Source: http://openjurist.org/411/f2d/1300/pennsylvania-power-light-company-v-united-states
Timestamp: 2017-01-17 08:12:56
Document Index: 139779310

Matched Legal Cases: ['§ 165', '§ 1231', '§ 1231', '§ 1', '§ 1231', '§ 165', '§ 1231', '§ 1231', '§ 1231', '§ 165', '§ 1231', '§ 1231', '§ 1231', '§ 1231']

411 F2d 1300 Pennsylvania Power Light Company v. United States | OpenJurist
411 F. 2d 1300 - Pennsylvania Power Light Company v. United States HomeFederal Reporter, Second Series 411 F.2d.
411 F2d 1300 Pennsylvania Power Light Company v. United States 411 F.2d 1300
PENNSYLVANIA POWER & LIGHT COMPANY and Subsidiary Companiesv.The UNITED STATES.
No. 220-64.
Defendant contended at the trial of this case (in the alternative to its position that the easements had indeterminate useful lives) that such easements are basically land, and land is not depreciable property. This contention is deemed abandoned because not thereafter made either in defendant's formal brief or in its oral arguments to the trial commissioner. As contended by defendant in its brief and subsequent oral arguments, it is concluded that the right-of-way easements are intangible assets. Panhandle Eastern Pipeline Co. v. United States, 408 F.2d 690 (decided March 14, 1969); Commonwealth Natural Gas Corp. v. United States, 395 F.2d 493 (4th Cir. 1968); Shell Pipe Line Corp. v. United States, 267 F.Supp. 1014, 1018 (S.D.Tex.1967).
Thus, the basic question in this case on this issue is whether taxpayer has established by a preponderance of the evidence that its easements (intangible assets) will be useful in its business for a limited period, estimated with reasonable accuracy. Taxpayer has made no effort to show that each easement has a useful life limited to the useful life of the original powerline constructed and maintained thereon, and it is not established that the termination of the useful life of any existing powerline will necessarily result in abandonment or retirement of its related easement. In other words, there is no evidence that the costs of removal of an obsolete or worn out powerline and construction of a replacement line on the same easement would make such a practice economically prohibitive, and thus require abandonment of that easement when the useful life of its original powerline terminated. In fact, taxpayer's practice is at least in some instances to keep an unenergized line in place in order to retain the easement for some future replacement of the line. Furthermore, the actual life of the original powerline is sometimes extended by replacement of component parts. Also, there is no evidence that the easements are in any way affected as to their useful lives by any possible exhaustion of supply of electric energy to be transmitted and distributed over the lines. In these respects, the instant case differs factually from Badger Pipe Line Co. v. United States, 401 F.2d 799, 185 Ct.Cl. 547 (1968), in which it was found that the useful lives of easements and their related pipelines (for transportation of refined petroleum products) were coterminous because replacement of an obsolete or worn out pipeline on the same right-of-way would not be economically feasible; and also from Commonwealth Natural Gas Corp. v. United States, supra, in which easement rights-of-way containing natural gas pipelines were held to have 30-year useful lives because such period was a reasonable measure of the life of the natural gas reserves available to the taxpayer for the taxable years in question. See also, Panhandle Eastern Pipeline Co., supra. The striking difference between the Panhandle decision and this case is that in the former plaintiff proved that the easement and the pipeline had coterminous useful lives. Both exhausted simultaneously.
