Full opinion text
OPINION PER CURIAM: This case was referred to Trial Commissioner Saul Richard 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 January 23, 1969. A notice 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, 408 F.2d 690, 187 Ct.Cl. 129, decided March 14, 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 ease are tangible assets for income tax purposes. Therefore, 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 with the amount of recovery to be determined pursuant to Rule 47(c). 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. Commissioner 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. DEPRECIABILITY OF COSTS OF SURVEYS AND OF ACQUIRING, CLEARING, AND GRADING THE TRANSMISSION LINE RIGHTS-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, railroad, 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 rod-dage 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 tranmission system, and therefore depreciable on the same basis as such system. However, by a notice of deficiency dated February 26, 1958, the Commissioner of Internal Revenue 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 (i. e., “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 with 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 multiline 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, 401 F.2d 799, 185 Ct.Cl. 547 (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 Revenue 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 re-coupment 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, 267 F.Supp. 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 rod-dage 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 assignability 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, 368 F.2d 233, 177 Ct.Cl. 395 (1966), as well as in Union Electric Co. v. Commissioner of Internal Rev., 177 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 aj 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 flow-age 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 depreciability 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 electriet 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, nonde-preciable. 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, 277 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 BONDS 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 the 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 Revenue, 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 of what the fair 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, in the above instance, $25 more to retire the bond than it received on issuance, is regarded as property 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, 55 S.Ct. 165, 79 L.Ed. 363 (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 “[f]rom 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, 159 F.Supp. 593, 141 Ct.Cl. 620, cert. denied, 358 U.S. 842, 79 S.Ct. 23, 3 L.Ed.2d 76 (1958). In that case, the taxpayer corporation issued 30-year debentures for which it received in return 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” (159 F.Supp. at 595, 141 Ct.Cl. at 624) 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 of 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].” (159 F.Supp. at 595, 141 Ct.Cl. at 623). 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. (159 F.Supp. at 595, 141 Ct.Cl. at 623-624.) 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. (159 F.Supp. at 596, 141 Ct.Cl. at 625) Plaintiff alternatively contends that if it is denied the claimed deduction of f 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 as 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 unamortized 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 pipe line, 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 emer gency facility under section 124-(Emphasis supplied) Such exclusion of emergency facilities from a company’s “natural gas property” thus necessitated the separation of the net income of the “natural gas property” from that of the emergency facilities. Under section 735(a) (12), the net income from a natural gas property was to be “computed in accordance with the regulations prescribed by the Commissioner * * The pertinent regulations (Treas.Reg. 112, § 35.735-2(l), 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, such as overhead, not directly attributable “to the 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 the gross income less the 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 the “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] eductions 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 nonemer-gency facilities. However, in its brief to the commissioner (p. 64) defendant now concedes that “[t]o 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 Revenue, 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 adjustment [s] 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 sub-paragraph (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 Regulations 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 require, 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 “[w]here 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 by I.T. 2386, VI-2 Cum.Bull. 110, which held that no adjustment to cost could be made by capitalizing interest or 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 Revenue 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.” Thus, says plaintiff, until the Board of Tax Appeals decided differently on October 4, 1929, in Central Real 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 Real 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 bi