Power Company Argues District Court Erred in Jury Instructions in Refund Suit

Since 1926, Carolina Power has been engaged in the generation, transmission and distribution of electric energy. By the end of 1971, Carolina Power had contracted for the manufacture and supply of key components for its Shearon Harris Nuclear Power Plant. Most of the physical construction of the Harris plant occurred between 1974 and 1983. Following rigorous testing, Carolina Power applied for and received its low power operating license in October 1986. In that month, Carolina Power entered the final stage of the start-up program, "power ascension testing." The government issued a second or "full power" operating license for the Harris plant in January 1987. That month the plant also achieved a sustained nuclear reaction in the core and commenced "low power" testing. The Harris plant then moved through various testing plateaus and reached 100 percent power in April 1987.

Carolina Power determined that the Harris plant was "ready and available" and therefore "placed in service" in 1986. The company maintained that everything that occurred after December 31, 1986 further confirmed that the Harris plant was "ready and available" in 1986 and therefore claimed a depreciation deduction for the plant on both its 1986 and 1987 returns. After an audit, the IRS disallowed all of the depreciation deduction claimed by Carolina Power for 1986 and a portion of that claimed for 1987. The utility paid the IRS the amounts allegedly due and filed for a refund. Following the Service's failure to allow or disallow the refund within six months, Carolina Power filed suit in U.S. district court. The case was tried before a jury for eight days and on December 18, 1995, the jury returned a verdict in favor of the government. Pending mediation, Carolina Power filed a notice of appeal.

Carolina Power argues that the district court's final jury instruction did not provide the proper legal standard for determining when an asset is "placed in service" for depreciation purposes. The company emphasizes that the depreciation regs require only readiness and availability, not actual use or operation, and the district court's jury instructions did not accurately reflect the law. Carolina Power also insists that the court failed to instruct the jury as to factors "outside the taxpayer's control" and as to the distinction between physical and legal conditions of readiness. The company further contends the court refused to instruct as to operability "at some level" and improperly and confusingly referred to IRS "Revenue Rulings". Finally, Carolina Power maintains that the district court committed several evidentiary errors that warrant the granting of a new trial.

STATEMENT OF JURISDICTION

STATEMENT OF ISSUES PRESENTED

STATEMENT OF THE CASE

STATEMENT OF FACTS

A. CP&L and the Harris Plant

D. NRC Oversight of the Harris Plant

C. Start-up Preoperational Testing

D. Facility Completion and Receipt of the Initial Operating License

E. Initial Operation of the Harris Plant

F. Full Power Licensing History

G. The IRS Denies CP&L's 1986 and 1987 Depreciation Deductions on the Harris Plant

PROCEEDINGS BELOW

SUMMARY OF THE ARGUMENT

ARGUMENT

Standard of Review

Legal Background on Depreciation

A. Tax Policy Favors Early Depreciation

STATEMENT OF JURISDICTION

[2] Jurisdiction in the district court rested upon both 28 U.S.C. section 1346(a)(1) and 26 U.S.C. section 7422. Jurisdiction in this Court rests upon 28 U.S.C. section 1291. Appeal is from a final judgment disposing of all claims below entered December 19, 1995 and was noticed on February 16, 1996. ¹

STATEMENT OF ISSUES PRESENTED

[3] The ultimate underlying dispute in this case is whether CP&L was entitled in tax year 1986 to begin taking a depreciation deduction for its investment in the Harris Plant. That matter undisputedly turns on when the Harris Plant was "placed in service" under the tax laws. It is also undisputed that under the Treasury Regulations an asset is placed in service when it is "placed in a condition or state of readiness and availability for a specifically assigned function." 26 C.F.R. section 1.167(a)-11(e)(i). Simply put, CP&L's position is that the Harris Plant met that test in 1986; the United States argued the Plant did not meet the test until 1987. The difference -- a matter of days as the evidence and argument below demonstrated -- has a more than $200 million dollar impact on CP&L.

[4] After the IRS disallowed the 1986 deduction, and CP&L paid the disputed taxes, CP&L filed a tax refund suit in 1994 in the United States District Court for the Eastern District of North Carolina, Raleigh Division. At the conclusion of trial, the jury returned a defense verdict and the court entered judgment against CP&L. CP&L now appeals that judgment on the basis of several prejudicial errors by the district court during the course of the trial.

STATEMENT OF FACTS

[5] The evidence at trial showed the following:

A. CP&L AND THE HARRIS PLANT

[6] Since 1926, CP&L has engaged in the generation, transmission and distribution of electric energy in portions of the states of North and South Carolina. (JA 131-32, 368, 657.) By 1971, CP&L had entered the nuclear industry and was well-experienced in the construction and startup of nuclear plants. (JA 1120.) At the end of 1971, CP&L had contracted for the manufacture and supply of key components for the Harris Plant. Most of the physical construction of the Harris Plant occurred between 1974 and 1983, and following rigorous testing, CP&L applied for and received its Low Power Operating License from the United States Nuclear Regulatory Commission ("NRC") in October 1986. (JA 135-36, 146, 168, 616-17.) By 1986, there were nearly a dozen plants operating around the country with the same reactor design as the Harris Plant. (JA 3S2.) Thus, the technology involved was neither new nor unproven. (JA 1120-21.)

B. NRC OVERSIGHT OF THE HARRIS PLANT

[7] The NRC is charged with licensing and regulating nuclear plants. (JA 133.) In this capacity, the NRC routinely reviews and assesses the physical condition of such plants. (JA 562.) Following the incident at the Three Mile Island nuclear plant in March 1979, the NRC made several significant changes in the way it regulated the nuclear industry which increased the regularity and rigor of these assessments. (JA 314, 578-80.) For example, the average number of hours that NRC personnel spent inspecting plants to determine whether they should receive their operating licenses increased to 60,000 hours (versus 6-7,000 hours for plants prior to 1979). (JA 562.)

[8] The NRC's oversight covers plant construction, start-up, operation and de-commissioning. (JA 133.) "Start-up" encompasses activities that are performed from the time construction is completed until commercial operation is achieved. (JA 135-40.) "Start-up" personnel arrived at the Harris Plant in 1981. (JA 137.) During the start-up process, the utility conducts an extensive testing program to confirm the operability of the plant and determine if there are any defects in construction. (JA 135-40, 1124-25.)

[9] The NRC started its review and oversight of CP&L's planned Harris Plant at an early date. (JA 563.) From at least 1980 forward, the NRC had resident inspectors and other representatives at the Harris Plant site on a constant basis, observing and inspecting CP&L construction efforts and assuring the Plant's readiness. (JA 142-43, 146-47, 315.) For example, at a meeting on January 9, 1985 between CP&L and NRC Regional and Headquarters personnel, the NRC described to CP&L the level of "facility completion" which would be required in order for CP&L to certify that the facility design, construction, and testing were completed and that the operations procedures were written and approved in order to support an NRC finding of readiness for operation, which ultimately occurred on October 24, 1986. (JA 179-80, 316-18, 564-65.)

