
    412 F.2d 1222
    SOUTHERN NATURAL GAS COMPANY v. THE UNITED STATES
    [No. 479-58.
    Decided June 20, 1969]
    
      
      John P. Lipscomb, attorney of record, for plaintiff. O. Rudolf Peterson, George W. Beatty, and Michael Mulroney, of counsel.
    
      Theodore D. Peyser, with, whom was Assistant Attorney General Johnnie M. Walters, for defendant. Philip R. Miller , of counsel.
    Before CoweN, Chief Judge, Laramore, Dureee, Davis, ColliNS, SkeltoN, and Nichols, Judges.
    
    
      
       This was a requirement only after June 21, 1938. 15 U.S.C. § 717f (1964).
    
   Per Curiam :

This case was referred to Trial Commissioner Saul Bichard Gamer with directions to make findings of fact and recommendation for conclusions of law under the order of reference and Rule 57(a). The Commissioner has done so in an opinion and report filed on Jannary 23,1969. A of intention to except was filed by both plaintiff and defendant. On April 25, 1969, plaintiff and defendant each filed a motion for leave to withdraw its notice of intention to take exception to the report and each moved that the court adopt the trial commissioner’s report as the basis for its judgment in this case. With slight modifications, the court agrees with the commissioner’s opinion, findings and recommended conclusion of law, as hereinafter set forth, and hereby grants the parties’ motions for leave to withdraw the notices of intention to except and adopts the commissioner’s opinion, findings and recommended conclusion of law as the 'basis for its judgment in this case without oral argument.

In adopting the commissioner’s opinion, as modified, we emphasize the trial commissioner’s statement that, under the facts of this case, it is unnecessary to decide whether the taxpayer’s right-of-way easements constitute intangible property, because the use of the double declining method of depreciation is not in issue. We adhere to our holding in Panhandle Eastern Pipe Line Co. v. United States, 187 Ct. Cl. 169, 408 F. 2d 690 (1969). Therefore, nothing contained in the trial commissioner’s opinion should be interpreted as a modification of that decision, or as a holding by the court that the right-of-way easements involved in this case are tangible assets for income tax purposes.

Therefore, recover, indicated in the opinion, on (1) the issue involving the depreciability of costs of surveys 'and of acquiring, clearing, and grading the transmission line rights-of-way; (2) the issue involving the acquisition of property with bonds issued at below par (to the limited extent indicated); (3) the excess profits tax issue involving the allocation of amortization on emergency facilities to its natural gas property; (4) the issue involving the depreciation basis of property purchased with preferred stock; (5) the issue involving the Alabama Natural Gas Corporation note; (6) the pooling expense issue; (7) the capitalization of depreciation issue (to the limited extent indicated); and (8) the issue concerning the loss on the sale of the compressor, together with interest ‘as provided by law. Judgment is entered for plaintiff accordingly with the amount of recovery to be determined pursuant to Eule 47(c). Plaintiff is not entitled to recover on tbe interest during construction issue, and witb respect to tbis aspect of tbe case, as well as 'all tbe other claims which are set forth in tbe petition but which were not thereafter submitted to the court for adjudication and are not, therefore, hereinabove enumerated, the petition is dismissed.

Oommissioner Gamer’s opinion, as modified by the court, is as follows:

As part of its business as an interstate natural gas company, plaintiff, after purchasing and producing such gas, transports it by an underground pipeline 'system. Its petition herein seeks recovery of approximately $1,880,000 representing claimed overpayments of its income taxes for the calendar years 1941-1953, and its excess profits taxes for 1941 and 1943. The claim is composed of several separate items, which, for convenience, will here be considered in the same order as presented by the parties in their briefs.

The original transmission system was constructed in 1929 and 1930 by plaintiff’s predecessor, the Southern Natural Gas Corporation. Plaintiff acquired the predecessor’s assets in 1935. “Plaintiff” will be used herein as referring to either the predecessor or the plaintiff where distinction is not essential to the matter being discussed.

Derreciability of Costs of Surveys and of AcquieiNg, Clearing, and Grading the Transmission Line Eights-of-Way

At the end of 1941, plaintiff’s transmission line system consisted of 1,339 miles of pipe. By the end of 1953, it had expanded to 3,795 miles of pipe. Plaintiff also has gathering lines originating in its producing gas fields. These lines convey the gas to its trunk transmission lines.

To construct such transmission line system, plaintiff obtained right-of-way or easement grants from the owners of the properties in which the pipes were laid. Certain costs were necessarily incurred in acquiring such right-of-way agreements. These costs included the amounts paid to the landowners, salaries and expenses of plaintiff’s employees (landmen) engaged in such acquisition activity, recording and legal fees, and expenditures to obtain highway, and river-crossing permits from the necessary authorities. Substantial costs were incurred in clearing and grading the rights-of-way. Costs were also incurred in connection with surveying the rights-of-way, as well as in making surveys relating to actual line construction. It is the depreciability of these costs of acquiring, clearing, and grading the transmission line rights-of-way, as well as of said surveying costs, which is at issue in this item.

One of the first steps taken in connection with the construction of a proposed line is the assembling by plaintiff’s engineering department of all available pertinent maps and the plotting thereon of the route of the line. These route maps are used in connection with obtaining from the Federal Power Commission (hereinafter referred to as the “FPC”) a certificate of public convenience and necessity. If time permits, aerial photographs of the area to be traversed are also taken and used for such purpose.

After a definite decision to build the line has been made and FPC approval obtained, plaintiff, prior to the commencement of actual construction, (1) commences the task of obtaining the necessary rights-of-way, and (2) arranges for the proposed line to be surveyed.

The acquisition of the rights-of-way is handled by plaintiff’s land department which begins by using the route maps and, where taken, the aerial photographs. After property ownership is determined, permission is obtained for plaintiff to make a field or land survey.

The survey is normally made in two forms (a) aerial, and (b) field or land. The aerial phase precedes the land and permits the preparation of an initial composite map, as well as the compilation of aerial mosaics (composite maps made from a group of aerial photographs). Plaintiff’s engineering department then places all the available construction details on the mosaics, which are furnished to the construction contractor. Such information as where to install casing under railroad and highway crossings and the diameter and thickness of the pipe to be installed at various locations, is indicated. The field or ground survey is made to mark, by means of stakes, the route of the line. The exact location of intervening fences and roads is established. The ground survey data is also placed on the aerial mosaics.

The initial composite map and the aerial mosaics also go to plaintiff’s land department for its use in acquiring the necessary right-of-way agreements. The department, however, does not wait for the final maps before commencing the acquisition of the rights-of-way. Where right-of-way agreements cannot be obtained, plat surveys are also made for condemnation purposes.

The consideration paid to the landowners for the right-of-way agreements is generally in the form of a fee per lineal rod. It is, therefore, referred to as a “roddage” fee. Occasionally, however, a flat amount not based on roddage is paid. In addition to right-of-way agreements, plaintiff must obtain the necessary highway, railroad, and river-crossing permits.

The first actual construction operation is the clearing of a sufficient width on the right-of-way to permit the construction crews to operate. This operation, an expensive one, includes the removal of fences, growing crops, brush, timber, and rocks.

Following the clearing, the right-of-way is then graded to prepare it for the succeeding construction operations. In certain areas grading may be necessary to accommodate the bending tolerance of the pipe. Stream banks may be graded down, and riprapping may be required in marshy areas. Grading is likewise an expensive operation.

In its returns for each of the years in issue, plaintiff included as part of its depreciation base amounts representing the costs of obtaining the right-of-way agreements for plaintiff’s transmission pipelines, as well as the above-mentioned surveying, clearing, and grading costs. Plaintiff considered such costs as properly includable in the cost of constructing its transmission system, and therefore depre-dable on tbe same basis as sucbi system. However, by a notice of deficiency dated February 26, 1958, the Commissioner of Internal Eevenue excluded such amounts from plaintiff’s depreciation base and disallowed the deductions for depreciation thereon. The amounts so excluded by the Commissioner (after his making certain adjustments in the claimed costs (or other tax basis), which adjustments are not here in issue) totaled, for all the years involved, $10,963,125.80 for the right-of-way acquisition costs, and $28,074,838.11 for the surveying, clearing, and grading costs. Of the latter figure, 21 percent, or $5,895,716, represents surveying costs, and the balance of $22,179,122.11 represents clearing and grading costs.

Plaintiff contends that the costs in dispute are an integral part of its investment in the transmission pipelines and should, therefore, properly be depreciated as a part of such pipelines and over their lives. It alternatively says that if such costs are not considered as a part of such investment and, therefore, must stand independently, their useful lives are, nevertheless, so closely related to those of the lines that they are properly measurable by the lives of such lines, thereby producing the same result.

Defendant argues, however, that the useful lives of the rights-of-way were, during the years in question, indeterminate and therefore not properly to be considered either as an integral part of, or as closely related to, the pipelines themselves, which concededly have limited lives of reasonable estimation and are, therefore, properly depreciable. While it is not disputed that intangibles (which defendant contends the rights-of-way constitute) may, where their useful lives have value for a reasonably estimable limited period, also be subject to a depreciation allowance, defendant contends that, in this instance, the intangible rights-of-way, being indeterminate during the years involved, did not have such a reasonably estimable useful life. It points out that the right-of-way agreements themselves are not limited in time and specifically permit entrance upon the land for pipeline maintenance and replacement purposes. Defendant maintains that plaintiff consequently has the potentially perpetual right of pipeline removal and replacement. And it further shows that normally, by their terms, the rights-of-way give plaintiff the right to lay additional pipelines thereon “multiline” agreements). Plaintiff has in fact laid additional lines on the rights-of-way for the purpose of increasing the capacity of the system, such lines laid adjacent or parallel to the original lines being called “loop” lines. As a consequence, defendant claims, plaintiff errs when it contends that the rights-of-way should be considered an integral part of the costs of the construction of the original pipeline only, or of the line in connection with which they were first procured, with their lives, therefore, to be considered as coterminous therewith. Consequently, argues defendant, the case properly falls within the rule established by the pertinent regulations and the cases that where the use of intangibles in the particular trade or business or in the production of income is not shown to be limited in duration, or where such limitation is shown to exist but the extent thereof is nevertheless not demonstrated with reasonable certainty or accuracy, then the intangibles are not subject to a depreciation allowance.

The surveying, clearing, and grading costs herein involved, defendant says, are costs wholly related to the rights-of-way and, for the same reasons, must also be considered as indeterminate and therefore nondepreciable.

While, as was said by the court in a similar situation where defendant made much the same contentions, “[t]here is force to each [such] argument” (Shell Pipe Line Corporation v. United States, 267 F. Supp. 1014, 1019 (S.D. Tex. 1967)), nevertheless, based on the record herein, including the ample, credible, and unrebutted testimony offered by plaintiff, it is concluded that plaintiff has here carried its burden of showing that the right-of-way acquisition costs, as well as the surveying, clearing, and grading costs in question, will have no substantial usefulness after the expiration of the concededly limited life of the individual pipeline to which they are related. It thus becomes unnecessary to decide (1) whether, as plaintiff primarily contends, such costs, even though originally intangible in nature, became merged into the overall physical project and, therefore, are to be considered as part of the depreciable costs thereof, or (2) whether, as plaintiff alternatively contends, the costs, even though they are treated independently as intangibles, are, because of their direct interrelationship with the particular pipeline for which they were acquired, nevertheless to be considered as having useful lives only coextensive with that of the pipelines. Under either theory the result here would be the same, i.e., plaintiff is entitled to depreciate the costs in dispute at the same rate as has been established and applied for the related pipeline (as to which there is here no dispute).

It has long been recognized that expenditures so intimately related to, and connected with, the acquisition of a capital asset are to be treated as part of the cost of or investment in the asset. Columbia Theatre Co., 3 B.T.A. 622 (1926); Louisiana Land & Exploration Co., 7 T.C. 507 (1946), affirmed, 161 F. 2d 842 (5th Cir. 1947); Herbert Shainberg, 33 T.C. 241 (1959).

Although it is true, as defendant emphasizes, that the rights-of-way herein involved are in form indeterminate, plaintiff has shown that, in fact and in actual practice, when another adjacent or loop line is laid, additional right-of-way costs are again incurred with respect to such new line, even though it is on the same right-of-way. Thus an individual and substantial set of right-of-way costs is incurred respect to each line constructed, with the new line receiving, on a total length basis, only insignificant benefit from the prior right-of-way expenditures.

In the construction of its loop lines, plaintiff has, considering the length of such lines and the differences in terrain they traverse, naturally encountered a variety of situations concerning its right-of-way agreements.

Practically all of the rights-of-way plaintiff procured' in 1929 'and 1930 for the original transmission system were mul-tiline agreements but specified no right-of-way width. A few (less than four percent of the total) specified 30 feet. On plaintiff’s first looping operation undertaken in 1939, plaintiff found it legally advisable to obtain from the landowners additional agreements which provided that the previously procured right-of-way was 30 feet in width and which granted plaintiff an additional 40 feet.

Whenever the existing right-of-way specifies a width insufficient to permit the laying of a loop line, plaintiff is, of course, required to obtain an additional right-of-way. Similarly, if the width is sufficient for a second line, but contains insufficient working space, plaintiff must again obtain additional width. Title and other expenses are thus incurred. Furthermore, even when the originally procured easement (if multiline) is sufficiently wide to hold the additional line, as well as to provide working space, plaintiff still, in accordance with the provisions of the right-of-way instrument, pays the owner new roddage fees (normally $1.00 per lineal rod for each additional pipeline laid) and obtains from the landowners additional line receipts, which are recorded, acknowledging the existing right-of-way. Thus plaintiff has found that, while right-of-way costs constitute on an overall basis only a small percentage of the costs of constructing a pipeline, the costs relating to rights-of-way which are incurred in connection with building loop lines are, nevertheless, substantial when considered as an individual item. Indeed, the record indicates they have greatly exceeded the right-of-way acquisition costs incurred in the building of the original line. While the increase no doubt also reflects cost increases over the years, it is plain that new substantial right-of-way costs are incurred whenever plaintiff builds a loop line. Furthermore, the highway, railroad, and river-crossing permits which plaintiff obtains authorize the construction of only one line. Additional permits must, therefore, be obtained whenever another line is constructed. Thus there appears to be lacking any practical reason which would preclude the segregation and allocation of the original right-of-way costs to the original line, and the subsequent right-of-way costs to the loop line, an allocation which, according to this record, appears to truly reflect the substantial accuracy of the situation. Under familiar principles, this practical approach to the depreciation problem is all that is required since, in such cases, mathematical certainty is not a prerequisite. Badger Pipe Line Company v. United States, 185 Ct. Cl. 547, 401 F. 2d 799 (1968).

As to the survey costs, the record shows, as above indicated, that after an FPC certificate of public convenience and necessity is obtained, the new line and its right-of-way have to be surveyed and staked. For one thing, it is imperative that a proper distance be kept from the old line. Changes since the last survey in stream, highway, railroad, prevalent crop, and structure conditions, must all be considered. And surveys must be made to locate new road, railroad, and river crossings, as well as to obtain the necessary permits.

Similarly, substantial clearing and grading costs are also incurred in connection with the building of a second line. It is true that, although the original clearing and grading-operations are not conducted in a manner which considers a possible future looping operation, some benefit is nevertheless naturally obtained from the previous right-of-way clearing operation. However, this is usually offset by the detriment of the prior grading. All of the previous grading-work originally done on the area that becomes the working side of the new line must be destroyed. Such topographical features as drainage controls and terracing built after the original construction must be first torn out and then restored. Any usefulness the clearing and grading costs would have beyond the life of the pipeline in connection with which they are incurred would, as of the time of such incurrence, be speculative. The operations are not, as stated, conducted with an eye toward the placing of another line on the right-of-way in the future.

Plaintiff’s experience has shown that surveying, clearing, and grading costs incurred in connection with the construction of loop lines have been substantial. While the record shows that surveying costs incurred incident to such construction have been, although substantial as an item, less in dollar amount than those incurred on the original lines, clearing and grading costs have for the most part been substantially more than the counterpart costs on the original line.

One of the tests that has been applied by the Kevenue Service to ascertain if an expenditure is properly part of a particular depreciable asset is to determine whether the same type of cost will recur with each reconstruction of the asset. If it would so recur, the original expenditure may reasonably be considered to constitute, for depreciation purposes, a part of the cost of the original construction, and each recurring cost of a similar nature may be considered to be a part of the subsequent reconstruction in connection with which it was incurred. One such example appears in G.C.M. 9357, X-l Cum. Bull. 385 (1931), where various undistributed construction expenditures incurred by a public utility were, for depreciation purposes, held to constitute a part of the cost of the property since the nature of the expenditures (which included engineering and office salaries and expenses, legal expenditures, damages, and insurance) was such that they would recur with each reconstruction of the property. On this record, the right-of-way, surveying, clearing, and grading expenditures herein involved meet this test.

It would be physically possible for plaintiff to lift an old pipeline out of the ground and replace it with new pipe (provided the line can be taken out of service). However, plaintiff has shown that the economics of its industry are such that, except in congested areas, it is more economical to lay a new adjacent or parallel line and abandon the old line in place, and that there is no reason to consider plaintiff’s lines differently from those of the remainder of the industry. The lifting costs themselves would be considerable. Nor is there any substantial continuing market for large quantities of old pipe except as junk, so that this factor of possible monetary recoupment is of little or no consequence. For safety reasons, old pipe cannot be reused in the gas industry without extensive testing. Nor is it suited for use in modern high pressure pipelines. Right-of-way costs are, on an overall basis, normally one of the smallest items of cost in the construction of a pipeline and therefore hardly a determinative factor. Cf. Shell Pipe Line Corporation v. United States, supra, at 1018. Actually, however, plaintiff has, except for three instances, made no substantial replacements of its lines. It is true that in these instances plaintiff did, because the lines were in highly congested areas, lift the old pipe and replace it with new pipe in the same right-of-way without incurring any additional roddage fees or right-of-way costs. Two instances were in the Atlanta, Georgia, area, involving six and five miles respectively, and the third was in the Birmingham, Alabama, area, involving eight miles. In these three congested area instances, the cost of obtaining new rights-of-way, the time that would necessarily be involved in acquiring them, and the lack of required space in which to lay a parallel line, made the lifting and replacement operations in the same trench a practical and economic necessity. But these were exceptional circumstances in atypical areas. Some nineteen miles of line in congested areas out of a total of close to 3,800 running through Louisiana, Mississippi, Alabama, and Georgia can hardly be the basis for a conclusion that plaintiff would, contrary to its general industry practice based upon the aforesaid considerations, generally replace an old line by lifting it in order to reuse the old trench. On the Birmingham replacement, plaintiff’s cost of lifting and replacing the pipe on the old right-of-way (which, because of the congested area, included heavy construction damages) was more than twice what the cost of laying a new line would have been had the right-of-way not been located in a residential area.

Finally, defendant points out that plaintiff’s rights-of-way give plaintiff the right to use the property covered thereby to transport by pipeline “any substance or commodity,” and that the easements, being assignable, could be sold to others for any such use. Accordingly, it argues that the rights-of-way have separate, independent value which may well outlive the pipelines now being used only for the transportation of natural gas. Defendant says that pipelines can be, and are being, used to transport such varied products as coal, oil, sludge, oxygen, alcohol, and brine. It therefore contends : “This multiple use feature of taxpayer’s right-of-way agreements coupled with their indefinite duration and as-signability brings them very close to fee interests, especially in the light of advancing pipeline technology and land values” (Def. Brief at 40). On these considerations, it concludes that the lives of the rights-of-way should not be related and limited to the lives of the pipelines. Thus, the writeoff of the right-of-way investments should, it contends, be permitted only when their abandonment occurs, which would coincide with the abandonment of the use of the pipeline for the transportation of natural gas, as at present, or for any of the other possible purposes. At the present time defendant says neither plaintiff nor its relatively new industry has established any reasonable basis by experience or otherwise for a reasonably accurate forecast as to when such abandonment will occur.

The theoretically possible uses of plaintiff’s rights-of-way for businesses other than plaintiff’s current one are so speculative that defendant’s contention based thereon must be rejected. Almost anything involving future applicability is, of course, possible, or at least technically conceivable, but depreciation allowances are based on estimates grounded upon reasonable probabilities and practical business considerations. Speculation on similarly remote possibilities of easement uses disassociated from current plant use was rejected in considering easement depreciation problems in Connecticut Light and Power Company v. United States, 177 Ct. Cl. 395, 368 F. 2d 233 (1966) , as well as in Union Electric Co. v. Commissioner of Internal Rev., Ill F. 2d 269 (8th Cir. 1949) (amounts paid for land rights, flowage rights, and easements for transmission lines, all acquired in connection with dam and hydroelectric plant, are depreciable as incident to the project itself).

During the years in question plaintiff had no plans to enter into any other business, nor would it have been economically advisable or practical for it to have converted its lines to the carrying of substances other than natural gas. At no time has plaintiff contemplated any such conversion. Thus, its rights-of-way, despite their indeterminate lives, would reasonably have no value during such years except in connection with plaintiff’s physical transmission system, which defendant concedes has only a limited life. Accordingly, industry right-of-way abandonment or retirement experience is beside the point. In neither Union Electric, supra (depreciation of dam based upon estimated useful life of one hundred years), nor Connecticut Light and Power Company, supra (hydroelectric properties considered to have life of from fifty to sixty years), was lack of industry meaningful experience in retirement of the easements, rights, and privileges involved an obstacle to allowing depreciation thereon on the same basis as the physical plant. Also see Kentucky Utilities Company v. Glenn, 250 F. Supp. 265 (W.D. Ky. 1965) (amounts paid for flowage and flooding rights in connection with dam and hydroelectric project may be depreciated on same basis as estimated life of dam and electric plant, i.e., one hundred years).

There is nothing in the record to indicate that plaintiff’s rights-of-way have, by themselves, any value separate and independent from the lines for which they were procured. On the other hand, the record does show that when plaintiff acquired some forty miles of rights-of-way for a proposed line which, it turned out, was never built, the rights-of-way were abandoned as useless.

While issues involving the depreciation of capital assets frequently turn upon the facts of the individual case, nevertheless no case has been cited denying the depreciability of transmission pipeline rights-of-way. On the other hand, in the above-mentioned similar cases of Badger Pipe Line Company v. United States and Texas-New Mexico Pipe Line Company v. United States, supra, involving the depreci-ability of rights-of-way acquired in connection with the construction of petroleum transmission lines, this court recently, on grounds similar to those here relied upon, sustained such depreciability, holding that the useful lives of the related easements were coterminous with that of the pipe. The same result was also arrived at in Portland General Electric Company v. United States, 189 F. Supp. 290, 305 (D. Ore. 1960), affirmed on other issues, 310 F. 2d 877 (9th Cir. 1962) (depreciation allowed on the costs of acquiring and clearing rights-of-way for electric transmission lines); Union Electric Co., supra (depreciation allowed on easements for electric transmission lines), and Shell Pipe Line Corporation, supra (depreciation allowed on costs of easements for petroleum transmission pipelines).

Based on all the above considerations, the conclusion is compelled that plaintiff is entitled to depreciate the right-of-way acquisition costs in dispute at the same rate as has been established and applied for the related transmission pipeline systems.

Defendant contends that all the survey costs were of benefit in the acquisition of the rights-of-way since the aerial and field survey information is ultimately furnished to plaintiff’s land department to aid it in acquiring the rights-of-way and the highway, railroad, and river-crossing permits, as well as to serve as an aid in any necessary condemnation proceedings. It therefore urges that all such costs should be treated in the same manner as the right-of-way acquisition costs, which, as shown, it contends were, during the years in question, non-depreciable. Plaintiff disputes this, claiming that a substantial part of the survey costs should be allocated to the construction of the pipeline itself because of the part the surveys play in providing the construction contractor with the necessary construction details. It emphasizes the fact that the land department does not wait for the final survey maps before commencing the acquisition of the rights-of-way.

However, this issue too need not be decided because, even if defendant is correct and all the survey costs are allocated to the rights-of-way, they would, in accordance with the above analysis, be depreciable anyway. And if plaintiff is right, the part of the survey costs allocated to detailing the necessary construction data would also be depreciable. Certainly such part of the survey costs would have to be considered as a necessary and integral part of the total construction cost, as defendant impliedly concedes when it attempts to throw the entire survey costs into the right-of-way category. Therefore, under either theory, the survey costs are depreciable on the same basis as the transmission system itself.

The costs of clearing and grading the rights-of-way are also similarly depreciable whether they be considered as properly allocable only to the right-of-way costs or as an integral part of the overall line construction costs. As shown, their usefulness extends in no substantial manner beyond the life of the pipeline to which they were originally related. Clearing and grading of the rights-of-way are two essential elements in the laying of a pipeline. As the court held 'in Commonwealth Natural Gas Corp. v. United States, 395 F. 2d 493, 494 (4th Cir. 1968) : “* * * the costs of clearing and grading are attributable to the cost of constructing the pipeline and depreciable with it.” Portland General Electric Company v. United States, supra, also allowed depreciation on the cost of clearing the right-of-way therein involved.

Plaintiff further alternatively contends that it is, in any event, entitled to right-of-way depreciation on the basis of its gas reserves. The theory is that the useful lives of the rights-of-way are dependent upon the period of time that the transmission line can be operated and that such period is, in turn, dependent upon when the sources of supply of natural gas available to plaintiff would become depleted. This natural resource reserve basis of right-of-way depreciability has been upheld in Northern Natural Gas Company v. O'Malley, 211 F. 2d 128 (8th Cir. 1960), and Commonwealth Natural Gas Corp. v. United States, supra, both cases involving natural gas transmission companies. Plaintiff produced much testimony directed toward estimating the useful life of its private gas reserves, and the parties have argued the point extensively. However, in view of the above disposition of the dispute, it is not necessary to consider this alternative contention.

For all of the above-mentioned reasons, plaintiff is entitled to a recovery on this item measured by the amount produced by allowing appropriate annual depreciation deductions for the years herein involved on the above-mentioned right-of-way acquisition costs, as well as on the surveying, clearing, and grading costs in issue, as hereinabove set forth.

Property Acquired With Bords at Below Par

In 1931, plaintiff’s predecessor went into receivership and proceedings for its reorganization were instituted under the Bankruptcy Act. Pursuant to the reorganization plan, plaintiff was organized and, as of December 31,1935, acquired all of tlie assets of its predecessor.

Plaintiff assumed the predecessor’s outstanding first mortgage bonds, which were not in default. However, plaintiff issued “adjustment mortgage bonds,” as well as stock, to the holders of the predecessor’s debentures and preferred stock and to the unsecured creditors. The adjustment bonds bore interest at 6 percent per annum, had a face value of $100, and were payable in 1960 at par. They were, on any interest payment, redeemable at plaintiff’s option at face value plus accrued interest.

To determine the cost to it of the depreciable capital assets which it acquired from its predecessor (it having been determined that the transaction was a taxable one), plaintiff first calculated the total fair market value of the securities which it had assumed and issued for all of the assets it had received. On the basis of such valuation ($23,979,394.23), plaintiff then concluded that the cost to it of the part thereof which constituted depreciable fixed capital assets was, as of December 30, 1935, $20,979,436.12. In arriving at these figures, the $100 par value adjustment mortgage bonds were valued at $71.50 as of the issue date. Plaintiff’s calculation of the cost to it of the depreciable fixed capital assets, based on said calculation of the value of the securities issued and assumed by it in exchange for such assets, was set forth in a letter to the Commissioner of Internal Eevenue, and plaintiff’s proposals were accepted by the Commissioner.

On its tax returns for the years 1936 through 1940, plaintiff claimed and was allowed depreciation deductions with respect to the assets it acquired from its predecessor based on said cost figure of $20,979,436.12.

Based on the $71.50 valuation of the adjustment mortgage bonds as of their December 30,1935 issuance date, the total fair market value of the bonds (which was also the cost basis of the property acquired therewith) was $1,647,749.37 less than the $100 par or face value of the bonds. On the theory that in 1960, when the bonds would be payable at par, it would then be paying $1,647,749.37 in excess market value of the property was as of its acquisition date, plaintiff treated said amount as an amortizable expense to be written off in equal installments over the 24-year life of the bonds.

In 1936, plaintiff incurred expenses totaling $25,547.07 in connection with the issuance of the bonds, and in 1939, it incurred additional expenses with respect thereto in the amount of $3,481.66. Plaintiff similarly treated these expenses as amortizable over the life of the bonds.

In accordance with such treatment, plaintiff, in its returns for the years 1936-1940, claimed, and was allowed, deductions for amortization of said $1,647,749.37 difference between the fair market value of the bonds on their issuance date and their par value. It was also allowed a deduction for bond expense amortization.

