
    411 F.2d 1300
    PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARY COMPANIES v. THE UNITED STATES
    [No. 220-64.
    Decided June 20, 1969]
    
      
      Norton Kern, attorney of record, for plaintiff. Reid & Priest, Thomas O. Kent, and Lawrence 0. Wilson, of counsel.
    
      Michael H. Singer, with whom was Assistant Attorney General Johnnie M. Walters, for defendant. Philip R. Miller and Joseph Kovner, of counsel.
    Before Cowen, Chief Judge, Laramore, Dureee, Davis, Collins, Skelton, and Nichols, Judges.
    
   Per Curiam

: This is a timely suit for recovery of Federal income taxes paid by plaintiff Pennsylvania Power & Light Company on its separate corporation returns for the calendar years 1951,1952, and 1953, and paid by such plaintiff and its subsidiaries on their consolidated returns for the calendar years 1954 and 1955. The aggregate recovery sought is $761,-414.04, plus statutory interest. Except as the context indicates otherwise, the singular term “taxpayer” is used to refer to such plaintiff and its subsidiaries.

Taxpayer is and was a Pennsylvania corporation engaged in the production, transmission, distribution, and sale of electric energy in Pennsylvania under rates subject to regulation by the Pennsylvania Public Utility Commission.

The issues in this case are: (1) whether taxpayer is entitled to depreciation allowance deductions on its costs incurred for initial clearing of easement rights-of-way acquired and used for construction, maintenance, and operation of its transmission and distribution lines; (2) whether taxpayer is entitled to depreciation allowance deductions on its costs of acquisition of such easements; and (3) whether taxpayer is entitled to deduct the full amounts of its uninsured casualty losses incurred in taxable years 1954 and 1955 from ordinary income, or whether under section 1231 of the Internal Revenue Code of 1954, only the amounts of such losses in excess of gains are deductible from ordinary income.

For the reasons hereinafter stated, it is our opinion that plaintiffs are entitled to recover on the first two issues stated above, but are not entitled to recover on the third issue.

As its primary source of electric energy, taxpayer operated steam and hydroelectric powerplants, and as a secondary source, had pooling and interchange agreements with other electric power companies. Electric power generated or purchased by taxpayer is and was marketed to industrial, commercial, governmental and residential consumers over transmission and distribution lines, which consist of conductors (wires), poles or towers, insulators and switches, and' related items. About 99 percent of such lines were located on easement rights-of-way. Infrequently, taxpayer acquires and did acquire the entire fee from the landowner for such purposes, but does not claim herein the right to depreciation of any such land. Its transmission lines carry up to 500,000 volts of power from generating stations to transformer substations located in general areas of use. Its distribution lines then carry 12,000 volts, or less, from the substations to the customer with, the electric power delivered at utilization voltage.

Taxpayer acquired such, easement rights-of-way from the fee owners of the lands they traversed. The landowner retained the right to continue productive use of the land included within the easement. Such easements varied from the widest at several hundred feet on which several lines could be built to the narrowest of unspecified width on which one line could be constructed and maintained. For example, one transmission line easement was a two-line right-of-way 100 feet wide across clear land, expanded to 150 feet through timberland. Taxpayer’s easements covered long and narrow strips of land.

Each of such easements grant and did grant taxpayer the right to construct, reconstruct, maintain, and operate one or more electric lines, as specified, with the right to clear and maintain such easement as necessary. Each contained no termination date, but continued or will continue in force and effect as long as a line is maintained thereon. It is undisputed that under Pennsylvania law, prevailing at all times relevant in this case, an easement right-of-way is extinguished or terminated by abandonment or cessation of use. Whenever taxpayer removed transmission or distribution lines without intention to reconstruct lines over the same right-of-way, it intended to and did abandon the pertinent easements and associated clearing costs. When taxpayer discontinued the use of an existing line, but intended to retain the easement for future use or construction, it left the unenergized line in place. No compensation was received by taxpayer on the abandonment of an easement, even in instances when taxpayer by written instrument (then only at the request of the landowner) released and abandoned the easement to clear record title.

In order to accomplish the intended use of an easement right-of-way, taxpayer first cleared and removed trees, bushes, and other impediments therefrom. This initial work not only removed hazards to the continuous operation of the line to be constructed, but reasonably facilitated the movement of men and equipment along the right-of-way for both construction and later maintenance. During operation of a line, taxpayer incurred further clearing costs as required, but such costs were treated as current expenses, deductible as such, and not capitalized. Initial clearing costs were capitalized.

As the trial commissioner found: “Since taxpayer and has retired component parts of transmission and distribution lines, such as conductors (wires) and poles, separately, as well as at the time when a section of a line is entirely retired, the initial clearing costs cannot be readily equated to the useful life of the powerline as originally installed.”

More difficult is the question whether or not taxpayer is entitled to depreciate its cost of acquisition of transmission and distribution easements as part of its depreciable properties. The major items of such costs, capitalized by taxpayer, were consideration paid to the landowners, salary and travel expenses of right-of-way agent, legal and appraisal fees, transfer taxes, and recording fees. In its tax returns, taxpayer did not include an allowance for depreciation in respect of such costs, but claimed deductions in accordance with its accounting practice for Federal income tax purposes of writing such costs off its books when an easement was retired. This issue is presented for taxable years 1952 through 1955, since only for those years did taxpayer’s claims for refund assert such ground for recovery.

Taxpayer’s first contention is that its right-of-way easements are “integral” parts of its transmission and distribution facilities, and, as such, subject to an allowance of depreciation. There can be no doubt that (1) such easements were essential to the construction, maintenance, and operation of the powerlines, and that (2) the lines were necessary parts of taxpayer’s overall electric plant and facilities. Furthermore, there is no contest concerning the validity of taxpayer’s consistent practice of including costs of construction of its powerlines in the aggregate of its depreciable properties for application of a composite depreciation rate pursuant to the composite method of computing depreciation. In other words, it is not disputed that the powerlines are depreciable property. However, when taxpayer on infrequent occasions constructs such a line on its land owned in fee, such land is not depreciable, even though it is essential to the construction, maintenance, and operation of that particular line. Consequently, more is required than a determination that the easements are essential to the existence of depreciable property.

Defendant contended at the trial of tbis case (in the alternative to its position that the easements had indeterminate useful lives) that such easements are basically land, and land is not depreciable property. This contention is deemed abandoned because not thereafter made either in defendant’s formal brief or in its oral arguments to the trial commissioner. As contended 'by defendant in its brief and subsequent oral arguments, it is concluded that the right-of-way easements are intangible assets. Panhandle Eastern Pipeline Co. v. United States, 187 Ct. Cl. 129, 408 F. 2d 690 (1969); Commonwealth Natural Gas Corp. v. United States, 395 F. 2d 493 (4th Cir. 1968); Shell Pipe Line Corp. v. United States, 267 F. Supp. 1014, 1018 (S.D. Tex. 1967).

The statutory authority for allowance of depreciation for the taxable years 1952 and 1953 is section 23 (l) of the Internal Revenue Code of 1939, 53 Stat. 14, 26 U.S.C. § 23(1) (1952); and for the taxable years 1954 and 1955, section 167 (a) of the Internal Revenue Code of 1954, 68A Stat. 51, 26 U.S.C. § 167 (a) (Supp. II, 1952). Both Code sections provide that there shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.

The applicable Treasury Regulations for the taxable years 1952 and 1953 are Treas. Eeg. 118, § 39.23 (1)-1 to -3,1953-2 Cum. Bull. 500, 26 C.F.E. (Part 39) :§ 39.23(1)-1 to -3(1953); and for taxable years 1954 and 1955, Treas. Eeg. § 1.167(a)-l to -3, 1956-1 Cum. Bull. 98. They provide that the allowance for depreciation is that amount which should be set aside for the taxable year in accordance with a reasonably consistent plan so that the aggregate of the amounts set aside, plus the salvage, will at the end of the estimated useful life of the depreciable property, equal the cost or other basis of the property. The estimated useful life of an asset is not necessarily its inherent physical life, but rather the period over which the asset may reasonably be expected to be useful in the taxpayer’s trade or business. This period is determined by reference to taxpayer’s experience with similar property taking into account present conditions and probable future development. Some of the factors to be considered in determining this period are (1) wear and tear and decay or decline from natural causes (2) the normal progress of the art, economic changes, inventions, and current developments within the industry and the taxpayer’s trade or business, and (3) the taxpayer’s policy as to repairs, renewals, and replacements. If the taxpayer’s experience is inadequate, the general experience in the industry may be used to determine the estimated useful life.

As provided in the above-cited regulations, depreciation allowance on tangible property applies to that part of the property which is subject to wear and tear, to decay or decline from natural causes, to exhaustion, or to obsolescence; and an intangible asset may be depreciated under such regulations if it is known from experience or other factors to be of use in the business for only a limited period, the length of which can be estimated with reasonable accuracy.

