Saginaw Bay Pipeline Company, Cms Saginaw Bay Company, Saginaw Bay Lateral Company v. United States of America

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RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
ELECTRONIC CITATION: 2003 FED App. 0259P (6th Cir.)
File Name: 03a0259p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
SAGINAW BAY PIPELINE
COMPANY, CMS SAGINAW
BAY COMPANY, SAGINAW
BAY LATERAL COMPANY, and
CMS SAGINAW BAY LATERAL
COMPANY,
Plaintiffs-Appellants,
v.
UNITED STATES OF AMERICA,
Defendant-Appellee.
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No. 01-2599
Appeal from the United States District Court
for the Eastern District of Michigan at Detroit.
No. 99-70454—John Corbett O’Meara, District Judge.
Argued: May 7, 2003
Decided and Filed: July 30, 2003
Before: KRUPANSKY, SILER, and GILMAN, Circuit
Judges.
2 Saginaw Bay Pipeline Co.,
et al. v. United States
No. 01-2599
1Plaintiffs Saginaw Bay Pipeline Company and CMS Saginaw Bay
Comp any formed a limited business partnership known as “Saginaw Bay
Area Limited Partnership.” Plaintiffs Saginaw Bay Lateral Company and
CMS Saginaw Bay Lateral Company created a second limited p artnership
called “Saginaw Bay Lateral 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
_________________
COUNSEL
ARGUED: Todd R. Mendel, BARRIS, SOTT, DENN &
DRIKER, Detroit, Michigan, for Appellants. Teresa T.
Milton, UNITED STATES DEPARTMENT OF JUSTICE,
APPELLATE SECTION TAX DIVISION, Washington,
D.C., for Appellee. ON BRIEF: Todd R. Mendel, BARRIS,
SOTT, DENN & DRIKER, Detroit, Michigan, Thomas P.
Marinis, Jr., VINSON & ELKINS, Houston, Texas, for
Appellants. Teresa T. Milton, Richard Farber, UNITED
STATES DEPARTMENT OF JUSTICE, APPELLATE
SECTION TAX DIVISION, Washington, D.C., for Appellee.
Alan I. Horowitz, Tamara W. Ashford, MILLER &
CHEVALIER CHARTERED, Washington, D.C., for Amicus
Curiae.
_________________
OPINION
_________________
KRUPANSKY, Circuit Judge. The plaintiffs-appellants,
Saginaw Bay Pipeline Company, CMS Saginaw Bay
Company, Saginaw Bay Lateral Company, and CMS Saginaw
Bay Lateral Company (collectively “the plaintiffs,” “Saginaw
Bay,” or “the pipeline companies”),1 have contested the

