1

RECOMMENDED FOR FULL-TEXT PUBLICATION

Pursuant to Sixth Circuit Rule 206

ELECTRONIC CITATION: 2003 FED App. 0259P (6th Cir.)

File Name: 03a0259p.06

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

_________________

SAGINAW BAY PIPELINE

COMPANY, CMS SAGINAW

BAY COMPANY, SAGINAW

BAY LATERAL COMPANY, and

CMS SAGINAW BAY LATERAL

COMPANY,

Plaintiffs-Appellants,

v.

UNITED STATES OF AMERICA,

Defendant-Appellee.

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No. 01-2599

Appeal from the United States District Court

for the Eastern District of Michigan at Detroit.

No. 99-70454—John Corbett O’Meara, District Judge.

Argued: May 7, 2003

Decided and Filed: July 30, 2003 

Before: KRUPANSKY, SILER, and GILMAN, Circuit

Judges.

2 Saginaw Bay Pipeline Co.,

et al. v. United States

No. 01-2599

1

Plaintiffs Saginaw Bay Pipeline Company and CMS Saginaw Bay

Company formed a limited business partnership known as “Saginaw Bay

Area Limited Partnership.” Plaintiffs Saginaw Bay Lateral Company and

CMS Saginaw Bay Lateral Company created a second limited partnership

called “Saginaw Bay Lateral Limited Partnership.” Together, those two

limited partnerships developed and constructed, and at all times relevant

to the case instanter owned and operated, the Saginaw Bay natural gas

pipeline network at issue herein.

On review, the American Petroleum Institute (“API”), with leave of

_________________

COUNSEL

ARGUED: Todd R. Mendel, BARRIS, SOTT, DENN &

DRIKER, Detroit, Michigan, for Appellants. Teresa T.

Milton, UNITED STATES DEPARTMENT OF JUSTICE,

APPELLATE SECTION TAX DIVISION, Washington,

D.C., for Appellee. ON BRIEF: Todd R. Mendel, BARRIS,

SOTT, DENN & DRIKER, Detroit, Michigan, Thomas P.

Marinis, Jr., VINSON & ELKINS, Houston, Texas, for

Appellants. Teresa T. Milton, Richard Farber, UNITED

STATES DEPARTMENT OF JUSTICE, APPELLATE

SECTION TAX DIVISION, Washington, D.C., for Appellee.

Alan I. Horowitz, Tamara W. Ashford, MILLER &

CHEVALIERCHARTERED, Washington, D.C., for Amicus

Curiae.

_________________

OPINION

_________________

KRUPANSKY, Circuit Judge. The plaintiffs-appellants,

Saginaw Bay Pipeline Company, CMS Saginaw Bay

Company, Saginaw Bay Lateral Company, and CMS Saginaw

Bay Lateral Company (collectively “the plaintiffs,” “Saginaw

Bay,” or “the pipeline companies”),1 have contested the
No. 01-2599 Saginaw Bay Pipeline Co.,

et al. v. United States

3

the court, lodged an amicus curiae brief in support of the plaintiffs. API

described itself as “a national trade association representing the entire

petroleum industry, including companies engaged in exploration and

production, transportation, refining, and marketing. With over 400

member companies and with petroleum councils in 27 state capitals

representing members in 33 states, API is dedicated to protecting and

advancing the interests of all parts of the oil and natural gas industry.” 

district court’s disallowance, following a bench trial, of their

claim against the defendant-appellee United States of

America through the Internal Revenue Service (hereinafter

“the defendant,” “the government,” or “the I.R.S.”) for

reimbursement of $3,474,244.00 in income tax payments,

deposited under protest, which the I.R.S. had assessed via tax

deficiency notices for the five calendar years 1991 through

1995. See Saginaw Bay Pipeline Co. v. United States, No.

99-CV-70454, 2001 WL 1203283 (E.D. Mich. Aug. 23, 2001)

(ordering final judgment for the defendant United States);

Saginaw Bay Pipeline Co. v. United States, 124 F. Supp. 2d

465 (E.D. Mich. 2000) (denying, on cross-motions, summary

judgment to all litigants). The sole issue in controversy was

(and remains) whether, under prevailing law, the plaintiffs’

underground natural gas pipelines should be depreciated over

a seven-year period, as argued by the plaintiffs, or instead

should be subject to fifteen-year depreciation, as asserted by

the government and as resolved by the district court. The

factual and legal epicenter of the dispute is whether or not the

subject pipeline system is a “gathering” pipeline (as defined

and developed herein) used in the gas production process

even though the plaintiffs are not themselves producers of

natural gas. 

