, the plaintiff neither paid nor offered to pay more for an agreement that included additional line rights than one that did not. Although the standard form of easement indenture used by the plaintiff included a second line provision, it was stricken without further ado if the property owner objected to its inclusion. With the plaintiff negotiating in this manner, only 293 of its 1594 right-of-way agreements included additional line rights.
Because less than 20 percent of its easements include additional line clauses, it would be physically impossible for plaintiff to add a line between two service points by using only right-of-way privileges already hi hand. Even if it used all of its additional line rights for such new construction, plaintiff would be obliged to secure new right-of-way agreements from the bulk of the property owners along the route. In such circumstances, it has been the plaintiff's invariable policy to pay the previously committed property owners the same rate of consideration as that paid their uncommitted neighbors even though such rate is in excess of that stipulated in the outstanding additional line clauses. It is in the plaintiff's interest to do this as a gesture of goodwill. The extra expense involved is minor and the preservation of good relations with all affected property owners is important because of the periodic necessity of going on their lands to perform repair and maintenance operations.
The evidence shows that the existence of second line rights has not influenced the routing of an additional line to be constructed between existing service points. This is true both because of plaintiff's practice of paying all property owners the going rate for a new line right-of-way and because of the insignificant portion of total construction costs that is represented by easement acquisition costs. In plaintiff's experience, such costs amounted to only 6-7 percent of total cost. Accordingly, when plaintiff increased its service capacity between Middlebury and Rockford, Illinois, a distance of 66 miles, by adding a 12-inch line to the existing 8-inch line, it used none of the additional line rights that it had acquired under the easements obtained for the original line.
In reality, it appears that the only discernible benefit derived by plaintiff from securing an additional line right is in the context of subsequent negotiations with the property owner or his assigns if and when the construction of another line is contemplated. At that juncture, the existence of such a right removes the possibility of having to resort to condemnation — a seldom-used procedure that is most unattractive to pipeline carriers generally from the standpoint of time, legal expense, and the creation of bad public relations. The possibility that in the future an additional line clause may assist plaintiff in avoiding a nuisance and inconvenience is not enough to vary the useful-life characteristics otherwise inherent in an easement grant for federal tax purposes.
For the reasons stated above, it is concluded that on the record in these cases the plaintiff has met the requirements of the statute, regulations, and interpretative ruling concerning its right to depreciate its easement acquisition costs. In the terms of the regulations and ruling, the plaintiff has shown that on the basis of "present conditions and probable future developments," the easements in question cannot "reasonably be expected to be useful," Treas. Reg. § 1.167 (a)-1 (b), "after the expiration of the useful life of [the] related pipeline," Rev. Rul. 65-264, 1965-2 Cum. Bull. 53.
The Government has long recognized that trunkline pipe, fittings, and construction costs are capital items subject to depreciation. The Internal Bevenue Service's Bulletin "F", applicable to the years in suit, estimates the useful life of these items at 40 years. Fn. 3, supra. Though the Bulletin sets forth specific useful-life periods for a broad array of types and categories of depreciable assets, it expressly provides that "[t]he estimated useful lives and rates of depreciation are based on averages and are not prescribed for use in any particular case." See also Massey Motors, Inc. v. United States, 364 U.S. 92, 101-102 (1960). Accordingly, the useful lives ascribed the easement acquisition costs here in suit need not conform literally with those prescribed in Bulletin "F" for trunkline pipe. The record shows that throughout its existence the plaintiff has depreciated the tangible components of its pipeline enumerated in Bulletin "F". On audit, the Bevenue Service has considered and passed on the depreciation rates used by plaintiff for federal tax purposes with respect to its line pipe, fittings, and the like. The same rates should be applied to the capital costs of the easements that pertain to those admittedly depreciable items.
Plaintiff's suggestion that both its entitlement to depreciation of easement acquisition costs and the period over which such costs may be depreciated should be governed by the treatment accorded those expenditures by the ICC in its regulatory capacity, is without merit. Old Colony R. R. v. Com missioner, 284 U.S. 552, 562 (1932). Tbe record in these cases shows only the ultimate fact that the Commission allowed a write-off at a specified annual rate. It reveals nothing of the purpose for which the allowance was approved or of the legal or factual considerations underpinning the Commission's action. All that does affirmatively appear is that in making its determinations the Commission did not have before it any of the easement indentures involved in these suits.
