      RECOMMENDED FOR FULL-TEXT PUBLICATION
           Pursuant to Sixth Circuit Rule 206            2       Saginaw Bay Pipeline Co.,                        No. 01-2599
   ELECTRONIC CITATION: 2003 FED App. 0259P (6th Cir.)           et al. v. United States
               File Name: 03a0259p.06
                                                                                _________________
UNITED STATES COURT OF APPEALS                                                        COUNSEL
             FOR THE SIXTH CIRCUIT                       ARGUED: Todd R. Mendel, BARRIS, SOTT, DENN &
               _________________                         DRIKER, Detroit, Michigan, for Appellants. Teresa T.
                                                         Milton, UNITED STATES DEPARTMENT OF JUSTICE,
SAGINAW BAY PIPELINE              X                      APPELLATE SECTION TAX DIVISION, Washington,
COMPANY , CMS SAGINAW              -                     D.C., for Appellee. ON BRIEF: Todd R. Mendel, BARRIS,
BAY COMPANY , SAGINAW              -                     SOTT, DENN & DRIKER, Detroit, Michigan, Thomas P.
                                   -  No. 01-2599        Marinis, Jr., VINSON & ELKINS, Houston, Texas, for
BAY LATERAL COMPANY , and -                              Appellants. Teresa T. Milton, Richard Farber, UNITED
CMS SAGINAW BAY LATERAL >                                STATES DEPARTMENT OF JUSTICE, APPELLATE
                                   ,
COMPANY ,                          -                     SECTION TAX DIVISION, Washington, D.C., for Appellee.
         Plaintiffs-Appellants, -                        Alan I. Horowitz, Tamara W. Ashford, MILLER &
                                   -                     CHEVALIER CHARTERED, Washington, D.C., for Amicus
                                   -                     Curiae.
           v.
                                   -                                            _________________
UNITED STATES OF AMERICA , -
                                   -                                                OPINION
          Defendant-Appellee. -
                                                                                _________________
                                  N
      Appeal from the United States District Court         KRUPANSKY, Circuit Judge. The plaintiffs-appellants,
     for the Eastern District of Michigan at Detroit.    Saginaw Bay Pipeline Company, CMS Saginaw Bay
 No. 99-70454—John Corbett O’Meara, District Judge.      Company, Saginaw Bay Lateral Company, and CMS Saginaw
                                                         Bay Lateral Company (collectively “the plaintiffs,” “Saginaw
                 Argued: May 7, 2003                     Bay,” or “the pipeline companies”),1 have contested the

          Decided and Filed: July 30, 2003                   1
                                                               Plaintiffs Saginaw Bay Pipeline Company and CMS Saginaw Bay
Before: KRUPANSKY, SILER, and GILMAN, Circuit            Comp any formed a limited business partnership known as “Saginaw Bay
                                                         Area Limited Partnership.” Plaintiffs Saginaw Bay Lateral Company and
                 Judges.                                 C M S Saginaw Bay Lateral Company created a second limited p artnership
                                                         called “Saginaw Bay La teral Limited Pa rtnership.” To gether, those two
                                                         limited partnerships developed and constructed, and at all times relevant
                                                         to the case instanter owned and operated, the Saginaw Bay natural gas
                                                         pipeline network at issue herein.

                                                             On review, the Am erican Petro leum Institute (“API”), with leave of

                           1
No. 01-2599                      Saginaw Bay Pipeline Co.,              3    4       Saginaw Bay Pipeline Co.,                          No. 01-2599
                                      et al. v. United States                        et al. v. United States

district court’s disallowance, following a bench trial, of their             industry parlance as “raw” or “wet” natural gas) from
claim against the defendant-appellee United States of                        SWEPI’s gas wellheads in eighteen distinct production fields
America through the Internal Revenue Service (hereinafter                    located in the Michigan East Central Basin to its natural gas
“the defendant,” “the government,” or “the I.R.S.”) for                      processing plant situated in Kalkaska, Michigan (“the
reimbursement of $3,474,244.00 in income tax payments,                       Kalkaska facility”). MichCon, through its subsidiary MCN
deposited under protest, which the I.R.S. had assessed via tax               Corporation, formed the plaintiff entities for that purpose.
deficiency notices for the five calendar years 1991 through                  Between 1988 and 1990, the plaintiffs constructed, in
1995. See Saginaw Bay Pipeline Co. v. United States, No.                     accordance with SWEPI’s specifications, a 126-mile
99-CV-70454, 2001 WL 1203283 (E.D. Mich. Aug. 23, 2001)                      subterranean steel pipeline network traversing six Michigan
(ordering final judgment for the defendant United States);                   counties which linked SWEPI’s East Central Basin gas fields
Saginaw Bay Pipeline Co. v. United States, 124 F. Supp. 2d                   to the Kalkaska facility.
