Court Opinion

ID: 8595815
Source: CourtListenerOpinion
Date Created: 2022-11-23 16:03:00.231622+00
Date Added: 2024-06-11T16:54:55.695881
License: Public Domain

Kashiwa, Judge,
concurring in part and dissenting in part:
In this case of offshore drilling operations, the majority of the court by affirming and adopting the trial judge’s recommended decision allows as intangible drilling and development costs (“IDC”) those costs incurred in fabricating-offshore drilling platforms (“platforms”), moving them to location and making them operational. I, however, would allow only the latter two groups of expenditures to qualify for the IDC option, denying the option to those costs incurred in fabricating the component parts (e.g., templets)21 of the drilling platform.
With relation to the IDC problem before us, I believe that the goal is to determine which costs are attributable to an item having a salvage value and which costs are attributable to wages, fuel, repairs, hauling and supplies incurred in using that item for the drilling of wells or their preparation for production.22 It seems clear that the costs of moving the platform from the shore to the place where it will be used for drilling and of securing it so that it can be so used qualify as IDC. On the other hand, a strong argument can be made that the cost of fabricating the component parts of the platform does not fall within the option on the ground that the component parts are items having a salvage value.
Each 1954 platform was individually designed for a specific location to take account of the peculiarities of that location ; however, the basic concept and design was a templet-*282type offshore platform.23 The design differences among platforms and platform extensions at different locations included the number of templets utilized to provide horizontal support for the platform pilings and the size of the deck areas.24 However, the basic component, the templet unit, was standard for all platforms.25 This basic templet unit came only in two sizes, 10' x 10' and 20' x 20'.26 Despite the size difference, the templet unit was designed, fabricated, installed, salvaged, repaired and stored as a basic unit. The unit never reverted back to its original state, viz., “such as lengths of pipe and steel beams.” 27
The fabrication process was the manner by which Humble acquired the templet unit. During the fabrication process of this basic templet unit, labor, fuel and supplies were integrated with tangible basic materials to form an item. The item, a 'basic templet unit, was designed to be salvaged.28 When salvaged the labor, fuel and supplies that went into its fabrication were also salvaged. As a result, the costs attributable to wages, fuel and supplies incurred during the fabrication of this templet unit should not qualify for the IDC option because they were “expenditures by which the *283taxpayer * * * [acquired] tangible property ordinarily considered as hawing a salvage value.” Treas. Reg. 118, § 39.23(m)-16(c) (1). Those costs, therefore, are recoverable only through depreciation.
The fact that dismantling and salvaging of platforms was a difficult operation and that during the salvage operation parts of the platform were badly damaged while other parts were not salvaged at all does not affect the IDC option. In the words of Justice Blackmun:
The salvage value reference29 [Keg. § 1.612-4(c) (1) (1965)] strikes us only as the usual, but not the necessary, characteristic of the non-option item. We do not regard salvage value 'as a condition of non-option status. [Footnote supplied.] [Harper Oil Co. v. United States, 425 F. 2d 1335, 1342 (10th Cir. 1970).]
Since the templets were designed to be salvaged as a component part in unit form, they ordinarily would be considered as having a salvage value without regard to the frequency of actual salvage or the actual reasons therefor. Nevertheless, as the trial judge found, “after considerable modification and reconditioning, most of the salvaged parts of [the platform] * * * were reusable at least once in other platforms.”30 The extent of modification to which the trial judge refers is the joining together of several 10' x 10' templets in order to form a 10' x 20' templet, or the adding of extensions to the basic templet unit.31 The basic unit design of the templet was never altered. As a result, the labor, fuel and supplies utilized to fabricate the lengths of pipe and steel beams into a templet were permanently integrated into the templet, and thereby had salvage value.32
*284After having carefully read the trial judge’s recommended decision and before entering into further discussion, I note the focal emphasis in the trial judge’s opinion is not on the basic templet component unit as above described but, rather, is on the tangible basic materials which make up the templet unit. In my opinion, the trial judge incorrectly assumes that the intangible basic materials (labor, fuel and supplies) utilized to fabricate the tangible basic materials (steel beams and pipes) into a templet unit do not have a salvage value. I view the costs attributable to labor, fuel and supplies, etc., incurred by the taxpayer in fabricating the basic templet unit as expenditures by which the taxpayer acquired “tangible property [the templet unit] ordinarily considered as having a salvage value.” Reg. 118, § 39.23(m)-16(c) (1). Therefore, those expenditures are nonoptional items.
I do not feel that a complete reading of the pertinent Regulations, in light of their history, provides support for the trial judge’s decision within the intent of the drafters of the Regulations.
The IDC option first saw light in T.D. 2447, relating to the Revenue Act of 1916, and read as follows:
The incidental expenses of drilling wells, that is, such expenses as are paid for wages, fuel, repairs, etc., which do not necessarily enter into and form a part of the capital invested or property account, may, at the option of the individual or corporation owning and operating the property, be charged to property account subject to depreciation or be deducted from gross income as an operating expense. [Emphasis supplied.]
The Treasury language was a cautious venture into the field, granting the option in guarded terms. The option was similarly stated, though in more detail, in the regulations *285promulgated under the Revenue Acts of 1916, 1917, 1918, 1921,1924 and 1926.
In 1932, Treasury Decision 433333 restated the provisions of all prior regulations relating to intangible drilling and development costs. The restated regulations,34 said to make “no change in administrative policy or in the practice under the regulations,” 35 more clearly described the IDC option. The pertinent provisions of Reg. 118, here in issue, remain virtually unchanged in form as carried forward from T.D. 4333.36
