                       T.C. Memo. 1997-457



                     UNITED STATES TAX COURT



             BADGER PIPE LINE COMPANY, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 23441-95.                      Filed October 8, 1997.



     Travis M. Dodd, Richard B. Noulles, and Jeffrey C. Rambach,

for petitioner.

     Gary L. Bloom, for respondent.



                          MEMORANDUM OPINION


     TANNENWALD, Judge:     Respondent determined a deficiency of

$93,440 in petitioner's Federal income tax for the taxable year

ended December 31, 1991.
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     After concessions, the issue for decision is whether

petitioner may deduct or must capitalize the expenses of

relocating a portion of its pipeline.1

Background

     This case was submitted fully stipulated under Rule 122.2

The stipulation of facts, supplemental stipulation of facts, and

attached exhibits are incorporated herein by this reference.

     Petitioner is a corporation, whose principal office was

located in Tulsa, Oklahoma, at the time the petition was filed.

It timely filed its 1991 tax return with the Internal Revenue

Service Center, Austin, Texas.

     Petitioner operates a common carrier refined products

pipeline system transporting refined petroleum products in the

States of Illinois, Indiana, and Wisconsin.   The system consists

of approximately 335 miles of pipeline.   Approximately 25 miles

of the pipeline consists of 16-inch pipe; the remainder consists

of 12-inch or smaller pipe.

     Petitioner's pipeline system is located on both private and

public property.   Because it is not always possible or


     1
        If we decide petitioner must capitalize all or some of
these expenses, then petitioner will be entitled to a
corresponding depreciation allowance.
     2
        Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable year at
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
                               - 3 -


practicable for petitioner to purchase the property that its

pipeline must traverse, petitioner often will purchase an

easement, or right-of-way, granting it the right to locate its

pipeline on particular parcels of private or public property.    In

some instances, however, petitioner is unable to purchase a

right-of-way because that right previously has been conveyed to

another easement holder, such as when the State holds the right-

of-way in property that borders a highway.   Under such

circumstances, petitioner may acquire a permit which allows it to

locate its pipeline within the existing right-of-way.     As a

matter of contract, however, such a permit often provides that if

petitioner's pipeline ever interferes with the right-of-way

holder's future use of the right-of-way, petitioner is

responsible for the cost of relocating the pipeline in order to

cure any such interference.   This method of securing a location

for the placement of pipeline represents a common, ordinary, and

necessary practice throughout the pipeline industry.

     At some point prior to 1991, petitioner entered into a

contractual agreement with the Illinois Department of Public

Works and Buildings, Division of Highways, predecessor to

Illinois Department of Transportation (both hereinafter referred

to as IDOT), whereby petitioner secured a permit to locate its

pipeline within an IDOT right-of-way that bordered certain

Illinois highways.   Pursuant to that permit, petitioner was and
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is contractually responsible for the cost of relocating its

pipeline if it were found later to interfere with IDOT's

prospective use of that right-of-way.

     Beginning prior to 1990, IDOT disclosed to petitioner and

other pipeline companies plans for improvements it intended to

make along Illinois Route 83, including pavement reconstruction

and the construction of certain retaining walls and noise

abatement walls.   The proposed IDOT improvements along Route 83

at the relevant location conflicted with petitioner's and at

least three other pipeline companies' existing pipelines within

IDOT's right-of-way.   By September 1990, it was determined that

petitioner and the other pipeline companies would be required to

relocate less than 1,000 feet of their respective pipelines in

order to comply with the existing IDOT permits and to avoid

interference with IDOT's proposed improvements at the relevant

location.   (Hereinafter we refer to the pipeline relocation

project as the Route 83 relocation.)

     Accordingly, petitioner and two other pipeline companies

jointly submitted a proposal to the Village of Hinsdale,

Illinois, and in March 1991 were granted a permit to relocate

their pipelines beneath Jackson Street, adjacent to Route 83.

Petitioner and the two other pipeline companies agreed to share

the cost of removing a portion of Jackson Street and then

restoring it after the pipelines were relocated.   Each pipeline
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company paid the expense of relocating its own pipelines.    Of

petitioner's $288,597 in expenditures on the Route 83 relocation,

$23,111 represents the cost of the new pipe and pipe bends

installed, and $3,196 represents the cost of the pipe coating.

