                   United States Court of Appeals
                         FOR THE EIGHTH CIRCUIT
                                 ___________

                                 No. 03-1922
                                 ___________

Clajon Gas Co., L.P.; Aquilla        *
Gas Pipeline Corporation;            *
Tax Matters Partner,                 *
                                     *
           Appellants,               *
                                     * Appeal from the United States
      v.                             * Tax Court.
                                     *
Commissioner of Internal Revenue,    *
                                     *
           Appellee,                 *
                                     *
______________________               *
                                     *
Gas Processors Association;          *
Western Gas Resources, Inc.;         *
American Petroleum Institute.        *
                                     *
           Amici on Behalf           *
           of Appellant.             *
                                ___________

                            Submitted: September 8, 2003

                                Filed: January 12, 2004
                                 ___________

Before SMITH, LAY, and MCMILLIAN, Circuit Judges.
                           ___________

SMITH, Circuit Judge.
      Clajon Gas Company ("Clajon")1 appeals an adverse United States Tax Court2
judgment requiring Clajon to depreciate the value of its natural gas pipeline system
during certain audit years3 using a fifteen-year, rather than a seven-year, depreciation
schedule. For the reasons set forth herein, we reverse the Tax Court.

                                     I. Background
       We begin our analysis of this taxpayer claim with a discussion about the
relevant processes and facilities involved in the production of natural gas. Natural gas
production is a multi-step process. These steps include extraction of the gas from the
earth, processing to make it marketable, and transportation to storage. Natural gas
emerges from the ground as a mixture of natural gas (methane), liquid condensate
and, sometimes, oil. Gas typically flows from the well to a gathering system through
"gathering pipelines," and the gathering system then aggregates the gas for delivery
to a gas processing plant, transmission pipeline, or other central point. The gathering
system may "dehydrate" the gas to remove water and "treat" the gas to remove
corrosive substances. Without dehydration and treatment, natural gas is unusable. Gas
that contains natural gas liquids ("NGLs")–such as ethane, propane, butane, and
natural gasoline–is referred to as "wet gas." Wet gas must be processed at a gas
processing plant to remove the NGLs before the gas can be transmitted to consumers.
The resulting "residue gas" is delivered to a transmission line at the outlet of the


      1
        Utilicorp United Incorporated is the parent corporation and agent for Clajon's
tax matters partner, Aquila Gas Pipeline Corporation. Aquila is the successor to PSI
Management, Incorporated, Clajon's tax matters partner for the earliest tax period at
issue here. For ease of discussion, we collectively refer to these entities as "Clajon."
      2
       We have jurisdiction to review decisions of the Tax Court pursuant to 26
U.S.C. § 7482(a)(1) and (b)(2) (2002).
      3
        The Internal Revenue Service ("IRS" or "Commissioner") adjusted Clajon's
partnership tax returns for the taxable years ending December 31, 1990, September
25, 1991, December 31, 1991, and June 30, 1992 ("the audit years").

                                          -2-
processing plant. The company extracting the gas may own the gathering system, or
it may be owned by an independent pipeline company that is not in the business of
extracting gas from the earth.

       The central issue in this case is whether Clajon's natural gas gathering pipeline
systems4 should be–for tax purposes–properly classified as production facilities or as
transportation facilities. This issue, in large part, turns on the manner in which the
pipelines are used in the collection and production of natural gas.5

       Clajon owns and operates natural gas gathering pipeline systems. A "gathering-
pipeline system" is a system of interconnected subterranean pipelines and related

