Full opinion text
OPINION THORNTON, District Judge. Plaintiff brings this action for refund of Federal Income Taxes paid by it for the years 1954 through 1957. The amount sought to be refunded is $1,213,-483.06, plus interest. During the years involved herein plaintiff was (and still is for that matter) a public utility engaged in the production, generation, transmission and distribution of electrical energy, and the production, purchase, transmission and distribution of natural gas. It was, and is subject to the jurisdiction of the Michigan Public Service Commission. The parties hereto have stipulated to the necessary jurisdictional facts and this Court has jurisdiction herein. The parties have also stipulated that if plaintiff is successful herein they will make the computation of the amounts to be recovered. The case has been presented to the Court on a Stipulation of Facts, a Supplemental Stipulation of Facts, testimony adduced at the trial and exhibits submitted with the stipulations and those introduced at the trial. The Court also has the benefit of a series of briéfs submitted by the parties seriatim. Plaintiff requests findings of fact by the Court in addition to those contained in the stipulations. A copy of the Stipulation of Facts and the Supplemental Stipulation of Facts is appended to this Opinion. At issue for the Court’s determination are three grounds of alleged overpayment of tax by plaintiff for the four years in question. We will deal with each of the grounds separately. They represent distinct areas. We will refer to them in the same manner as the parties have done — Advertising Expense, Death Benefit and Depreciation — bearing in mind that as to all three, defendant has disallowed or refused to allow deductions in whole or in part to which plaintiff claims it is entitled. Defendant’s position is that there has been no overpayment by plaintiff — that plaintiff is not entitled to the additional deductions claimed by it, and that the partial disallowance of certain advertising expenses was correct. ADVERTISING EXPENSE For the four taxable years in question plaintiff deducted as “ordinary and necessary expenses * * * ” (26 U.S.C.A. § 162(a)) amounts paid by it to the New York Advertising Agency, N. W. Ayer and Son, Inc., to be used by it in the Electrical Companies’ Advertising Program (ECAP). The basis of the partial disallowance by the Internal Revenue Service of the amounts so paid is found in the Treasury Regulations on Income Tax (1954 Code), § 1.162-15(d). This section was superseded, but not changed, in 1965, for taxable years beginning before January 1, 1963 by § 1.162.20 (26 CFR § 1.162-20). The operative language is: “Expenditures * * * for the promotion or defeat of legislation * * or for carrying on propaganda (including advertising) related to any of the foregoing purposes are not deductible from gross income. * * * the cost of advertising to promote or defeat legislation or to influence the public with respect to the desirability or undesirability of proposed legislation is not deductible as a business expense, even though the legislation may directly affect the taxpayer’s business. * * expenditures for institutional or ‘good will’ advertising which keeps the taxpayer’s name before the public are generally deductible as ordinary and necessary business expenses provided the expenditures are • related to the patronage the taxpayer might reasonably expect in the future. * * * expenditures for advertising which present views on economic, financial, social, or other subjects of a general nature but which do not involve [the promotion or defeat of legislation * * or propaganda (including advertising) related to any of the foregoing purposes] are deductible if they otherwise meet the requirements of the regulations under Section 162. * * * Expenditures for the promotion or the defeat of legislation include, but shall not be limited to, expenditures for the purpose of attempting to influence members of a legislative body directly or indirectly, by urging or encouraging the public to contact such members for the purpose of proposing, supporting, or opposing legislation * * It is obvious from reading the foregoing that non-deductible is correlative with advertising directed toward the “promotion or defeat of legislation.” It is not correlative with advertising expressing views on economic, financial or social subjects, per se. Copies of the advertising in controversy are contained in Stipulation Exhibits A through D, as to the magazine media. Also at issue are some television commercials for the year 1955. In support of its position that the ECAP advertising was legislatively oriented, defendant urges that certain biennial national opinion surveys are revealing of the true motivation of the ECAP. These have been conducted by Opinion Research Corporation, Princeton, New Jersey, directed as to topic by ECAP and N. W. Ayer and Son, Inc. They had as their purpose the measurement of attitudes and changes in attitude of the public toward the private electrical utilities industry and toward the governmental operation of electrical power. Some of the topics bore such headings as “Attitudes Toward Government Ownership,” “Socialism,” the “TVA and DixsonYates,” “Atomic Energy and Electricity.” While the contents of these surveys may have served as guidelines for ECAP, the yardstick for use here is the language, and its import, contained in the advertising, the expense for which is sought to be deducted by plaintiff as a necessary and business expense. The regulation refers to “expenditures * * * for the promotion or defeat of legislation * * * or for carrying on propaganda (including advertising) related to any of the foregoing purposes * * *.” It also refers to “the cost of advertising to promote or defeat legislation or to influence the public with respect to the desirability or undesirability of proposed legislation * * The advertising itself must be judged. No matter what the intent of its promulgation may have been, if it is clear of the regulatory prohibition we cannot brand it violative. No matter how criminal a man's intent may be, if he in fact commits no crime a conviction based on his intent cannot be sustained. Although we have made a cursory examination of the surveys submitted as exhibits herein we have preferred to base our judgment here on the advertisements themselves. The expenditures then for which deductions are sought to be allowed were paid to ECAP, and in turn by it to Ayer for the production of certain advertising. Was this advertising in furtherance of promotion or defeat of legislation ? Did it constitute propaganda related to such purpose? We have reviewed the eleven “disallowed” advertisements contained in Stipulation Exhibit A (ECAP ADVERTISING 1954), the nine “disallowed” advertisements and seven “disallowed” television commercials contained in Stipulation Exhibit B (ECAP ADVERTISING 1955), the ten “disallowed” advertisements contained in Stipulation Exhibit C (ECAP ADVERTISING 1956) and the nine “disallowed” advertisements contained in Stipulation Exhibit D (ECAP ADVERTISING 1957) . A fair reading of these, both individually and collectively, compels the conclusion that they belong to the nondeductible category within the purview of § 1.162-20. Repeated reading of the advertisements only serves to reinforce this conclusion. The impact of the adroitly worded presentations seems to us to come within