The depreciation issue here involved has been decided in three reported cases. In Northern Natural Gas Co. v. O'Malley, 277 F.2d 128 (8th Cir. 1960), and Commonwealth Natural Gas Corp. v. United States, 266 F. Supp. 298 (E.D.Va. 1966), it was held that the useful life of pipeline easements was determinable by reference to the projected quantity of mineral reserves (in those cases, gas) from which the transmission lines drew their supply. These decisions are inapposite here since the plaintiff's system transports only refined products, not crude oil. It therefore makes no claim that oil reserves have a bearing on the useful life of its properties.
More in point is Shell Pipe Line Corp. v. United States, 267 F. Supp. 1014 (S.D. Tex. 1967), where a carrier of both crude oil and refined products contended that the useful life of its easements was coextensive with that of the pipe to which they related. Although the court decided that the easements in question were useful to the taxpayer for only a limited time and were therefore depreciable, it did not fix their useful life by reference to that of the line to which they pertained. For reasons that do not appear in the opinion, the court reserved the latter question for further proceedings. Shell Pipe Line Corp. v. United States, supra, at 1016. In any event, it does appear that the holding in Shell is in conceptual harmony with the decision reached here; the decision being that the useful life of plaintiff's easements is the same as that of the installed pipe for which they were acquired, with the cost thereof to be depreciated at the same rate as has been established and applied by the parties for the related pipe. To the extent that the Office of Defense Mobilization certification is involved, such depreciation will be at the accelerated rate specified in the certification. Fn. 1, supra.
Findings oe Fact
1. Plaintiff is a Delaware corporation, organized on April 21, 1953.
2. Plaintiff has always been engaged solely in the business of transporting refined petroleum products by pipeline. It is a common carrier operating interstate and has therefore always been subject to the jurisdiction and control of the Interstate Commerce Commission for rate-regulation purposes.
3. The outstanding capital stock of plaintiff for the years in issue, 1956 and 1958, was owned by the following companies :
Percent
Sinclair Pipe Line Co- 34
Cities Service Oil Co_ 32
The Texas Company- 22
The Pure Oil Company_'_ 12
4. Aside from the operating personnel who manned the system on a day-to-day basis, plaintiff had no employees of its own. Cities Service Pipe Line Company, a wholly owned subsidiary of Cities Service Oil Company, furnished operating, maintenance, construction, and administrative services to Badger on a contract basis.
5. Plaintiff's system is an underground, trunkline products line. It transports no crude oil. It therefore has no feeder, branch, or gathering lines. Basically, Badger receives petroleum products from a refinery in East Chicago, Indiana, and two refineries in Lockport, Illinois, and transports them in a generally northwesterly direction to Madison, Wisconsin, and various intermediate points.
6. Plaintiff did not own the refined petroleum products which it transported as a common carrier, nor did it own or control any terminals or facilities for the storage or marketing of refined petroleum products transported.
7. The original portion of the Badger system, an 8-inch line from Peru to Rockford, Illinois, was built in 1947 by the Wood River Oil & Refining Company, who acquired the rights-of-way for that line. Thereafter, the system was acquired by the Sinclair Oil Company who in turn sold it to Badger in 1955, at which, time Badger commenced operating and building the balance of its system.
8. Plaintiff, for the years in issue, owned a pipeline system, approximately 266 miles in length, which consisted of the following segments:
(a) A 12-inch pipeline, approximately 178 miles in length, extending from East Chicago, Indiana, via Des Plaines and Rockford, Illinois, to Madison, Wisconsin.
(b) A 10-inch pipeline, approximately 6.7 miles in length, connecting with segment (a) at Canal Junction, (near Chicago, Illinois), to Lemont, Illinois, at which point the line increases to a 12-inch line to Loekport, Illinois, this segment being approximately 3.3 miles in length.
(c) A 10-inch pipeline, approximately 11.6 miles in length, connecting with segment (a) at Canal Junction, to Cicero, Illinois.
(d) An 8-inch pipeline, approximately 66.6 miles in length, from Peru, Illinois, connecting with segment (a) at Rockford, Illinois. This segment was constructed in 1947 by Wood River Oil & Refining Company. In 1950, it was sold to Sinclair Refining Company, who sold it to plaintiff in 1955. See finding 7, supra.
9. Segments (a), (b), and (c), set forth in finding 8 above, were constructed by plaintiff under a Necessity Certificate (No. TA-NC-27769) issued by the Office of Defense Mobilization, under date of April 15, 1954. The certificate granted plaintiff the right to amortize 25 percent of the cost of the facilities over a 60-month period in lieu of normal depreciation. These segments were placed in service in January 1955. Segment (d) was not covered by the Necessity Certificate. The rights-of-way for segments (a), (b), and (c) were certified by ODM for accelerated amortization only to the extent that they were depreciable for federal income tax purposes.