In the late 1980s, Shell Western Exploration and

Production, Inc. (“SWEPI”), a division of Shell Oil Company

(“Shell”), commenced negotiations with the Michigan

Consolidated Gas Corporation (“MichCon”) for MichCon’s

construction and operation of a steel pipeline system to

transmit unprocessed natural gas (known in prevailing

4 Saginaw Bay Pipeline Co.,

et al. v. United States

No. 01-2599

2

The plaintiffs’ standard service contracts with gas producers

required that the producers separate specified amounts of water, sand, and

certain other materials from the natural gas at the wellhead via the use of

“field separators,” prior to the introduction of the extracted hydrocarbons

into the Saginaw Bay pipeline system, in order to meet specifications

engineered to reduce the risks of pipeline corrosion and obstruction.

Accordingly, the Saginaw Bay system’s lateral gathering lines did not

connect directly to the field wellheads, and its lines transported partially

purified “raw” natural gas. Nevertheless, the gas moved by the pipeline

companies from the gas fields to the Kalkaska processing plant was not

consumable “dry” methane gas. Rather, although that product contained

contract-restricted quantities of certain natural pollutants, it nonetheless

required substantial processing at the Kalkaska facility to complete its

final conversion into “dry pipeline-quality” methane fuel suitable for sale

to end users. See further discussion below.

industry parlance as “raw” or “wet” natural gas) from

SWEPI’s gas wellheads in eighteen distinct production fields

located in the Michigan East Central Basin to its natural gas

processing plant situated in Kalkaska, Michigan (“the

Kalkaska facility”). MichCon, through its subsidiary MCN

Corporation, formed the plaintiff entities for that purpose.

Between 1988 and 1990, the plaintiffs constructed, in

accordance with SWEPI’s specifications, a 126-mile

subterranean steel pipeline network traversing six Michigan

counties which linked SWEPI’s East Central Basin gas fields

to the Kalkaska facility.

That system consisted of a central line leading into the

Kalkaska processing plant, which was fed by lateral adjoining

pipes which linked specific wellheads to “field separators”2

and ultimately to the main pipeline. The main pipeline had a

daily maximum capacity of 135 million cubic feet of “wet”

gas. At all times material to this litigation, although the

plaintiffs owned and operated the pipeline system, the

transient “raw” natural gas remained the property of its
No. 01-2599 Saginaw Bay Pipeline Co.,

et al. v. United States

5

3

During the relevant period 1991-95, the Saginaw Bay pipeline

network did not exclusively transport “wet” gas belonging to SWEPI.

Rather, it also carried “raw” natural gas produced by, among others, Sun

Oil, Marathon, Oryx, and Amoco.

4

Although both “transmission” lines and “distribution” lines carry

pure, “dry” natural gas for ultimate consumer use, the term “transmission

line” evidently is most frequently used to describe an interstate pipeline

which carries clean processed gas from a cleansing center to a distribution

center, whereas the phrase “distribution line” apparently is most often

employed to describe a pipeline which transfers “dry” gas from a local

distribution center to specific business or residential customer addresses.

See, e.g., Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672, 691 (1954)

(Clark, J., dissenting) (“The natural gas industry, like Ancient Gaul, is

divided into three parts. These parts are production and gathering,

interstate transmission by pipeline, and distribution to consumers by local

distribution companies.”) 

producer throughout the transportation process.

3

 The

producers compensated the plaintiffs for the use of the

pipeline on a contractual “fee-for-service” basis.