the ambit of non-deductibility under § 1.162-20. In order to gain an appreciation of the gist of the advertisements it is necessary to read each advertisement in toto. We will, therefore, append hereto copies of three of the “disallowed” advertisements selected on the basis as to what strikes us as presenting a fair range from least purposeful to those most purposeful. Plaintiff suggests that “if by some stretch of imagination there is any merit to the Defendant’s position, that the Plaintiff is prohibited from deducting all of the costs of advertisements which relate to government-operated utilities, it is inequitable and unfair to penalize the Plaintiff to the extent of disallowing the deduction of the cost of the entire advertisement, merely because in the mind of the Defendant a single sentence relates to government-operated utilities. If any amount is to be disallowed, and we submit that no amount should be disallowed, the disallowance should be limited to total linage or total wordage which relates to government-operated utilities.” We think that the suggestion, if followed, would do violence to the purpose and intent of the regulation. A “cutting and pasting” job if contemplated by the regulation needs to be spelled out. No such procedure is spelled out in § 1.162-20 nor implied therein. We should not fail to comment on the cases cited by plaintiff in its brief. It relies heavily on Commissioner of Internal Revenue v. Tellier, 383 U.S. 687, 86 S.Ct. 1118, 16 L.Ed.2d 185 (1966). In Tellier the taxpayer sought to deduct as an “ordinary and necessary expense” legal expenses in the amount of $22,964.-20 incurred in his unsuccessful defense of a criminal prosecution. The taxpayer’s business was underwriting the public sale of stock offerings and purchasing securities for resale to customers. He was prosecuted for violating the fraud section of the Securities Act of 1933 and the mail fraud statute. The Court, speaking through Mr. Justice Stewart, said that “there can be no serious question that the payments deducted by the respondent were expenses of his securities business under the decisions of this Court, and the Commissioner does not contend otherwise.” The Commissioner’s position was that the expenditures should have been disallowed “on the ground of public policy.” Justice Stewart said that this view “finds no support, however, in any regulation or statute or in any decision of this Court, and we believe no such ‘public policy’ exception to the plain provision of § 162(a) is warranted in the circumstances presented by this case.” We fail to see any analogy to the instant matter. We fail to see how any language contained in that opinion is relevant to the case at bar. The case contains no reference to, nor does it mention § 1.162-20. In its brief plaintiff distinguishes the instant case from a group’of seven or eight cases cited by the defendant herein. We do not base our conclusion on the holdings in these eases. Each was decided on a set of facts quite distinct from those here present, except perhaps for Cammarano v. United States, 358 U.S. 498, 79 S.Ct. 524, 3 L.Ed.2d 462 (1959), which involved expenditures directed at a pending state referendum. Plaintiff’s brief is a persuasive one, but it does not meet the regulation head-on. It skirts it, albeit effectively. We have reached our conclusion here by the simple process of applying the unambiguous language of the regulation to the “disallowed” advertising. In so doing there is, in our opinion, only one possible result. The plaintiff cannot prevail. DEATH BENEFIT A statement of the issue in the above-captioned area is best given here by drawing upon the plaintiff’s own language as it appears in its briefs. We set forth below the factual background, together with plaintiff’s argument, in language that is a combination of plaintiff’s and the Court’s. The death benefit issue involves the amount deductible for Federal Income Tax purposes during each of the taxable years 1955, 1956 and 1957. The plaintiff claims that all events had occurred by the end of each of these years to establish the fact of its liability to its retired employees (as a result of the issuance of Death Benefit Certificates to these employees), and that the amount of such liability could be determined with reasonable accuracy. Prior to the year 1955 the plaintiff provided death benefit payments usually in the amount of $1,000, to the beneficiaries of its retired employees upon the death of such retired employees. This death benefit program was insured and the plaintiff’s premium payments to the insurance company were allowed as a deduction for income tax purposes by the defendant. Starting in 1955 the plaintiff continued its death benefit program, but changed the method of financing to that of a self-insured plan. Plaintiff claims: That the death benefit certificate unconditionally obligated the plaintiff to pay the death benefit upon the occurrence of an event which was certain to happen — the death of the retired employee — and that, therefore, on the last day of each of the years 1955, 1956 and 1957 the plaintiff had an actuarially determined obligation to pay death benefits on account of those employees already retired and to those employees to be retired in the future; that this obligation with respect to plaintiff’s retired employees was fixed and vested and could only be discharged by payment of the death benefit upon the employee’s death; and, that it is entitled to deduct at least the face amount of the certificates it delivered to retiring employees each year. Plaintiff has placed in the record an actuarial determination of the present value of the outstanding certificates at the end of each year, to be used if it be determined that the plaintiff would be entitled to a deduction equal to the present value of the delivered certificates, and contends that it should be entitled to deduct in each of the years 1955, 1956 and 1957 an amount equal to the annual increase in present values of the Death Benefit Certificates delivered and outstanding. The plaintiff’s Death Benefit Plan arose out of a labor dispute with its Union employees and the recommendation of a Special Commission under the Michigan Labor Mediation Act that the parties agree to a contract provision whereby the Company provides life insurance or death benefits of $1,000 for all retired or retiring employees. This agreement was adopted by the Union and Company on September 22, 1955, and provides in part as follows (Exhibit DD): “Each full-time regular employee who works to or after his Normal Retirement Date on or after March 1, 1955 will be included in the Plan. [Sec. II, par. 1] ****** Each eligible employee will be permitted to designate a payee or payees of the Benefit and in the absence of such designation the Benefit shall be payable to his estate. [Sec. Ill par. 1] ****** Each eligible employee on retirement will be given a certificate by the Company indicating his eligibility for the Benefit under the Plan. Payment of Benefits will be made by the Company on receipt of a properly executed claim form signed by the designated payee or payees and accompanied by a certified copy of the Death Certificate of the deceased retired employee. [Sec. V, pars. 1, 2. ]” With respect to the contentions of defendant we set them forth below in the language of its briefs, in combination with some of our own language: Defendant contends that there are three