10. Plaintiff elected to claim amortization over the 60-month period, in lieu of normal depreciation, with respect to 25 percent of the cost of segments (a), (b), and (c). The first deduction was taken in February 1955, the last in January 1960. The underlying issue in this case involves the de-preciability of the rights-of-way in which plaintiff's pipelines are laid. The parties agree that the allowability of amortization would follow as a matter of law, if it were found that the depreciation was 'allowable.
11. In tbie construction of a pipeline system, it is necessary to utilize the land of others. For this purpose, easements or right-of-way grants are secured. Although the instruments utilized by the plaintiff to secure these rights-of-way differed in particular terms, coverage, and conditions, they generally provided for the right to construct, operate, and maintain the pipeline or pipelines and all necessary appurtenances. Ordinarily the grants also accorded the grantee the right to repair or replace the pipeline. In some instances, the indentures gave the carrier so-called "second or additional line rights." See finding 14, infra.
12. The right-of-way easement grants in question were for an indefinite or indeterminate period of time, rather than a specified term of years. Normally they provided that the easement rights ran for so long as the installed pipeline was maintained.
13. Although there are various criteria used by plaintiff in determining the increments of the total payment to be offered a landowner for a right-of-way, the term "roddage fee" is generally used to describe the total sum actually paid. The term is based on the practice of paying a landowner a flat sum per rod for the right-of-way. The roddage fee, as payment for the initial right-of-way, includes payment for the right of entry, the right of ingress and egress for the purpose of maintenance and repair, the right to operate, and the severance damages (the difference in the value of the land due to laying the pipeline). The typical agreement also required the grantee to pay construction damages representing all reasonable damages to growing crops and improvements occasioned in laying, repairing, or removing all lines, drips and valves. In addition, the grantee was contractually obligated to restore all tile drains and fences affected by its operations.
14. It is the common practice of plaintiff to request, when negotiating with landowners, that it be permitted to construct more than one pipeline in the right-of-way if the need arises. This feature is commonly referred to as second or additional line rights. In negotiating the roddage fee to be paid the landowner for the acquisition of a right-of-way, no premium is paid for the inclusion of an additional line rights provision in the agreement. The standard form of agreement that the plaintiff presents to the landowner contains such a provision. If the landowner signs the agreement without objection, the clause remains in it. If he demurs, the plaintiff eliminates the clause. From the plaintiff's standpoint, the desirability of securing an additional line right privilege is not that it will be exercised in the future according to its particular terms. To the plaintiff, it simply represents a bargaining tool that would be available to it in the event of future and separate negotiation with the same landowner, or his assigns, for another right-of-way. Principally, it would avoid the possibility of having to resort to condemnation at that time. In the industry, about one-half of the time additional line rights are obtained. When additional lines are installed, such rights are infrequently enforced.
15. Excluding pumping stations, the total roddage of the Badger system is 96,501. Of this total, 26,745 rods are covered by right-of-way agreements that provide for additional line rights. Put otherwise, 69,756 rods (or approximately 72 percent) of the length of the Badger system involve right-of-way agreements having no additional line rights. The total rod-dage referred to above is covered by 1,594 right-of-way agreements. Of that total, 1,301 (or approximately 82 percent) of such agreements have no additional line rights.
A typical agreement for additional line rights provides in pertinent part:
KNOW ALL MEN BY THESE PEESENTS, that the undersigned, hereinafter referred to as Grantor, for and in consideration of the sum of ONE DOLLAE AND OTHEE CONSIDEEATIONS, to the undersigned in hand paid by BADGEE PIPE LINE COMPANY, a corporation, hereinafter called Grantee, the receipt of which is hereby acknowledged, does hereby grant, sell and convey unto said Grantee, its successors and assigns, a right of way and easement to construct, maintain and operate a pipe line with appurtenances thereto, over and through the hereinafter described land, .
^ # #
There is hereby granted to the Grantee herein the right to construct, maintain and operate on said right of way, additional pipe line or lines, and appurtenances, and in the event Grantee exercises this right Grantee shall, pay Grantor the sum of $1.00 per lineal rod for each additional line so laid, as well as damages caused by Grantee to Grantor's growing crops and timber; and Grantee shall in such case have the same rights with respect to such additional lines and appurtenances as are hereby granted with respect to the first line and appurtenances to be constructed.
