People ex rel. Third Avenue R. v. State Board of Tax Com'rs

[1-3] First. The learned counsel for the appellants contended at Special Term, and argues here, that they were in any event entitled to have the assessments reduced to 89 per cent, of the value as determined by the state board, in order to equalize them with the other assessments. It has been authoritatively settled that on certiorari the court should reduce special franchise assessments to the same percentage of valuation as has been followed generally with respect to the assessments of other real property on the same roll. People ex rel. H. & M. R. R. Co. v. State Board of Tax Commissioners, 142 App. Div. 220 , 126 N. Y. Supp. 1063 , reversed on another point 203 N. Y. 119 , 96 N. E. 435 ; Id., 143 App. Div. 26 , 127 N. Y. Supp. 918 , reversed on another point 203 N. Y. 119 , 96 N. E. 435 ; People ex rel. Jamaica Water Supply Co. v. State Board of Tax Com’rs, 196 N. Y. 39 , 89 N. E. 581 . A stipulation in writing was made between the Attorney General, who appeared for the state board, and counsel for the relators, which provided, among other things, that the relators were “entitled to at least an equalization allowance of 10% of the assessment and that the state board of tax commissioners has stated that for the purposes of direct taxation the values in the county of New York shall be equalized on the basis of 11%,” and it was offered and received in evidence. The stipulation also embraced the gross earnings and"operating expenses of the railroads. When it was offered in evidence, counsel for the city said:

“With regard to this stipulation, the city stands mute until it receives the result of the combined examinations of the experts employed by the Attorney General and by myself.”

It was received in evidence subject to verification of the figures and to a motion to strike it out if they were found to be inaccurate. The relators offered in evidence an equalization table made by the state board of equalization for the year 1910, which showed that in the county of New York in the year 1909 the ratio of assessed valuations of real and personal property to actual values was 89 per cent. It was received in evidence without objection, but it was subsequently claimed by counsel for the respondents that their attention was not drawn to it, and they objected to it on the ground that it was immaterial and irrelevant, and that it was no part of the duty of' the state board of equalization to determine ratios and percentages or to prepare said table. Counsel for the respondents now make the further objection to that table, which they did not specifically take on the hearing, that it merely shows that in the year 1909, which is not the one in question, the ratio was 89 per cent., and that there is no evidence that it was the same in the year 1910. The only right to equalization is with respect to assessments on the same roll (Tax Law, § 290), and therefore that question was to be determined by the ratio of assessments for the year 1910. The court, in effect, accepted the excuse

[4] Second. The appellants further contend that, if they are not entitled to a reduction of the assessments as made by the state board by 11 per cent., they are at least entitled to have them reduced 10 per cent. The court decided that they were not entitled to any reduction, for the reason that such right depended on the actual value of their special franchises, and not the value placed upon them by the state board. The learned court was entirely right in the ruling made on this point. On a certiorari proceeding the court determines de novo the value of the special franchises, and from such value decides whether the state board erred, and, if necessary, modifies the assessment (People ex. rel. Manhattan R. Co. v. Barker, 152 N. Y. 417 , 46 N. E. 875 ; People ex rel. H. & M. R. R. Co. v. State Board of Tax Com’rs, 143 App. Div. 26 , 34, 127 N. Y. Supp. 918 ; reversed on another point, 203 N. Y. 119 , 96 N. E. 435 ), and it is on the value as thus found, and not upon the value as found by the state board of Tax Commissioners, that the relators are entitled, if at all, to equalization (People ex rel. Manhattan Ry. Co. v. Woodbury, 203 N. Y. 231 , 235, 96 N. E. 420 ; People ex rel. H. & M. R. R. Co. v. State Board of Tax Com’rs, 203 N. Y. 119 , 131, 96 N. E. 435 ).

[5] Third. A question is presented at the outset as to whether the correctness of these assessments is to be determined by the application

“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.”