The remainder of $262,290 represents expenditures for labor,

miscellaneous supplies, and the removal and restoration of

Jackson Street.

     When performing a relocation of the foregoing type, it is

not feasible to stop the flow of product through the pipeline for

the duration of time necessary to complete the relocation.

Consequently, petitioner had to dig new trenches, install

replacement pipe, test the pipe, and then divert the product flow

to the relocated portion of the pipeline.   The existing pipe was

then removed.   Completing the relocation in this manner

interrupts product flow for only a few hours and the supply of

product to users only marginally.   Accordingly, petitioner was

able to continue its business operations in the normal course,

with only a minor interruption.   The foregoing procedure is a

common and ordinary occurrence in petitioner's business.

     The less than 1,000 feet of pipeline at issue in this case

is part of the approximately 25-mile section of 16-inch Badger

pipeline originally installed and placed in service in 1968 (the

1968 pipe).   The entire 1968 pipe runs between pumping stations

located at Canal Junction and Des Plaines, Illinois, and
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transports various refined fuel products, including gasoline,

distillates, turbine fuels, and fuel oil.

     Prior to installation, the 1968 pipe was coated externally

with a coating having an approximate thickness of five thirty-

seconds inch.   The 1968 pipe also was protected cathodically,

which is a process by which an electric current is applied to

buried steel pipe to protect bare metal from corrosion in the

event the pipe's coating is flawed, damaged, or otherwise becomes

disbonded.

     In 1991, in order to perform the Route 83 relocation,

petitioner acquired new 16-inch steel pipe (the 1991 pipe).

Prior to installation, the 1991 pipe was coated externally with a

coating having a minimum thickness of 12 mils (twelve one-

thousands inch).   After installation, the 1991 pipe was protected

cathodically using existing cathodic protection at the site.

     After product flow was diverted into and through the 1991

pipe section, the less than 1,000-feet of the 1968 pipe at the

relocation site was removed (the removed pipe) and visually

inspected for signs of corrosion and physical damage, as required

by Federal Department of Transportation Regulations.   Based on

the results of the inspection, petitioner determined that the

removed pipe, with the exception of a small portion damaged

during the removal process, could be saved for re-use elsewhere

in the 16-inch pipeline section should the need arise.   The
                                - 7 -


removed pipe was taken to one of petitioner's storage facilities.

The pipe has not been reused and remains in inventory.

Petitioner did not retire the removed pipe, nor did it remove the

undepreciated cost of that pipe from its books and records.     The

original 1968 pipe on either side of the newly installed 1991

pipe was unaffected by the Route 83 relocation.

     Prior to, during, and following the Route 83 relocation,

petitioner's pipeline complied with all existing regulatory

requirements at the Route 83 location site.   The Route 83

relocation was performed by petitioner solely to comply with its

contractual obligations under its permit from IDOT and in order

to continue the use of its pipeline in the ordinary and normal

course of its business; it was not performed in response to any

regulatory order, regulation, or other regulatory requirement of

IDOT or any other regulatory agency.    Relocation expenses such as

those incurred by petitioner are ordinary and necessary incidents

of petitioner's business, are commonly and ordinarily incurred in

the pipeline business, and are necessary to enable a pipeline to

operate in the normal course of business.

     The Route 83 relocation was not performed as part of a

general plan of rehabilitation or refurbishment.   It was not

intended to, and did not, adapt the pipeline to a new or

different use.   It did not result in any change in use of

petitioner's pipeline system.   Prior to, during, and following
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the Route 83 relocation, the direction, capacity, pressure, and

product flow of petitioner's pipeline remained unchanged,

including the direction, capacity, pressure, and product flow at

the Route 83 location.   The Route 83 relocation was intended to

and did keep petitioner's pipeline in the same ordinary and

normal working condition as it was in before the relocation.

Discussion

     Section 162(a) allows the deduction of "all the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business".    Section 1.162-4, Income Tax

Regs., provides:

     The cost of incidental repairs which neither materially
     add to the value of the property nor appreciably
     prolong its life, but keep it in an ordinarily
     efficient operating condition, may be deducted as an
     expense * * *. Repairs in the nature of replacements,
     to the extent that they arrest deterioration and
     appreciably prolong the life of the property, shall
     * * * be capitalized * * *


On the other hand, section 263(a)(1) provides that "No deduction

shall be allowed for * * * Any amount paid out for new buildings

or for permanent improvements or betterments made to increase the

value of any property or estate."   Such an amount "is a capital

expenditure that is taken into account through inclusion in

inventory costs or a charge to capital accounts or basis".    Sec.