issues presented by the plaintiff’s claim for deductions in 1955,1956 and 1957 of accrued liabilities under its Death Benefit Plan as follows: (1) Whether, under Section 404(a) (5) of the Internal Revenue Code of 1954, the plaintiff is entitled only to the deduction of the benefits actually paid during the year, which it claimed and was allowed on its return; (2) whether, if Section 404(a) (5) is not applicable, the plaintiff was otherwise entitled to a greater deduction; and (3) the proper amount of any greater deduction. Re Section 404(a) (5) the defendant contends: That Section 404(a) (5) requires that regardless of other rules of accounting, compensation paid or accrued on account of any employee under a plan deferring the receipt of such compensation is deductible only in the taxable year when such compensation is actually paid to the employee or his beneficiary; that Section 404(a) (5) excises such arrangements as the plaintiff’s from the normal rules of tax accounting, regardless of whether the taxpayer is on a cash, accrual or other method of accounting ; that a deduction is allowable only in the year of payment, and then only if the employee’s rights are nonforfeitable; that, therefore, the defendant holds that the commuted value of the unpaid balance of the obligation was not deductible before its actual payment; that Section 404(a) (5) is an application of the long standing rule designed to forestall tax avoidance, that compensation to be paid in the future on account of an employee must be irrevocably set aside by an employer before it is deductible. Compensation is paid, within the meaning of Section 404(a) (5), at the time the funds are paid or made available to the employee. With respect to that section, which was adopted without change from the 1939 Code, the House Committee Report on the 1954 Code further stated that “[t]he employer cannot take a deduction when he makes his contribution unless the benefits are immediately paid to the employee.” (H.Rept. No. 1337, 83d Cong., 2d Sess., pp. 43-44); that plaintiff’s Death Benefit Plan originated in collective bargaining between plaintiff and its employees’ Union, regardless of whether or not the plaintiff considers it merely burial insurance for the family; that as death benefits, plaintiff’s payments clearly were compensation paid on account of any employee under a plan deferring the receipt of such compensation; that Treasury regulations on Income Tax (1954 Code) expressly provide that “Section 404(a) also governs the deductibility of unfunded pensions and death benefits paid directly to former employees or their beneficiaries” (Sec. 1.404(a)-l(a) (1), 26 C.F.R. Sec. 1.-404(a)-l(a) (1)), and that “if amounts are paid as a death benefit to the beneficiaries of an employee (for example, by continuing his salary for a reasonable period), * * * such amounts are deductible under section 404(a) (5) in any case when they are not deductible under the other paragraphs of section 404(a).” (Sec. 1.404 (a)-12, 26 C.F.R. Sec. 1.404(a)-12); that plaintiff’s contention that Section 404(a) (5) is limited to benefits received by the employee during his life is refuted by the statute itself which speaks of “compensation paid or accrued on account of [not ‘to’] any employee”; that regardless of whether from the institution of its Death Benefit Plan in 1955, or after an employee’s retirement at or after the age of 65, or only after the retired employee's death, the plaintiff became obligated to pay the benefit to the employee’s beneficiary, the plan was a plan deferring the receipt of such compensation and under Section 404(a) (5) the benefit was deductible by the plaintiff only when the plaintiff actually paid it to the beneficiary. The question as to what is and what is not deferred compensation cannot be stretched to include any consideration of the Death Benefit Plan of plaintiff. Nor do the provisions of Section 162 and/or 212 of the Internal Revenue Code have any affinity for the plaintiff’s Death Benefit Plan so as to place the plan within the “catch-all” provisions of Section 404(a) (5). John C. Nordt Co., 46 T.C. 431, 441 states that: “Section 404(a) (5) is a ‘catch-all provision’ intended to cover plans which do not fall into the formal categories (such as pension trusts, employees’ annuities, and stock bonus and profit-sharing trusts) described in paragraphs (1), (2), and (3) of subsection (a). * * *” No testimony was adduced in this proceeding that in any way associated plaintiff’s Death Benefit Plan with a continuance of the salary of any retired employee of Consumers for any period of time, reasonable or otherwise. It is conceded by defendant, and it is readily apparent, that plaintiff’s Death Benefit Plan evolved from an “arm’s length transaction" between the Company and the employees’ Union, upon the recommendation of a Special Commission appointed by the Governor of the State of Michigan under the Michigan Labor Mediation Act (Act 176 of Public Acts of 1939). The Special Commission’s primary function was to aid management and labor, through the process of mediation, in reaching amicable settlements of labor disputes then pending between the employees’ Union and the plaintiff. This recommendation by the Special Commission produced the following resolution (adopted September 22, 1955), have as Exhibit CC, by the Board of Directors of Consumers Power Company: “Report was made that on May 13, 1955, the Special Commission appointed by the Governor of the State of Michigan in the matter of the dispute between the company and the Utility Workers Union of America, C.I.O., recommended payment by the company of life insurance or death benefits of $1,000 for all retired or retiring employees within the bargaining unit; and that the officers of the company agreed with the union to the payment of death benefits in conformity with the recommendation of the Special Commission. It was further reported that the officers of the company formulated a Death Benefit Plan for all employees of the company, effective March 1, 1955, a copy of which was presented to the meeting. Under the Plan, each full-time regular employee who works to or after his normal retirement date and each such employee retiring under the company’s Pension Plan with the consent of the company because of total and permanent disability, will be eligible for the benefit. The benefit payable to the designated payee on the death of an employee retiring on or after March 1, 1955 will be $1,000 or the amount for which he was eligible under an existing group life insurance plan put into effect on July 1, 1944, if greater. The maximum amount payable under the existing insurance plan is $2,000. Upon motion duly made and seconded, the following resolution was thereupon unanimously adopted: RESOLVED: That the Death Benefit Plan for the company’s employees in the form submitted to this meeting be and hereby is approved and that the officers of the company be and hereby are authorized to do all things necessary to carry out the Plan. ****** I, P. A. Perry, Assistant Secretary of Consumers Power Company, do hereby certify that the foregoing is a true and correct copy of preamble and resolution duly and regularly adopted at meeting of the board of directors of Consumers Power Company duly held on September 22, 1955, at which a quorum was in attendance and voting throughout and that said preamble and resolution have not since been rescinded but are still in full force and effect. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of the Company this 9th day of November, 1965.” The findings and recommendations of the Special Commission, here as Exhibit BB, that had to do with the foregoing resolution by the Company recites the following: “UNION PROPOSAL NO. 40 {Insurance for Retired Employees) ‘The Company to provide $1500 life insurance for each retired and retiring employee.’ We have stated in connection with Union Pension Plan Proposal No. 9 our view that the parties should negotiate life insurance benefits for retired and retiring employees. In our opinion the Company does owe some responsibility in this regard to retired and retiring employees, although less than to employees on the payroll. Because of the cost of insurance for older persons companies which provide life insurance for retiring employees generally do so at a reduced amount. In the case of some companies it may be more economical to pay a death benefit directly rather than covering the risk by insurance. Recommendation The Commission recommends that the parties agree to a contract provision whereby the Company provides life insurance or death benefits of $1,000 for all retired or retiring employees.” The Death Benefit Plan itself, here as Exhibit DD, is devoid of any mention of “deferred compensation” and is equally devoid of any writing that would permit an inference from which a conclusion could be drawn that the plan had anything to do with deferred compensation. We have purposely given defendant’s argument (that the plaintiff’s Death Benefit Plan encompasses “deferred compensation”) extensive exposure because it is difficult for us to understand how the defendant can advance such an argument in view of the absence of any testimony, on direct or cross examination, to support such a theory, and in view of the modus operandi of the plan during the taxable years in question. When we add to the foregoing the statement by Judge Arundell of the Tax Court in John C. Nordt Co., supra, at page 442, that “[n] either the regulations nor the Code itself purports to answer the question of what constitutes ‘a [Death Benefit] plan’ under Section 404(a) (5),” we are at a loss to comprehend how the defendant can so easily place it in Section 404(a) (5) as deferred compensation. Section 404(a) (5) must be the catch-all to end all catch-alls. Defendant readily concedes that plaintiff’s Death Benefit Plan is not encompassed by (1), (2), or (3) of Section 404 (a). It does not so concede as to Section 404(a) (5). It is the conclusion of the Court, however, that it was not a plan deferring the receipt of compensation and, accordingly, was not a plan limiting the plaintiff to deductions for only the amount of the benefit paid to the beneficiary at the time of actual payment. In Commissioner of Internal Revenue v. Champion Spark Plug Company, 266 F.2d 347 (6th Cir. 1959) we find the following : “Briefly stated, the salient facts are that the board of directors of the respondent corporate taxpayer adopted a resolution in the latter part of 1953, directing the payment of $33,750 to a totally disabled salesman-employee (or, in the event of his death, to his widow) as a substitute for a policy of insurance on the salesman’s life which it had unsuccessfully attempted to secure under a pension plan; and the Tax Court considered that the authorized payment by the corporate taxpayer to its employee was an unconditional obligation to pay a business expense upon the adoption of the resolution by the directors on December 16, 1953. The court considered that the obligation became then ‘accrued’, as the taxpayer, during 1953, had kept its books and reported its income in compliance with the accrual method of accounting. The United States Tax Court held that, in the circumstances of the ease, the authorized payment to respondent’s employee was a deductible business expense for the year 1953, although the sum authorized to be paid was payable to the employee in sixty equal semimonthly instalments, beginning January 15, 1954. We believe that the tax court reached a correct result, upon the basis of its findings of fact and opinion. Accordingly, its decision is affirmed.” The tax court, in Champion, had stated the following: “We are convinced that a study of the entire record shows that Badger had been fully paid for past services and the authorized payment was not compensation for any services rendered to the petitioner. It was to alleviate the financial hardship suffered as a result of his fatal illness. Petitioner, with commendable solicitude for the sad plight of a faithful employee, felt some measure of obligation due to the fact that his assigned position had resulted in his loss of insurability. Petitioner’s discharge of the obligation in the manner revealed by this record was not the payment of compensation under any plan deferring the receipt of compensation such as to render section 23 (p), or the quoted regulations, applicable. * * *” Champion Spark Plug Co., 30 T.C. 295, 300 (1958). As an alternative theory (alternative to the theory of deferred compensation), the defendant contends: That if Section 404(a) (5) did not apply to the plaintiff’s Death Benefit Plan and prohibit any deduction before actual payment of the benefit to a retired employee’s beneficiary, the plaintiff was not otherwise entitled to deduct any “accrued liability” under the plan; that Section 461, Internal Revenue Code of 1954, provides that a deduction shall be taken for the taxable year which is the proper taxable year under the method of accounting used in computing taxable income; that for a taxpayer computing its taxable income by the accrual method it has long been held that in order truly to reflect the income of a given year, all the events must occur in that year which fixed the amount, and the fact of the taxpayer’s liability for the items of indebtedness deducted though not paid; that under this fundamental principle of tax accounting, a taxpayer may not accrue an expense the amount of which is unsettled or the liability for which is contingent. In support of this theory defendant relies upon Dixie Pine Products Co. v. Commissioner of Internal Revenue, 320 U.S. 516, 519, 64 S.Ct. 364, 88 L.Ed. 270 (1944) ; United States v. Consolidated Edison Co., 366 U.S. 380, 385, 81 S.Ct. 1326, 6 L.Ed. 2d 356 (1961); and Security Flour Mills Co. v. Commissioner of Internal Revenue, 321 U.S. 281, 284, 64 S.Ct. 596, 88 L.Ed. 725 (1944). This Court certainly has no quarrel with the legal proposition for which these three opinions stand as it pertains to the facts under consideration by the Supreme Court in each of the three cases. However, the facts in the three cited cases are as foreign to the facts in this case as a fish is to feathers. “Decision of the issue presented in these cases must be based ultimately on the application of the fact-finding tribunal’s experience with the mainsprings of human conduct to the totality of the facts of each case.” Commissioner of Internal Revenue v. Duberstein, 363 U.S. 278, 289, 80 S.Ct. 1190, 1198, 4 L.Ed.2d 1218 (1960) Continuing with its alternative theory defendant invokes Treasury Regulations on Income Tax (1954 Code) Section 1-461-1 (a) (2) providing that: “Under an accrual method of accounting, an expense is deductible for the taxable year in which aU the events have occurred which determine the fact of the liability and the