On this point counsel for the respondents further claim that it is not competent for this court to interfere with the assessments, for the reason that the relators have not sustained the burden, imposed upon them by law, of showing that the assessments cannot be sustained tested by the rule which the state board of tax commissioners might lawfully have followed. See People ex rel. H. & M. R. R. Co. v. State Board of Tax Com’rs, 143 App. Div. 26 , 34, 127 N. Y. Supp. 918 , and cases there cited. In the original returns the state board made no attempt to state the method by which they arrived at the valuations. They were required to make further returns to the writs procured by the Third Avenue Company and the Kingsbridge Company, in each of which they certified, among other things:

“That from the information set forth in the alleged report and supplemental reports of the relator, filed with the state board, it is impossible to work out any satisfactory or correct basis of valuing special franchises herein under review. The board has availed itself of all tests of value within its reach and every fact and all information which in its judgment has any bearing upon such value and no certain or fixed rule or method has been adopted in making said valuation.”

In their further return to the writ in the Third Avenue Company proceeding, for the purpose of showing the complications arising from attempting to apply the various rules and theories in determining the value of the special franchises, they gave at length as an illustration what they deemed would be the result of the application of the net earnings rule, based upon the receiver’s report of the value of the property, which, however, they pointed out as not being satisfactory in many respects. Computed in that manner, they certified that the value of the special franchises of the Third Avenue Company would be $7,-036,921.50. They also in their further returns gave illustrations as to what would be the assessable value if computed by the so-called “sales value” rule, “easement value” rule, and by a method suggested by the receiver in his testimony before the public service commission shortly before the assessments were made. They then certified

[6] Where, as here, the railroads had been constructed and equipped and completed and in operation, and the relators have been in the full use and enjoyment of all of their franchises for a considerable period of time, I am of opinion that the net earnings rule is presumptively the proper rule by which to determine the value of their special franchises for the purpose of taxation. See People ex rel. Bklyn. Hts. R. R. Co. v. St. Board, 146 App. Div. 372 , 131 N. Y. Supp. 49 , affirmed 204 N. Y. 648 , 97 N. E. 1113 ; Jamaica Water Supply Co. v. State Board, supra. Therefore, although we are not disposed to hold that the city is estopped by the proceedings upon the hearing from claiming that the valuation should be determined by the application of some other rule, the result is the same, for the reason that the city failed to offer any evidence tending to show mismanagement of the corporations by reason of which the net earnings were not what they should have been, or otherwise tending to show that the net earnings rule should not be applied.

[7, 8] The net earnings rule, as declared by the Court of Appeals in the Jamaica Case, starts with the gross earnings for the year ending with the commencement of the year for which the valuation is made, and from this sum is deducted (1) the operating expenses, and (2) “a fair and reasonable return on that portion of the capital of the corporation which is invested in tangible property,” and the balance thus found is deemed to give the net earnings attributable to the special franchises, the value of which is then found by capitalizing such balance "at a fair rate.” It has been authoritatively decided by the Court of Appeals that the rate of interest, which will be a fair return on the capital invested in the tangible property, is a question of fact, and that in capitalizing the final balance, which represents the net earnings of the special franchises, for the purpose of ascertaining the value of the special franchises, such balance shall be capitalized at a rate 1 per cent, higher than the fate allowed as a return on the tangible property. People ex-rel. Manhattan Ry. Co. v. Woodbury, supra, opinion of Haight, J.,- concurred in by majority.

■ Counsel for appellants also argues that, if the Kingsbridge Company’s special franchises are to be valued on the theory that it had net earnings, then the net earnings of the two companies should have been apportioned on a mileage basis, which would make the assessment against the Third Avenue Company much less. On that theory part of the valuation would escape taxation, as it is now too late to increase the assessment against the Kingsbridge Company. I am of opinion, therefore, that the objections are without merit, and that, since the Third Avenue Company kept its books in such a manner as to show the percentage of fares received on account of the operation of the Kingsbridge Company, the apportionment made of the net earnings between the two companies on that basis did not in the circumstances aggrieve either of them.