In 1945 Congress passed Concurrent Resolution 50,37 approving the existing and prior regulations relating to the option. With the adoption of the 1954 Code, in Section 263 (c) Congress did no more than direct the Treasury to prescribe regulations corresponding to the regulations which were approved by Congress in Concurrent Resolution 50.
This brief account of the history of the IDC option is important with respect to an interpretation of Reg. 118 provisions here in issue.
The drafters of the regulations, as above shown, have consistently demonstrated an intent to qualify for the IDC option those costs which are “incidental expenses,” costs which do not “enter into and form a part of the capital invested or property account,” and costs “which in themselves do not have a salvage vlue.” In other words, expenditures by which the taxpayer does not require “tangible property ordinarily considered as having a salvage value” have been the recurring theme to determine qualification of expenditures for the IDC option.
The relevant provisions, as applied to the instant case, of Treas. Reg. 118, construed in light of the drafters’ apparent overall goal, set forth the task to determine which costs are *286attributable to an item having a salvage value and which costs are incurred in using that item for the drilling of wells or their preparation for production. As previously analyzed, the items of expense incurred in fabricating the salvageable component parts of the platform structure did add value to the basic tangible materials which in part comprised the component unit and that value can be salvaged when the overall structure is dismantled and the components reused. On the other hand, the items of expense incurred in assembling the component parts to form a section, in moving the section to the drilling site and in securing it so that it can be used for the drilling of wells qualify for the IDC option. This 'latter group of costs are labeled in the regulations as hauling and installation costs.
Although the trial judge acknowledges that the basic component units of the platform do have a salvage value,38 he interprets the regulations to restrict the application of the “salvage value” phrase so as to have that phrase relate only to the tangible raw materials from which the templets and other basic components were fabricated. Recognizing that subsection (c) (1) of the IDC regulations gives “examples” of items to which the option does not apply, the trial judge focuses on the fact that the taxpayer does not seek to deduct the cost of the “actual materials” used in the offshore platforms. Nevertheless, because under the taxpayer’s practice the basic templet unit and other component parts of the platform are salvaged as a unit, the costs incurred in fabricating those component units have salvage value. The example which refers to the “actual materials” used in the offshore platforms within the sense of the regulation, in my opinion, includes the fabricated templet basic unit components. Those are the relevant “actual materials” from which the offshore platforms were constructed.
To buttress his conclusion that the costs incurred during fabrication of the basic component units do not have salvage value and thereby qualify for the IDC option, the trial judge quotes from the Harper Oil decision.39 The trial judge emphasizes the last sentence of the above-mentioned quote, implying that Harper Oil supports his reasoning. To my *287understanding, the above referred to sentence lends support for this dissenting opinion rather than for the majority opinion. Justice Blackmun was directing comment to the labor, fuel and supply costs incurred in installing the casing, not to the labor, fuel and supply costs incurred in fabricating or manufacturing the casing. This observation becomes clear when one reads the entire paragraph from which the quoted passage is taken. By paraphrasing Mertens Law of Federal Income Taxation and by referring to the “cost of * * * casing,” Justice Blackmun clarifies his prior statement whereby he was referring to installation costs, not manufacture costs, of the casing. Juxtapose Justice Blackmun’s discussion concerning casing with my previous discussion concerning templet units. The result is that the cost of installing templet units, viz., assembling the units to form structural legs of the platform, would qualify for the IDC option; however, the cost of fabricating the basic templet units would not qualify for the IDC option.
The trial judge also placed great reliance upon the sentence in the regulations which reads:
For the purpose of this option, labor, fuel, repairs, hauling, supplies, etc., are not considered as having a salvage value, even though used in connection with the installation of physical property which has a salvage value.
The trial judge correctly reasons that:
* * * [t]he obvious reason for the clause in cfuestion is to eliminate a possible contention that the option-type expenditures (labor, fuel, etc.) acquire a salvage value because they were connected with the installation of admittedly salvable property. * * * [T]he clause in no way restricts the application of the regulation but instead expands it to include a situation where option-type expenditures can be related to salvable property without losing their own characterization as nonsalvable items. [At page 272.]
However, by focusing on the tangible basic materials instead of the salvageable basic component units of the platform, the trial judge, in my opinion, incorrectly concludes that Humble installed “lengths of pipe and steel beams.” On the contrary, Humble installed the basic component unit. Consistent with *288the regulations, installation costs of the basic component unit are subject to the option; the only costs not subject to the option are those costs incurred in fabricating the platform components. It is those costs which I contend have a salvage value.
In order to support his conclusion that the above-quoted regulation sentence brings fabrication as well as installation costs within the IDC option, the trial judge reasons that the drafters intended the word “installation” to expand the coverage of the IDC option to include “option-type expenditures [which] can be related to salvable property without losing their own characterization as nonsalvable items.” Consistent with the trial judge’s reasoning, the quoted sentence “expands” the coverage of the regulation only insofar as it assures that the immediately preceding regulation sentence 40 is not to be interpreted to disallow installation costs incurred with respect to salvageable property.
