District court disagrees on depreciation recovery period for gathering system.

• Author: Kautter, David J.
• Position: Pipelines; modified accelerated cost recovery system - US District Court, Michigan

In Saginaw Bay Pipeline Co., DC MI, 8/23/01, a district court held that an appropriate modified accelerated cost recovery system (MACRS) recovery period for a taxpayer's "gathering pipelines" is 15 years.

Background

Under asset class 13.2 (Exploration for and Production of Petroleum and Natural Gas Deposits) of Rev. Proc. 87-56, "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" have a seven-year MACRS recovery period. Alternatively, "assets used in the private, commercial, and contract carrying of petroleum, gas and other products by means of pipes and conveyors" fit within asset class 46.0 (Pipeline Transportation) and have a 15-year MACRS recovery period.

The company, relying on Duke Energy Natural Gas Corp., 172 F3d 1255 (10th Cir. 1999), rev'g 109 TC 416 (1997), argued that use within the industry is the determining factor, and the asset belongs in class 13.2. The IRS contended that the nature of the company's trade or business determines that the asset belongs in class 46.0; see Letter Ruling (TAM) 9548003, citing Rev. Proc. 71-25, that asset class 13.2 includes gathering pipelines when the "related activities [are] undertaken by petroleum and natural gas producers."

Duke Energy

In Duke Energy, the company's subsidiary owned and operated interconnected gas-gathering pipelines and compression facilities. The subterranean pipelines delivered "raw gas" to processing plants in oil and gas fields; however, Duke Energy did not own an interest in the wells that produced the collected gas. Most of Duke Energy's gathering systems delivered raw gas directly to processing plants owned by the company or unrelated third parties; the remaining systems delivered the gas to intra- and interstate pipelines without processing. Duke Energy contracted with producers to share or transfer property rights (or both) to the gas during various points in the production and processing stages.

The Tax Court decided that the determination of an asset's class under Rev. Proc. 87-56 is its primary use based on the taxpayer's particular activities, not the taxpayer's industry. It concluded that gathering pipelines owned by a corporation that does not have an interest in oil- or gas-producing wells were depreciable over 15 years as class 46.0 assets used for pipeline transportation. About this same time, a Wyoming district court (within the...