Natural gas, in its “raw” form when extracted from the

earth at the wellhead, is typically contaminated with

numerous impurities, including, among other things, butane,

ethane, pentane, propane, water, nitrogen, carbon dioxide,

other inert gases, sulphur, sand, and drilling fluids. All

adulterants must be substantially removed at a purification

site such as the Kalkaska facility, leaving only nearly-pure

“dry” methane gas, prior its sale to residential or commercial

consumers. The cleansed, customer-ready “dry”

petrochemical fuel is then exported from the purification plant

to distributors or other customers via lines which, for

purposes of this decision, shall be denominated

“transmission” or “distribution” pipelines, which are pipelines

designed and operated solely for the carriage of “dry”

hydrocarbon gas, sometimes referred to in the fossil fuel

business as “pipeline-quality gas.”4 By contrast, because the

Saginaw Bay pipeline was designed to, and was operated as,

6 Saginaw Bay Pipeline Co.,

et al. v. United States

No. 01-2599

5

The record herein revealed that various terms of art frequently used

in the natural gas trade have not always been used consistently, and may

have different meanings when used in different contexts. For example,

main or trunk pipelines which adjoin lateral “gathering” lines running

from field wellheads, which transmit the “raw” gas gathered from the

lateral lines to a purification facility, have sometimes been called

“transmission” pipelines. Similarly, “wet” gas partially cleansed by field

separators has occasionally been designated “pipeline-quality gas” in

reference to its conformity to contract specifications for introduction into

a “gathering” pipeline for carriage to a purification complex, as opposed

to that term’s more common usage in reference to “dry” gas which is

suitable for transit via a “transmission” or “distribution” pipeline for

ultimate delivery to a consumer. However, as developed herein, the

terminology used, whether by the pipeline’s owner or anyone else, to

describe or identify a particular pipeline, is not dispositive of its proper

treatment under the federal income tax laws. Rather, as evolved herein,

the actual functional use to which a particular pipeline or pipe system is

dedicated determines its asset classification for tax depreciation purposes.

a conduit for “wet” natural gas, it constituted a species of

natural gas transportation pipeline frequently described,

within prevailing natural gas industry nomenclature, as a

natural gas “gathering” pipeline.5

Because the respective functions of “gathering” pipelines,

vis a vis “transmission” or “distribution” pipelines, as defined

herein, are entirely distinct, the operating standards for the

two systems are correspondingly dissimilar. For example,

whereas “transmission” or “distribution” pipeline systems are

typically unable to safely accommodate any significant

presence of solid or liquid contaminants, “gathering”

pipelines including the Saginaw Bay system must be

equipped to handle at least limited amounts of the nongaseous components of “raw” natural gas. Additionally,

because “raw” natural gas ordinarily burns at a higher

temperature than “dry” natural gas, “transmission” or

“distribution” line service contracts generally provide for the

transport of fossil fuel having a relatively low “heating

value,” usually no more than 950 British Thermal Units
No. 01-2599 Saginaw Bay Pipeline Co.,

et al. v. United States

7

(“BTUs”); whereas “gathering” lines (including the Saginaw

Bay system) transport “raw” gas with higher “energy values,”

typically ranging between 950 and 1400 BTUs. The Saginaw

Bay service contracts specified that “the Gas shall have a total

heating value per standard cubic foot of not less than 950

British thermal units.” (Emphasis added). 

Likewise, a “gathering” system must be constructed to

function at relatively low pressures over comparatively short

distances. The Saginaw Bay system could tolerate no more

than 1440 pounds per square inch (“psi”) of pressure, and

covered only 126 miles. By contrast, a “transmission” or

“distribution” line usually functions at comparatively higher

pressures over longer distances, often totaling hundreds of

miles.

Perhaps most significantly, “gathering” pipelines must be

flushed out regularly – a process labeled “pigging” – to avert

or delay excessive wear-and-tear pipeline corrosion and the

accumulation of foreign obstructive materials, given the

ubiquitous presence of contaminants dissolved within “wet”

natural gas; whereas “transmission” or “distribution” lines

conveying only clean “dry” gas never require that type of

expensive and time-consuming routine maintenance. Record

proof reflected that, during the interval pertinent to the instant

action, at least some portions of the Saginaw Bay system

required “pigging” twice or thrice daily.

Consequently, because the purposes and functions of

“gathering” lines are commercially distinct from those of

“transmission” or “distribution” lines, the coordinate

economic costs and investment risks accompanying each are

also diverse. The unique expenses and production delays

affiliated with the regular “pigging” of “gathering” pipelines

are obvious examples. The singular risks of serious damage

to “gathering” lines by corrosion or obstruction, and the

attendant initial need to construct a comparatively sturdy

8 Saginaw Bay Pipeline Co.,

et al. v. United States

No. 01-2599

“gathering” pipeline relative to a “transmission” or

“distribution” line, constitute further examples.