465 (E.D. Mich. 2000) (denying, on cross-motions, summary
judgment to all litigants). The sole issue in controversy was                   That system consisted of a central line leading into the
(and remains) whether, under prevailing law, the plaintiffs’                 Kalkaska processing plant, which was fed by lateral adjoining
underground natural gas pipelines should be depreciated over                 pipes which linked specific wellheads to “field separators”2
a seven-year period, as argued by the plaintiffs, or instead                 and ultimately to the main pipeline. The main pipeline had a
should be subject to fifteen-year depreciation, as asserted by               daily maximum capacity of 135 million cubic feet of “wet”
the government and as resolved by the district court. The                    gas. At all times material to this litigation, although the
factual and legal epicenter of the dispute is whether or not the             plaintiffs owned and operated the pipeline system, the
subject pipeline system is a “gathering” pipeline (as defined                transient “raw” natural gas remained the property of its
and developed herein) used in the gas production process
even though the plaintiffs are not themselves producers of
natural gas.
   In the late 1980s, Shell Western Exploration and
Production, Inc. (“SWEPI”), a division of Shell Oil Company                      2
                                                                                    The plaintiffs’ standard service contracts with gas producers
(“Shell”), commenced negotiations with the Michigan                          required that the producers separate specified amounts of water, sand, and
Consolidated Gas Corporation (“MichCon”) for MichCon’s                       certain other materials from the natural gas at the wellhead via the use of
construction and operation of a steel pipeline system to                     “field separators,” prior to the introduction of the extracted hydrocarbons
transmit unprocessed natural gas (known in prevailing                        into the Saginaw Bay pipeline system, in order to meet specifications
                                                                             engineered to reduce the risks of pipeline corrosion and obstruction.
                                                                             Accordingly, the Saginaw Bay system’s lateral gathering lines did not
                                                                             connect directly to the field wellheads, and its lines transported partially
the court, lodged an amicus curiae brief in support of the plaintiffs. API   purified “raw” natural gas. Nevertheless, the gas moved by the pipeline
described itself as “a national trade association representing the entire    companies from the gas fields to the Kalkaska processing plant was not
petroleum industry, inc luding companies engaged in exploration and          consumable “dry” methane gas. Rather, although that product contained
production, transportation, refining, and marketing. With over 400           contract-restricted quantities of certain natural pollutants, it nonetheless
member companies and with petroleum councils in 27 state cap itals           required substantial pro cessing at the K alkaska facility to co mplete its
representing members in 33 states, API is dedicated to protecting and        final conversion into “dry pipeline-quality” methane fuel suitable for sale
advancing the interests of all parts of the oil and natural gas industry.”   to end users. See further discussion below.
No. 01-2599                       Saginaw Bay Pipeline Co.,               5    6       Saginaw Bay Pipeline Co.,                            No. 01-2599
                                       et al. v. United States                         et al. v. United States

producer throughout the transportation process.3 The                           a conduit for “wet” natural gas, it constituted a species of
producers compensated the plaintiffs for the use of the                        natural gas transportation pipeline frequently described,
pipeline on a contractual “fee-for-service” basis.                             within prevailing natural gas industry nomenclature, as a
                                                                               natural gas “gathering” pipeline.5
   Natural gas, in its “raw” form when extracted from the
earth at the wellhead, is typically contaminated with                             Because the respective functions of “gathering” pipelines,
numerous impurities, including, among other things, butane,                    vis a vis “transmission” or “distribution” pipelines, as defined
ethane, pentane, propane, water, nitrogen, carbon dioxide,                     herein, are entirely distinct, the operating standards for the
other inert gases, sulphur, sand, and drilling fluids. All                     two systems are correspondingly dissimilar. For example,
adulterants must be substantially removed at a purification                    whereas “transmission” or “distribution” pipeline systems are
site such as the Kalkaska facility, leaving only nearly-pure                   typically unable to safely accommodate any significant
“dry” methane gas, prior its sale to residential or commercial                 presence of solid or liquid contaminants, “gathering”
consumers.       The cleansed, customer-ready “dry”                            pipelines including the Saginaw Bay system must be
petrochemical fuel is then exported from the purification plant                equipped to handle at least limited amounts of the non-
to distributors or other customers via lines which, for                        gaseous components of “raw” natural gas. Additionally,