Another critical inquiry in this case is the proper meaning to be attributed to the words “in themselves.” 41 In addressing the problem of interpreting this phrase, the trial judge chose to substitute the phrases “in and of themselves” (at page 271) and “in and of itself” (at page 276) for the actual words of the regulation. In my opinion the trial judge gave undue emphasis to the words “in themselves” and thereby failed to acknowledge the importance of subsequent language in the regulation which bears on the inquiry.
In at least three separate places in the Eegulations in issue, installation costs are singled out for favorable treatment. Thus, the Eegulations distinguish between those costs incurred in the installation of physical property and those costs incurred in acquiring the tangible items being installed. The labor, fuel, etc., used in erecting the platform structure, or in transporting the structure to the drilling site, add no value to the structure which can be salvaged when the drilling operation is completed and, hence, do not “in themselves” have salvage value. On the other hand, labor, fuel, etc., used in fabricating the salvageable components of such a structure *289do add value to and become integrated with the tangible basic materials comprising the component part. Therefore, the items, both intangible and tangible materials, have salvage value “in themselves.” Having a salvage value “in themselves,” the items do not qualify for the IDC option; the cost of the items must be capitalized and recovered only through depreciation. In other words, the general rule as stated in Section 263(a) of the Internal Revenue Code of 1954 is applicable, not the exception to the general rule, i.e., Section 263(c).
It should be noted that the IDC option remains, as it has been since its birth, an addendum to the general capitalization principle enunciated by § 263(a). Harper Oil, supra at 1342. Capitalization of this kind of cost is the rule and ex-pensing the exception. The deduction afforded by § 263(c) is not a matter of right; rather, it is a matter of legislative grace. The deduction must be authorized by “clear provision.” And it is the taxpayer who has the burden of demonstrating that he is entitled to the deduction. Harper Oil, supra at 1342; New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934); Deputy v. duPont, 308 U.S. 488, 493 (1940); United States v. Olympic Radio & Television, Inc., 349 U.S. 232, 235 (1955); New World Life Ins. Co. v. United States, 88 Ct. Cl. 405, 26 F. Supp. 444 (1939); Mayer v. United States, 126 Ct. Cl. 1, 111 F. Supp. 251 (1953). In my opinion, the taxpayer in the instant case has failed to demonstrate by pointing to a clear provision in the regulations that it is entitled to deduct via the IDC option those costs incurred while fabricating the basic component units of its drilling platform. For the foregoing reasons, I am firmly convinced that the costs of fabricating the basic templet -units, a necessary component part in the templet-type platform used by Humble during the tax years in question, are not subject to the IDC option.
FINDINGS OF FACT
1. The plaintiff, Exxon Corporation (Exxon), is a Delaware corporation engaged in substantially all phases of the petroleum and petrochemical businesses, including exploration, development, production, refining, transportation, and marketing.
*290On November 12, 1954, Standard Oil Company (New Jersey) 'acquired in excess of 80 percent of the voting power of all classes of stock of Humble Oil & Refining Company, a Texas corporation, hereinafter referred to as Humble. Humble timely filed a separate income tax return for that portion of 1954 (January 1,1954 through November 11,1954) during which its income was not included in the consolidated return filed by Standard Oil Company (New Jersey). On December 1, 1959, Humble entered into an agreement with Humble Oil & Refining Company, a Delaware corporation hereinafter referred to as Humble (Delaware), whereby Humble transferred all of its assets to Humble (Delaware) and Humble (Delaware) assumed all the obligations and liabilities of ETumble. The name of Standard Oil Company (New Jersey) was changed to Exxon Corporation and on January 1,1973, Humble (Delaware) was merged into Exxon Corporation, which thereupon became the owner of the claim here in issue.
2. During 1954, Humble built in the Gulf of Mexico offshore oil drilling and production platforms. These offshore platforms were numbered by Humble 797E, 797F, 798D, 804G, 820E, and 1428B. An extension was added to platform 820E later in 1954. Also extended in 1954 was a seventh platform, number 802C, which had been built prior to 1954. These platforms were located on numbered leases which leases conveyed to Humble an operating interest in the territory subject thereto.42
3. These offshore platforms and extensions thereof were necessary for drilling wells in the seabed and thereafter preparing the drilled wells for the production of oil and gas. The platform extensions were built to permit the drilling of wells in excess of the number for Which the platform had originally been designed. Whenever a well drilled from an offshore platform proved productive, the platform remained at the location of the well and was thereafter used for production purposes. All of the platforms and platform extensions mentioned above with the exception of platform 1428B, *291are still in place in the Gulf of Mexico and are being used as production units. Platform 1428B was dismantled during 1954 and removed from the Gulf in 1955.
4. The amounts in issue, which Humble deducted on its 1954 Federal income tax return pursuant to an election to deduct all “intangible drilling and development costs”, are the costs incurred by Humble for wages, fuel, repairs, hauling, and supplies during the land-phase and water-phase construction of these platforms and platform extensions. However, a portion of the construction costs incurred by Humble (for wages, fuel, repairs, hauling, and supplies) in building offshore platforms are not in issue; the defendant does not contest that Humble properly deducted as intangible drilling and development costs all of its water-phase construction costs incurred after the partially constructed parts of a platform, and related materials, were lifted by crane from the construction barge. These latter construction costs were classified by the examining agent as currently deductible “erection” costs, in contrast to the earlier construction costs classified by the agent as non-deductible “fabrication” costs. Accordingly, the water-phase construction costs in issue are the costs incurred before the platform pieces and related materials were lifted by crane. The costs of the actual materials in the platforms, such as lengths of pipe and steel beams, were not deducted by Humble on its 1954 Federal income tax return and, accordingly, are not in issue. The dollar amounts of expenditures in issue per platform are as follows:

5. Humble’s Exploration Department selected the drilling site for each of the offshore platforms. Information as to each selected site location was transmitted to Humble engineers in its Operations Division which was charged with *292the responsibility of designing the platforms. These engineers then gathered further pertinent information about the particular drilling site under study such as water depth, tides, wind and storm ratings, wave forces, soil conditions, number of wells to be drilled, depth of wells, type and weight of the drilling rig, and location of rig components and supporting facilities on the deck. Some of this information, particularly underwater conditions, was obtained by the Operations Division from outside consulting engineers who performed core drillings and furnished soil surveys. Other information, such as the anticipated number of wells to be drilled at each location, the type of drilling rig to 'be used, and the nature of the supporting facilities to be placed on the platform, was conveyed to the Humble engineers by the Operations Division superintendent.
6. Thereafter Humble engineers prepared all detailed plans and specifications for each platform or platform extension to be constructed. In the course of these preparations, there was correspondence among Humble engineers in the Headquarters Production Department located in Houston, Texas, Humble engineers in the Louisiana Division Office located in New Orleans, Louisiana, and Humble engineers in the Humble District Office located at Grand Isle, Louisiana. In 1954 the basic design work was performed in Houston by the Office of the Chief Civil Engineer in the Headquarters Production Department. The actual plans, construction specifications, and construction drawings were prepared by the Louisiana Division Office in New Orleans, but any design changes or modifications proposed by the Louisiana Division Office were reviewed and either approved or disapproved by the Headquarters Production Department in Houston.
7. Each platform in 1954 was individually designed specifically to take account of various factors pertinent to the particular site location. 'See finding 5, supra. Recognition of these factors, which varied from one site location to another, necessitated some design -differences between platforms at different locations. Examples of the differences actually occurring among the 1954 platforms and platform extensions include (a) the number of templets which provided hori*293zontal support for the platform pilings, and which ranged from four to nine per platform, (b) the sizes of the templets which were 10' x 10' for some platforms, and 20' x 20' for others, (c) the templet spacings, (d) the deck areas, ranging from 70' x 85' to 60' x 120', (e) the type and size of structural pilings, (f) the sizes and weights of cap beams and types of portal bracing (both used to connect the templets to each other), sizes and weights of skid beams, of templet legs and bracing, of deck beams and of-conductor pipe and (g) the weights of the platforms which ranged from 466 tons to 1,000 tons.
8. Although the 1954 platforms were designed for a specific location and to take account of the peculiarities of that location, the basic concept and design of a templet-type offshore platform in 1954 had been standardized. The original concept, was developed by W. Horace Williams Company, Inc. (hereinafter “Williams”), and in 1947, through the joint efforts of Humble and Williams personnel, Humble erected -the first operational templet-type platform in the Gulf of Mexico. There were other types of offshore structures used by oil companies in 1954 such as caissons and jacket type platforms. Caissons are large, installed single pipes, used for purposes other than drilling. Jacket-type platforms utilize a single-trussed structure (rather than several trussed structures, such as templet-type platforms) for vertical support and are suitable mainly for use in shallow water. All platforms built or extended' by Humble in 1954 were templet-type platforms.
9. The platform construction process was divided into two stages referred to as the “land phase” and the “water phase.” Humble did not employ its own personnel to perform either the land phase or water phase construction, because it was uneconomical to maintain a continuing labor force for these purposes. Therefore, Humble engaged independent contractors to perform the actual construction of its platforms.
10. Humble selected its independent construction contractors by writing to various construction companies requesting bids. Such invitations for bids were generally sent to Williams, to J. Ray McDermott Company of Assumption Parish, Louisiana, and to Brown & Root, Inc. of Plaquemines *294Parish, Louisiana. All three were well-known, experienced marine contractors. In addition, invitations to bid were sent to Hunt Tool Company for platforms 797E and 797F and to Young-Elkins Machine & Supply Company for platform 797F.
Attached to the invitations were the plans and specifications for the platform involved which had been prepared by Humble engineers, as above described. Also attached were sample contracts and a list of materials to be supplied by Humble. Generally, this Humble-supplied material consisted of structural goods such as the heavier steel beams and larger sizes of pipe. The list of material further indicated whether the material furnished by Humble was new or second class (salvaged).
11. Upon receipt of an invitation to bid, Williams’ personnel estimated the costs which would be incurred in performing both the land and water phase contracts. Williams then submitted its bids to Humble, whose engineers analyzed the elements of the cost estimates for each bid. The analysis would set forth for each land phase contract the costs of materials to be furnished by Humble and of those to be furnished by Williams, the costs of performing the land phase prefabrication work on the platform components, the costs of loading the platform components onto barges for transportation to the offshore site, and the amount of the contractor’s overhead and profit. Included in the analysis of the land phase estimate for costs of performing the land phase prefabrication would be a detailing of costs for labor, fuel, repairs, supplies, and hauling incurred by the contractor. These detailed costs would reflect both direct and indirect costs. An analysis would also be made for each water phase contract on a similar basis. The water phase analysis would set forth a breakdown of direct and indirect costs for materials, transportation, labor, insurance, and the contractor’s fee.
12. It was customary for separate contracts to be entered into for the land and water phases of each platform or platform extension. The land phase contract was typically a fixed-price contract while the water phase contract was a cost-plus-fixed-fee contract. A cost-plus-fixed-fee contract *295was used for the water phase because uncertain weather conditions in the Gulf made it difficult to estimate the total costs involved.