In 1941, plaintiff elected to redeem the adjustment mortgage bonds at face value for cash. As of the redemption date, the difference between their 1935 issuance date fair market value and their face value which, under plaintiff’s treatment, still remained to be amortized, was $1,304,884.19. Similarly, the total of the above-mentioned bond issuance expenses which was as yet unamortized amounted to $22,808.16. On its return for that year, plaintiff claimed an amortization deduction of $1,327,692.35, being the total of said two figures. However, such deduction was disallowed by the Commissioner of Internal Revenue and constitutes the basis of the present controversy on this portion of the case.

As to the issue relating to the difference between the fair market value of the adjustment mortgage bonds on their issuance date and their par value, plaintiff analogizes its situation to one in which a cash sale of bonds is made at a discount. Where, for instance, the issuer of a 4 percent bond, payable in 25 years at its face value of $100, receives, on its issuance, only $75 in cash, the $25 difference between the issuance price and the face value payable at maturity, referred to as “bond discount,” is regarded as a cost or expense of issuing the bond. It is sometimes regarded as in the nature of interest additional to that specified in the bond. Such expense or loss, resulting from the issuer’s being required to pay, instance, $25 more to retire the bond than it received on issuance, is regarded as properly proratable and amortizable over the life of the bonds, thus producing an annual charge of one dollar.

Although no Code provision deals with the tax treatment of such a “bond discount” expense, the regulations applicable to the year 1941 (as do the current regulations) provided that “[i]f bonds are issued by a corporation at a discount, the net amount of such discount is deductible and should be prorated or amortized over the life of the bonds,” and the practice has received judicial sanction. Helvering v. Union Pacific R. Co., 293 U.S. 282 (1934). The expenses of issuing bonds are also amortizable over the life of the bonds, and the same regulations further provide that, if bonds which have been issued at a discount are retired prior to their maturity date, the unamortized bond discount and issuance expenses are deductible in full in the year of retirement.

Plaintiff argues that no distinction may fairly be made between the situations where bonds are sold for cash at a discount and where, as here, bonds are issued for property the fair market value of which is less than the face amount of the bonds. It points out that had it sold the bonds for cash at their then value of $71.50, and then used the cash to pay for the predecessor’s assets, the unamortized bond discount would have been deductible in full in 1941, the year the bonds were retired. It contends that “Eflrom the standpoint of the issuing corporation, it makes no difference whether the transaction is handled in one step (by issuing bonds directly to the seller) or in two steps (by issuing bonds to the public and paying the proceeds to the seller). In either event, the difference between the value of the bonds and the amount payable at maturity represents an adjustment in the stated interest rate which should be amortizable over the life of the bonds.” (Pltf. Brief at 58)

However, the rule in this court on this issue appears to have been settled in Montana Power Company v. United States, 141 Ct. Cl. 620, 159 F. Supp. 593, cert. denied, 358 U.S. 842 (1958). In that case, the taxpayer corporation issued 30-year debentures for which, it property valued at less than the face amount of the debentures. When, well prior to the expiration of the 30-year period, the corporation retired' the debentures at face amount, it claimed, again upon the analogy of a corporation selling bonds for cash at a discount, a deduction in the amount of the difference between the value of the property it received (i.e., the value of the debentures upon the issuance date) and the face amount of the debentures. The court, however, sustained the disallowance of the claimed loss deduction, holding that, as long as the property received for the securities is held, no “loss” can properly be considered as having occurred. Until a “loss” (or gain) is actually “realized” by the sale of the property, the court held, “no tax consequences” (141 Ct. Cl. at 624,159 F. Supp. at 595) arise from the fact that the taxpayer, at the time of the purchase of the property, may have paid, whether by cash or by a promise to pay in the future (i.e., by debentures or bonds), more for the property than it was worth. The “bad bargain” would properly be evidenced, the court pointed out, only on the corporation’s financial statement at the time of the purchase of the property, which would show an impairment of net worth by reason of an obligation to pay a sum larger than the property was worth, but, insofar as it reflected a transaction of this kind, net worth on any particular day would not, the court held, be “relevant for income tax purposes.” “He must ‘realize’ his bad bargain, his loss, by selling [the property].” (Id.)

Thus, where debentures or bonds are issued for property and the property is still held when the securities are redeemed at face value, the court refused to consider the situation as equivalent to. a “bond discount” one such as arises from a sale for cash of bonds at less than face value, even though the property may have been worth less than face value when the securities were issued. Since that is the situation of the plaintiff herein, Montana Power compels the dismissal of this item of claim.

It is true, as plaintiff points out, that in Montana Power, the exchange o.f the property for the securities was part of a tax-free reorganization with the purchasing corporation therefore taking the assets on the same “basis” as they had in the hands of the seller, while in the instant case the transaction was a taxable one, with plaintiff therefore presumably paying actual market value for the property. However, the Montana Power rule was clearly meant to apply to the issuance of bonds for property in either situation, the court specifically stating that its decision was not based on “the discrepancy between the tax basis figure [i.e., the carryover basis assumed by the purchaser resulting from the tax-free nature of the transaction] and the actual value figure [of the property].” (141 Ct. Cl. at 623, 159 F. Supp. at 595) The following holding of the court is, obviously, as applicable to a taxable acquisition as to a tax-free one:

* * * If one buys something and pays more than it is worth, and more than he can resell it for, there are no immediate tax consequences of this every day occurrence. If, instead of paying cash, he promises to pay after a period of years, he may regret his bad bargain more, but when he pays, there are still no tax consequences. He must “realize” his bad bargain, his loss, by selling. Likewise when he makes a good bargain and gets something worth more than he pays or promises to pay for it, he is not taxed upon his good fortune until he realizes his gain by selling. (141 Ct. Cl. at 623-24, 159 F. Supp. at 595)

While there is on this issue authority to the contrary, including American Smelting & Refining Co. v. United, States, 130 F. 2d 883 (3d Cir. 1942), upon which plaintiff strongly relies, this court in Montana Power specifically noted:

_ We have considered the contrary position on this question taken by the Court of Appeals for the Third Circuit in American Smelting & Refining Co. v. United States, 130 F. 2d 883, but we find ourselves unable to agree with it. (141 Ct. Cl. at 625, 159 F. Supp. at 596)

Plaintiff alternatively contends that if claimed deduction of $1,327,692 on its 1941 return representing alleged unamortized “bond discount,” such sum should be added back to the cost basis of the property since it was included in the total actually paid therefor when the bonds were redeemed at face value. Thus, the face amount of the bonds would establish the cost basis of the property for depreciation purposes. With such addition to basis, plaintiff would then have been entitled in 1941 and 1942 to larger depreciation deductions. (Only 1941 and 1942 would be so involved because in 1943, sections 112(b) (10) and 113(a) (22) of the 1939 Code were enacted under which plaintiff was thereafter required to use its predecessor’s basis rather than its own cost basis in computing allowable depreciation.)

Defendant concedes this alternative contention and no reason is apparent for not implementing the parties’ agreement in this respect. Accordingly, plaintiff is entitled to recover on this item in such amount as plaintiff’s basis for the properties acquired from its predecessor, increased by the sum of $1,327,692, would, for the years 1941 and 1942, produce additional depreciation deductions with respect to the depreciable properties so acquired.

Finally, plaintiff points out that even if it was not entitled to a “bond discount” deduction in 1941, such claimed “discount” comprised only $1,304,884.19 of the $1,327,692.35 deduction which the Commissioner disallowed, the balance of $22,808.16 representing unamortized bond issuance expenses. Plaintiff claims entitlement to at least this part of the deduction.

This claim defendant also concedes. Helvering v. Union Pacific R. Co., supra. Accordingly, plaintiff is also entitled to recover such, amount as is produced by its entitlement to a deduction for 1941 in the amount of $22,808.16 for unamor-tized bond issuance expense.

Excess Profits Tax Issues

Under the Second Revenue Act of 1940 (Pub. L. No. 801, 76th Cong., 3d Sess.), plaintiff was subject to excess profits taxes for the years 1941 and 1943. The amount thereof was based on the excess over the normal or base period profits.

The Act also permitted, as new section 124 of the 1939 Code, special amortization, i.e., over a period of five years, with respect to emergency or war facilities. This was in the nature of a relief provision since normally such amortization deductions from gross income greatly exceeded the depreciation deductions that would ordinarily be allowable, and thus would reduce the excess profits gross income.

By the Revenue Act of 1943, certain excess profits tax relief was, in the form of an amendment to section 735 of the 1939 Code, granted to natural gas companies “engaged in the withdrawal or transportation by pipeline of natural gas.” The relief was an extension to such companies of exemptions that had already been granted with respect to “excess output” of mining and timber operations. In the case of a natural gas company, the nontaxable income from exempt excess output (i.e., the excess of the “natural gas units” for the year over the normal output) was derived according to a formula. A unit net income was determined by dividing the net income from the “natural gas property” by the units sold during the year. One-half of such unit net income multiplied by the units of excess output became the “nontaxable income from exempt excess output.” (§ 735(b) (5))

Section 735(a)(5) defined “natural gas property” as follows:

The term “natural gas property” means the property of a natural gas company used for the withdrawal, storage, and transportation by pipe line, of natural gas, excluding any part of such property which is an emergency facility under section 12%. (Emphasis supplied)

Such exclusion of emergency facilities from a company’s “natural gas property” thus necessitated the separation of the net income of tbe “natural gas property” from tbat tbe emergency facilities.

Under section 785 (a) (12), tbe net income from a natural gas property was to be “computed in accordance with tbe regulations prescribed by tbe Commissioner * * Tbe pertinent regulations (Treas. Reg. 112, § 35.735-2 il), 1944 Cum. Bull. 430, 438) provided: (a) “Deductions for depreciation and amortization of operating equipment can be charged directly to natural gas property and other property”; (b) indirect expenses, sucb as overhead, not directly attributable “to tbe natural gas property or to other property shall be fairly apportioned between” the two types of property ; and (c) the gross income from the “natural gas property shall be tbe gross income less tbe costs and proportionate profits attributable to the emergency facilities.”

In the computation of the relief from excess profits taxes under section 735 for the taxable years 1942 and 1943, i.e., in calculating the net income from tbe “natural gas property” to determine the “unit net income,” which in turn determines “the nontaxable income from exempt excess output” (i.e., nontaxable income from exempt excess output = units of excess output x one-half of unit net income), the Commissioner of Internal Revenue allocated a portion of the amortization of emergency facilities (over 86 percent for 1942 and over 78 percent for 1943) to the “natural gas property,” in the same way that the regulations indicated allocations should be made with respect to overhead and other indirect items “which cannot be directly attributed to the natural gas property or to other property * * *.” The effect of such allocation was to reduce the net income from such “natural gas property,” as well as the unit net income and, finally, the nontaxable income (which was, as shown, based, in accordance with the prescribed formula, on “exempt excess output”).

Plaintiff protested this allocation, which, it contended, resulted in a denial to it of the relief intended by the statute. It argued that such amortization deductions are solely related to property expressly excluded by section 735(a) (5) from being a part of the “natural gas property” and that no part of such deductions should, therefore, be allocated to such “natural gas property.” It emphasized the portion of the regulations which provided that “[d] educ-tions for depreciation and amortization of operating equipment can be charged directly to natural gas property and other property” (emphasis supplied) and pointed out that there was no necessity for the allocation since the amounts of amortization attributable to the emergency facilities and of depreciation attributable to the “natural gas property” were both known.

Throughout the trial proceedings, defendant maintained its position that an allocation was necessary to avoid an overstatement of net income from nonemergency facilities. However, in its brief to the commissioner (p. 64) defendant now concedes that “ttlo arrive at net income for purposes of Section 735(a) (12), the deduction for depreciation and amortization should be limited to the amounts directly chargeable to the natural gas property other than emergency facilities,” and that no allocation such as was made by the Commissioner should have been made.

Accordingly, in accordance with the parties’ present agreement concerning the proper interpretation of the statutes and regulations (no reason being apparent for not accepting the parties’ agreement with respect thereto), plaintiff is entitled, with respect to its excess profits tax liabilities for the years 1941 and 1943, to recover such amount as will be produced by calculating, for its taxable years 1942 and 1943, its net income and unit net income under section 735 (a) (12) of the 1939 'Code, as well as its resulting nontaxable income from exempt excess output under section 735(b) (5), without allocating to its “natural gas property,” as defined by section 735(a)(5), any amortization on emergency facilities.

Interest During Construction

As previously noted, plaintiff acquired the predecessor’s assets as of December 31,1935, and, for the immediately following years 1936 through 1942, the tax basis of the assets in plaintiff’s hands was plaintiff’s cost, since the acquisition was a taxable transaction. However, beginning with 1943, plaintiff was, pursuant to sections 112(b) (10) and 113(a) (22) of the 1939 Code, required to take the predecessor’s basis, such “substituted basis” to be adjusted, however, in accordance with section 113 (b) (2), for “proper adjustments of a similar nature in respect of the period during which the property was held by the transferor * *

For the years 1943-1953, plaintiff claimed an upward adjustment in the basis of the transferred assets by including therein the interest in the amount of $1,035,707.83 that had been paid or accrued by the predecessor during the years 1929 and 1930 with respect to the bonds and debentures it had issued to finance the construction of the system. The depreciation deductions taken by plaintiff during such 1943-1953 years were on such adjusted basis. However, for such years, the Commissioner of Internal Eevenue, in determining the basis of the depreciable properties transferred to plaintiff as of December 31,1935, reduced the amount thereof by eliminating said item of interest during construction. Of course, this elimination from basis served to reduce the annual depreciation deductions. In this item of claim, plaintiff contests such elimination and the resulting annual reductions.

The serious obstacle to plaintiff’s claim is section 113(b) (1) (A) of the Code which delineates what are the “[p] roper adjustments] in respect of the property [which] shall in all cases be made * * The reference in the aforesaid section 113(b) (2) concerning “proper adjustments of a similar nature” is to said subsection (b)(1). And such subsection (b) (1) provides, in its subparagraph (A), that proper adjustments shall be made for

* * * expenditures, * * * or other items, properly chargeable to capital account, but no such adjustment shall be made for taxes or other carrying charges, * * * for which deductions have been taken by the taxpayer in determining net income for the taxable year or prior taxable years; * * *. (Emphasis supplied)

The parties are agreed that interest during construction may properly be regarded as constituting a “carrying charge,” “properly chargeable to capital account” (as the predecessor did, in fact, charge such interest on its books, in accordance with accepted accounting principles). However, since it turns out that the predecessor did, in its income tax returns for 1929 and 1930, take deductions, as a current expense, for the identical interest here in question in determining its net income for such years, it is plain that the above italicized portion of subsection (b) (1) (A) bars plaintiff’s attempt to add to basis such previously already deducted interest.

Plaintiff attempts in various ways to extricate itself from this plainly disabling provision of section 113(b)(1)(A) but its contentions in this respect cannot be accepted.

First, plaintiff says that, although back in 1930 and 1931 when its predecessor filed its aforementioned returns for its 1929 and 1930 tax years, Treasury Kegulations 74, Article 561, in terms permitted a taxpayer to elect to add such “carrying charges” to basis instead of deducting them in computing net income, a substantially identical provision in a previous regulation was held, in judicial proceedings, to be invalid. Accordingly, it argues, the predecessor “necessarily felt compelled to deduct the interest on its returns” instead of capitalizing it as permitted by the regulation.

What plaintiff is referring to is as follows:

When the predecessor took the deductions as current expenses on its 1929 and 1930 returns, the pertinent statutory provision was section 111(b) of the Revenue Act of 1928 (45 Stat. 791) which required, in determining gain or loss amounts, that proper adjustment of basis be made for any expenditure “properly chargeable to capital account * * *.” It was under this provision that the aforesaid Article 561 of Regulations 74, was issued. The regulations similarly provided that basis should be adjusted for any expenditure “properly chargeable to capital account, including * * * carrying charges, such as taxes on unproductive property” and went on to provide further that “[wjhere the taxpayer has elected to deduct carrying charges in computing net income, or used such charges in determining his liability for filing returns of income for prior years, the cost or other basis may not be increased by such items * *

Section 111(b) of the 1928 Act was similar to section 202(b) of the Revenue Act of 1924 (43 Stat. 253,255) which, for the first time, had provided that, in determining gain or loss on the sale or other disposition of property, proper adjustment should be made for “any expenditure properly chargeable to capital account.” Although the 1924 Act did not define what expenditures would be considered so “properly chargeable,” the House Committee Report on the bill stated that under the section, “carrying charges, such as taxes on unproductive property, are to be added to the cost of the property,” and the regulations under such 1924 Act (Treas. Reg. 65, Art. 1561) provided, in a paraphrase of the House Committee Report, that basis must be increased “by carrying charges, such as taxes on unproductive property.” And, in 1926, a ruling was issued under the 1924 Act which specifically included interest paid to carry unproductive property and permitted capitalization thereof provided it had not been deducted in computing net income. S.M. 5033, V-l Cum. Bull. 9 (1926). This was followed in 1927 2386, Cum. Bull. 110, which, held that no adjustment to cost could be made by capitalizing interest ox-taxes which had already been deducted in prior years, even though such charges had been capitalized on the taxpayer’s books.

Provisions similar to section 202(b) of the 1924 Act were also contained in section 202(b) of the Eevenue Act of 1926 (44 Stat. 9, 11-12), and the regulations issued thereunder (Treas. Reg. 69, Art. 1561) similarly referred to “carrying charges, such as taxes on unproductive property.”

says the Board of Tax Appeals decided differently on October 4, 1929, in Central Beal Estate Co., 17 B.T.A. 776, it appeared, ever since 1924, that taxpayers who paid interest, taxes, and other similar charges on unproductive property could, for federal income tax purposes, add such items to basis instead' of deducting them currently, as was required prior to the Revenue Act of 1924. In Central Beal Estate, however, it was held that, although section 202(b) of the 1924 Act provided that, in calculating basis, proper adjustment should be made for expenditures “properly chargeable to capital account,” no definition appears in the Act concerning what items are so chargeable, and that, considering the consistent holdings theretofore that “taxes and interest are not capital items, we are satisfied that they do not come within the terms of the Act” ( at 780). The Board, noting the inaccurate statement in the House Committee Report to the effect that the allowance of taxes on unproductive property as an addition to basis comported with the construction then being placed on the law by the Treasury Department (since the Department instead had consistently held otherwise, i.e., that taxes and interest were not capital items), (a) rejected the Report as a helpful aid to an interpretation of the Act; (b) noted the failure of the Senate Committee Report on the bill to make any similar statement or, in fact, to say anything about “carrying charges,” such report instead stating that the purpose of the section was to allow, as addition to cost, the cost of capital improvements and betterments; and (c) concluded that “[t]he Revenue Act of 1924 does not purport to convert into a capital charge that which was not such a charge under prior acts” and that “since all decisions of the courts and of the Commissioner prior to Regulations 65, have consistently held that interest and taxes are not capital items, we are of opinion that they may not be capitalized under section 202 of the Revenue Act of 1924” (at 780-81). Thus, the provisions in the regulations theretofore construed as authorizing the capitalization of interest were in effect considered to be invalid. The Board’s decision was affirmed on March 18, 1931, in Central Real Estate Co. v. Commissioner of Internal Revenue, 47 F. 2d 1036 (5th Cid) .

However, when laid against the record in this case, the above sequence of events cannot fairly be taken as the basis, as claimed by plaintiff, for the predecessor’s alleged feeling that, in view of the Board’s decision on October 4, 1929 in Central Real Estate, it would have been “a futile gesture” (Pltf. Brief, p. 95) to attempt to capitalize interest during construction for 1929 in its 1929 return, filed on June 15, 1930, and similarly, in view of the affirmance of Central Real Estate on March 18,1931, to capitalize such interest for 1930 in its 1930 return filed on July 1,1931.

The record shows that considerable thought was given to the specific matter in the preparation of such returns not only by the predecessor but by its parent, Tri-Utilities Corporation. The correspondence between those in the two corporations who were responsible for tax matters, such correspondence being referred to by both parties as a contemporaneous clue as to why the returns were filed as they were, is detailed in the findings. And as to 1929, it appears quite plain (despite, concededly, the difficulty of arriving with absolute assurance at conclusions concerning what motivated action taken over 35 years ago) that the real reason it was decided to deduct the interest was, in the words of the parent’s tax manager, as a letter of March. 12, 1930 to the predecessor’s treasurer, that it was felt “it would be of advantage to take all the deductions in the tax return for the year 1929 that we are entitled to,” since it was expected at that time that the company would “earn considerable income in the next few years.” With the interest so deducted, the “return will reflect a large statutory net loss,” which could, he said, then be carried forward and applied to the “considerable income in the next few years” which the predecessor “expects to earn.” It is quite true that the letter expressed the opinion that “the Revenue Department will not permit a depreciation deduction on such items [interest on bonds during construction] where they are clearly set forth in the fixed capital account,” and that it also referred to the deductibility of the item as not being “definitely settled” under “the tax law and regulations.” However, despite such uncertainty, the tax manager concluded that “we feel that the return for the calendar year 1929 should reflect all deductions which can possibly be construed to be deductible.” Accordingly, the 1929 return was filed in such manner by the predecessor.

It seems quite clear, therefore, that the 1929 return was filed in the way it was because it was considered to be to the predecessor’s tax advantage to do so, and not under the compulsion of Central Beal Estate, which was not even mentioned in the letter. Indeed, the letter, if anything, indicates that the manager entertained doubt, under the then state of the law, that the predecessor could deduct the interest. His feeling was, quite clearly, founded upon the fact that the statutes and the regulations all provided, in mandatory terms, that basis “shall be adjusted” for any item properly chargeable to capital account, the so-called “election” to deduct seemingly referring not to the future but instead to past years, capitalization, pursuant to the statutes and regulations, not being permitted if the taxpayer had previously elected to the propriety of its action (the Commissioner of Internal Revenue had not acquiesced in the invalidation of his regulation requiring capitalization, with the Board’s decision in Central Beal Estate then, in addition, being on appeal) , it deliberately went ahead and deducted the interest anyway because of the considerable tax advantage it felt would accrue to it as a result. Thus, to say, as plaintiff now does, that the predecessor, although it wished to capitalize, felt compelled, because of the then state of the law, to deduct the interest rather than to capitalize it, is to advance a contention which is simply not borne out by the record.

For 1930, the reason for the predecessor’s filing the return as it did, with the interest again deducted, is not as clear. Prior to the time of such filing on July 1, 1931, it apparently had become obvious to it, as set forth in a letter of June 12, 1931 from the predecessor’s official responsible for the preparation of the return to the parent’s tax department manager, that such deduction “will no doubt not be of any use as far as building up a loss to be carried forward is concerned,” and that if capitalized, it “would realize * * * yearly write-off of depreciation” which “would be very advantageous to Southern Natural Gas, as it would approximately increase the depreciation write-off $100,000 each year.” He suggested amending the already filed 1929 return, as well as the prepared draft of the 1930 return “so that we can then consider the interest as part of the depreciable property.” It is, therefore, puzzling why, in view of the fact that the parent’s tax manager, in his letter of June 15, 1931, agreed with the recommendation of the predecessor’s tax official that the interest be capitalized, the predecessor nevertheless went and filed the return anyway with the interest deducted as a current expense. The only possible conclusion is that the predecessor again acted as it did with respect to the 1929 return in the manner it ultimately determined was, for reasons best known to itself, in its best interests, and certainly not under any supposed legal compulsion, which is not even hinted at in the correspondence. The manager did not consider that the problem as it then existed — although Central Beal Estate had already been decided by the Court of Appeals (and which case again was not even mentioned in any of the letters, although other specific citations were made) — was settled in such a manner as to require one course of action rather than another, for he advised: “Upon reviewing the situation again [including a recent memorandum of the General Counsel of the Eevenue Service] I believe that the question of how to handle Interest during Construction has not been definitely settled by the Treasury Department * * *.” The predecessor’s official in his letter had also noted that “the question of the capitalization of interest and taxes in computing gains * * * is still pending.” Again there was at that time nothing to indicate that the Commissioner of Internal Eevenue was going to acquiesce in the invalidation, in the Fifth Circuit, of his regulation to the detriment of those who had relied on it and the succeeding substantially identical regulations. When one gives full consideration to the pros and cons, and there is no indication that a certain course of action was felt to be compelled, the only rational conclusion is that that course of action was adopted which was determined to be in one’s best interests. That was exactly the way the predecessor had acted in 1929, and the presumption must be that it similarly so acted in 1930. Indeed, plaintiff does not urge that 1930 be treated any differently from 1929. In any event, what is plain is that plaintiff has failed to carry its burden of proving that the predecessor, in filing its 1930 return, deducted the interest only because it felt it had no other choice.

Accordingly, the fact, which plaintiff stresses, that it turned out the predecessor never realized any tax benefits from the interest deductions it took, and 1930 years themselves (since the heavy losses it suffered in those years would have resulted in no income tax being due even had such deductions not been taken), or for any subsequent year (since losses were incurred during all the years to which the 1929-1930 loss credits could have applied), must be considered to be irrelevant in view of the further fact, as shown, that the predecessor fully contemplated (at least at the time it filed its 1929 return) that such tax benefits would accrue. As the Court said in Pacific National Co. v. Welch, 304 U.S. 191 (1938), “[t]he amount of the tax for the year in question is only one of many considerations that may be taken into account by the taxpayer when deciding which method to employ.” (at 194) Even the method which produces a higher tax for the year in question may, the Court pointed out, be considered “preferable because of probable effect on amount of taxes in later years.” (Id.) The circumstance that the benefits expected at the time an election is made do not materialize does not give a taxpayer the subsequent right to start all over again and adopt ah initio that method which hindsight makes plain would have been more beneficial. “There is nothing to suggest that Congress intended to permit a taxpayer, after expiration of the time within which return is to be made, to have his tax liability computed 'and settled according to the other method.” (Id.) Cf. Gimbel Brothers, Inc., et al. v. United States, 186 Ct. Cl. 299, 404 F. 2d 939 (1968).

It thus becomes unnecessary to decide the issue of what would be the legal implications flowing from a situation, were it factually proved, in which a taxpayer reasonably felt that because of the state of the law, he was in effect compelled to file in a certain manner, and whether a choice made under such circumstances could later be disregarded and a different course of action, in conformity with clarifying subsequent provisions of the statutes and regulations, then be pursued.

Plaintiff further argues, however, that by reason of amended returns for 1929 and 1930 which were later filed by the predecessor, in which the deductions for the interest were eliminated, it is now not barred under section 113 (b) (1) (A) by the deductions tberefor taken in the original returns. This contention too is unacceptable because the record does not indicate that such amended returns were ever accepted by the Commissioner of Internal Eevenue and that they are, therefore, to be given any force and effect. Since, as plaintiff concedes, the 1939 Code contained no statutory provision for the filing of amended returns, such returns must be regarded without such acceptance merely as untimely filed returns for the years they purport to amend. Daniels Jewelers, Inc. v. United States, 150 Ct. Cl. 525, 279 F. 2d 226 (1960).'

What the record shows as to these amended returns is as follows: -

On August 6,1931 (i.e., a little over a month after plaintiff had filed its 1930 return), Treasury Decision 4321 was issued amending the above-mentioned Article 561 of Regulations 74 promulgated under section 111(b) of the Revenue Act of 1928, the Fifth Circuit, on March 18,1931, having held in Central Beal Estate that the similar regulation under the similar section of the 1924 Act could not be supported by the provisions of such section. In conformity with Central Real Estate, the amendment provided that carrying charges may not be treated as items properly chargeable to capital account. It made a savings exception, however, as to those cases in which such expenditures made prior to the date of the issuance of the amendment had been charged to capital account by taxpayers in their tax returns (in reliance on the previous regulations). Accordingly, those taxpayers who, despite the capitalization requirement provisions of the original regulation, had elected to deduct such charges in computing net income, as the predecessor had done, were not allowed to change such election. Thus, had the predecessor

complied with the regulations and its action would have been preserved despite Central Beal Estate (and this issue in this case would not have arisen).

The following month, i.e., on September 21, 1931, the predecessor filed with the Collector in Birmingham, Alabama, an amended return for 1929 in which the interest during construction item was eliminated as a deduction and instead capitalized as a construction cost, and on September 23,1931, the Collector acknowledged its receipt and advised it was being forwarded to Washington “to be audited in connection with the original.”

An amended return was also prepared at that time for 1930 which also capitalized the interest but only the amount that had been paid or accrued up to April 1, 1930, the date the main transmission line was completed. However, as shown by a letter dated September 17,1931, from the predecessor’s tax official to the parent’s tax department manager, its filing was delayed because one of the predecessor’s receivers raised the question of whether the entire system could, under T.D. 4321, still be considered “unproductive” during that year because, even though the main transmission line was completed, it took practically the entire balance of the year to construct the lateral lines, the service lines, and the meter stations, so that the company could still be considered as being in a construction or development stage during the entire year, the operating activities being, in his opinion, only “incidental” to the “major problem” of completing the construction program. By letter of October 3,1931, however, the tax manager replied that since a large part of the system had actually been put into service in 1930, and had thus become productive, it was his conclusion that T.D. 4321 would not support the capitalization of all the interest expended during the entire year. He therefore recommended the filing of the amended return as prepared.