amount thereof can be determined with reasonable accuracy.” (Emphasis supplied) and argues that strict adherence to this “all events” test for revenue purposes is necessary “to prevent the permanent exemption of income of a continuing business from payment of tax.” Plaintiff’s answer to defendant’s “all events” theory is that all the events had occurred in each of the taxable years in question to establish the fact of liability to its retired employees, and that the amount of such liability could be determined with reasonable accuracy. The posture of this aspect of the case is perfectly clear — the defendant contending that a certain test must be met in order to sustain plaintiff’s tax theory, and the plaintiff contending that it has fully met the test. Of assistance to us in arriving at a proper determination of this issue is United States v. Anderson, 269 U.S. 422 at page 441, 46 S.Ct. 131 at page 134, 70 L.Ed. 347 (1926) in which we find the following : “In a technical legal sense it may be argued that a tax does not accrue until it has been assessed and becomes due; but it is also true that in advance of the assessment of a tax, all the events may occur which fix the amount of,the tax and determine the liability of the taxpayer to pay it. * * * ” Peninsular Metal Products Corporation, 37 T.C. 172, 178-179 (1961), concerns a situation where the taxpayer’s liability had become “fixed, absolute and unconditional” by virtue of a 1956 agreement, and the Court there held that the “all events” test was satisfied and the taxpayer should prevail. We quote below from this case: “Petitioner cites Champion Spark Plug Co.,* * * as being a case very closely in point to the issue here involved. * * * In the instant case the respondent, in contending that petitioner is not entitled to deduct any amount in 1956, argues that the agreement of March 17, 1956, was a modification of the prior employment agreement of July 28, 1954. There is no merit in this argument. The agreement of July 28, 1954, was ‘terminated for breach, effective immediately’ on January 19, 1956, at which time Burgess was removed as president and general manager of the petitioner. Burgess and his attorney protested the discharge of Burgess and the cancellation of his contract. A definite and clear-cut dispute arose between petitioner and Burgess. Petitioner claimed it had discharged Burgess and canceled his contract because Burgess had been guilty of numerous and serious defaults in the performance of his employment agreement and had breached ‘his employment agreement, all of which was denied by Burgess. In order to settle the controversy amicably, petitioner and Burgess entered into the agreement of March 17, 1956. This agreement was in no way a modification or revision or a continuation of the employment agreement of July 28, 1954, but was a separate, distinct, and definite agreement executed between petitioner and Burgess to settle amicably the controversy which had arisen between them, whereby petitioner became absolutely liable to pay Burgess the then-determined amount of $117,-400. The agreement of March 17, 1956, was not subject to any contingencies or conditions. Burgess was not obligated or required to render or perform any services or refrain from doing anything. The liability to Burgess was fixed, absolute, and unconditional whether Burgess lived or died. All the events had occurred in 1956 which determined the fact of petitioner’s liability to pay Burgess $117,400 as liquidated damages. We think the instant case is substantially on all fours in principle with Champion Spark Plug Co., supra. For the reasons previously given, we hold that petitioner is entitled to deduct the full amount of $117,400 from its gross income in its income tax return for the year 1956. * * * ” From all the foregoing the Court concludes that when plaintiff issued a Death Benefit Plan Certificate to a retired or retiring employee of the Company during any of the years 1955, 1956 or 1957, then and at that time its liability under the provisions of the Certificate was clearly established; also, the amount of said liability could be determined with reasonable accuracy. The Plan, therefore, met the “all events” test set forth in Treasury Regulations on Income Tax, 1954 Code, Section 1.461-1 (a) (2). Since plaintiff has conformed to the “all events” requirement of the tax regulations, it is entitled to deduct the face amount of each Death Benefit Plan Certificate issued to a retired employee of the Company for the year of issuance— 1955, 1956 or 1957. DEPRECIATION The Internal Revenue Code of 1954 provides for the allowance of depreciation as a deduction from gross income, as follows: “(a) General rule. — There shall be allowed as a depreciation deduction 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. * * *» (26 U.S.C.A. § 167) The substantive issue under the depreciation heading involves plaintiff’s right to take deductions in computing Federal income for: A. depreciation on its “costs of initial electric transmission line clearing sustained in the year 1957 in the amount of not less than $100,727.00” and B. depreciation on its “costs of right-of-way easements sustained in the year 1957 in the amount of not less than $188,045.00.” We will refer to A and B above as clearing costs and easement costs, respectively. The clearing costs were capitalized and carried in a separate plant account. The costs of the easements also were capitalized and were carried in three separate plant accounts. In its Complaint plaintiff states, at pages 8-9, that “[t]he average amount in its plant account for such initial clearing for the construction of electric transmission lines for the year 1957 was not less than $4,-116,397.00. Such amount represents the amount which the Plaintiff paid in wages to have trees and shrubs cut as a necessary and integral part of the construction of an electric transmission line so as to set the towers and poles and keep such towers and poles and the electric wire conductor free of any contact by trees and shrubs. The land is not improved for rough stumps remain after the clearing.” Plaintiff goes on to state that during its existence many electric transmission lines have been retired from service and that as a result the costs of initial clearing are retired from service. Plaintiff states that these retirements from service “will continue in the future at least as rapidly as in the past, and in amounts of not less than the amounts involved in the past.” The depreciation taken by plaintiff for clearing costs on its books of account in 1955 was upon the basis of a 75-year life. The Michigan Public Service Commission approved such book accounting. Plaintiff states in paragraph 26 of its Complaint that the “application of an accepted formula used for determining the useful life of depreciable property for Federal income tax purposes, indicates a useful life at the end of the year 1957 of not more than 75 years.” Plaintiff goes on to say in paragraph 27 that “[i]n the alternative, the useful life of the Plaintiff’s initial electric transmission line clearing costs is the same as the assets with which they are associated, namely, the towers, poles and conductors, which in the Plaintiff’s case is a 51-year life.” The plaintiff makes the observation that the purpose of depreciation is to allocate to each accounting year a proportion of the initial cost of an asset “so that over the life of the asset