      4
         During the audit years, Clajon owned six natural gas gathering systems in
Texas: Southeast Texas (SETPS), Mentone, Gomez, Maverick, Rhoda Walker, and
Panola County. The SETPS, which comprised about 91% of the assets at issue, was
constructed by Clayton Williams and his related companies, producers of natural gas,
to gather gas that they produced at their own wells. The SETPS performed exactly the
same functions before and after its sale by Clayton Williams to Clajon. Clajon also
transported gas pursuant to a transportation agreement with the Lower Colorado
River Authority (“LCRA”), which delivered treated gas to a residue line owned by
Clajon and located downstream of Clajon’s LaGrange processing plant. The residue
line carried LCRA's gas to an interstate transmission pipeline for transport to
consumers. A small fraction of Clajon’s revenues, three percent in 1990 and five
percent in 1991, consisted of revenues from such transportation of natural gas. The
residue line used to transport the LCRA gas was not part of Clajon’s SETPS
gathering system located upstream of the LaGrange plant, and that residue line is not
at issue in this proceeding.
      5
        The SETPS included multiple compressor stations, dehydration units, and
stations to handle fallout of liquid condensate. Gas from the SETPS was processed
at one of Clajon’s gas processing plants, which was connected to that system. Gas
from Clajon's other systems was dry (contained little or no liquefiable hydrocarbons),
thus making it unnecessary to process the gas in order to remove natural-gas liquids
("NGLs"). The Panola and Rhoda Walker systems provide compression and
dehydration services. The Gomez and Mentone systems provide dehydration services.

                                          -3-
compression facilities that collect the raw gas from wells and deliver it to a central
point, such as a processing plant. Gathering lines may include thousands of miles of
pipe that are typically located over a relatively small area. A gathering system’s
smaller diameter pipelines,6 sometimes called feeder lines or lateral lines, connect
individual wells or one or more central production facilities to larger diameter lines,
or trunk lines, that deliver the gas to a gas processing plant or to a transmission line.
Due to the short distances raw gas must travel in a gathering system, gathering lines
typically are designed to function at relatively low pressure.

       In contrast, a "transmission-pipeline system" carries residue gas from remote
areas of production to local gas distribution systems for the end-use market.
Typically, a transmission-pipeline company will not permit gas in its pipelines that
does not meet its gas-contract specifications as to the content of NGLs, water, and
other impurities. Transmission pipelines deliver this "pipeline quality" gas to gas
distribution systems typically owned by local utilities that deliver it to industrial,
commercial, and residential customers. Unlike gathering lines, transmission lines are
not exposed to the same corrosive chemicals because those chemicals have been
removed as part of the gathering and treatment processes. Transmission lines
generally range from twenty to forty-two inches in diameter and may span hundreds
or thousands of miles located over a large area. Consequently, transmission pipelines
are designed to withstand the higher pressure required to move the gas greater
distances.

       Gathering pipelines typically have a shorter physical life–due to the corrosive
effect of the impurities–than do transmission pipelines. The economic useful life of
gathering pipelines is dependent on the productive life of a particular gas field or
fields localized in one area–when all of the economically recoverable reserves in a
field have been produced, the production activity in that field terminates, and the


      6
          Clajon's pipelines ranged in size from two to twenty inches in diameter.

                                          -4-
gathering system serving that field may cease to be useful. On the other hand, the
economic useful life of a transmission line is not tied to the economic useful life of
any one gas field, as transmission lines serve multiple fields spread over a much
larger area.

       Clajon, a company that does not itself produce natural gas, contracted with gas
producers who paid Clajon for the use of its gathering pipelines.7 The majority of
these contracts called for the producer to be paid a percentage of the proceeds derived
from the sale of the natural gas after processing. Under a gas transportation contract,
Clajon charged its customers a fee to move gas through its systems.

                                        II. Issue
        The issue facing us is straightforward: If Clajon's gathering systems are
classified as production assets, they depreciate over a seven-year period. However,
if the gathering systems are classified as transportation assets, they should depreciate
over a fifteen-year period.

