People ex rel. Jamaica Water Supply Co. v. State Board of Tax Commissioners

In the determination of this appeal it is essential at the outset to ascertain precisely what questions are presented for our consideration. These depend upon the scope and extent of the powers conferred upon the Supreme Court by the legislature in so-called certiorari proceedings to review the action of the state board of tax commissioners in valuing a special franchise for purposes of taxation. That power is wholly statutory—that is to say, it is derived from the provision of the Tax Law. Ordinarily, the writ of certiorari whereby the court reviews the judicial or quasi-judicial determination of a board or body of officers

Although the Tax Law provides that the testimony in these cases must be taken by a referee, who is to report the same with his conclusions of law and fact, it is to be noted that the final determination of the question whether the valuation by the assessing officers was erroneous or not,'rests not with the referee but with the court at Special Term, to which he reports the testimony and his conclusions, which in the language of the statute constitute only “ a part ” of the matter upon which the court is to base its determination. When such a case comes before the Appellate Division, therefore, it is not merely the report of the referee witli the annexed proofs, which that tribunal has to review, but it is also the decision of the court at Special Term with all matters upon which such decision is founded — that is to say, the Appellate Division must consider the return of the assessing officers, including all proofs and exhibits accompanying the same, as well as the testimony reported by the referee and his conclusions. Upon this aggregate of papers, the Appellate Division is called upon to determine whether the court at Special Term has properly upheld or overruled the valuation adopted by the assessing officers.

In a case of this kind, the purpose sought to be attained through the state board of tax commissioners in the first instance and -subsequently by means of certiorari proceedings

In our opinion it is beyond the province of the courts to lay down an exclusive rule of franchise valuation applicable to all cases. Of course, if there were only one reasonable method of getting at the true value of a special franchise, it would plainly be the duty of the state board to adopt that method. It is conceded, however, that there are many reasonable methods, and it is not for the courts to insist that one shall be pursued rather than another so long as the legislature has chosen to leave them all equally open to the assessing officers. When a particular assessment comes up for review, as in the present case, the duty of the appellate courts is discharged when they inquire whether the rule whereby the value of this special franchise was ascertained was reasonably adapted to that end, and, if so, whether it

I cannot express my own views on this subject better than by quoting from one of the opinions of Robebt Eabl, formerly chief judge of this court, written by him as referee in the celebrated litigation involving the constitutionality of the amendment to the Tax Law by which this very tax on special franchises was first imposed. He said: “ There is no law or authority which requires assessors, in making assessments, to adopt any certain or fixed rule or method. The only rule for their guidance is the actual value of property to be assessed, and they may avail themselves of all tests of such value within their reach, and of every fact, and all information which in their judgment has any bearing upon such value. If, in assessing these franchises, these officers included with them the value of any other property, thus enhancing their value, their assessments would be illegal. This I do not understand they did. I cannot find that they assessed any values but the special franchises; but in assessing them they considered several incidental matters, such as earning capacity, business advantages, etc., all bearing upon their value. If the local assessors throughout the state are bound to adopt some certain rule or method in reaching assessable values, and if their assessments must fail unless when questioned they can state some certain rule or method by which they were guided, I believe a large share of their assessments would fail to withstand the assaults of the taxpayers. All that such assessors could say when questioned is substantially what these officers have said here, that they have availed themselves of such information as they could obtain as to values and then fixed them according to their best judgment. Assessments when thus made are not illegal. They may be too high, and for that the remedy is by review. It is only when undisputed facts are before the assessors, and by adopting some wrong rule or method they disregarded such facts

In the consideration of this case we are bound to assume at the outset that the valuation of the relator’s special franchise as fixed by the state board of tax commissioners was correct. “ It is essential that a party assailing the validity of an assessment should make it conclusively appear that the method by which the assessors arrived at the result complained of was incorrect, and that the assessment does not represent the fair value of the property assessed.” (People ex rel. Westchester Fire Ins. Co. v. Davenport, 91 N. Y. 574 , 581. See, also, People ex rel. Osgood v. Commissioners of Taxes, 99 N. Y. 154 ; People ex rel. Panama R. R. Co. v. Commissioners of Taxes, 104 N. Y. 240 , and People ex rel. Burlte v. Wells, 184 N. Y. 275 .) In the case last cited Chief Judge Cullen said that “ the presumption is that the determination of the assessors was correct, and to relieve itself from assessment it was incumbent upon the relator to clearly show that the assessment was erroneous.” (p. 279.)