With the exception of one platform, Williams was awarded the land and water contracts for all platforms and platform extensions built during 1954. Hunt Tool Company was awarded the land contract for platform 797F.
13. A typical land phase contract in 1954 contained the following language:
Contractor agrees to begin immediately and to press with due diligence until completion in a good and workmanlike manner with the necessary plant facilities, supervision, crews, tools, machinery and equipment furnished and maintained by Contractor at his own cost and expense the erection, fabrication or construction of the parts in accordance with the plans and specifications agreed to by Contractor and Humble, of one (1) marine type offshore drilling structure with spud piles * * * for use at a well location known as Grade Isle * * * on (the) Gulf of Mexico. It is the intention of the parties hereto that Contractor shall, under this contract, prefabricate as much of the platform and shall perform as much of the actual work towards the building of said platform as may be possible and consistent with good engineering practice towards the end that the least amount of work for the erection of this platform will remain to be done under the Water Phase of the job which is covered by a separate contract. When completed, Contractor agrees to load all of the parts of such structure into barges furnished by Contractor at Contractor’s terminal and to make same ready for transportation to the well location.
The specifications, * * * and the plans * * * according to which the Contractor is to fabricate and construct such parts are attached hereto and made a part hereof for all purposes * * *
H» H* *f» «í»
Humble has in stock and will make available to Contractor at New Orleans, Louisiana, certain material, templets, structural steel and steel pipe. From this material it has been agreed between the parties that Contractor shall employ the items and the quantities which are specified in Material Inventory List attached hereto.
*296Upon notice from Contractor to Humble that all of the structural parts have 'been completed in accordance with the terms and requirements of this contract, the acceptance thereof by Humble and the loading thereof by Contractor upon its barges ready for transportation to the well site, the contract price shall be due and payable by Humble to Contractor.
14. Upon being awarded a land phase contract, Williams would order the materials which it was obligated to furnish under the contract, and Humble would furnish the materials which it had agreed to furnish.43 When the materials ordered by Williams for a Humble platform arrived at Williams’ construction or fabrication yard, they were identified on the shipping documents as pertaining to a particular platform job, although each piece was not itself specifically so marked. Although legal title to sudh materials did not pass to Humble until delivery of the platform parts to the transportation barge, Williams regarded the materials as “belonging” to Humble, since it had purchased them specifically for the purpose of satisfying its contractual obligations to Humble.
15. After the platform construction materials had been assembled in Williams’ fabrication yard, approximately fifty Williams’ employees, mostly iron workers, were deployed in the performance of the land phase contract. The iron workers were classified into three basic groups according to skills; namely, burners, fitters, and welders. A burner, using an acetylene torch, cut the steel beams, pipe, bars, and plate into the required shapes and sizes required by Humble specifications. A fitter, taking the pre-cut pieces, further trimmed and fitted the pieces together in order that they might then be welded. The welders first tack-welded the fitted pieces and then returned to perform the finish welds.
16. Before a welder could perform work on any of Humble’s 1954 platforms, he had to pass a test administered in the contractor’s yard by a Humble welding inspector from the Louisiana Division Office in New Orleans, Louisiana. *297Williams did not test the welders whom it hired to perform work on a Humble platform, but instead relied upon Humble’s welding inspector to determine whether the welders were qualified to do the work. After testing the contractor’s welders, the Humble welding inspector periodically checked the welds which were made during the course of the land-phase construction to determine if the welding was being performed in accordance with Humble’s plans and specifications. In the event a weld was found to be defective, the welding inspector required Williams to replace it. In addition to a welding inspector, a Humble engineer from the Louisiana Division Office inspected the progress of the land construction work during visits from time to time to the contractor’s yard. Both he and the welding inspector could, and in some cases did, require Williams to revise its work to conform to Humble’s plans and specifications. Williams assumed no responsibility for the adequacy or performance of the platforms which it constructed from Humble’s plans and specifications.
17. It was agreed as a term of the land job contract that Williams would perform as much of the prefabrication and construction work on land as was reasonably possible. Therefore, Williams generally carried out its land-phase construction work to the point where the platform was in the largest pieces that could be lifted by crane onto the barge. However, an additional limiting factor with respect to land-phase construction was the size of the canal from Williams’ yard to the Gulf of Mexico, since the platform could only be constructed on land to the extent that it could pass under the bridges over the canal as well as through the canal locks.
18. When the various component parts of the platform in their largest manageable size had been completely loaded onto the barge, or barges, the land phase of the construction contract was at an end. The water stage of construction began with the towing of the barges to the drilling site in the Gulf of Mexico. The construction work on the water was performed from a construction ship or construction barge which had a crane capable of lifting the pieces of the partially constructed platform. A substantial amount of welding, cutting, and fitting work was performed on the construction *298barge before pieces of tbe platform were lifted by crane. The welding, cutting, and fitting work performed after the platform pieces were lifted by crane is not in issue because the defendant has conceded that these construction costs are currently deductible as intangible drilling and development costs.