       Our inquiry begins with an examination of the modified accelerated cost
recovery system ("MACRS"),8 the current system of depreciation rules. Under
MACRS, the recovery period for a given asset is determined by the Asset Guideline
Class to which the asset belongs under 26 U.S.C. § 167(m) of the Internal Revenue



      7
         Under a wellhead purchase contract, Clajon purchased the gas at a meter on
the producer's well site connected to Clajon's gathering system. The price was either
fixed or calculated as a percentage of the proceeds Clajon received for its residue gas
at the tailgate of the processing plant. Under a gas processing contract, Clajon and the
producer shared revenues from Clajon's sale of both extracted NGLs and residue gas.
      8
      MACRS is the result of Congress's 1986 revision of the "Accelerated Cost
Recovery System." See Tax Reform Act of 1986, Pub. L. 99-514 (codified as
amended in sections of 26 U.S.C.)

                                          -5-
Code.9 The asset classes are set out in Rev. Proc. 87-56, 1987-2 C.B. 674. Saginaw
Bay Pipeline Co., CMS v. United States, 338 F.3d 600, 604 n. 6 (6th Cir. 2003); Duke
Energy Natural Gas Corp. v. Comm'r, 172 F.3d 1255, 1257 (10th Cir. 1999).

       Clajon contends that its gathering pipelines fall within Asset Class 13.2. This
class "[i]ncludes assets used by petroleum and natural gas producers for drilling of
wells and production of petroleum and natural gas, including gathering pipelines and
related storage facilities." Rev. Proc. 87-56, 1987-2 C.B. 678. Natural gas production
assets, including gathering pipelines under Asset Class 13.2, are depreciated over
seven years. Rev. Proc. 87-56, 1987-2 C.B. 674. Natural gas processing plants are
likewise depreciated over seven years under Asset Class 49.23.

       The IRS contends that Clajon's pipelines fall within Asset Class 46.0. This
class "[i]ncludes assets used in the private, commercial, and contract carrying of
petroleum, gas and other products by means of pipes and conveyors. The trunk lines
and related storage facilities of integrated petroleum and natural gas producers are
included in this class." Rev. Proc. 87-56, 1987-2 C.B. 684. Transmission pipelines
are depreciated over fifteen years under Asset Class 46.0. Rev. Proc. 87-56, 1987-2
C.B. at 684. Gas distribution assets also are depreciated over fifteen years under Asset
Class 49.24. Rev. Proc. 87-56, 1987-2 C.B. at 686.

                                    III. Discussion
      We review tax court decisions as we do civil bench trials in district court. Black
Hills Corp. v. Comm'r of Internal Revenue, 73 F.3d 799, 804 (8th Cir. 1996). We
review de novo legal questions and mixed questions of law and fact; we review
findings of fact under the clearly erroneous standard. Id. Clajon, as the plaintiff and


      9
       Although Congress removed § 167(m) of the tax code in 1990, § 167(m)(1)
remains vital by its incorporation by reference into 26 U.S.C. § 168(i)(l), which
continued as part of the tax code for the audit years at issue.

                                          -6-
taxpayer, must carry the burden of proving its entitlement to a claimed deduction that
has been contested by the IRS. Helvering v. Taylor, 293 U.S. 507, 514 (1935).
However, "if doubt exists as to the construction of a taxing statute, the doubt should
be resolved in favor of the taxpayer." Saginaw, 338 F.3d at 604 (quoting Hassett v.
Welch, 303 U.S. 303, 314 (1938)).

                                     A. Property Use
       The depreciation "recovery period" is dependent on the "class life," a term
reflecting the "anticipated useful life of that class of property to the industry or other
group." 26 U.S.C. § 167(m)(1) (repealed) incorporated by reference into § 168(i)(1).
Asset classifications are based on a "use-driven" functional standard or, in other
words, on how the asset is primarily used. 26 C.F.R. § 1.167(a)-11(b)(4)(iii)(b),
Treas. Reg. Proper asset-class selection thus hinges on the primary use of the
property. Treas. Reg. § 1.167(a)-11(b)(4)(iii)(b).We consider primary use for
classification purposes "even though the activity in which [the] property is used is
insubstantial in relation to all the taxpayer's activities." Id.