The return to the writ of certiorari did not disclose the method whereby the state board of tax commissioners arrived at the sum of $800,000 as a just and true valuation of the special franchise of the relator. It left the Special Term in the dark on that subject. The return, it is true, did state that the board had considered the value of the relator’s real estate in the streets and the value of its right to use the streets and the cost of its property and the income derived therefrom as elements in arriving at the valuation of the special franchise. The return also contained certain negative averments, such as the statement that no property was included in the valuation except such as was in, under, above or running through the streets; nor was the value of the right to be a corporation included; nor the value of the good will of the business carried on by the relator. Eevertheless, when the

This, as we have said, is not clearly ascertainable from the return itself nor the papers which came to the Special Term with it. The learned referee to whom the case was sent, a lawyer of much experience in tax proceedings, realized this but disposed of the matter in a peculiar way. He assumed that the state board of tax commissioners ought to have valued the relator’s special franchise by the application of what is known as the net earnings rule; and applying this rule himself, as he understood it, to the facts and circumstances appearing in the return and the evidence taken before him, he reached the conclusion that the special franchise valued in this manner would exceed the valuation fixed by the board. His findings and conclusions were adopted by the Special Term, which made an order that such valuation was neither erroneous, illegal nor an overvaluation, and dismissed the writ | of certiorari. The referee appears to have paid no attention' to the proposition sustained by the authorities above cited to the effect that it was incumbent upon the party attacking the assessment to establish some error on the part of the assessing officers in principle or fact. He acted on the assumption that if the assessment were shown to be excessive by the appli

While, as we have already pointed out, the legislature has not prescribed any exclusive or hard and fast rule for assessing the value of special franchises, we think that in the case of this relator and many other corporations similarly circumstanced the adoption and application of the net earnings rule would result in a fair and just valuation. There are obviously many cases, however, to which it would not be applicable at all. Take, for example, the case of a corporation enjoying a special franchise which by reason of mismanagement or other causes had yielded no earnings perhaps for many years; there it might be wholly contrary to the truth to hold that the special franchise of such corporation had no value simply because there happened to have been no earnings by which that value could be measured. Since, however, the net earnings rule may often be employed with convenience and justice and doubtless could justly be adopted in the case at bar, it is proper for us to make some observations in regard to the manner of applying it and the ascertainment of the elements necessary for its application. What we shall say on

The net earnings rule contemplates a valuation upon the basis of the net earnings of the corporation which are attributable to its enjoyment of the special franchise. The method is thus applied :

(1) Ascertain the gross earnings.

(2) Deduct the operating expenses.

(3) Deduct a fair and reasonable return on that portion of the capital of the corporation which is invested in tangible property.

The resulting balance gives the earnings attributable to the special franchise. If this balance be capitalized. at a fail-rate we have the value of the special franchise.

The questions which we propose to discuss are presented by the matters of difference in the case at bar between the referee and the Appellate Division. They are four in number : (1) The referee did not include the relator’s taxes for the year in the operating expenses to be deducted from the gross earnings. The Appellate Division held that such taxes should be deducted in order to ascertain the earning capacity. (2) The referee made no allowance for depreciation of the tangible property employed in the relator’s business. The Appellate Division held that some allowance for depreciation should be deducted from the gross earnings. (3) The referee held that a return of 5% upon the value of the tangible property employed in the relator’s business was a fair return on the money invested in such property, although he conceded that there was no evidence on that subject in the case. The Appellate Division, also without evidence, held that 6$ should be computed as the proper rate of return on money invested in the relator’s tangible property. (4) In valuing the tangible property employed in the relator’s business the referee adopted the cost of the land. The Appellate Division held that the present value of the land, which is much greater, should have been adopted. These differences, it will be seen,