The receiver, however, by letter of October 22, 1931, requested the manager to reconsider his opinion, stating that one of the local tax examiners (Birmingham, Alabama) had expressed the opinion that until the company had actually commenced operating with respect to 75 percent of its proposed business, it would still be considered to be in a development or construction stage. Because of the company’s “potential earning power,” he stated, the receivers desired “to treat all interest paid or accrued during the year 1930 as part of the construction cost.” In his reply of October 26, 1931, the manager stated that (1) “[t]he matter of how to treat ‘interest during construction’ is one which has not been definitely decided by the Bureau of Internal Eevenue,” and (2) the question of when construction may be considered to be completed is a factual one. Therefore he concluded that if the predecessor considered his previous opinion as to the procedure to be followed to be “detrimental to the interests of the company,” it should, despite the previous judgment he expressed outlining a procedure he felt would be acceptable to the Bureau, not consider such judgment as “binding” and should proceed to file the amended return with all the interest capitalized.

On December 26, 1931, the predecessor filed its amended return for 1930 with all the interest capitalized.

Apparently the receivers were, however, in doubt as to whether a return had in fact been filed since by letter of May 16,1932, they made inquiry of the Birmingham Eevenue Office with respect thereto. The following day the office advised that such a return had been filed and that, as with the 1929 amended return, it had been forwarded to Washington to be audited in connection with the original return.

And here the record stops insofar as the amended returns are concerned. Thus, outside of clearly indicating that, with these returns as with the originals, the predecessor still, as of the dates of their filing, did not feel it was under any lsgal compulsion to file in any particular manner (it believing that, even at such filing dates, the proper treatment of the interest during construction item was “one which has not been definitely settled by the Bureau of Internal Eevenue”), and was still taking that course which it considered to be in its best corporate interests, the record fails to make plain whether such returns were ever accepted by the Commissioner of Internal Eevenue. An acceptance in this case, which is purely discretionary (Daniels Jewelers, Inc., supra), would be vital for the predecessor was, in such returns, taking a position which was expressly forbidden by the amended regulation, i.e., after August 6,1931, it was for the first time capitalizing the interest although the amendment specifically permitted such treatment only if such capitalization had been made, in reliance on the original regulation, in returns filed prior to such date. As shown, the predecessor knowingly and consciously did not take such action. Under the circumstances, there could be no presumption of acceptance, and this would be so even though, as plaintiff points out, no tax was due under either the original or amended returns, for the capitalization treatment, although not affecting the tax liability for either the years 1929 or 1930, obviously might, because of the company’s “potential earning power,” affect such liability for many future years.

As indicating acceptance of the amended returns by the Commissioner, plaintiff places heavy reliance on the report made by an examining revenue agent with respect to its 1932 return. The predecessor’s 1931 return contained no depredation deductions, but the 1932 return did claim such a deduction with respect to the interest capitalized on the 1929 and 1930 amended returns. Such 1932 return, which showed a loss of almost a million dollars, was reviewed by the Nashville Revenue Office and then forwarded to Washington “for final review.” Plaintiff argues that, in computing allowable depreciation on this audit, “the Internal Revenue Service treated the 1929 and 1930 interest payments as an addition to basis, in accordance with the capitalization election made on the amended returns.” (Pltf. Brief, p. 109) This contention cannot be accepted for two reasons. First, the report of a field office sent to Washington “for final review” does not constitute proof of acceptance by the Commissioner of Internal Revenue. Such basic year-to-year changes in accounting procedures which may drastically affect tax liability over the years must necessarily be subject to approval by the Commissioner of Internal Kevenue. Second, in his report the Nashville Office’s reviewing agent stated that he was making no attempt to determine the extent to which the deductions claimed were allowable because he would, in any event, be unable to overcome the huge loss reported. Accordingly, he stated he was not submitting a corrected net loss schedule. In one exhibit attached to the report consisting of a reconciliation of the net losses for 1929 through 1932, as shown by the corporate books and the tax returns, the agent did refer to the losses for 1929 and 1930 “as disclosed by the amended returns,” and in subsidiary exhibits also referred to the amended returns for such years. However, no computation of “allowable depreciation for 1932” was made.

For the agent’s purpose of making such a comparison or reconciliation, it would, of course, be quite natural to look at the amended returns, for those returns, capitalizing the interest, were the only ones that could, with respect to this item, be compared with the corporate books, in which the interest was also capitalized. But a field office agent’s looking at the amended returns for this limited purpose in connection with an audit of a different and subsequent year’s return can hardly be considered as constituting an acceptance of the amended returns for the earlier years, including the legal propriety, under the circumstances here involved, of the change from one method of treating interest during construction to another. This is especially true in light of his further explanation that he did not even audit the depreciation schedule for such subsequent year’s return because “the large net loss cannot be overcome.”

Daniels Jewelers, Inc. v. United States, supra, on which plaintiff relies, is inapposite. There, waiver by the government of the timeliness of an election, which depended on the acceptance of an amended return in which the election was made, was necessarily indicated by the government’s subsequent action of assessing a deficiency for one of the years with respect to which the amended return was filed. Because of the statute of limitations, the assessment could not have been made but for the acceptance of the amended

return. Here, there by the Commissioner indicating any acceptance of the amended returns.

The Commissioner’s mere failure to act upon the election set forth in the amended returns cannot, of course, be taken to indicate acceptance. Kaufmann and Baer Company, et al. v. United States, 138 Ct. Cl. 510, 137 F. Supp. 725, cert. denied, 352 U.S. 885 (1956).

For all of the above reasons, it is concluded that plaintiff is not entitled to recover on this item of claim.

DEPRECIATION BASIS OP PROPERTY PURCHASED WlTH Preferred Stock

As above indicated, for the property plaintiff acquired from its predecessor in 1935, plaintiff is required, commencing with 1943, to take the predecessor’s depreciation tax basis. The parties are in agreement that, under section 113(a) of the 1939 Code, such basis is predicated upon the cost of the properties to the predecessor. In this item of the case, the parties are in dispute as to the amount of such cost.

Had the predecessor paid for its system in cash, its cost would, of course, be readily ascertainable. However, the dispute here arises from the circumstance that, in connection with the construction of the original line in 1929 and 1930, the predecessor made part payment to some of the contractors and materialmen participating in the construction in the form of its $7 ciunulative preferred stock. The predecessor was then a newly organized corporation in the initial stage of constructing its system. The preferred stock in question was newly issued and was neither listed on any exchange nor traded over the counter. Such private sales as had occurred were insignificant. Accordingly, it had no established or readily ascertainable market value or price. Yet, the cost to the predecessor of its system, which cost fixes the depreciable tax base, depends upon a determination of the value of the stock it gave to the contractors and suppliers for the property it received from them.

The predecessor initiated the stock payment program in the summer of 1929 in an effort to conserve its cash. Some contractors, by their contracts, agreed to accept such payment. Others also ultimately accepted such stock as part payment although their contracts did not so require.

The number of shares issued for the portion of the properties so purchased by the stock was based on agreements between the predecessor and the participating contractors and suppliers that they would receive one share for every $90 worth of contract services rendered or materials furnished. The physical assets or services received by the predecessor from the contractors and suppliers were entered on its books at the contract or agreed prices, which were then settled by payment of cash and preferred stock at $90 per share. In calculating its cost of such assets and services for the purpose of computing its depreciation base, the predecessor considered the stock as having a value equal to $90 a share, and its annual depreciation deductions were taken on such a cost basis.

For the years 1943 through 1953, however, the Commissioner of Internal Revenue made certain determinations relating .to the preferred stock which drastically revised plaintiff’s depreciable tax basis. He determined that the predecessor had issued 31,797 shares of preferred stock to pay for $2,869,809.95 in materials and services. He then reduced said amount by $1,559,445.95, a reduction which was produced by his rejecting the $90 per share valuation assigned by the predecessor and instead assigning values ranging from $45 per share for the first shares issued at various times between October 1929 and April 1930, to $24.66 per share for the final shares issued in February 1931. This reduction in basis had the effect, of course, of diminishing the depreciation deductions allowed in each of the years in question.

The parties are now in agreement that the Commissioner included too many shares in his calculation of the number that was issued by the predecessor as payment for depreciable services or materials incorporated in such lines as were still in existence during the tax years in question. However, they remain in disagreement as to what .the proper number should be. There is agreement that at least 21,040 shares were so issued on various dates from October 7, 1929, through February 18, 1931. However, defendant maintains that on October 24,1929, 5,700 shares were issued to the firm of Ford, Bacon & Davis and that, although the boohs and records of the parties reflect the transaction as a purchase by the Ford firm of the shares at $87.50 per share (plus accrued dividends), the issuance of the shares was in reality in part payment of a $500,000 fee due such firm for services rendered in designing the transmission system and supervising its construction. Thus, defendant argues that the value of 26,740 shares is involved, not 21,040.

Further, defendant now maintains that even the reduced share values assigned by the Commissioner of Internal Revenue were too high and that the fair market value of the 26,740 shares allegedly involved ranged, as of their issuance dates, from $35 per share on October 7, 1929, to a low of $5 per share for the final November 20,1930-February 18,1931 period. On this basis, defendant contends there should be a reduction of $1,774,625 in basis, representing the difference between the book value of $2,392,350 for the property and services allegedly acquired with the 26,740 shares of stock and the fair market value of such stock in the alleged amount of $617,725.

Plaintiff, however, insists that the issuance of the 5,700 shares to Ford, Bacon & Davis was in pursuance of a straight sale and purchase and had nothing to do with payment for services, that the correct number of shares issued in payment of depreciable assets is, therefore, only 21,040, and that such number was correctly incorporated into the depreciation base at $90 per share, being the agreed value assigned 'by the predecessor and its contractors and suppliers.

For the reasons hereinafter set forth, it is concluded that plaintiff is correct on both aspects of this controversy.

Consideration will first be given to the question of the measure of the cost basis to the predecessor of the property and services acquired by the shares, which both sides agree should be based upon the value of the shares. Irving Trust Co. v. United States, 90 Ct. Cl. 310, 30 F. Supp. 696, cert. denied, 311 U.S. 685 (1940).

Other than the value assigned to the shares by the contracting parties, there was, for the reasons indicated, no readily ascertainable basis for determining value. No persuasive reason is apparent, however, for not accepting the contemporaneous value judgments of experienced businessmen with adverse interests and negotiating at arm’s length. Here the contractors agreed that for every $90 worth of labor, materials, or services they gave the predecessor under their contracts, they would receive one share of preferred stock. The only natural conclusion is that they considered the stock had such an equivalent value, for it is hardly to be supposed that established business firms of national repute, as many of the contractors and suppliers were, were either in effect duped into giving $90 worth of labor, material, or services for as little as $5, or were indulging in some kind of charitable exercise. Defendant does not question the $90 value of the services and materials furnished. It questions only the correlative stock value. Thus, the logical conclusion of defendant’s position is necessarily that the predecessor obtained that part of its system represented by the stock in question at an astounding bargain, i.e., it received $2,392,350 worth of property and services for only $611,725.

The cases too support the logical conclusion that, in a situation such as here involved, the value of the stock, for the purpose of establishing “cost” as basis under the income tax laws, is to be presumed to be equal to $90, the conceded value of the materials and services for. which the stock was exchanged.

Where stock is exchanged for property, and a determination of the value of the stock is therefore necessary to establish “cost” for tax purposes, “the best available criteria of the market price of the stock” is, normally, sales of the stock made in the open market. Tennessee Products Corp. v. United States, 124 Ct. Cl. 1, 18, 107 F. Supp. 578, 587 (1952).

However, where, as here, no sales of the stock have for all practical purposes been made, so that the stock has no readily ascertainable market value, but the property received in exchange for the stock does have such a value and therefore constitutes the best evidence of the fair market value of the shares, then the operation of the presumed-equivalence-in-value rule comes into play, i.e., “the value of the two properties exchanged in an. arms-length transaction are either equal in fact, or are presumed to be equal.” Philadelphia Park Amusement Co. v. United States, 130 Ct. Cl. 166, 172, 126 F. Supp. 184, 189 (1954). In that case, the taxpayer exchanged a bridge for the grant by a city of a 10-year extension of a railway franchise. It subsequently became necessary to establish, for tax purposes, the cost basis of the franchise extension. This court held that, if such franchise extension value was “difficult or impossible to ascertain because of the nebulous and intangible characteristics inherent in such property,” the fair market value of the bridge, which was subject to a reasonably accurate determination, would, in accordance with such equivalence rule, “be presumed to be the value of the extended franchise.” (130 Ct. Cl. at 173, 126 F. Supp. at 189) And this rule was applied in United States v. Davis, 370 U.S. 65 (1962), a case, such as the instant one, involving an exchange of stock for property, and which specifically approved and relied on Philadelphia Parh. In Dmis the Court held that, in connection with a property settlement incident to a divorce proceeding, the measurement of the taxable gain realized 'by the husband on stock exchanged for a release of the wife’s marital rights (as well as of the wife’s “cost” basis for the stock) would be based on the fair market value of such rights, and that these rights, the independent value which was not, of course, readily ascertainable, must be considered “to be equal in value to the property for which they were exchanged.”

* * * Absent a readily ascertainable value it is accepted practice where property is exchanged to hold, as did the Court of Claims in Philadelphia Park Amusement Co. v. United States, 130 Ct. Cl. 166, 172, 126 F. Supp. 184, 189 (1954), that the values “of the two properties exchanged in an arms-length transaction are either equal in fact, or. are presumed to he equal, [cases cited] ” (Id. at 72)

Indeed, although the use of such “barter-equation method” to evaluate property is normally limited to “cases involving valuation of property for which there is little or no market,” Seas Shipping Company v. C.I.R., 371 F.2d 528, 529 (2d Cir.), cert. denied, 387 U.S. 943 (1967), its use to evaluate stock in a particular situation has been sustained even “where there is an active market for the property to be valued [i.e., the stock]” (id. at 532) (the small transactions on the stock exchange being considered as not truly reflecting many of the value aspects of the transaction involving the large block of shares exchanged in the ship-stock transfer that was the subject of the case) , Here too the court was troubled by the improbable results that would follow from giving the stock a value different from that assigned by the parties themselves.

* * * If the trading price of $22.81 were taken as the stock’s value, it would mean that taxpayer had sold its ships for $2,000,000 less than they were worth [the ships’ value being known and not in controversy] — a highly unlikely occurrence. * * * Where parties with adverse interests are at issue over the worth of property and then agree upon the dollar amount of that worth, the agreement is very persuasive evidence of value. (Id. at 532)

Certainly, here the predecessor and the experienced firms which were its construction contractors and suppliers were contracting parties with adverse interests and bargaining at arm’s length. They were unrelated to the predecessor. The record fails to indicate that any contractor was compelled to take stock for any part of his services or was, for instance, threatened with the loss of the predecessor’s business if he did not participate. When National Tube Company refused to take any stock for its services because of a policy not to participate in financing, tbe predecessor continued to do business with it on an all-cash, basis. Other contractors, too, did not, for one reason or another, participate. Under the program, the greatest percentage of the contract price the contractors were asked to accept in stock was 25 percent. Some took less. The record contains ample evidence, including testimony of witnesses who were contemporaneously familiar with the transactions in question, supporting the arm’s length nature thereof. The contract prices were arrived at by competitive bidding or by negotiation and there is nothing to show that they were not fair and reasonable. No attempt was made to negotiate for lower prices when payment was made entirely in cash. In some instances, prices were established before the supplier was asked to take part payment in preferred stock, and the prices were in no way altered when the supplier agreed. And defendant does not, as stated, dispute the predecessor’s actual receipt of supplies and services worth $90 for each share of preferred stock issued to the contractors and suppliers. Defendant introduced no testimony at all on this aspect of the case and there is nothing of any substance in the record to support its suggestions and speculative intimations to the effect that the bargaining was not in fact at arm’s length.

Defendant seems to argue that the Philadelphia Parh ride is, as it construes the case, applicable only in the situation of a taxable event to the acquiring party, i.e., one in which it is necessary to establish the basis of property acquired in a transaction which in itself is a taxable exchange giving rise to gain or loss to the acquiring party. In the instant case, says defendant, the receipt of the materials and services was not a taxable exchange giving rise to gain or loss. Instead, defendant argues, it simply served to establish basis for the purpose of the depreciation allowance, which is designed to permit only recovery of the taxpayer’s cost, i.e., the value of the property he gave up, and not recovery of the value of the property he acquired, which, it is stressed, may well be entirely different.

Such an attempted limitation upon the Philadelphia Parle bolding is unwarranted. It is true tliat the court in Philadelphia Parle determined that the exchange of the bridge for the 10-year extension of the franchise was a taxable exchange resulting in a gain or loss, the cost 'basis of which to the taxpayer would be the cost of the franchise extension. However, what was involved in Philadelphia Parle was a determination of basis not only for gain or loss purposes, but also for purposes of depreciation. It was some years after the exchange, when the taxpayer abandoned its franchise, that it claimed a loss arising out of such abandonment in the amount of the undepreciated cost of the franchise at the time of the abandomnent. This necessitated a finding concerning the original cost of the extended franchise as a basis for determining such loss. In addition, however, the taxpayer also claimed depreciation deductions for the amortization of such cost. Thus, the case involved a determination of the cost basis of the extended franchise and “the tax consequences” thereof, not only for the purpose of establishing a capital-loss basis, but also, as in the instant case, for the purpose of establishing a proper depreciation basis, such factor, indeed, constituting a major consideration in the case. The court’s reference in Philadelphia Parle to the effect that the bridge-franchise exchange constituted a “taxable exchange” was made only in contradistinction to “the nonrecognition provisions of section 112(b) of the [1939] Code,” i.e., the various situations in which, in the words of the statute, “no gain or loss shall be recognized.” The taxpayer in that case had contended, inter cilia, that the exchange was such a nontaxable transaction. However, once the transaction was classified as a taxable exchange, the basis determined for establishing gain or loss was also recognized as the basis for depreciation purposes.

But even in the sense in which defendant here uses the term “■taxable exchange,” *.<s.3 a transaction giving rise to income tax consequences in the form of a capital gain or loss, it is plain that the establishment of a basis for depreciation purposes also has, in the form of annual deductions from gross income, such consequences, as Philadelphia Park makes plain. For, as shown, the same original cost of the extended franchise which constituted the basis for determining the undepreciated cost the taxpayer would ultimately be entitled to write off at the time of the abandonment, also determined the amount of the annual depreciation deductions that could be taken on such original cost in order to ascertain the amount of such undepreciated cost. Indeed, the determination of one basis for capital gain or loss purposes and another for depreciation purposes would, since they are both based on “cost,” clearly produce an inconsistency which, it is plain, the Congress intended to avoid.

Further, if defendant’s attempted “taxable exchange” distinction of Philadelphia Park is, instead, based on the notion of immediate tax consequences, i.e., the necessity of adopting some method, even rough, of determining basis so that a taxable transaction should not escape taxation, United States v. Davis, supra, compels its rejection. There, the stock marital rights exchange had immediate tax consequences to the husband, who disposed of the stock, but not to the wife, who received it. Yet the Court held that “the same calculation that determines the amount received by the husband fixes the amount given up by the wife, and this figure, i.e., the market value of the property transferred by the husband, will ~be taken by her as her tax basis for the property received.” (Emphasis supplied.) {Id. at 73.)

Defendant says that a current, retrospective, expert opinion of the then fair market value of the stock, based on the application of such factors as earnings and dividend prospects, book value, the capital structure of the corporation, and the state of the particular industry, as well as the general economy (the stock market crash occurred in late October 1929, in the midst of the construction program), shows that the contractors erred so greatly in 1929 and 1930 in accepting the stock at $90 per share that it must be concluded ■they had no real appreciation of what they were doing. It is evident, says defendant, that they must have been uninformed to have acted so rashly. Since the application of the fair market value test presupposes informed and knowledgeable contracting parties, Central Trust Company, et al. v. United States, 158 Ct. Cl. 504, 520, 305 F. 2d 393, 402 (1962), defendant argues that the $90 yardstick should, therefore, be rejected.

However, this contention in itself presupposes the propriety, in a case such as the instant one, of using expert testimony to test the rationality of the contemporaneous assignment by the contracting parties of a certain value to the stock. A wide discrepancy between an expert’s retrospective valuation figure and the contracting parties’ contemporaneous value judgment could then always be the basis for a contention that the party who accepted the higher valuation simply must be presumed to have been, at the least, uninformed. The use of the barter-equation method to establish fair market value being thus destroyed, it would then be necessary, since no other satisfactory objective method of determining such value would be available, to resort to expert opinion testimony. Thus the reasoning makes full circle. This approach must be rejected.

First, it is apparent that in any of the cases applying the presumed-equivalence-in-value rule, it could have been concluded that the value of the stock or other property involved should, instead, have been established, or at least tested, by expert testimony. However, since the use of such expert opinion testimony to establish valuation based on such factors as book value and earnings and dividend prospects is proper only when there is no better method of arriving at a reasonably accurate figure, it is plain that the use of the barter-equation rule was necessarily considered in such cases as constituting a better method. It is simply a matter of what is the best evidence in a particular case. As the Board of Tax Appeals stated in Amerex Holding Corporation, 37 B.T.A. 1169, 1190 (1938), affirmed per curiam, 117 F. 2d 1009 (2d Cir.), cert. denied, 314 U.S. 620 (1941) : “If therefore it appears from ¡the record that the value of the property received, upon the issuance by a corporation of certain of its shares of stock, is the best evidence of the fair market value of those shares at the time of issue, that evidence should be applied and the fair market value of the shares of stock issued determined accordingly * * * .” The Board therefore refused to accept an expert witness’s opinion, given in response to hypothetical questions, as to the fair market value of stock.

This is not to say that, under any and all circumstances, and in accordance with a hard and fast rule, the value of shares issued for property must always be equated with the value of the property received in exchange. Amerex Holding Corporation, supra, at 1192. But certainly a contemporaneous agreement between parties “with adverse interests” bargaining at arm’s length “over the worth of property” as to “the dollar amount of that worth,” Seas Shipping, supra, at 532, which is the situation in the instant case, is far superior to experts’ widely varying judgments made many years later which are based on a host of factors that are concededly extremely difficult to evaluate. “What the value is [of stock exchanged for other property] in any case is to be determined by evidence, and a formula is only recognized at law as a makeweight or as a last resort.” Pierce Oil Corporation, 32 B.T.A. 403, 430 (1935).

Second, the record here shows that the experienced firms which participated in accepting the preferred stock at the $90 figure did not act blindly or recklessly. They were furn-islied projected sales figures and other financial information about the predecessor corporation and were, furthermore, informed of the others who were participants in the plan.

Although defendant now, over 35 years later, protests the alleged outlandish $90 valuation contemporaneuosly agreed to by the various contracting parties, the record shows that such valuation was, upon responsible and considered review, accepted, also in more contemporary proceedings, by quasi-judicial as well as governmental authorities. When the predecessor and Oklahoma Contracting Company, which built a portion of the main line, had a dispute concerning the amount payable under the cost-plus part of their contract, the arbitration board to which the matter was submitted decided, on July 5,1930, the amount due and, in addition, provided that the award was to be payable in the predecessor’s preferred stock at a $90 per share value. This provision was one to which the contractor, feeling that the stock, based on a value of $90 per share, was equivalent in value to the amount of the award, had no objection. And in 1944 and 1945 the Federal Power Commission conducted a lengthy review of plaintiff’s books and accounts to determine, for rate-making purposes, the original cost of the plant and property. No exception was taken to the $90 valuation upon which the cost was based.

The record thus containing nothing of substance to warrant the rejection here of the barter-equation or presumed-equivalence-in-value rule, no reason becomes apparent which would compel resort to expert opinion testimony, a method employed only when no other satisfactory method, based on contemporary events, is reasonably applicable. Accordingly, defendant’s expert opinion evidence, as well as plaintiff’s rebuttal evidence of a similar nature (offered only protectively since plaintiff relies on the barter-equation rule) has not been considered for the purpose of establishing other possible valuations as of the various dates the predecessor either obligated itself to the contractors and suppliers to issue the shares or as of the dates such shares were actually issued.

As to the second issue involving the question of whether the 5,700 shares issued to Ford, Bacon & Davis in October 1929 were in payment of services performed (with the value of the shares, therefore, forming part of the depreciation base), or whether the transaction was simply a straight cash purchase by the Ford firm, it seems clear that the record simply does not permit the payment-for-services conclusion urged by defendant, which is based solely upon inferences drawn some 35 years later. The direct evidence is overwhelming the other way. The testimony by both parties to the stock transaction is that a purchase and sale was intended. All the contemporaneous records are cast in such form and support the testimony. There is no contrary evidence. Nor is any tax advantage to either party offered as a reason why the parties should have indulged in the alleged window dressing. The Ford firm would receive the same amount of income whether paid in cash or stock and the basis for the securities would be the same whether acquired by purchase or as ¡payment for a fee. Nor was there any apparent contemporaneous concern that the predecessor might take a different depreciation base if stock were used in payment.

The factor that seems to strongly arouse defendant’s suspicion is that, as recorded on the books, the purchase price of the stock by the Ford firm was, in dollars, approximately equal to its fee under its May 1929 contract for designing and supervising the construction of the transmission system. At $87.50 per share (plus accrued dividends) the purchase amounted to $498,750. As stated, the fee was $500,000. This, says defendant, “had the effect of returning to the predecessor corporation all of the cash which was advanced to Ford, Bacon & Davis as fees in 1929.” As motive, defendant suggests that because the Ford firm also had a contract for the management of the system after it would go into operation, it had a stake in the predecessor’s success and continued life. Since the predecessor was then engaged, as part of its effort to conserve cash, in a program of requesting contractors to take preferred stock in part payment of their services, “it was logical that Ford, Bacon & Davis should do likewise,” since “the predecessor corporation probably would not have been able to persuade others to take preferred in part payment for services and materials without representing that Ford, Bacon & Davis had agreed to do likewise.” It hardly seems likely, says defendant, that such a “sophisticated, well-known” firm would, in view of the stock market collapse, have invested $500,000 in the stock of such a new and “already-troubled enterprise” [i.e., its shortage of cash] “but for some compulsion or commitment and its affiliation with the enterprise.”

All these contentions are based on pure speculation. Furthermore, the alleged basic purpose of the transaction, i.c., the Ford firm’s stake in the success of the enterprise, its desire, therefore, to participate in the cash conservation program, and its wanting to act in a manner which would induce the other contractors to emulate it, could be just as well accomplished by a straight purchase of stock as well as by an acceptance of stock for services, so that again no window dressing was necessary. Indeed, even assuming that, after the predecessor paid the Ford firm cash for its services and the firm then decided, for a variety of reasons, including those suggested by defendant, to invest the cash in the predecessor’s stock, there would still be no reason to consider the transaction as a sham and thus in effect recast the contract between the parties so that it would be treated as one whereby payment would be made in stock rather than in cash. The evidence shows that it was not uncommon for the Ford firm to invest in the stock of its clients if it felt that it could do so on an advantageous basis. That the parties could have originally cast the contract in the form of taking stock for services furnished is quite immaterial. And as to the alleged unlikelihood of the Ford firm’s purchasing the stock after the market crash in October 1929, the evidence shows that, although the actual issuance of the shares occurred after the collapse, the firm committed itself to purchase the stock during the summer of 1929.

For all of the above reasons, it is concluded that plaintiff has here carried its burden of showing that the Commissioner of Internal Nevenue erred in treating the 5,'700-share transaction in question as a payment of preferred stock for services (and therefore throwing the stock into plaintiff’s depreciation base at his low valuation figures).

On this item plaintiff is entitled to recover in such amount as is produced by calculating the depreciation deductions for the years involved upon a base which includes 21,040 shares of preferred stock issued, as above described, to contractors and suppliers in part payment for materials and services, such stock to be valued at $90 per share, i.e., $1,893,600, instead of the number of shares and the valuations determined by the Commissioner.

Alabama Gas Note Issue

Included in the assets which plaintiff acquired from its predecessor was a note dated December 27,1933, in the principal amount of $350,000, issued by the Alabama Natural Gas Corporation. As of December 31, 1935, when plaintiff acquired the note, interest in the amount of $42,291.67 had accrued thereon but had not been paid. However, plaintiff paid the predecessor only $350,000 for both the note and the accrued interest. (None of such unpaid interest had ever been included by tibe ¡predecessor in income for federal tax purposes.)