C. START-UP PREOPERATIONAL TESTING

[10] In 1985 and 1986, as construction was being completed on particular systems at the Harris Plant, the components in each system underwent a series of rigorous "preoperational tests" designed to simulate operation of the systems in the Plant. (JA 170-71.) Each preoperational test typically involved days of tests utilizing the equipment in various operating conditions. (JA 170-71.) These were documented in substantial packages of data that recorded test performance requirements and test data and were subjected to intense scrutiny by a "Joint Test Group" review process. (JA 280-81.) All of these activities were conducted under the watchful eye of NRC inspectors. (JA 562.) This program ensured, with a high degree of confidence, that the Harris Plant systems critical for operation, including the generation of electricity, were constructed as designed and would operate in accordance with NRC and CP&L requirements, before CP&L certified on October 3, 1986 that it was ready to receive an operating license. (JA 170.)

[11] For example, on December 27, 1985, CP&L began a series of "Hot Functional" tests during which CP&L heated and pressurized water in the Plant's primary and secondary loops to normal operating temperatures and pressures. (JA 154-55, 622.) During Hot Functional testing, the Harris Plant was synchronized to CP&L's electrical distribution system and generated 15 megawatts of electricity (15,000 kilowatts -- enough to power a small town), which was fed into the CP&L system. (JA 157, 624.) The Hot Functional testing program was completed in February 1986. (JA 155, 441-42, 622-23.) The generation of electricity during this program demonstrated that the Harris Plant was operable, although nuclear fuel had not been used. (JA 156-57.)

[12] By October 1986, there remained only a small number of preoperational tests to be performed (of the total 189 ultimately performed). (JA 648-49.) None of the remaining tests was critical to power operations. (JA 648-49.) The known reliability of the nuclear technology and the results from the preoperational tests proved that the systems at the Harris Plant were operational -- "ready and available" to perform their assigned function in October 1986. (JA 209-10, 353.)

D. FACILITY COMPLETION AND RECEIPT OF THE INITIAL OPERATING

[14] The Harris Plant received its NRC "Facility Operating License" or "Low Power License" on October 24, 1986. (JA 168, 869- 904.) The NRC specifically and expressly found that construction of the facility had been "substantially completed . . . and that the facility WILL OPERATE in conformity with the application as amended, the provisions of the [Atomic Energy] Act, and the regulations of the Commission . . . ." (JA 872.) (Emphasis added.) As CP&L's witnesses explained, "[t]hat was a finding on the part of the Commission that said that they were convinced that we would operate the Plant in accordance with the design up to its full rate of power in accordance with the regulations . . . and it meant that they had found that we had satisfied their requirements." (JA 332.) Dr. Thomas Murley, CP&L's expert witness and a retired senior NRC executive, ² described how the issuance of the Low-Power License meant the Plant was capable of operating up to its full rate of power:

This first operating license is not some kind of practice

[15] Notwithstanding these findings related to the CONDITION of the Harris Plant, in that it had passed all tests and was physically ready to operate up to full power, the initial operating license issued on October 24, 1986 did contain the standard administrative restriction imposed by the NRC on the USE of the plant above 5% thermal power. (JA 175-76, 214, 256, 578-79, 626-27, 630, 677, 869- 904.) This restriction was lifted in a subsequent re-issuance of the license on January 12, 1987 -- a so-called "Full Power License," which is discussed separately and in detail below.

[16] Once the Harris Plant received its initial "Low Power" License in October 1986, it was, in all material respects, an operating nuclear plant. As CP&L's Vice President for Nuclear Engineering and Licensing, Alan Cutter ³ explained:

When we received the operating license [October 24, 1986],

[17] Finally, in addition to the increased regulatory requirements, after receipt of the license in October 1986, the overall environment of the Plant changed from that of a plant under construction to a plant in operation. (JA 332-34, 462.) There was a shift in the Plant management's focus from managing a plant under construction to facing the challenges of operating the Plant. (JA 462.) The operating staff was in control of the Plant. (JA 462-63.) The main control room was staffed around the clock with the shifts necessary to satisfy Technical Specification requirements for operating nuclear plants. (JA 462-63.)

E. INITIAL OPERATION OF THE HARRIS PLANT

[18] In October 1986, CP&L entered the final stage of the start-up program: "power ascension testing." (JA 202.) This program is a series of tests wherein observations are made and data recorded while the plant is put through actual operating procedures that bring the plant up to full power. (JA 202-03, 214-15.) These tests are performed while the licensed operators in the control room operate the plant. The power ascension testing program's first significant milestone was fuel load. (JA 369.)

[19] Fuel load (initially completed at the Plant on November 21, 1986) is a normal operating activity for a nuclear power plant. (JA 196-98, 294-95, 341.) It is conducted approximately every 18 months (after each "Fuel Cycle") throughout the life of the plant. (JA 466-68.) As Dr. Murley testified in describing the operation of the Plant once it received the first operating license:

You recall the operating license was issued on October 24,

[20] Following this fuel loading, and after some initial tests designed to further confirm the fuel was assembled and installed correctly, the reactor vessel head was secured. (JA 509.) At this point, the Plant conducted further operational activities and power ascension testing on December 24, 1986, including proceeding as usual through plant heat up to the point where the plant was brought to full temperature and pressure. (JA 251-52, 280, 469-70, 509-10.) This transition is also a typical plant operating activity -- every start- up for the life of the plant, the plant is heated up (using conventional sources) to temperatures and pressures for operation and, once this has been achieved, a nuclear chain reaction is initiated in the reactor core and the plant begins operating on nuclear (rather than conventional) power. (JA 509-10.)

[21] On January 3, 1987, the Harris Plant achieved a sustained nuclear reaction in the core (i.e. "went critical") and commenced "low power" testing -- a normal operating procedure. (JA 198, 470, 1120.) Subsequently, the Plant moved through various testing plateaus and reached 100% power in April 1987. (JA 499-501, 522.) Throughout its history of operations and to the present, the Harris Plant has been one of the most efficient and safe commercial nuclear power plants in the industry. (JA 687-88.)

F. FULL POWER LICENSING HISTORY

[22] The NRC issued a second or "Full Power" operating license to CP&L for the Harris Plant on January 12, 1987. (JA 215, 335, 1263- 1324.) This license was identical in all material respects to the first operating license (October 1986), except that it did not contain the restriction on the use of the Harris Plant to 5% of rated thermal power and did not refer to a handful of preoperational tests that had been deferred beyond the grant of the initial license. (JA 216-22, 1263-1324.)