       The government argues that the asset's primary use must be based on how the
taxpayer uses the asset, not on how the asset itself is used. The government asserts
that Treas. Reg. § 1.167(a)-11(b)(4)(iii)(b) makes plain that it is the taxpayer's–and
not another's–primary use of the property that determines classification. The
government bases its stance on the included sentence, "Property shall be classified
according to primary use even though the activity in which such property is primarily
used is insubstantial in relation to all the taxpayer's activities," and asserts that this
reference to the taxpayer indicates that the "use" must be how the taxpayer uses the
asset. Id.

       Though this is the first time our circuit has faced this precise issue, other
circuits have already addressed it. After careful consideration of the arguments, we,
like our sister circuits in the Saginaw Bay and Duke Energy cases, conclude that

                                           -7-
Clajon primarily used its gathering system assets in a manner that falls within the
description of Asset Class 13.2: "assets used by petroleum and natural gas producers
for . . . production of . . . natural gas, including gathering pipelines and related storage
facilities."

        As noted, there is a difference between "gathering pipelines" and "transmission
pipelines." The Saginaw Bay and Duke Energy courts–faced with virtually identical
facts– distinguished the two systems before determining that the pipelines in those
cases were "gathering pipelines." We agree with their analysis and find that the
pipelines at issue here are "used" to gather natural gas from the wellhead and deliver
it to a gathering system and treatment plant. It just so happens that the owner of the
pipelines–Clajon–is not the entity gathering the natural gas. Rather, Clajon is the
pipeline owner that leases the space to producers. However, this difference in
ownership status does not change how the pipelines are actually used.

                                     B. Ownership
       Revenue Procedure 87-56 describes the property included in Asset Class 13.2
as "assets used by petroleum and natural gas producers," including "gathering
pipelines and related facilities." The government argues that gathering pipelines must
be owned by a producer to qualify under Asset Class 13.2. Clajon, admittedly, is not
a producer–as that term is defined in the industry–of natural gas.10 Rather, Clajon
owns the pipelines that, through various contracts, are leased to producers to transport
natural gas from the well to production plants. However, the provision's plain
language does not require that the producer must also be the owner of the gathering
system assets.


       10
        A "producer" in the oil and gas industry is "an operator who owns wells that
produce oil or gas." Duke Energy Natural Gas Corp., 172 F.3d at 1256 n. 2 (quoting
Howard R. Williams & Charles J. Meyers, Manual of Oil and Gas Terms 854 (9th ed.
1994)).

                                            -8-
       The IRS argues that because Clajon is not a "producer," Clajon's pipeline
system merely "transports" natural gas rather than contributes to the "production" of
natural gas. Therefore, asserts the IRS, the assets must fall within Asset Class 46.0.
Again, however, the Duke Energy and Saginaw Bay courts discounted the IRS's
reading of the provision, and we agree with their conclusion. The Duke Energy court
noted that if these assets were divided into two groups based on the ownership of
these types of pipelines–regardless of the fact that the pipelines were used for the
same purpose–it would "create an inconsistent regime for the depreciation of assets."
Duke Energy, 172 F.3d at 1261.

      If placed in different classes, gathering systems used for the same
      purpose and serving identical wells would fall under different
      depreciation schedules depending upon the producer or nonproducer
      status of the asset's owner. Moreover, if a producer sells a gathering
      system to a nonproducer such as Duke, the system would shift from one
      asset class to another without any change in its function or
      characteristics, and the system's new owner would be forced to
      depreciate the asset over a far longer period.

Duke Energy, 172 F.3d at 1261. The Duke Energy court refused to create this
dichotomy absent an explicit distinction based on ownership in Rev. Proc. 87-56. Id.