16. The following schedule shows the Badger system on a segment-by-segment basis, indicating the relative percentage, in terms of both roddage and numbers of right-of-way instruments, of each segment covered by additional line rights.
Description Project---numbers From To Number of rights-of-way owned Percent - ofR/W With No w/out Total add. add. add. line line line rights rights rights
Segment (a)
600 East Chicago_East Chicago Pump Sta_ 25 0 25 100
601 East Chicago Pump Canal Junction. 144 10 134 93.06 Sta.
604 Canal Junction_Des Plaines, Illinois_ 381 3 378 99.21
605 Des Plaines, Illinois_Rockford, Illinois. 288 59 229 79.51
607 Rockford, Illinois_Madison, Wisconsin_ 287 144 143 49.83
609 Illinois Toll Road _ 7 4 3 42.86 reroute.
Total Segment (a). 1,132 220 912 80.57
Segment (6)
603 Canal Junction_Lemont and Lockport, 32 Illinois. 19 13 40.63
Segment (c)
602 Canal Junction_Cicero, Illinois_ 27 27 100
Segment (d)
606 Peru, Illinois_Rockford, Illinois. 251 246 98.01
Segment (e)
611 Middlebury, Illinois_Rockford, Illinois.. 143 49 94 58.74
Segment (f)
610 Des Plaines, Illinois.-- O'Hare International Airport. 100
Grand totals. 1,594 293 1,301 81.62
Description Roddage covored by Percent right-of-way of - - roddage With No w/out From To Total add. add. add. line lino line rights rights rights Project numbers
Segment (a)
600 East Chicago_ East Chicago Pump Sta_ 815 0 815 100
601 East Chicago Pump Sta. Canal Junction_ 8,303 491 7,812 94.08
604 Canal Junction_ Des Plaines, Illinois. 7,690 56 7,634 99.27
606 Des Plaines, Illinois. .- Rockford, Illinois_ 21,563 6,383 16,170 75.02
607 Rockford, Illinois - _ Madison, Wisconsin. 18,363 12,681 6,682 30.94
609 Illinois Toll Road re route. . 208 175 33 15.87
Total Segment (a). 66,932 18,786 38,146 67.00
Segment (6)
603 Canal Junction_Lemont and Lockport, 3,161 1,667 1,594 60.59 Illinois.
Segment (c)
602 Canal Junction_Cicero, Illinois_ 3,657 0 3,657 100
Segment (d)
606 Peru, Illinois_Rockford, Illinois_ 21,334 1,126 20,208 94.72
Segment (e)
611 Middlebury, Illinois... Rockford, Illinois_ 10,674 5,276 6,398 50.67
Segment (j)
610 Des Plaines, Illinois--- O'Hare International 753 0 753 100 Airport.
Grand totals. 96,501 26,745 69,766 72.29
17. In order to provide uninterrupted service during major repair operations, pipeline companies quite often add a so-called loop line to a particular pipeline. A loop line is a new and additional line, generally running adjacent and parallel to the first line. It connects into the first line ahead of and beyond the portion of the original line that is being repaired or replaced. Although the loop line may be technologically superior to the line that it is looping, its capacity is limited by the looped line's pressure and size.
18. When a pipeline carrier desires to significantly increase existing transportation capacity between two points, it will ordinarily construct a so-called parallel line. Operationally, such a line is completely independent of the preexisting line between the points involved. Because of this separateness, service continuity between the points is maintained by the uninterrupted use of the old line during construction of the new. Such continuity could not be obtained if capacity were to be increased by removing the old line and replacing it with a larger one in the same trench. Because of the economic necessity of service continuity, such a procedure would only be employed in the most exceptional circumstances. Usually such circumstances would involve a congested urban area where no other reasonable alternative was available. Plaintiff has never done this and there is no indication in the evidence that it will be compelled to in the foreseeable future.
19. In planning the routing of a loop or parallel pipeline, plaintiff ordinarily gave no special deference to utilization of additional line rights on the existing pipeline that was to be looped or paralleled. For example, when Badger constructed Project 611, a 12-inch line from Middlebury to Rockford, it used none of the additional line rights contained in the agreements covering the original 8-inch line that was put in by Wood River Oil & Refining. Finding 7 above. To the extent that plaintiff utilized second line rights in the construction of a new line, it paid the owner the currently prevailing rate in the area for roddage fees, whether or not that rate was higher than the one stipulated in the original right-of-way agreement. This was done because it was most desirable, if not essential, for the carrier to retain the property owner's goodwill. Maintenance of goodwill was important because of plaintiff's periodic need to go on the right-of-way property for repair and maintenance operations. Moreover, the difference between the prevailing roddage fee and that specified in the original instrument was not sufficient to offset the legal costs and inconvenience entailed in legally enforcing the additional line right provision contained in the original right-of-way agreement.
