123 N.Y.S. 599 | N.Y. Sup. Ct. | 1910
This is a proceeding to review the action of the State Board of Tax Commissioners in assessing the special franchise of the Queens County Water Company in the borough of Queens at the sum of $275,000. The assessment is attacked on the grounds of overvaluation and of inequality. The proceeding was brought on for trial at Special Term upon the petition and return, and both the relator and the defendants offered evidence upon the issues
The relator, while properly admitting in its elaborate brief that there is no method which must be exclusively used by the court in determining the value, has presented an argument based on the application of the so-called net earnings rule. It claims that the application of this rule shows that the intangible right had no value whatever and that, therefore, the value of the special franchise did not exceed the sum of $128,779.73, which was the value of the pipes and mains in the streets of Queens county.
The city of Hew York, intervening, has filed a brief claiming that the net earnings rule, “ if properly and justly applied,” shows that the value of the special franchise in Queens county including the tangible property in the streets is upward of $800,000.
The Attorney-General claims that the net earnings rule is inapplicable and is not a safe guide or any guide at all in determining the value of the special franchise; and that, as no other means of determination is presented to the court, the proceeding must be dismissed, because the relator has failed in overthrowing the presumption that the assessment is correct.
The net earnings rule is a method of determining the value of a special franchise by ascertaining its earning capacity. It is assumed to be worth that sum which, placed at interest at a determined rate, usually six or seven per cent., will produce the amount which the franchise earns. If the gross earnings of the company, the operating expenses, other proper charges against earnings, and the value of the tangible property be given, the value of the special franchise is the result of a purely mathematical computation.
The net earnings rule as formulated by the Court of Appeals in the Jamaica Water Supply Company Case, 196 N. Y. 39, is as follows:
“(1) Ascertain the gross earnings.
“(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 the balance be capitalized at a fair rate we have the value of the special franchise.”
Both the relator and the city agree on the first factor, although the agreement is an appearance only. They differ in the items going to make up the second factor, and also as to the amount of the tangible property of the company which is the basis of the third factor.
(1) The relator claims that there should be deducted from the gross earnings the sum of $34,843.05 as depreciation of “ depreciable property ” for the year under consideration, while the city allows but $11,494.88. The relator’s evidence on this subject consists of estimates made by its engineer for a number of years showing an annual depreciation in the plant of five and seven-eighths per cent. The city’s evidence consists of an elaborate table in which physical depreciation is figured out with respect to the life of the different items of relator’s depreciable property. Tho difference in the result is principally due to the inclusion by the relator of functional depreciation or obsolescence whereas the evidence of the city is confined to physical depreciation only. So long as depreciation of property is a proper factor to take into account in determining the net earnings, I cannot see why the rule should not be applied as well to fxmetional as to physical depreciation. In both cases the property becomes valueless because no longer capable of being applied to the purposes for which it was designed. It would be a false system of accounting which did not take into consideration the destruction of the value of property from whatever cause, so long as that cause is in constant operation and can be foreseen with reason able certainty. A loss due to functional depreciation is incurred in the operation of the business and, therefore, should he charged as an expense of operation. City of Knoxville v. Knoxville Water Company, 212 U. S. 1. Machinery which to-day is sufficient for
(2) Whether the rentals from the street hydrants repudiated by the city should be deducted from the gross earnings cannot be determined without knowing whether the city is liable therefor. It is evident that the relator does not wish a determination that the city is not liable, neither does the city desire a determination that it is; so neither party has presented evidence on the question. The relator has the burden of showing that the franchise was overvalued by the commissioners; and its contention as to this item, being unsupported by evidence, cannot be sustained.
(3) I think that the relator is wrong in deducting from its gross earnings the net amount earned by the Brooklyn contract. It is true that the water pumped into the mains for delivery to the borough of Brooklyn does not go through the pipes laid in the streets but it is a source of revenue from the invested capital. It is earnings from the sale of about one-half of the output of water obtained by the use of the land, the pumps and the plant; and, as these items of property must be allowed to produce a return to be deducted from the net earnings before determining the balance attributable to the special franchise, I think that the earnings from this source must be included in the computation.
(4) The item of $1,000 claimed by the -relator for uncollectible accounts, being less than one per cent., I think reasonable. On the other hand, I fail to see how the item of $1,800 for farming expenses can be called expenses of operating a plant for the distribution of water.
Six per cent, upon the amount of this tangible property amounts to $45,607.05. Deducting this from the amount of the net earnings leaves a balance of $40,682.69, with which to pay a return on the land before ascertaining the amount of the net earnings attributable to the special franchise. In order to apply the net earnings rule, or before it can be determined whether that rule should be adopted, it becomes necessary to know the amount of the capital invested in land. This brings us to the point most seriously contested by the parties.
(5) The relator claims that it possesses as part of its tangible property invested in its business 846 acres of land which, with its holdings at Far Eockaway and Arverne,
Moreover, I am at a loss for evidence satisfactory to me to determine what is the present value of this land. According to the relator’s testimony, its real property cost $584,934.09. This includes $300,000 in stock and bonds paid for the Dubois purchase of about 300 acres with a plant, $224,000 paid for land in Valley Stream since 1901, and the cost of the Far Rockaway and Arverne property. The application made to the department of taxes and assessments of the city of Few York, for the revision of its assessment states that the value of the real property of the relator, including the improvements now valued at $228,-038.23, as of the second Monday of January, 1907, was $545,933.70; and about fifteen acres have been since purchased. The expert, upon whose testimony the relator relies to convince the court that the present value of the land is $1,500,000, states that the increase in value from 1907 to 1909 was about ten per cent. Both of these valuations were made by the relator as representations to public authorities to induce a downward revision of its taxes, and I know of no reason why I should accept one scale of valuations as .anymore reliable than the other. I am, therefore, without satisfactory evidence which enables me to determine the value of the land owned by the relator.