       In response, the government notes that previous versions of the relevant asset-
class regulations distinguished gathering-system assets owned by gas producers and
non-producers.11 However, not only have these historical provisions been



      11
        See, e.g., Rev. Proc. 72-10, 1972-1 C.B. 721, 731 (superseding Rev. Proc.
71-25, 62-21); Rev. Proc. 71-25, 1971-2 C.B. 553, 556 (establishing Asset Class
13.2); Rev. Proc. 62-21, 1962-2 C.B. 418, 424 (establishing Guideline Class 17(b),
which "[e]xclude[d] gathering pipelines and related storage facilities of pipeline
companies").

                                         -9-
superseded,12 but the provision most recently superseded,13 and the currently-
applicable version of this provision,14 do not distinguish between the gathering
system assets of producers and non-producers for depreciation purposes. Nothing in
Rev. Proc. 72-10, 1972-1 C.B. 721, 72315 suggests that an ownership distinction
should be made, nor does the "used for" language in Rev. Proc. 87-56, 1987-2 C.B.
674, 678, 684, suggest that "ownership" is a distinguishing factor when determining
the appropriate asset class for depreciation purposes. Therefore, we, like the Sixth and
Tenth Circuit Courts of Appeal, refuse to read such a distinction into the provision.

                                  IV. Conclusion
      Both the plain language of the asset class descriptions and the primary use of
Clajon's gathering systems in the process of producing natural gas leave us with the




      12
        See Rev. Proc. 72-10, 1972-1 C.B. 721, 731 (superseding Rev. Proc. 71-25,
62-21); Rev. Proc. 71-25, 1971-2 C.B. 553, 566 (superseding Rev. Proc. 62-21).
      13
         See Rev. Proc. 77-10, 1977-1 C.B. 548, (superseding Rev. Proc. 72-10, while
noting that the change "was not intended to modify the composition of the existing
classes of Rev. Proc. 72-10").
      14
           See Rev. Proc. 87-56, 1987-2 C.B. 674.
      15
         Rev. Proc. 72-10, 1972-1 C.B. 721 states that Asset Class 13.2 "[i]ncludes
assets used for drilling of wells and production of petroleum and natural gas,
including gathering pipelines and related storage facilities, when these are related
activities undertaken by petroleum and natural gas producers."

                                         -10-
firm conclusion that Clajon's gathering systems fall within Asset Class 13.2 rather
than Asset Class 46.0. We, therefore, reverse the Tax Court's decision.16
                       ______________________________




      16
         In its final footnote, the IRS contends that if we reverse the Tax Court, we
must remand to allow the Tax Court to address whether any of Clajon's assets
constitute "trunk lines" that fall into Asset Class 46.0. In essence, the IRS argues that
because some of Clajon's gathering-system pipelines are sometimes referred to as
"trunk lines" (due to their size or location in the gathering-system scheme), Asset
Class 46.0 specifically includes them ("The trunk lines and related storage facilities
of integrated petroleum and natural gas producers are included in this class . . . .").
Rev. Proc. 87-56, 1987-2 C.B. 678, 684.

       We reject this contention. Within the natural gas and petroleum industry, the
term "trunk line" can refer to the specific "transmission line" or to the more
generalized "spine" or "main artery" within either a transmission or gathering system.
Saginaw Bay, 338 F.3d at 605 n. 8. Our discussion herein clarifies that the true test
for determining the proper Asset Class turns on the function and use of those
pipelines–regardless of their names, sizes, or who owns them. As such, we conclude
as a matter of law that all functionally-defined "gathering pipelines"–such as those
in Clajon's gathering system–should be included in Asset Class 13.2, "leaving all
remaining natural gas transport lines (such as "transmission" and "distribution" lines,
as well as non-gathering "trunk lines" owned by integrated producers of natural gas
which are used to transmit "dry" natural gas to distributors or consumers) within
Asset Class 46.0." Id. (Emphasis added.)

                                          -11-