Additionally, a functional “transmission” or “distribution”

line will ordinarily retain a useful and profitable economic life

for as long as gas dealers or consumers connected by that line

to the processing plant continue to purchase heating gas;

however, a “gathering” line more likely may become

obsolete, redundant, or otherwise unprofitable prior to its

natural “wear-and-tear” expiration, if, for example, the field

wellheads it services become depleted or otherwise

unproductive, or comparatively inexpensive alternate sources

of “raw” natural gas accessible to the processing plant

become competitively available. Accordingly, “gathering”

lines are not only more costly and labor-intensive to

construct, maintain, and operate, but also generally have a

shorter operational life span than “transmission” or

“distribution” lines.

Because both “transmission” or “distribution” natural gas

pipes, and “gathering” natural gas lines, constitute property

used in a trade or business, the owner of either type of

pipeline is entitled to a “reasonable allowance” for annual

depreciation of that asset against the owner’s ordinary

business income for a finite number of years. See 26 U.S.C.

§ 167(a)(1). The depreciation allowance for tangible property

used in a trade or business should be ascertained by reference

to three factors – namely the legally-prescribed

(1) “depreciation method,” (2) “recovery period,” and

(3) “convention” – for the business asset at issue. See 26

U.S.C. §§ 167(b), 168(a). The adversaries sub judice have

agreed that the instant controversy involves only element two,

the selection of the proper depreciation “recovery period” for

the Saginaw Bay pipelines.

The plaintiffs, as taxpayers, must carry the burden of

proving their entitlement to a claimed deduction which has

been contested by the I.R.S. Helvering v. Taylor, 293 U.S.
No. 01-2599 Saginaw Bay Pipeline Co.,

et al. v. United States

9

6

The parties herein have agreed that, although Congress removed

§ 167(m) from the tax code via a 1990 amendment, subsection 167(m)(1)

has retained continuing vitality by its incorporation by reference into

§168(i)(1), which remained a part of the code during the 1991-95 tax

years material to the subject action. Accord, Duke Energy Natural Gas

Corp. v. Commissioner, 172 F.3d 1255, 1257 (10th Cir. 1999).

7

“For purposes of this section, property shall be included in the asset

guideline class for the activity in which the property is primarily used.

See paragraph (e)(3)(iii) of this section for rule for leased property.

Property shall be classified according to primary use even though the

activity in which such property is primarily used is insubstantial in

relation to all the taxpayer’s activities.” 26 C.F.R. § 1.167(a)-

11(b)(4)(iii)(b). (Emphases added).

507, 514 (1935). However, “if doubt exists as to the

construction of a taxing statute, the doubt should be resolved

in favor of the taxpayer.” Hassett v. Welch, 303 U.S. 303,

314 (1938). 

The applicable depreciation “recovery period” is keyed to

the “class life” of the subject property. 26 U.S.C. § 168(e)(1).

An asset’s “class life” is defined by referencing “the class life

[category] prescribed by the Secretary which reasonably

reflects the anticipated useful life of that class of property to

the industry or other group.” 26 U.S.C. § 167(m)(1)

(repealed), incorporated by reference into § 168(i)(1).6 The

Treasury Regulations (“the Regulations”) posit a “use-driven”

functional standard for assigning asset classifications.

7

 26

C.F.R. § 1.167(a)-11(b)(4)(iii)(b).

However, the Treasury Secretary has promulgated two

material, specific, functionally-defined natural gas industry

asset life classifications which facially may encompass the

Saginaw Bay pipeline complex -- to wit, Asset Class 13.2

(defined to include “gathering pipelines” and other property

used in the production of natural gas), which has a listed

“class life” of fourteen years and an associated General

Depreciation System “recovery period” of seven years; and

10 Saginaw Bay Pipeline Co.,

et al. v. United States

No. 01-2599

8

[Asset Class] 13.2: Exploration for and Production of Petroleum

and Natural Gas Deposits:

Includes assets used by petroleum and natural gas producers for

drilling of wells and production of petroleum and natural gas,

including gathering pipelines and related storage facilities. . . .