The principal practical benefit of obtaining a multiple line agreement is that it avoids the very costly and time-consuming procedure of condemnation when constructing a new line. In practice, although a common carrier such as Badger has the right of eminent domain, condemnation is utilized very rarely, if at all. Such a procedure is regarded by the carriers as strictly a last resort because of the time and money that it consumes, as well as its generally unfavorable public-relations aspects.
20. Construction costs of pipelines vary with the type of area (open, medium, congested) in which they are located. Costs in medium congested areas are from one-third to one-half more than in open area. In congested areas, because of the various construction difficulties, costs could be at least twice as much. Estimated present-day costs of construction in the area of plaintiff's system vary from $2 per foot in open area to $6 per foot in congested areas. Such costs are for construction only and do not include costs for pipe or acquisition of rights-of-way. Costs of acquiring rights-of-way represent only about 6 to 7 percent of the total construction costs, and would also be higher in more congested areas.
21. Rights-of-way are purchased for a specific project and not for investment and subsequent sale. Although rights-of-way are conventionally assignable on a going-concern basis (i.e., the rights that plaintiff acquired from Sinclair in its initial system in 1955, and the rights Sinclair obtained from Wood River Oil & Refining Company in its purchase of the same system, see finding 8), there is no known established market for dealing in rights-of-way. Replacement of line generally is for repair purposes of small segments of pipe. Upon permanent abandonment or removal of the pipeline, the associated rights-of-way ordinarily expire by their terms. Accordingly, pipeline rights-of-way have neither salvage value nor marketability at the end of the life of the related pipeline system.
22. The uncontroverted evidence in this .record is that, in the absence of an intervening rise in construction costs, the total cost of constructing a loop line or parallel line would be the same as that for construction of the original line. Any cost savings on clearing and grading for the second line are largely offset by the extra expense of operating in a manner that will preserve the first line and protect it from damage done 'by heavy construction equipment running over the surface under which it is buried.
23. As an interstate common carrier by pipeline, plaintiff is subject to the jurisdiction of the ICC and is required by that agency to follow the Uniform System of Accounts for Pipe Line Companies for accounting purposes. Order 19200 of the ICC, 205 ICC 33 (November 13,1934), required depre- eiation accounting by all pipeline carriers. The order classified rigbts-of-way as depreciable investment. The Uniform System of Accounts, issue of 1952, (prescribed by the ICC) reaffirmed the principles of the 1934 order by prescribing depreciation accounting for pipeline companies and designating rights-of-way as depreciable assets. Finally, in Sub-order # P-128 (October 1955), the ICC specified 3.38 percent as the rate that plaintiff should use for depreciation of its right-of-way expenditures. This determination was the result of proposals by the plaintiff and other carriers to the ICC and was apparently based on information furnished by the carriers to the ICC. The record here does not disclose any factual considerations on which the ICC premised its depreciation conclusions. The record affirmatively shows, however, that the right-of-way indentures were not furnished to the ICC and were not considered by it in making its determinations.
24. On its federal income tax returns plaintiff elected to deduct accelerated amortization with respect to the portion of the facilities properly certified, and normal depreciation, by use of the straight-line composite-rate method, with respect to the balance of its depreciable investment. Plaintiff followed the ICC rates in calculating its depreciation deductions for federal tax purposes. Tax depreciation rates were 3.40 percent in 1956 and 3.41 percent in 1958. Such composite rates were approved by IBS examiners. (The corresponding ICC rates were 3.39 percent for 1956 and 3.41 percent for 1958.) Bight-of-way costs were included in the investment balances subject to depreciation and accelerated amortization. A full year's deduction for accelerated amortization was taken in both 1956 and 1958 and disallowed upon audit.
25. Plaintiff's investment in pipeline rights-of-way at the beginning and end of each year involved herein, was as follows:
Investment in Rights-of-Way
Year Beginning End
1956. $452,903.05 $452,903.05
1958. 453,003.05 451,310.05
26.The following' schedule sets out an analysis of plaintiff's investment in pipeline rights-of-way. This analysis shows plaintiff's investment in certified and uncertified facilities as between the portion subject to amortization and that subject to depreciation.