[23] This two-step operating license is not required by the Atomic Energy Act, nor any NRC Regulation but is instead a matter of administrative policy. There are numerous and varying rationales put forward for this policy. (JA 578-80, 660.) However, there does not appear to be any technical reason for the 5% limitation on the initial operating license. (JA 195-96, 458-59, 579.) Instead, the NRC uses the temporary restriction as a way to observe how the plant is running before issuing the Full Power License. (JA 195-96, 458-59, 686.) Significantly, the revised process did nothing to dilute the NRC's finding of operational readiness at the initial (1986) operating licensing stage, which involved a far more extensive review than the Full Power (1987) stage. (JA 581, 670-71.)

[24] Around the time the initial operating license for the Harris Plant was issued, and as the Plant was loading fuel in November 1986, the NRC staff scheduled CP&L to be brought up on December 18, 1986 for a public meeting and NRC Commissioner vote on its Full Power License. (JA 199-200, 337-38, 340-42, 345, 474, 1325- 38, 1339-45.) Following the expected favorable Commission vote, the schedule provided for the Plant to be brought critical and power ascension testing at low power to be conducted during the week of December 21 to December 27. (JA 342, 349-50.) An unrestricted operating Full Power License was to have been issued by or about December 26th. (JA 342-43.)

[25] However, due to a series of events -- none of which were within CP&L's control and none of which were based on an actual issue of the Plant's physical status or readiness -- at some point in early December the NRC staff made a decision to take CP&L off the NRC's docket for December 18. (JA 346-47, 610-11.) CP&L adduced evidence at trial to establish that the Commission's choice to reschedule the meeting was caused by: (1) mounting political pressure being brought to bear on the NRC by anti-nuclear groups who were raising what eventually turned out to be meritless claims of problems at the Plant (JA 339-40, 348-49, 487-88); (2) the inability of the NRC staff to satisfy the NRC's Executive Director on December 9, 1986 that it was prepared to make a presentation to the Commissioners on December 18, 1986 (even though the information required for such a presentation had been previously supplied to them) (JA 347, 360-61, 362-65); (3) internal NRC miscommunications as to the status of so-called "loose ends" (JA 354-57, 360-61, 365) and/or (4) the fact that sticking to the December 18 schedule would have likely impacted the holidays for those staffers who would have been required to prepare and issue the Full Power License during the Christmas week. (JA 342-43, 347-49, 484, 487-88, 600-02.) Once CP&L was removed from the December 18 meeting, it could not receive its Full Power License in 1986 because the next full commission meeting was not scheduled to occur until January 8, 1987. (JA 346-49.) The jury could easily have concluded that the NRC's decision to reschedule the meeting was made as a result of any one of, or a mix of, all four factors -- none of which was within the control of CP&L.

[26] In any event, the Plant had the same essential physical characteristics with the same capabilities at the time each operating license was issued. (JA 581.) As former NRC Director Murley testified before the NRC would grant the Low Power License "all the systems that were essential for operation up to full power had to be ready." (JA 629.) When discussing the difference between the two operating licenses in his trial testimony, CP&L's General Manager of the Harris Plant James Willis ⁴ stated:

A. My understanding was that the plant was technically being

G. THE IRS DENIES CP&L'S 1986 AND 1987 DEPRECIATION DEDUCTIONS

[28] After an audit of CP&L's 1986 and 1987 Federal income tax returns, the IRS disallowed all of the depreciation deduction claimed by CP&L for the Harris Plant in 1986 and a portion of that claimed for 1987. (JA 414-15, 657-58.) Instead, the IRS claimed that CP&L owed $74,591,621 in taxes and, by CP&L's calculation, $44,080,512 in interest accrued for the 1986 tax year, and $47,961,673 in taxes and, by CP&L's calculation, $21,185,498 in interest accrued for the 1987 tax year as a result of the disallowance of the deduction for depreciation of the Harris Plant. (JA 419, 421-22, 425-26.) On August 1, 1991, CP&L paid all of these amounts. (JA 419, 657.)

[29] On July 27, 1993, CP&L filed timely claims for refunds of taxes paid for the years 1986 and 1987 with the IRS Center in Memphis, TN. (JA 420.) When the IRS failed to allow or disallow the refund six months later, CP&L filed a Complaint against the United States in the U.S. District Court for the Eastern District of North Carolina on April 29, 1994 seeking a refund of $187,819,304 plus interest accrued to the time of judgment. (JA 15-37, 427-28.)

PROCEEDINGS BELOW

[30] After extensive discovery and denial of the government's motion for summary judgment, the parties engaged in final trial preparation in the fall of 1995. CP&L moved in limine, inter alia, to prevent the government from introducing evidence and adducing expert testimony as to certain IRS "Revenue Rulings." (JA 44-58.) The district court denied the motions without elaboration -- from the bench. (JA 103.)

[31] Prior to trial, both CP&L and the government submitted proposed jury instructions and detailed legal analysis relating thereto. (JA 59-92.) The case was tried before a jury for eight days. As the trial drew to a close, the district court heard the parties in charge conference. After the district court read the charge to the jury, CP&L objected on several grounds. (JA 864-67.)

[32] On December 19, 1995, the jury returned a verdict in favor of the government. (JA 1572.) CP&L filed a timely notice of appeal on February 16, 1996. (JA 1574.) The case has since been placed in abeyance pending mediation.

SUMMARY OF THE ARGUMENT

[33] The district court erred in two significant respects. First, the court's instructions to the jury did not reflect the proper legal standard for determining when an asset is "placed in service" for Internal Revenue depreciation purposes. Despite statutory authority, supportive case law and CP&L's protests, the district court failed to offer instructions on several legal principles concerning when an asset may be depreciated. Specifically, the court did not provide an instruction to the jury on the "beyond the taxpayer's control" factor, the distinction between physical and legal readiness to operate, or the level of operability required if an asset is to be deemed "ready and available" for purposes of depreciation. Had an instruction been offered to the jury on any one of these principles, the verdict would likely have resulted in a tax refund to CP&L.

[34] Further, the district court erroneously instructed the jurors to give deference to a five factor test derived from various IRS "Revenue Rulings." These Revenue Rulings are factually irrelevant and inconsistent with the Treasury Regulations and case law. In addition, forcing the jurors to square these seemingly "legal" factors against the binding law in the case likely resulted in jury confusion.

[35] Second, the district court committed several evidentiary errors which warrant a new trial. It excluded a brief submitted to this Court by the United States in defense of its licensing decision as to the Harris Plant (CP&L Exhibit 168). The brief contained admissions by the government concerning the condition of the Harris Plant in 1986, which directly contradicted the government's position and evidence in this action. The court also excluded a 1993 IRS Publication containing statements contradicting the government's "placed in service" position and evidence in the trial. Both exhibits are unquestionably relevant and should have been admitted below.

[36] Additionally, the district court allowed the government to introduce the contested Revenue Rulings into evidence. Not only should the court have excluded the Rulings from admission as "factual" evidence, but it should not have allowed the government's nuclear power expert to opine on the legal implications of the Rulings, a subject well outside his area of expertise. This evidentiary error also served to exacerbate the prejudicial effect of the erroneous jury instruction.

[37] Accordingly, this Court should find that a new trial is warranted.