(1) As to the taxes, where the net earnings rule is adopted we think they should be deducted from the gross earnings in order to determine the net earnings of the taxpayer. • In Willcox v. Consolidated Gas Co. ( 212 U. S. 19 , 51) the Supreme Court of the United States held that the taxes paid by the defendant even if founded upon an erroneous valuation “ were properly treated by the company as part of its operating expenses, to be paid out of its earnings before the net amount could be arrived at applicable to dividends.” Certainly the gross earnings of a corporation in any one year are diminished by the amount of taxes it has to pay in that year, and such taxes operate to diminish the net earnings in their precise amount. The earning capacity of a corporation cannot be ascertained without taking them into account. The deduction to which the relator is thus entitled on account of taxes, however, does not include the special franchise tax itself. The Tax Law makes a special franchise real estate for purposes of assessment, and in assessing real estate at its true value the estimated amount of the tax to be paid tlierecn is never deducted.

(2) In the deduction made by the referee for expenses there is an item of $3,789.37 under the head of maintenance, and it is clear that this does not include a proportionate allowance on account of the general depreciation of the plant which will ultimately require replacement. We suppose that judicial notice may be taken of the fact that in the conduct of many industrial enterprises there is a constant deterioration of the plant which is not made good by ordinary repairs which, of course, operates continually to lessen the value of the tangible property which it affects. Tlie amount of this depreciation differs in different enterprises, but the annual rate is usually capable of estimate and proof by skilled witnesses. Ho corporation would be regarded as well conducted which did not make some provision for the necessity of ulti

(3) Having ascertained the entire net earnings the problem before the referee was how to fix the proportion of such net earnings which were attributable to the enjoyment of the special franchise. Taking the value of all the relator’s tangible property as fixed by him he computed interest thereon at the rate of 5$ and deducted the resulting amount from the total net earnings. “ The balance of the earnings,” he says, “after making this allowance for return on the investment in tangible property, results clearly from the ownership and use oE the special franchise owned by the company.” He gives as a reason for deducting the rate of 5f0, in the absence of any testimony as to the proper rate, that it was considered a fair return on the money invested. The Appellate Division, on the other hand, held that 6% should be allowed as a fair return upon the capital invested in the real estate and other tangible property. In the case of Willcox v. Consolidated Gas Com pany, already cited, the Supreme Court of the United States agreed with the District Court that the complainant was entitled to &f0 on the fair value of its property devoted to the public use; and in a case like the present where the net earnings rule is applied, we think that the court below might properly assume, as a matter of general knowledge in the business community, that a prospective return of at least the legal rate of interest, which is 6f0 in this state, is requisite to induce investors to embark their money in enterprises of such a nature as that undertaken by this corporation. It is true that this is a question of fact, but the doctrine of judicial notice generally applies only to matters of fact. While evidence as to what constitutes a fair and reasonable rate of return in the business of a corporation was received in this Consolidated Gas Co. Case ( 157 Fed. Rep. 849 , 869), and may properly be taken by the court in certiorari proceedings under the Tax Law if parties see fit to offer it, the court may,

(4) In valuing the tangible property of the relator, the land occupied by a portion of the plant was an important element to be considered. The referee allowed a return only upon the original cost of such land ($25,162.01) instead of. upon its present value ($71,018.28). He argues that the value of the special franchise is not augmented by the increase in the value of the land. Where, however, the value of a special franchise is to be ascertained by the application of the net earnings rule, which involves a capitalization of the surplus, it must be assumed that the present owners are entitled to a reasonable return upon the value of their property now. A stockholder who has recently acquired his stock will probably have paid an increased price therefor by reason of the increase in the market value of the very land in question. The taxes upon this land are based upon the present value, not upon its cost to the corporation when originally acquired. So we think its present value must be taken into account in applying the net earnings rule to the valuation of the special franchise. If, as is suggested might occur in some supposed cases, this would result in giving a special franchise no taxable value at all, that would be a conclusive reason for rejecting the net earnings rule in such cases and would demand the adoption of some other method of valuation. A similar question arose in Willeox v. Consolidated Gas Co. (supra), where it was argued that the basis of valuation of the land occupied by the plant of the Consolidated Gas Company should not exceed its cost to the company, but the Supreme Court of the United States said: “We concur with the court below in holding that the value of the property is to be determined as of the time when the inquiry is made regarding the rates. If the property, which legally enters into the consideration of the question of rates, has increased in value since it was acquired, the company is entitled to the benefit of such increase. This is, at any rate, the general rule. We