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

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3During the relevant period 199 1-95 , the Saginaw Bay pipeline
network did no t exclusively transport “wet” gas belonging to SW EPI.
Rather, it also carried “raw” natural gas produced by, among o thers, Sun
Oil, Marathon, Oryx, and Amoco.
4Although both “transmission” lines and “distribution” lines carry
pure, “dry” natural gas for ultimate consumer use, the term “transmission
line” evidently is most frequently used to describe an interstate pipeline
which carries clean processed gas from a cleansing center to a distribution
center, whereas the phrase “distribution line” apparently is most often
employed to describe a pipeline which transfers “dry” gas from a local
distribution center to specific business or residential customer addresses.
See, e.g., Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672, 691 (1954)
(Clark, J., dissenting) (“T he natural gas ind ustry, like Ancient G aul, is
divided into three parts. These parts are production and gathering,
interstate transmission by pipeline, and distribution to consumers by local
distribution companies.”)
producer throughout the transportation process.3 The
producers compensated the plaintiffs for the use of the
pipeline on a contractual “fee-for-service” basis.
Natural gas, in its “raw” form when extracted from the
earth at the wellhead, is typically contaminated with
numerous impurities, including, among other things, butane,
ethane, pentane, propane, water, nitrogen, carbon dioxide,
other inert gases, sulphur, sand, and drilling fluids. All
adulterants must be substantially removed at a purification
site such as the Kalkaska facility, leaving only nearly-pure
“dry” methane gas, prior its sale to residential or commercial
consumers. The cleansed, customer-ready “dry”
petrochemical fuel is then exported from the purification plant
to distributors or other customers via lines which, for
purposes of this decision, shall be denominated
“transmission” or “distribution” pipelines, which are pipelines
designed and operated solely for the carriage of “dry”
hydrocarbon gas, sometimes referred to in the fossil fuel
business as “pipeline-quality gas.”4 By contrast, because the
Saginaw Bay pipeline was designed to, and was operated as,
6 Saginaw Bay Pipeline Co.,
et al. v. United States
No. 01-2599
5The record herein revealed that various terms of art frequently used
in the natural gas trade have not always been used consistently, and may
have different meanings whe n used in different contexts. For example,
main or trunk pipelines which adjoin lateral “gathering” lines running
from field wellheads, which transmit the “raw” gas gathered from the
lateral lines to a purification facility, have sometimes been called
“transmission” pipelines. Similarly, “wet” gas partially cleansed by field
separators has occasionally been de signated “pipeline-qua lity gas” in
reference to its conformity to contract specifications for introduction into
a “gathering” pipeline for carriage to a purification complex, as opposed
to that term’s more common usage in reference to “dry” gas which is
suitable for transit via a “transmission” or “distribution” pipeline for
ultimate delivery to a consumer. Howe ver, as developed herein, the
terminology used, whether by the p ipeline’s owne r or anyone else, to
describe or identify a particular pipeline, is not dispositive of its proper
treatment under the federal income tax laws. Rather, as evolved herein,
the actual functional use to which a particular pipeline or pip e system is
dedicated determines its asset classification for tax depreciation purpo ses.
a conduit for “wet” natural gas, it constituted a species of
natural gas transportation pipeline frequently described,
within prevailing natural gas industry nomenclature, as a
natural gas “gathering” pipeline.5
Because the respective functions of “gathering” pipelines,
vis a vis “transmission” or “distribution” pipelines, as defined
herein, are entirely distinct, the operating standards for the
two systems are correspondingly dissimilar. For example,
whereas “transmission” or “distribution” pipeline systems are
typically unable to safely accommodate any significant
presence of solid or liquid contaminants, “gathering”
pipelines including the Saginaw Bay system must be
equipped to handle at least limited amounts of the non-
gaseous components of “raw” natural gas. Additionally,
because “raw” natural gas ordinarily burns at a higher
temperature than “dry” natural gas, “transmission” or
“distribution” line service contracts generally provide for the
transport of fossil fuel having a relatively low “heating
value,” usually no more than 950 British Thermal Units

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

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6The parties herein have agreed that, although Congress removed
§ 167(m) from the tax code via a 199 0 amendment, subsection 167(m)(1)
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
years material to the subje ct action. Accord, Duke Energy Natural Gas
Corp. v. Commissioner, 172 F.3d 12 55, 1257 (10th Cir. 1999).
7“For purposes of this section, property shall be included in the asset
guideline class for the activity in wh ich the pro perty is prim arily used.
See paragraph (e)(3)(iii) of this section for rule for leased prope rty.
Pro perty 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.” 26 C.F.R. § 1.167(a)-
11(b)(4)(iii)(b). (Emphases adde d).
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.” Hassett v. Welch, 303 U.S. 303,
314 (1938).
The applicable depreciation “recovery period” is keyed to
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
[category] prescribed by the Secretary which reasonably
reflects 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).6 The
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).
However, the Treasury Secretary has promulgated two
material, specific, functionally-defined natural gas industry
asset life classifications which facially may encompass the
Saginaw Bay pipeline complex -- to wit, Asset Class 13.2
(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
Depreciation System “recovery period” of seven years; and
10 Saginaw Bay Pipeline Co.,
et al. v. United States
No. 01-2599
8[Asset Class] 13.2: Exploration for and Production of Petroleum
and N atural Gas D eposits:
Includes assets used by petroleum and natural gas produ cers for
drilling of wells and production of petroleum and natural gas,
including gathering pipelines and related storage facilities. . . .
. . . .
[Asset Class] 46 .0: Pipeline Transportation:
Includes assets used in the private, commercial, and contract
carrying of petroleum, gas and other p roducts 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. 678, 684. (Boldface in original; italics
added). “Trunk lines” are large-diameter, usually high-pressure mainlines
which connect distant points; they generally include “transmissio n lines.”
However, large “gathering” ma in lines are sometimes also referred to as
“trunk lines.” Nevertheless, reading the two asset class descriptions
together, it is evident that all functionally-defined “gathering pipelines”
should be consigned to Asse t Class 13.2, lea ving 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 co nsumers)
within Asset Class 46.0. See further developme nt belo w.
Asset Class 46.0 (defined to include assets used in the
carrying of gas by pipes), which triggers a listed “class life”
of twenty-two years, and an accompanying General
Depreciation System “recovery period” of fifteen years.8
Rev. Proc. 87-56, 1987-2 C.B. 678, 684 (hereinafter “the
Revenue Procedure”).
The pipeline companies have maintained that the Saginaw
Bay pipeline network fits into Asset Class 13.2, and hence
they should be entitled to comparatively accelerated seven-
year depreciation. By contrast, the I.R.S. argued, with
success before the district court, that the plaintiffs’ pipelines

