Court Opinion

ID: 4474235
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:10:50.624812+00
Date Added: 2024-06-11T15:04:22.064447
License: Public Domain

Beghe, J., dissenting: Elementary economic analysis supports the conclusion of Judge Foley, who tried this case, that the gathering system assets in issue are class 13.2 assets “used by * * * producers for * * * production of * * * natural gas” under Rev. Proc. 87-56, 1987-2 C.B. 674, 678. Petitioner’s gathering systems are used for production of natural gas by all the well owners/operators/producers from whose wells originated the gas processed through the systems. This is true, notwithstanding such producers do not own and operate any gathering system, with most such producers selling to petitioner at the wellhead the bulk of the gas processed through a system1 and a few other such producers paying petitioner fees for processing their gas through the system. Back in 1937, R.H. Coase, in the first of the papers for which he was awarded the Nobel Prize in economics in 1991, “The Nature of the Firm”,2 raised and answered a basic question about the concept of the firm and its boundaries. Coase explained why businesses exist and operate as they do, why, for instance, companies choose to produce some goods or provide some services for themselves and contract with outsiders to provide other goods and services. Coase explained that relative market prices are not the sole factor; transaction costs also affect the decision. The nature and amount of those costs, Coase theorized, frequently determine whether a company will seek an outside supplier or service provider or itself supply the item or perform the service.3 Whatever decision a gas well owner/operator/producer firm makes in any particular case,4 there is a significant (for me, dispositive) economic sense in which any such producer firm uses a gathering system; this is irrespective of whether the producer owns and operates the system itself, or instead, as in the case at hand, sells its gas to petitioner at a fixed price at the wellhead, enters into any one of the various ultimate sale proceeds sharing arrangements with petitioner (also described in Duke Energy Natural Gas Corp. v. Commissioner, 172 F.3d 1255 (10th Cir. 1999), revg. 109 T.C. 416 (1997)), or has its gas processed through petitioner’s system for a fee and then sold for the producer’s account from the processing plant after the last stage of the productive process has been completed. As shown by the opinion of the Court of Appeals for the Tenth Circuit in Duke Energy Natural Gas Corp., with which Judge Foley and I agree, the question under Rev. Proc. 87-56, supra, of who a gathering system is “used by” turns neither on who owns the producers or the system, nor on who owns the gas processed through the system. The gathering system is “used by * * * producers for * * * production of * * * natural gas”, id., irrespective of the effects on legal ownership and refinements of title of the terms of the contracts they use to have the gas from their wells processed through the system. Foley and Vasquez, JJ., agree with this dissenting opinion.   Albeit pursuant to contracts under which most such producers and petitioner share the ultimate proceeds of sale to a pipeline company that transports the processed product to public utilities for distribution to consumers.    Económica 4 (Nov. 1937), reprinted in Coase, The Firm, the Market and the Law 33 (1988), and Williamson & Winter, eds., The Nature of the Firm Origins, Evolution, and Development 18 (1991).    See Easterbrook, “Derivative Securities and Corporate Governance,” 69 U. Chi. L. Rev. 729, 729-730 (2002); Tedeschi, “E-Commerce Report,” N.Y. Times C12 (Oct. 2, 2000).    4 A generic description of a range of possibilities similar to those in the case at hand is found in Joskow, “Asset Specificity and the Structure of Vertical Relationships: Empirical Evidence”, in Williamson & Winter, eds., supra at 117, 119: there is a wide range of institutional arrangements that can be used to govern transactions between economic agents. Specific institutional arrangements emerge in response to various transactional considerations in order to minimize the total cost of making transactions. The boundary between a firm and a market provides a very rough distinction between the two primary institutional mechanisms for allocating resources, but this is the beginning, not the end, of the inquiry. Firms can take on many different organization structures. Market transactions can take many different forms ranging from simple spot transactions [sale at the wellhead for a fixed price] to complex long-term contracts [various sharing arrangements present in this case and described in Tenth Circuit opinion in Duke Energy II\. The specific set of institutional arrangements chosen would represent the governance structure that minimized the total cost of consummating the transactions of interest.