. . . . 

 [Asset Class] 46.0: Pipeline Transportation: 

Includes assets used in the private, commercial, and contract

carrying of petroleum, gas and other products by means of pipes

and conveyors. The trunk lines and related storage facilities of

integrated petroleum and natural gas producers are included in

this class. . . . 

Rev. Proc. 87-56, 1987-2 C.B. 678, 684. (Boldface in original; italics

added). “Trunk lines” are large-diameter, usually high-pressure mainlines

which connect distant points; they generally include “transmission lines.”

However, large “gathering” main lines are sometimes also referred to as

“trunk lines.” Nevertheless, reading the two asset class descriptions

together, it is evident that all functionally-defined “gathering pipelines”

should be consigned to Asset Class 13.2, leaving all remaining natural gas

transport lines (such as “transmission” and “distribution” lines, as well as

non-gathering “trunk lines” owned by integrated producers of natural gas

which are used to transmit “dry”natural gas to distributors or consumers)

within Asset Class 46.0. See further development below. 

Asset Class 46.0 (defined to include assets used in the

carrying of gas by pipes), which triggers a listed “class life”

of twenty-two years, and an accompanying General

Depreciation System “recovery period” of fifteen years.

8

Rev. Proc. 87-56, 1987-2 C.B. 678, 684 (hereinafter “the

Revenue Procedure”).

The pipeline companies have maintained that the Saginaw

Bay pipeline network fits into Asset Class 13.2, and hence

they should be entitled to comparatively accelerated sevenyear depreciation. By contrast, the I.R.S. argued, with

success before the district court, that the plaintiffs’ pipelines
No. 01-2599 Saginaw Bay Pipeline Co.,

et al. v. United States

11

9

The government has averred that a material fact distinguishes Duke

Energy’s pipeline systems from the Saginaw Bay pipelines, because the

United States in Duke Energy did not dispute that Duke’s pipeline

networks were “gathering systems” for asset class attribution purposes

(see Duke Energy Natural Gas Corp. v. Commissioner, 172 F.3d 1255,

1256-58 (10th Cir. 1999)); whereas in the case here in controversy the

trial court agreed with the government’s argument that the Saginaw Bay

network was not a “gathering system.” See Saginaw Bay Pipeline Co. v.

United States, No. 99-CV-70454, 2001 WL 1203283, at *2-3 (E.D. Mich.

Aug. 23, 2001) (finding, as a matter of both fact and law, that the Saginaw

Bay pipeline was not a “gathering” pipeline because it did not directly

connect to any field wellhead, and also because it was not substantially

located on a natural gas producer’s land from which natural gas was

extracted). In support of its “disconnection” theory, the trial court

adopted the reasoning of a non-controlling Fifth Circuit decision,

Hamman v. Southwestern Gas Pipeline, Inc., 721 F.2d 140, 142-43 (5th

Cir. 1983), by which that court had construed federal natural gas pipeline

safety regulations to require that “gathering” lines must attach directly to

wellheads. The key regulation posited that a “‘gathering line’ means a

pipeline that transports gas from a current production facility to a

transmission line or main.” 49 C.F.R. § 192.3. (A gas wellhead qualifies

as a “current production facility”). The Hamman court’s construction of

that regulation to restrict the meaning of “gathering pipeline” solely to

lateral “feeder” pipelines which connect directly to field wellheads, as

opposed to pipelines which transport natural gas from field wellheads but

do not physically join those wellheads, is facially open to question. At

any rate, to the extent that Hamman might carry any persuasive weight in

the Sixth Circuit, it would be restricted to construction of the laws

governing natural gas pipeline safety, such as the federal rules controlling

the depths at which certain types of gas pipelines must be buried. See

Hamman, 721 F.2d at 142. No evident rationale supports the application

of a safety regulation’s judicially-refined definition of “gathering

pipeline” to the income tax depreciation regulations, given the total

dissimilarity of the purposes of the two sets of standards. Id. at 143

(“Keeping in mind that Congress meant the [Natural Gas Pipeline Safety]

Act to minimize accidents caused by natural gas pipelines, we hold that

a pipeline must be directly attached to a gas well in order to meet the

belong in Asset Class 46.0, which authorizes fifteen-year

depreciation.