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

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10The 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
sentence of Asset Class 13.2.” Saginaw Bay Pipeline Co. v. United
States, No. 99-CV-70454, 2001 WL 1203283, at *2 (E.D. Mich. Aug. 23,
2001). In reality, the d istrict court had misconstrued the “used by”
phraseology to mean “owned by” a natural gas producer. As persuasively
explicated by the T enth Circuit:
W e are not persuade d b y the government's interpretation of
the asset class descriptions. "Use" do es not mean "own" in
either the legal dictionary definition of the wo rd use, see Black's
Law Dictiona ry 1541 (6th ed. 1990) ("T o make use of; to
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
or service, especially to attain an end."), nor in everyday
parlance. . . .
The Revenue Procedure before us creates and describes
asset classes for the purpose of establishing depreciation
schedules, and contains critical information affecting taxpayer
decisions about capital investment. W e cannot accept the
governme nt's attemp t to interpolate the wo rds "owned by" into
the description of Asset Class 13.2. We instead interpret that
description to include any gathering system, so long as it is used
by a gas producer--whether under its own ownership or through
contractual arrangements--in the exploration for and production
of petroleum and natural ga s.
(10th Cir. 1999). That court ruled that, although Duke
Energy was not itself a “producer” of natural gas, its
“gathering” systems were primarily used by gas producers to
transmit partially-cleansed-but-essentially-still-“wet” natural
gas to purification plants. Id. at 1258. Moreover, after
weighing factors such as the comparatively low operational
pressures, generally confined geographical areas serviced,
and relatively short potential economic life spans attributable
to Duke’s “gathering” pipe systems, the Tenth Circuit
concluded that, as a functional issue, “[t]he net effect is that
the economic character of Duke's gathering activities is more
akin to production than pipeline operation.”10 Id. at 1258-59.
14 Saginaw Bay Pipeline Co.,
et al. v. United States
No. 01-2599
Duke Energy Natural Gas Corp. v. Comm issioner, 172 F.3d 1255, 1259-
60 (10th Cir. 1999 ). Alterna tively, the Duke Energy court convincingly
illustrated that, even if the Asset Class 13.2 description co uld be rationally
construed to expressly list “gathering” lines which were owned by natural
gas producers, the use of the word “includ es,” rather than “includes only”
(see note 8 above), signals an intent of its drafter not to restrict the asset
classification solely to the listed property, but instead also to embrace
“precisely analogous assets used by non-producers to provide services
directly to producers.” Id. at 1260 (citing, inter alia, 26 U.S.C.
§ 7701 (c)).
Indeed, the United States’ posture that the depreciation
status of pipelines which in fact are used as “gathering” lines
should depend not upon their function and the costs and risks
associated with their operation, but instead upon the business
identity of their owners, would, if adopted, lead to the absurd
result that pipelines used for identical “gathering” purposes
would be depreciated over seven years if owned by a producer
of natural gas, but would instead be subject to fifteen-year
depreciation if owned by a pipeline company engaged in the
trade of transporting “wet” natural gas for hire. As
compellingly expressed by the Duke Energy court:
Furthermore, were we to read a distinction into the
asset classes requiring taxpayers to place the gathering
systems of nonproducers in Asset Class 46.0 and the
gathering systems of producers in Asset Class 13.2, we
would thereby create an inconsistent regime for the
depreciation of assets. 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. Absent an explicit