Thus, the basic question in this case on taxpayer tías established by a preponderance of the evidence that its easements (intangible assets) will be useful in its business for a limited period, estimated with reasonable accuracy. Taxpayer has made no effort to show that each easement has a useful life limited to the useful life of the original powerline constructed and maintained thereon, and it is not established that the termination of the useful life of any existing powerline will necessarily result in abandonment or retirement of its related easement. In other words, there is no evidence that the costs of removal of an obsolete or worn out powerline and construction of a replacement line on the same easement would make such a practice economically prohibitive, and thus require abandonment of that easement when the useful life of .its original powerline terminated. In fact, taxpayer’s practice is at least in some instances to keep an unenergized line in place in order to retain the easement for some future replacement of the line. Furthermore, the actual life of the original powerline is sometimes extended by replacement of component parts. Also, there is no evidence tiat the easements are in any way affected as to their useful lives by any possible exhaustion of supply of electric energy to be transmitted and distributed over the lines. In these respects, the instant case differs factually from Badger Pipe Line Co. v. United States, 185 Ct. Cl. 547, 401 F. 2d 799 (1968), in which it was found that the useful lives of easements and their related pipelines (for transportation of refined petroleum products) were coterminous because replacement of an obsolete or worn out pipeline on the same right-of-way would not be economically feasible; and also from Commonwealth Natural Gas Corp. v. United States, supra, in which easement rights-of-way containing natural gas pipelines were held to have 30-year useful lives 'because such period was a reasonable measure of the life of the natural gas reserves available to the taxpayer for the taxable years in question. See also, Panhandle Eastern Pipeline Co., supra. The striking difference between the Panhandle decision and this case is that in the former plaintiff proved that the easement and the pipeline had coterminous useful lives. Both exhausted simultaneously.

In this case, however, the useful life of the easement extends beyond the life of the initial power line. There is a possibility that other transmission or distribution lines will be substituted for the initial line. In the Panhandle case, however, the proof showed that the initial pipeline placed on the easement was not replaced by substitute pipelines.

However, merely because the equating of the life of an easement to the life of its related pipeline may be relatively precise, it does not follow that taxpayer’s estimates of the lives of its powerline easements are invalid as a matter of fact or law. Furthermore, it is obvious that the problem of estimating the life of natural gas reserves available to the taxpayer in Commonwealth Natural Gas Corp., supra, i.e., its fair share of all such reserves available or discovered east of the Bocky Mountains, is one of extreme complexity, necessarily requiring exercise of judgment by competent professionals who might well reach widely varying opinions. The Fourth Circuit Court of Appeals recognized and rejected impreciseness as a reason for reversing the lower court’s ultimate finding as to the useful life of the pipeline easements involved. Commonwealth Natural Gas Corp. v. United States, supra.

Recognizing that the purpose of depreciation allowance was to return the costs of exhausting assets to the taxpayer over the useful lives of sueb ¡assets in taxpayer’s trade or business, and holding that in essence, the deduction for depletion did not differ from the deduction for depreciation, the Supreme Court in United States v. Ludey, 274 U.S. 295 (1927), ruled that ¡as intended by Congress, a “rough estimate” of the depletion deduction on an oil reserve was to be made, rather than ignore the fact of depletion. The established facts were that the quantity originally in the reserve was not actually known, could not be measured, hut at best approximated, and consequently the percentage of the whole reserve withdrawn in 'any year was necessarily a “rough estimate.” Thereafter, in Burnet v. Niagara Falls Brewing Co., 282 U.S. 648, 654-655 (19-31), the Supreme Court held that it would be unreasonable and in violation of the statutory purpose to ¡ascertain taxable income in each year, to put upon the taxpayer the burden of proving to a “reasonable certainty” the existence and amount of obsolescence of plant, but all that is required is a “reasonable approximation” of the amount that may be fairly included in the deduction for obsolescence. Citing United States v. Ludey, supra, the Supreme Court in Massey Motors, Inc. v. United States, 364 U.S. 92 (1960), reiterated the principle that the primary purpose of depreciation accounting is to further the integrity of periodic income statements by making a meaningful allocation of the cost entailed in the use of the asset to the periods to which it contributes to production of income, and observed with respect to rental oars involved, that there were risks of error in the projections or estimates of the periods such assets would be held in the business and the prices received for them on their retirement, but stated that “prediction” is the very essence of depreciation accounting. The holding. Was that the reasonable allowance for depreciation of the property was to be calculated over the estimated useful life of the asset while employed by the taxpayer, applying a depreciation base of the cost of the property to the taxpayer less its resale value at the estimated time of disposal. In commenting on the possibility of error where “probabilities” are relied upon to produce what is hoped to be an accurate estimation of the expense involved in utilising the asset, the court observed that to insure a correct depre-elation base in the years after a mistake has been discovered, adjustments may be made when it appears that a miscalculation has been made. Obviously the court was referring to challenge of subsequent returns by the Internal Eevenue Service in well-known administrative procedures available. See also, Hertz Corp. v. United States, 364 U.S. 122 (1960); and also, Fribourg Navigation Co. v. Commissioner, 383 U.S. 272 (1966), citing Ludey, Massey, and Hertz, with approval.

Taxpayer submitted depreciation studies to the Pennsylvania Public Utility Commission in connection with proceedings which resulted in orders being issued by such Commission in 1952 and 1956, which established the rates taxpayer could charge for electric energy supplied to its customers. Such studies showed useful lives for the assets involved in this case, computed under the geometric mean method of analysis, and accepted by the Commission, as

follows:

Useful life in years

Asset 195% order 1958 order

Transmission easements_ 100 100

Distribution easements_ 50 40

Initial cost of clearing transmission easements_ 100 75

Initial cost of clearing distribution easements_ 50 40

While methods of accounting approved by such a regulatory body are not binding upon the Internal Eevenue Service or the courts in tax oases, Old Colony R.R. v. Commissioner, 284 U.S. 552, 562 (1932), nevertheless such regulatory action has probative value in an appropriate case, such as the instant one. Northern Natural Cas Co. v. O'Malley, 277 F. 2d 128, 137-138 (8th Cir. 1960); Portland General Electric Co. v. United States, 189 F. Supp. 290, 298 (D. Ore. 1960). Not only were the same items involved herein before the Pennsylvania regulatory body, but at times on either end of the period of taxable years involved herein, and in addition, taxpayer’s expert witness on the useful lives of such assets in this case, Mr. John J. Eeilly, participated as a consultant in the preparation of the studies submitted to the Pennsylvania agency.

Dr. Harold A. Cowles, Professor of Industrial Engineering at Iowa State University, an expert in the field of engineering valuation, depreciation, and property and Mr. John J. Eeilly, a consulting engineer, who during 30 years of experience had made or directed approximately 80 depreciation studies for more than 40 public utility clients, were the expert witnesses who testified on behalf of taxpayer herein. The defendant presented no expert witness in rebuttal of ihéir testimony.

Dr. Cowles explained in detail the “actuarial” and “turnover” methods used in determining the useful lives of mass property accounts, the two primary categories of methods being used. The basic difference is that for the various actuarial methods, data must be available as to the original date of installation of items of property which have been retired from service, whereas no such information is required to apply the turnover methods. One accepted form of the actuarial methods is the “annual rate” method, and the “geometric mean” method is an accepted form of the turnover methods. Dr. Cowles testified that either the annual rate or the geometric mean method could aid in producing a reasonable prediction of the estimated lives of a mass property account when the results are interpreted by a competent engineer who is familiar with the properties which are the subject of the study. Dr. Cowles had reviewed the data received in evidence relating to the additions and retirements of taxpayer’s property accounts in issue, and testified that they were adequate to enable a competent engineer to determine reasonably the estimated lives of the properties of such accounts. Dr. Cowles explained the Iowa type survivor curves, developed in studies and research conducted at his university for many years. They are widely used in property life analysis in the public utility field.

Mr. Eeilly’s opinion as to the useful lives of the assets in issue in this case was 100 years for transmission easements, 45 years for distribution easements, 60 years for initial cost of clearing transmission easements, and 35 years for initial cost of clearing distribution easements. Mr. Eeilly applied the geometric mean method to each of taxpayer’s pertinent accounts. In addition, because of available data, he applied the annual rate method to taxpayer’s transmission easement and clearing accounts, employing the Iowa type survivor curves. He considered information concerning the causes of the retirements of the pertinent properties and also the likelihood that such retirements would continue and become more frequent in the future. In reaching his opinion, he relied upon his extensive knowledge of taxpayer’s overall electric plant and facilities, acquired in connection with his services as a consultant for taxpayer in connection with the 1952 and 1956 proceedings before the Pennsylvania Public Utility Commission, including a 2-month inspection in 1954 of taxpayer’s entire system. We note, at this point, that the testimony before the court in this case is different from that presented to us in the case of Virginia Electric and Power Company v. United States, post, at 120, 411 F. 2d 1314 (1969). Accordingly, on the basis of different proof we reach a different conclusion as to the appropriate useful life for these easements in this taxpayer’s trade or business.