there would be reflected its loss of value due to wear and tear, including the destructive force of the elements, and obsolescence.” Obviously obsolescence must be anticipated, and its rate cannot be projected with precision. Plaintiff states in paragraph 28 of its Complaint that its “initial electric.transmission line clearing costs will become obsolete in the future as in the past, but to a greater degree in the future [emphasis supplied] than in the past, by reason of any one of numerous technological and economic obsolescence factors existing in the electric public utility field. Such factors include, among others, new extremely high voltage transmission lines, changes in design of transmission line poles and towers, and the generation of electric energy by means of nuclear reaction, fuel cells, solar cells, magneto-hydrodynamic and thermionic methods.” It is plaintiff’s claim in relation to the clearing costs as set forth in paragraph 29 that it “is entitled under the provisions of section 167 of the Internal Revenue Code of 1954, as amended, and Income Tax Regulations § 1.167, to a depreciation deduction based upon the gradual day-by-day economic obsolescence of its initial electric transmission line clearing costs over a period of 51 years and in the amount of not less than $100,727.00 in computing its Federal income tax liability for the year 1957.” The answer of defendant to plaintiff’s Complaint re all the allegations in paragraphs 23-28 (those relating specifically to clearing costs), is that defendant is “without knowledge or information sufficient to form a belief” as to their truth. As to paragraph 29 (the last paragraph relating specifically to clearing costs) defendant’s answer is that it “denies the allegations of paragraph 29.” The fundamental dispute between the parties here appears to be one having to do with degree of accuracy of prediction concerning obsolescence. Plaintiff argues that the Commission requires much greater accuracy in the projection in the life of intangible assets than of tangible assets — that because “exhaustion, wear and tear” of tangible assets can be fairly accurately predicted and therefore allowed greater leeway, the formula for predicting obsolescence of intangible assets must be tied down with greater certainty. Plaintiff argues, in hocus-pocus fashion, that the assets involved herein are tangible and not subject to what it deems to be the stricter rule for intangibles. It uses various references in support of this position, such as the application of the State of Michigan’s property tax and the view taken by the Michigan Public Service Commission. It should be noted that in the cases cited by plaintiff, including some as recently as the summer and fall of 1968, the Court treated and referred to easements and clearing costs as intangible assets. We do not deem it necessary to make a determination here that they are one or the other. Since the date of the trial plaintiff has called to the attention of the Court several recent decisions involving depreciation, by utility companies, of the kind of assets we are here talking about. These cases are as follows: Badger Pipe Line Co. v. United States, October 15,1965, U. S. Court of Claims Great Lakes Pipe Line Co. v. United States, August 15, 1965, U. S. District Court, W.D.Mo. Texas-New Mexico Pipe Line Co. v. United States, October 18, 1968, U. S. Court of Claims, 401 F.2d 796 Commonwealth Natural Gas Corp. v. United States, 395 F.2d 493 (C.A.4, May 7, 1968) Oklahoma Gas & Electric v. United States, August 9, 1968, U. S. District Court, W.D.Okla., 289 F.Supp. 98 Panhandle Eastern Pipe Line Co. v. United States, June 18, 1968, Commissioner’s Opinion Pennsylvania Power & Light Co. v. United States, July 30, 1968, Commissioner’s Opinion Virginia Electric & Power Co. v. United States, October 16, 1968, Commissioner’s Opinion We have read these decisions and find them apposite. Prior to any further discussion of them we will here pause to comment briefly on some, if not all, of the six witnesses whose testimony supported the position of plaintiff, and the one witness upon whose testimony the government relies. We will advert to the final argument of counsel summarizing the positions taken by them for their respective clients. Finally, we will draw upon the decisions above-cited for what we consider to be statements of the law that apply as forcefully to the situation of this plaintiff as they did to the plaintiffs in those cases. The Court heard testimony from Mr. Russell C. Youngdahl on the depreciation issue. Mr. Youngdahl’s position with Consumers Power at the time he testified was Executive Manager of Engineering Construction. For the purpose of giving a fair picture of Mr. Youngdahl we here set forth testimony from the transcript reflecting what transpired upon his first taking the witness stand. (Tr. 230-233) “Q. Your full name, please? A. Russell Charles Youngdahl. Q. Mr. Youngdahl, what is your home address, please? A. 1747 Oaks Drive, Jackson, Michigan. Q. What is your present position? A. Present position is Executive Manager of Engineering Construction with the Consumers Power Company. Q. How long have you held this position, Mr. Youngdahl? A. About three days. Q. Prior to three days ago, what was your position, sir? A. Prior to Tuesday of this week I was Executive Manager of Electric Operations for the Consumers Power Company. Q. I take it this is a promotion? A. Yes. Q. Congratulations. A. Thank you. Q. How long have you been associated with Consumers Power Company? A. Since 1946. Q. In what capacities? A. Initially as a Junior Engineer; then as a Field Engineer; then as Division Engineer; as an Operations Supervisor; as an Assistant Superintendent; as Electric Distribution Superintendent ; as Assistant General Supervisor of Electric Operations; and most recently as Executive Manager of Electric Operations. Q. Now, as Executive Manager of Electric Operations up until two or three days ago, will you please describe, briefly, the duties of your position? A. Yes. I reported directly to the Vice President of Electric Operations, and all of the department then reported through me to him, and we are responsible for electric generation in the Consumers Power Company; the electric distribution and transmission system for Consumers Power Company; the bulk power planning for Consumers Power Company, the electric budgets and planning for the Consumers; coal purchases, and the forestry departments. Q. What is your professional education? A. I have a Bachelor of Science from the University of Michigan, Electrical Engineering, and a Master of Industrial Management from M.I.T., Massachusetts Institute of Technology. Q. Are you a member of any professional societies? A. Yes. The I.E.E.E., and it stands for the Institute of Electrical and Electronic Engineers. Q. Mr. Youngdahl, for your convenience in answering the next question we have enlarged Exhibit LL and put it over on an easel, and we have a pointer for your use if you wish to use it. Will you please describe, briefly, the company’s electric transmission system as it existed in 1957? A. All right. Consumers’ electric system in 1957 — and this is a map of 1957 — supplied energy to, basically, the Lower Peninsula, with the exception of the Thumb area, the Detroit area, and this piece of Michigan near the Lake and Indiana. There were some 33 hydro plants, eight fossil-burning plants, and two Diesel