To date, the only sister circuit to confront a similar contest

has been the Tenth Circuit, which, on nearly identical facts,9

12 Saginaw Bay Pipeline Co.,

et al. v. United States

No. 01-2599

gathering line definition.”).

Similarly, the district judge’s invocation of Public Service

Commission of Kentucky v. Federal Energy Commission, 610 F.2d 439,

444 (6th Cir. 1979) (ruling that exclusive federal regulatory jurisdiction

under the Natural Gas Act encompassed natural gas from the moment that

it entered the stream of interstate commerce by exiting the wellhead and

entering a “gathering” pipeline, despite a statutory exemption permitting

state regulatory jurisdiction over “production and gathering” activities,

which the court construed to be limited to production activities undertaken

by natural gas producers upon the real estate where the gas wellheads

were located) was misconceived. The trial jurist erroneously intimated

that Public Service Commission supported the conclusion that only gas

production activities which occurred on the realty which produced the

natural gas should be categorized as “gathering” activities, and therefore

pipelines largely lying on property from which no gas was extracted

should not be deemed “gathering” pipelines for any purposes including

income tax asset classification. However, although the transported

contents of “gathering pipelines” might be distinguishable from

“gathering” activities which transpire on the producer’s property or

leasehold for federal regulatory jurisdictional purposes, that distinction is

entirely immaterial to the federal income tax depreciation treatment of

pipelines which transport “wet” as opposed to “dry” natural gas,

irrespective of the label attributed to such pipelines.

Accordingly, the trial court erred, as both a matter of fact and law, by

characterizing the Saginaw Bay pipelines as something other than a

“gathering” system as defined for purposes of the instant litigation. See

Razavi v. Commissioner, 74 F.3d 125, 127 (6th Cir. 1996) (explaining that

a district court’s findings of historical fact are examined for clear error,

but its applications of law to the facts and its ultimate legal conclusions

including resolutions of mixed questions of law and fact are scrutinized

de novo). As illuminated herein, the undisputed practical uses to which

the Saginaw Bay pipelines were put during the five tax years in

controversy militated to characterize them as “gathering pipelines” for

income tax purposes within the ambit of Asset Class 13.2 as a matter of

law, irrespective of their lack of direct connections to field wellheads by

reason of intervening “field separators,” and regardless of the subject

pipeline’s situs on land from which natural gas was not extracted.

reversed the United States Tax Court’s application of fifteenyear depreciation, in favor of the seven-year writeoff. Duke

Energy Natural Gas Corp. v. Commissioner, 172 F.3d 1255
No. 01-2599 Saginaw Bay Pipeline Co.,

et al. v. United States

13

10The initial adjudicator in the case in controversy opined that “Duke

was wrongly decided in its interpretation of the term ‘used by’ in the first

sentence of Asset Class 13.2.” Saginaw Bay Pipeline Co. v. United

States, No. 99-CV-70454, 2001 WL 1203283, at *2 (E.D. Mich. Aug. 23,

2001). In reality, the district court had misconstrued the “used by”

phraseology to mean “owned by” a natural gas producer. As persuasively

explicated by the Tenth Circuit:

We are not persuaded by the government's interpretation of

the asset class descriptions. "Use" does not mean "own" in

either the legal dictionary definition of the word use, see Black's

Law Dictionary 1541 (6th ed. 1990) ("To make use of; to

convert to one's service; to employ; to avail oneself of; to utilize;

to carry out a purpose or action by means of; to put into action

or service, especially to attain an end."), nor in everyday

parlance. . . .

The Revenue Procedure before us creates and describes

asset classes for the purpose of establishing depreciation

schedules, and contains critical information affecting taxpayer

decisions about capital investment. We cannot accept the

government's attempt to interpolate the words "owned by" into

the description of Asset Class 13.2. We instead interpret that

description to include any gathering system, so long as it is used

by a gas producer--whether under its own ownership or through

contractual arrangements--in the exploration for and production

of petroleum and natural gas. 