1.263(a)-1(b), Income Tax Regs.
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     Within the scope of section 263(a)(1) are those amounts paid

or incurred (1) to add to the value, or substantially prolong the

useful life, of property owned by the taxpayer, or (2) to adapt

property to a new or different use.      Id.   Examples of capital

expenditures include "The cost of acquisition, construction, or

erection of buildings, machinery and equipment, furniture and

fixtures, and similar property having a useful life substantially

beyond the taxable year."    Sec. 1.263(a)-2(a), Income Tax Regs.

However, section 1.263(a)-1(b), Income Tax Regs., specifically

recognizes that "Amounts paid or incurred for incidental repairs

and maintenance of property are not capital expenditures * * *.

See section 162 and § 1.162-4."

     Expenses incurred as part of a plan of rehabilitation or

improvement must be capitalized even though the same expenses if

incurred separately would be deductible as ordinary and

necessary.     United States v. Wehrli, 400 F.2d 686, 689 (10th Cir.

1968); Norwest Corp. v. Commissioner, 108 T.C. 265, 280 (1997).

     Similarly, moving expenses can be a current business expense

or a capital expenditure depending on the context.      True v.

United States, 894 F.2d 1197, 1209 (10th Cir. 1990).     Moving

costs associated with the acquisition of capital assets are

considered part of the cost of acquisition, a capital

expenditure.    See Maier Brewing Co. v. Commissioner, T.C. Memo.

1987-385, affd. without published opinion 916 F.2d 716 (9th Cir.
                              - 10 -


1990) (cost of moving brewery tanks from seller's plant); Sears

Oil Co. v. Commissioner, T.C. Memo. 1965-39 (cost of transporting

barges from place of manufacture to taxpayer's place of

business).   In contrast, the cost of moving property already in

use by the taxpayer may be a deductible business expense,

although the general plan of rehabilitation analysis applies to

moving as well as repair costs.   True v. United States, supra at

1209 (and cases cited therein).

     An important factor in determining whether the appropriate

tax treatment is immediate deduction or capitalization is the

taxpayer's realization of benefits beyond the year in which the

expenditure is incurred.   INDOPCO, Inc. v. Commissioner, 503 U.S.

79, 87 (1992); United States v. Wehrli, supra at 689.     This,

however, is not an absolute rule, since the benefits of

expenditures considered to be currently deductible, such as

repairs, for example, often extend beyond the current year.

United States v. Wehrli, supra.   As stated previously by this

Court, "The proper test is whether the expenditure materially

enhances the value, use, life expectancy, strength, or capacity

as compared with the status of the asset prior to the condition

necessitating the expenditure."   Plainfield-Union Water Co. v.

Commissioner, 39 T.C. 333, 338 (1962).

     It is clear from the foregoing analysis that whether an

expenditure may be deducted or must be capitalized is a question
                              - 11 -


of fact.   INDOPCO, Inc. v. Commissioner, supra at 86; Norwest

Corp. v. Commissioner, supra at 280.     The distinctions between

current expenses and capital expenditures "are those of degree

and not of kind".   INDOPCO, Inc. v. Commissioner, supra at 86

(quoting Welch v. Helvering, 290 U.S. 111, 114 (1933)).      "Courts

have adopted a practical case-by-case approach in applying the

principles of capitalization and deductibility."     Norwest Corp.

v. Commissioner, supra at 280.3   In this context, we see no need

for us to cut through the thicket of the decided cases and

detail, as the parties have sought to do, their facts and

holdings in order to arrive at a decision herein.4    Rather, we

shall discuss the facts as reflected in the record before us and

arrive at a conclusion, recognizing that we shall be engaging in

an exercise in line drawing, a difficult task which nevertheless

is part of the daily grist of judicial life.    See Harrison v.

Schaffner, 312 U.S. 579, 583 (1941); Russell Box Co. v.

Commissioner, 208 F.2d 452, 454 (1st Cir. 1953); Allen v.

Commissioner, 66 T.C. 340, 346 (1976).