We now come finally to the question of equalization. The writ of certiorari alleged that the assessment of the relator’s special franchise was unequal because other property in the county of Queens was assessed at 89$ of its real value, whereas the property of the relator for the purposes of the special franchise tax was assessed at its full value, being 11$ higher than the assessment made on other property on the same roll in the same' county. The referee and the court at Special Term determined that this allegation was true, finding that the ratio of assessed value to the actual or real value of the real estate in the borough of Queens in the year 1907 was 89$. The referee disregarded this inequality because he thought that even if the assessments were to be equalized at 89$, as demanded by the relator, the valuation of the special franchise fixed. by the state board of tax commissioners might nevertheless be sustained. The Appellate Division, however, took a different view and held that 11$ of the value of the special franchise as determined by the state board of tax commissioners should be deducted therefrom in order to equalize it with the assessed value of other property.

Under section 250 of the Tax Law (as the sections were then numbered, now section 290, chap. 60 of the Consolidated Laws) any person assessed upon any assessment roll might petition for a writ of certiorari on the ground that the assessment was unequal because it had been made at a higher . proportionate value than the assessment of other property on the same roll by the same officers. By section 45 of the same statute (now section 46) it was provided that an assessment of a special franchise by the state board of tax commissioners might be reviewed in the manner prescribed by the

During the ten years that have elapsed since special franchises were first rendered liable to taxation in this state, the courts with a single exception appear to have acted upon the assumption that a special franchise tax was open to attack by

Those cases were tried before the Hon. Robert Earl as referee. In a series of extremely able opinions, from one of which a quotation has already been made, that learned judge discussed and determined all the important issues presented by that very complicated and interesting litigation. In one of these opinions, discussing a number of general objections to the assessments which had previously been considered, he said: “ These franchises were all assessed at what these officers deemed to be their full and true value, while other real estate in the municipalities in which these franchises are operated was assessed by the local assessors at less than its full and true value, and so these assessments will have to be reduced at least so much as will equalize them with the other assessments in the same localities. In Hew York the assessment of other real estate was sixty-seven per cent of its full and true value; in Kings, sixty eight per cent; in Queens, eighty per cent; in Richmond, sixty-six per cent, and in Westchester, ninety

Here we have an express finding made by a referee in a certiorari proceeding under the Tax Law for which there was absolutely no authority or basis unless that statute permitted the court in such a proceeding to reduce the assessment of a special franchise upon the ground of inequality. The final order in the proceeding followed the findings. That order, it is true, was reversed by the Appellate Division (People ex rel. Metropolitan Street Ry. Co. v. State Board of Tax Commis sioners., 79 App. Div. 188 ); but when the case came to this court the order of the Appellate Division was in turn reversed and the judgment of the Special Term affirmed. By this affirmance the Court of Appeals necessarily sustained the referee’s findings made by Judge Earl to which we have referred and which could only be approved on the ground that under the Tax Law the assessment of a special franchise may be reduced so as to equalize it with other assessments in the same locality.

There seems to be no occasion for any further discussion of a question which appears so clearly to be settled by authority. The state board of tax commissioners and other critics of that portion of the Tax Law relating to special franchises have frequently recommended that the power to reduce for inequality should be conferred upon that board itself instead of being confined in its exercise to the court in certiorari proceedings, but this is a matter in regard to which the legislature alone can grant relief.

The views which have been expressed may prove useful to the assessing officers in all cases where they see fit to apply the net earnings rule to the valuation of special franchises, and will, at all events, be serviceable as a guide to the disposition

It may be well to notice one additional point to which no reference has been made in the foregoing discussion. In capitalizing the final returns the referee adopted the rate of

The order of the Appellate Division should he modified so as to remit the matter to the Special Term instead of to the state board of tax commissioners for further consideration and proceedings in accordance with this opinion ; no costs in this court to either party.

Edward T. Bartlett, Haight, Werner, Hiscock and Chase, JJ., concur; Cullen, Oh. J., and G-ray, J., absent.

Ordered accordingly.