All of this $42,291.67 in past due interest was, by 1941, paid by Alabama Gas to plaintiff ($10,000 in 1938; $9,000 in 1939; and $23,291.67 in 1940), such payments being in addition to the current interest payments due and paid on the note. Since plaintiff had, as a package, paid $350,000 for both the principal and the unpaid and accrued interest, it treated the past due interest payments as a return of capital and not as interest income. It accordingly adjusted its cost basis for the note downward by such amount.

In 1946, the full $350,000 principal amount of the note was paid by Alabama Gas.

With respect to plaintiff’s tax liability for 1946, the Commissioner of Internal Revenue took the position that, since plaintiff had treated the past due interest payments as adjustments to basis, such basis consequently should be adjusted to $307,708.33 ($350,000 minus the past due interest of $42,291.67), and that plaintiff, therefore, had realized a gain of $42,291.67 when the note was paid in full by the $350,000 payment. He therefore added such gain to plaintiff’s income.

During the trial proceedings herein, defendant reiterated the Commissioner’s position. Plaintiff, however, contested it. Its contention was as follows: When plaintiff received the past due interest in 1938,1939, and 1940, it was then on a cost basis with respect to said note and accrued interest, since, as hereinabove noted, the transaction by which it acquired all of the predecessor’s assets was considered to be a taxable one. On such basis, it was proper for it to have considered the defaulted interest as a return of capital to be charged to basis since, as a purchase, both the note and the defaulted interest were collectively purchased at the single cost of $350,000. However, when, as a result of the heretofore noted sections 112(b) (10) and 113(a) (22) of the 1939 Code (added thereto by section 121 of the Revenue Act of 1943, 58 Stat. 21, and which were applicable only to tax years beginning on and after January 1,1943), pursuant to which plaintiff’s acquisition of the predecessor’s assets fell into the category of a nontaxable exchange, plaintiff’s basis then changed from its cost to that basis which the property had in the predecessor’s hands on the December 31,1935 date oí the acquisition of the property by plaintiff. The predecessor’s basis for the note was $350,000. That was the amount it gave Alabama Gas when the note was executed in 1933. As of December 31, 1935, when plaintiff acquired the note, there had been no principal payments thereon, so basis of $350,000 carried over to plaintiff. On such basis, the defaulted interest payments which plaintiff subsequently received in 1938-1940 must, therefore, necessarily be regarded as interest and not as a return of capital, for that is how they would have been regarded and reported had the note remained in the predecessor’s hands. Under the carryover basis theory, plaintiff is regarded as merely stepping into the shoes of the predecessor. Thus, when the principal of the note was repaid in 1946, there was only a return of capital originally laid out with, consequently, no gain resulting. While, as shown, plaintiff had in fact not treated such defaulted interest payments as a receipt of interest, so that it had not paid any tax thereon, section 121 of the Eevenue Act of 1943, which put the carryover-basis rule into the Code for insolvency reorganizations (into which category plaintiff’s acquisition of the predecessor’s assets fell), provided for back-casting the rule, but only for the purpose of determining future tax effects of past transactions and not of altering the tax results of the back years themselves. Therefore, in this particular situation, plaintiff is not, as to such $42,291.67 of defaulted interest, required to pay any tax thereon, either as for a capital gain or as for interest income.

In its brief to the commissioner, defendant now concedes the correctness of plaintiff’s position.

Accordingly, in accordance with the parties’ present agreement as to the proper interpretation and effect of the statutes on a transaction such as the instant Alabama Gas note one (no reason appearing for not giving effect to the parties’ agreement with respect thereto), plaintiff is entitled to recover on this issue in such amount as is produced by eliminating the sum of $42,291.67 as capital gain for the year 1946, said, amount having been added to plaintiff’s income for such year by the Commissioner of Internal Bevenue.

Pooling Expenses

This item is based upon certain expenditures plaintiff made during the years 1943-1947 with respect to oil and gas leases it had acquired. Plaintiff contends that these expenditures constitute “ordinary and necessary expenses * * * in carrying on [its] trade or business” under section 23 of the Internal Revenue Code of 1939 (26 U.S.C. §23 (1952)), and are therefore deductible, in the computation of its income tax, from gross income during the particular years. Defendant contends that the expenditures are of a capital nature under section 24(a) (2), i.e., amounts paid out “for permanent improvements or betterments made to increase the value of any property or estate,” and therefore to be capitalized. In the latter event, the expenditures would become part of a tax base and recoverable over a longer period of time through the depletion allowance. Plaintiff’s deductions of the expenditures from gross income on its tax returns for the years 1943-1947, totaling $64,114.15, were disallowed by the Commissioner of Internal Bevenue.

In 1942, plaintiff acquired certain oil and gas leases on relatively small adjoining tracts located in the Bear Creek Field in Louisiana. The expenditures herein involved were those subsequently incurred by plaintiff in obtaining so-called “pooling” agreements from all parties (surface owners, royalty owners, mineral rights owners, etc.) who held interests in such leases. Under each of the individual leases, plaintiff had the right (and obligation) to drill on the property covered thereby. However, where the properties adjoin, it is not desirable to place a well on each small parcel of land covered by an individual lease. For one thing, where the oil or gas in the pool beneath the several adjoining properties can feasibly be extracted by one well, it would obviously be uneconomic and inefficient to effect the extraction by numerous wells. For another, the operation of a well on one parcel opens up the door to claims by those having interests in the adjoining property that the minerals under their property were being wrongfully drained. To prevent such drainage, plaintiff would be obliged to drill an “offset” well on sucli adjoining property. In addition, the states have a conservation interest in the problem. The Department of Conservation of the State of Louisiana declared, in its Order No. 78, that one well was capable of draining “efficiently and economically” an area of approximately 640 acres.

Accordingly, it is common in the industry to “pool” a number of small parcels into a larger drilling unit, and, during 1943-1947, plaintiff obtained fourteen such pooling agreements on its Bear Creek leases, each agreement creating a 640-acre unit for one gas well. It incurred expenses totaling $64,114.15 in obtaining such agreements, of which $41,246.96 was paid as consideration therefor, and it is the proper tax treatment thereof which is here in issue.

Prior to the pooling agreement, each owner of an interest in a tract covered by a lease had an interest only in the royalties and other benefits accruing from production from such tract. Under the pooling agreement, however, each such owner had an interest in the royalties and other benefits accruing from production from all the tracts in the 640-acre unit, such interest being a percentage obtained by dividing 640 into the acreage of the tract in which he originally had his interest. Thus, if a party to the pooling agreement was originally entitled to the royalties on ten acres, he was, after the agreement entitled to 10/640 of the royalties on the entire 640-acre tract.

While “[t]he line which separates capital expenditures from ordinary expenses cannot always be clearly drawn” (Connecticut Light and Power Company, supra, 177 Ct. Cl. at 407, 368 F. 2d at 240), it seems clear that the expenditures made in forming the pooling agreements should be regarded as ordinary and necessary expenses incurred for the efficient operation of plaintiff’s business. Plaintiff could hardly be said to have acquired any property rights of a capital nature as a result of the agreements. It had drilling rights on the properties involved before the agreements were entered into and it had the same rights subsequent thereto. Insofar as plaintiff was concerned, what the pooling agreements essentially accomplished was to relieve it of the obligation of drilling unnecessary wells. Cf. Belridge Oil Co., 27 T.C. 1044 (1957), affirmed, 267 F. 2d 291 (9th Cir. 1959) ; Earl v. Whitwell, 28 T.C. 372 (1957), reversed on other grounds, 257 F. 2d 548 (5th Cir. 1958) ; Winfield Killam, 39 T.C. 680 (1963), all holding that unitization agreements by owners of producing rights did not effect a tax-free exchange of separate property interests for new property interests within the meaning of the income tax laws.

The only decision directly in point cited by the parties is Campbell v. Fields, 229 F. 2d 197 (5th Cir. 1956), which sustains plaintiff’s contention, holding that expenses incurred by lessees incident to forming pooling and unitization agreements were properly deductible in the year incurred as ordinary and necessary business expenses under section 23 of the Internal Revenue Code of 1939, the same section herein involved. In that case the government contended that the pooling agreement modified the leases by converting them into larger units, thereby increasing their value, and that, since the original leases held by the lessees represented capital investments, the pooling agreement itself, effecting such value increase, should be treated as such an investment. The court, however, rejected the contention as giving “too much consideration to form and too little to substance” (at 201). After analyzing “the nature of the property right as was evidenced by the leases and the extent to which that right was changed by the pooling and unitization” (id.), the court concluded:

* * * Subsequent to the pooling and unitization each owner and lessee has the right to a share in the gas in the field to be produced through wells on the land included in the unit, each participant’s portion being measured by the area of his contribution to the unit. His ultimate economic interest is little, if any, different after pooling and unitization than before.
It cannot be said as a matter of law, and we doubt that there could be any accurate determination as a matter of fact, whether the ultimate realization by taxpayers would be greater or less with unitization than without well spacing and unitization. We do not find that the unitization of the leases resulted in any such conversion of the character of taxpayers’ investment as worked a basic change in the nature of the property right which they held. * * * (at 201-202)

It therefore held that the expenditures made incident to forming the pooling agreement “were not made for acquiring property or defending title to property, nor for the purpose of converting one kind of property into some different kind of property,” and that they were, instead, “incurred in order that the taxpayers might realize and enjoy the income from the property” (at 203), a type of expense which, as distinguished from “additions to the capital investment in the property,” the court had previously held in Bliss v. Commissioner of Internal Revenue, 57 F. 2d 984, 985 (5th Cir. 1932), constituted an ordinary and necessary 'business expense.

Campbell v. Fields on the ground that there, only attorneys’ fees and surveying charges incident to the formation of the pooling agreements were involved, while here there are also included in the amounts expended sums paid as consideration for the pooling agreements, is hardly meaningful. There is nothing inherent in attorneys’ fees or surveying charges which would prevent them too, in a proper situation, from being capitalized. Defendant makes no such contention here nor was any such contention made in OamfbeTl.

Another alleged distinction is that the court in OamfbeTl held as it did on the ground that the lessees “acquired no new rights and that there was no conversion of one kind of property into another,” while in the instant case, plaintiff “did acquire a new right of continuing value — the right to drill but one well for each 640-acre unit and the right to develop the leases without unnecessary wells” (Def. Brief, p. 133). Although defendant concedes “this may also have been true in the Fields case, the Fifth Circuit did not appear to take cognizance of this important factor * * *” (id.). In Campbell v. Fields the taxpayers entered into both pooling and unitization agreements, the expenses involved in the controversy apparently being applicable to both (a unitization agreement being one entered into between lessee-operators to effect “development and operation of an oil pool as a unit,” designating “one or more of the parties as operator” (229 F. 2d at 199)). However, for the purpose of deciding the “ordinary” and “necessary” business expense issue involved, the court did not make any distinction between pooling agreements entered into between the owners of the royalty interests and the lessees, and unitization agreements entered into between the lessee-operators. “The Government concedes * * * that the restrictions with respect to the spacing of wells impose an economic burden on operating except under pooling agreements, and that economic advantages are made possible by unitization” (at 201), and on, above set forth, to reject the contention “that by the pooling and unitization there was a modification of the leases resulting in their conversion into unitized proration units calculated to increase their capital value” (id.). Thus, the contention that the court in Campbell v. Fields did not “take cognizance of [the] important factor” of a pooling agreement’s effect of eliminating unnecessary well drilling, is not justified. This f actor was not only considered — it was emphasized.

Finally, defendant urges that if Campbell v. Fields is not to be distinguished it should not be followed. It says that the principles enunciated by this court in Connecticut Light and Power Company, supra, properly applied to the facts of the instant case, would lead to a result different from that arrived at in Campbell.

It is plain that the court in Connecticut lay down an all-embracing and strict rule to the effect that every expenditure which produced something which could be said to be “of continuing value” to the taxpayer must automatically be classified as a capital outlay. Instead, the court, as its citation of and quotation from United States v. Akin, 248 F. 2d 742 (10th Cir. 1957), makes plain (177 Ct. Cl. at 409), was only laying down some general guidelines to aid in the solution of the often difficult question of distinguishing between current and capital expenditures, and, quite properly, considered the “continuing value” aspect as one consideration. It recognized, however, that the result depends upon the “unique factual pattern[s]” of the individual case (177 Ct. Cl. at 407), emphasizing what the court stated in Bussell Bom Co. v. Commissioner of Internal Revenue, 208 F. 2d 452, 454 (1st Cir. 1953) :

It has been said that the essential difference between an ordinary and necessary business expense and a capital expenditure is the difference between upkeep and investment, or between a maintenance or operating expense and a capital disbursement. * * * But such statements do not go far in solving concrete cases. * * *

As stated, in Connecticut, the flowage rights and easements the power company took by eminent domain constituted an inseparable part of the overall dam property. Without the acquisition of such rights and easements, the project could not have been constructed. The expenditures involved in obtaining them, therefore, were properly held to constitute an integral part of the dam, which itself was a capital asset depreciable over a period of years. In the instant case, however, the pooling agreement expenses, which essentially eliminated the necessity of drilling unnecessary wells, was, as Campbell v. Fields holds, in the nature of an “operating expense,” rather than a capital disbursement. That such agreements may also have produced some benefits of continuing value (i.e., the elimination of drainage claims), as would necessarily be true of many ordinary and necessary business expenses designed to produce more efficient operations, would nevertheless not, it seems plain, serve to make, for that reason alone, the expenses incurred in their procurement capital in nature.

The analogy of the instant case to the earlier Connecticut Light & Power Company v. United States case, 156 Ct. Cl. 304, 299 F. 2d 259 (1962), would be more appropriate. There it was held that the utility’s costs incurred in converting its customers’ gas-consuming equipment for the use of natural gas were deductible as ordinary and necessary expenses and were not in the nature of capital outlays. And such expenditures, it should be noted, necessarily resulted in benefits to the company of continuing value, for the conversion would obviously produce a supply of natural gas over many years. The court stated:

* * * It is apparent that neither plaintiff nor its customers acquired any new assets as a result of the conversion expenditures. It appears to us, rather, that their net effect was to enable plaintiff to retain precisely the same privilege of supplying gas to its customers, for as long as they desired, as it had previously. (156 Ct. Cl. at 312-13, 299 F. 2d at 265)

Similarly, as Campbell v. Fields holds, the costs involved, although incurred to enable the more efficient production of gas, result in the obtaining of such production from the same interests as plaintiff previously had.

Based on the above considerations, no persuasive reason for departing from the Fifth Circuit’s holding in Campbell v. Fields has been advanced.

For the same reasons, the expenditures in question would not fall, as defendant urges, within the provisions of Section 29.28 (m)-10 (a) of Treasury Regulations 111, which provides in part: “In the case of the payor any payment made for the acquisition of an economic interest in a mineral deposit * * * constitutes a capital investment in the property recoverable only through the depletion allowance.” As pointed out, plaintiff had already obtained its economic interests in the gas deposits through its original leases. The pooling agreements did not, for income tax purposes, give it such new interests therein as to make the expenses incident thereto capital outlays.

For all of the above reasons, the expenditures involved in this item should be treated as ordinary and necessary expenses deductible, in the years incurred, from gross income under section 23 of the 1939 Code. Plaintiff is, therefore, entitled to recover on this item in such amount as is produced by allowing, on its 1943-1947 income tax returns, as deductions from gross income under section 23 of the 1939 Code, its expenditures incurred in obtaining the pooling agreements with respect to its oil and gas leases in the Bear Creek Field in Louisiana.

Capitalization op Depreciation

During the 1941-1953 years herein involved, plaintiff, by the construction of additional facilities, expanded its pipeline system. Plaintiff owned, during the years 1946-1953, certain automotive equipment (including a boat in 1953) which it used for purposes primarily relating to the operation and maintenance of the system. From time to time, however, such equipment was engaged on the construction operations.

The equipment in question was depreciated at the rate of 4 percent annually (under plaintiff’s composite account method of depreciation). On its books, plaintiff capitalized that portion of the depreciation which was attributable to the time the equipment was used in connection with the construction projects, i.e.., such portion of the depreciation amount was treated as part of the cost of the projects constructed. However, on its income tax returns for such years, plaintiff claimed the full amount of the depreciation as current deductions without any allocation, for capitalization purposes, to any construction activity. Upon final audit, the Commissioner of Internal Revenue, concluding that the manner in which plaintiff had treated the depreciation on its books was proper, required the capitalization of that part of the depreciation which was allocable to the time the equipment had been devoted to project construction purposes. Such portions of the depreciation deductions were therefore transferred to the cost bases of the projects, to be depreciated, together with the rest of the projects’ costs, over the lives of the projects. It is this capitalization of such portion of the depreciation which is here in dispute. Thus, there is no question of plaintiff’s being wholly deprived of any depreciation deduction. It is simply a matter of whether the part of the depreciation involved will be recouped in the one year in question or over a period of years.

The amount of the depreciation properly allocable to the costs of the projects involved, if such an allocation is required as a matter of law, is not in dispute.

On this issue it seems clear that the Commissioner’s action was correct. All costs which enter in to the creation of an asset and give it value should be included in the asset’s depreciable base, to be recovered over the life of the asset. If a salaried employee spends part of his time on a corporate project under construction, and part on regular corporate pursuits (assuming the corporation that part of his salary represented by the time he spent contributing to the advancement of the project should be allocated to the cost of the project and depreciated over the life of the asset, together with all the other project costs (which, as shown, is plaintiff’s practice when it capitalizes the salaries of its employees (landmen) attributable to the acquisition of pipeline right-of-way agreements). Similarly, if an item of depreciable equipment, such as an automobile, is used on a part-time basis on such a proj ect, the part of the depreciation represented by the time the equipment was devoted to construction purposes should be allocated to the project costs. The depreciation of the equipment here in question was certainly a cost to the plaintiff. No reason is apparent for carving out a special exception for depreciation. The contribution of a part of such cost to the asset being constructed necessarily gave an equivalent added value to the asset. It must, therefore, be included in the project’s base costs, i.e., capitalized. As noted, plaintiff recognized these principles by keeping its books in that manner, thus obtaining an accurate calculation of the project’s complete costs. Under the theory it urges in this case, however, there is no explanation of how the part of the depreciation expense which contributed to the value of a project is recouped if the project is sold.

Under plaintiff’s theory, it would, indeed, appear that plaintiff would, because of the inaccurate basis resulting from the omission of such a project cost, recover the depreciation cost in question twice, once through the deduction it wishes to take as a current expense, and again when the construction project is sold or its investment otherwise fully recouped at the end of its depreciation period. If sold, the price would, presumably, fully reflect the added value contributed by the use of the equipment in the construction of the asset, and the salvage value will necessarily be that much greater if fully depreciated on the lower cost basis.

Section 24(a) (2) of the 1939 Code specifically provides that: “In computing net income no deduction shall in any case be allowed in respect of * * * [a]ny amount paid out for new buildings or for permanent improvements or better-ments made to increase the value of any property * * Similarly, tbe regulations issued thereunder require the capitalization of “amounts paid for increasing the capital value * * * of property.” These Code and regulation provisions clearly sustain defendant’s position.

Plaintiff bases its claimed right to deduct in the particular years involved the entire 4 percent depreciation on the equipment in question — without any diminution resulting from allocating any part thereof for inclusion in the cost of the projects constructed during such years — upon section 23(7) of the 1939 Code. That section allows, in the computation of net income, a deduction from gross income for depreciation on “property used in the trade or business or * * * held for the production of income.” Plaintiff says that it was its “business” to expand, and that the newly constructed facilities constituted “property held for the production of income.” The devotion of its equipment to such construction activities, it argues, thus constituted a use in its “trade or business,” entitling it to the statutory depreciation deduction in full in the pertinent year.

Of course, the term “business” could, in a certain sense, be so used, i.e., plaintiff’s purpose was to expand, or plaintiff made it its “business,” or goal, to expand. Indeed, practically all businesses have such a purpose or goal. But that, clearly, is neither the ordinary meaning of the term nor the sense in which the section of the Code relied upon uses it. Such an interpretation would make it practically impossible for any businessman to use a realistic cost basis on a building or other project being constructed for ultimate use in his business and in connection with the construction of which any of his own personnel or equipment was used. Pushed to its logical conclusion, it would, indeed, mean that a businessman who constructed, with his own men, materials, and equipment, a new physical asset for use in his own business would deduct from current expenses all the costs of the creation of the asset, leaving it without any cost base for depreciation or other purposes. And, as stated, the theory would directly contravene section 24(a) (2) forbidding deductions in respect of expenditures made in connection with, “new or “permanent improvements or betterments made to increase the value of any property.” All the sections of the Code must be read together to avoid conflict and achieve a harmonious, rational result. Certainly, plaintiff’s “business” was the operation of a natural gas pipeline system, and not the construction of capital assets.

Great Northern Ry. Co. v. Comm’r of Internal Revenue, 40 F. 2d 372 (8th Cir.), cert. denied, 282 U.S. 855 (1930), upholds the Commissioner’s position herein. In that case the court affirmed the Board of Tax Appeals’ approval of the Commissioner’s capitalizing for income tax purposes the amounts the taxpayer-railroad had capitalized on its books as the cost of transporting men and materials used in connection with betterments and additions. The transportation was effected by trains specifically devoted to the purpose, as well as by the taxpayer’s regular passenger and freight trains. On the former, the entire cost of the movement was involved and easily ascertainable. As to the latter, a cost allocation was made in accordance with an Interstate Commerce Commission accounting formula devised for the charging by railroads to the cost of construction an allowance representing the expense to the railroad of transporting men and materials over their own lines for construction purposes. The court noted that “[n] either this labor nor material has anything to do with repairs, replacements, and maintenance. The labor and material involved here are entirely devoted to additions and betterments.” (at 372) And it held:

It is obvious that this expenditure was a capital account and in no wise chargeable to operating expenses. Therefore, whatever its amount, it should not be used in reduction of net income, (at 373)

The rule was thereafter reaffirmed in Gulf, Mobile & Northern R.R. Co., 22 B.T.A. 233, 245-47 (1931), and in Missouri Pacific R.R. Co., 22 B.T.A. 267, 286-87 (1931). And while Northern Pac. Ry. Co. v. Helvering, 83 F. 2d 508 (8th Cir. 1936), involved only the question of the proper amount of the cost of transporting men and material for construction purposes which was to be allocated for capitalization, the court, in noting that “[t]here is no dispute that for income tax purposes these transportation expenses for construction should be deducted from the total maintenance and operating expenses * * *” (at 509), further stated in a supporting footnote: “There could be no real dispute, as the expenses of such transportation are clearly a capital item, [citing cases]” (Id.) The allocation formula approved included “wear and tear [i.e., depreciation] of the train equipment, of the rails, ties and roadbed * * (at 513)

Plaintiff relies on Great Northern Ry. Co., 30 B.T.A. 691 (1934), which held that the full amount of depreciation on the taxpayer-railroad’s equipment sustained during the tax year, including depreciation during the period the equipment was used for the construction of additions to or betterments of the railroad’s property, could be deducted, as an operating expense, from gross income, without charging any amount thereof to capital account (as the taxpayer had in fact charged on its books).

In light of its prior consistent holdings to the contrary, as well as the above-mentioned opinions of the Eighth Circuit, it is difficult to understand the decision. The only previous authority mentioned in the opinion is its own in Great Northern Ry. Co., 8 B.T.A. 225 (1927), which the Board noted was relied upon by the Commissioner of Internal Bevenue in determining the deficiency but was not even mentioned in his brief submitted to the Board. The Board concluded that the Commissioner’s failure to even cite the case meant that “apparently he no longer regards it as authority for the ruling now under review.” (30 B.T.A. at 708) Perhaps the Board was influenced by what it construed to be a reversal of the Commissioner’s position. In any the Board did say, as plaintiff points out: “In our opinion the equipment employed by the petitioner in its construction work was used by its owner in a trade or business. This satisfies the conditions of the statute.” (Id.)

This explanation based on the acceptance of the taxpayer’s meeting the “trade or business” provisions is overly simple. Of course equipment used in constructing additional facilities of the permanent improvement type is used in “a” trade or business, as the Board stated’. It was certainly not used for pleasure. However, it is not used in “the” trade or business of the taxpayer, which is, as shown above, the word used in section 23 (Ü). Further, it ignores the distinction the Court of Appeals drew in Great Northern, Ry. Co., supra, between “repairs, replacements, and maintenance,” which the court obviously concluded fell within the category of use in a railroad’s “trade or business,” as distinguished from use “devoted to additions and betterments.” As above pointed out, if the Board’s “trade or business” concept, as reflected in this case, were generally applied', any businessman could devote any of the equipment normally used in his ordinary business pursuits to the construction of new facilities without any costs of such use allocation ever being reflected in the cost base of the new facility for either capital gain or depreciation purposes.

Insofar as the Board may have been influenced by what it felt was an abandonment by the Commissioner of the position he had previously taken in the earlier Great Northern case, defendant’s strong reliance here on such position, as affirmed by the Eighth Circuit, at least removes this factor from consideration. The position was in fact reaffirmed prior to this case. See Rev. Rul. 55-252, 1955-1 Cum. Bull. 319 (timber planting costs, including depreciation of equipment, such as trucks, used in planting, should be capitalized and recovered through depletion as the timber subsequently is cut and sold). See also Rev. Rul. 59-380,1959-2 Cum. Bull. 87 (depreciation sustained on construction equipment owned by taxpayer and used in the erection of capital improvements for the equipment owner’s use should be capitalized and made a part of the cost of the capital improvement, such equipment not being considered as property used in the taxpayer’s “regular trade or business” [at 88]).

Because of the above considerations, the Board’s inconsistent holding cm this particular issue in the second Great Northern case cannot be accorded the controlling weight which plaintiff urges it should have.

The rejection of this item of plaintiff’s claim means that from 1946 through 1953, the annual depreciation (at the 4 percent rate) on plaintiff’s automotive equipment (including the boat) should, for the period or periods it was used in connection with the construction of new physical facilities and ’betterments constituting permanent improvements, be capitalized and added to the cost of such new facilities, with such capitalized amount to be depreciated, together with all the costs entering into the depreciation base of such facilities, at the 4 percent rate.

The facts show that, while the Commissioner did, in rejecting plaintiff’s claim, and, in accordance with his theory, conclude that plaintiff was entitled only to an allowance of depreciation at the 4 percent rate on the capitalized amounts, he nevertheless, in computing such amounts, allowed the 1946 and 1947 depreciation only for those years. Although depreciation was allowed for 1948 through 1953 on the capitalized depreciation incurred during those years, for some reason, possibly an inadvertent computational error, he failed to allow any depreciation for the years 1948-1953 on the depreciation capitalized for 1946 and 1947, i.e., he failed to carry the allowable amounts through to the subsequent years. For these years, plaintiff is, of course, also entitled to such allowances, as defendant concedes. (Def. Brief at 139, n. 46) Plaintiff is, therefore, entitled to recover on this item such amount as, for the years 1948-1953, is produced by allowing depreciation during those years at the 4 percent rate on the 1946-1947 capitalized amounts.

Loss ON Sale of Compressor

In 1950, plaintiff purchased a Clark 600-horsepower compressor for $33,110.18 for use in its ordinary business operations. Deductions for depreciation were taken thereon from the date of purchase.

Mississippi Gas Company was a wholly owned subsidiary of the plaintiff. During 1951, it required a compressor engine for use in its operations. At that time, plaintiff was not using the Clark compressor so it was lent to this subsidiary. The arrangement was that plaintiff would sell the compressor to ■the subsidiary after a fair price could be determined, such price to be in part dependent upon the amount the subsidiary would have to spend to recondition it.

In early August 1952, it was agreed that the then value of the compressor as reconditioned was $40,757.20, that $20,757.20 was the cost of reconditioning, and that plaintiff’s sale price to the subsidiary should, therefore, be the remaining $20,000. Thereupon, on August 18, 1952, the sale was effected at that price.

Plaintiff’s depreciation on the compressor prior to its sale was $4,681.44. As a result, plaintiff suffered a loss of $8,428.74, being the difference between the purchase price of $33,110.18 less the depreciation, and the agreed selling price of $20,000.

On its 1952 tax return, plaintiff claimed such $8,428.74 loss as an ordinary loss under section 117(j) (2) of the 1939 Code. This section provides that losses on sales of “property used in trade or ‘business,” as defined in section ll7(j) (l), should, to the extent they exceed gains on such property, “not be considered as * * * losses from sales or exchanges of capital assets,” i.e., they are to be treated as ordinary losses incurred in the regular course of business. The Commissioner of Internal Revenue, however, disallowed this deduction in full, thus refusing to accord the loss that ordinary loss treatment provided under section 117 (j) (2).