ARGUMENT

Standard of Review

[38] Accuracy and adequacy of the jury instructions are reviewed de novo. Morrill v. Prince George's County, 1996 U.S. App. LEXIS 31090, at *5 (4th Cir. Dec. 4, 1996) ⁵ (citing United States v. Morrison, 991 F.2d 112, 116 (4th Cir. 1993)). Reversal is warranted when "the error is determined to have been prejudicial, based on a review of the record as a whole." Sturges v. Matthews, 53 F.3d 659, 661 (4th Cir. 1995) (quotation omitted).

[39] The court's evidentiary decisions are reviewed for abuse of discretion. Redman v. John D. Brush & Co., 111 F.3d 1174, 1177 (4th Cir. 1997).

LEGAL BACKGROUND ON DEPRECIATION

[40] Courts have repeatedly admonished the government for taking an overly-restrictive interpretation of the laws governing depreciation. See, e.g., Simon v. Commissioner, 68 F.3d 41, 46 (2d Cir. 1995) ("[C]ourts should take care that the Commissioner's role as revenue maximizer does not vitiate Congress's intent to sacrifice revenue to generate economic activity."); Gehl Co. v. Commissioner, 795 F.2d 1324, 1334 (7th Cir. 1986); LeCroy Research Sys. Corp. v. Commissioner, 751 F.2d 123, 128 (2d Cir. 1984). In this case, with the aid of the district court, the IRS has once again enforced an interpretation of tax law that runs afoul of this principle.

A. Tax Policy Favors Early Depreciation

[42] There is no dispute that "wear and tear" had occurred on all facets of the Harris Plant before 1987. As testified by Mr. Scott Hinnant, the Harris Plant Manager: ⁶

[C]ertainly from the time we began the start-up of the plant

A. [T]he Hot Functional Test is an integrated preoperational

[43] Since the 1950s, Congress, through the authorization of accelerated methods for calculating the allowable deduction for depreciation, has used the depreciation deduction not just to reflect assets, wear and tear, but also to stimulate the economy by encouraging businesses to invest in new plants and equipment. In 1981, convinced that tax reductions were essential to ensure the continued economic growth of the country, Congress passed the Economic Recovery Tax Act ("ERTA"), which governs the time period relevant to this case. See Liddle v. Commissioner, 65 F.3d 329, 332- 34 (3d Cir. 1995) (recounting history of ERTA). As part of the ERTA, Congress provided for especially rapid depreciation to stimulate economic growth. See id. at 333; see also 5 Mertens, supra, section 23A.02. The legal interpretation of the Code and Treasury Regulation at issue here must be guided by the overriding policy of allowing early deductions by taxpayers such as CP&L who Congress intended should recover as early as possible their substantial investments in the economy -- $4 billion in the case of the Harris Plant.

B. THE DEPRECIATION REGULATION REQUIRES ONLY READINESS AND

Property is first placed in service when first placed in A

[45] As an example of property that is considered "ready and available," the Treasury Regulations provide:

In the case of property acquired by a taxpayer for use in his

[46] Another example found at section 1.46-3(d)(2)(iii) provides that equipment is to be considered "placed in service" for tax purposes when it

is acquired for a specifically assigned function and is

[47] As this language makes clear, an asset is "in service" for tax purposes when it is physically capable of performing its function. See, e.g., P. Dougherty Co. v. Commissioner, 159 F.2d 269, 271 (4th Cir. 1946) (holding that depreciation should begin when the property is available for use, even though the property is not in use). Actual operation is not required, for as the Eighth Circuit noted recently, "'placed in service, is not synonymous with 'used.'" Northern States Power, 151 F.3d at 880; see also Connecticut Yankee Atomic Power Co. v. United States, 38 Fed. Cl. 721, 730 (1997) ("The common thread among these cases is that property acquired on one date but not actually utilized until another date may qualify for a depreciation . . . on the earlier date."). ⁷

[48] CP&L does not attack the Regulation. Indeed, it is the controlling law. But a fair examination of the record below demonstrates that the government urged, and the district court issued, jury instructions and evidentiary rulings that are directly contrary to the regulation and the cases that have applied it.

I. THE JURY INSTRUCTIONS DID NOT ACCURATELY REFLECT CONTROLLING "IN

[50] Here, rather than fairly and correctly instructing the jury on pertinent legal principles, the jury instructions either omitted or misstated the proper legal standards in at least four respects -- any of which by itself was a source of prejudice and confusion warranting a new trial.

A. THE TRIAL COURT FAILED TO INSTRUCT THE JURY AS TO FACTORS

[52] As noted, CP&L proffered evidence that these factors were outside its control. Thus, on this point, CP&L requested that the jury be instructed as follows: "An asset may be considered placed in service for tax purposes even if the asset is, in fact, incapable of operation, if the reason the asset cannot be operated is due to circumstances beyond the taxpayer's control." (JA 865.) The trial court, without explanation, erroneously refused to give the instruction.

[53] At least two federal courts of appeal have held that assets which in fact are incapable of operation may still be "in service" for tax purposes, if the reason the asset cannot be operated is outside the control of the taxpayer. The seminal case of Sears Oil Co. v. Commissioner, 359 F.2d 191 (2d Cir. 1966) exemplifies the district court's error. Sears Oil involved a barge that was completed and ready for use, but was frozen into the water of a canal and could not be used in the taxpayer's oil transport business until the succeeding tax year. Id. at 198. The Second Circuit held that a deduction was proper, reasoning that allowing a depreciation deduction in the earlier year "seems only proper, in order to reflect the gradual deterioration of the completed asset[.]" Id.

[54] The Sixth Circuit has followed Sears Oil's lead and held that depreciation is allowable when the reason for non-operation is beyond the taxpayer's control. In SMC Corp. v. United States, 675 F.2d 113 (6th Cir. 1982), the taxpayer had purchased a shredder and a crane for its scrap metal business that had been constructed and assembled in one tax year but was unable to be used in that year because electric power lines had not been connected to the site. Id. at 114. ⁸ The Sixth Circuit concluded that because the plant was fully functional except for the connection to a power source, and the reason for the lack of a power source was outside the control of the taxpayer, the plant should be considered "placed in service" in the earlier year.

[55] The "beyond the taxpayer's control" test of the Second and Sixth Circuits has also been recognized and followed by other courts. See, e.g., United States v. United Energy Corp., 1987 U.S. Dist. LEXIS 10514, at *27 (N.D. Cal Feb. 25, 1987); cf. Northern States Power, 151 F.3d at 881-82; Connecticut Yankee, 38 Fed. Cl. at 730 n.17. Such a rule is fully consistent with the policy of permitting early depreciation deductions to stimulate economic growth. Where the taxpayer has made the investment and the asset is otherwise ready for use, cost recovery through the tax system ought not to be precluded due to circumstances beyond the taxpayer's control. Any other rule would chill large investment decisions that are influenced by tax considerations. In particular, taxpayers might shy away from making investments in innovative or regulated technologies for fear that, due to controls not of their own making, the asset might not be placed in use, even though it is ready for use.