 

(10th Cir. 1999). That court ruled that, although Duke

Energy was not itself a “producer” of natural gas, its

“gathering” systems were primarily used by gas producers to

transmit partially-cleansed-but-essentially-still-“wet” natural

gas to purification plants. Id. at 1258. Moreover, after

weighing factors such as the comparatively low operational

pressures, generally confined geographical areas serviced,

and relatively short potential economic life spans attributable

to Duke’s “gathering” pipe systems, the Tenth Circuit

concluded that, as a functional issue, “[t]he net effect is that

the economic character of Duke's gathering activities is more

akin to production than pipeline operation.”10 Id. at 1258-59.

14 Saginaw Bay Pipeline Co.,

et al. v. United States

No. 01-2599

Duke Energy Natural Gas Corp. v. Commissioner, 172 F.3d 1255, 1259-

60 (10th Cir. 1999). Alternatively, the Duke Energy court convincingly

illustrated that, even if the Asset Class 13.2 description could be rationally

construed to expressly list “gathering” lines which were owned by natural

gas producers, the use of the word “includes,” rather than “includes only”

(see note 8 above), signals an intent of its drafter not to restrict the asset

classification solely to the listed property, but instead also to embrace

“precisely analogous assets used by non-producers to provide services

directly to producers.” Id. at 1260 (citing, inter alia, 26 U.S.C.

§ 7701(c)).

Indeed, the United States’ posture that the depreciation

status of pipelines which in fact are used as “gathering” lines

should depend not upon their function and the costs and risks

associated with their operation, but instead upon the business

identity of their owners, would, if adopted, lead to the absurd

result that pipelines used for identical “gathering” purposes

would be depreciated over seven years if owned by a producer

of natural gas, but would instead be subject to fifteen-year

depreciation if owned by a pipeline company engaged in the

trade of transporting “wet” natural gas for hire. As

compellingly expressed by the Duke Energy court:

Furthermore, were we to read a distinction into the

asset classes requiring taxpayers to place the gathering

systems of nonproducers in Asset Class 46.0 and the

gathering systems of producers in Asset Class 13.2, we

would thereby create an inconsistent regime for the

depreciation of assets. If placed in different classes,

gathering systems used for the same purpose and serving

identical wells would fall under different depreciation

schedules depending upon the producer or nonproducer

status of the asset's owner. Moreover, if a producer sells

a gathering system to a nonproducer such as Duke, the

system would shift from one asset class to another

without any change in its function or characteristics, and

the system's new owner would be forced to depreciate the

asset over a far longer period. Absent an explicit
No. 01-2599 Saginaw Bay Pipeline Co.,

et al. v. United States

15

distinction based on ownership in the Revenue

Procedure, we decline to create such an inconsistency. 

Id. at 1261. (Notes omitted). 

The government’s retort was anchored in an elaborate

historical construct which tediously traced the pedigree of

business property depreciation federal tax laws since the

inception of modern national income taxation in 1913 in a bid

to illustrate that, over the years, the United States had ofttimes commanded varying tax treatments of similar business

assets used for similar purposes on the sole basis that the

respective owners of those assets were engaged in different

commerce. That effort was unavailing, because, since at least

the early 1970s, the United States has explicitly renounced an

“industry-based” approach to asset classification in favor of

a “use-based” system. See 26 C.F.R. § 1.167(a)-

11(b)(4)(iii)(b) (applicable to property placed in service after

December 31, 1970), which posits, among other things, that

“[p]roperty shall be classified according to primary use even

though the activity in which such property is primarily used

is insubstantial in relation to all the taxpayer’s activities.”

(Emphasis added). The Duke Energy court had correctly

rejected the same argument by the I.R.S.:

The government argues that in previous iterations of

the asset classes in dispute, the IRS distinguished

between assets owned by gas producers and those owned

by non-producers. See, e.g., Rev. Proc. 72-10, 1972-1

C.B. 721, 731 (superseding Rev. Proc. 71-25, 62-21);

Rev. Proc. 71-25, 1971-2 C.B. 553, 556 (establishing

Asset Class 13.2); Rev. Proc. 62-21, 1962-2 C.B. 418,

424 (establishing Guideline Class 17(b), which

"[e]xclude[d] gathering pipelines and related storage

facilities of pipeline companies"). We first note that all

of the relevant provisions of the earliest Revenue

Procedures the government cites to support its

interpretation of the current asset class descriptions have

16 Saginaw Bay Pipeline Co.,

et al. v. United States

No. 01-2599

been explicitly superseded. See Rev. Proc. 72-10, 1972-1

C.B. 721, 731 (superseding Rev. Proc. 71-25, 62-21);

Rev. Proc. 71-25, 1971-2 C.B. 553, 566 (superseding

Rev. Proc. 62-21).