Upon careful review of the testimony of taxpayer’s expert witnesses, considered in the light of all of the evidence in this case, it is concluded that the pertinent properties are exhausting assets, and that taxpayer has established with reasonable accuracy the useful lives of its right-of-way easements, as follows:

Transmission right-of-way easements_100 years

Distribution right-of-way easements_ 45 years

On the basis of such useful lives, taxpayer is entitled to include in the aggregate of its depreciable properties for application of a composite rate of depreciation pursuant to the composite method of computing depreciation, its costs of acquisition of its easements. It is concluded from all of the evidence that this will more accurately reflect income in accordance with the principle that taxable income for each taxable year should be ascertained by meaningful allocation of costs of use of assets employed in the trade or business. It is undisputed that the reasons for retirement of taxpayer’s easements have resulted in increased retirements of powerlines since 1955 because of growth of population, industrial expansion, and technological improvements in methods of operation of electric utilities. Furthermore, it is reasonable to predict, as does taxpayer, that such retirements will increase in the future. The drastic changes which have occurred since the first light globe of Thomas A. Edison suggest strongly stantial technological developments will occur in the future. While the subject is not mentioned in the record of this case, this court cannot ignore the commonly-advanced prospect that development of use of nuclear energy could well result in a revolutionary change in the generation, transmission, and distribution of electric energy, whether to the advantage or disadvantage of this taxpayer. Taxpayer operates a fast-growing business, and it seems clear that if taxpayer is compelled to continue to defer the writing off of the pertinent capital costs until actual retirement of each easement, there will have been accomplished from year to year and over a substantial period of time, a distortion of the application of the capital costs of such assets in effecting the annual income accounting principle of the income tax laws. There is the distinct probability that technological and other changes could accelerate to the point that write-off of such costs only at the time of easement retirements could result in concentration of such deductions in a relatively Short period of time. Despite the impreciseness of taxpayer’s estimates of useful lives, they are reasonable, and their application will result in spreading the recapture of the pertinent capital costs over the very substantial periods of time above-stated. The fact that taxpayer has not established a useful life for each of its easements and for each item of initial clearing costs, but rather a useful life for the mass properties in each of the pertinent accounts, does not detract from the reasonableness of its estimates. Some easements and initial clearing costs may survive, while others will terminate before the expiration of such estimated useful lives. The unreasonable conclusion would be to equate these easements and clearing costs to fee-owned land, presumed to last forever at a steadily appreciating value. As stated by the Supreme Court, if what now appears to be reasonable useful lives of such assets proves by further experience to be in error, administrative steps are readily available for a redetermination. Our trial commissioner found that the initial clearing costs had an independent useful life, apart from the easements and transmission lines. As we held in the YEP 00 case, initial clearing costs are not independent assets and they are subject to depreciation as part of the cost basis of the easements, over the useful life of the easement. For the reasons stated in the VEPOO decision, we find, on the records in these cases, that clearing costs are depreciated over the useful life of the easement, and that they do not have independent useful lives for the purpose of computing the depreciation deduction. Initial clearing costs are not separate assets and they exhaust together with the transmission and distribution lines easements, over the useful lives of such easements.

Taxpayer is entitled to recover on this issue in accordance with the foregoing opinion.

The remaining issue in this case is whether taxpayer is entitled to deduct the full amounts of its uninsured casualty losses incurred in taxable years 1954 and 1955 from ordinary income, or whether under section 1231 of the Internal Revenue Code of 1954, only the amounts of such losses in excess of gains are deductible from ordinary income.

In 1954 and 1955, taxpayer sustained uninsured casualty losses to real property and depreciable property used in its business in the respective amounts of $613,641.44 and $567,-558.37 from a wind and rain storm in 1954 and a flood in 1955. In the same years, taxpayer realized gains on the sales of real property and depreciable property used for more than 6 months in its business, in the respective amounts of $75,460.71 and $67,177.89. For each year, taxpayer’s timely claim for refund asserted the right to a deduction of the entire casualty loss from ordinary income without offset of the above-stated gains realized in that year. This ground for refund having been disallowed for both taxable years by the Internal Revenue Service, taxpayer by its timely petition filed herein seeks recovery for each year for the same reason asserted administratively.

Section 165 (a) of the Internal Revenue Code of 1954, 26 XT.S.C. § 165(a) (1952ed.,Supp.IV),provides:

§ 165. Losses, (a) General rule. There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.

Plaintiff’s position is that this section plainly provides for the deduction of its losses not compensated for by insurance, and that offsets of its gains were not provided for under § 1231(a) of the 1954 Code, 'as follows:

§ 1231. Property used in the trade or business and involuntary conversions.
(a) General rule.
If, during the taxable year, on sales or exchanges of property used in the trade or business, plus the recognized gains from the compulsory or invohmtary conversion (as a result of destruction in whole or in fart, theft or seizure, or an exercise of the power of requisition or condemnation or the threat or imminence thereof) of froferty used in the trade or business and capital assets held for more than 6 months into other property or money, exceed the recognized losses from such sales, exchanges, and conversions, such gains and losses shall 'be considered as gains and losses from sales or exchanges of capital assets held for more than 6 months. If such gains do not exceed such losses, such gains and losses shall not be considered as gains and losses from sales or exchanges of capital assets. For purposes of this subsection—
$ $ ‡ ‡ ‡
(2) losses upon the destruction, in whole or in part, theft or seizure, or requisition or condemnation of property used in the trade or business or capital assets held for more than 6 months shall be considered losses from a compulsory or involuntary conversion. [Emphasis added]

Taxpayer argues that this section is clearly and unambiguously limited to recognized gains and losses from the “compulsory or involuntary conversion (as a result of destruction in whole or in part, * * *) of property * * * intoother property or money,” and that uninsured casualty losses are not included therein. Since taxpayer’s property losses by storm or flood were not compensated for by insurance, there was no conversion of property into “other property or money.”

The statutory predecessor of § 1231(a) was § 117(j) (2) of the Internal Bevenue Code of 1939, 26 U.S.O. § 117(j) (2) (1952), added to the 1939 Code by the Bevenue Act of 1942, 56 Stat. 846, and reenacted in the 1954 Code without change.

The explanation for the proposed enactment of the predecessor of § 1231 (a) in the Bevenue Act of 1942 was con-in the Report of the Committee on Ways and Means, House Report No. 2888, 77th Cong., 1st Sess., 1942-2 Cum. Bull. 872, 415, as follows:

Under existing law, the gain or loss from the sale or exchange of depreciable property is not treated as a capital gain or capital loss, but as an ordinary gain or an ordinary loss. This rule was originally inserted as a relief provision to enable corporations to have the full benefit of a loss from the sale of machinery, instead of being limited by the capital loss provisions, which would permit it only a certain percentage of the loss. It was felt at that time that the taxpayer should not be denied the full loss because it sold the property at a loss instead of abandoning the property. While this rule provided relief in case a loss was realized, it appears that many taxpayers are able to dispose of their depreciable property at a gain over its depreciated cost. To treat sueh a gam as an. ordinary gain will result in am, undue hardr ship to the taxpayer. For example, a taxpayer sells certain trawlers used in his business to the Government. If the gain from the sale is regarded as an ordinary gain, it may result in the taxpayer receiving practically nothing for his property. Another example is where the proceeds of insurance on destroyed property exceed the cost of the property. The existing law treats such gain as ordinary income. The gain or loss resulting from the i/moljimtary conversion of property into other property or money is also treated as an ordinary gain or loss. The theft of am, article which is inswred is an example in point. Your committee has provided the following solution for this problem :
(a) If the total gains in such cases exceeds the losses, such gains shall be considered as gains from the sale or exchange of capital assets held for more than 15 months. Buildings and similar real property improvements are not included in this provision, unless gains or losses therefrom result, from an involuntary conversion. This is because buildings and similar real property are treated under a different provision of the bill. In determining whether the gains exceed the losses, 100 per cent of such gains or losses are taken into account. In the case of involuntary conversions, the existing law is amended to provide that the loss shall be recognized upon the conversion.
(b) If the gains do not exceed the losses in such cases, such gains and losses will be treated as ordinary gains and ordinary losses instead of capital gains or capital losses. Where the losses exceed the gains, the excess will be deductible from income as an ordinary loss. [Emphasis supplied]

The pertinent Senate and House committee reports for the 1954 Code (3 U.S. Code Cong. & Ad. News 4017, 4417, 4621, 5076, 83d Cong. 2d Sess., 1954) expressed no legislative intent concerning reenactment of § 117 (j) as § 1231, except the statement that no substantive change was intended.

In 1943, the Internal Revenue Service issued regulations concerning the Revenue Act of 1942, as amendments to Treas. Eeg. 103, and among them, was new § 19.117-7 pertaining to new § 117(j) of the 1939 'Code, 1943 Cum. Bull. 314, 327, which new regulation provided in pertinent part as follows:

In determining whether such gains exceed such losses for the purposes of section 117 (j), losses upon the destruction in whole or in part, theft or seizure, requisition or condemnation of the property described in section 117(j) are included whether or not there was a conversion of S'aoh property into money or other property. Por example, if a capital asset held for more than six months, with an adjusted basis of $400, is stolen, and the loss from this theft is not compensated for by insurance or ' otherwise, the $400 loss is included in the computations under section 117(j) to determine whether gains exceed losses. * * * [Emphasis supplied]

In substance, tins same language was included in Treas. Reg. § 1.1231-1 (e) applicable to § 1231(a) of the 1954 Code, 26 C.F.R. § 1.1231-1 (e) (Rev. to 1-1-58).