plants that generated electricity, along with three interconnections to the Detroit Edison system. Q. Could I interrupt you for a moment? What is a ‘fossil-burning plant’ ? A. Excuse me. Coal. Coal-burning plant. The purpose of the transmission system was to interconnect these generating facilities throughout the State and deliver the electrical energy to other points of need of utilization. Actually, there is a step-down area, because the transmission system generally does not service customers per se, but supplies service to sub-stations, which sets it down to a lower utilization voltage, which, in turn, is stepped down again to supply service to the ultimate user.” After describing briefly the company’s transmission lines Mr. Youngdahl’s testimony included statements to the effect that there would be an acceleration of retirements of electric transmission lines in the state because of the “growth of Michigan and the technological changes that are taking place in the field of generation and interconnection of systems.” (Tr. 263) He testified that the company’s electric transmission easements have a limited life because the transmission system “is not a static thing.” (Tr. 263) Mr. Youngdahl described the plaintiff’s electric distribution system as it existed in 1957. He then testified that electric distribution easements traverse approximately the same types of area as electric transmission easements and are subject to “substantially the same mortality causes as electric transmission easements” (Tr. 270) and that they have a life which tends to be shorter than the electric transmission easements because “they have a greater exposure to being moved, to being changed, than the transmission system.” (Tr. 271) He also testified that obsolescence accounts for approximately 80% of retirement of the company’s electric plant (Tr. 272). “This would apply to the entire system. The generating units, the transmission system, and the distribution system.” (Tr. 272) Another witness called by plaintiff was Mr. John Simpson who testified upon taking the stand, as follows: (Tr. 303) “Q. Your full name, please? A. John Simpson. Q. Mr. Simpson, what is your home address ? A. 3958 Fayette Court, Jackson, Michigan. Q. What is your occupation? A. I am Vice President in charge of Gas Operations for Consumers Power Company. Q. How long have you been employed by Consumers Power Company? A. In excess of twenty years. Q. In what capacities, sir? A. Well, I came with the company in 1946 as a Junior Engineer; Transferred to our subsidiary, Michigan Gas Storage Company in 1947; In 1950 or ’51 I was made Assistant General erintendent of Michigan Gas storage Company; And in 1952 I returned to Consumers Power Company as General Supervisor of Gas Operations. In 1958 I was appointed to my present position. Q. And you are still vice president? A. Yes, sir. Q. In charge of Gas Operations? A. Yes, sir. Q. Are you a registered engineer? A. Yes, sir, I am, in the State of Michigan. Q. Please describe, briefly, the duties of your position? A. Well, I am in charge of the acquisition of gas supply; planning ; construction; operation and maintenance of our integrated natural gas system. Q. Does this include the distribution system ? A. Yes, sir, it does.” Mr. Simpson then proceeded to give a description of the gas distribution system of plaintiff as it existed in 1957. He testified that the gas distribution system consisted “primarily of two types of facilities” (Tr. 304) — the distribution grid running up and down the city streets “from which the service pipe to each individual customer’s home or place of business is run” and the supply mains “which take the gas into the distribution grid.” (Tr. 304) When asked what causes there were for relocating or abandoning gas distribution mains, Mr. Simpson replied “Well, there are two main reasons. One is corrosion or deterioration of the pipe such that it is no longer safe to use and must be retired or abandoned because of a leaking condition; or, secondly — and perhaps the one that is the reason that rules most of the time— is obsolescence.” (Tr. 310) Asked whether the cost of a gas distribution easement constitutes a part of the cost of the main which is installed in it, Mr. Simpson replied in the affirmative. Mr. Simpson testified that many new gas easements had been necessary in order to add new mains, and he submitted a schedule prepared by him showing the amount of gas distribution mains retired for 1953-1965 (Exhibit NNN) — over 900 miles of distribution mains. He was asked what happened to the mains upon retirement, and his answer was that “practically all of it was just left in place and abandoned.” (Tr. 315) He had previously explained why retired mains must be abandoned and cannot as a practical matter be removed — the cost of removal being more than the salvage value. He also testified that when old mains wear out it is not possible to lay new ones over them. He testified that the life of these distribution easements is the same as the supply mains (Tr. 320) — that the type of pipe used by the company in the last 15 years for supplying mains has been “exclusively coated and wrapped steel pipe.” (Tr. 320) A witness called by plaintiff, who held no position with plaintiff and who testified that plaintiff had not been a client of his company prior to employment in this ease, impressed this Court as a person thoroughly competent in his field, whose judgment may not be lightly questioned. He is Mr. John J. Reilly. His competency and qualification can best be presented by the portions of the transcript hereinafter set forth: (Tr. 483-489) “Q. Will you state your name and address, please? A. My name is John J. Reilly, and my place of residence is Roslyn Heights, Long Island, a suburb of New York City. Q. What is your occupation, Mr. Reilly ? A. I am an employee of Ebasco Services Incorporated, and hold the position of Director of Valuation and Appraisal Services. Q. Can you describe your duties— A. (Interposing) As Director of these Services, I am responsible for the preparation and supervision of all valuation and depreciation studies. Q. What kind of organization is Ebasco Services ? A. Ebasco is a wholly-owned subsidiary of Electric Bond and Share Company. It has provided consulting engineering, design, construction, and management consultation services to utility companies and governments for the past sixty years. It is one of the largest designers and constructors of steam electric and hydro-electric power plants. Q. Prior to your employment in this case, Mr. Reilly, has Consumers Power Company been a client of Ebasco ? A. No, it has not. Q. Have you prepared a resume of your education and professional experience? A. Yes, sir, I have. MR. ALLEN: Mark this, please. (A booklet entitled, ‘Resume of Education and Professional Experience of John J. Reilly,’ was thereupon marked Plaintiff’s Exhibit YYY by the Reporter.) Q. (By Mr. Allen, continuing) Mr. Reilly, I hand you what has been marked for identification as Exhibit YYY. Will you identify it for us, please? (Handing exhibit to the witness.) A. This exhibit is a brochure which contains a resume of my education and professional experience. Q. So the Court will have a general idea of your qualifications, Mr. Reilly, will you summarize, briefly, your education and professional experience? A. I am a graduate of Ohio University, with a degree of Bachelor of Science in Civil Engineering