[56] Moreover, Dr. Murley's testimony highlights the fact that CP&L's Harris Plant was ready for use (JA 629-31), and that the NRC would have considered it as such, thereby strongly suggesting that CP&L would have received the Full Power License but for the delay of the Commissioners' meeting, a circumstance outside CP&L's control.

[57] Indeed, in the January 8, 1987 NRC hearing the speaker for the "Kudzu Alliance" and "Chapel Hill Anti-nuclear Group" ("Intervenors") stated that but for their intervention in the licensing process, he believed the NRC "would have gone ahead with that vote [on the Full Power License]" on December 18, 1986 "if we hadn't raised our voices . . . got newly inaugurated Senator Sanford on the phone, and of course the Attorney General. . . ." (JA 1169-70; see also JA 367, 484.) Further, in his trial testimony, Mr. Willis stated his belief that the December 18 vote was cancelled:

. . . because intervenor groups had intervened with Mr. Denton

[58] Given the weight of the authorities acknowledging the "beyond the taxpayer's control" test, the government's arguments regarding the Full Power License and the evidence showing that these matters were outside CP&L's control, it was reversible error for the district court not to include language of the nature CP&L suggested in the jury instruction.

B. THE TRIAL COURT FAILED TO INSTRUCT THE JURY AS TO THE

[60] In Hellings v. Commissioner, 67 T.C.M. (CCH) 1988 (1994), the Tax Court found that a $100,000 charter boat was "in service" by the end of 1983, even though the Coast Guard certification was not finally obtained until six months later. Id. at 1991. Similarly, in Giles v. Commissioner, 50 T.C.M. (CCH) 1342 (1985), the Tax Court found that an auto purchased in December 1979 for use in a taxpayer's business was "in service" when it was purchased, even though the taxpayer did not secure license plates for the vehicle until January 1980. Id. at 1343. Indeed, the government in Giles successfully argued for a 1979 "in service" date, despite the fact that the asset in issue was not licensed until the succeeding year. Id. Finally, in Tennessee Natural Gas Lines, Inc. v. Commissioner, 71 T.C. 74 (1978), the Tax Court found a liquefied natural gas facility to have been "placed in service" in 1973, the date it was physically operational. Id. at 87. The court so held even though the taxpayer did not receive its temporary certificate of Public Convenience and Necessity -- which authorized the taxpayer to acquire and operate the facility -- from the Federal Power Commission until 1974. Id. at 81.

[61] Although presented with the arguments above, the court below refused to give an instruction on this point. As noted, the government repeatedly urged the jury to conclude that the absence of the second operating license, or Full Power License, in 1986 precluded a 1986 "in service" date, even though PHYSICAL readiness of the Harris Plant at the time was established by substantial evidence. (JA 816-17, 826.) The prejudice stemming from the district court's refusal to give such an instruction is manifest. The error was particularly prejudicial in the context of this case, where CP&L established that the same regulatory body that issued the Full Power License had, during the prior year (1986), made a determination on issuing the Low Power Operating License that the Plant was PHYSICALLY READY FOR OPERATION UP TO FULL POWER. (JA 174, 192, 332, 458-59, 629, 875.)

[62] In his testimony at trial, Mr. Hinnant made clear that with the October 1986 license:

A. . . . There were no physical restrictions on the plant. It

[63] Similarly, the former NRC official Dr. Murley testified that the Plant was capable of going to full power in October 1986:

Q. In issuing this low power license, the license with the 5

C. THE TRIAL COURT REFUSED TO INSTRUCT AS TO OPERABILITY "AT

[65] The Fifth Circuit's opinion in Sealy Power v. Commissioner, 46 F.3d 382 (5th Cir. 1995) is particularly instructive on this point. In that case, the Fifth Circuit held that depreciation was allowable even though the facility was not capable of achieving its intended level of electrical output because of a defect in one of its component parts. Id. at 394. The IRS contended that the facility was never "placed in service" for tax purposes due in part to the defect, and therefore was not entitled to a depreciation deduction or an investment tax credit in any year. Id.

[66] The Fifth Circuit reversed the Tax Court and held that since the facility was, in fact, capable of generating some electricity in calendar year 1984 (although the amounts generated were so "small" they were not recorded in the company's records), it was "placed in service" for tax purposes during that year. Id. at 397-98. The court went on to state: "[t]hat the facility was unable to generate electricity at its rated capacity does not obviate the fact that it met its specifically assigned function of generating electricity." Id. at 397. The court further explained:

We agree with the Commissioner's then-unsuccessful argument in

[67] Other decisions support the Sealy conclusion. For example, in Connecticut Yankee, the IRS urged that depreciation should only be available when the asset is "ready and available for immediate use." Connecticut Yankee, 38 Fed. Cl. at 730 (emphasis omitted). The claims court rejected the government's position, reasoning that nothing in the Treasury Regulations says that the asset need be ready for immediate use to qualify for a deduction. Id.; accord Northern States Power, 151 F.3d at 880-81 (essentially the same).

[68] In the instant case, the district court refused to give the proffered instruction on this point. The prejudice to CP&L by the omission was significant because, by closing argument, the government was asserting that only by the time the Plant was generating at full power or "Commercial Operation" (May 2, 1987) was the Plant ready to perform its intended function as a base load plant operating at rated capacity. (JA 841-42.) ("They built the plant to serve as a baseload plant. The only time it started . . . that and the only time it was ready and available to doing that was May 2."). The government also pressed the undisputed fact that the Plant's RATED CAPACITY could not LEGALLY be achieved without the Full Power License -- even though it was also undisputed that the Plant could generate a small amount of electricity with the October 1986 Low Power License. (JA 214, 826.)

[69] Like the facility in Sealy, the Harris Plant was capable of operating in 1986 (although it was not licensed at full power). The October 1986 Low Power Operating License permitted the Harris Plant to operate up to 5% power and to generate electricity. (JA 214, 875.) Both nuclear fission and contamination of the Plant were occurring in 1986, and all parts of the Plant were operable and undergoing wear and tear. (JA 226-27, 632.) As both the Treasury Regulations and Sealy make clear, operability at full power is not necessary for the asset to be "in service." The district court should have included the instruction on this point.

D. THE TRIAL COURT IMPROPERLY AND CONFUSINGLY REFERRED TO IRS

(1) On what date had the taxpayer obtained the necessary

1. THE REVENUE RULINGS ARE MERELY "SAFE HARBOR"

[73] In addition, while some so-called "interpretive" Revenue Rulings contain detailed analysis and legal reasoning as to the IRS' interpretation of a Tax Regulation, other non-interpretive Revenue Rulings, such as those at issue here, merely apply the IRS' legal view to a set of facts and derive a result.

