Clajon Gas Co., L.P., Aquila Gas Pipeline Corp., Tax Matters Partner - Page 13

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          included in two or more asset guideline classes, each with its              
          own (different) class life.5  Gathering pipelines are subject to            
          depreciation by both natural gas producers (under 13.2) and                 
          pipeline companies (under 46.0).                                            
          IV.  Duke Energy                                                            
               In Duke Energy Natural Gas Corp. v. Commissioner, 109 T.C.             
          at 421, we concluded that the taxpayer’s gathering systems were             
          “used primarily by a pipeline company [the taxpayer] to carry gas           
          to a production facility, which * * * brings them within asset              
          class 46.0.”  In reaching that conclusion, we rejected the                  
          taxpayer’s argument “that its gathering systems are included in             
          asset class 13.2 because the systems are used by petroleum and              
          natural gas producers to produce natural gas in that the systems            
          are essential to the production and sale of gas in the market.”             
          Id.  We noted:  “The mere fact that the gathering systems may               

               5  For example, Rev. Proc. 87-56, 1987-2 C.B. 674, provides            
          that “assets used in the drilling of onshore oil and gas wells”             
          are generally includable within Asset Class 13.1, which has a               
          6-year class life and a 5-year recovery period.  Asset Class 13.1           
          specifically excludes “assets used in the performance of any of             
          these activities * * * by integrated petroleum and natural gas              
          producers for their own account”.  Asset Class 13.2, on the other           
          hand, which specifically pertains to “assets used by petroleum              
          and natural gas producers for drilling of wells and production of           
          petroleum and natural gas” has a 14-year class life and a 7-year            
          recovery period.  An onshore oil drilling rig, therefore, has a             
          shorter class life and recovery period if owned and used by a               
          person whose sole activity is well drilling than it would have if           
          owned and used by an integrated oil and gas producer.                       

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