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distinction based on ownership in the Revenue
Procedure, we decline to create such an inconsistency.
Id. at 1261. (Notes omitted).
The government’s retort was anchored in an elaborate
historical construct which tediously traced the pedigree of
business property depreciation federal tax laws since the
inception of modern national income taxation in 1913 in a bid
to illustrate that, over the years, the United States had oft-
times commanded varying tax treatments of similar business
assets used for similar purposes on the sole basis that the
respective owners of those assets were engaged in different
commerce. That effort was unavailing, because, since at least
the early 1970s, the United States has explicitly renounced an
“industry-based” approach to asset classification in favor of
a “use-based” system. See 26 C.F.R. § 1.167(a)-
11(b)(4)(iii)(b) (applicable to property placed in service after
December 31, 1970), which posits, among other things, that
“[p]roperty 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.”
(Emphasis added). The Duke Energy court had correctly
rejected the same argument by the I.R.S.:
The government argues that in previous iterations of
the asset classes in dispute, the IRS distinguished
between assets owned by gas producers and those owned
by non-producers. 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"). 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
16 Saginaw Bay Pipeline Co.,
et al. v. United States
No. 01-2599
been explicitly superseded. 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).
More importantly, the language of the most
recent--and relevant--of these prior iterations does not
establish that gathering systems of nonproducers have
been distinguished from those of producers for
depreciation purposes since 1972. See Rev. Proc. 77-10,
1977-1 C.B. 548, 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"). Rev. Proc. 72-10, 1972-1 C.B. 721, 723, which
establishes the immediately prior (and still relevant)
iteration of the applicable sentence of the description of
Asset Class 13.2, states that the class "[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."
This description relies upon essentially the same
language as the current asset class in stating that when
gathering systems are "used for" the drilling and
production processes of producers, they belong in Asset
Class 13.2. We are no more persuaded by the
government's argument that the words "undertaken
by"--which refer to "activities"--necessarily implies that
the assets must be "owned by" producers than we are
persuaded that the words "used by" necessarily require
ownership. The relevant earlier asset class descriptions
provide us with no clear mandate to distinguish between

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No. 01-2599 Saginaw Bay Pipeline Co.,
et al. v. United States
17
11Accordingly, 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.
gathering systems based upon ownership, and we
therefore will not do so.11
Id. at 1260-61. (Emphases added).
This reviewing court has carefully considered the trial
court’s written opinions and final judgment, the briefs and all
arguments of counsel, the material contained within the Joint
Appendix, and the controlling legal authorities. It finds that
the district court committed reversible legal and factual error
by ruling that the Saginaw Bay pipelines at issue herein were
not “gathering” pipelines subject to seven-year depreciation
under the Revenue Procedure’s Asset Class 13.2 definition.
This court finds the Tenth Circuit’s reasoning and conclusions
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
18 Saginaw Bay Pipeline Co.,
et al. v. United States
No. 01-2599
of the land under which that pipeline runs, and/or whether that
pipeline was connected by lateral “feeder” lines directly or
indirectly to the field wellheads. Concordantly, all natural
gas transportation pipelines used for any purpose other than
the production-related “gathering” of “wet” gas, including
dry-gas “transmission” and “distribution” pipelines as defined
herein, should be depreciated over fifteen years under the
General Depreciation System as Asset Class 46.0 property,
even if they are owned or used by a producer of natural gas.
The judgment of the district court for the defendant is
reversed, and the case is remanded for entry of judgment in
favor of the plaintiffs and for such necessary further
proceedings as are consistent with this disposition.

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