[13] Fifth. There is no conflict in the evidence with respect to the value of the tangible property of the respective companies in the streets, which is assessed by the state board as part of the special franchises. The value of the tangible property of the Third Avenue Company in the streets was found to be $3,102,659.40, and of the Kingsbridge Company, $488,643. In applying the net earnings rule, the court found that the value of the intangible element of the special franchises of the Third Avenue Company was $7,766,147.16, and that that of the Kings-bridge Company was $544,870.30, and by adding these respective amounts to the value of the tangible property of the respective companies in the streets the total value of the special franchises of the respective companies was found to be as already stated.

The court allowed a return of 6 per cent, on the value of the tangible property of the companies, both in the streets and outside the streets.

[14] Sixth. The court capitalized the net income representing the intangible element of the special franchises at 6 per cent. The relators contend that this was error, and that, if the action of the court in allowing only 6 per cent, as a return on the tangible property is sustained, then they were entitled to have such income capitalized on the basis of 7 per cent. This contention on the part of the relators is well founded, and the opinion of Judge Haight on that question in People ex rel. Manhattan Ry. Co. v. Woodbury, supra, which on that point became the opinion of the court, renders further discussion unnecessary.

[15] Seventh. The Third Avenue Company owned 335 cars, valued at $1,436,939.52, which it did not use in the operation of its special franchises, but which it leased to three other companies, and for which it received a rental during the year ending December 31,1909, of $150,-602; and 135 cars, valued at $501,763, which it did not use, but which it leased to two other companies without charging any rental therefor. In estimating the tangible property upon which a return was allowed, the value of the cars which were leased and upon which a rental was received was included, but not the value of the cars for which no rental was received; and the rental received for the use of cars was included in computing the gross earnings. The appellants contend that the court erred in excluding from the value of the tangible property the value of the cars' from which no income was derived, and in including in the gross earnings the rental received from cars leased. They want a return on the value of the cars, but do not want the rent credited to gross receipts. This argument is made upon the theory that those cars were owned by the relators or one of them, and that, therefore, they formed part of the tangible property; but that, inasmuch as they were not used in operating the special franchises, the rental received therefor from other companies should not have been included in the gross earnings. This point requires a construction of the net earnings rule, as applied to these facts, for I have stated the substance of the material evidence. It merely appears that the company owned, but evidently had no present use for, the cars. Neither the circumstances under which they were purchased nor the future necessities of • the-company were shown. l am of opinion that the Court of Appeals

A further point somewhat similar is made. It appears that 205 of the 335 cars upon which a rental was received consisted of two classes of cars, known as summer and winter cars. In the summer the summer cars were used by the lessee, and in the winter it used the others. Those not in use were stored by the owner. An argument based upon the fact that these cars were stored by the owner part of the time is made to the effect that in any event the relators are entitled to have onerhalf the value of these cars, viz., $400,805.01, retained in the value of the tangible property upon which they are entitled to a return. It is undisputed that none of these cars were in any manner used in the operation of the special franchises of the relators. For the reasons already assigned, therefore, their value cannot be retained in the value of the tangible property. It is claimed that the subsidiary companies have been allowed for the rent paid for the use of the cars, and that, if the rents received by the relators are not added to gross receipts, the state may be defrauded. The state and municipality can protect themselves by contesting any unreasonable or exorbitant rental claimed as a disbursement by lessees. These views require a deduction from the net income of the two companies before division for capitalization of $64,385.63.