19. During the water work, -Humble assigned a civil engineer and a welding inspector to the project who ascertained whether the work conformed to the standards and specification set forth in the water-phase contract. The engineer and the welding inspector held the same authority during the water work as the division engineer and welding inspector held during the land work. The engineer and welding inspector often lived on the construction vessel throughout the the water stage.
20. If no economically productive wells were drilled at a particular location, the platform would be dismantled. The dismantling generally occurred in the reverse order of the prior erection -and assembly process. The dismantled platform parts, which were roughly the same prefabricated parts as existed at the completion of the land-phase contract, would then be taken ashore. There they would be stored at Humble’s Grand Isle installation or in a contractor’s yard for further disposition.
For the most part, however, Humble’s 1954 offshore platforms proved productive and have remained at the well locations for production purposes. Hence, as stated above, all of the platforms and platform extensions in issue are still in place in the Gulf with the exception of platform 1428B which was dismantled during 1954 and 1955.
21. There were several reasons for dismantling and removing unproductive platforms instead of simply leaving them in the water. The construction permits from the Army District Engineer required Humble to remove a platform upon expiration of its permit, or if the platform was incomplete at the expiration of the permit, or upon request. Since Humble knew it would probably be directed to remove a platform upon expiration of its permit in order to reduce navigational hazards posed by the platform, it elected to do so as soon as the platform ceased to be useful. Humble *299also recognized that by removing an unproductive platform as soon as possible and even prior to expiration of the permit (which was often valid for as 'long as ten years), it could thereby avoid the substantial costs of maintaining navigational aids such as lights, horns, and bells on the platform, as required by the United States Coast Guard. Humble’s exposure to liability for damages resulting from possible ship collisions with the structures was also reduced by early dismantling. Finally, Humble was able to use the components of the dismantled platforms in the construction of other drilling and production platforms. For example, platform 1428B, which proved unproductive, was dismantled in late 1954 and early 1955, and most of its parts were thereafter reconditioned and used in a platform built on state lease 2729.
22. With respect to the monetary value and economic feasibility of reusing salvaged materials, there are Humble files containing estimated figures which suggest that the costs of salvage operations consistently exceeded the monetary value of the materials expected to be salvaged, all as indicated by what management called an Authorization for Expenditure (AFE).44 The actual cost of salvage, however often varied from the estimated cost thereof as Humble’s actual experience with the removal of about sixteen platforms shows. Sometimes the actual cost would exceed the estimated cost by as much as 40 percent, and sometimes the reverse occurred. Sometimes a similar type of variance could be noted between the actual and the estimated values of salvaged parts. Accordingly, at this stage of technological experience in offshore platform construction, such estimates appeared to be little more than engineer guesses.
On one occasion, the dismantling of platform 1428B in 1954, the salvaged components were valuable to Humble as a means of expediting the construction of another platform, without regard to any particular monetary value they might have had. Humble had dismantled that particular platform with the intent of immediately reusing the components and thus hasten the construction of the platform on lease 2729 *300without losing the time otherwise required to fabricate the components from new steel.
23. On October 29, 1954, Humble wrote to Williams requesting a bid for the dismantling and salvage for reuse of platform 1428B, stating in part:
You are invited to submit a bid to cover the salvage of this platform. The work to be done consists of: (1) removing all parts of the platform and eight anchor piles from the Gulf; (2) loading this salvaged material on barges; (3) transporting salvaged material to Contractor’s yard; (4) unloading all salvaged material; (5) reconditioning all material by removing all marine growth, mud, rust scales and damaged protective coatings by adequate hand and/or mechanical methods, and priming all exposed steel; and (6) storing for use in other platforms. In dismantling the platform, the material should be removed as nearly as possible in sections and shapes that can be reused in future construction, and should be handled in such manner as to prevent damage to the sections. Contractor will be expected to remove templets intact and to pull the piling and anchor piles from the Gulf bottom.
Williams was awarded the Salvage Job contract which was signed on November 24, 1954. Attached thereto was an exhibit titled “Specifications for Salvage of Offshore Platforms” reading, in part as follows:
The platform shall be dismantled in sections or parts corresponding to the prefabricated sections or parts from which the platform was erected. Where the handling of larger parts will materially speed the work in the Gulf, parts commensurate with the capacity of the equipment being used may be removed. Such parts, however, shall not destroy the integrity of the prefabricated sections and shall be further dismantled in Contractor’s yard for conditioning and storage. All sections or parts shall be rigged for handling in such manner as to prevent damage to the sections or parts in loading and unloading.
*****
After being unloaded in Contractor’s yard or other yard specified by Humble, all parts, sections and materials from the dismantled platform shall be conditioned for storage and/or use in future platforms by removing all marine growth, mud, rust scales and damaged protective coatings by 'adequate hand and/or mechanical *301methods and by priming all exposed steel to prevent further corrosion while stored. * * *
% # # #
Templet sections, cap and portal sections and other fabricated sections shall be stocked as units. Beams, piles and pipe shall be marked to show length of each piece, with fade-proof crayon, so as to be readable after stocking without handling other pieces. Creosote decking may be used for cribbing and shall be placed so beams and pipe will drain and bear evenly. Small items such as bolts, lag screws, fence posts, floor flanges, clevises, etc., shall be grouped for inventory and storing. All junk items shall be assembled in one pile for disposition by Humble.