[74] The IRS publishes these Rulings to permit taxpayers to gauge the likelihood that a particular tax position will be sustained by the IRS if the taxpayer is audited. Thus, although it is a well- established principle that a taxpayer may use the Revenue Rulings defensively (see Estate of Kosow, 45 F.3d at 1528 n.4), there is no authority for permitting the IRS to use them offensively, and certainly not in a jury trial. Nevertheless, in recent cases, as in this one, the government has sought to elevate the effect of Revenue Rulings so as to make satisfaction of the "Five Factor Test" NECESSARY rather than SUFFICIENT and to give them the force and effect of law. Clear precedent and common sense preclude this.

[75] First, in each of the Revenue Rulings at issue here, the IRS determined that the facts put forth by the taxpayer were SUFFICIENT to show that the power plant at issue was "in service" in that case. But at no time in those Revenue Rulings did the IRS state that the facts found were NECESSARY for the asset to be deemed in service. See Rev. Rul. 76-256, 1976-2 C.B. 46; Rev. Rul. 76-428, 1976-2 C.B. 47; Rev. Rul. 79-98, 1979-1 C.B. 103. As a result, on their face the Revenue Rulings are merely "safe harbor" provisions that stand for the proposition that the IRS will likely find an asset "in service" if presented with fact situations substantially similar to those in the Rulings. They neither state nor stand for the proposition that an asset can only be "in service" if a taxpayer can demonstrate facts satisfying all, or even most, of the factors identified in the Rulings. Since the government argued that all but one of the factors had NOT been met by the Harris Plant in 1986, the Revenue Rulings were inapplicable as a matter of law.

[76] Second, to the extent that federal courts use Revenue Rulings as guidance THEY DO SO IN DETERMINING THE MEANING OF THE LAW, a function reserved strictly for the court. Although CP&L submits that these Revenue Rulings do not provide an appropriate aid to statutory construction (see discussion infra at pp. 44-47), they certainly should not have been given to the jury qua jury instruction. To do so is akin to giving a jury pages from the legislative history of a statute or unvarnished passages from Blackstone's Commentaries. Cf. 9A Wright & Miller, supra, section 2556, at 442-44 (explaining that placing direct quotations from legal authorities in instructions is usually "not helpful" to juries because such quotations were "never intended to be used as instructions to juries"). Tellingly, CP&L cannot find a single reported case where a Revenue Ruling (unrelated to the asset at hand) was incorporated into a tax case jury instruction.

2. THE FIVE FACTOR TEST IS INCONSISTENT WITH THE

[78] Even a terse examination of the Regulations at issue in this case, together with the federal court opinions that have reviewed these laws (all of which were presented to the trial court and are discussed supra), reveals that the courts have adopted a broader test of "in service" than the one embodied in the "five factor" Revenue Ruling test.

a. "DAILY OPERATION" AND "SYNCHRONIZATION"

[79] The Regulation, as well as a number of cases, clearly provide that an asset need not be actually operating or "in use" to be "in service." However, the fifth Revenue Ruling factor "daily operation," (defined by the United States as producing "net electrical generation" or more electricity than the plant uses to operate) clearly requires what the Regulation does not. As one Tax Court plainly said, "in order for an asset to be placed in service in a given year, it need not actually be used. . . ." Oregon Trail Mushroom Co. v. Commissioner, 63 T.C.M. (CCH) 3045, 3045-11 (1992); accord Northern States Power, 151 F.3d at 880 ("'placed in service' is not synonymous with 'used.'"). ¹³

[80] In a similar vein, the fourth Revenue Ruling factor, "synchronization," effectively requires that the plant actually be in use generating electricity. The government's own expert witness, Dr. William R. Jacobs, stated at trial:

So I concluded that they met that criterion, including the

b. "PERMITS AND LICENSES"

[81] As discussed supra, the relevant inquiry is whether an asset is PHYSICALLY capable of operation, not whether it is LEGALLY capable. Therefore, an asset is not required to meet the first Revenue Ruling factor ("to have all necessary licenses or permits") to be "in service." ¹⁴ Yet the Revenue Rulings specify it. In sum, the "Five Factors" contradict the Regulations and the federal case law interpreting them and, therefore, should not have been considered.

3. THE COURT'S REVENUE RULING REFERENCES WERE CONFUSING AND

[83] By quoting the relevant (and controlling) Treasury Regulations, but on the other hand, instructing that the Revenue Ruling factors were to be given "deference," the jury charge was, at best, confusing, and at worst, internally inconsistent. The jurors were improperly left to decide how to square the seemingly "legal" factors from the Rulings (two of which require actual plant operation) with the law of the Treasury Regulation (which does not). This was a task the district court itself should have undertaken -- and in CP&L's view such an effort would have resulted in exclusion of the Rulings. Instead, this difficult and inherently legal task was left to the jury. Nor was the defect cured by the instruction's caution that not all factors were "necessary." Even without being told to "defer" to them, a lay jury will naturally consider anything called an IRS "Ruling" as having force of law when plainly it does not. Cf. Faigin v. Kelly, 184 F.3d 67, 80 (1st Cir. 1999) ("A lay jury is quite likely to give special weight to judicial findings merely because they are judicial findings."); Deangelis v. Harrison, 628 A.2d 77, 80-81 (Del. 1993) (error to suggest to jury that another federal judge's comments from a different proceeding are entitled to special deference). Indeed, by requiring the jury to give them "deference," the court as a practical matter elevated the significance of these Revenue Ruling factors as having the force of law. ¹⁵

II. THE DISTRICT COURT COMMITTED EVIDENTIARY ERRORS WARRANTING A NEW

A. EXCLUSION OF THE GOVERNMENT'S ADMISSIONS AS TO THE "AFW

[86] CP&L offered, through Scott Hinnant, the CP&L Start-up Manager, a 1987 brief filed by the NRC and the United States Department of Justice (Plaintiff's Exhibit 168) in an appeal to this very Court of the Harris NRC licensing decision. (JA 1369-1483.) The brief attached affidavits of two NRC employees. (JA 1426-29, 1477- 81.) In all those documents, the government discussed the Harris start-up program in very favorable terms. (JA 302-05, 1369-1483.) More particularly, it expressly addressed this Court on the same "AFW pump" problem down to the very date and time of the event. (JA 1427- 29.) In sum, the government characterized the AFW pump problem as a non-issue.

[87] For example, the sworn declaration of Bartholomew C. Buckley, the NRC's Plant Project Manager at the Harris Plant, (attached to the brief), states:

In the January 27, 1987, Memorandum in Support of Motion to Stay

[88] A second sworn declaration by an NRC staffer contained information relating to the delay in receipt of the Full Power License in December 1986 as due to the intervenor action (the significance of which is discussed supra at pp 14-16). NRC Region II employee David M. Verrelli discussed the intervenor situation and resultant delay to CP&L in receiving its Full Power License. (JA 1477-81.) Mr. Verrelli summarized the efforts of the NRC to determine additional information in November and December 1986 regarding the petition filed by certain opponents of the Harris Plant. (JA 1478- 80.) Interestingly, the Declaration makes clear that a confidential "two-hour" telephone interview with an "anonymous alleger" occurred on December 18, 1986 -- the very day that CP&L previously had been scheduled for a Commissioner vote on issuance of its Full Power License. (JA 1479.) CP&L was unable to prove up the circumstances surrounding this telephone call from the nuclear opponents to the NRC because it was not directly evidenced anywhere except for this government Declaration. These events were clearly major factors in delaying the Harris licensing schedule from December 1986 until January 1987.