in the year 1932. I also completed graduate courses in Power Plant Engineering at Columbia University during ’39 and ’40. During the period ’33 to ’37,1 worked for the City of New York as a Structural Design Engineer. I was employed by Ebasco Services, Incorporated, as a Power Plant Design Engineer in April 1937. Since 1937, except for a two-year period of service in the Navy, I have been continuously employed by Ebasco, and was appointed to my present position in 1954. During the major part of the 30-year period, I have been engaged in engineering work closely related to the appraisal of industrial property. These appraisal studies were made generally for acquisition, sale, financing, rate, condemnation and tax purposes, or to satisfy the requirements of local, state, and federal regulatory agencies. During this 30-year period, I assisted with appraisal studies for some 170 industrial and government clients, more than half of which were public utility clients. During this same period I either made or directed approximately 80 depreciation studies for some 46 public utility clients. Q. Have you prepared a list of the public utility clients for whom you have made depreciation studies? A. Yes, I have. MR. ALLEN: Mark this, please. (A booklet entitled, ‘Ebasco Depreciation Studies Involving Statistical Methods Made for Public Utility Clients,’ was thereupon marked Plaintiff’s Exhibit ZZZ by the Reporter.) Q. (By Mr. Allen, continuing) I hand you what has been marked for identification as Exhibit ZZZ. Will you identify it for us, please (handing Exhibit to the witness) ? A. Exhibit ZZZ is a table showing a list of the clients for which I have either been assisting or directing statistical studies covering the subject of depreciation, and these clients are public utility clients. Q. Will you proceed with the statement of your qualifications? A. In connection with these appraisal or depreciation studies, I participated in conferences, or hearings, as a consultant or expert witness, in proceedings before the following regulatory agencies: Idaho, Kansas, Massachusetts, Nevada, New Mexico, New Orleans — pardon me — North Carolina, Ohio, Pennsylvania, Rhode Island, Virginia, and Washington, State Public Utilities Commissions; the Federal Maritime Commission; the Federal Power Commission; the Department of Justice; and the Internal Revenue Service. I have also appeared as a valuation witness before courts of law in the United States and Canada. Q. Are you a registered professional engineer ? A. Yes, I am a registered professional engineer in the States of Louisiana, New York, Pennsylvania, Rhode Island, Virginia, and Washington. I also hold a certificate of qualification issued by the National Bureau of Engineering Registration. Q. What are your professional society affiliations ? A. I am a member of the American Society of Appraisers, the American Society of Civil Engineers, and the Depreciation Accounting Committee of the Edison Electric Institute. Q. What is the Edison Electric Institute? A. The Edison Electric Institute is a trade association participated in by some 200 electric public utilities throughout the United States. Q. You mentioned a Depreciation Accounting Committee of the Edison Electric Institute of which you are a member. Will you tell us what that committee is? A. The Depreciation Accounting Committee of the Edison Electric Institute is a committee, a technical committee composed of engineers and accountants from various electric utility companies throughout the United States, with guest members from Canada, and also with representation from the various service companies, such as Ebasco and other companies. Q. As a member of the Depreciation Accounting Committee of Edison Electric Institute, have you participated in any joint activity with any branch of the American Gas Association ? A. Yes. During the period from 1949 to the present, I have participated in the joint meetings of the Edison Electric Institute — the Depreciation Accounting Committee Meetings of the Edison Electric Institute and the American Gas Association. Q. What is the American Gas Association? A. The American Gas Association, like the Edison Electric Institute, is a trade association composed of operating companies representing the gas transmission, gas production, and gas distribution. It also includes companies such as Consumers, where they serve both electric and gas. Q. Are you generally familiar with electric and gas utility plants ? A. Yes, I am. Q. Are you generally familiar with electric and gas utility rights-of-way? A. Yes, I am. Q. Have you made yourself familiar with Consumers Power Company, and particularly its plant and its operation ? A. I have. Q. Mr. Reilly, two of the accounts in issue in this case involve average useful service lives of an account called electric transmission easements, and another one called electric transmission line clearing costs. Are you familiar with that? A. Yes, I am. Q. At our request have you made a determination of the average useful lives of the Plaintiff’s property in these two accounts? A. Yes, I have. Q. Have you read the Stipulation of Facts and the supplemental Stipulation of Facts in this case ? A. Yes, I have. Q. Have you examined the exhibits in this case pertinent to this issue ? A. Yes, I have. Q. Have you listened to, or read the transcript of, the testimony in this case on the depreciation issue? A. Yes, I have. Q. Based on the testimony in this case and the facts as stipulated, do you have an opinion as to the average useful service life of plaintiff’s electric transmission line clearing costs and the Plaintiff’s electric transmission easements? A. Yes, I have such an opinion.” With respect to the electric transmission easement account and the electric transmission line clearing costs account Mr. Reilly was asked what method he used in estimating the useful lives. He stated that he used the actuarial method. He further stated that: (Tr. 492-493) “This method of analyzing past experience represents the application to industrial property of statistical procedures developed in the life insurance field for investigating human mortality. It is distinguished from other methods of life estimation by the requirement that it is necessary to know the age of the property at the time of its retirement and the ages of survivors, or plant remaining in service. The application of this method involves the statistical procedure known as the ‘annual rate method’ of analysis. This procedure relates the retirements during each age interval to the exposures at the beginning of that interval, the ratio of these being the annual retirement ratio. Subtracting each retirement ratio from unity yields a sequence of annual survival probabilities from which a survivor or mortality curve can be determined. The length of this curve depends primarily upon the years of experience available. Normally, if the experience band of years is short in relation to the average life of the property, an incomplete or stub survivor curve results. While there are a number of acceptable methods of smoothing and extending this stub survivor curve, incomplete survivor curve, in order to compute the area under it from which the average life is determined, the well-known Iowa Type Curve Method was used in this study.” Mr. Reilly then proceeded to explain the statistical basis for the results he obtained. We will not set this forth here. It is of a te