[16] Eighth. The court found the value of the tangible property of the relators in the streets in its condition on the tax day to be $3,-591,302.40, and that it would have cost $5,707,780 to reproduce it new at that time. We are not asked to review these findings of fact; but the appellants, contend that they were entitled to have included in the value of the tangible property upon which a return is to be allowed, the reproduction value of the tangible property in the streets, as distinguished from the depreciated or present value thereof, upon which the order of the court was predicated. We are of opinion that the court adopted the proper rule established by the authorities and recently declared by this court. People ex rel. Kings County Lighting Co. v. Willcox and Others, 141 N. Y. Supp. 677 , March, 1913; Jamaica Waterworks v. State Board, supra; Willcox v. Consolidated Gas Co., 212 U. S. 19 , 29 Sup. Ct. 192 , 53 L. Ed. 382 , 15 Ann. Cas. 1034; City of Knoxville v. Knoxville Water Co., 212 U. S. 1 , 29 Sup. Ct. 148 , 53 L. Ed. 371 ; San Diego Land Co. v. National City, 174 U. S. 739 , at page 757, 19 Sup. Ct. 804 , 43 L. Ed. 1154 ; People ex rel. Brooklyn Heights R. R. Co. v. State Board, 69 Misc. Rep. 646 , 127 N. Y. Supp. 825 , affirmed 146 App. Div. 372 , 131 N. Y. Supp. 49 ; People ex rel. Man. R’d v. State Board,. 143 App. Div. 905 , 127 N. Y. Supp. 1138 , af

[17] Ninth. The relators also claim that the court erred in excluding from the value of the tangible property an item for “development expenses” of $3,094,752.44. This claim is based upon the testimony of a witness, called by the relators, who described what he meant by development expenses, as follows:

“Development expenses are usually taken to include the expenses that must be made for legal advice, technical advice, and obtaining consents of public service commissions, or, rather, other public bodies, and completing your organization, preliminary surveys, and all that sort of thing that is preliminary to the beginning of construction work itself of the physical plant. Then there are also such items as the property owners’ consents, the right to build your tracks in the streets, and which must be obtained from property owners. Then there is the item of interest during construction; that is, the physical construction of the property must be paid for as it is erected, or installed, and interest is accumulating on that outlay, which in property of this kind will reach a considerable sum of money before the property is ready to begin operation and produce an income. In the same way taxes accrue from the moment that the real estate is first purchased, usually some time in advance of the beginning of construction. Then, in addition, there is the profit that the promoter of the enterprise will look for, which has been recognized and allowed for by public service commissions and courts, as well as the financial man’s charges or broker’s commissions, as it is sometimes called, generally charged for the raising of the necessary capital or underwriting the securities. All of those may be grouped as development expenses.”

He estimated the amount of what he termed development expenses at 20.05 per cent, of the reproduction cost of the property. He took the reproduction cost from other evidence as a basis, and then figured thereon 6 per cent, for interest on the investment, 5 per cent, for promoter’s profit, and 2% per cent, for broker’s commissions, and these together with other items, not figured on a percentage basis, brought the total amount to the estimated percentage. I am of opinion that no error was committed in not adding an item for such development expenses in determining the value of the tangible property upon which a return was to be allowed. The elements which go to make up the so-called development expenses, with the exception of taxes and interest during construction which are presumptively given proper consideration in determining the value of the tangible property as such, do not add to the value of the tangible property. We start with the full and true value of the tangible property, and we are asked to add to such valuation an item that has no bearing on the value of the tangible property. For the so-called development expenses no tangible property is acquired. Those expenses are incurred in developing the franchises to render them of value. In so, far as anything is obtained for such items of disbursements, it is represented by the intangible element of the special franchises, and, if so, it is manifest that it could not properly be considered. Development expenses are taken into consideration in determining the value of railroad property as a whole for the purpose of capitalization (People ex rel. Third Ave. Rd. Co. v. Public Service Com’rs, 145 App. Div. 318 , 130 N. Y. Supp. 97 , affirmed 203