Iin its petition herein and throughout the trial proceedings plaintiff contested the disallowance, contending that the loss it incurred on the sale of this machine qualified in all respects for ordinary loss treatment under section 117(j) (2).

In its brief to the commissioner, defendant now states that it concedes this issue. (at 152)

The parties now being in agreement that, under the facts as now established, the loss on the sale of the compressor is entitled to be treated as an ordinary one, and no reason being apparent for not accepting such agreement, plaintiff is, accordingly, entitled to recover on this issue in such amount as is produced by allowing, on its 1952 tax return, a deduction in the amount of $8,428.74 as for an ordinary loss arising from the sale of the Clark compressor.

This is the final issue that plaintiff has presented to the court for adjudication.

FINDINGS of Fact

I. Jurisdictional and General Facts

1. The petition herein was filed for the recovery of income and excess profits taxes for the calendar years 1941 to 1953, inclusive.

2. Plaintiff is a Delaware corporation with its office and principal place of business located in Birmingham, Alabama. At all times material herein, plaintiff was principally engaged in the business of purchasing, producing and' transporting by its own pipeline systems natural gas for sale directly to industries for their own use and to utilities for resale. Plaintiff has been subject to the Natural Gas Act (Act of June 21,1938,15 U.S.C. .§ 717 et seq. (hereinafter referred to as the “Natural Gas Act”) ) and subsequent amendments and reenactments thereof, and has been licensed and regulated by the Federal Power Commission (hereinafter referred to as the “FPC”). In general the FPC regulates the accounting methods employed by plaintiff and the rates or prices at which it can sell gas to customers for resale. The accounting procedures are set forth in the FPC’s Uniform System of Accounts for Natural Gas Companies. Plaintiff’s books of account were maintained and its tax returns filed on the accrual basis and on the basis of a taxable year ending December 31.

3. Plaintiff’s income and excess profits tax returns for the calendar years 1941 to 1953, inclusive, were filed with the District Director of Internal Bevenue at Birmingham, Alabama (formerly the Collector of Internal Bevenue for the years prior to 1952 and hereinafter referred to as the “District Director”). Said returns disclosed' income tax liabilities, all of which were paid in quarterly installments.

4. (a) Thereafter, on audit of said returns by the Commissioner of Internal Bevenue, additional income taxes and excess profits taxes were determined to be due from, or credits or refunds allowable to, plaintiff. Said additional taxes were paid by plaintiff to the District Director, and the credits or refunds were allowed.

(b) Within the times prescribed by law plaintiff duly filed with the District Director a claim for refund for each of the years involved covering the issues raised herein. On August 27, 1958, said District Director, by direction of the Commissioner, disallowed in full each of said claims.

(c) Plaintiff is the owner of the claims herein asserted and no assignment or transfer of the same or any part thereof has heretofore been made.

(d) In accordance with the provisions of Buie 47 (c) the trial of this case was limited to issues of law and fact relating to the right of plaintiff to recover, reserving the determination of the amount of recovery and the amounts of any offsets, if any, for further proceedings.

5. At all times material herein, plaintiff, with the consent and approval of the Commissioner, has employed the composite account straight-line method of computing depreciation for federal income tax purpose's. Under such method, substantially all of plaintiff’s depreciable properties (exclusive of producing oil and gas properties and emergency facilities) were included in one account with a single rate and reserve. To the average of the opening and closing balances of the account, which were composed of the cost or other tax basis of the properties includable therein and which reflected the additions and retirements for the year, was applied one overall composite rate of four percent in determining the deductions for depreciation to which plaintiff was entitled.

6. Plaintiff was organized on October 30,1935, for the purpose of acquiring and taking over the properties of its predecessor corporation, Southern Natural Gas Corporation (hereinafter referred to as the “predecessor”). For the years 1936 through 1942, the basis of said properties for tax purposes in the hands of plaintiff was the cost thereof to plaintiff. For the years 1943 and thereafter, the basis of said properties to plaintiff for tax purposes, under sections 112(b) (10) and 113(a) (22) of the Internal Revenue Code of 1939, as amended, was the basis of the properties in the hands of the predecessor.

7. Plaintiff’s predecessor was organized under the laws of the State of Delaware in May 1928. During the years 1929 and 1930 the predecessor was engaged in the construction of a pipeline system for the transmission of natural gas. The primary construction of this system was completed on June 1, 1930, and the secondary construction was completed on November 1, 1930. The original line ran from Louisiana to Atlanta, Georgia, and included several branch lines extending into the various states through which the main pipeline passed. The line was conveyed to plaintiff effective as of December 31,1935.

II. Rights-of-Way, Surveying, Clearing and Grading Issue

8. Natural gas is transported under pressure through underground pipelines. In addition to the pipelines themselves, an integrated transmission system consists of a wide variety of properties or related facilities, all of which, contribute to the movement of gas to markets.

9.The following tabulation sets forth for the years 1941 through 1953 the total mileage of plaintiff’s transmission lines exclusive of loopings, and the mileage of looped lines (mileage for the years 1941 through 1944 being a close approximation due to vague records) :

Total Miles of Pipe

Additional construction has continued to date.

10. Tire terrain in which plaintiff’s pipelines lie varies considerably. In southern Louisiana, the line built in 1952 or 1953 runs fifteen to sixteen miles into the Gulf of Mexico. Inland, it runs through marsh or swamp areas and the lines are laid in canals. The terrain in Louisiana from Logansport eastward is comparatively level and, with the exception of some wet areas in the vicinity of the Ouachita Liver, not too difficult from the standpoint of constructing pipelines. In Mississippi the terrain consists of rolling hills but becomes more difficult and mountainous in Alabama and western Georgia. It then smooths out to gently rolling hills in South Carolina.

11. Plaintiff has owned, used and expanded its integrated transmission systems in its business since their construction or acquisition. In connection with these systems, plaintiff, or its predecessor, paid the owners of land through which tbe pipelines were constructed for rights-of-way and incurred legal fees, notary fees, recording fees, and other expenses in securing such rights-of-way. Plaintiff also incurred substantial costs in surveying, clearing, and grading the rights-of way. Plaintiff did not thereby acquire any other interest in the lands over which such rights-of-way were obtained.

12. In order to construct its pipeline system, plaintiff obtained from the owners of most of the land through which the lines were to be laid right-of-way grants or agreements. After July 25,1947, when plaintiff could not obtain the right-of-way by contract or could not reach agreement on the compensation, it could acquire the necessary right-of-way by exercise of the power of eminent domain under the Act of July 25,1947, ch. 333, 61 Sltat. 459. Under this Act, plaintiff had the right to lay a single pipeline for the transportation of natural gas through an owner’s land.

13. Almost all of the right-of-way agreements acquired by plaintiff’s predecessor for the original transmission system specified no width of the right-of-way. A very few (less than four percent) specified thirty feet. These agreements obtained in 1929 or 1930 also contained provisions allowing the construction of additional lines. These are known as multiline agreements. For the first looping operation, which was undertaken in 1939, plaintiff obtained, on advice of its attorneys, agreements which provided that the right-of-way obtained under the original agreement was thirty feet in width and which granted plaintiff an additional forty feet of right-of-way.

14. Although plaintiff has a separate form of agreement for each state in which it operates, the language in each form is substantially identical. A typical agreement obtained by plaintiff states in part as follows:

KNOW ALL MEN BY THESE PEESENTS: That the undersigned ... for and in consideration of $--, cash in hand paid, the receipt and sufficiency of which is hereby acknowledged, do hereby grant, bargain, sell and convey unto Southern Natural Gas Company _ (hereinafter called “grantee”), its successors and assigns, an easement and right of way over, along and. through a strip of land 60 feet in width, being 30 feet wide on each side of the center line thereof to be located and determined by grantee as hereinafter provided, located within the boundaries of the hereinafter described lands (or over, along and through that part of said 60 foot strip as shall be located within the boundaries of said lands), for the purposes, presently and at such times and from time to time in the future as grantee may elect, of constructing, maintaining, operating, renewing, repairing, changing the size of, increasing the number of, relocating, removing and/or replacing one or more pipe lines for the transportation of gas, oil, petroleum, or any substance or commodity, and telephone, telegraph and/or electric lines and all appliances, appurtenances, fixtures and equipment, whether above or below ground, from time to time deemed by grantee to be necessary or desirable in connection with any of such lines. . . .
$ ‡ ‡ $
For the determination of said right of way and the full enjoyment or use of the rights and easements herein granted, this grant shall include, without limitation, the further easement and right of ingress and egress over and across said lands and other adjacent lands of the grantors, and the use thereof reasonably necessary in connection with the construction, repair, or replacement of pipe lines on said right of way; together with the right, from time to time, to cut and keep clear all trees, undergrowth and other obstructions, whether on said right of way or not, that may injure or endanger any of said lines, appliances, appurtenances, fixtures and equipment, or that it may be necessary or convenient to cut or remove in the location or determination of said right of way or in the use or enjoyment of any of the rights, interests or estates hereby conveyed.
Whenever and as often as grantee or assigns shall lay and construct more than one pipe line on or along the right of way granted hereby, the then owner of the lands hereby subject to this easement and right of way shall be entitled to receive an additional consideration of $1.00 per lineal rod for, each such additional pipe line so laid, upon completion thereof.
Grantors reserve the right to cultivate or otherwise make use of said lands for purposes and in a manner which will not interfere with the enjoyment or use of the rights, easements and estate hereby granted, but grantors shall not construct nor permit to be constructed any houses, buildings, lakes, ponds, structures, or any obstructions on or over said right of way, or any part thereof, as surveyed or finally determined.
The grantee herein is further granted the full right and authority to lease, sell, assign, transfer and/or convey to others the right of way, estate, interests, rights and privileges hereby granted, in whole or in part or any interest therein, and to encumber the same.
Grantee shall 'bury all pipes laid hereunder below plow depth wherever such pipes cross any lands in cultivation at the time of the laying thereof.
Grantee shall pay for all damages to fences, crops and timber that may be suffered by grantors by reason of the exercise by grantee of any of the rights and privileges hereby granted, but shall not be liable for damages caused by keeping said right of way clear of trees, undergrowth and other obstructions in the course of the maintenance and operation of its pipe line system and appurtenances.
No delay of grantee in locating or, determining the right of way herein conveyed, or in ithe use of any other right or easement hereby granted or in laying or installing any line or additional lines in or along said right of way shall result in the loss, limitation or, abandonment of any of the right, title, interest, easement or estate granted hereby.
This grant covers all the agreements and stipulations between grantors and grantee and no representations or statements, verbal or written, have been made modifying, adding to, or changing the terms of or consideration for this grant.
The terms and provisions hereof shall inure to the benefit of and be binding upon the grantors and grantee, and their respective heirs, successors, or assigns.
_ TO HAVE AND TO HOLD the estate, easements, rights and privileges hereby conveyed to said grantee, its successors and assigns, forever.

15. In addition to right-of-way agreements, plaintiff has to obtain highway and railroad permits from the necessary authorities when its pipelines cross a highway or railroad. These permits do not give the right to lay more than one line. For crossing rivers plaintiff has to obtain permits from the Corps of Engineers of the United States Army. This requires the preparation of maps showing in considerable detail the proposed method of crossing.

16. Since June 21, 1938, the first step in the construction of a natural gas pipeline has been the obtaining from the FPC of a certificate of public convenience and necessity (15 U.S.C. §7l7f (1964), effective June 21, 1938). engineering department assembles all maps available and plots the route of the proposed line thereon. If time permits, aerial photographs of the area to be traversed are taken. Detailed cost estimates are prepared and presented before the FPC. After a decision to build the line has been made, plaintiff arranges for the proposed line to be surveyed. On major projects this is done by outside contractors.

T7¡. Surveys indicating where the pipeline is to be laid are always made prior to the start of actual construction. They are also used to determine the location of fiver crossings and to obtain profiles of river bottoms so as to assist the contractor in preparing his bid. Surveys are usually in two forms — aerial and field or land. The aerial phase which precedes the land survey permits both the preparation of an initial composite map and the compilation of aerial mosaics consisting of composite maps made from a group of aerial photographs. All the construction details available are put on the mosaics which are furnished to the contractor to inform him how to build the line, where to install casing under railroad and highway crossings, and the diameter and thickness of the pipe to be installed at various locations. The initial composite map and the aerial mosaics are also furnished to plaintiff’s land department for use in acquiring right-of-way agreements.

18. The general practice of the field or ground survey is to establish on the ground the pipeline alignment with stakes marking the line at 200-foot intervals. The survey team flags all fences and makes horizontal and vertical control surveys of all federal, state, and paved county roads to be crossed. It also makes surveys for plats in the event condemnation becomes necessary. Permits for the surveying crews are obtained by plaintiff’s land department. All data obtained by the ground survey is plotted by plaintiff’s engineering department on the aerial mosaics.

19. Once permission is obtained from the FPC, plaintiff’s land department begins to acquire the necessary rights-of-way. It uses route maps prepared by the engineering department and, where available, aerial photographs. Land department personnel approach the landowners and examine courthouse records to determine the ownership of the land. When the ownership is established actual land descriptions are prepared. The right-of-way agreements are prepared and taken to the landowners in an effort to purchase the rights-of-way. Generally, the consideration paid to the landowners is in the form of a fee per lineal rod. These are known as roddage fees and have been used in the natural gas industry since about 1929. Occasionally, instead of roddage fees a flat amount not based on roddage is paid for the agreement. The executed agreements are acknowledged by the landowners, witnessed, checked for accuracy, and recorded. A restriction list is then prepared on which the rights-of-way are set forth and any restrictions to be observed by the construction contractor indicated. Plaintiff’s land department also obtains the necessary highway, railroad, and river-crossing permits.

20- In securing its rights-of-way plaintiff incurs a variety of costs, such as landmen’s salaries and expenses, the amounts paid to landowners, recording fees, legal fees, and costs of obtaining highway, railroad, and river-crossing permits. If a right-of-way is not utilized for laying a pipeline, it has no value to plaintiff.

21. The actual construction of a pipeline of the plaintiff is undertaken by a construction crew, known as a “spread.” Its components, each under the direction of a foreman, are crews performing various functions.

22. The contractor’s first operation is to clear sufficient width on the right-of-way — usually forty to fifty feet — in order that the spread may operate. Clearing entails the cutting of fences across the right-of-way and the building of temporary gates, the destruction of any growing crops, and the Clearing of any brush or timber. The pipe is not laid in the center of the cleared area but fifteen feet from one edge. On five feet on either side of the ditch line the stumps of any trees are removed in order that the machine that digs the ditch for the pipe can have free access. The remaining large trees (those having a diameter of at least twelve inches at the stump) in the cleared area are cut within four inches of the ground so that the equipment can operate in the right-of-way. The cleared brush (including trees having a diameter of up to twelve inches at the stump) is burnt and any merchantable timber is racked for Itbe landowner’s disposal. are removed with a bulldozer. Clearing the right of way is an expensive operation and a contractor will clear no more space than is necessary. When clearing is done for a new line, no clearing is undertaken at that time for any loop line that might be laid in the future.

23. Following the clearing operation, the contractor grades the right-of-way with bulldozers to prepare it for the other construction operations that follow. In rough country grading is also necessary to accommodate the tolerance that the pipe will bend.When streams are encountered the banks are graded down and the stream temporarily bridged. In marshy areas the right-of-way is riprapped or corduroyed in order to keep the equipment from bogging down. The grading of the right-of-way is likewise an expensive operation and is not done with regard to a possible looping of the line in the future. Plaintiff’s construction contracts contain a provision with respect to grading which read as follows:

5. The right of way shall be graded in such manner as to best facilitate the laying of the pipeline and the doing of the Work.

24. Depending upon the terrain the clearing and grading will amount to from ten to fifteen percent of the total construction costs of a pipeline. Both operations are essential elements in the laying of a pipeline.

25. Following the grading of the right-of-way the pipe, usually in 40-foot lengths, is hauled in and laid alongside the right-of-way. The ditch or trench for the pipe is then dug by a ditching machine. The depth of the ditch is such as to allow about 36 inches of covering over the pipe. Dirt from the trench is piled on one side, called the “spoil side,” which is cleared to a width of 15 feet. The opposite side of the ditch is the working side. The pipe is bent by a bending machine when necessary to fit the ditch. After the pipe is welded it is then cleaned, enameled, and wrapped in one operation. It is then lowered into the ditch. The ditch is then backfilled and the right-of-way cleaned up. Fences previously cut are rebuilt. The usual practice is to restore the right-of-way to its original condition. If terraces or erosion control devices have been destroyed they are replaced.

26. The construction of a pipeline occasions damage to the landowners’ property, such as the destruction of growing crops, trees, and shrubbery. In some instances landowners insist on payment of damages prior to construction. Plaintiff discourages such payments unless it can get a complete release from the landowners. It prefers to calculate the damages after construction is finished. Damages due to construction are not treated by plaintiff as right-of-way acquisition costs but are entered into a separate account and for federal tax purposes depreciated as a part of the pipeline system.

27. A loop line is an additional pipeline laid adjacent or parallel to an existing line for the purpose of increasing the capacity of the system. It has been plaintiff’s practice to employ in general 20-foot spacing between its lines though at times the lines will be farther apart.

28. The building of a loop line adjacent to an existing line involves substantially the same steps as were taken in the construction of the original line. A certificate of public convenience and necessity is obtained from the FPC. Existing maps are brought up-to-date. Survey permits are obtained when necessary and title information is made current. Where necessary, right-of-way agreements are again prepared, and the landowners approached. New agreements are notarized and recorded. Supplemental roddage fees are paid. In addition, new road, railroad, and river-crossing permits are obtained.

29. In the construction of its loop or parallel lines, plaintiff has encountered a variety of situations with respect to its right-of-way agreements. Whenever the existing right-of-way specifies a width insufficient to permit the laying of a loop line, plaintiff, if it can do so, buys an additional right-of-way. Similarly, whenever the width is great enough to accommodate a second line but contains insufficient working space, plaintiff is required to purchase an additional width. In other instances the width is sufficient to hold the second line as well as to provide working space. In such instances, an originally procured multiline agreement would foreclose the possibility of future condemnation proceedings. In all of the preceding situations plaintiff pays new roddage fees and incurs certain title and other expenses as above described. Over the years these expenses have increased. When a new agreement is not required, it has been plaintiff’s practice to obtain from the landowner an additional line receipt acknowledging the existing right-of-way. These line receipts are in turn recorded.

30.In the following tables there are set forth plaintiff’s costs as shown on its books of account for right-of-way acquisition costs with respect to its north main line (constructed in 1929 and 1930) and two loop or parallel lines (constructed in the years 1940 through 1953) in each of the States of Alabama and Mississippi and for Alabama and Mississippi combined:

31. Plaintiff’s engineering department uses the base maps for the previous line but for safety reasons stakes the existing line closest to the route of the proposed new line. Plaintiff does not permit a construction contractor to get within five feet of an existing line without special permission.

32. It is necessary to survey the new line, and it is not a safe procedure to rely upon old surveys. An important purpose of the new survey is to permit the physical staking of the location of the new line so that the contractor can follow it. It is also made to determine new features that may have occurred since the last line was laid, such as house count, changes in streams, rivers, highways, and railroads, the crops prevalent at the time, and such information as will assist a contractor in making a realistic bid. Surveying is also necessary in applying for new railroad, road, and river-crossing permits.

33. In the following table there are set forth plaintiff’s costs as shown on its books of account for surveying with respect to its north main line (constructed in 1929 and 1930) and two loop or parallel lines (constructed in the years 1940 through 1953) in each of the States of Alabama and Mississippi, and for Alabama and Mississippi combined:

34. In the actual construction of a loop or parallel line, the contractor may derive some benefit from the prior clearing but usually any benefit is offset by the detriment of the prior grading. All the grading on the working side of the new line done in the original construction is destroyed and the presence of the old line presents hazards which can hamper the contractor. Drainage controls or terracing built after the original construction have to be tom out and restored. A loop line also frequently poses problems to the contractor in getting to and from the right-of-way.

35.In the following table there are set forth plaintiff’s costs as shown on its books of account for clearing and grading with respect to its north main line (constructed in 1929 and 1930) and two loop or parallel lines (constructed in the years 1940 through 1953) in each of the States of Alabama and Mississippi and for Alabama and Mississippi combined:

36. The remaining expenses incurred in laying a loop line (i.e., other than those referred to in findings 28 to 35) are of the identical character as those involved in the laying of an original line, as above set forth in findings 16 to 26.

37. Plaintiff’s gas is taken to a central point in -underground mains or gathering systems where it enters plaintiff’s main transmission lines. In connection with the laying of these gathering systems plaintiff uses the same type of right-of-way agreements that are used for its transmission lines and it incurs the same type of costs and expenses in acquiring such rights-of-way. Such costs and expenses are capitalized on plaintiff’s books and are depreciated both for book and federal income tax purposes. Plaintiff includes such costs and expenses in a composite account which includes also the cost of well equipment, heaters, separators, the pipe in the gathering systems, field compressors, and purification equipment. Depreciation rates are based on estimated lives of from ten to twenty years depending upon the estimated reserve of gas in the field involved. For the costs incurred under the 1939 Code years plaintiff has used a straight-line depreciation method. For such costs incurred from 1954 plaintiff has elected the double-declining balance method of depreciation set forth in section 167 (b) of the 1954 Code, a method expressly limited to tangible property. Such depreciation of plaintiff’s gathering systems, including the associated right-of-way costs, has been allowed by the Internal Revenue Service.

38. Included in the cost of plaintiff’s gathering systems are its costs of surveying, clearing, and grading its gathering lines. Such costs were likewise capitalized and depreciation thereof for federal income tax purposes has been allowed as above described by the Internal Revenue Service.

39. After the construction of a line plaintiff maintains its rights-of-way to prevent exposure of the pipe from washouts or erosion. In cases where erosion is detected the area is filled up with sacks of sand and terraces are built to divert the water. Plaintiff also keeps trees, brush, and undergrowth cleared from the right-of-way. The lines are patrolled by linewalkers, as well as by airplanes in more recent years. Plaintiff permits the landowners to grow normal farm crops on its rights-of-way but does not permit houses or other structures to be built thereon which would interfere with operations.

40. It is physically possible to lift an old pipeline out of the ground provided the line can be taken out of service. Safety requires that all the gas be first removed from the line. Next, the line is located and staked and by use of equipment the dirt or covering is removed down to about four or five inches from the top of the pipe. Then, by hand, slings or belts are placed around the line and, by equipment, the pipe is lifted from the ditch and laid on timbers placed across the ditch. On welded lines the pipe would be cut into 40-foot joints at the welds. On Dresser coupling lines the bolts have to be cut. In any salvage operation the badly corroded or damaged areas would have to be removed. The parts of the line intentionally bent when installed are not reusable and have to be discarded. The remaining pipe would then be taken to a yard, cleaned, and rebeveled for welding, and then recoated. Plaintiff would have to pay for those types of damages for which it was liable under the right-of-way agreement. There is no substantial, continuing market for large quantities of old pipe except as junk. For safety reasons old pipe cannot be reused in the natural gas industry without extensive testing. Also, such pipe is not suited for use in modern high-pressure pipelines.

41. On three occasions plaintiff has had to lift segments of its lines and replace them with new pipe in the same right-of-way. In each instance, this method was the most economically desirable, as the line was in a congested area. The first occurred about 1953. Plaintiff needed additional capacity for serving Atlanta and replaced about six miles of 10-inch feed line with 30-inch pipe. In 1962 for safety reasons plaintiff replaced about five miles of old 20-inch lapwelded pipe joined with Dresser couplings leading into Atlanta with new all steel welded 20-inch pipe. In both instances, the area was highly congested and there was no practical economic possibility of using a different route. Plaintiff did not consider a new route for either of these two Atlanta replacements because of the high cost of acquiring a new right-of-way and the time it would take to acquire it. The area was heavily built up so that a new route would have required condemnation of a number of churches and valuable residential property. Plaintiff’s only other replacement was in north Birmingham in 1962. Again, because of the presence of houses and other buildings close to the line, plaintiff felt it should replace about eight miles of its original 1929-1930 20-inch line with all steel welded pipe. Because of the congestion, there was no room to lay a parallel line and the only other alternative was to move ten or twelve miles away to a new location which plaintiff felt would be too expensive. The lifting and replacement operation proved to be expensive, the contractor’s bid price being in excess of $1 per foot before salvage of the pipe. Had the right-of-way not been located in a residential area, the cost of laying a new line would have run from $3 to $3.25 per foot. The construction damages were heavy.

42. The contractor who lifted the north Birmingham line in 1962 bought the lifted pipe, much of which was in reasonably good condition, from plaintiff at a price of $1.50 per foot. He made the purchase because he believed he could sell the pipe to Colonial Pipeline Company, a products line, for use as casing under roads and railroads for the 16-inch products line Colonial then had under construction. The contractor, after cleaning the pipe and welding it into 36 to 40-foot sections, did sell several thousand feet of it to Colonial for that purpose. Some was, however, sold for junk and the remainder was sold to Savannah Gas Company, for use in a low pressure gas distribution system. Without the prospective outlet to Colonial, the contractor would not have bought the pipe.

43. The contractor who lifted plaintiff’s 10-inch line into Atlanta had a customer some months later who needed pipe of that size. The pipe was about ten years old and in good condition. The contractor thereupon bought the pipe from plaintiff for resale. Plaintiff had no need for the pipe. After the 1962 Atlanta lifting of five miles of 20-inch pipe, plaintiff was able to dispose of the pipe to a used pipe dealer at about $1.50 per foot.

44. On the two Atlanta and the north Birmingham replacements, plaintiff did not pay new roddage fees. On the Birmingham replacement the contractor did have to do some grading to obtain access for his equipment. While the clearing in the Birmingham replacement only involved small bushes and landscaping, the right-of-way had become a part of a residential area and restoring the properties to their prior condition was expensive.

45. Plaintiff has made no replacements of its lines other than the three above described, except for small sections that had become corroded and were leaking. Plaintiff has not been able to sell such small corroded sections for other than junk. Only a very minor part of plaintiff’s original 1929-1930 line has been replaced through 1964.

46. During the thirty-six years between 1929 and 1965, plaintiff lias abandoned only minor amounts of rights-of-way. Specifically, these consisted of its Coaldale lateral line, amounting to about ten miles of right-of-way and pipe near Birmingham; forty miles of right-of-way acquired for a line which was never built between Calhoun, Georgia, and Chattanooga, Tennessee; and, in a few instances, abandonment of right-of-way in connection with a relocation of the line to accommodate new highway construction.

47. During the years in suit and at the time of trial, plaintiff did not have any plans for abandoning any major portion of its system or its rights-of-way.

48. During the years in suit and at the time of trial, plaintiff was engaged in expanding its capacity on the assumption that the market for its gas was also expanding.

49. The cost of acquiring rights-of-way has increased over the years due to the rise in land values, salaries, expenses, attorneys’ fees, and urbanization.

50. The economics of the natural gas industry are such that from a. construction standpoint it is more economical (except in congested areas) to lay a new parallel line and abandon an old line in place than it is to replace the old line with new pipe. While roddage fees are taken into account in the determination to build a loop or parallel line, they are one of the smallest items of cost in the construction of a pipeline.

51. Under the FPC regulatory practices plaintiff determines its cost of service which is based on its cost of doing business (such as gas purchased, salaries, wages, taxes, depreciation, depletion, and a return on the un-recovered investment). This cost of service is the basis for the rates plaintiff may use on regulated sales of gas. Under the Uniform System of Accounts plaintiff capitalizes on its books the costs incurred for the acquisition of rights-of-way, and the costs of surveying, clearing, and grading the same for its transmission systems. Under this system such costs are capitalized as a part of plaintiff’s transmission gas plant.

52. Plaintiff recovers these capitalized costs from its customers through the inclusion of charges for depreciation in its cost of service. On its boohs the offsetting expense items to these revenues are the depreciation charges. The recovery of these depreciation charges is added to plaintiff’s reserve for depreciation. Plaintiff’s rate base includes, among other items, its gas plant less the reserve for depreciation. Additions to the reserve reduce the rate base for the future. As a practical matter the rate base is not recomputed each year but periodically by the FPO when a rate increase is sought or some other adjustment in rates is needed. Plaintiff now uses a 8y2 percent book depreciation rate for its transmission plant. During the years in issue it used a service life base and employed varying rates.

53. During the years in issue it would not have been economically practical for plaintiff to have converted its lines to the carrying of substances other than natural gas. The same was true as of the time of trial. At no time during its operations has plaintiff contemplated converting its lines to the transporting of other substances.