[89] The court excluded this documentary evidence without explanation. (JA 302-05.) Yet, the government highlighted the AFW pump issue and the absence of the Full Power License in final argument as proof that the Harris Plant was not "in service." (JA 815-16, 826-27.) The admission (and arguably prior inconsistent statements) of the government in the excluded brief were extremely relevant to disputed issues that had already been presented to the jury. The evidence presented no cause for prejudice or confusion. It was not hearsay. To exclude it was prejudicial error.

B. Revenue Ruling Evidence

[90] Long before the jury charge, the Revenue Rulings proved to be a source of significant dispute in this case. The government's campaign to enshrine the Revenue Rulings extended even to efforts to have them admitted into evidence and extolled by its principal expert. The government prevailed in these efforts over CP&L's objections. The rulings were plainly erroneous and are cause for reversal.

1. Dr. JACOBS' TESTIMONY

[91] It was reversible error for the district court to admit testimony of the government's expert witness, nuclear engineer Dr. Jacobs, relating to Revenue Rulings. The subject of Dr. Jacobs' expert report and testimony was purportedly an evaluation of when the Harris Plant was "placed in service" under Treasury Regulation section 1.167. Yet, the focus of Dr. Jacobs' evaluation centered on the IRS Revenue Rulings. (JA 711-18, 728-31.) CP&L moved in limine to exclude this testimony. (JA 54-58.) The district court denied the motion and Dr. Jacobs testified as to the Rulings extensively. (JA 711-18, 728-31.) There are at least three reasons why the district court erred in admitting Dr. Jacobs' testimony.

[92] First, it is well-established in this Court and elsewhere that expert testimony containing application of legal standards to facts is inadmissible. See, e.g., United States v. Wilson, 133 F.3d 251, 265-66 (4th Cir. 1997) (district court erred in allowing experts to testify as to applicability of regulations); Adalman v. Baker, Watt & Co., 807 F.2d 359, 365 (4th Cir. 1986) (finding inadmissible proffered expert opinion concerning whether, under securities laws, disclosure of a particular fact was required in the course of negotiating a transaction). ¹⁶ Accordingly, courts have routinely excluded purported "expert" testimony applying tax laws. ¹⁷ The district court here should have done the same.

[93] Second, even assuming that the testimony could have been admissible through a different witness, it was clearly outside the scope of Dr. Jacobs' area of expertise. Dr. Jacobs is neither an accountant, lawyer, nor tax professional of any kind, and did not possess the requisite knowledge, skill, experience, training or education on the IRS Revenue Rulings or the tax matters related to these issues. (JA 732.) Before this case, he had never heard of the "five factor" test. (JA 732.)

[94] At most, Dr. Jacobs should have been allowed to testify as to the construction and licensing of power plants. See, e.g., United States v. Johnson, 54 F.3d 1150, 1157 (4th Cir. 1995) (Fed. R. Evid. 702 "does not afford the expert unlimited license to testify without first relating that testimony to some 'specialized knowledge on the expert's part'"); see also Hardin v. Ski Venture, Inc., 50 F.3d 1291, 1296 (4th Cir. 1995) ("expert" was not qualified to testify) The district court's failure to limit Dr. Jacobs' testimony to the scope of his expertise was an abuse of discretion. See, e.g., Thomas J. Kline, Inc. v. Lorillard, Inc., 878 F.2d. 791, 800 (4th Cir. 1989) (district court abused discretion in allowing expert to extend beyond area of expertise).

[95] Finally, an expert witness' testimony can only be based on facts and data "of a type reasonably relied upon by experts in the particular field." United States v. Tran Trong Cuong, 18 F.3d 1132, 1143 (4th Cir. 1994). Where there is no indication that the reports or data are of a type reasonably relied upon by experts in the field, the testimony is excluded. See, e.g., Osbourn v. Anchor Labs., Inc., 825 F.2d 908, 915 (5th Cir. 1987). It is beyond argument that Revenue Rulings and federal case law are not "facts or data" relied upon by nuclear engineers. Dr. Jacobs' testimony on the implications of the Revenue Rulings and any federal court cases should have been precluded on this ground as well.

2. RULINGS AS "FACTUAL" EVIDENCE

[96] Before trial, the government signaled its intention to introduce evidence relating specifically to the Revenue Rulings, by name and Ruling numbers, CP&L urged in its in limine motion that such evidence should be excluded (JA 49-53), but the district court denied the motion. (JA 103.) At trial, evidence referring to and summarizing them was admitted. (JA 711-18, 728-31.)

[97] Aside from their questionable legal significance, admission of the Revenue Rulings as factual evidence was a blatant violation of Rules 402 and 403 of the Federal Rules of Evidence: they involve factual determinations about the assets of other taxpayers. The FACTS of those cases do not tend to show that the Harris Plant was or was not "placed in service." The IRS' conclusions on the facts of those cases are its application of the Treasury Regulation TO THOSE FACTS. Revenue Rulings are only an IRS attorney's opinion as to whether the facts in those cases showed that the assets met the legal test. See discussion supra at 40-43.

[98] The introduction of the Revenue Rulings into evidence was analogous to allowing a jury to consider the factual or legal findings made by other juries or tribunals, as to different cases. The Fourth Circuit and others have held that this alone creates unfair prejudice. See Nipper v. Snipes, 7 F.3d 415, 417 (4th Cir. 1993); accord Thompson v. Glenmede Trust Co., 1996 U.S. Dist. LEXIS 13672, at *9 (E.D. Pa. Sept. 16, 1996)("[W]hen a party attempts to admit the findings of another court into evidence, the Court must exclude those findings pursuant to Federal Rule of Evidence 403."); Fryou ex rel. Fryou v. Gaspard, 1991 U.S. Dist. LEXIS 5571, at *4 (E.D. La. April. 24, 1991) (excluding findings of another grand jury). ¹⁸

C. EXCLUSION OF THE IRS PUBLICATION WAS ERROR

[99] The government argued in its opening statement that the "farm equipment" example in the Treasury Regulation discussing equipment not in actual use was limited to equipment that was "acquired" (which it argued was not relevant to equipment that was assembled by the taxpayer). (JA 115-16.) In a more general sense, the government's expert witness asserted that the Revenue Ruling factors were to be used, and thereby attempted to require operation or use of the asset in order to show that it was "placed in service." (JA 715- 16.) Indeed, the government seemed to ridicule CP&L's position that an asset that was not actually in operation could be "in service." (JA 112-17.)