The issue raised by the allegations in the petition and the denials in the return is one of fact. Was the franchise overvalued ? This is to he determined by the evidence presented on the trial. I am not concerned either with the figures presented to the board in the report of the corporation or in the petition for the correction of the assessment. I am not reviewing the action of the commissioners upon evidence submitted to them. I am trying an issue of fact on the evidence submitted to me. Upon this issue the relator has the
The more the net earnings rule is examined, the more apparent becomes the wisdom of our appellate 'tribunals in holding that it does not furnish a method which is necessarily controlling in determining the value of a special franchise. It is obvious that the application of this rule reduces the value of the special franchise by the amount of every increase in the tangible property used in the business. If, therefore, the earnings of the company should be largely increased and the purchase of land should be continued, such earnings would not result in a proportionately increased value of the special franchise. In 1901 the company was operating with a holding of 330 acres. Since that time it has purchased over 500 acres, at a cost of upward of $200,000. The strict application of the net earnings rule would reduce the value of the special franchise by the amount of every dollar expended in the purchase of land. If the land increased in value $500,000, the value of the special franchises would decrease just that amount. If the officers serve without pay, as they do in this case, the value of the special franchise is increased by a capitalization of a fair salary list to the officers of six per cent. If the value of the land should depreciate, the special franchise would appreciate proportionately in amount. This company has claims against the city of upward of $7,000 for the rental of hydrants. If this claim be valid, the special franchise is worth about $120,000 more than if the claim is invalid. These illustrations indicate that the net earnings rule is
But the rejection of the net earnings rule is not decisive of the case. It remains to inquire whether there is other evidence which, taken in connection with that already considered, leads to the conclusion that the franchise was overvalued. The issued capital stock of the company is $1,050,000, and its bonded indebtedness $500,000. Four and one-half per cent, dividends were paid on the stock last year and interest at five per cent, on the bonds. The bonds are presumably worth par and the stock has never sold above par, the last sale of which we have knowledge being at eighty cents on the dollar. As the capital stock and bonds represent all the property of the company, both tangible and intangible, its selling value is some evidence of the value of all the company’s property. If it should appear that the value of the tangible property is equal to or greater than the selling value of all its stock and bonds, this would furnish some evidence that the intangible property has no value. In considering this evidence, it makes no difference whether the property of the company is necessary or even convenient for its business or not. If the land of this company is worth $800,000, then its tangible property would sum up to the par value of its share and bond capital. But, in view of the uncertainty of the valuation of the land, the fact that there does not seem to be any real market for the stock where its value may be tested by sales freely made, and other evidence to be adverted to, I am not inclined to give any controlling consideration to this bit of evidence.
All the property of the company used in the transaction of its business produced and sold a certain amount of water. About one-half of its output was sold to the city of Brooklyn for the sum of $32,377.16. The remaining half, marketed by means of its special franchise, produced $142,-123.10. The pipes in the public and private streets through which this half was conveyed to its customers are worth $333,777.15. The amount sold in Queens by the use of the special franchise was $106,272.09. The value of pipes in public and private streets in Queens was $166,224.18. It
The company has no legal monopoly, but it has a practical monopoly. It supplies water to a territory rapidly growing in population. The income from the sale of water and from hydrant rentals, after deducting operating expenses, has increased from $21,877.94 in 1896 to $130,918.18 in 1908; and about seventy-five per cent, of its income from the sale of water to customers other than the city of Brooklyn has been earned in the county of Queens by the use of the special franchise in question.
I have given to all this evidence such careful and thoughtful consideration as I am able to bring to bear upon it, and I remain unconvinced that the commissioners have overvalued this franchise.
The only remaining question is that of inequality. The same evidence of inequality was introduced in this- case as in the case of People ex rel. Q. B. G. & El. Co. v. Woodbury, ante, page 481. I have considered this question in the determination of that case and I there decided that the presumption was that the assessment-was made at the full value of the special franchise and that, for the purpose of determining the question of inequality, comparison must be made'with the assessment of other property in the borough of Queens; that it appeared that property in the borough of Queens was not assessed at its full value; that the evidence of the assessment of other property introduced by the relator was confined to the fifth ward of the said borough; that I could not find without further evidence that the ratio between the assessed value and the actual value obtaining in the fifth ward prevailed throughout the county at large; that the only evidence of the relation between the assessed and the real value as to the county at large was the determination of the State Board of Equalization to the effect that property in the borough of Queens was assessed at eighty-seven per cent.; that such determination was treated by both parties as competent evidence upon the issue and that, therefore, I should hold that the special franchise was assessed at its full value, but that
I, therefore, decide in this case that thirteen per cent, should be deducted from the sum of $275,000 and that the assessment of the relator’s property should be fixed at the sum of $239,250. Costs must be awarded against the relator.
Ordered accordingly.