[18-20] Tenth. One of the relators owned premises on Ninth and Tenth avenues between 216th and 218th streets, on which was erected a car barn. It did not require the use of the entire building during the year 1909, and it leased part of the upper floor to the Metropolitan Street Railway Company. The court found the value of this real estate to be $325,000, and deducted one-half of that sum from the tangible property on the theory that the company was only using, in connection with its franchise, about one-half of the premises. The relators claim that they should have received a return on the entire value of this property upon the ground that it was held and necessarily required for the purposes of the corporation in connection with the franchises in question, although its immediate necessities at the time did not require the use of the entire building. I am of opinion that this contention is well founded, and that the court erred in finding that the part of the building thus rented was not used in connection with these franchises. The company was not required, in building, to limit the size of its building to its requirements at the time, but had authority, and it was its duty to its stockholders, in the interest of econ- • omy, to build for the reasonable future requirements of the company. With regard to the purchase of equipment and rolling stock, it is quite different for presumptively there is no necessity fdr making such purchases until about the time their use is required. One of the relators owned another parcel of real estate situated on Amsterdam avenue, between 185th and 186th streets, on which a stable had been erected. During the year in question, this stable, which was of the value of $65,000, had been rented for private business purposes, and was in no manner used in connection with the operation of the special franchises. There is evidence of no practical probative force for it does not appear that the witness was qualified to speak on the subject, tending to show that the company held it for its future needs, and on that theory it claims that the value of the property should have been included in the value of the tangible property upon which it is entitled to a return. I am of opinion that the court properly excluded this property upon the ground that no part of it was used in connection with, or was necessary for, the operation or enjoyment of the special franchises. One of the companies also owned premises on the Bowery, on which a substation had been erected, and which was of the value of $405,000. It occupied and used part of this building, and rented 70/4os thereof for commercial purposes. The court excluded from the valuation of the tangible property the proportionate part of the premises which was rented. This falls within the ruling with respect to the car barn, and the company was entitled to a return on the entire value; but the rental should have been added to the gross income. Another parcel of unimproved real estate of the value of $1,200 was owned by one of the relators. It was excluded from the tangible property, and properly so, I think, for it was not used in any manner, and was merely held for possible future requirements. I recognize that there is room for a difference of opinion with respect to some of these

[21] Eleventh. The relators, pursuant to the provisions of section 48 of the Tax Law, paid to the city during the year 1909 $5,382.12 for that year, and for car license fees, pursuant to the provisions of their respective grants, $8,560 for that year; and they claim that those amounts should have been deducted from the gross income before capitalizing the net income representing the value of the intangible element of the special franchises; but the court ruled otherwise. I am of opinion that they were entitled to these deductions. It is the net income of the companies from the operation of the franchises that is to be capitalized. These disbursements were fixed and certain, and the payments were unavoidable. They should be regarded as any other disbursement incurred in operating the franchises! By virtue of the provisions of the same section, these items are deducted from the amount of the special franchise tax, and therefore it is contended by the learned counsel for the respondents that, if those are amounts deducted from the gross income, there will be a double allowance for the same expenditure. I am of opinion that this argument is not sound.- The practical effect of failing to deduct these items from the gross income is to capitalize the amount of those disbursements in ascertaining the value of the special franchises upon which the tax is to be levied. The provisions of said section 48 of the Tax Law, so far as material, are as follows:

“If, when the tax assessed on any special franchise is due and payable under the provisions of law applicable to the city * * * in which the tangible property is located, it shall appear that the * * * corporation affected has paid to such city * * * for" its exclusive use within the next preceding year, under any agreement therefor, or under any statute requiring the same, any sum based upon a percentage of gross earnings, or any other income, or any license fee, or any sum of money on account of such special franchise, granted to or possessed by such *' * * corporation, which payment was in the nature of a tax, all amounts so paid for the exclusive use of such city * * * except money paid or expended for paving or repairing of pavement of any street, highway or public place, shall be deducted from any tax based on the assessment made by the state board of tax commissioners for city * * * purposes, but not otherwise; and the remainder shall be the tax on such special franchise payable for city * * * purposes.”