Taxpayer contends that there is no statutory for this regulation, and that such regulation is contrary to the plain language of 1954 Code § 1231(a) and its predecessor, 1939 Code § 117 (j), providing for offsets of gains against conversion losses only when the conversions of property are into property or money, leaving unqualified the provisions of 1954 Code § 165(a) for deduction of uninsured casualty losses.

In 1958, 1954 Code § 1231(a) was amended (Technical Amendments Act of 1958, 72 Stat. 1606, 1642) to apply to taxable years beginning after December 31,1957, by adding the following sentence at the end of such section:

In the case of any property used in the trade or business and of any capital asset held for more than 6 months and beld for the production of income, this subsection shall not apply to any loss, in respect of which the taxpayer is not compensated for by insurance in any amount, arising from fire, storm, shipwreck, or other casualty, or from theft.

The proposed enactment of this amendment was explained in the Beport of the Committee on Finance, Senate Beport No. 1983, 85th Cong., 2d Sess., 1958-3 Cum. Bull. 922, 995-996, as follows:

Under present law where there are uninsured losses on property as a result of its destruction, theft, seizure, requisition, or condemnation, such losses, in the case of property used in the trade or business or capital assets held for more than 6 months, are treated as section 1231 losses. These casualty losses coming under section 1231 of the code must be added together with other gains and losses from sales or exchanges of property used in a trade or business and with other gains or losses from involuntary conversions. If the resulting net amount is a gain, under section 1231 it is treated as a long-term capital gain and in effect taxed at a rate no higher than 25 percent. If, on the other hand the net amount is a loss, under section 1231 it is treated as an ordinary loss which can be offset against income taxed at the regular tax rates.
Where a taxpayer elects to be a self-insurer against casualty losses, there seldom is a conversion into money or other property, as there would be if the destroyed property were insured. If this casualty loss were the only loss incurred during the taxable year by the self-insured person, he would be entitled to the full benefit of an ordinary loss deduction under section 1231, 'but where there are also 1231 gains, the casualty loss is partially or wholly offset against these gains which would otherwise be taxed as capital gains. As a result, the 'benefit of having casualty losses treated as ordinary, rather than capital, losses may be reduced or eliminated in the case of self-insurers, depending on the fortuitous circumstance as to what gains the taxpayer may have from trade or business assets or involuntary conversions. This is not a problem for those who are fully insured by others because they receive insurance payments in the case of destroyed property which offset the casualty losses which would otherwise be realized. Moreover, such persons may deduct currently the cost of their insurance for property used in a trade or business. Thus, in their case they obtain a deduction against ordinary income for any premiums paid and any gains from trade or business assets (or involuntary conversions) are taxed as capital gains and are not offset against losses (since these are covered by insurance) which would otherwise be treated as ordinary losses.
Your committee believes that an u/n-intended hardship and for that reason it has added a provision to the Mouse bill amending section 1231 (a) of the code. The provision added makes section 1231 inapplicable in the case of losses where the taxpayer is not compensated for the loss 'by insurance, if the loss arises from fire, storm, shipwreck, or other casualty or from theft. This treatment is to apply, however, only in the case of property used in the trade or business and in the case of capital assets held for more than 6 months and held for the production of income. The effect of this provision will be to treat such losses always as ordinary losses and never to offset them against gains Which might otherwise be treated as capital gains. [Emphasis supplied.]

This Senate Report contained further explanation, 1958-3 Cum. Bull, at 1124-1125, as follows:

Tour committee has provided this section to separate certain uninsured casualty losses from the computation of section 1231 gain or loss, but only with respect to property used in the trade or business and capital assets held for the production of income which have been held more than 6 months. The amendment applies with respect to, for example, loss incurred as the result of the destruction of a taxpayer’s oil tanks which he used for oil storage in his trade or business, but on which he was unable to obtain insurance. On the other hand, the amendment does not apply to loss arising from the destruction or theft of the taxpayer’s uninsured personal automobile. * * * [Emphasis supplied.]

Until very recently there was no case involving the precise factual situation in this case, i.e., an uninsured casualty loss to business property in a taxable year prior to the effectiveness of the 1958 amendment of section 1231(a). The decided cases all concern nonbusiness properties, i.e., uninsured loss by storm or other casualty of trees and shrubbery on residential property, or of personal jewelry by theft.

In Weyerhaeuser Co. v. United States, 402 F. 2d 620 (9th Cir. 1968) the court was confronted with the taxpayer who suffered uninsured losses of business property during the years 1954-1957. There, as in this case, taxpayer argued that its losses were deductible from ordinary income. The court said, and we agree, that:

In failing to include personal-use property in the 1958 amendment, Congress clearly evidenced its opinion that the amendment was necessary to accomplish, for taxable years beginning in 1958, the treatment of income-producing property which Weyerhaeuser here claims was already proper before the amendment. Or, to state this another way, Congress in 1958 obviously believed that the rule announced in Maurer — involving personal-use property losses during the taxable year 1954 — was not the pre-1958 law as to income-producing property. Yet, as pointed out above, no basis for distinction between income-producing and personal-use property existed prior to 1958. It is evident, therefore, that Congress in 1958, at least by implication, rejected the interpretation which had been placed upon the section by the Maurer court.
In any event, it is apparent, we think, that, since no other change was made by the 1958 amendment, the pre-1958 rule for all types of property covered by the section, including the income-producing type here in question, should be held to be the same as the post-1958 rule applicable to property held for personal use. The Fourth, Fifth, and Sixth Circuits have each concluded that the post-1958 rule for property held for personal use is that all losses, both insured and uninsured, are covered by section 1231 (ah Campbell v. Waggoner, 370 F. 2d 157 (5th Cir. 1966); Chewning v. Commissioner, 363 F. 2d 441 (4th Cir.), cert. denied, 385 U.S. 930, 87 S. Ct. 289, 17 L. Ed. 2d 212 (1966); Morrison v. United States, 355 F. 2d 218 (6th Cir.), cert. denied, 384 U.S. 986, 86 S. Ct. 1887 (1966). In reaching their conclusions that, as to property not covered by the 1958 amendment, section 1231 (a)’s coverage extends to both insured and uninsured losses, each of these three courts of appeal specifically rejected the Maurer court’s reasoning. The discussions in the Morrison and Campbell opinions on the point are particularly worthy of reference. We share the conviction that the Maurer court erred in its conclusion. [402 F. 2d at 628,629.]

In Maurer v. United States, 284 F. 2d 122 (10th. Cir. 1960)the taxable year was 1954, during which taxpayers suffered uninsured casualty losses of trees and valuable plantings on residential property, and the question was whether there was an ordinary loss under § 165 or a capital loss under § 1231. The Tenth Circuit held that § 1231 was inapplicable, but recognized that the language of Treas. Keg. § 1.1231-1 (e) (ruling that involuntary conversions are to be treated under § 1231 whether or not there is a conversion into other property or money) could lead to only one of two conclusions, either that such regulation is clearly inconsistent with the terms of the statute and invalid, or else it is inapplicable in the particular situation involved. The court refrained from deciding the question of validity of the regulation “in the face of the plain wording of Section 1231,” commenting that such regulation might be an attempt to distinguish involuntary conversions from casualties, but that because the jury had found that the loss was a casualty, the court was presented with no question turning on such a distinction. In Oppenheimer v. United States, 220 F. Supp. 194 (W.D. Mo. 1963), the taxable year was 1956, during which taxpayers had an uninsured casualty loss of trees and other valuable plantings on residential property, and also a greater net long term gam from the sale of a farm. Without discussion of the legal problem, but relying on desirability of uniformity of decision in the field of federal taxation, the district court followed Maurer, supra, and held that the casualty loss was deductible from ordinary income pursuant to § 165, and that it was not required under § 1231 that such loss be offset against the gain on the sale of the farm.

The only other decided cases involve taxable years after the effectiveness of the 1958 amendment of § 1231(a). In Morrison v. United States, 355 F. 2d 218 (6th Cir. 1966), eert. denied, 384 U.S. 986, the taxable year was 1960, during which taxpayer sustained an uninsured casualty loss of trees, shrubbery, and other improvements on residential property, and also realized a greater gain on the sale of an orange grove held for production of income. The Sixth Circuit rejected taxpayer’s argument that because there was no conversion of property into other property or money, the loss in question was not included in tbe type of losses intended to be covered by § 1231(a), and held that taxpayer was not entitled to deduct her loss as an ordinary loss under § 165(c) (3), but that the loss had to be offset against the gain from the sale of the orange grove under § 1231 (a). The court commented that by the 1958 amendment, Congress excluded from the application of § 1231, property used in the trade or business and any capital asset held for more than 6 months and held for the production of income, where the taxpayer was not compensated by insurance in any amount, but that it was significant that Congress did not exclude the classification of “capital assets held for more than six months.” Prior to the 1958 amendment, the pertinent Treasury Regulation had since 1943 included uninsured casualty losses within the application of § 1231 and its predecessor. While recognizing that no validity can attach to a Treasury Regulation which is inconsistent with the statute, the court concluded that the controlling principle was that announced by the Supreme Court in Helvering v. Winmill, 305 U.S. 79, 83 (1938), as follows:

_ Treasury regulations and interpretations long continued without substantial change, applying to unamended or substantially reenacted statutes, are deemed to have received congressional approval and have the effect of law.