24. The dismantling and salvage of platform 1428B was a difficult operation, and parts of the platform were badly damaged in the process. One principal cause for this was the use by the contractor of an 80-ton crane, the capacity of which proved insufficient to pull the templets from the Gulf floor according to plan. As a result, dynamiting was resorted to for loosening the templets, and the explosive blasts caused substantial damage to some platform parts.45 Nevertheless, after considerable modification and reconditioning, most of the salvaged parts of platform 1428B were reusable at least once in other platforms. Some parts were not immediately reused, but were reconditioned and stored in Williams’ yard for future reuse. 'Other salvaged parts were junked or sold as scrap, such as conductor pipe, pile caps, and severely damaged portions of templet legs or braces, of fence, of walkway, of cellar, and of stairway. Parts of platform 1428B not salvaged at all included the anchor piles, the “H” piling, and several lower templets.
25. The platform erected on state lease 2729, in the construction of which significant parts of platform 1428B were used, was located on a site with conditions quite different than those where platform 1428B had been located. The soil foundation in the South Pass area (state lease 2729) was considerably different than that in the Grand Isle area (state *302lease 1428). The South Pass area is geologically newer than the Grand Isle area, and its soil foundation, being composed of soft, highly unstable muds, is less competent than that at Grand Isle. As a result, the platform pilings penetrated an average of 420 feet into the muds and were the deepest piles driven by Humble at that time for platform purposes. The nine templets, salvaged from platform 1428B and reused at South Pass, each required 35 foot extensions to adapt them to this reuse. In addition, the near surface conditions at South Pass differed from those at Grand Isle and necessitated radical changes to provide a greater capacity of the platform to resist the lateral load from wave forces. To increase lateral stability and provide additional support under the drilling rig, several 10' x 10' templets from platform 1428B were remodeled into three 10' x 20' templets for use on the seaward side of the South Pass platform.
26. Occasionally Humble would design, or actually begin prefabrication of, a platform before the exact site had been established. At such times, the approximate location of the site was known, and the platform would be designated for accounting purposes as a “stock platform”. In this manner, expenses and other tabulations could be appropriated, accumulated, and identified to the proper platform, and work begun without waiting for designation of the exact site. Usually this method was used only when the contemplated site was close to a lease line. Only minor design modifications were required when the exact site location was eventually determined, which was usually never more than several hundred feet from the approximate location.
27. Derricks, such as those used on the 1954 platforms, were constructed for Humble by contractors. Boiled steel shapes, such as angles, channels and beams, as well as steel grating, bolts, and washers, were used in the fabrication of derricks. These basic materials were purchased by a supplying firm. The supplying firm then fabricated these basic materials into derrick parts by cutting the pieces to length, punching them for bolt holes and galvanizing them. The parts thus fabricated and comprising the parts required for a complete derrick were purchased by Humble from the supplying firm as a derrick (dismantled). The principal *303supplying firms were Lee C. Moore and Emsco Derrick and Equipment Company. Tbe derricks and derrick substructures supported the drilling rig equipment. The. derricks were constructed on the platforms by a rig building contractor. “Construction” really consisted of “erection”, since no substantial fabrication occurred at the platform site. As noted above, the supplying firms from whom Humble purchased the derricks had already performed the fabrication work prior to the erection phase on the platforms. When a derrick was no longer required on a platform, due to cessation of drilling operations, it was dismantled, transported to another platform, and re-erected in the same manner. It was normal practice to utilize a drilling derrick on more than one drilling platform if drilling schedules so permitted. The construction work performed on derricks consisted of transportation, labor, and equipment required to erect the derrick on the drilling platform. In the case where a drilling derrick was dismantled, moved, and re-erected on another drilling platform, it was then necessary to replace bolts and bent or missing members, as well as damaged flooring. Derricks were transported in a “knocked-down” condition, since they were too bulky and fragile to transport in an erected condition.
28. With respect to the administrative proceedings herein, the parties have stipulated that on March 3, 1965, the Commissioner of Internal Revenue assessed a deficiency in income taxes against Humble with respect to its income tax return filed for the period January 1, 1954, through November 11, 1954. A portion of that deficiency, in the amount of $349,726, was due to the disallowance of deductions claimed for offshore platform construction expenditures attributable to the tax period totaling $791,172. Humble paid the deficiency plus assessed interest, and thereafter timely filed its claim for refund in the amount of $558,733, representing the $349,726 portion of the deficiency plus $209,007 assessed interest. On November 17, 1967, the Internal Revenue Service issued a notice disallowing the claim for refund of Humble under Section 6532 (a) (1) of the Internal Revenue Code. Following agreements extending the time for bringing suit until November 16,1971, Humble timely filed its petition herein on November 12,1971.
*30429. Subsequent to tbe filing of the petition, defendant’s counsel requested that the revenue agent examine the amounts set forth in the petition, and with the concurrence of Humble, he reduced the amount in. controversy ¡regarding the water work on platform 797E, in the amount of $7,011, and also reduced the land costs and water costs on platform 802C, in the amounts of $250 and $57,750, respectively. The plaintiff concedes that these amounts were not currently deductible because they related to production operations rather than drilling operations. It was determined by Humble that platform 797J was actually erected in 1955 and the controverted expenditures relating to that platform, in the amount of $67,276, were actually deducted on the 1955 return. Accordingly, the plaintiff is entitled to a refund for 1954 in the amount of the deficiency and assessed interest attributable to platform 797J. After making these adjustments, the amounts remaining in issue with respect to the several platforms are set forth in tabular form above. See finding 4.
30. The amounts of tax and assessed interest in issue are also stipulated by the parties as follows:

CONCLUSION OF LAW
Upon the foregoing findings of fact which are made a part of the judgment herein, the court concludes as a matter of law that plaintiff is entitled to recover, and judgment is entered to that effect, with the determination of the exact *305amount of recovery to be made in further proceedings under Rule 131 (c).
In accordance with the opinion of the court, a memorandum report of the trial judge and a stipulation of the parties, it was ordered on February 4, 1977 that judgment for the plaintiff be entered for $512,818, together with statutory interest as provided 'by law.

 JTor ease in discussion throughout this opinion, I will refer only to templets as the pre-fabricated basic component parts of the drilling platform. However, there were other pre-fabricated basic component parts, such as cap and portal sections. To the extent that the other basic component parts are similar to the above discussed templet sections, I would deny the IDC option to the costs incurred in fabricating those component parts.

 The costs to which I refer, in addition to the enumerated costs, include the cost of insurance and taxes, as well as the contractor’s overhead and profit

 All platforms built or extended by Humble (plaintiff’s predecessor) In 1954 were templet-type platforms. Findings of Fact, No. 8. Therefore, this opinion does not consider with respect to the IDC option the other types of offshore structures used by oil companies In 1954, such as caissons and jacket-type platforms.

 For other design differences, see Findings of Fact, No. 7.

 Templets are fabricated structures composed of steel beams and pipe which are designed to support the platform deck.

 A well-documented pictorial treatise, “Humble Oil and Refining Company, Civil Engineering Project Report, July 20, 1956," Joint Exhibit 1, in evidence and part of the record of this ease, visually presents the construction of a Humble offshore drilling platform.

 See Findings of Fact, No. 4.

 On October 29, 1954, Humble wrote to Williams requesting a bid for the dismantling and salvaging for reuse of a platform, stating in part: “* * * In dismantling the platform, the material should be removed as nearly as possible in sections and shapes that can be reused in future construction and should be handled in such manner as to prevent damage to the sections. Contractor will lie expected to remove the templets intact and to pull the piling and anchor piles from the Gulf bottom.” [Emphasis supplied.] Williams was awarded the salvage job contract. Attached thereto was an exhibit titled “Specifications for Salvage of Offshore Platforms” reading, in part, as follows :
“The platform shall be dismantled in sections or parts corresponding to the prefabricated sections or parts from which the platform was erected. * * «
*****
“Templet sections, cap and portal sections and other fabricated sections shall be stocked as units. * * *” [Emphasis supplied.] [Findings of Fact, No. 23.]

 Although Justice Blackmun was referring to Treas. Reg. § 1.612-4(c) (1) (1965), that Identical language appears In Reg. Ill § 29.23 (m)-16(c) (1) Issued under the 1939 Code and applicable to the instant case.

 Findings of Fact, No. 24.

 Findings of Fact, No. 25.

 An item not In Issue In the present case but still analogous to the basic templet unit Is the component parts of the derricks which were used on the 1954 platforms.
The derricks were constructed for Humble by contractors. Rolled steel shapes, such as angles, channels and beams, as well as steel grating, bolts and washers, were used In fabrication of derricks. These basic materials were fabricated Into derrick parts by cutting the pieces to length, punching them for bolt holes and galvanizing them. The parts thus fabricated and compris*284ing the part required for a complete derrick were purchased by Humble from the supplying firm as a dismantled derrick. These parts were then erected Into a derrick on the platform by a rig building contractor. When the derrick was no longer required on the platform, due to cessation of drilling operations, it was dismantled, transported to another platform and re-erected. (Findings of Fact, No. 27).
As with the basic templet unit, those costs incurred in moving, assembling and making the derrick parts operational as a derrick would in a proper case be allowed to qualify for the IDC option. The expenditures for wages, fuel arid supplies, etc., Incurred In fabricating the basic tangible materials into derrick parts would not qualify for the IDC option.

 T.D. 4333, XI-1 Cum. Bull. 31 (1932).

 Treas. Reg. 103, § 19.23 (m)-16.

 T. D. 4333, supra at 31.

 It should be noted that In 1943 the Treasury issued T.D. 5276 01943 Cum. Bull. OLStl, amending Treas. Reg. 103) which constituted a complete overhaul of the IDC option for taxable years beginning after December 31, 1942. Except for the fact that costs subject to the IDC option were defined to include the cost to the operator of any drilling or development work done for him by contractors under any form of contract, T.D. 5276 did not change with respect to the instant case any pertinent provision of T.D. 4333, which carried over to Reg. 118.

 H.R. Con. Res. 50, 79th Cong., 1st Sess. (1945); 1945 Cum. Bull. 545.

 At page 271.

 At page 274.

 “In general, this option applies only to expenditures for those drilling and developing Items which in themselves do not have a salvage value.” Reg. 118, § 39.23(m)-16(a) (1).

 See note 40.

 Platforms derived their Identification numbers from the number of the particular state lease upon which the platform was located. For example, platform 798D was located on land subject to lease number 798. The “D” indicates that 798D was the fourth platform erected on lease 798.

 In 1954, a Humble offshore drilling and production platform was constructed from several principal categories of materials, including (a) rolled structural steel shapes known as “H” beams, (b) structural steel pipe, (c) structural steel bars and plate, and (d) structural timber. Humble purchased and supplied the heavier materials, such as steel beams and plate from steel mills, and Williams obtained and supplied the smaller items which it also purchased from steel miUs.

 An AFE was a device used by Humble management formally and officially to authorize the commencement of a planned project. In the context of value, it represented the estimated value of the parts after salvage, as calculated prior to the commencement of the salvage operation.

 In later platform salvage operations, Humble managed to avoid some of tbe difficulties and damage which occurred during the salvage of platform 1428B. For example, 3T. Ray McDermott Co., Inc. used a 250-ton American crane to pull the templets of platform 929B.