purposes of this decision, shall be denominated                                because “raw” natural gas ordinarily burns at a higher
“transmission” or “distribution” pipelines, which are pipelines                temperature than “dry” natural gas, “transmission” or
designed and operated solely for the carriage of “dry”                         “distribution” line service contracts generally provide for the
hydrocarbon gas, sometimes referred to in the fossil fuel                      transport of fossil fuel having a relatively low “heating
business as “pipeline-quality gas.”4 By contrast, because the                  value,” usually no more than 950 British Thermal Units
Saginaw Bay pipeline was designed to, and was operated as,

                                                                                   5
    3                                                                                The record herein revealed that various terms of art frequently used
      During the relevant period 199 1-95 , the Saginaw Bay pipeline           in the natural gas trade have not always been used consistently, and may
network did no t exclusively transport “wet” gas belonging to SW EPI.          have different meanings whe n used in different contexts. For example,
Rather, it also carried “raw” natural gas produced by, among o thers, Sun      main or trunk pipelines which adjoin lateral “gathering” lines running
Oil, Marathon, Oryx, and Amoco.                                                from field wellheads, which transmit the “raw” gas gathered from the
    4
                                                                               lateral lines to a purification facility, have sometimes been called
      Although both “transmission” lines and “distribution” lines carry        “transmission” pipelines. Similarly, “wet” gas partially cleansed by field
pure, “dry” natural gas for ultimate consumer use, the term “transmission      separators has occasionally been de signated “pipeline-qua lity gas” in
line” evidently is most frequently used to describe an interstate pipeline     reference to its conformity to contract specifications for introduction into
which carries clean processed gas from a cleansing center to a distribution    a “gathering” pipeline for carriage to a purification complex, as opposed
center, whereas the phrase “distribution line” apparently is most often        to that term’s more common usage in reference to “dry” gas which is
employed to describe a pipeline which transfers “dry” gas from a local         suitable for transit via a “transmission” or “distribution” pipeline for
distribution center to specific business or residential customer addresses.    ultimate delivery to a consumer. Howe ver, as developed herein, the
See, e.g., Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672, 691 (1954)       terminology used, whether by the p ipeline’s owne r or anyone else, to
(Clark, J., dissenting) (“T he natural gas ind ustry, like Ancient G aul, is   describe or identify a particular pipeline, is not dispositive of its proper
divided into three parts. These parts are production and gathering,            treatment under the federal income tax laws. Rather, as evolved herein,
interstate transmission by pipeline, and distribution to consumers by local    the actual functional use to which a particular pipeline or pip e system is
distribution companies.”)                                                      dedicated determines its asset classification for tax depre ciation purpo ses.
No. 01-2599                   Saginaw Bay Pipeline Co.,         7    8     Saginaw Bay Pipeline Co.,                    No. 01-2599
                                   et al. v. United States                 et al. v. United States

(“BTUs”); whereas “gathering” lines (including the Saginaw           “gathering” pipeline relative to a “transmission” or
Bay system) transport “raw” gas with higher “energy values,”         “distribution” line, constitute further examples.
typically ranging between 950 and 1400 BTUs. The Saginaw
Bay service contracts specified that “the Gas shall have a total        Additionally, a functional “transmission” or “distribution”
heating value per standard cubic foot of not less than 950           line will ordinarily retain a useful and profitable economic life
British thermal units.” (Emphasis added).                            for as long as gas dealers or consumers connected by that line
                                                                     to the processing plant continue to purchase heating gas;
  Likewise, a “gathering” system must be constructed to              however, a “gathering” line more likely may become
function at relatively low pressures over comparatively short        obsolete, redundant, or otherwise unprofitable prior to its
distances. The Saginaw Bay system could tolerate no more             natural “wear-and-tear” expiration, if, for example, the field
than 1440 pounds per square inch (“psi”) of pressure, and            wellheads it services become depleted or otherwise
covered only 126 miles. By contrast, a “transmission” or             unproductive, or comparatively inexpensive alternate sources
“distribution” line usually functions at comparatively higher        of “raw” natural gas accessible to the processing plant
pressures over longer distances, often totaling hundreds of          become competitively available. Accordingly, “gathering”
miles.                                                               lines are not only more costly and labor-intensive to
                                                                     construct, maintain, and operate, but also generally have a
   Perhaps most significantly, “gathering” pipelines must be         shorter operational life span than “transmission” or
flushed out regularly – a process labeled “pigging” – to avert       “distribution” lines.