54. In its returns for each of the years 1941 through 1953, plaintiff included as a part of its depreciation base amounts representing the costs (or other tax basis) for the acquisition of rights-of-way with respect to plaintiff’s transmission systems or lines and the costs (or other tax basis) of surveying, clearing, and grading such rights-of-way. In his notice of deficiency dated February 26,1958, the Commissioner excluded said amounts from plaintiff’s depreciation base and disallowed the deductions for depreciation thereon. The cost (or other tax basis) of plaintiff’s acquisitions of rights-of-way, and of the surveying, clearing, and grading thereof for each of the years herein involved was determined by the Commissioner after making certain adjustments thereto which are not at issue herein. In determining said costs (or other tax basis) of rights-of-way retired during the years herein involved, the Commissioner used a formula for adjustment of the amounts thereof, which formula is likewise not at issue herein. As so determined, after the aforementioned adjustments, the total cost (or other tax basis) at the close of each, year, which, is also the total at the beginning of the succeeding year, was as follows:

Of the foregoing costs under the heading “Surveying, Clearing and Grading” 21 percent or $5,895,716 thereof represents surveying costs and 79 percent or $22,179,122.11 thereof represents clearing and grading costs. Such costs or other tax basis were capitalized on the books of plaintiff and also for federal income tax purposes. The parties agree that if all or any part of the foregoing costs or other basis of the rights-of-way are to be included in plaintiff’s depreciation base, it will be necessary to recompute the costs or other basis of rights-of-way retired, pursuant to the formula used by the Commissioner, and such recomputation will be made as a part of a Rule 47 (c) proceeding.

III. Property Acquired With Bonds at Below Par

55. On or about September 30,1931, plaintiff’s predecessor corporation was placed in receivership in the United States District Courts for the District of Delaware and the Northern District of Alabama. On September 4, 1935, proceedings for the reorganization of the predecessor corporation, under section 77-B of the Bankruptcy Act, were instituted in the United States District Court for the District of Delaware. During April of 1935 a plan of reorganization was confirmed by the court effective November 1, 1935, such confirmation binding all interested parties. The predecessor corporation had not defaulted on the interest on its outstanding First Mortgage 6% Sinking Fund Gold Bonds, Series of 1944 (hereinafter called the “first mortgage bonds of the predecessor”) and had met the sinking fund provisions of the mortgage securing such bonds. Under the reorganization plan these securities remained undisturbed.

56. Pursuant to the plan of reorganization a new corporation, the plaintiff, was organized on October 30,1935, under the laws of the State of Delaware. Effective as of December 31, 1935, the predecessor corporation conveyed to plaintiff all of its assets, including its pipeline running from Louisiana to Atlanta as well as several branch lines extending into various states through which the main pipeline passed. The properties so transferred to plaintiff were subject to the outstanding first mortgage bonds of the predecessor corporation in the amount of $14,844,000 and plaintiff assumed liability therefor. Also, pursuant to the plan of reorganization, plaintiff issued the following securities:

The adjustment mortgage bonds bore interest at the rate of six percent per annum. These bonds were redeemable at the option of the taxpayer on any interest payment date at the principal amount thereof plus accrued and unpaid interest thereon. In connection with the issuance of the adjustment mortgage bonds, plaintiff in 1936 incurred expenses of issuance totaling $25,547.07. Thereafter, it was determined by the Commissioner of Internal Bevenue that the transaction whereby plaintiff obtained possession of all the properties of its predecessor corporation was a taxable transaction in that the plan of reorganization did not qualify under section

112(g) (1) or section 112(b) (5) as amended. Plaintiff accepted this determination which, on February 5,1940, was embodied in a closing agreement with the Commissioner on Treasury Form 906.

57. Under date of May 13,1937, plaintiff sent to missioner of Internal Revenue a letter in which it set forth a proposal for determining the cost to it of the depreciable assets received by it from its predecessor corporation. After referring to the determination of the Commissioner that the transaction between plaintiff and the predecessor corporation was a taxable one, the letter stated in part as follows:

On the basis of this ruling, it will be necessary to determine the value of the properties conveyed by the Southern Natural Gas Corporation under the plan of reorganization, to the Southern Natural Gas Company. The valuation of the assets under a taxable transaction, therefore, must be valued in accordance with the fair value of the securities issued by the Southern Natural Gas Company to the creditors and stockholders of the Southern Natural Gas Corporation. On this basis, we have found that the total fair market value of the securities issued by the Southern Natural Gas Company for the properties it received on December 30, 1935 was $23,979,394.38. On the basis of the above security valuation, we have determined that the cost of the depreciable fixed capital received by the Southern Natural Gas Company was $20,979,436.12 as of December 30, 1935.

Attached to this letter was the following schedule setting forth plaintiff’s computation of the cost of its depreciable fixed capital:

Valuation of the Depreciable Fixed Capital received by the Southern Natural Gas Company for securities issued by it in accordance with the reorganization plan of the Southern Natural Gas Corporation.
1st Mortgage 6 percent Sinking Fund Gold Bonds (at Par)_'_ $14, 844, 000. 00
Adjustment Mortgage Bonds (at 71 %)_ 4,133, 827.38 Common Stock “Class A” — 554,500 shares (at 71 1/2)- 4,158,750.00 Common Stock “Class B” — 274,939 shares (at 3)_ 842,817.00
Total Value of Securities_ 23,979,394.38
Total Value of Securities Issued_ 23,979, 394. 38
Less: Value of Assets other than Plant &
Property_ 1,672,864. 72
Net Total Value of Securities_ 22,306,629. 66
Deduct:
Land (at cost)_ 111,396.07
Rights of Way (at cost)_ 941,819.71
Organization (at cost)_ 273,878.76
Total Deductions_ 1,327,093. 54
Depreciable Fixed Capital at Dee. 31, 1935_ 20,979, 436.12

58. Under date of December 11, 1937, the Natural Resources Section of the Engineering and Valuation Division, Bureau of Internal Revenue, made a report on the depreciation base of plaintiff’s properties received from its predecessor corporation. A copy of this report was sent to plaintiff by the Commissioner of Internal Revenue on January 7,1938, and states in part as follows:

The file of the case was recently referred to the Securities Section for an opinion as to the value of securities exchanged for assets. A notation has been made by Mr. Gayton on a statement submitted by the taxpayer on May 13, 1937, the notation accepting the value claimed for securities as the taxpayer’s total value of assets at date of reorganization. It is believed a reasonable basis for valuing land, rights of way, and organization cost is its actual cost. These items, together with the value of assets other than plant and property, are subject to Audit check as to their accuracy, since the total value of securities issued, reduced by these items, results in the base for depreciation computation.
As a check on the reasonableness of the depreciable base claimed, the taxpayer’s statement of total investment in equipment by years from the beginning of 1931 to the end of 1935 was reduced by depreciation computed at 3-%%,_resulting in a base at date of reorganization of approximately $22,700,000. That claimed is approximately $21,000,000.00. Considering that the plant was under construction during a period of high material and labor cost, the base claimed appears reasonable.

59. Based upon the acceptance by the Commissioner of Internal Revenue of plaintiff’s determination of its cost of the assets and properties received from its predecessor corporation, as set forth in its letter of May IB, 1937, and the allocation of such cost between depreciable and nondepreciable assets, plaintiff claimed on its returns for the years 1936 through 1940, and was allowed, deductions from gross income for depreciation on such cost as determined. In addition, for each of the years 193,6 through 1940, plaintiff claimed and was allowed deductions for amortization of the difference between the fair market value of the adjustment mortgage bonds and the par value of such bonds. The bonds were valued at the date the plan of reorganization of plaintiff’s predecessor corporation became effective, and such value was accepted by the Securities Section of the Engineering and Valuation Division, Bureau of Internal Bevenue, as indicated in its report of December 11, 1937. This difference was determined to be $1,647,749.37, plus expense of $25,547.07, or a total of $1,673,296.44 and, after the disallowance of a deduction of $1,072,767.36 claimed in the 1936 return for the balances of the unamortized debt discount and expense applicable to plaintiff’s predecessor corporation, an annual deduction for amortization of $69,720.68 was allowed for the years 1936, 1937, and 1938. In a report of the Internal Bevenue Service, dated November 10,1937, covering plaintiff’s taxable year 1936 this determination was explained as follows:

The taxpayer filed its 1936 return and claimed as a deduction the unamortized bond discount and expenses applicable to the first mortgage bonds issued by the old corporation in the sum of $1,058,747.46. The taxpayer claimed the total unamortized bond discount and expense in 1936 as the first mortgage bonds of the old company which the new company assumed on December 31, 1935 were retired in the latter part of 1936 by the proceeds of a new issue of first mortgage bonds. In the opinion of the examining officer the unamortized bond discount and expense applicable to the first mortgage bonds issued by the old corporation and assumed by the new, is not a proper deduction for the reason that as the reorganization was taxable, the new company has no right to claim the unamortized bond discount and expense as its deduction. The examining agent relies upon the decision in the Turner, Farber, Love Co. v. Helvering case 68 F. (2d) 416 — 13 A.F.T.B.
On the same basis, examining agent is disallowing an amount for $14,019.90 representing the book amortiza- and expense applicable to the old debentures of the old corporation.
However, as an offset to the disallowance of the above amounts as deductions, the taxpayer claims that it is entitled to amortize the bond discount and expense on the adjustment mortgage bonds which it issued in partial payment of the property of the old corporation.
The new company issued $5,781,576.75 of par value adjustment mortgage bonds to the old corporation. The taxpayer claims the right to amortize over 24 years life of the adjustment mortgage bonds dating from Jan. 1, 1936, a discount representing the difference between the fair market value of the adjustment mortgage bonds at the date the plan of reorganization became effective and the par value of such bonds. The amount involved is $1,647,749.37 plus expense of $25,547.07 or a total of $1,673,296.44, and the yearly amortization would amount to $69,720.68. The fair market value is 71-14.28-% points on $5,781,576.75 makes the $1,647,749.37. * * *

The value of plaintiff’s adjustment mortgage bonds as of December 31,1935, when issued, was $71.50 per $100 of face value. In 1939 plaintiff incurred additional expenses with respect to said adjustment mortgage bonds of $3,481.66. Deductions for the amortization of discount and expense were claimed by plaintiff in its 1939 and 1940 tax returns in the amounts of $69,805.60 and $69,890.52, respectively. Upon audit of said tax returns by the Commissioner such deductions were not disallowed.

60. In 1941 plaintiff redeemed the adjustment mortgage bonds at face value for cash. As of the date of this redemption the amount of unamortized discount and expense with respect to said bonds, was $1,327,692.35 (including $22,808.16 of expenses). In its tax returns for 1941 plaintiff claimed as a deduction from gross income said $1,327,692.35. Upon final audit of said 1941 returns the Commissioner of Internal Revenue disallowed said deduction in full. No part of said $1,327,692.35 was included by plaintiff as a part of the cost of the depreciable assets acquired from its predecessor corporation for the purpose of computing the allowance for depreciation in plaintiff’s 1941 and 1942 tax returns; nor was any part of said $1,327,692.35 included as an adjustment under section 113(b) of the 1939 Code to the basis of plaintiff’s depreciable properties for the year 1941 and subsequent years.

IV. IntbRest During Construction

61. The construction of plaintiff’s natural gas transmission systems was begun in 1929. The primary construction was completed on June 1, 1930; the secondary construction was completed on November 1, 1930. The interest accrued and paid by the predecessor with respect to the bonds and debentures issued to finance the primary and secondary construction attributable to the periods of construction was as follows:

On its books of account the predecessor capitalized the entire interest expense for 1929 and 1930 as a construction cost. From an accounting standpoint it has long been considered proper to capitalize such type of interest cost as a part of the cost of construction, the theory being that interest paid on money borrowed for construction purposes is properly considered a construction cost until the project is completed and the property becomes productive.

62. (a) Section 202(a) of the Eevenue Act of 1921 (42 Stat. 227-321) provided as follows:

That the basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired after February 28,1913, shall be the cost of such property; * * *

(b) Under the Eevenue Act of 1924 (43 Stat. 253-355), section 202(b) provided that:

In computing the amount of gain or loss under subdivision (a) proper adjustment shall be made for (1) any expenditure properly chargeable to capital account, and (2) any item of loss, exhaustion, wear and tear, obsolescence, amortization, or depletion, previously allowed with respect to such property.

This language had not appeared in earlier revenue acts. Pursuant to said section, the Treasury promulgated Article 1561 of Eegulations 65, which provided in part as follows:

In computing the amount of gain or loss, however, the •cost or other basis of the property must be increased by the cost of capital improvements and betterments made to the property since the basic date, and by carrying charges, such as taxes on unproductive property * * *.

(c) Similar provisions corresponding to section 202(b) of the Eevenue Act of 1924 appeared in section 202 (b) of the Eevenue Act of 1926 (44 Stat. 9-131) and section 111(b) of the Eevenue Act of 1928 (45 Stat. 791-883), which are applicable to the years 1929 and 1930. The regulations promulgated under the 1926 Act (Treas. Eeg. 69, Art. 1561) and the 1928 Act (Treas. Eeg. 74, Art. 561) contained substantially the same language as that promulgated under the 1924 Act but added the following immediately thereafter:

_ * * * Where the taxpayer has elected to deduct carrying charges in computing net income, or used such charges in determining his liability for filing returns of income for prior years, the cost or other basis may not be increased by such items in computing the gain or loss from the subsequent sale of property.

63. On October 4,1929, the Board of Tax Appeals in the case of Central Real Estate Co., 17 B.T.A. 776, held that, for the purpose of ascertaining gain or loss, section 202(b) of the Eevenue Act of 1924 did not authorize the capitalization of taxes and interest on the unpaid purchase price of unproductive real estate. The Board also held that that part of Article 1561 of Eegulations 65 quoted above in finding 62 was not a correct interpretation of the law. The Court of Appeals for the Fifth Circuit on March 18, 1931, affirmed the Board’s decision, saying:

_ * * * All the revenue acts have specifically provided for the deduction of taxes and interest from gross income annually while dealing generally with other items of expense. If Congress had intended to give the taxpayer the privilege of adding taxes and interest to cost, it would have been very easy to have said so. As the act does not so provide, the conclusion is inescapable that Congress did not so intend. * * * (Central Real Estate Co. v. Commissioner of Internal Eevenue, 47 F.2d 1036, 1037)

64. On March 12,1930, C. W. Ormerod, then manager of the tax department of Tri-Utilities Corporation (the parent of the predecessor), wrote J. J. Mason, treasurer of the predecessor, with respect to the corporation’s 1929 tax return. In this letter he said in part:

Mr. Swan has informed me that the company expects to earn considerable income in the next few years. I therefore feel that it would be of advantage to take all the deductions in the tax return for the year 1929 that we are entitled to. It must be understood that the tax law and regulations have not definitely settled the deduc-tibility of certain expenses covering situations such as yours, but we feel that the return for the calendar year 1929 should reflect all deductions which can possibly be construed to be deductible.
In your statement of deductions there does not appear to be any deduction for interest on bonds during construction. For accounting purposes this is a proper charge to fixed capital but the Bevenue Department will not permit a depreciation deduction on such items where they are clearly set forth in the fixed capital account. It is therefore my opinion that the interest charge to fixed capital for the calendar year 1929 should 'be taken 'as a deduction on the tax return.
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If the above recommendations are accepted the return will reflect a large statutory net loss and I believe that it would be advisable for the officers of the company to determine whether the future operations of the company would result in enough taxable net income during the calendar years 1930 and 1931 to exceed the net loss filed on the proposed 1929 report.

65. The predecessor’s original 1929 tax return was prepared by one H. S. Miller, who was deceased at the time of trial. Extensions of time for the filing of this return had been secured until June 15, 1930. In this return, which was filed with the Collector of Internal Kevenue in Birmingham, the predecessor deducted the interest during construction for 1929 as interest paid.

66. (a) Bay C. Backus was employed by the predecessor in August 1928. He was transferred from New York City to Birmingham in December 1980. Backus prepared the tax return for 1930 which was filed by the predecessor. A draft of the return was prepared in early 1930. However, before it was filed, he wrote a letter, dated June 12,1931, to Ormerod, which stated, inter alia, as follows:

Under date of March 11th I forwarded to you a schedule which outlines the classification of fixed capital accounts used by Southern Natural Gas Corporation and you will note that this classification provides for separate accounts for all overhead items. Heretofore it has been the practice of the Treasury Department to disallow depreciation on overhead accounts of this nature when they are not distributed to the prime accounts; so that in preparing the returns for 1929 and 1930, interest charges during construction which have been capitalized on the books were taken as a deduction on the Federal Income Tax Return. In 1929 this amounts to $672,454.37 and in 1930 — $1,584,095.55, which is a total for the two years of $2,256,549.92. Under a recent memorandum of the General Council [sic], of the Income Tax Unit (Prentice-Hall, Paragraph Í138 — Page 1327) the question of distributing overheads to the prime accounts in order that depreciation may be obtained is considered as being correct, when the overhead items are actual expenditures and do not result from appraisal valuations. This opinion does not specifically mention interest during construction but as the opinion is rather broad as to what would be considered as being expenditures during construction, it is my belief that this would, also cover the interest expenditures during construction. I also note under Paragraph 10029 — Page 10024, that the question of the capitalization of interest and taxes in computing gains or losses from sales is still pending, although regulation 74 — article 561 outlines that carrying charges may be added to the cost in computing gains or losses, if such carrying charges are not taken as a deduction 'in prior years. If it is possible for us. to spread the interest during construction over the prime cost so that, instead of taking the interest charges for 1929 and 1930 as a deduction, we would realize these expenditures as a deduction thru the yearly write-off of depreciation, this would be very advantageous to Southern Natural Gas, as it would approximately increase the depreciation write-off $100,000 each yeap. Ns the deduction of this interest on the 1929 and 1930 returns will no doubt not be of any use as far as building up a loss to be carried forward is concerned, I would appreciate you advising your opinion as to. amending the 1929 [return as filed] and [the draft version of the] 1930 returns and not reflecting this interest as a deduction, so that we can then consider, the interest as a part of the depreciable property. I have consulted Mr. Mason regarding the making of these changes and it is his opinion that it would be advisable to do so, if possible.

(b) Mr. Ormerod on June 15,1931, replied as

The thought you up the charges for interest during construction has been giren consideration in this office. That was the reason why I telegraphed you to obtain an extension of time to July 1st within which to file the 1930 return. After considerable discussion in this office we came to the conclusion that there was nothing in the recent General Counsel’s memorandum which would indicate that interest during Construction is a proper charge to Fixed Capital which could be depreciated. Upon reviewing the situation again I believe that the question of how to handle Interest during Construction has not been definitely settled by the Treasury Department and perhaps it would be wise to set up our Fixed Capital accounts by classes of property, breaking down Interest during Construction and applying it to each class. If this is done I believe that you should keep a record of the allocation, so that if the Treasury Department does not agree you can easily eliminate the interest during construction.
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With regard to the above I wish to go on record to the effect that I am not positive that the government will allow the Fixed Capital accounts to be set up in this manner as the Treasury Department has not made any definite statement on this point. I do feel that working it up in this manner will be of considerable advantage to the company if the Treasury Department acquiesces.
Under the circumstances it appears to me that the only practical thing to do is to amend the 1929 and 1930 reports to reflect the above recommendations. This is especially true when we consider that the company is operating at such a huge loss. Your letter indicates that there will be another large loss for the year 1930, very little of which will probably be used as a deduction by the Company in its future tax returns.

67. (a) The predecessor’s original 1930 tax return was filed with the Collector at Birmingham, pursuant to extensions of time received, on or about July 1,1931. The interest during construction applicable to 1930 was deducted on such return.

(b) The predecessor received no tax benefit from the deductions of interest during construction claimed on its original returns for 1929 and 1930.

68. Under daite of August 6, 193,1, the Treasury Department promulgated Treasury Decision 4321 (X-2 Cum. Bull. 169 (1981)) amending Article 561 of Regulations 74. The announcement of the amendment read:

To Collectors of Internal Revenue and Others Concerned:
Article 561, Regulations 74, is hereby amended by the elimination of the third and fourth sentences of the second paragraph thereof, and the substitution therefor of two sentences reading as follows:
In computing the amount of gain or loss, however, the cost or other basis of the property shall be properly adjusted for any expenditure, receipt, loss, or other item properly chargeable to capital account, including the cost of improvements and betterments made to the property since the basic date. Carrying charges, such as interest and taxes on unproductive property, may not be treated as items properly chargeable to capital account, except in the case of carrying charges paid or incurred, as the case may be, prior to August 6, 1931, by a taxpayer who did not elect to deduct carrying charges in computing net income and did not use such charges in determining his liability for filing returns of income.

69. (a) On September 17, 1931, Mr. Backus wrote Mr. Ormerod stating in part as follows:

Mr. "White talked with me yesterday regarding the possibility of considering all interest paid during the year 1930 as part of the cost of construction ana not considering any portion of the interest paid during the year 1930 as a deduction on the amended 1930 return. Mr. White feels that Southern, although it did operate in 1930, such operations were incidental to their major problem of completing their construction program, and he asked me to withhold filing the 1930 amended return until he has talked with you regarding this. Mr. White expects to be in New York shortly, at which time he will go over this matter with you.
Under T.D. 4321, paragraph 10003, Prentice-Hall, carrying charges, such as interest and taxes, may be capitalized on unproducted [sic] property until August 6, 1931, and it is.my thought that we now have a firm basis in pur contention that Interest During Construction paid prior to August 6, 1931 should be added to the cost of such property and to then realize such charges as a deduction through depreciation. I will appreciate you advising me the result of your conference with Mr. White, and, also your opinion in connection with the above recent ruling.
As we have not as a any in 1929 on the amended 1929 return, I am filing the 1929 amended return as submitted to you.

Mr. Backus also prepared an amended income tax return for 1929 for the predecessor in which the interest deduction was eliminated and instead capitalized as a construction cost.

(b) The amended 1929 return was filed on September 21, 1931, with the Collector in Birmingham. On September 23, 1931, the Collector by letter acknowledged receipt of the amended return for 1929, “which is being forwarded to the Bureau of Internal Revenue, Washington, D.C. to be audited in connection with the original.”

70. (a) In a letter to Mr. Backus, dated October 3, 1931, Mr. Ormerod expressed the belief that the scope of Treasury Decision 4321 was limited to unproductive property and therefore did not apply when a large part of a line was in service.

(b) In a letter dated October 22,1931, from Mr. James H. White (one of the receivers for the predecessor), Mr. Ormerod was asked to reconsider his opinion. Said letter stated as follows:

We have discussed at length the proposed amended Federal Tax Return of Southern for the year 1930 as submitted by Mr. Backus, which included as part of the construction cost all interest paid or accrued to April 1, 1930, and thereafter all interest accrued or paid on the primary construction program was taken as a deduction.
It is our thought that Southern Natural Gas Corporation may include all the interest paid or accrued for the year 1930 as part of the construction cost, even though the main transmission line was completed,, in view of the length of time required to construct service lines and meter stations in order to attach the business over a twelve hundred mile pipeline system, and during the entire year 1930 Southern Natural Gas Corporation was mostly engaged in constructing lateral lines, service lines and meter stations, and, in our opinion, the corporation during that year was in a construction or development .stage.
This matter has 'been discussed with one of the local examiners of the Revenue Department and it is his opinion that unless Southern Natural Gas Corporation had attached 75% of the proposed business, then the company was still in a construction or development stage and it would be proper to charge construction with, all interest paid or accrued during that period.
Due to the amount of money involved and the potential earning power of Southern Natural Gas Corporation, we would greatly appreciate your reconsidering your opinion regarding this matter and, if possible, we would like to treat all interest paid or accrued during the year 1930 as construction cost.

(c) Mr. Ormerod’s reply of October 26, 1931, stated as follows:

I have received your letter dated October 22,1931 and have given considerable thought to your remarks in regard to the proposed amended Federal income tax return to be filed for the Southern Natural Gas Corporation covering the year 1930.
The treatment of many items for Federal income tax purposes is an open question. The matter of how to treat “interest during construction” is one which has not been definitely decided upon by the Bureau of Internal Revenue. The question as to when a company completes its construction period, is one which must be based upon the facts surrounding the case.
In my previous letters to Mr. Backus, I outlined a procedure, which, based upon our experience in handling tax matters before the Bureau of Internal Revenue, would be acceptable to the Department. Naturally, this is a matter of judgment on our part and is not binding on any of the officials of Southern if they decide that the interest of the company would be bene-fitted by a departure from the procedure as outlined.
With regard to the discussion which you have had with the local examiners of the Revenue Department, I wish to say that their opinion has very little weight with the authorities at Washington.
It is therefore my suggestion, if the officials of the company decide that the procedure as outlined in my letters, is detrimental to the interests of the company, that an amended return be filed, based upon their suggestions.

(d) Mr. Backus thereafter prepared the amended return for 1930, in which he eliminated the deduction for interest and capitalized it as a construction cost. The amended return was filed with the Collector on December 26, 1931.

71. On May 16, 1932, the receivers of the predecessor wrote to the Birmingham office of the Treasury Department stating that their records indicated that an amended return for 1930 had been prepared but that they were not certain whether the return had actually been filed. They therefore inquired as to whether such amended return for 1930, which disclosed a net loss of $79,527.13, had been filed and, if so, the date of filing. On May 17, 1932, in response to the inquiry, the Birmingham office of the Treasury Department replied that its records showed that an amended return for 1930 had been filed on December 26, 1931, and that it had been forwarded to Washington to be audited in connection with the original return.

72. On October 24, 1931, by a form letter, the Internal Revenue Agent in Charge of the Nashville, Tennessee, office of the Treasury Department notified the predecessor with respect to the year 1929 as follows:

This office is recommending to the Commissioner of Internal Revenue that your income tax returns for the year or years indicated be accepted as correct.

On January 9, 1933, the same office of the Treasury Department sent the same form of notification to the predecessor with respect to the year 1930. Both letters contained the statement: “I am sure you will appreciate that this action is subject to approval in Washington * *

73. Meanwhile the predecessor had filed ifts 1931 tax return but claimed no depreciation deductions therein except as to incidental amounts relating to automobiles. This return showed a net loss of $450,362.40.

74. In September 1933, the predecessor filed its 1932 tax return showing a net loss of $966,408.67. On this return the predecessor claimed deductions for depreciation on the interest that had been previously capitalized on the 1929 and 1930 amended tax returns. Mr. Backus had prepared the depreciation schedules. This return was examined by the Treasury Department during 1934.

75. (a) On June 28,1934, the Nashville office of the Treasury Department sent the predecessor a report covering the examination of the 1932 tax return. It was stated therein that “the original * * * is today being forwarded to the Bureau at Washington, D.O. for final review.”

(b) In this report for 1932, the examining revenue agent stated that he was unable to overcome the reported loss of almost a million dollars. For this reason, he did not submit a corrected net loss schedule for 1932 and did not recommend the assessment of a tax deficiency. The report consists primarily of the following three exhibits with explanatory comments: a comparative balance sheet for the last day of

1931 and the last day of 1932 as shown by the corporate books; an analysis of surplus as shown by the corporate books; and a reconciliation of the net losses for 1929 through

1932 as shown by the corporate books with the losses reported on the tax returns. In addition, the report contains a number of subsidiary exhibits and notes.

(c) As explanation of the comparative balance sheet as shown by corporate books, there appeared the following under the heading “Transmission System Properties”:

There is shown on Exhibit A-2 a summary of the accounts comprising the balance sheet figures.

From Exhibit A-2 it may be noted that as at Dec. 31, 1932 “interest” during construction of 2,368,233.72 had been capitalized. A summary of this item by years is as follows:

1929 _ 450, 190.95
1930 _ 1,912,938. 86
Subtotal_ 2,363,129.81
1931 - 5,103.91
Total- 2,368,233. 72
The detail of the interest during construction for 1929 and 1930 is shown in Exhibit B-l of a separate information report of even date herewith in connection with the worthlessness of taxpayer’s capital stock. By reference to .Exhibit A-2 it may be noted that interest of 1,936,591.16 is shown as at Dec. 31,1931, whereas the sum of 2,363,129.81 is shown above. It appears that the difference of 426,538.65 is included in “Expenses Capitalized 2,238,440.82” on Exhibit A-2.

In Exhibit C to his report the agent under the heading of “Reconciliation of Net Losses 1929-1932, Inclusive” set forth the losses for 1929 and 1930 “as disclosed by amended returns.” In Exhibit C-l of the report the agent set forth the details of the “Net Loss As Disclosed By Amended Return— Year Ended 12/31/29.” In Exhibit C-2 the agent showed the net loss as shown on the original 1930 return as well as the net loss on the 1930 amended return. In reconciling the difference he described as “Unallowable Deductions & Additional Income” the amount of $1,584,095.55 claimed as an interest deduction on the original 1930 return and capitalized on the amended return. The agent explained that he did not audit the depreciation deduction claimed on the return for 1932 because “the large net loss for 1932 cannot be overcome.”