     The parties have stipulated:   (1) The relocation was

accomplished in order to permit the use of the pipeline in the


     3
        See also 1 Bittker and Lokken, Federal Taxation of
Income, Estates and Gifts, sec. 20.4.8, at 20-92 (2d ed. 1989).
     4
        As the Supreme Court has observed, the cases in this area
"appear difficult to harmonize". See INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 86 (1992).
                               - 12 -


ordinary and normal course of petitioner's business; (2)

relocation expenses, such as petitioner incurred, are commonly

and ordinarily incurred in the pipeline business and are

necessary in the operation of that business; (3) the relocation

was not part of a general plan of rehabilitation and did not

adapt the pipeline to a new use; and (4) the pressure, capacity,

and use of the pipeline were the same before and after the

relocation.   They disagree as to the differences in quality

between the 1991 pipe and the 1968 pipe it replaced, and the

impact of those differences on the useful life and the effect on

the overall value of the pipeline.

     The Route 83 relocation involved less than 1,000 feet of

pipeline out of 25 miles of 16 inch pipeline, which was part of a

335-mile system.   See Fire Companies Bldg. Corp. v. Burnet, 57

F.2d 943, 944 (D.C. Cir. 1932) (this "is not a case of replacing

a few feet of iron piping with brass piping, but rather the

replacing of all iron piping in the hot-water system with a much

more expensive material, which appreciably added to the value of

the property.").    Regardless of whether the 1991 pipe is of

better quality or has a longer life than the materials used in

constructing the 1968 pipeline, we are satisfied that the Route

83 relocation, given its limited scope, did not materially add to

the value of the pipeline or appreciably prolong the life of the

1968 pipe.    We are not persuaded otherwise by the analysis of
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respondent's expert as to the impact of the differences in

characteristics between the 1991 pipe and the 1968 pipe.    The

relocation herein involves the same kind of analysis that would

cause us to treat the replacement of a small number of slate

tiles in a roof as repairs, while requiring a replacement of the

roof or a major portion thereof to be classified as capital in

nature.   Cf. Pierce Estates, Inc. v. Commissioner, 16 T.C. 1020,

1026 (1951), revd. on another issue 195 F.2d 475 (3d Cir. 1952);

see Fire Companies Bldg. Corp. v. Burnet, supra.   In a similar

vein, we find respondent's reliance on Rev. Rul. 73-203, 1973-1

C.B. 146, and Rev. Rul. 82-12, 1982-1 C.B. 52, misplaced.    Aside

from the fact that such rulings do not have binding effect, see

Northern Ind. Pub. Serv. Co. v. Commissioner, 105 T.C. 341, 350

(1995), affd. 115 F.3d 506 (7th Cir. 1997), both rulings involved

replacement or relocation of substantial portions of public

utility systems.

     The purpose of the Route 83 relocation was simply to keep

the 1968 pipeline in its normal, ordinary and efficient operating

condition.   Plainfield-Union Water Co. v. Commissioner, supra;

see also Chicago, Burlington & Quincy R. Co. v. United States, 97

Ct. Cl. 264, 455 F.2d 993 (1972) (construction projects to

protect and maintain rail embankments), revd. on another issue

412 U.S. 401 (1973); Polyak v. Commissioner, 94 T.C. 337, 347-348

(1990) (floorboard replacement limited to damaged sections).      In
                              - 14 -


this connection, we find it significant that petitioner could not

have removed and relocated 1,000 feet of 1968 pipe without

disrupting its entire pipeline system.

     Respondent describes the use of new pipe (the 1991 pipe) as

"a controlling fact".   We think that, under the circumstances

herein, respondent's reliance on this element is misplaced.     The

courts have consistently recognized that the mere use of new

materials does not prevent an expenditure from being classified

as "repairs".   See United States v. Wehrli, 400 F.2d at 689;

Niagara Mohawk Power Corp. v. United States, 214 Ct. Cl. 686, 558

F.2d 1379, 1388 (1977); Red Star Yeast & Prods. Co. v.

Commissioner, 25 T.C. 321, 349 (1955); Buckland v. United States,

66 F. Supp. 681, 683 (D. Conn. 1946).    The key consideration is

the overall purpose of the relocation and the context in which it

occurred.

     On the facts of this case, we hold that petitioner is

entitled to a current deduction for the costs of the relocation.

     To implement our holding and concessions,

                                          Decision will be entered

                                    under Rule 155.
