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 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 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 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, 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 ("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 "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. 507, 514, 55 S. Ct. 287, 79 L. Ed. 623 (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, 58 S. Ct. 559, 82 L. Ed. 858 (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 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 In re Revenue Procedure, Rev. Proc. 87-56, 1987-2 C.B. 674, 684, 1987 WL 350424 (1987) (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 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 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 (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.

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 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, 1972 WL 29197 (superseding Rev. Proc. 71-25, 62-21); Rev. Proc. 71-25, 1971-2 C.B. 553, 556, 1971 WL 26202 (establishing Asset Class 13.2); Rev. Proc. 62-21, 1962-2 C.B. 418, 424, 1962 WL 13048 (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 been explicitly superseded. See Rev. Proc. 72-10, 1972-1 C.B. 721, 731, 1972 WL 29197 (superseding Rev. Proc. 71-25, 62-21); Rev. Proc. 71-25, 1971-2 C.B. 553, 566, 1971 WL 26202 (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, 1977 WL 42723 (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 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 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.