or delay excessive wear-and-tear pipeline corrosion and the
accumulation of foreign obstructive materials, given the               Because both “transmission” or “distribution” natural gas
ubiquitous presence of contaminants dissolved within “wet”           pipes, and “gathering” natural gas lines, constitute property
natural gas; whereas “transmission” or “distribution” lines          used in a trade or business, the owner of either type of
conveying only clean “dry” gas never require that type of            pipeline is entitled to a “reasonable allowance” for annual
expensive and time-consuming routine maintenance. Record             depreciation of that asset against the owner’s ordinary
proof reflected that, during the interval pertinent to the instant   business income for a finite number of years. See 26 U.S.C.
action, at least some portions of the Saginaw Bay system             § 167(a)(1). The depreciation allowance for tangible property
required “pigging” twice or thrice daily.                            used in a trade or business should be ascertained by reference
                                                                     to three factors – namely the legally-prescribed
   Consequently, because the purposes and functions of               (1) “depreciation method,” (2) “recovery period,” and
“gathering” lines are commercially distinct from those of            (3) “convention” – for the business asset at issue. See 26
“transmission” or “distribution” lines, the coordinate               U.S.C. §§ 167(b), 168(a). The adversaries sub judice have
economic costs and investment risks accompanying each are            agreed that the instant controversy involves only element two,
also diverse. The unique expenses and production delays              the selection of the proper depreciation “recovery period” for
affiliated with the regular “pigging” of “gathering” pipelines       the Saginaw Bay pipelines.
are obvious examples. The singular risks of serious damage
to “gathering” lines by corrosion or obstruction, and the              The plaintiffs, as taxpayers, must carry the burden of
attendant initial need to construct a comparatively sturdy           proving their entitlement to a claimed deduction which has
                                                                     been contested by the I.R.S. Helvering v. Taylor, 293 U.S.
No. 01-2599                       Saginaw Bay Pipeline Co.,               9    10       Saginaw Bay Pipeline Co.,                          No. 01-2599
                                       et al. v. United States                          et al. v. United States

507, 514 (1935). However, “if doubt exists as to the                           Asset Class 46.0 (defined to include assets used in the
construction of a taxing statute, the doubt should be resolved                 carrying of gas by pipes), which triggers a listed “class life”
in favor of the taxpayer.” Hassett v. Welch, 303 U.S. 303,                     of twenty-two years, and an accompanying General
314 (1938).                                                                    Depreciation System “recovery period” of fifteen years.8
                                                                               Rev. Proc. 87-56, 1987-2 C.B. 678, 684 (hereinafter “the
   The applicable depreciation “recovery period” is keyed to                   Revenue Procedure”).
the “class life” of the subject property. 26 U.S.C. § 168(e)(1).
An asset’s “class life” is defined by referencing “the class life                The pipeline companies have maintained that the Saginaw
[category] prescribed by the Secretary which reasonably                        Bay pipeline network fits into Asset Class 13.2, and hence
reflects the anticipated useful life of that class of property to              they should be entitled to comparatively accelerated seven-
the industry or other group.” 26 U.S.C. § 167(m)(1)                            year depreciation. By contrast, the I.R.S. argued, with
(repealed), incorporated by reference into § 168(i)(1).6 The                   success before the district court, that the plaintiffs’ pipelines
Treasury Regulations (“the Regulations”) posit a “use-driven”
functional standard for assigning asset classifications.7 26
C.F.R. § 1.167(a)-11(b)(4)(iii)(b).                                                 8
                                                                                    [Asset Class] 13.2: Exploration for and Production of Petroleum
                                                                               and N atural Gas D eposits:
  However, the Treasury Secretary has promulgated two
material, specific, functionally-defined natural gas industry                       Includes assets used by petroleum and natural gas produ cers for
asset life classifications which facially may encompass the                         drilling of wells and production of petroleum and natural gas,
Saginaw Bay pipeline complex -- to wit, Asset Class 13.2                            including gathering pipelines and related storage facilities. . . .