[100] CP&L offered, through Murray Gould, its Tax Department Manager who made the decision to take the 1986 depreciation deduction, an IRS Publication (Plaintiff's Exhibit 269) which stated the following unqualified IRS view:

PLACED IN SERVICE

Even if the property is not actually used yet, it is in service

CONCLUSION

[101] For the reasons stated herein, the jury's verdict below should be vacated, the judgment reversed, and the case remanded for a new trial.

STATEMENT REGARDING ORAL ARGUMENT

[102] Plaintiff-Appellant Carolina Light & Power Company requests oral argument.

Dated: February 13, 2001

² Dr. Murley had twenty-six years experience at the AEC and NRC, and for the seven years preceding his retirement in February 1994, he served as Director of Nuclear Reactor Regulation, where he was responsible for the licensing of all U.S. nuclear plants. (JA 614.)

³ Mr. Cutter had a Masters in Nuclear Engineering, served a number of years in the nuclear navy as an officer, and thereafter, worked in various senior positions in the U.S. nuclear industry for over twenty-five years. (JA 309-13.)

⁴ Mr. Willis retired as a Captain from the U.S. nuclear submarine navy, and thereafter, spent twelve years in the nuclear program of several U.S. utilities. (JA 453-55.)

⁵ All unpublished decisions are included in an addendum to this Brief.

⁶ Mr. Hinnant had twenty-two years nuclear experience at CP&L, including sixteen years at the Harris Plant site, and at the time of trial, was Vice President of one of the other operating CP&L nuclear plants. (JA 125-29.)

⁷ Indeed, the IRS' taxpayer information booklet on depreciation, Publication 534, states that "[e]ven if the property is not actually used yet, it is in service when it is ready and available for its specific use." (JA 1489.)

⁸ The power lines were not successfully connected to the taxpayer's plant until three months after the end of the fiscal year for which the tax depreciation was sought. SMC Corp. v. United States, 1980 U.S. Dist LEXIS 13752 (E.D. Tenn. Aug. 12, 1980), aff'd, 675 F.2d 113 (6th Cir. 1982).

⁹ Mr. Denton served as Director of Nuclear Reactor Regulation at the NRC. He was succeeded in this position by Dr. Murley.

¹⁰ These factors were derived from Revenue Rulings that are all over twenty years old. See Rev. Rul. 76-256, 1976-2 C.B. 46; Rev. Rul. 76-428, 1976--2 C.B. 47; Rev. Rul. 79-98, 1979-1 C.B. 103.

¹¹ See, e.g., Idaho Power Co. v. Commissioner, 477 F.2d 688, 696 n.10 (9th Cir. 1973), rev'd on other grounds, 418 U.S. 1 (1974); Stubbs, Overbeck & Assocs., Inc. v. United States 1445 F.2d 1142, 1146-47 (5th Cir. 1971); Aluminum Co. of Am. v. United States, 123 F.2d 615, 621 (3d Cir. 1941); National Right to Work Legal Defense & Educ. Found., Inc. v. United States, 487 F. Supp. 801, 805 (E.D.N.C. 1979); Exxon Corp. v. United States, 40 Fed. Cl. 73, 89 n.10 (1998); Northern Ind. Pub. Serv. Co. v. Commissioner, 105 T.C. 341, 350 (1995), aff'd, 115 F.3d 506 (7th Cir. 1997); Halliburton Co. v. Commissioner, 100 T.C. 216, 232 (1993), aff'd mem., 25 F.3d 1043 (5th Cir. 1994).

¹² In Davis, the Court applied traditional principles of statutory construction and concluded that the Revenue Rulings at issue there were entitled to "considerable weight" because they coincided with the Court's independent interpretation of the relevant statute and regulations. See Davis, 504 U.S. at 478-86. But see United States v. Thompson/Center Arms Co. 504 U.S. 505, 518 n.9 (1992) (questioning the idea of deference being given to Revenue Rulings).

¹³ See also P. Dougherty Co., 159 F.2d at 271 (depreciation allowed when asset was available for use although not actually in use); Sears Oil, 359 F.2d at 198 (asset was frozen in river); SMC Corp., 675 F.2d at 114 (shredder and crane had no power source); Connecticut Yankee, 38 Fed. Cl. at 729-30 (asset not in use); Giles, 50 T.C.M. at 1344 (automobile purchased for use in sales business "in service" in year purchased even though it was not used in business until succeeding year); Schrader v. Commissioner, 34 T.C.M. (CCH) 1572, 1577 (1975) (air conditioners for laundromats, which were purchased in one year, were "in service" as of purchase date even though they were not used until subsequent year), aff'd, 582 F.2d 1374 (6th Cir. 1978) See also Linsmayer v. Commissioner, 70 T.C.M. (CCH) 664 (1995), in which the Court and the IRS deemed a hydroelectric plant to be "in service" and eligible for depreciation even though it had not been in daily operation.

¹⁴ One can imagine circumstances where the failure to secure the permit or license is connected to the physical capabilities of the plant; however, there is no evidence whatsoever that such circumstances were present in this case.

¹⁵ The error was compounded by the government's expert witness, who testified that Revenue Rulings were "to be given heavy weight, heavy consideration in tax matters." (JA 732.) Moreover, the government itself highlighted the ostensible "deference" the jury should give to the Revenue Rulings. (JA 831.)

¹⁶ Accord Hygh v. Jacobs, 961 F.2d 359, 363-64 (2d Cir. 1992) (striking expert opinion as to whether defendant's conduct violated statutory provisions); Rich v. Bailey, 1996 U.S. Dist. LEXIS 19437, at *17 (E.D. Pa. Dec. 23, 1996) ("The meaning of terms in a statute or regulation or the application of such terms to specified conduct are not subjects for expert opinion or testimony."), aff'd mem., 135 F.3d 766 (3d Cir. 1997).

¹⁷ See, e.g., Snap-Drape, Inc. v. Commissioner., 98 F.3d 194, 197-98 (5th Cir. 1996) (expert reports containing legal conclusions regarding tax laws inadmissible); Hospital Corp. of Am. v. Commissioner., 109 T.C. 21, 59 (1997) (same); Gulf Oil Corp. v. City of Philadelphia, 53 A.2d 250, 256-58 (Pa. 1947) (chemist's testimony interpreting the meaning of a state tax exemption was inadmissible).

¹⁸ In Zeus Enterprises, Inc. v. Alphin Aircraft, Inc., 190 F.3d 238 (4th Cir. 1999) a prior administrative ruling was admitted into evidence. But that case involved a prior finding as to the asset in question at trial and the party opposing introduction of the prior administrative decision had participated in the proceeding and even testified. Unlike Zeus, prior IRS proceedings leading to the Revenue Rulings at issue had nothing to do with the Harris Plant and CP&L was not involved.