Exxon Corp. v. United States

BeNNett, Judge,

concurring:

While I agree with Trial Judge Fletcher’s result and join in the concurring opinion of Judge Davis, I believe a further comment is in order. A strong reason, not elsewhere articulated, for interpreting the regulation as the trial judge and plaintiff would have us read it is that their interpretation is workable. Defendant’s reading of the regulation, on the other hand, would present substantial difficulties in the administration of the tax laws. The court should not strain to reach an interpretation, not clearly compelled, that would have such a result. Commissioner v. Brown, 380 U.S. 563, 571 (1965); Steuer v. United States, 207 Ct. Cl. 282, 294 (1975); Kantor v. United States, 205 Ct. Cl. 1, 6 (1974). There is considerable appeal in defendant’s view of the regulation, for the theory that it ascribes to the regulation’s accounting scheme is familiar: one-time expenditures for items that contribute to the construction of platform components with continuing value should 'be capitalized and depreciated, rather than ex-pensed. If, however, certain otherwise intangible drilling costs are to be capitalized, according to defendant’s theory, it would become necessary to determine exactly what components of the final assembly could be saved as they are and subsequently reused. This would not be an easy exercise.

The trial judge pointed out that each platform in the present case was designed to accommodate ocean depth and current conditions at the proposed drilling site. This immediately leads one to suspect that platform component subassem-blies are not uniformly salvable. In this case, one platform was dismantled and its parts stored in roughly their state of assembly at the completion of the land-phase construction stage. Does this warrant the conclusion that all platform *280 components, or all of plaintiff’s forerunner’s 1954 platform components, are saleable in the same state of assembly? Is the entitlement to current deductions or the requirement of capitalization under the regulation to be determined in each case on the basis of a plaintiff’s salvage history ? What would be the plight of a future plaintiff who could point to no instances of salvage, so successful were his geologists’ pre7 dictions? Defendant’s argument that a taxpayer would be required to capitalize the intangible costs of building those components “ordinarily” possessed of continuing value, tracking the language of subsection (c) (1) of the regulation and the reasoning of Harper Oil Co. v. United States, 425 F. 2d 1335 (10th Cir. 1970), while perhaps removing the subjective element from the determination, would not make its rule any easier to apply. The focus of the questions may shift: What is the “ordinary” state of assembly in which a component of a tailor-made platform remains after the platform is dismantled ? To ascertain the ordinary salvage value of a component, is one to consult industrywide history or practice of salvage, or expert opinion regarding what would have been reusable ? Despite the difficulty of the questions and the imprecision that would necessarily result from resort to estimation, the drilling operator’s accountants and the IRS’s auditors would be expected, under defendant’s approach, to come up with answers on salvage value in exact figures, and to do so in the year of the platform’s construction, not in the year of its razing.

Were we to follow defendant’s reading of the regulation, the accounting for each platform would potentially revolve about fact problems not at all readily resolved or resolvable. Considering the number of platforms built (with changing technology) by a variety of drilling operators since 1954, and yet to be built, the problem takes on staggering proportions. For the added reason that defendant’s interpretation of the regulation would be altogether cumbersome in application for the taxpayer, the IRS, and for the courts when the first two cannot agree, the court does well to avoid that interpretation and to stand by the reading that it adopts.