By these provisions, the Legislature clearly recognizes that such payments are in the nature of taxes. The purpose of the Legislature in allowing such deductions on the payment of the taxes was to prevent inequality in taxation as between street railway corporations, which were required to make such payments, embracing the corporations which have received grants of late years, and those corporations which were not required to make such payments, embracing most of the older corporations. Heerwagen v. Crosstown Ry. Co., 90 App. Div. 275 , 86 N. Y. Supp. 218 , affirmed 179 N. Y. 99 , 71 N. E. 729 ; Matter of New York C. I. Co. v. Moynahan, 148 App. Div. 908 , 134 N. Y. Supp. 17 . The rule is well settled that taxes are to be deducted (People ex rel. Jamaica Water Supply Co. v. State Board, supra, on re-argument 197 N. Y. 33 , 90 N. E. 112 ; People ex rel. Third Ave. Co. v. St. Bd., 136 App. Div. 155 , 120 N. Y. Supp. 528 , affirmed 198 N. Y. 608 , 92 N. E. 1098 ; People ex rel. Brooklyn Heights R. R. Co. v. State Bd., 69 Misc. Rep. 646 at 653, 127 N. Y. Supp. 825 , affirmed 146 App. Div. 372 , 131 N. Y. Supp. 49 , 204 N. Y. 648 , 97 N. E. 1113 ), and there is no difference in principle in my opinion between ordinary taxes and those disbursements.

[22] Twelfth. The relators contended on the hearing that there should have been deducted from the gross income an item aggregating $4,675.92 for taxes paid in the year 1909 for the year 1908, and an item of $8,864.81 for assessments for local improvements levied in 1906, 1907, and 1908, but paid in the year 1909; and they make the same claim on the appeal. The net earnings rule as announced by the Court of Appeals contemplates merely the deduction of the operating expenses for the year during which the gross receipts have been received, and neither the payment of taxes for prior years, nor the payment of other obligations, has any bearing on the question as to what is the value of the special franchises to be determined by the application of the net earnings rule.

[23] Thirteenth. The relators paid during the year 1909 an item.of $539.30 as “an assessment for some sort of improvements” as shown by the record. If that assessment was on the property on which the relators were entitled to a return, it should have been deducted, but the evidence does not show against what property it was levied, or anything further with respect to it. The appellants, therefore, are

[24] Fourteenth. During the year in question, the companies were operated by a receiver appointed by the federal court. The relators claim that his salary of $24,000 was an operating expense, and should have been deducted from the gross income. The only argument made to sustain the rejection of this item is that this was an extraordinary situation, and that ordinarily there would be no disbursement for the salary of a receiver. The receiver, however, took the place of the president or general manager of the company, and the payment of his salary was a necessary disbursement, and presumably saved the payment of salaries to others for the performance of the duties which he performed.

[25] Fifteenth. The court found that the relators received $5,953.18 for “Interest & Discount” from the use of their property in operating the franchises; and that was included as part of the gross receipts. This was taken from a tabulation made from the books of the relators by an accountant for the respondents; but the particular source of the income is not otherwise shown. It appears that the court allowed the relators a return on a working capital of $400,285.65, and for aught that appears this item may have been for interest earned on this working capital. The appellants contend that this item should not have been included in gross income. I think they have not shown sufficient basis to warrant its deduction, and that it w.as properly included in-the gross receipts.

[26-28] Sixteenth. The appellants also claim that the court erred' in deducting $206,735.89 from.the operating expenses of the relators for the year 1909 in arriving at the net income. By the stipulation, to . which reference has been made, it was stipulated that.the operating expenses for the relators for the year 1909 were $1,704,477.87, but that there was included in this amount the sum of $273,857.31, which the Attorney General claimed was for replacements, and was covered' by an allowance of $336,695.99, made in the same stipulation for depreciation for that year. Instead of calling experts to show what would be a proper allowance for depreciation, and what should be embraced in such an allowance, the parties stipulated that the relatorswere entitled to deduct from their gross earnings for the year ending December 31, 1909, said last-named sum “on account of a depreciation allowance.” The record contains no evidence, other than the phraseology of this stipulation, as to what items were intended to be included in the stipulated allowance for depreciation. The learned counsel for the city contends that the rule is now established that there can be no> allowance for the creation of a sinking fund, and that the only allowance that may lawfully be made on account of depreciation is a straight annual allowance. This contention appears to be sustained by the case of People ex rel. Manhattan Ky. Co. v. Woodbury, supra. That case, however, is not decisive of the question arising on the.contention made by the appellants. In People ex rel. Third Ave. R. R. Co. v. State Board, 136 App. Div. 155 , 120 N. Y. Supp. 528 , affirmed without opinion 198 N. Y. 608 , 92 N.