The court relied upon the legislative history of the 1958 amendment, as expressing the same view, i.e., that the pertinent regulation expressed existing law prior to such amendment. The Sixth Circuit expressed “great respect” for the opinion of the Tenth Circuit in the Maurer case, supra, but concluded that its view was the more logical one, and that it conformed to the intent of Congress in enacting the legislation. In accordance with the stipulations of the parties to be bound by the decision in the Morrison case, supra, and after denial of certiorari in that case, the Sixth Circuit reversed district court decisions for taxpayers in two other similar cases and remanded for entry of judgment in favor of the United States. Dawson and Hall v. United States, 66-2 U.S. Tax Cas. ¶ 9674 (1966); Killebrew v. United States, 66-2 U.S. Tax Cas. ¶ 9675 (1966).

The reasoning' of the Maurer case was also rejected by the Fourth Circuit in sustaining the ruling of the Tax Court that a -taxpayer’s 1960 casualty loss of boxwood bushes on residential property had to be offset under § 1231(a) against gains realized by taxpayer in the same year from sales of property used in his trade or business. Chewning v. Commissioner, 44 T.C. 678 (1965), aff'd per curiam, 363 F. 2d 441 (4th Cir. 1966), cert. denied, 385 U.S. 930.

In Campbell v. Waggoner, 370 F. 2d 157 (5th Cir. 1966), the court also rejected the Maurer decision and approved the holdings in Morrison and Chewning, in ruling that the taxpayers could not deduct their personal jewelry theft loss, sustained in taxable year 1960, as an ordinary loss from ordinary income under § 165(c)(3), but such loss had to be offset under § 1231 (a) against the gain from the sale in the same taxable year of depreciable assets used in their trade or business. The Fifth Circuit considered the legislative history of § 1231(a) 'and the longstanding regulation involved, and concerning the 1958 amendment of that section, stated.

* * * By this amendment Congress made it clear that prior thereto all wholly uncompensated casualty and theft losses were covered by Section 1231. The 1958 amendment had the effect of excluding from Section 1231 treatment only wholly uncompensated casualty and theft losses used in the trade or business and of any capital asset held for more than six months and held for the production of income. Congress thus unmistakably showed that it did not wish to exclude from the effect of of 'Section 1231 wholly uncompensated casualty and theft losses on property not used in a business or not held for the production or income, and the legislative history so reflects. [370 F. 2d at 159-160]

Perhaps the taxpayer’s position is not entirely devoid of /merit. However, it is our opinion that the Weyerhaeuser and Morrison decisions are applicable and that the validity of the regulation should be sustained. Taxpayer’s uninsured casualty losses on its business assets must be offset by gains realized on the sale of real property and depreciable assets used for more than six months in its business. Accordingly, taxpayer is not entitled to recover on this issue.

Findings of Fact

1. Plaintiff, Pennsylvania Power & Light Company, is a corporation organized and existing under the laws of the Commonwealth of Pennsylvania, having been incorporated on June 4,1920, with offices at Ninth and Hamilton Streets, Allentown, Pennsylvania. Except as the context requires, the singular term “taxpayer” as used herein will refer collectively to the plaintiffs Pennsylvania Power & Light Company and Subsidiary Companies.

2. During the years 1951 through 1955, taxpayer was and continues to be a corporation engaged in the production, transmission, distribution, and sale of electrical energy in the Commonwealth of Pennsylvania under rates subject to regulation by the Pennsylvania Public Utility Commission.

3. During the periods involved herein, the number of taxpayer’s electric customers, who were located within approximately 30 counties in the Commonwealth of Pennsylvania, increased from 540,000 in 1951 to more than 680,000 in 1955. As its primary source of electric energy, the taxpayer operated steam and hydroelectric power plants and, as a secondary source, had pooling and interchange agreements with other electric power companies. During the years in suit, taxpayer’s plant capacity increased from 681,175 to 1,319,300 kilowatts; its pole miles of transmission lines increased from 1,332 to 1,815, and its pole miles of distribution lines increased from 24,054 to 28,044; and its output increased from 4,216,245 thousand kilowatt hours to 6,656,965 thousand kilowatt hours.

Between 1954 and 1964, taxpayer’s number of customers increased by 13.1 percent, and its sales of energy (in kilowatt hours) increased 81.6 percent. Taxpayer expected the growth to continue into the future as evidenced by the fact that, as of 1965, it estimated that it would spend about $315 million during the years 1965-1969 for the completion of an additional 1,300,000 kilowatts of generating capacity, the start of a new 900,000 kilowatt generating unit, construction of substantial transmission facilities, expansion and modernization of distribution lines, and general upgrading of facilities.

4. Taxpayer’s books of account have been maintained, and its tax returns have been filed for all periods here involved on an accrual and calendar year basis.

5. Taxpayer filed corporation income tax returns with the Director of Internal Revenue, Philadelphia, Pennsylvania, for the years 1951, 1952, and 1953, under the name of plaintiff Pennsylvania Power & Light 'Company. The dates of filing said returns and the amounts of income tax liability shown thereon are as follows:

Taxable year 1951 — July 14, 1952 — $9,060,678.91

Taxable year 1952 — July 13, 1953 — $10,451,007.00

Taxable year 1953 — July 14, 1954 — $10,782,031.12

The above amounts have been paid in full by the taxpayer.

6. Plaintiff, Pennsylvania Power & Light Company, as parent company, filed on or about September 15, 1955, a consolidated corporation, income tax return under the name of Pennsylvania Power & Light Company and Subsidiary Companies for the year 1954. Such return included the parent company and the following subsidiary companies: Palmer-ton Telephone Company, Realty Company of Pennsylvania, The Scranton Electric Company, and West Pittston-Exeter Railroad Company. Each of the aforementioned subsidiaries duly executed a consent authorizing the taxpayer to include such subsidiary in the consolidated return filed by the taxpayer for the year 1954, and to act as agent for each subsidiary company within the scope of section 1.1502-16 of the Income Tax Regulations issued under the Internal Revenue Code of 1954.

The amount of income tax liability shown on the 1954 return was $11,542,103.37, which amount was paid in full.

7. Plaintiff, Pennsylvania Power & Light Company, as parent company, filed on or about September 15, 1956, a consolidated corporation income tax return under the name of Pennsylvania Power & Light Company and Subsidiary Companies for the year 1955. Such return included the parent company and the following subsidiary companies: The Scranton Electric Company, West Pittston-Exeter Railroad Company, Palmerton Telephone Company (through March 15, 1955), Realty Company of Pennsylvania, Holtwood Coal Company (from June 1, 1955), Holtwood Real Estate Company (from June 1, 1955), and Susquehanna Canal and Power Company (from June 1, 1955). Eaoh of the aforementioned subsidiaries duly executed a consent authorizing taxpayer to include such subsidiary in the consolidated return filed by taxpayer for the year 1955, and to 'act as agent for each subsidiary company within the scope of section 1.1502-16 of the Income Tax Regulations issued under the Internal Revenue Code of 1954.

The amount of income tax liability shown on the return was $14,361,310.78, which amount was paid in full.

8. The returns filed by taxpayer for the years 1951 through 1955, inclusive, were reviewed by a revenue agent with resulting deficiencies or overassessments of tax, as the case may be, in the amounts, and for the years indicated by the agent’s reports, as follows:

Deficiency
Year Date of revenue (overassess-agent’s report ment) in tax
1951.March 18,1959. ($78,957.77)
1952.August 19,1959. 159,423.50
1953.August 19,1959. 133,462.07
1954..._November 1, 1960_ 685,629.94
1955._November 1, 1960_ 205,047.89

9. Deficiencies of income tax, plus interest, were assessed by the District Director of Internal Revenue, Philadelphia, Pennsylvania, and paid by taxpayer, and a refund of income tax, plus interest, was received by taxpayer, on the dates, for the respective years, and in the respective amounts as shown in the following tabulation:

10.With respect to each of the years 1951 to 1955, inclusive, taxpayer entered hito successive agreements with the Commissioner of Internal Revenue extending the period of limitations for assessment of income taxes for the years, and to the dates, as shown by the following tabulation:

Findings of Fact Year Period of limitations extended to

1951_June 30, 1959

1952_ December 31, 1959

1953_ December 31, 1959

1954_December 31, 1960

1955_December 31, 1960

11. Taxpayer timely filed with the District Director of Internal Revenue, Philadelphia, Pennsylvania, claims for refund of income tax for the years, on the dates, and in the amounts 'as shown in the following tabulation:

12. The refund claims filed by the taxpayer for the years 1951 and 1952 were disallowed in full by the District Director. The refund claims for the years 1953 through 1955 were allowed in part, resulting in refund of tax, plus applicable

interest, in the amounts and for the years as shown below:

The refunds so allowed by the Commissioner of Internal Revenue did not relate to any of the claims which are asserted by the taxpayer in the petition herein.