More importantly, the language of the most

recent--and relevant--of these prior iterations does not

establish that gathering systems of nonproducers have

been distinguished from those of producers for

depreciation purposes since 1972. See Rev. Proc. 77-10,

1977-1 C.B. 548, 548 (superseding Rev. Proc. 72-10,

while noting that the change "was not intended to modify

the composition of the existing classes of Rev. Proc. 72-

10"). Rev. Proc. 72-10, 1972-1 C.B. 721, 723, which

establishes the immediately prior (and still relevant)

iteration of the applicable sentence of the description of

Asset Class 13.2, states that the class "[i]ncludes assets

used for drilling of wells and production of petroleum

and natural gas, including gathering pipelines and related

storage facilities, when these are related activities

undertaken by petroleum and natural gas producers."

This description relies upon essentially the same

language as the current asset class in stating that when

gathering systems are "used for" the drilling and

production processes of producers, they belong in Asset

Class 13.2. We are no more persuaded by the

government's argument that the words "undertaken

by"--which refer to "activities"--necessarily implies that

the assets must be "owned by" producers than we are

persuaded that the words "used by" necessarily require

ownership. The relevant earlier asset class descriptions

provide us with no clear mandate to distinguish between
No. 01-2599 Saginaw Bay Pipeline Co.,

et al. v. United States

17

11Accordingly, because Saginaw Bay’s primary business is irrelevant

to the depreciation classification of their pipelines used for natural gas

“gathering” activities, the fact that the plaintiffs identified themselves on

their tax returns as engaged in the trade of “natural gas transportation” (as

opposed to production or “gathering”) is immaterial.

gathering systems based upon ownership, and we

therefore will not do so.11

Id. at 1260-61. (Emphases added).

This reviewing court has carefully considered the trial

court’s written opinions and final judgment, the briefs and all

arguments of counsel, the material contained within the Joint

Appendix, and the controlling legal authorities. It finds that

the district court committed reversible legal and factual error

by ruling that the Saginaw Bay pipelines at issue herein were

not “gathering” pipelines subject to seven-year depreciation

under the Revenue Procedure’s Asset Class 13.2 definition.

This court finds the TenthCircuit’s reasoning and conclusions

articulated in Duke Energy Natural Gas Corp. v.

Commissioner, 172 F.3d 1255 (10th Cir. 1999), to be

logically persuasive and factually on point, and thus adopts its

analysis and ruling. This court further concludes that the

subsequent conflicting analysis and decision of the United

States Tax Court in Clajon Gas Co. v. Commissioner, 119

T.C. 197, 2002 WL 31399696 (Oct. 25, 2002), was legally

ill-formulated and unpersuasive.

In conclusion, this reviewing court rules that every natural

gas carriage pipeline which functions as a “gathering”

pipeline in the methane gas production process by

transporting impure “raw” or “wet” natural gas from the field

wellheads to a cleansing and processing facility qualifies as

a “gathering pipeline” subject to seven-year General

Depreciation System depreciation under the strictures of

Asset Class 13.2 of Rev. Proc. 87-56, irrespective of the

primary business of the owner of that pipeline, the other uses

18 Saginaw Bay Pipeline Co.,

et al. v. United States

No. 01-2599

of the land under which that pipeline runs, and/or whether that

pipeline was connected by lateral “feeder” lines directly or

indirectly to the field wellheads. Concordantly, all natural

gas transportation pipelines used for any purpose other than

the production-related “gathering” of “wet” gas, including

dry-gas “transmission” and “distribution” pipelines as defined

herein, should be depreciated over fifteen years under the

General Depreciation System as Asset Class 46.0 property,

even if they are owned or used by a producer of natural gas.

The judgment of the district court for the defendant is

reversed, and the case is remanded for entry of judgment in

favor of the plaintiffs and for such necessary further

proceedings as are consistent with this disposition.