76. For the years 1943 through 1953 the Commissioner, in determining the basis under section 113(a) (22) of the 1939 Code of the depreciable properties transferred by the predecessor to plaintiff as of December 31,1935, reduced the amount thereof for interest during construction and for other items. Of that total amount only $1,035,707.83 is at issue herein.

V. Preferred Stock Issue

77. The construction of the predecessor’s pipeline system and the supplying of materials therefor were performed by various contractors and vendors. The predecessor paid for a portion of the services and materials by issuing to vendors and contractors its $7 cumulative preferred stock (hereinafter called the “preferred stock”). This preferred stock had a liquidation value of $100 and a call price of $105. The property received was entered on the predecessor’s books at the contract or agreed price and the account was settled by the payment of cash and preferred stock at $90 per share.

78. For the years 1943 through 1953, in determining the basis of the predecessor’s depreciable properties in the hands of plaintiff, the Commissioner determined that 31,797 shares of the predecessor’s preferred stock had been issued to contractors and vendors for services and materials in the total amount of $2,869,809.95. The following schedule sets forth the values placed by the Commissioner on the preferred stock at the time of issuance:

Based upon the foregoing the Commissioner made the following adjustment to the basis of the predecessor’s depreciable properties in the hands of plaintiff as of January 1, 1943:

Amount of services and materials_$2, 869, 809. 95

Value of 31,797 shares of stock_ 1,310,364. 00

Difference - 1,559,445.95

Adjustment for retirements prior to Jan. 1, 1943_ 164, 458. 38

Reduction in basis- 1, 394, 987. 57

Such reduction in basis was made as of January 1, 1943, and was not restored for any of the years here in issue.

79. (a) Included in the 31,797 shares considered by the Commissioner were 556 shares issued to White and Case and Allen Underwood and Canterbury, and 65 shares issued to S. P. McDonald, S. Oliver White, and M. C. Stewart. None of these shares were issued in payment for services or materials which were charged to the predecessor’s depreciable property account.

(b) Also included in the 31,797 shares considered by the Commissioner were 4,305 shares issued in payment for services and materials for the Mobile line and certain other portions of the system which were sold in 1930 and therefore were not part of plaintiff’s system during the years in question. Accordingly, the value of these 4,305 shares is moot and is not in issue in this case.

(c) Also were gineering Company, which were later returned and canceled, and 13 shares issued for the account of O’Brien Brothers, which were later returned and presumably canceled.

(d) Excluded from the 31,797 shares considered by the Commissioner were 215 shares issued in May 1930 to Petroleum Electric for services or materials in the amount of $19,350 which was charged to the predecessor’s depreciable property account.

(e) With the above adjustments, the total of the shares in issue is 26,740.

80. The predecessor issued 21,040 shares of its preferred stock to contractors and suppliers in payment for services and supplies relating to the depreciable properties in issue. The following tabulation sets forth the contractors and suppliers who received such preferred stock, the number of shares received, and the consideration received in relation to the depreciable properties in issue:

In addition to the foregoing, there is a dispute between the parties as to whether an additional 5,700 shares which Ford, Bacon & Davis received from Tri-Utilities Corporation, the predecessor’s parent, should be treated as a purchase by Ford, Bacon & Davis or as payment for services rendered by Ford, Bacon & Davis to the predecessor.

81. (a) Ford, Bacon & Davis, Inc., a corporation (hereinafter sometimes referred to as “FB&D”), was a well-known firm of consulting engineers. It worked for the predecessor in the pipeline construction project first as engineers, then as agents in negotiating contracts and in material procurement, and as supervisors of construction. It also acted as consultants on the secondary construction phase.

(b) On May 1, 1929, FB&D entered into two contracts with the predecessor, a construction contract and a management contract. Under the construction contract, FB&D was employed to design and construct a natural gas pipeline from the Monroe and Richland gas fields in Louisiana to Birmingham, Atlanta, and other points. As compensation, the predecessor agreed to reimburse FB&D for all expenses on account of its performance of the contract (including the salaries of its employees, plus an allowance of fifty percent thereof for overhead) and to pay (1) a fee for the primary construction of $500,000 and (2) a fee for the secondary construction of three percent of some work and four percent of the balance. The fee for the primary construction was payable at the rate of $50,000 per month beginning with May 1, 1929, and $25,000 per month beginning with January 1, 1930. In November 1929, the term of the management contract was extended from December 31, 1930, to December 31, 1932.

Sometime after May 1929, FB&D agreed to purchase from Tri-Utilities (then known as “United Power, Gas & Water Oorp.”) 5,700 shares of the predecessor’s preferred stock at $87.50 per share. The predecessor agreed to issue FB&D 25,000 shares of its common stock as additional consideration for services rendered prior to May 1, 1929. During the summer of 1929, in the course of requesting suppliers to accept payment in part in the predecessor’s preferred stock and thus to participate in the financing of the enterprise, the predecessor’s purchasing agent advised the suppliers that FB&D was also going to take preferred stock.

(c) During the period from July 25,1929, through December 31, 1929, FB&D received cash payments totaling $489,-585.55 from the predecessor. amounts thereof were as follows:

82. On October 24, 1929, FB&D made a payment of $221,326.39 to Tri-Utilities which was treated on the FB&D books as payment for 2,500 shares of the predecessor’s preferred stock at $87.50 per share plus accrued dividends. On November 25,1929, FB&D made another payment to TriUtilities, this one amounting to $280,000, which was treated on the FB&D books as a payment for 3,200 shares of the predecessor’s preferred stock at $87.50 per share. FB&D received two stock certificates, one for 2,500 shares of preferred and another for 3,200 shares of preferred, both bearing the date of October 24,1929. On November 25, 1929, FB&D received the 25,000 shares of the predecessor’s common which it had been promised previously.

83. The acquisition by FB&D of the 5,700 shares of preferred stock was discussed by its board chairman with other board members as a proposed purchase; considered and approved by FB&D’s board of directors as such; described as a purchase in the board minutes; entered as cash disbursements on FB&D’s Cash Record and Bank Balances Statement; carried as a purchase on FB&D’s bookkeeping account summary relating to the predecessor’s preferred stock; reported as a cash purchase on a schedule attached to FB&D’s 1936 federal income tax return; and was accepted as a purchase at $87.50 per share by the Internal Revenue Service in an audit report relating to such return in which other stock acquisitions were described as payments.

84. The 5,700 preferred shares hereinabove referred to were purchased by FB&D as an investment. It believed it was acquiring the stock at a discount price $87.50 instead of $90). Whenever possible and considered to be advantageous, FB&D followed a practice of buying clients’ securities.

85. On May 17,19,30, by a supplemental agreement, FB&D was relieved of its responsibility for the secondary construction but was nevertheless retained as a consultant on such construction, for which it was to be paid a fee equivalent to iy2 percent of the construction cost payable entirely in preferred stock at $90 per share, whether or not any services were rendered. Of the preferred stock received by FB&D under such supplemental agreement, 960 shares were issued to FB&D by the predecessor for services performed in relation to the depreciable properties in issue.

86. In 1929 and 1930 the predecessor’s preferred stock was not listed on any stock exchange; there were no market quotations for it and no records of bid-and-asked prices on the over-the-counter market. The preferred stock had no readily ascertainable or established market value or price.

87. In the summer of 1929 the cash resources of the predecessor were short, and the predecessor sought to supplement them. To conserve cash, it requested that its contractors and suppliers take preferred stock in part payment for services and materials. Certain contractors and vendors who received preferred stock expressly agreed in their contracts to take such stock in part payment of the price of their materials and services; others accepted such stock in partial payment of the services rendered or materials furnished even though they had not previously expressly agreed to do so. Not all suppliers and contractors were asked to accept preferred stock in pant payment, in some instances because of time limitations and in others because it was known that the supplier did not have the necessary resources. One supplier, National Tube, refused to take the preferred because its policy was not to participate in financing. Nevertheless, the predecessor continued to purchase from it after its refusal to take preferred stock.

88. (a) Where a contractor or vendor expressly agreed to take preferred stock in part payment for services or materials, the agreement typically provided as follows:

Payments under this agreement shall be in cash until seventy-five percent (75%) of the total payments due hereunder shall have been, made to the Contractor. the remaining twenty-five percent (25%), payments will be made to the Contractor in the Seven Dollar ($7.00) Cumulative Preferred Stock of the Corporation without nominal or par value at the price of Ninety Dollars ($90) for each share of said stock plus accrued dividends and Contractor shall accept such preferred stock in full payment of such twenty-five percent (25%) of the total payments hereunder, said preferred stock to be part of a present issue in the total amount of fifty thousand (50,000) shares of such stock.

,(b) The following schedule summarizes the terms of the contract provisions which are in evidence and the shares issued under them:

89. By the latter part of the 1920’s many of the long-distance interstate natural gas pipeline companies had been formed. Most of such companies were owned and financed in whole or in part by large well-known producing companies. One of the first long-distance natural gas pipelines was built in 1927 and put in service in 1927 or 1928 by Cities Service Gas Company. Williams Bros, built the Shamrock-Enid natural gas pipeline in 1927 or 1928. The Colorado Interstate Gas Company pipeline, built in 1928, began its first full year of deliveries in 1929. It was owned in part by Standard Oil Company of New Jersey and by Cities Service Company. The Mississippi Biver Fuel Corporation’s pipeline, which was constructed and began deliveries in 1929, was owned by Standard Oil Company of New Jersey. FB&D had designed, constructed or supervised construction of these last two lines. Northern Natural Gas Company constructed an interstate pipeline which began operations in 1930. It was owned by several large utility companies. Panhandle Eastern Pipe Line Company’s pipeline, financed by private capital, was constructed in 1929 and 1930. In 1930 construction of a new interstate pipeline was announced. Natural Gas Pipeline Company of America, a company owned in part by Standard Oil Company of New Jersey and other large producing companies, was to be the builder.

90. The normal price basis in the construction contracts for the predecessor’s main line was a set amount per linear foot. In some instances, the more difficult parts of the line had an added cost-plus rate. The construction contracts were reviewed for price reasonableness by the predecessor’s chief engineer, a man experienced in the natural gas industry.

91. FB&D was a leading firm in the design and construction of pipeline systems. The 960 shares issued to FB&D in payment of its fee on the secondary construction were received by it as payment for services rendered at $90 per share.

92. Hope Engineering Company was a leading pipeline construction company. Its basic contract price of $1.58 per linear foot was reasonable and fair for the services it provided.

93. (a) O’Brien Bros, was a general contractor. Although it had no experience in natural gas pipeline construction, it was anxious to enter that field. Its contract price was established in competitive bidding against several other contractors. Its bid price was too low, however, and the cost to it of the construction exceeded the price paid by the predecessor corporation.

(b) After O’Brien Bros, encountered financial difficulties, FB&D and the predecessor corporation had to pay its indebtedness for payrolls and other items. On November 30, 1930, the predecessor issued 280 shares of its preferred stock to subcontractors working for, or vendors of, O’Brien Bros, and the predecessor increased its “1930 Construction Work in Progress” account by $28,000 to reflect the issuance of those shares. O’Brien Bros, gave the predecessor its note for $28,000; the note gave O’Brien Bros, the option of discharging its indebtedness in whole or in part by delivering preferred stock to the predecessor.

(c) About May 19,1931, O’Brien Bros, delivered 13 shares of preferred stock to the predecessor. Aside from that delivery, the note was never paid. Shortly thereafter, the “1930 Construction Work in Progress” account was reduced by $2,670 to reflect reductions of $10 per share on the of preferred stock outstanding in the O’Brien Bros, transaction and by an additional $19.72 attributable to accrued dividends on the 13 shares delivered by O’Brien Bros. The balance in the “Work in Progress” account based upon materials and services provided the predecessor by subcontractors and vendors of O’Brien Bros, attributable to the issuance of 267 shares of preferred stock was $24,010.28, or $89.96 per share for each of the 267 shares of preferred stock. Additional adjustments of $26 and $3,148.51 decreasing the “Construction Work in Progress” account were made on account of O’Brien Bros. The latter reduction represented a credit balance due O’Brien Bros, for miscellaneous items. There is no evidence that the predecessor reduced its “Construction Work in Progress” account for the 13 shares returned.

94. (a) Oklahoma Contracting Company, a leading contracting firm, constructed portions of the predecessor’s main line at a base contract price of $1.09 per linear foot. More difficult parts of the line had an added cost-plus rate. At about the same time, it was building a long-distance natural gas transmission line of similar size for Mississippi River Fuel Company over comparable terrain at a bid price of $1.52 per linear foot, payable all in cash. The contract price received by Oklahoma Contracting Company was a fair and reasonable price for the services it provided the predecessor.

(b) A dispute arose between Oklahoma Contracting the predecessor over the amount payable under the cost-plus portion of the contract and the matter was submitted to arbitration. After several hearings, on July 5, 1930, the arbitration board found the predecessor to be indebted to Oklahoma Contracting and awarded the latter the sum of $295,000. The decision provided that the amount of the award was payable in the predecessor’s preferred stock at a price of $90 per share. That value of the preferred stock was not questioned by Oklahoma Contracting. When Oklahoma Contracting received the preferred stock it was of the view that such stock was worth the amount of services which had been rendered in exchange for it.

95. The 215 shares of preferred stock received by Petroleum Electric were issued to it for services or materials in the amount of $19,350 or $90 per share.

96. Williams Bros, was an experienced pipeline contractor. Much of its construction area was over some of the roughest and most difficult section of the line. Its contract bid price of $3.75 per linear foot was a reasonable price.

97. The suppliers who took the predecessor’s preferred stock were reputable firms. The material prices to be paid were arrived at by competitive bidding or by negotiation with the suppliers. Although the man who was in charge of the predecessor’s procurement department had no prior experience in pipeline construction, he did have prior experience in negotiating and contracting for freight rates. In negotiating material prices, the predecessor had available, and referred to, posted list prices, item catalogs, industry publications, and other indicia of the price of the materials to be procured, and discount lists and information. Cash, volume, and haulage discounts were allowed by its suppliers in arriving at the prices charged. Those who negotiated prices with the suppliers had some knowledge of after-discount prices paid by other companies for similar items. Suppliers who were asked to supply material partially in exchange for preferred stock were given projected sales figures, and other financial information about the predecessor corporation and were told that FB&D and other contractors were going to take preferred stock. No attempt was made to negotiate lower prices for payment entirely in cash. No threats were made by the predecessor to cancel or withhold an order if preferred stock was not taken. The prices paid for the material that was supplied in exchange for preferred stock were reasonable in relation to prevailing market prices. The predecessor received supplies worth $90 for each share of preferred issued to the suppliers.

98. Payment in preferred stock was made in strict accord with the price terms, i.e., each share was applied against $90 of that portion of the price allocable to the preferred Contract terms and disbursements for services were reviewed and checked internally by the predecessor. As indicated above, construction contract prices were generally based on a linear-foot basis. The contractor submitted periodic billings based on the estimated number of feet of pipe laid. Disbursements to contractors on their billings were checked to insure that they matched ¡the contract terms. Payments for materials were matched with invoices received from the vendors and with the supply contracts to insure their accuracy. Payment was made on the basis of the agreed prices. At the time the predecessor was negotiating the placement of its preferred stock with pipe suppliers (who made the pipe to order), their production capacity was being fully utilized. The predecessor’s dealings with the contractors and suppliers were carried on at arm’s length.

99. In 1944 and 1945, the Federal Power Commission reviewed plaintiff’s books and accounts to determine the original cost of plant and property for rate-making purposes. The rate base includes the investment in the gas plant which includes transmission lines and related properties. The review by the FPC’s staff lasted for about a year. No exception was taken to the amount at which plaintiff valued the property received in exchange for preferred stock.

100. The value of the predecessor’s property resulting from services and materials supplied by contractors and vendors, received in return for its preferred stock, was not less than $90 per share. The predecessor received $90 in value from its contractors and suppliers for each share of preferred stock which was issued to them as a part of the price of the services and materials they provided.

101. On the basis of the record as hereinabove set forth, the cost to the predecessor of the materials and services it received from the 21,040 shares of preferred stock it issued in payment thereof was $1,893,600, based upon a value of $90 per share.

VI. Pooling Expense Issue

102. In November 1942, plaintiff acquired oil and gas leases from H. L. Hunt in what is known as the Bear Creek Field located in Beinville Parish, Louisiana. This field was productive of natural gas. Thereafter, plaintiff attempted to obtain voluntary agreements in a form called “Gas, Distillate Pooling Agreement” from the surface owners, royalty owners, mineral owners, and other interested parties in the field in order to create 640-acre units for each gas well.

103. By specific provisions contained in these agreements plaintiff was able to remove the threat of drainage claims. Through these claims the lessors of neighboring lands could demand that plaintiff drill a well on their properties to protect their gas and oil from being extracted through wells on property in which they had no rights. If plaintiff failed to drill such “offset wells,” these lessors could cancel their leases. Also, the ability, by bringing together all interests in such a tract in order that it might be treated as one drilling unit and on which only one well would be drilled and operated, preventing the drilling of unnecessary wells, led to a more efficient operation. In addition, after the war commenced, the only way plaintiff could obtain an allocation of steel from the government was to drill a well on a 640-acre basis.

104. The pooling agreements used provided in part as follows:

1. For all the purposes hereof and for the development and production of gas and all liquid hydrocarbons produced therein or therewith only, the tracts of land, as described in said “Exhibit A”, are hereby pooled, combined and/or unitized and shall be treated, developed and operated for the production of gas and all liquid hydrocarbons produced therein or therewith by SOUTHERN in accordance with the lease or leases as heretofore and as herein amended, covering and affecting such tracts, as one unit, one tract and/or one lease and all royalties, or overriding royalties, and other benefits accruing by reason of the production of gas and all liquid hydrocarbons produced therein or therewith from any tract or tracts described in said attached “Exhibit A” shall be treated as an entirety and shall be divided among and paid to the separate royalty owners, or overriding royalty owners in the proportion that the acreage (mineral or royalty rights, or acres) owned by each separate royalty owner or overriding royalty owner in any one or more of the tracts pooled, combined and/or unitized hereby bears to the total acreage contained in all of said tracts, and payment of said royalties and overriding royalties that may be due from the production from said tract or tracts, when made in the proportions specified in this paragraph, shall be and constitute full compliance by SOUTHERN with its obligation to make any such payment.

105. Plaintiff obtained voluntary pooling agreements covering five wells but then encountered difficulty in obtaining further agreements. Thereafter, plaintiff, in order to facilitate the obtaining of 640-acre units for each gas well in the Bear Creek Field, applied to the Department of Conservation of the State of Louisiana for the adoption and promulgation of special rules, regulations, and orders for the establishment, inter alia, of drilling units in the Bear Creek Field. On February 9,1944, the Department of Conservation promulgated Order No. 78 with respect to the Bear Creek Field, together with rules and regulations issued thereunder.

106. Order No. 78 stated) as follows:

Purpose

In order to prevent waste, and to avoid the drilling of unnecessary wells, and to conserve and protect the correlative rights of all parties at interest, it is the intent and purpose of this order to establish a drilling pattern based on one well to each unit of approximately Six Hundred and Forty (640) acres; to designate the location of the well and the acreage to be included in each such unit; and to require the pooling, as authorized by Section 9(a) of Act. No. 157 of 1940, of smaller tracts of land, leases and mineral interests, in order to establish as nearly as practical said units in a manner equitable to the interested parties; and to afford to every owner of any interest in the designated units an opportunity to participate in some unit. The following rules and regulations are adopted for the Hosston formation (restricted) and the Pettit Zone (Sligo formation) of the Bear Creek Field in order to effectuate that purpose.

The Department of Conservation also found:

That both the producing and physical characteristics of these reservoirs indicate that one well in each of the separate reservoirs is capable of draining efficiently and economically an area of approximatey six hundred and forty (640) acres.

107. With the assistance of Order No. 78 plaintiff was able to obtain voluntary agreements from all the parties interested in the Bear Creek Field in the form of its Gas, Distillate Pooling Agreement whereby 14 drilling units were established.

108. The obtaining of such pooling agreements and the establishment of 14 drilling units gave plaintiff no greater interest in the gas underlying the units than it had before. Its royalty obligations were not increased. In this connection, Order No. 78 provided:

C. The gas and condensate produced from any well on any unit embracing more than one separately owned tract of land shall be allocated or distributed among all such tracts in the proportion that the area of such tract bears to the entire area of such unit.

As previously stated, plaintiff was relieved from the potential necessity of having to drill a well on each lease. The terms of the leases were extended so that they would remain in force for as long as the pooling agreement was in effect. Plaintiff promised to commence drilling a well on each unit within sixty days after acceptance of the pooling agreement, subject to contingencies beyond its control. The rights of the other parties to the agreements were pooled by them. With respect to a well that was in production at the time a unit was formed, the royalties previously payable only to the owner of the lease where the well was located were made payable by the pooling agreement to the owners of all of the interests included in the unit.

109). During the years 1943 through 1947 plaintiff incurred costs in connection with the 14 unit agreements in the total amount of $64,114.15. The part of the total paid by plaintiff for the pooling agreements, either as a nominal legal consideration per mineral acre or as an inducement to bring acreage into the unit, amounted to $41,246.96; the part paid for legal abstracting and recording fees with respect to the agreements amounted to $7,626.40; the part paid for salaries and expenses of plaintiff’s employees incurred in obtaining the agreements amounted to $15,126.57; and the part paid for miscellaneous incidental expenses amounted to $78.22. With respect to the consideration paid for the pooling agreements (totaling $41,246.96), plaintiff paid those who had an interest in the first five wells either five or ten dollars per mineral acre; to the others plaintiff generally paid one dollar per mineral acre. These payments averaged $4.60 per acre.

110.In its income tax returns for the years 1948 through 1947 plaintiff claimed as deductions from gross income under section 23 of the 1939 Code expenses incurred as described above in amounts with respect to the years in question according to the following tabulation:

In the final determination of plaintiff’s tax liabilities for said years, the Commissioner disallowed such deductions in their entirety.

YU. Capitalization of Depreciation Issue

111. During the years in question, 1941 through 1953, plaintiff greatly expanded its natural gas pipeline systems through the construction of additional facilities. During the years 1946 through 1953 plaintiff owned and operated certain automotive equipment (including a boat in 1953) for such purposes as the operation and maintenance of its systems. From time to time, however, some of this equipment was used in connection with certain of its construction projects.

112. On its federal income tax returns for the years 1946 through 1953, plaintiff included the aforementioned automotive equipment under its composite account method of depreciation and claimed deductions for depreciation thereon at the rate of 4 percent on its tax basis on such equipment. Upon final audit of plaintiff’s tax returns for such years, the Commissioner determined that there should be capitalized that portion of the depreciation deductions claimed by plaintiff attributable to the times such automotive equipment was used in connection with plaintiff’s construction projects. Plaintiff had in fact capitalized these amounts on its books. The amounts so capitalized and so attributable are as follows:

Upon such amounts capitalized, the Commissioner allowed depreciation computed at the composite rate of 4 percent for the years 1948 through 1953.

113. For the years 1946 and 1947 the Commissioner allowed depreciation at the rate of 4 percent for the amounts capitalized in those years but failed to allow depreciation on such amounts for the subsequent years 1948 through 1953. The net amounts capitalized in those two years in dispute in this proceeding (representing the difference between the depreciation capitalized by the Commissioner and the depreciation allowed on the amounts capitalized) are as follows:

Conceded Issues

VII. Excess Pkoeits Tax Issues

114. For the years 1942 and 1943 plaintiff was a “natural gas company” within the meaning of section 735(a) (1) of the 1939 Code, and as such claimed and was granted by the Commissioner relief under section 735. The right of plaintiff to relief under that section is not at issue in this proceeding. Under section 735(a) (5) defining a “natural gas property” there was to be excluded therefrom any part of such property which was an emergency facility under section 124 of the 1939 Code. Plaintiff had during the years 1942 and 1943 portions of its natural gas property which were emergency facilities under said section 124. The Commissioner in his final computation of relief under section 735 allocated the deduction for amortization of plaintiff’s emergency facilities between the natural gas property and the emergency facilities in proportion to the amount of natural gas determined to have been transported by each and refused to attribute said deduction entirely to the emergency facilities. Under such method the Commissioner of Internal Eevenue for 1942 allocated 86.181919% of said deduction to plaintiff’s natural gas property and the balance to plaintiff’s emergency facilities. For 1943 the Commissioner allocated 78.963519% of such deduction to plaintiff’s natural gas property and the balance to plaintiff’s emergency facilities.

115. In its 193i9 income tax return plaintiff claimed and was allowed a deduction for depreciation of costs incurred in the surveying and clearing of the rights-of-way of its transmission system. The amount of such deduction was $20,226.42. The Commissioner in computing plaintiff’s excess profits credit for 1941 and 1942 under the income method did not eliminate such deduction.

VIII. Alabama Gas Note Issue

116. Among the assets acquired by plaintiff from its predecessor corporation as of December 31, 1935 was the First Mortgage 6% Income Note of the Alabama Natural Gas Corporation, a Delaware corporation, dated December 27, 1933, and due on or before July 1,1944 in the principal sum of $350,000.00. At the time of said acquisition interest in the amount of $42,291.67 had previously accrued on said note for the years 1933,1934 and 1935 but had not been paid. On its federal tax returns for the years 1933, 1934 and 1935 Alabama Natural Gas Corporation claimed deductions for said accrued interest in the amounts of $291.67, $21,000.00 and $21,000, respectively. Said corporation received no tax benefit from said deductions. None of this interest 'had ever been included in income for federal tax purposes of plaintiff’s predecessor corporation. Said note had been acquired by the predecessor corporation on December 27, 1933 at a cost basis of $350,000.00. Prior to January 1, 1936 no payments had been made on said note with respect to either principal or interest. Said note in the hands of plaintiff at the time of acquisition had a cost basis to it of $350,000.00. Additional interest accrued and was paid on said note in each of the years 1936 through 1945 in the amount of $21,-000.00 per year. In the years 1938,1939 and 1940, in addition to the foregoing interest payments, the Alabama Natural Gas Corporation paid $10,000.00, $9,000.00 and $23,291.67, respectively, with respect to the past due interest of $42,291.67. No deduction was claimed or allowed with respect to said payments for the years 1938, 1939 and 1940 for federal tax purposes. In 1946 the principal of said note in the amount of $350,000.00 was paid in full. In his final determination of plaintiff’s tax liabilities for 1946 the Commissioner determined that plaintiff’s cost or tax basis in the said note was $307,708.33 and held that a gain of $42,291.67 had been realized upon payment.

IX. CLARK COMPRESSOR ISSTJE

117. On January 25,1950 plaintiff acquired from one P. H. Pewitt a 600-horsepower Clark Compressor for $33,110.18. On August 18,1952 the compressor was sold by plaintiff for $20,000.00 to Mississippi Gas Company, a Delaware corporation, all of whose outstanding capital stock was owned at such time by plaintiff. Deductions for depreciation of said compressor from January 25,1950 until prior to its sale had been claimed by plaintiff and allowed by the Commissioner of Internal Eevenue in the amount of $4,681.44. The compressor was of a type usable in taxpayer’s ordinary business.

118. In 1951 Mississippi Gas Company commenced an operation in which it needed a compressor engine for the injection of gas. Plaintiff was not then using the Clark Compressor and transferred it to Mississippi Gas Company to be adapted to its needs with the understanding that it (Mississippi Gas Company) would recondition the compressor at its own. expense and thereafter a sales price would be agreed upon, giving consideration to the cost to Mississippi Gas Company for such reconditioning. On May 26, 1952 Mississippi Valley Gas Company, a corporation unrelated to plaintiff, contracted to purchase all the assets of Mississippi Gas Company. Prior to said agreement of sale one unfinished piece of business was the fixing of the value of the Clark Compressor which had been reconditioned by Mississippi Gas Company at its expense and which in turn it was going to sell to Mississippi Valley Gas Company. At this time no amount had been set which Mississippi Gas Company would pay plaintiff. In this connection Mississippi Valley Gas Company, the ultimate unrelated purchaser, agreed to appoint its representative in setting a value on the Clark Compressor.

119. Mississippi Valley Gas Company appointed as its representative William N. Black, Chief Appraisal Engineer, Ebasco Services, who met in early August 1952 with O. N. Clark, vice-president in charge of engineering and operations of plaintiff, for the purpose of fixing an agreed value for the Clark Compressor. After giving consideration to the amount spent in reconditioning by Mississippi Gas Company, they arrived at a fair value of $40,757.20 for the reconditioned compressor. They allowed the amount of $20,757.20 for the cost of reconditioning the unit. The balance of $20,000.00 was the price to be paid by Mississippi Gas Company to plaintiff.