(defined to include “gathering pipelines” and other property
                                                                                    ....
used in the production of natural gas), which has a listed
“class life” of fourteen years and an associated General                            [Asset Class] 46 .0: Pipeline Transportation:
Depreciation System “recovery period” of seven years; and
                                                                                    Includes assets used in the private, commercial, and contract
                                                                                    carrying of petroleum, gas and other p roducts by means of pipes
    6                                                                               and conveyors. The trunk lines and related storage facilities of
      The parties herein have agreed that, although Congress removed                integrated petro leum and natural gas producers are included in
§ 167(m) from the tax code via a 199 0 am endment, subsection 167(m)(1)             this class. . . .
has retained continuing vitality by its incorporation b y reference into
§168(i)(1), which remained a part of the code during the 1991-95 tax           Rev. Proc. 87-56, 1987-2 C.B. 678, 684. (Boldface in original; italics
years material to the subje ct action. Accord, Duke Energy Natural Gas         added). “Trunk lines” are large-diameter, usually high-pressure mainlines
Corp. v. Commissioner, 172 F.3d 12 55, 1257 (10th Cir. 1999).                  which connect distant points; they generally include “transmissio n lines.”
    7
                                                                               However, large “gathering” ma in lines are sometimes also referred to as
      “For purposes of this section, property shall be included in the asset   “trunk lines.” Nevertheless, reading the two asset class descriptions
guideline class for the activity in wh ich the pro perty is prim arily used.   together, it is evident that all functionally-defined “gathering pipelines”
See paragraph (e)(3)(iii) of this section for rule for leased prope rty.       should be consigned to Asse t Class 1 3.2, lea ving all remaining natural gas
Pro perty shall be classified according to primary use even though the         transport lines (such as “transmission” and “distribution” lines, as well as
activity in which such property is primarily used is insubstantial in          non-gathering “trunk lines” owned by integrated producers of natural gas
relation to all the taxpayer’s activities.” 26 C.F.R. § 1.167(a)-              which are used to transmit “dry”natural gas to distributors or co nsumers)
11(b)(4)(iii)(b). (Emphases adde d).                                           within Asset Class 46.0. See further develo pme nt belo w.
No. 01-2599                        Saginaw Bay Pipeline Co.,             11     12     Saginaw Bay Pipeline Co.,                            No. 01-2599
                                        et al. v. United States                        et al. v. United States

belong in Asset Class 46.0, which authorizes fifteen-year                       reversed the United States Tax Court’s application of fifteen-
depreciation.                                                                   year depreciation, in favor of the seven-year writeoff. Duke
                                                                                Energy Natural Gas Corp. v. Commissioner, 172 F.3d 1255
  To date, the only sister circuit to confront a similar contest
has been the Tenth Circuit, which, on nearly identical facts,9
                                                                                gathering line definition.”).
    9
       The government has averred that a material fact distinguishes Duke            Similarly, the district judge ’s invocation o f Public Service
Energy’s pipeline systems from the Saginaw Bay pipelines, because the           Commission of Kentucky v. Federal Energy Commission, 610 F.2d 439,
United States in Duke Energy did not dispute that Duke’s pipeline               444 (6th Cir. 1979) (ruling that exclusive federal regulatory jurisdiction
networks were “gathering systems” for asset class attribution purposes          under the Natural Gas Act encompassed natural gas from the moment that
(see Duke Energy Natural Gas Corp. v. Comm issioner, 172 F.3d 1255,             it entered the stream of interstate commerce by exiting the wellhead and
1256-58 (10th Cir. 19 99)); where as in the case here in controversy the        entering a “gathering” pipeline, despite a statutory exemption permitting
trial court agreed with the government’s argument that the Saginaw Bay          state regulatory jurisdiction over “produ ction and gathering” activities,
network was not a “gathering system .” See Saginaw Bay Pipeline Co. v.          which the court construed to be limited to production activities undertaken
United States, No. 99-CV-70454, 2001 W L 12 032 83, at *2-3 (E.D. Mich.         by natural gas producers upon the real estate where the gas wellheads
Aug. 23, 2001) (finding, as a matter of both fact and law, that the Saginaw     were located) was misco nceive d. The trial jurist erroneously intimated
Bay pipeline was not a “gathering” pipeline because it did not directly         that Public Service Commission supported the con clusion that only gas
connect to any field wellhea d, and also because it was no t substantially      production activities which occurred on the realty which produced the
located on a natural gas p roducer’s land from which natural gas was            natural gas should be categorized as “gathering” activities, and therefore
extracted). In supp ort of its “disconnection” theo ry, the trial court         pipelines largely lying on property from which no gas was extracted
adopted the reasoning of a non-controlling Fifth Circuit decision,              should not be deemed “gathering” pipelines for any purposes including
Ham man v. Southwestern Gas Pipeline, Inc., 721 F.2d 140 , 142 -43 (5 th        income tax asset classification. However, although the transported
Cir. 1983), by which that court had construed federal natural gas pipeline      contents of “gathering pipelines” might be distinguishable from
safety regulations to require that “gathering” lines must attach dire ctly to   “gathering” activities which transpire on the producer’s property or
wellheads. The key regulation posited that a “‘gathering line’ means a          leasehold for federal regulatory jurisdictional purposes, that distinction is
pipeline that transports gas from a current production facility to a            entirely immaterial to the federal income tax depreciation treatment of
transmission line or main.” 49 C.F.R. § 19 2.3. (A gas wellhead qualifies       pipelines which transport “wet” as opposed to “dry” natural gas,
as a “current production facility”). The Hamman court’s construction of         irrespective of the label attributed to such pipe lines.