13. On July 13, 1962, the Internal Revenue Service notified taxpayer by certified mail of the rejection and disallowance, to the extent not previously allowed, of the claims for refund filed by taxpayer for the years 1951 through 1955. Taxpayer commenced this suit by filing the petition herein on July 10,1964.

14. Depreciation deductions were claimed in the income tax returns filed by the taxpayer for the years and in the amounts as shown in the following tabulation:

Year Amount

1961 _$8,823, 076. 04

1952 _ 9,241,597.70

1953 _ 9, 928,327.39

1954 _ 12, 338,755.10

1955 _ 13,570,258.12

The aforesaid depreciation deductions claimed by taxpayer in tbe returns as filed included an allowance for depreciation in respect of tbe cost incurred by taxpayer in tbe initial clearing of rigbts-of-way, but did not include an allowance for depreciation in respect of tbe costs incurred by taxpayer in acquiring rigbts-of-way. Taxpayer’s alleged claim to depreciate tbe costs of acquiring rigbts-of-way for tbe taxable years 1952, 1953, 1954, and 1955, as well as Tbe Scranton Electric Company’s right to depreciate, during tbe taxable years 1954 and 1955, the costs incurred by it in initially clearing rigbts-of-way, was timely raised in claims for refund filed by taxpayer for such years.

15. The amounts of tbe depreciation deductions claimed by tbe taxpayer for the years 1951 through 1955 were adjusted by tbe Internal Eevenue 'Service so that the resulting depreciation deductions as allowed for tbe respective years are as follows:

Year Amount

1951-$8, 686,500.15

1952 - 9,093,473.63

1953 - 9,770,719.78

1954 - 12,132, 812.24

1955 - 13,348,109. 62

The aforesaid depreciation deductions did not include any allowance for depreciation in respect of tbe costs incurred by taxpayer in acquiring rigbts-of-way or tbe costs incurred in initially clearing rigbts-of-way.

16. In lieu of depreciation in respect of tbe costs of acquiring rigbts-of-way, tbe Internal Eevenue Service allowed a deduction as claimed by taxpayer on its federal income tax returns for retirements of such property for each of tbe years 1952 through 1955, as shown in tbe following tabulation:

Year Amount

1952 _$3,191.69

1953 _ 3,911.20

1954_ 305.83

1955 _ 26,907.00

In lieu of depreciation in respect of the costs incurred in initially clearing rights-of-way, the Internal Revenue Service allowed taxpayer deductions for retirements referable to such property for each of the years 1951 through 1955, and deductions for additional amortization in 1952 and 1953. The amounts of such deductions for each of said years are as shown in the following tabulation:

17. The electric power generated by the taxpayer in its plants is marketed to industrial, commercial, governmental and residential consumers over transmission and distribution lines, which consist of conductors (wires) , poles or towers, insulators, overhead ground wires, buried ground wires, transformers, and switches erected on cleared rights-of-way. Taxpayer’s transmission system was a network of high voltage electric lines, operating on voltages of 66,000 volts, 220,-000 volts, and 500,000 volts, which conduct power from the generating stations to substations in the general area of use, and includes the substations where the voltage is reduced. The distribution system of taxpayer is a network of electric lines operating at voltages of 12,000 volts and lower which are used to conduct power from the substations to the customer at his utilization voltage.

18. Among the initial steps taken by taxpayer in the creation or expansion of its transmission and distribution system were the acquisition of land or land rights (rights-of-way) from land owners by negotiated agreement or condemnation. In some instances, the taxpayer acquired the entire fee from the land owner, but taxpayer does not claim herein the right to depreciation of any land acquired in fee. Approximately 99 percent of taxpayer’s transmission and distribution lines were located on right-of-way easements.

19. In order to use the acquired right-of-way for transmission and distribution, taxpayer was required to clear and remove trees, bushes, and other impediments from the land. The initial work cleared the right-of-way for construction of the line, in order to move men and equipment in along the line for maintenance, and also to eliminate from the right-of-way trees and brush that could grow into the right-of-way and jeopardize continuous operation of the line. The rights-of-way so cleared were incorporated into the taxpaper’s transmission and distribution systems, and, until retired by sale or abandonment were intended to serve taxpayer as a means for the marketing of electric energy. In order to accomplish that objective, it was necessary for the taxpayer to construct or have constructed such facilities as towers, poles, transformers, cables, and wires. These facilities are replaced by taxpayer as required, upon wearing out or becoming obsolete, and are removed at the time of the disposal or abandonment of the rights-of-way.

20. Taxpayer’s practice is to record the costs of acquiring rights-of-way, and the initial clearing thereof, in capital accounts on its books. Such costs are determined by taxpayer’s management after analysis of pertinent records. When cleared or uncleared rights-of-way were sold, abandoned, or otherwise retired, taxpayer wrote off on its books the cost so determined in the year of retirement.

21. The costs incurred by taxpayer to initially clear rights-of-way over which it subsequently transmitted and distributed electric energy were of benefit to the taxpayer in the construction of transmission and distribution facilities and any replacements thereof, until the retirement of such facilities. After the land has been cleared, taxpayer maintains it in about the same cleared condition as long as the line is in operation. No reclearing job is undertaken. The costs incurred to maintain the land in a cleared condition, following the initial clearing, have been deducted by the taxpayer as maintenance expenses and are not involved herein.

22. The costs incurred by taxpayer for removing stumps, grading, and excavating incident to the preparation of foundations for towers or other structures are not considered part of taxpayer’s costs of clearing rights-of-way and are not involved herein, nor are taxpayer’s costs to purchase or construct such facilities as towers, poles, transformers, cables, and wires. All of such costs are treated by taxpayer as part of its depreciable electric plant in service.

23. Pursuant to orders of the Federal Power Commission (FPC) and the Pennsylvania Public Utility Commission, taxpayer made an inventory of all its properties as at the end of 1936, and reclassified its accounting records, which method of reclassification was approved by both of such commissions in 1947. The reclassification was segregated into subaccounts, which was completed by 1952 for the accounts set forth in finding 24, and such accounts, as reclassified and as segregated, have been continued in the general ledger of taxpayer up to the present time.

24. The following tabulations show the additions, retirements and year-end balances for the named accounts, as reclassified, of plaintiff Pennsylvania Power & Light Company:

Accounts 84-10 and 84-16 Clearing Bights-of-Way — Transmission Plant

The balance on hand at December 31,1936, for each of the foregoing accounts is the accumulated balance based on the accounting records of Pennsylvania Power & Light Company and its predecessor companies. The earliest additions recorded in such accounts and still on hand at the end of 1936 were recorded in 1908.

The balances for the corresponding accounts taken from the 'books of The Scranton Electric Company for the years 1953,1954, and 1955 were as follows:

25. Right-of-way easements and initial clearing costs are retired from taxpayer’s business for various specific reasons which fall into major categories as follows:

(a) Retirements due to system changes, such as, changes in load demand in a particular area because of population or industrial growth, acquisition of new service areas, retirements of substations and generating stations, combining lines with other utility companies, improved service, improvement in economy of operation, changes in lines to avoid storm or ice damage, changes from overhead to underground service, and line changes to improve accessibility for maintenance. Taxpayer retired 34 generating stations during the years 1945 to 1955. Of the 10 operating in 1955,7 remained in 1967, and 2 new ones had been added for a total of 9 in 1967.

(b) Retirements due to governmental requirements, including movement of lines to comply with state laws or city ordinances, to accommodate construction of new streets, airports, schools, hospitals, recreation areas, or railroad spurs, to accommodate relocations and improvements of streets, highways and bridges, and to clear areas for flood control projects.

(e) Retirements due to changes i/n land use hy others, including moving lines to accommodate new or expanded industries, urban redevelopment, new or changed commercial uses, residential development, tree conditions, and goodwill.

Most of the relocations of lines consisted of moving numerous rather small sections since taxpayer has very few large relocations involving moving of whole transmission or distribution lines.

26. For the taxable years 1951 through 1955, taxpayer computed its deductions for depreciation in the following manner. Its depreciable properties (including initial costs of clearing but excluding acquisition costs of land rights) were included within a single group of all properties in its electric plant. This group included facilities used in both the generation and the transmission of electric power. The adjusted tax costs for this group at the beginning of each taxable year and at the end of each taxable year were ascertained. Then the beginning and ending tax costs for such taxable year were added and divided by two in order to determine the average annual cost upon which depreciation was computed for that taxable year. The average annual cost of the electric plant group for the taxable year was then multiplied by the composite rate of depreciation applicable to electric plant to determine the depreciation deduction allowable in respect thereto. The rate allowed by the Internal Eevenue Service for the electric properties of Pennsylvania Power & Light Company (including the property acquired from Pennsylvania Water and Power Company by merger) for the years 1951 through 1955 was 3.25 percent. The composite rate of depreciation allowed for the properties of The Scranton Electric Company for the years 1954 and 1955 (the only two years before the court in which this company was included in the consolidated returns filed by the taxpayer) was 3.5 percent.