Recognizing that the purpose of depreciation allowance was to return the costs of exhausting assets to the taxpayer over the useful lives of such assets in taxpayer's trade or business, and holding that in essence, the deduction for depletion did not differ from the deduction for depreciation, the Supreme Court in United States v. Ludey, 274 U.S. 295, 47 S.Ct. 608, 71 L.Ed. 1054 (1927), ruled that as intended by Congress, a "rough estimate" of the depletion deduction on an oil reserve was to be made, rather than ignore the fact of depletion. The established facts were that the quantity originally in the reserve was not actually known, could not be measured, but at best approximated, and consequently the percentage of the whole reserve withdrawn in any year was necessarily a "rough estimate." Thereafter, in Burnet v. Niagara Falls Brewing Co., 282 U.S. 648, 654-655, 51 S.Ct. 262, 75 L.Ed. 594 (1931), the Supreme Court held that it would be unreasonable and in violation of the statutory purpose to ascertain taxable income in each year, to put upon the taxpayer the burden of proving to a "reasonable certainty" the existence and amount of obsolescence of plant, but all that is required is a "reasonable approximation" of the amount that may be fairly included in the deduction for obsolescence. Citing United States v. Ludey, supra, the Supreme Court in Massey Motors, Inc. v. United States, 364 U.S. 92, 80 S.Ct. 1411, 4 L.Ed.2d 1592 (1960), reiterated the principle that the primary purpose of depreciation accounting is to further the integrity of periodic income statements by making a meaningful allocation of the cost entailed in the use of the asset to the periods to which it contributes to production of income, and observed with respect to rental cars involved, that there were risks of error in the projections or estimates of the periods such assets would be held in the business and the prices received for them on their retirement, but stated that "prediction" is the very essence of depreciation accounting. The holding was that the reasonable allowance for depreciation of the property was to be calculated over the estimated useful life of the asset while employed by the taxpayer, applying a depreciation base of the cost of the property to the taxpayer less its resale value at the estimated time of disposal. In commenting on the possibility of error where "probabilities" are relied upon to produce what is hoped to be an accurate estimation of the expense involved in utilizing the asset, the court observed that to insure a correct depreciation base in the years after a mistake has been discovered, adjustments may be made when it appears that a miscalculation has been made. Obviously the court was referring to challenge of subsequent returns by the Internal Revenue Service in well-known administrative procedures available. See also, Hertz Corp. v. United States, 364 U.S. 122, 80 S.Ct. 1420, 4 L.Ed.2d 1603 (1960); and also, Fribourg Navigation Co. v. Commissioner of Internal Revenue, 383 U.S. 272, 86 S.Ct. 862, 15 L.Ed.2d 751 (1966), citing Ludey, Massey, and Hertz, with approval.
Asset                      1952 order  1956 order
Transmission easements .............................   100       100
Distribution easements .............................    50        40
Initial cost of clearing transmission easements ....   100        75
Initial cost of clearing distribution easements ....    50        40
While methods of accounting approved by such a regulatory body are not binding upon the Internal Revenue Service or the courts in tax cases, Old Colony R. R. v. Commissioner of Internal Revenue, 284 U.S. 552, 562, 52 S.Ct. 211, 76 L.Ed. 484 (1932), nevertheless such regulatory action has probative value in an appropriate case, such as the instant one. Northern Natural Gas Co. v. O'Malley, 277 F.2d 128, 137-138 (8th Cir. 1960); Portland General Electric Co. v. United States, 189 F.Supp. 290, 298 (D.C.Ore. 1960). Not only were the same items involved herein before the Pennsylvania regulatory body, but at times on either end of the period of taxable years involved herein, and in addition, taxpayer's expert witness on the useful lives of such assets in this case, Mr. John J. Reilly, participated as a consultant in the preparation of the studies submitted to the Pennsylvania agency.
Mr. Reilly's opinion as to the useful lives of the assets in issue in this case was 100 years for transmission easements, 45 years for distribution easements, 60 years for initial cost of clearing transmission easements, and 35 years for initial cost of clearing distribution easements. Mr. Reilly applied the geometric mean method to each of taxpayer's pertinent accounts. In addition, because of available data, he applied the annual rate method to taxpayer's transmission easement and clearing accounts, employing the Iowa type survivor curves. He considered information concerning the causes of the retirements of the pertinent properties and also the likelihood that such retirements would continue and become more frequent in the future. In reaching his opinion, he relied upon his extensive knowledge of taxpayer's overall electric plant and facilities, acquired in connection with his services as a consultant for taxpayer in connection with the 1952 and 1956 proceedings before the Pennsylvania Public Utility Commission, including a 2-month inspection in 1954 of taxpayer's entire system. We note, at this point, that the testimony before the court in this case is different from that presented to us in the case of Virginia Electric and Power Company v. United States, Ct.Cl., 411 F.2d 1314, decided today. Accordingly, on the basis of different proof we reach a different conclusion as to the appropriate useful life for these easements in this taxpayer's trade or business.