that regulation to re strict the meaning o f “gathering pipeline” so lely to
lateral “feeder” pipelines which connect directly to field wellheads, as             Accordingly, the trial court erred, as both a matter of fact and law, by
opposed to pipelines which transport natural gas from field wellheads but       characterizing the Saginaw Bay pipelines as something other than a
do not physically join those wellheads, is facially open to question. At        “gathering” system as defined for purposes of the instant litigation. See
any rate, to the extent that Hamman might carry any persuasive weight in        Razavi v. Commissioner, 74 F.3d 125, 127 (6th Cir. 1996) (explaining that
the Sixth Circuit, it would be restricted to construction of the laws           a district court’s findings of historical fact are examined for clear error,
governing natural gas pipeline safety, such as the federal rules controlling    but its applications of law to the facts and its ultimate legal conclusions
the depths at which certain types of gas pip elines must be b uried. See        including resolutions of mixed questions of law and fact are scrutinized
Hamman , 721 F.2d at 14 2. No evident rationale supports the application        de novo). As illuminated herein, the undisputed practical uses to which
of a safety regulation’s judicially-refined definition of “gathering            the Saginaw B ay pipelines were put du ring the five tax years in
pipeline” to the income tax depreciation regulations, given the total           controve rsy militated to characterize them as “gathering pipelines” for
dissimilarity of the purpo ses of the two sets o f standards. Id. at 143        income tax purposes within the ambit of Asse t Class 13.2 as a matter of
(“Keeping in mind that Co ngress meant the [N atural G as Pip eline Safety]     law, irrespective of their lack of direct connections to field wellheads by
Act to minim ize acciden ts caused by natural gas pipelines, we hold that       reason of intervening “field separators,” and regardless of the subject
a pipeline must be directly attached to a gas well in order to meet the         pipeline’s situs on land from which natural gas was not extracted.
No. 01-2599                        Saginaw Bay Pipeline Co.,                13   14     Saginaw Bay Pipeline Co.,                               No. 01-2599
                                        et al. v. United States                         et al. v. United States

(10th Cir. 1999). That court ruled that, although Duke                              Indeed, the United States’ posture that the depreciation
Energy was not itself a “producer” of natural gas, its                           status of pipelines which in fact are used as “gathering” lines
“gathering” systems were primarily used by gas producers to                      should depend not upon their function and the costs and risks
transmit partially-cleansed-but-essentially-still-“wet” natural                  associated with their operation, but instead upon the business
gas to purification plants. Id. at 1258. Moreover, after                         identity of their owners, would, if adopted, lead to the absurd
weighing factors such as the comparatively low operational                       result that pipelines used for identical “gathering” purposes
pressures, generally confined geographical areas serviced,                       would be depreciated over seven years if owned by a producer
and relatively short potential economic life spans attributable                  of natural gas, but would instead be subject to fifteen-year
to Duke’s “gathering” pipe systems, the Tenth Circuit                            depreciation if owned by a pipeline company engaged in the
concluded that, as a functional issue, “[t]he net effect is that                 trade of transporting “wet” natural gas for hire. As
the economic character of Duke's gathering activities is more                    compellingly expressed by the Duke Energy court:
akin to production than pipeline operation.”10 Id. at 1258-59.