120. Thereafter, on August 18,1952 plaintiff formally sold the compressor to Mississippi Gas Company for $20,000.00 and rendered its Bill No. 8-15 of the same date in that amount. On September 22, plaintiff deposited to its account in the First National Bank of Birmingham the amount of $183,087.02 received from the Mississippi Gas Company which included the amount of $20,000.00 in payment of Bill No. 8-15.

121. On its tax return for 1952 plaintiff claimed the resulting loss from the sale of said compressor as an ordinary loss pursuant to section 117( j) of the 1939 Code. The amount of such loss was $8,428.74, being the difference between the purchase price of $33,110-18 less depreciation of $4,681.44, and the agreed selling price of $20,000.00. In his final determination of plaintiff’s tax liabilities for. said year, the Commissioner of Internal Revenue disallowed the deduction in full.

Conclusion or Law

Upon the foregoing findings of fact and opinion, which are adopted by the court and made a part of the judgment herein, the court concludes as a matter of law that plaintiff is entitled to recover, to the extent indicated in the opinion, on (1) the issue involving the depreciability of costs of surveys and of acquiring, clearing, and grading the transmission line rights-of-way; (2) the issue involving the acquisition of property with bonds issued at below par (to the limited extent indicated); (3) the excess profits tax issue involving the allocation of amortization on emergency facilities to its natural gas property; (4) the issue involving the depreciation basis of property purchased with preferred stock; (5) the issue involving the Alabama Natural Gas Corporation note; (6) the pooling expense issue; (7) the capitalization of depreciation issue (to the limited extent indicated); and (8) the issue concerning the loss on the sale of the compressor, together with interest as provided by law. Judgment is entered for plaintiff accordingly. The amount of the recovery on these issues will be determined in subsequent proceedings under Rule 47(e). Plaintiff is not entitled to recover on the interest during construction issue, and with respect to this aspect of the case, as well 'as all the other claims which are set forth in the petition but which were not thereafter submitted to the court for adjudication and are not, therefore, hereinabove enumerated, the petition is dismissed.

In accordance with the opinion of the court, a stipulation of the parties, and a memorandum report of the commissioner as to the amount due, it was ordered on July 11,1969, that judgment for the plaintiff be entered for $1,674,246.21, together with interest as provided by law. 
      
       Plaintiff obtained the power of eminent domain under the Act of July 25, 1947, ch. 333, 61 Stat. 459. under the Act, plaintiff has the right to lay a single pipeline through an owner’s land.
     
      
       Or, after 1943, its predecessor’s tax basis concerning such Items.
     
      
       Section 23 of the Internal Revenue Code of 1939 (26 U.S.C. § 23 (1952)) provided that :
      “§ 23. Deductions from gross income.
      “In computing net income there shall be allowed as deductions:
      * * * * *
      
        “(1) Depreciation.
      “A reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence)—
      “ (1) of property used in the trade or business, or
      “ (2) of property held for the production of income.”
     
      
       Treas. Reg. 103, § 19.23(1)-3 (1939 Code) ; Treas. Reg. Ill, § 29.28 (Z)-3 (1939 Code). These regulations read as follows :
      “See. 29.23(Z)-3. Depredation o} Intangible Property. — Intangibles, the use of which in the trade or business or in the production of income is definitely limited in duration, may be the subject of a depreciation allowance. Examples are patents and copyrights, licenses, and franchises Intangibles, the use of which in the business or trade or in the .production of income is not so limited, will not usually be a proper subject of such an allowance. If, however, an intangible asset acquired through capital outlay is known from experience to be of value in the business or in the production of income for only a limited period, the length of which can be estimated from experience with reasonable certainty, such intangible asset may be the subject of a depreciation allowance, provided the facts are fully shown in the return or prior thereto to the satisfaction of the Commissioner. No deduction for depreciation, including obsolescence, is allowable in respect of good will.”
      Defendant does not, for instance, dispute plaintiff’s depreciating, as part of the pipeline costs, the item of damages arising from the construction activity which plaintiff paid to compensate the landowners.
     
      
       See n. 5.
     
      
      
        Westinghouse Broadcasting Co. v. Commissioner, 309 F. 2d 279 (3d Cir. 1962), cert. denied, 372 U.S. 935 (1963).
     
      
       In 1965 the Internal Revenue Service issued Rev. Rul. 65-264, 1965-2 Cum. Bull. 53, providing that where oil and gas pipeline right-of-way costs (which may include costs of surveying, clearing, and grading the rights-of-way, as well as such items as legal fees, salaries of right-of-way agents, roddage fees or other consideration to landowners, and severance and crop damage) will no longer be useful after the expiration of the useful life of a related pipeline, they may be depreciated over the life of the related pipeline. To qualify for such depreciation, however, the taxpayer must prove that such costs will not be useful in the construction of additional pipelines, including both loop lines and replacements in the original trench.
      A companion ruling, Rev. Rul. 65-265, 1965-2 Cum. Bull. 52, held such costs attributable to buildings and roadways to be part of the total cost of the project.
     
      
       As the court held, for instance, in Connecticut Light and Power Company v. United States, 177 Ct. Cl. 395, 409, 415, 368 F. 2d 233, 241, 244 (1966), in which it treated the flowage rights and easement costs there involved “as much a part of the cost of the [dam and hydroelectric plant] project as labor and material used in the construction” thereof, “inseparably linked with the overall costs of the project,” and therefore required to “be considered as part of such depreciable costs.”
     
      
       As the court treated tlie petroleum pipeline rights-of-way in Badger Pipe Line Company v. United States, 185 Ct. Cl 547, 401 F. 2d 799 (1968), and Texas-New Mexico Pipe Line Co., et al., v. United States, 185 Ct. Cl. 570, 401 F. 2d 796 (1968), as having, because they “are directly and completely interrelated to the particular pipelines for which they were acquired” (Badger Pipe Line Company, supra, 185 Ct. Cl. at 569), useful lives coextensive with that of such pipelines.
     
      
       The distinction would become important were the use of the double-declining balance method of depreciation involved since, under section 167(b) of the 1954 Code, intangibles are not subject to such depreciation method. See Panhandle Eastern Pipe Line Co. v. United States, 137 Ct. Cl. 129, 408 F. 2d 690 (1969).
     
      
       Rev. Rul. 65 — 265,1965-2 Cum. Bull. 52, provides:
      “The grading of land involves moving soil for the purpose of changing the ground surface. It produces a more level surface and generally provides an improvement which adds value to the land. Such expenditures are ‘inextricably associated with the land’ and, therefore, fall within the rule that land is a nondepreciable asset. See Algernon Blair, Inc., v. Commissioner, 29 T.C. 1205 (1958), C.B. 1952-2, 4.
      “However, excavating, grading and removal costs directly associated with the construction of buildings and the paved roadways, are not ‘inextricably associated with the land’ itself. These costs, since they have a direct association with such construction, are part of the costs of construction of the buildings and the paved roadways.
      “* * * The costs attributable to excavation, grading and removing soil necessary for the proper setting of the buildings and paving of the roadways are part of the cost of those assets and should be included in the depreciable base for the buildings and roadways.”
     
      
       Under Treas. Reg. 1.167(a)-! (b), promulgated under the 1954 Code, if the taxpayer’s own experience is inadequate, the general experience in his industry may be used to determine estimated useful life for depreciation purposes.
     
      
       The fact that “because the rights acquired might be used in connection with another hydroelectric project which might be constructed after the Shepaug project becomes useless,” did not serve to sustaim “defendant’s contention that the expenditures are not depreciable * * (177 Ct. Cl. at 413, 368 F. 2d at 243.)
     
      
       But the Commissioner argues that in the event another dam should be constructed at the same place in the Osage river after the present dam has become useless these rights here involved would mot be exhausted and they would never require replacement. In such case the taxpayer would not have to pay anew for highways submerged, for buildings razed nor for moving bodies from cemeteries. In this the Commissioner does not take into account the principle that the right to deductions for depreciation does not depend upon mere possibilities.” (177 F. 2d at 275.) The Revenue Service has refused to follow this case. Rev. Rul. 55-729, 1955-2 Cum. Bull. 53.
     
      
       4 Mertenn, Law of Federal Income Taxation, § 23.01, at 7-8 (1966 Rev.).
     
      
       Plaintiff employs a composite straight-line method of computing depreciation for federal income tax purposes, under this method, the depreciable properties, such as its transmission pipeline systems, are included, in one account with an overall composite rate of 4 percent.
     
      
       See Rev. Rul. 65 — 265, referred to in n. 8-
     
      
       Included in the capitalized costs of plaintiff’s gathering lines are its costs of surveying, clearing, and grading the lines, and depreciation of such costs has also been allowed by the Revenue Service.
     
      
       The depreciation rates of the right-of-way acquisition costs on plaintiff’s gathering systems are based on estimated lives of from ten to twenty years, depending upon the estimated reserve of gas in the particular field involved. Cf. Shell Pipe Line Corporation v. United States, supra n. 11.
      
     
      
       Plaintiff, as an interstate natural gas pipeline company, is required to heep accounts in conformity with the requirements of the PPC’s Uniform System of Accounts, under this system, plaintiff’s right-of-way, surveying, clearing, and grading costs are capitalized and depreciated annually. Such depreciation charges thus become a part of plaintiff’s cost of service for its regulated sales. Although determinations by utility regulatory agencies as to how certain expenditures should be treated are noit binding on the Commissioner of Internal Revenue (Old Colony R. Co. v. Commissioner, 284 U.S. 552, 562 (1932)), some courts have, in tax cases, given weight to the accounting requirements imposed upon a public utility by such agencies. See Portland General Electric Company v. United States, 189 P. Supp. 290 (D. Ore. 1960), affirmed, 310 P. 2d 877 (9th Cir. 1962) ; Shell Pipe Line Corporation v. United States, supra, n. 11. But see Badger Pipe Line Company v. United Statessupra n. 10.
     
      
       “The predecessor’s first mortgage bonds which plaintiff assumed were valued at par. Plaintiff’s “Class A” common stock was valued at $7.50 per share and Its “Class B" common stock at $3 per share.
     
      
       Treas. Reg. 103, § 19.22(a)-18(3) (a). The present regulations are § 1.61-12(e) (3).
     
      
       Treas. Reg. 103, § 19.22 (a)-18 (3) (b).
     
      
       In Southern Railway Co., 27 B.T.A. 673, 687-88 (1933), it was similarly held, in the situation there involved, that the issuance of bonds for another corporation’s securities, the fair marliet value of which was less than the par value of the bonds, did not give rise to “bond discount,” as would be the case where bonds are issued for cash at less than par value. “The promise to pay a greater sum than the value of the property does not establish ipso facto the presence of discount in the transaction. * * * «the doctrine of nondeductibility of cost of property until its realization through sale or other disposition would deny the claimed deduction.” (Id. at 688) In Sam S. Sarria Theatrical Enterprises, Inc., 1 T.C.M. 352 (1943), the Tax Court, adopting the principle laid down in Sacramento Medico Dental Building Co., 47 B.T.A. 315 (1842), also held that a corporation which had issued bonds for property, the value of which was less than the face of the bonds, was not entitled, when the bonds were redeemed, to deduct as a loss the difference between such lesser value and the face value of the bonds.
     
      
       Although the difference between the value of the bonds when issued (and presumably the value of the property purchased therewith) and their face value was, as shown, $1,647,749.37, plaintiff did, as noted, take “bond discount” amortization deductions in its 1936-1940 returns. It has, therefore, already recovered the difference between $1,647,749.37 and $1,327,692, leaving only the latter amount which was not amortized. Accordingly, only the latter amount is to be added back to “basis,” and this is all that plaintiff claims for this purpose. (Pltf’s Brief, p. 70.)
     
      
       “Tite face amount of the bonds issued by petitioner for the property question must be considered as the cost of the property, since it represented the sum which petitioner was obligated to pay therefor.” Sacramento Medico Dental Building Co.t supra n. 25, at 328.
     
      
       No excess profits were imposed for 1942. However, tbe granting of section 735 relief for such year, as weU as for 1943, may result in unused excess profits credit carrybacks to 1941, thus reducing plaintiff’s 1941 liability.
     
      
       Defendant’s pretrial submission of its contentions stated, -with respect to this issue:
      “In order to compute taxpayer’s World War II excess profits tax, it is necessary, under Section 735(a) (12) and (b)(5), to compute taxpayer’s net income from non-emergency facilities. For tbis purpose, tbe defendant submits that the Commissioner of Internal Revenue properly allocated taxpayer’s depreciation and amortization between non-emergency and emergency facilities in accordance with the ratio of sales from the two types of facilities. Otherwise, the net income from non-emergency facilities will be overstated and the operation of the emergency facilities will show an unrealistic loss. * * *”
     
      
       A second issue concerning tie computation of plaintiff’s excess profits taxes for 1941 and 1942 arose from the circumstance that for the year 1939, one of plaintiff’s base years, plaintiff claimed and was allowed a deduction in the amount of $20,226.42 for the depreciation] of costs incurred in the surveying and clearing of plaintiff’s transmission line rights-of-way. This allowance (although similar deductions were, as shown, disallowed for the years 1941-1953 in computing plaintiff’s income taxes, and for the years 1941 and 1942 in computing plaintiff’s excess profits credit) served to reduce plaintiff’s base period income.
      In the event the court, on the issue concerning the depreciability, during the years 1941-1953, of the surveying and clearing costs, held against plaintiff and denied deductions therefor, plaintiff, on this excess profits item of the case, made a protective claim to the effect that, if deductions are denied for 1941— 1953, the identical deduction should similarly be eliminated for 1939, which would then serve to increase its base period income and decrease its excess profits tax computations for 1941 and 1942 (assuming any such taxes are payable, since a decision in its favor on the emergeney-faeilities-allocation issue could result in the elimination of all excess profits tax liability for such years anyway). However, the determination that deductions for the depreciation of the surveying and clearing costs are allowable moots this protective claim.
     
      
       Pltf. Brief, p. S5.
     
      
       H.R. Rep. No. 179, 68th Cong., 1st Sess. 12-13, 1939-1 (Part 2) Cum. Bull. 241, 250.
     
      
       “* * * The provision [in section 202 of the Revenue Act of 1924] permitting proper adjustment to be made for any expenditure or item of loss properly chargeable to capital account clearly means such items as add to the value of the property. It would be impracticable for Congress to enumerate in detail what those items might be, but taxes and interest do not fall into that class * * *. All the revenue acts have specifically provided for the deduction of taxes and interest from gross income annually * * *. If Congress had intended to give the taxpayer the privilege of adding taxes and interest to cost, it would have been very easy to have said so. As the act does not so provide, the conclusion is inescapable that Congress did not so intend. * * *’> (47 F. 2d at 1037)
     
      
       Rinding 64.
     
      
       After stating that he had been informed that the company expected to “earn considerable income in the next few years” and that he therefore felt all possible deductions should be taken for 1929, he continued: “It must be understood that the tax law and regulations have not definitely settled the deductibility of certain expenses covering situations such as yours, but we feel that the return for the calendar year 1929 should reflect all deductions which can possibly be construed to be deductible."
     
      
       The Board of Tax Appeals affirmed the Commissioner’s action in denying the taxpayer’s claim but arrived at its result on grounds that were broader than those urged by the Commissioner. The Board interpreted the statute as precluding the capitalization of interest during construction, while the Commissioner merely took the position that, as he had held in I.T. 2386, the attempted capitalization could not be effected because the taxpayer had previously deducted the interest. In Jackson v. Commissioner of Internal Revenue, 172 F. 2d 605 (7th Cir. 1919), which involved the same question as Central Real Estate, the Commissioner, although agreeing with the result of Central Real Estate, disagreed with the basis thereof and the Board’s reasoning. The court in Jacleson agreed with the Commissioner and sustained the validity of Article 1'5,6|1 of Regulations 69 promulgated under the 1926 Revenue Act.
     
      
       Finding 66(a).
     
      
       Finding 66(b).
     
      
       X-2 Cum. Bull. 169 (1931).
     
      
       “In computing tlie amount of gain or loss, however, the cost or other basis of the property shall be properly adjusted for any expenditure, receipt, loss, or other item properly chargeable to capital account, including the cost of improvements and betterments made to the property since the basic date. Carrying charges, such as interest and taxes on unproductive property, may not be treated, as items properly chargeable to capital account, except in the case of carrying charges paid or incurred, as the case may be, prior to August 6, 1931, by a taxpayer -who did not elect to deduct carrying charges in computing net income and did not use such charges in determining his liability for filing returns of income.” X-2 Cum. Bull. 169 (1931).
     
      
      
         'Section 606 of the Revenue Act of 1928 gave the Treasury the power to apply a change in the regulations without retroactive effect.
     
      
       Findings 69(a), 70(b).
     
      
       Finding 70(b).
     
      
       Finding 70(c).
     
      
       No reliance can, of course, be placed on the form letters, dated October 24, 1931, with respect to the year 1929, and January 9, 1933, with respect to the year 1930, which the predecessor received from the Nashville Revenue Office advising that the office “is recommending to the Commissioner of Internal Revenue that your income tax returns [for such years] be accepted as correct,” (Rinding 72) Both letters made plain that the recommendation was “subject to approval in Washington.” In addition, there is no indication that the letters referred to the amended returns and not the original returns.
     
      
       Section 113(a) of the 1939 Code provides:
      “(a) Basis (unadjusted) of property. — The basis of property shall be the cost of such property * «
     
      
       21,040 shares at 590.00=551,893,600 5,700 shares at 87.50= 498,750 2,392,350
     
      
      
         “Where a corporation acquires property by the issuance oí its own stock therefor, and the persons to whom its stock is issued are not in control of the corporation after receiving the stock, the cost to the corporation acquiring the property is, of course, the value of its stock issued therefor.” (90 Ct. Cl. at 323. 30 F. Supp. at 702)
     
      
       The same result obtained in the companion Tar Court case oí Moore-MoCormaclo Lines, Ine., 44 T.C. 745 (1965), both cases arising out of a sale of ships by Seas Shipping Company to Moore-McCormack Lines for cash, notes, and 300,000 shares of stock.
     
      
       “* * * it appears that those who agreed to tafce the preferred in the summer of 1929 were probably uninformed as to the true nature of the enterprise * * (Emphasis supplied.) (Def. Brief, p. 107)
     
      
       130 Ct. Cl. at 170,126 F. Supp. at 187.
     
      
       130 Ct. Cl. at 171,126 F. Supp. at 187.
     
      
       The Revenue Act of 1924 provided (section 204 (b) and (c)) that the basis for depreciation should be the same as for gain or loss. This basis tvas cost. (Section 113 (a) and (b), and section 114(a) of the 1939 Code similarly so provided.) In commenting upon these 1924 Act provisions, H.R. Rep. No. 179, 68th Cong., 1st Sess. 18, 1939-1 (Part 2) Cum. Bull. 241, 264, stated:
      “* * * It provides that the basis of computing depreciation and depletion shall be the same as the basis of computing gain or loss from the sale of property, and represents what is obviously the correct rule, since the theory in setting a basis for depreciation and depletion is the same as in setting one for determining gain or loss from sale; that is, to insure a taxpayer a return of his capital free from tax.”
     
      
       “* * * a corporation is in a position to seek tlie best price obtainable [for its shares] and the price which a willing buyer, not required to buy, might reasonably be expected to pay would undoubtedly be determined with due regard to the assets, liabilities, earnings, records, and future business prospects of the corporation and to the price at which other shares of the corporation might be selling on the market, and if under such circumstances the directors exercised bad judgment in disposing of the stock, or, for some purpose in respect of which they might still exercise discretion, issued the shares for property having a value much lower than the price which could have been obtained, it could not reasonably be said that the cost of the property received, or in other words the fair market value of the stock issued, was limited to the value of the property received.”
     
      
       In this case, the Board refused to value the shares by the value of the property received therefor since the record contained “substantial evidence as to the actual value of Pierce Oil shares” (at 430). The rule that “the value of the shares is measured by the property,” it held, is to be applied only where “the value of the property received is the only available measure of the cost. Obviously it has no application where many shares were already outstanding representing other property and such share's have a determinable value.” Id.
      
     
      
       Nop have any findings, therefore, been made with respect thereto.
     
      
       Def. Brief, pp. 96-87.
     
      
       Id at 97.
     
      
      
        Ibid.
      
     
      
      
         Id at 98.
     
      
       Furthermore, the market collapse in October 1929 did not mark the end of contemporaneous value Judgments of $90 per share. When the predecessor and the Ford firm entered into a settlement agreement in May 1930 concerning the secondary line construction, the contract specifically called for the payment of the firm’s fee in preferred stock at the rate of $90 per share. The arbitration award to Oklahoma Contracting, also measured ini terms of $90 per share, was similarly made after the market crash.
     
      
       After 267 shares were issued to O’Brien Brothers, 13 of such shares were returned to the predecessor and presumably canceled. Defendant contends that the depreciation base should, accordingly, be appropriately adjusted downward to reflect such return and cancellation. The record does not presently indicate what appropriate depreciation base adjustments, if any, were made by the predecessor subsequent to the cancellation and return. If there was an overissuance, or if the return and cancellation otherwise constituted an adjustment based upon the predecessor’s failure to receive materials or services represented by the 13 shares, the depreciation base should, of course, have been adjusted accordingly, in which case plaintiff’s entitlement to recovery should be framed upon a calculation of 21,027 shares instead of 21,040. This matter can be ascertained in connection with the proceedings to be had under Rule 47 (c) for the determination of the exact amount due.
     
      
       Similarly, however, there might well have been other situations where cost-basis gains were taxed in the intervening period and where a carryover basis would have resulted in no gain. Plaintiff could not go back and recoup such taxes.
     
      
       Furthermore, during the war years, steel allotments were made only for large wells.
     
      
       “Our examination of the unitization agreement discloses no -words of conveyance. * * * We think the unitization agreement here was nothing more than another joint effort on the part of the owners of the producing rights to the Zone to best conserve their respective individual interests therein by joining in a plan for the most economical and productive operation of the whole field. Hence, we think each participant had exactly the same interests and rights in its respective properties after unitization as before, except that by mutual consent they had agreed to limit their production and operate their wells in the most economically feasible way from the standpoint of conservation considerations.” (at 1053-54)
     
      
       “This court is of the opinion that in income tax language there was no exchange. * * * Essentially the view we take of the unitization transaction is that it amounts to no more than an agreement as to how the parties will use that which they already had.” (at 295)
     
      
       Holding that in Louisiana, there was, in accordance with the decision of the Supreme Court of Louisiana in Martel v. A. Veeder, Inc., 199 La. 423, 6 So. 2d 335 (1942), no exchange or cross-conveyance of properties in unitization.
     
      
       “* * * The unitization agreement in WMtwell was by compulsory action under a State law whereas the agreement in the Belridge case was voluntary. We said this was immaterial on the question whether property or property rights were conveyed and that in either instance unitization amounts to no more than a production and marketing arrangement as between owners of oil-producing properties or rights. * * * We realize, of course, that the laws of the various States are not uniform in determining the legal effect of unitizing oil properties. * * * It is our- opinion that the Federal tax effects of unitization should not be made to depend upon the geographical location of the unitized properties, but, as pointed out by the U.S. Supreme Court, the tax laws should be interpreted so as to give a uniform application to a nationwide scheme of taxation.” (at 688-89) • ■
     
      
      
        Vern W. Bailey, 21 T.C. 678 (1954).
     
      
       In Bliss, the court held that attorney’s fees Incurred to defend the taxpayer’s oil and gas rights ■were not capital expenditures. It stated:
      “* * * To treat as an addition to the cost of land the amount of an expenditure made, after ownership was acquired, to enable the owner, his agent or lessee, to possess and use the land for business purposes, undisturbed by intruders or trespassers, would involve a disregard of the difference between the cost of acquiring ownership of property and expenses paid or incurred to protect the owner’s right to undisturbed possession and enjoyment of his or produces, by bimseli, Ms agents or lessees. It seems reasonable to treat amounts expended for services rendered in ejecting or excluding trespassers after ownersMp bad been acquired as expenses incident to tbe ownersMp of property and tbe acquisition and enjoyment of income from it, ratber than as additions to tbe capital investment in tbe property. We conclude that tbe attorney’s fees incurred and paid as above stated were ordinary and necessary business expenses * * (at 986)
     
      
      
        United States v. Akin, 248 F. 2d at 744, reads as follows:
      “♦ * * It Is not always easy to find a verbal formula which readily supplies an unerring guide in drawing the boundary line between current expenses and capital outlays. But it may be said in general terms that an expenditure should be treated as one in the nature of a capital outlay if it brings about the acquisition of an asset having a period of useful life in excess of one year or if it secures a like advantage to the taxpayer which has a life of more than one year. * * *”
     
      
      
         Not, clearly, could tlie expenditures be considered, as defendant contends, as such a “lease development” cost as the geophysical survey (made on all the properties upon which the lessee held mineral leases) which the Tax Court in Louisiana Land, & Exploration Co., 7 T.C. 507 (1946), aff’cl as to other issues, 161 P. 2d 842 (5th Cir. 1947), held constituted an “over-all geophysical exploration” (at 516), the costs of which should be capitalized. The survey was made “to guide petitioner in determining generally whether and to what extent these large areas of land should be explored by drilling wells” (at 515). The court considered the survey cost to constitute the same type of development expense as “platting, mapping, and subdividing of a tract of land held for sale * * *" (at 516). Pooling expenses are hardly of such a nature.
     
      
       Section 29.24-2 of Treasury Regulations 111, applicable to tbe years 1946-1951, anfl section 39.24(a)-2 of Regulations 118, applicable to tbe years 1952 and 1953.
     
      
       See n. 4.
     
      
      
        Great Northern Railway Co., 8 B.T.A. 225, 260-83 (1927).
     
      
       The Board held, in discussing the amount to be allocated to construction costs: “In our opinion, a part of the wear and tear of the train equipment of the rails, ties, etc., may be properly capitalized when men and materials for construction work are transported in transportation service trains." (Great Northern Railway Co., supra, n. 75, at 263). The following year the Board, in Chicago, R.I. & P. Ry. Co., 13 B.T.A. 988, 1021-22 (1928) (Issue 2), reversed as to other issues, 47 E. 2d 990 (7th Cir.), cert. denied, 284 U.S. 618 (1931), reaffirmed its Great Northern decision, holding that: “Respondent did not err in crediting operating expenses for the years 1916 and 1917 the amounts representing expenses of transportation for investment.” (at 1022)
     
      
       “* * * the cost of transporting men engaged in and materials to be used for new construction constituted a capital expenditure and not a proper deduction in computing taxable net income.” (at 246-46) The case was affirmed as to other issues, 71 F. 2d 953 (D.C. Cir.), cert. denied, 293 U.S. 295 (1934).
     
      
       Defendant’s brief refers to tbe “Board’s mistaken view that tbe Commissioner’s unexplained failure to cite tbe first Great Northern decision meant that he repudiated its authority.” (at 149)
     
      
      
        Estate of Sam N. Broadhead, 25 T.C.M. 133 (1966), also cited by plaintiff, actually did not address itself to tbe Issue herein involved, although it Is true that the court did refer to the second Great Northern case in a manner that might he construed to constitute a reaffirmation thereof, the court referring to the fact that the respondent (Commissioner of Internal Revenue) “neither in his brief herein nor in Revenue Ruling 59-380, supra, discusses our holding in that case that depreciation on equipment employed by a taxpayer in constructing facilities as a part of its regular operations was deductible » * [at 154] (Assuming it would make any difference, it does not appear that the Board in the second Great Northern case actually made any finding that the taxpayer-railroad constructed additional capital facilities “as a part of its regular operations.”) Without considering the validity of Rev. Rui. 59-380, however, the taxpayer’s claim that he was entitled to deduct the depreciation on certain equipment instead of capitalizing it and adding it to the cost basis of the timberlands involved, was denied in Broadhead simply on a failure of proof basis. Plaintiff had used draglines to improve the timberlands (construction of canals and roadways). Its attempt to deduct the depreciation on the draglines as a current expense of doing business was denied on the ground that it was not shown that, at the time in question, the particular lands involved were being used as a part of the operation of any going timber trade or business.
     
      
      
         I.e.j tie property (a) must have been used ini tie business; (b) was subject to a depreciation allowance; (c) was beld for more than six months; (d) was not of a land properly includable in inventory; and (e) was not held primarily for sale to customers in the ordinary course of business.
     
      
       petition sets forth certain other claims which, since plaintiff has not pursued them, are deemed to be abandoned.
     
      
       The amount oí $24,010.28 represents the $28,000 original entry reduced by (1) $1,300 for the 13 shares returned; (2) $2,670 for the reduction of $10 per share on the 267 shares outstanding; and (3) $19.72 accrued dividends on the 13 shares returned.
     