1956 1958 Facilities Beginning Ending Beginning Ending
Certified facilities:
Subject to amortization_ $101,140.64 $101,140.64 $101,140.64 $101,140.64
Subject to depreciation_ $303,321.91 $303,321.91 $303,421.91 $303,421.91
Total_ $404,462.55 $404,462.55 $404,562.65 $404,562.55
uncertified facilities:
Subject to depreciation___ 48,440.50 48,440.50 48,440.50 46,747.50
Grand total_ $462,903.05 $452,903.05 $453,003.50 $451,310.05
27.The amounts of depreciation and/or accelerated amortization disallowed as a deduction by the Internal Revenue Service in the examination of plaintiff's income tax returns were as follows:
1956 _$31,941. 84
1958 _ 31,917.00
28. Plaintiff duly and timely filed its corporation income tax returns for the calendar years 1956 and 1958 with the District Director of Internal Revenue at Oklahoma City, Oklahoma, and paid income taxes of $127,634 for 1956 and $423,359 for 1958. In such returns it claimed deductions from income for "depreciation and amortization" which included depreciation and amortization of its investment in rights-of-way.
29. Upon audit and examination of plaintiff's return for the year 1956, a deficiency in tax was assessed in the amount of $12,398, which amount, together with interest thereon of $1,173, was paid to the District Director of Internal Revenue at Oklahoma City, on October 13,1958.
30. Plaintiff filed a timely claim for refund of the additional tax, and interest thereon, paid for the year 1956 in the amount of $13,571.
31. Plaintiff's claim for refund for tiie year 1956 was disallowed by the Commissioner of Internal Revenue by a notice dated May 5,1961.
32. Upon audit and examination of plaintiff's income tax return for the year 1958, a deficiency in tax was assessed in the amount of $17,885, which amount, together with interest thereon of $771.26, or a total amount of $18,656.26, was paid to the District Director of Internal Revenue at Oklahoma City, Oklahoma, on December 29,1959.
33. Plaintiff filed a timely claim for refund of additional tax, and interest thereon, paid for the year 1958 in the amount of $17,280.38.
34. Plaintiff's claim for refund for the year 1958 was disallowed by the Commissioner of Internal Revenue by a notice dated May 23,1962.
35. The plaintiff is the sole owner of these claims, and no part thereof has been assigned or transferred by it to a third party.
Ultimate Finding
36. Plaintiff's rights-of-way, with or without additional line rights, are directly and completely interrelated to the particular pipelines for which they were acquired. They have no measurable use or value separate and apart from such lines. The rights-of-way do not contribute to the production of income independently of their association with the line. Right-of-way acquisition costs become an integral part of the pipeline system for the construction of which they were incurred 'and to which they relate; the useful lives of the two for federal income tax depreciation purposes are coterminous.
Conclusion oe Law
Upon the foregoing findings of fact and opinion, which are adopted by the court and made a part of the judgment herein, the court concludes as a matter of law that the plaintiff is entitled to recover and judgment is entered to that effect. The amounts of recovery are reserved for further proceedings under Rule 47(c).
In accordance with the opinion of the court, a memorandum report of the commissioner and a stipulation of the parties, it was ordered on December 31, 1968, that judgment for the plaintiff be entered for $30,851.38 with interest thereon as provided by law.
The amortization deductions involved in the years in suit stem from the Office of Defense Mobilization's issuance of accelerated amortization certificates to the plaintiff covering part of the cost of a portion of the system that it built. The parties agree that the allowability of deductions for amortization, as distinguished from depreciation, presents no separate or different legal or factual issues. In both instances the plaintiff's deduction rights are solely dependent upon the useful-life characteristics of the easement rights that it obtained from property owners.
By an order under Rule 47(a), these suits were consolidated with Texas-New Mexico Pipe Line Co. v. United States, Nos. 51-63, 345-64, and Texaco-Cities Service Pipe Line Co. v. United States, Nos. 52-63, 374-64, for purposes of trial.
Bulletin "E" (Revised January 1942), Income Tax Depreciation and Obsolescence-Estimated useful Lives and Depreciation Rates, p. 54, specifies useful lives of 25 and 40 years for gathering lines and trunk lines, respectively. Because it carries only refined petroleum products, plaintiff's entire system consists of trunk lines.
Section 1.167(a)-1(b), Treasury Regulations on Income Tax (1954 Code).
An agreement with the City of East Chicago and several permits to enter land adjacent to plaintiff's right-of-way were for definite periods of time.