                                                                                       Furthermore, were we to read a distinction into the
                                                                                    asset classes requiring taxpayers to place the gathering
    10                                                                              systems of nonproducers in Asset Class 46.0 and the
        The initial adjudicator in the case in controversy opined that “Duke
was wrongly decid ed in its interpretation of the term ‘used b y’ in the first
                                                                                    gathering systems of producers in Asset Class 13.2, we
sentence of Asset Class 13.2.” Saginaw Bay Pipeline Co. v. United                   would thereby create an inconsistent regime for the
States, No. 99-CV-70454, 2001 WL 1203283, at *2 (E.D. Mich. Aug. 23,                depreciation of assets. If placed in different classes,
2001). In reality, the d istrict court ha d misc onstrued the “used by”             gathering systems used for the same purpose and serving
phraseology to mean “owned by” a natural gas producer. As persuasively              identical wells would fall under different depreciation
explicated by the T enth C ircuit:
                                                                                    schedules depending upon the producer or nonproducer
         W e are not persuade d b y the gov ernm ent's interpretation of            status of the asset's owner. Moreover, if a producer sells
    the asset class descriptions. "Use" do es not mean "own" in                     a gathering system to a nonproducer such as Duke, the
    either the legal dictionary definition of the wo rd use, see Bla ck's           system would shift from one asset class to another
    Law Dictiona ry 1541 (6th ed. 1990) ("T o ma ke use of; to                      without any change in its function or characteristics, and
    convert to one's service; to employ; to avail oneself of; to utilize;
    to carry out a purpose or action by means of; to put into action
                                                                                    the system's new owner would be forced to depreciate the
    or service, especially to attain an end."), nor in everyday                     asset over a far longer period. Absent an explicit
    parlance. . . .

         The Revenue Procedure before us creates and describes
    asset classes for the purpose of establishing depreciation                   Duke Energy Natural Gas Corp. v. Comm issioner, 172 F.3d 1255, 1259-
    schedules, and contains critical information affecting taxpayer              60 (10th Cir. 1999 ). Alterna tively, the Duke Energy court convincingly
    decisions about capital investment. W e cannot accept the                    illustrated that, even if the Asset Class 1 3.2 d escription co uld be rationally
    go vernme nt's attemp t to interpolate the wo rds "owned by" into            construed to expressly list “gathering” lines which were owned by natural
    the description of Asset Class 13.2. We instead interpret that               gas producers, the use of the word “includ es,” rather than “includes only”
    description to include any gathering system, so long as it is used           (see note 8 above), signals an intent of its drafter not to restrict the asset
    by a gas producer--whether under its own ownership or through                classification solely to the listed property, but instead also to embrace
    contractual arrangements--in the exploration for and production              “precisely analogous assets used by non-producers to provide services
    of petroleum and natural ga s.                                               directly to producers.” Id. at 1260 (citing, inter alia, 26 U.S.C.
                                                                                 § 7701 (c)).
No. 01-2599                  Saginaw Bay Pipeline Co.,       15    16   Saginaw Bay Pipeline Co.,                  No. 01-2599
                                  et al. v. United States               et al. v. United States

  distinction based on ownership in the Revenue                     been explicitly superseded. See Rev. Proc. 72-10, 1972-1
  Procedure, we decline to create such an inconsistency.            C.B. 721, 731 (superseding Rev. Proc. 71-25, 62-21);
                                                                    Rev. Proc. 71-25, 1971-2 C.B. 553, 566 (superseding
Id. at 1261. (Notes omitted).                                       Rev. Proc. 62-21).
   The government’s retort was anchored in an elaborate                More importantly, the language of the most
historical construct which tediously traced the pedigree of         recent--and relevant--of these prior iterations does not
business property depreciation federal tax laws since the           establish that gathering systems of nonproducers have
inception of modern national income taxation in 1913 in a bid       been distinguished from those of producers for
to illustrate that, over the years, the United States had oft-      depreciation purposes since 1972. See Rev. Proc. 77-10,
times commanded varying tax treatments of similar business          1977-1 C.B. 548, 548 (superseding Rev. Proc. 72-10,
assets used for similar purposes on the sole basis that the         while noting that the change "was not intended to modify
respective owners of those assets were engaged in different         the composition of the existing classes of Rev. Proc. 72-
commerce. That effort was unavailing, because, since at least       10"). Rev. Proc. 72-10, 1972-1 C.B. 721, 723, which
the early 1970s, the United States has explicitly renounced an      establishes the immediately prior (and still relevant)
“industry-based” approach to asset classification in favor of       iteration of the applicable sentence of the description of
a “use-based” system.          See 26 C.F.R. § 1.167(a)-            Asset Class 13.2, states that the class "[i]ncludes assets
11(b)(4)(iii)(b) (applicable to property placed in service after    used for drilling of wells and production of petroleum
December 31, 1970), which posits, among other things, that          and natural gas, including gathering pipelines and related
“[p]roperty shall be classified according to primary use even       storage facilities, when these are related activities
though the activity in which such property is primarily used        undertaken by petroleum and natural gas producers."