When the aforesaid composite rates were established by agreement between taxpayer unid the Internal Eevenue Service, initial clearing costs of transmission and distribution rights-of-way were included in the depreciable property base, but the costs of acquiring transmission and distribution rights-of-way were not included in such depreciable property base.

27. Taxpayer does not claim herein any right to depreciation on land rights used in connection with the production and generation of the electric power. In its income tax returns, the taxpayer claimed deductions for depreciation on original clearing costs of rights-of-way used in transmission and distribution, but did not claim depreciation on the cost of acquiring rights-o'f-way used for such purposes. Instead, in such returns, taxpayer claimed deductions for its costs of transmission and distribution rights-of-way in the year of retirement. The Internal Eevenue Service has not allowed depreciation either on the original clearing costs or on the acquisition costs of rights-of-way used in transmission and distribution, but has instead, in both cases, allowed deductions upon retirement of such clearing costs and rights-of-way as set forth in finding 16. The parties are agreed that should taxpayer be allowed depreciation on original clearing costs and on costs of rights-of-way used in transmission and distribution, the defendant has a right to set off the additional taxes that would be attributable to non-allowability of deductions for retirement of the properties; and further that in the event taxpayer prevails herein, the defendant has the right to set off any Korean War excess profits taxes that may be due and owing on account of any decrease in the taxpayer’s invested capital base.

28. During the year 1951, taxpayer sustained an uninsured casualty loss to real property and depreciable property used in its trade or business in the 'amount of $673,641.44 as a result of a wind and rain storm on October 15,1954. During 1954, taxpayer also received gains on the sale of real property, gains on depreciable property used in its trade or business, all of which 'had been 'held for more than 6 months, in the amount of $75,460.71. In its return for 1954, taxpayer first offset the amount of the casualty loss against gains attributable to the sale of property used in its trade or business, and deducted the remainder from ordinary income. In its claims for refund for 1954, taxpayer claimed a deduction of the entire casualty loss from ordinary income without prior offset against gain realized on the sale of real and depreciable property used in its trade or business. This ground for refund was disallowed by the Internal Revenue Service.

29. During the year 1955, taxpayer and its subsidiary, The Scranton Electric Company, in the operation of their businesses, suffered uninsured casualty losses to real property and depreciable property used in their trades or businesses in the total amount of $567,558.37, as a result of a flood that occurred on August 18, 1955. Also during 1955, taxpayer received gains as a result of sales of real property and deprecia-ble property used for more than 6 months in its trade or business in the amount of $67,177.89. In the income tax return filed by taxpayer for the year 1955, taxpayer first offset the amount of the casualty losses against gains attributable to the sale of real property and depreciable property used in its trade or business for more than 6 months. In its refund claim for 1955, taxpayer requested allowance of the casualty loss in full as 'an ordinary deduction without prior offset against gains realized on the sale of property in 1955. The Internal Revenue Service has rejected this ground for refund.

30. The trial of this case was limited to the issues of law and fact relating to the right of taxpayer to recover, reserving for further proceedings the determination of the amount of recovery, if any, considering inter alia the setoffs described in finding 27, any required adjustment of taxpayer’s book costs to tax costs, and the reasonableness of taxpayer’s rate of depreciation.

31. Taxpayer is the sole an'd absolute owner of the claim herein presented and no assignment or transfer of such claim or any part thereof has been made.

32. The average tax bases of Pennsylvania Power & Light Company’s electric plant in service upon which the examining agent of the Internal Bevenue Service allowed depreciation on audit were as follows for the years in question:

Average depreciable Year taw base

1951 _$280,265,496. 82

1952 _ 275,895,418.32

1953 _ 296,622,029.60

1954 _ 315,243,338.91

1955 _ 327,933,195.29

40,468,311. 00

The $40 million figure in 1955 represents properties acquired from Pennsylvania Water and Power Company on June 1, 1955.

The average tax bases of The Scranton Electric Company’s utility plant in service upon which the examining agent of the Internal Bevenue Service allowed depreciation on audit were as follows for the years in question:

Average depreciable Year taw base

1954 _$49,517, 899.16

1955 _ 61,020,770.82

33. Taxpayer’s easements grant it the right to construct, reconstruct, maintain, and operate electric lines on the premises of the grantor together with the right to go upon the premises to clear the easement to the extent necessary for plaintiff’s facilities. They contain no specific termination date, and each continues in force and effect as long as a line is maintained thereon.

34. Taxpayer almost always acquires right-of-way easements for its transmission and distribution lines (99 percent are located on such) rather than land in fee. Such easements are easier to secure and less expensive. There is no devaluation of adjoining land by severance or limitation of access. The landowner can continue the productive use of the land included in the easement. Disposition by taxpayer of fee-owned strips of land involves expense and difficulties, whereas the easement can be abandoned by removal of transmission or distribution facilities. Taxpayer’s rights-of-way varied from the widest at several hundred feet on which several lines could be built to the narrowest of unspecified width on which one line could be constructed and maintained. As an example, an engineer drawing (in evidence) of a transmission two-line right-of-way easement depicts a width of 100 feet across unwooded land, expanded to 150 feet across timber land. Generally, taxpayer’s easements are long and narrow strips of land. Obviously, distribution line easements would be generally narrower than those for transmission lines.

Taxpayer purchases land in fee for such lines only when necessary to prevent encroachments, such as, for example, along a highway where a line is not to be constructed for some time and an encroaching building might be constructed on an easement.

35. The major items of cost (capitalized as stated in finding 20) incurred by taxpayer in connection with acquiring right-of-way easements are as follows: Consideration paid to the property owner, salary of the right-of-way agent who negotiates with the owner; transportation and traveling expenses of right-of-way agent, legal fees, appraisal fees, transfer taxes, and recording fees.

36. The costs (capitalized as stated in finding 20) incurred by taxpayer to initially clear a right-of-way easement, as described in finding 19, are those necessary for use of the easement in the construction and operation of transmission and distribution facilities and do not serve to improve for general use the land traversed by the easement.

37. When taxpayer removes transmission and distribution lines without intention to reconstruct lines over the same right-of-way, it intends to and does abandon the easements and associated clearing costs on which such lines were located and writes them off on its books of account.

38. When plaintiff discontinues the use of an existing line but intends to retain the easement for future use or construction, it leaves the line in place.

39. Taxpayer conveys an abandoned easement to the owner of the fee only when requested to do so by the owner, but does not receive any payment upon the abandonment of transmission and distribution right-of-way easements regardless of whether or not the easement is conveyed to the owner of the fee at his request.

40. The reasons, set forth in finding 25, for abandoning transmission and distribution lines prior to 1956 have continued since that time and resulted in increased retirements because of growth of population, industrial expansion and technological improvements in methods of operation of electric utilities. It is reasonable to predict that such retirements will increase in the future.

41. Taxpayer retires component parts of transmission and distribution lines such as conductors (wires) and poles separately as well as at the time when a section of a line is entirely retired. Approximately 50 percent of poles are retired by reason of relocation or abandonment of lines. The remainder are abandoned because of deterioration, storm damage, and similar causes.

42. The factors which affect to a greater extent the useful lives of plaintiff’s electric utility properties are functional causes such as obsolescence, inadequacy, and requirements of public authorities. To a lesser extent, physical causes, such as wear and tear, casualty, and action of the elements, are factors which affect the useful life of utility properties.

43. Except for the infrequent occurrence that the original location of a line is changed because of adverse climatic conditions encountered, i.e., sleet formation, flooding, or damage by ice flows, it is not the physical but the functional causes which result in the easement retirements experienced by taxpayer.

44. Taxpayer and the Bell Telephone Company of Pennsylvania jointly acquire right-of-way easements which grant those companies the right, privilege, and authority to construct, reconstruct, maintain, and operate joint electric and telephone lines and necessary associated equipment across a landowner’s property.

45. Taxpayer frequently allows the Bell Telephone Company of Pennsylvania to string its telephone wires over right-easements which, have been granted to taxpayer, and which include a clause permitting taxpayer to allow such use. In like manner, the Bell Telephone Company of Pennsylvania will often obtain right-of-way easements permitting it to allow taxpayer to string its electric lines over the easements acquired by the telephone company and allows taxpayer to do so.

46. Taxpayer and the Bell Telephone Company, by agreement dated September 17, 1935, licensed one another to affix wires and attachments to poles owned by either of the companies. The two companies have also entered into pole allocation agreements pursuant to which one company will install poles in designated locations on land over which both companies have easements and will permit the other company to attach thereto. More than 165,000 poles are presently being used jointly for electric and telephone transmission by taxpayer and the Bell Telephone Company.

47. Bight-of-way easements obtained by the Bell Telephone Company are similar in every material respect to easements obtained by taxpayer with the exception that the former’s easements refer to use for telephone lines while the latter’s easements refer to use for electric lines.