Transmission right-of-way easements .................100 years
Distribution right-of-way easements ................. 45 years
In any event, it is apparent, we think, that, since no other change was made by the 1958 amendment, the pre-1958 rule for all types of property covered by the section, including the income-producing type here in question, should be held to the same as the post-1958 rule applicable to property held for personal use. The Fourth, Fifth, and Sixth Circuits have each cluded that the post-1958 rule for property held for personal use is that all losses, both insured and uninsured, are covered by section 1231(a). Campbell v. Waggoner, 370 F.2d 157 (5th Cir. 1966); Chewning v. Commissioner of Internal Revenue, 363 F. 2d 441 (4th Cir.), cert. denied, 385 U. S. 930, 87 S.Ct. 289, 17 L.Ed.2d 212 (1966); Morrison v. United States, 355 F.2d 218 (6th Cir.), cert. denied, 384 U.S. 986, 86 S.Ct. 1887, 16 L.Ed. 2d 1004 (1966). In reaching their conclusions that, as to property not covered by the 1958 amendment, section 1231(a)'s coverage extends to both insured and uninsured losses, each of these three courts of appeal specifically rejected the Maurer court's reasoning. The discussions in The Morrison and Campbell opinions on the point are particularly worthy of reference. We share the conviction that the Maurer court erred in its conclusion. [402 F.2d at 628, 629.]
In Maurer v. United States, 284 F.2d 122 (10th Cir. 1960), the taxable year was 1954, during which taxpayers suffered uninsured casualty losses of trees and valuable plantings on residential property, and the question was whether there was an ordinary loss under § 165 or a capital loss under § 1231. The Tenth Circuit held that § 1231 was inapplicable, but recognized that the language of Treas.Reg. § 1.1231-1(e) (ruling that involuntary conversions are to be treated under § 1231 whether or not there is a conversion into other property or money) could lead to only one of two conclusions, either that such regulation is clearly inconsistent with the terms of the statute and invalid, or else it is inapplicable in the particular situation involved. The court refrained from deciding the question of validity of the regulation "in the face of the plain wording of Section 1231," commenting that such regulation might be an attempt to distinguish involuntary conversions from casualties, but that because the jury had found that the loss was a casualty, the court was presented with no question turning on such a distinction. In Oppenheimer v. United States, 220 F.Supp. 194 (W.D.Mo.1963), the taxable year was 1956, during which taxpayers had an uninsured casualty loss of trees and other valuable plantings on residential property, and also a greater net long term gain from the sale of a farm. Without discussion of the legal problem, but relying on desirability of uniformity of decision in the field of federal taxation, the district court followed Maurer, supra, and held that the casualty loss was deductible from ordinary income pursuant to § 165, and that it was not required under § 1231 that such loss be offset against the gain on the sale of the farm.
The only other decided cases involve taxable years after the effectiveness of the 1958 amendment of § 1231(a). In Morrison v. United States, 355 F.2d 218 (6th Cir. 1966), cert. denied, 384 U.S. 986, 86 S.Ct. 1887, 16 L.Ed.2d 1004 the taxable year was 1960, during which taxpayer sustained an uninsured casualty loss of trees, shrubbery, and other improvements on residential property, and also realized a greater gain on the sale of an orange grove held for production of income. The Sixth Circuit rejected taxpayer's argument that because there was no conversion of property into other property or money, the loss in question was not included in the type of losses intended to be covered by § 1231(a), and held that taxpayer was not entitled to deduct her loss as an ordinary loss under § 165(c) (3), but that the loss had to be offset against the gain from the sale of the orange grove under § 1231(a). The court commented that by the 1958 amendment, Congress excluded from the application of § 1231, property used in the trade or business and any capital asset held for more than 6 months and held for the production of income, where the taxpayer was not compensated by insurance in any amount, but that it was significant that Congress did not exclude the classification of "capital assets held for more than six months." Prior to the 1958 amendment, the pertinent Treasury Regulation had since 1943 included uninsured casualty losses within the application of § 1231 and its predecessor. While recognizing that no validity can attach to a Treasury Regulation which is inconsistent with the statute, the court concluded that the controlling principle was that announced by the Supreme Court in Helvering v. Winmill, 305 U.S. 79, 83, 59 S.Ct. 45, 46, 83 L.Ed. 52 (1938), as follows:
The reasoning of the Maurer case was also rejected by the Fourth Circuit in sustaining the ruling of the Tax Court that a taxpayer's 1960 casualty loss of boxwood bushes on residential property had to be offset under § 1231(a) against gains realized by taxpayer in the same year from sales of property used in his trade or business. Chewning v. Commissioner of Internal Revenue, 44 T.C. 678 (1965), aff'd per curiam, 363 F.2d 441 (4th Cir. 1966), cert. denied, 385 U. S. 930, 87 S.Ct. 289, 17 L.Ed.2d 212.