“The annual ordinary expenditures tor repairs, replacements, and renewals upon such a property cannot be assumed to make it unnecessary to provide a fund which will replace its engines, electrical equipment, and other physical property which at some time must be replaced.”

The court in that case also held that the state board of tax commissioners and the city were at liberty to show that any items for replacements or renewals included in the accounts of the company’s operating expenses are such as would be covered by the depreciation fund. In the Jamaica Water Supply Case, supra, the Court of Appeals held that the court might take judicial notice of the fact that there is a constant deterioration of a plant, lessening the value of the tangible property, which is not made good “by ordinary” repairs. And with respect to the amount of such depreciation and the manner in which it should be -provided for said:

“The amount of this depreciation differs in different enterprises, but the annual rate is usually capable of estimate and proof by skilled witnesses. No corporation would be regarded as well conducted which did not make some provision for the necessity of ultimately replacing the property thus suffering deterioration; and we cannot see why an allowance for this purpose should not be made out-of the gross earnings in order to ascertain the true earning capacity.”

In that case the Appellate Division, discussing the same point ( 128 App. Div. 18 , 112 N. Y. Supp. 396 ), said:

“Perhaps the evidence would justify the conclusion that the amount allowed for maintenance is sufficient to replace from time to time as may be necessary the mains, hydrants, and some of the other tangible property of the company. But it must have expensive pumps and machinery and other property which is liable to serious depreciation by use, and in time to actual destruction, so that prudence would require that each year a certain reasonable sum be laid aside as replacement or up-keep fund for such contingencies as are not covered by the ordinary maintenance charges. If such fund is not maintained, the property is being robbed for the purpose of paying dividends or exaggerating its paper value.”

In People ex rel. Manhattan Ry. Co. v. Woodbury, supra, the Court of Appeals, in discharging the sinking fund rule, announced the true rule to be:

“That the annual allowance for depreciation should be computed by dividing the values of the various kinds of tangible property by the number of years of their respective estimated physical lives.”

It is, I think, fairly established by the authorities cited that in addition to deducting from gross receipts the ordinary expenses of operation, including ordinary repairs and ordinary renewals and replacements of parts of old appliances, machinery, structures, and equipment by new, as distinguished from expenditures for new construction and new machinery appliances and equipment, a further annual deduction to cover current and future disbursements for new construe

It follows from the views I have expressed that the final net income was $224,841.88. This apportioned between the two companies, upon the same basis as that followed by the Court at Special Term, shows the net income of the Third Avenue Company to be $210,101.-25, and that of the Kingsbridge Company _ to be $14,740.63. These amounts capitalized at 7 per cent, show the value of the special franchises of the Third Avenue Company to be $3,001,446.43, and of the Kingsbridge Company to be $210,580.42. Adding to the value of the special franchises of the Third Avenue Company the value of the tangible property in the streets, which was found to be $3,102,659.40, as stated, and which is assessed as part of the special franchises, shows a total value for that company.of $6,104,105.83; and adding to the value of the special franchises of the Kingsbridge Company the value of its tangible property in the streets, found to be $488,643, shows a total value for that company of $699,223.42. These values are less than the assessments. The assessments as thus reduced must be further reduced by 10 per cent, in order to equalize them with other assessments on the same roll. It is thus found that the assessment against the Third Avenue Company should "have been $5,493,695.25, and that against the Kingsbridge Company should have been $629,-301.07.

The relators concede that they claimed before the state board of tax commissioners that the assessment of the Third Avenue Company was excessive by $7,000,000. Inasmuch as that assessment was not found to be excessive by the court at Special Term, and is' not found by this court to be excessive by one-half of that amount, they are not entitled, under section 294 of' the Tax Law, to costs.

It follows, on the computations made by the relators, which if erroneous may be corrected on settlement of the orders, that the orders