48. In January 1942, the U.S. Treasury Department, Bureau of Internal Bevenue, published Bulletin “F” which was entitled “Income Tax Depreciation and Obsolescence Estimated Useful Dives and Depreciation Bates.” This bulletin set forth estimated useful lives and rates of depreciation for a wide variety of property classifications for each of the major business industries. The bulletin was intended as a guide for taxpayers and officers of the Bureau of Internal Bevenue in determining allowances for depreciation for United States income tax purposes. Estimated useful lives and rates of depreciation were set forth as a starting point from which correct rates may be determined in the light of the experience of the property under consideration and all other pertinent evidence. An estimated useful life of 67 years with zero salvage was set forth in the bulletin for right-of-way easements acquired by telephone companies.

49. The table of useful lives contained in the 1942 edition of Bulletin “F” was republished without change in 1960 by the United States Treasury Department, Internal Eevenue Service, in IRS Publication No. 1T3.

50. In July 1962, the U.S. Treasury Department, Internal Revenue Service, published Rev. Proc. 62-21, 1962-2 Cum. Bull. 418, entitled “Depreciation Guidelines and Rules.” Upon publication of Rev. Proc. 62-21, Bulletin “F” was withdrawn as a guide to examining revenue officers for the determination of depreciable lives of property.

51. Rev. Proc. 62-21 provided that depreciable lives or depreciation rates of capital assets of telephone companies, as established by the Federal Communications Commission and other regulatory agencies, were to be used in the computation of depreciation for federal income tax purposes.

52. In August 1964, the U.S. Treasury Department, Internal Revenue Service, published a revised edition of Rev. Proc. 62-21. This revised publication also prescribed that telephone companies were to compute depreciation for tax purposes by use of the depreciable lives established by the Federal Communications Commission and other regulatory agencies.

53. In 1965, the U.S. Treasury Department Internal Revenue Service, published Rev. Proc. 65-13,1965-1 Cum. Bull. 759, a supplement to Rev. Proc. 62-21. This supplement did not change the manner in which telephone companies were to compute depreciation for tax purposes from that previously prescribed under the earlier editions of Rev. Proc. 62-21.

54. The Uniform System of Accounts prescribed for Class A and Class B Telephone Companies by the Federal Communications Commission is set forth in 47 Code of Federal Regulations § 31.01-1, et seq. Section 31.02-82 lists “pole lines” (Account 241) as a class of depreciable telephone plant. Account 241 (pole lines), described in § 31.241 (with cross reference to §§ 31.2-22 and 31.211), includes cost of clearing routes of pole lines (except maintenance of previous clearings) and permits, privileges, and rights-of-way for construction which have a term of more than one year.

55. Section 81.02-80 of such Uniform System of Accounts provides that depreciation charges are to be computed by applying the composite annual percentage rate considered ap-placable to tbe original cost of each class of depreciable telephone plant owned or used by the company. These rates are to be based upon the estimated service values and lives developed by a study of the company’s history and experience, and such engineering and other information available with respect to prospective future conditions.

56. Taxpayer, for each of the years in issue in this ease, computed depreciation for book purposes on costs of acquiring transmission and distribution right-of-way easements and initial costs of clearing land and rights-of-way for construction, operation, and maintenance of transmission and distribution lines by use of the geometric mean method of life analysis.

57. On July 30, 1952, the Pennsylvania Public Utility Commission issued an order for the purpose of establishing rates for the sale of electric energy by taxpayer, wherein, inter cilia, it accepted the useful lives set forth in a depreciation study which had been submitted by taxpayer, as follows:

Service lives Class of property (years)

Transmission easements_ 100

Distribution easements_ 50

Initial cost of clearing transmission rigbts-of-way- 100

Initial cost of clearing distribution xigbts-of-way_ 50

The estimated service lives as adopted by the Commission were determined under the geometric mean method of life analysis. That method of life analysis was also used by taxpayer in studies submitted to and accepted by the Commission in arriving ait depreciable service lives of overhead conductors, underground conduits, underground conductors, services, meters, and street lighting and signal systems.

58.In subsequent proceedings before the Commission, taxpayer submitted further studies of the estimated useful service lives of its transmission and distribution properties, and the Commission, in an order dated July 16, 1956, issued for the purpose of establishing rates for the sale of electric energy by taxpayer, accepted useful lives developed under the geometric mean method of life analysis and set forth in the study submitted by taxpayer to the Commission as follows:

Glass of property Service lives (years)

Transmission easements_ 100

Distribution easements_ 40

Initial cost of clearing transmission easements. 75

Initial cost of clearing distribution easements 40

Tlie geometric mean method of life analysis was also employed in arriving at the estimated service life of several other classifications of depreciable property, as described in the previous paragraph herein.

59. Harold A. Cowles, Professor of Industrial Engineering at Iowa State University and expert in the field of engineering valuation, depreciation, and property life analysis, testified in this case on behalf of the taxpayer.

60. Iowa State University has conducted studies in the field of depreciation since 1915 and developed the Iowa type survivor curves in the course of these studies. Professor Cowles testified that there are two primary types or methods of statistical analysis ordinarily employed when attempting to arrive at the predicted average service life of mass properties. These are the actuarial methods of life analysis and the turnover methods of life analysis. The basic difference between the actuarial methods and the turnover methods is that in order to apply the former methods, data must be available as to the original date of installation of items of property which have been retired from service. Such information is not required in order to make use of the turnover methods.

61. Professor Cowles testified that one of the accepted actuarial methods of life analysis in mass property accounts is the so-called “annual rate method” which measures, as of each age of the property, the probability of the continued survival of such property throughout the following year. The annual rate method of life 'analysis is similar to the procedure used by insurance companies in predicting average lives and is in common usage in the public utility industry. When applied by a person of competent engineering judgment, the annual rate method may be used to determine reasonably the useful lives of mass property accounts.

62. Professor Cowles further testified that among the accepted turnover methods of predicting average lives of properties in mass property accounts is the geometric mean method. The geometric mean method is a statistical method of life 'analysis which produces a decimal that is equal to the reciprocal of the average estimated service life of the property account under analysis. This method is applicable to growing mass properties, that is where additions exceed retirements, and tends to eliminate distortion due to the growth factor. The geometric mean method of life analysis is also widely used in the electric public utility industry and, when coupled with engineering judgment, produces a reasonable prediction of the estimated service life of a mass property account.

63. Mr. John J. Reilly, a consulting engineer, testified on behalf of taxpayer in an expert capacity.

64. During his 30 years of experience as a consulting engineer, Mr. Reilly has either made or directed approximately 80 depreciation studies for more than 40 public utility clients. During the period 1945 through 1949 he worked directly with the tax department of his firm on the federal income tax depreciation problems of 27 public utility companies.

65. Mr. Reilly was engaged as a consultant to taxpayer in the preparation of the depreciation and value studies which were submitted to the Pennsylvania Public Service Commission in connection with the rate proceedings which resulted in the previously referred to Commission orders of July 30,1952, and July 16,1956 (findings 57 and 58).

66. In his consulting capacity, Mr. Reilly conducted extensive inspections of taxpayer’s electric properties in both the years 1951 and 1954. For a period of 2 months in 1954, he made an observed depreciation study of taxpayer’s entire system including transmission lines, major substations, pow-erplants, and most of its distribution system and general service facilities.

67. In arriving at his determination of the average service lives of the various property accounts (finding 24) for the years in issue, Mr. Reilly employed the geometric mean method of life analysis to each account. In addition, because of the availability of aged retirement data, i.e., taxpayer’s experience in the years 1937-1955, he also made use of the annual rate actuarial method (employing the Iowa-hype curves) in determining the predicted service lives of the transmission right-of-way easements account and the initial clearing of transmission rights-of-way account. The results obtained by use of these life analysis methods were then interpreted by Mr. Eeilly in light of his experience and knowledge of electric utility property in general, and taxpayer’s property in particular, in arriving at his estimates of the average service lives of the account classifications in issue.

68. Mr. Eeilly testified that in Ms opinion the average service lives of the mass properties in issue in this case would be as follows:

Glass of property Service lives

Transmission right-of-way easements-100 years

Distribution right-of-way easements- 45 years

Initial cost of clearing transmission rights-of-way- 60 years

Initial cost of clearing distribution rights-of-way- 35 years

CONCLUSION OK LAW

Based upon the foregoing findings of fact and opinion, wMch are adopted by the court and made a part of the judgment herein, the court concludes as a matter of law that plaintiffs are not entitled to recover on the issues raised under sections 165 and 1231 of the Internal Eevenue Code of 1954, and plaintiffs’ petition to that extent is dismissed, but plaintiffs are entitled to recover on the other issues in tMs case, and judgment is entered to that effect, with the amount of recovery to be determined in further proceedings pursuant to Buie 47 (c). 
      
      We are indebted to Trial Commissioner Koald A. Hogenson for Ms opinion and recommended conclusion of law, which we adopt, with modifications.
     
      
       Although Maurer involved the uninsured loss of property held for personal use, the Tenth Circuit did not attempt to draw, for § 1231(a) purposes, any distinction between property held for personal use and income-producing property.
     
      
       Retirement is used herein to mean permanent withdrawal of property from the business because of its sale, exchange, or abandonment. Treasury Regulations on Income Tax (1954 Code), § 1.167(a)-8(a), 26 C.F.R. § 1.167(a)-8(a).
     