is insubstantial in relation to all the taxpayer’s activities.”     This description relies upon essentially the same
(Emphasis added). The Duke Energy court had correctly               language as the current asset class in stating that when
rejected the same argument by the I.R.S.:                           gathering systems are "used for" the drilling and
                                                                    production processes of producers, they belong in Asset
     The government argues that in previous iterations of           Class 13.2. We are no more persuaded by the
  the asset classes in dispute, the IRS distinguished               government's argument that the words "undertaken
  between assets owned by gas producers and those owned             by"--which refer to "activities"--necessarily implies that
  by non-producers. See, e.g., Rev. Proc. 72-10, 1972-1             the assets must be "owned by" producers than we are
  C.B. 721, 731 (superseding Rev. Proc. 71-25, 62-21);              persuaded that the words "used by" necessarily require
  Rev. Proc. 71-25, 1971-2 C.B. 553, 556 (establishing              ownership. The relevant earlier asset class descriptions
  Asset Class 13.2); Rev. Proc. 62-21, 1962-2 C.B. 418,             provide us with no clear mandate to distinguish between
  424 (establishing Guideline Class 17(b), which
  "[e]xclude[d] gathering pipelines and related storage
  facilities of pipeline companies"). We first note that all
  of the relevant provisions of the earliest Revenue
  Procedures the government cites to support its
  interpretation of the current asset class descriptions have
No. 01-2599                        Saginaw Bay Pipeline Co.,             17     18   Saginaw Bay Pipeline Co.,                   No. 01-2599
                                        et al. v. United States                      et al. v. United States

  gathering systems based upon ownership, and we                                of the land under which that pipeline runs, and/or whether that
  therefore will not do so.11                                                   pipeline was connected by lateral “feeder” lines directly or
                                                                                indirectly to the field wellheads. Concordantly, all natural
Id. at 1260-61. (Emphases added).                                               gas transportation pipelines used for any purpose other than
                                                                                the production-related “gathering” of “wet” gas, including
   This reviewing court has carefully considered the trial                      dry-gas “transmission” and “distribution” pipelines as defined
court’s written opinions and final judgment, the briefs and all                 herein, should be depreciated over fifteen years under the
arguments of counsel, the material contained within the Joint                   General Depreciation System as Asset Class 46.0 property,
Appendix, and the controlling legal authorities. It finds that                  even if they are owned or used by a producer of natural gas.
the district court committed reversible legal and factual error
by ruling that the Saginaw Bay pipelines at issue herein were                     The judgment of the district court for the defendant is
not “gathering” pipelines subject to seven-year depreciation                    reversed, and the case is remanded for entry of judgment in
under the Revenue Procedure’s Asset Class 13.2 definition.                      favor of the plaintiffs and for such necessary further
This court finds the Tenth Circuit’s reasoning and conclusions                  proceedings as are consistent with this disposition.
articulated in Duke Energy Natural Gas Corp. v.
Commissioner, 172 F.3d 1255 (10th Cir. 1999), to be
logically persuasive and factually on point, and thus adopts its
analysis and ruling. This court further concludes that the
subsequent conflicting analysis and decision of the United
States Tax Court in Clajon Gas Co. v. Commissioner, 119
T.C. 197, 2002 WL 31399696 (Oct. 25, 2002), was legally
ill-formulated and unpersuasive.
   In conclusion, this reviewing court rules that every natural
gas carriage pipeline which functions as a “gathering”
pipeline in the methane gas production process by
transporting impure “raw” or “wet” natural gas from the field
wellheads to a cleansing and processing facility qualifies as
a “gathering pipeline” subject to seven-year General
Depreciation System depreciation under the strictures of
Asset Class 13.2 of Rev. Proc. 87-56, irrespective of the
primary business of the owner of that pipeline, the other uses

    11
        Accordingly, because Saginaw B ay’s primary business is irrelevant
to the depreciation classification of their pipelines used for natural gas
“gathering” activities, the fact that the plaintiffs identified themselves on
their tax returns as engaged in the trade of “natural gas transportation” (as
opp osed to pro duction or “gathering”) is immaterial.
