142 N.Y.S. 986 | N.Y. App. Div. | 1913
The State Board of Tax Commissioners, which, for brevity, I shall call the State Board, assessed the special franchises of the Third Avenue Bailroad Company for the year in question at $7,920,000, and those of the Kingsbridge Bailway Company at $759,000. The proceedings were originally instituted in the county of Albany against the State Board only; but subsequently the city of New York was permitted to intervene as a respondent, and the place of trial was changed to the county of New York. The three certiorari proceedings were tried together and are presented for review by a single record. The first proceeding was instituted by the Third Avenue Company to review the assessment against it; the second by Wallace and others, as a committee representing the purchasers of the Third avenue fine on foreclosure, to review the same assessment, and the third by the • Kingsbridge Company to review the assessment against it.
The learned court at Special Term found that, although the assessments as made represented the full value of the special franchises as found by the State Board of Tax Commissioners, yet, as a matter of fact, the value of the special franchises of
These appeals present many interesting points and some difficult questions of law, which I shall endeavor to state and consider in what appears to be then* logical order.
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 eighty-nine 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. Hudson & Manhattan R. R. Co. v. Board of Tax Comrs., 142 App. Div. 220; revd. on another point, 203 N. Y. 119; People ex rel. Hudson & Manhattan R. R. Co. v. Tax Comrs., 143 App. Div. 26; revd. on another point, 203 N. Y. 119; People ex rel. Jamaica Water Supply Co. v. Tax Comrs., 196 id. 39.) 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 ten per cent 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 Yew York shall be equalized on the basis of eleven per cent; ” 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
Second. The appellants further contend that if they are not entitled to a reduction of the assessments as made by the State Board by eleven per cent, they are at least entitled to have them reduced ten 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; People ex rel. Hudson & Manhattan R. R. Co. v. Tax Comrs., 143 App. Div. 26, 34; revd. on another point, 203 N. Y. 119); 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 R. Co. v. Woodbury, 203 N. Y. 231, 235; People ex rel. Hudson & Manhattan R. R. Co. v. Tax Comrs., Id. 119, 131.)
Third. A question is presented at the outset as to whether the correctness of these assessments is to be determined by the application of the net earnings rule. The only evidence offered by either side was with respect to the value of the special franchises, tested by the net earnings rule. The appellants
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 fañ 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
Fourth. The Third Avenue Company operated the Kings-bridge road, and the court found that a separate account was kept of the income, but not of the expenses of operation. The accounts of the company for the year ending December 31, 1909, were used as a basis for applying the net earnings rule in determining the taxable values of the special franchises on the-second Monday of January, 1910. The court found the net income of both companies to be'$498,661.05, and apportioned that amount between them for the purpose of ascertaining the value of the special franchises of each, according to the proportion the fares collected on each bore to the total fares collected, and found on that basis that ninety-three and four hundred and forty-four one-thousandths per cent of the net income represented the net income attributable to the special franchises of the Third Avenue Company, and six and five hundred and fifty-six one-thousandths per cent that of the Kingsbridge Company. The lineal track mileage of the Kings-bridge Company was nineteen and one one-hundredths per cent of the total mileage of both companies. The same attorney and counsel appeared for both companies, and it does not appear that any question was raised upon the hearing with respect to the apportionment of the net earnings between them. It is manifest that taxes should be paid upon the total value of the special franchises of the two companies, and the court should not permit either company to escape its just burden of taxation on technical grounds. The stipulation to which reference has been made contains a statement to the effect that the Third Avenue Company not only operates the Kingsbridge Company, but derives “the entire proceeds or income from such operation.” It appears to be contended that the effect of this stipulation is that the Kingsbridge Company received no consideration for such use of its franchises by the
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 Kingsbridge Company was $544,870.30, and by adding these
The court allowed a return of six per cent on the value of the tangible property of the companies, both in the streets and outside the streets. The relators contend, on the testimony of certain experts, who gave their opinions with respect to what would be a proper return on such tangible property, that the court should have allowed a return of eight per cent. I am of opinion that the court properly determined this question. Six per cent is the legal rate of interest in this State, and although that is not controlling, the evidence of the experts does not satisfactorily show that a return at the legal rate of interest would not be a reasonable return on such property. On like evidence the court in People ex rel. Manhattan R. Co. v. Woodbury (143 App. Div. 905; 203 N. Y. 231) affirmed the allowance of a return of only six per cent, and that rate has been applied in numerous other cases. (People ex rel. Jamaica Water Supply Co. v. Tax Comrs., supra; People ex rel. Third Ave. R. R. Co. v. Tax Comrs., 136 App. Div. 155.)
Sixth. The court capitalized the net income, representing the intangible element of the special franchises, at six per cent. The relators contend that this was error, and that if the action of the court in allowing only six per cent as a return on the tangible property is sustained, then they were entitled to have such income capitalized on the basis of seven 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 R. Co. v. Woodbury (supra), which on that point became the opinion of the court, renders further discussion unnecessary.
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
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, 156 App. Div. 603; People ex rel. Jamaica Water Supply Co. v. Tax Comrs., supra; Willcox v. Consolidated Gas Co., 212 U. S. 19; Knoxville v. Water Co., Id. 1; San Diego Land Co. v. National City, 174 id. 739, 757; People ex rel. Brooklyn Heights R. R. Co. v. Tax Comrs., 69 Misc. Rep. 646; affd., 146 App. Div. 372; People ex rel. Manhattan R. Co. v. Woodbury, 143 id. 905; 203 N. Y. 231; People ex rel. Queens County Water Co. v. Woodbury, 67 Misc. Rep. 490; 143 App. Div. 618; affd., 202 N. Y. 619.)
Ninth. The relators also claim that the court erred in exclud
Tenth. One of the relators owned premises on Ninth and Tenth avenues between Two Hundred and Sixteenth and Two Hundred and Eighteenth 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 economy, to build
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, $5,560 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
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.
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 not entitled to a reduction from the gross income on account of that item.
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.
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 was properly included in the gross receipts.
Sixteenth. The appellants also claim that the court erred in deducting $206,735.89 from the amount charged by the relators for operating expenses 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-G-eneral 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 relators were 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 he no allowance for the creation of a sinking fund, and that the only allowance that may lawfully be made on account of deprecia
In People ex rel. Manhattan R. Co. v. Woodbury (supra) the Court of Appeals," in discussing 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 construction and new machinery, appliances and equipment, is authorized under the rule last promulgated by the Court of Appeals, which, I think, contemplates that in determining the probable life of each item or unit of tangible property suffering depreciation, obsolescence shall be duly considered. The books of the company showed operating expenses in the amount of $1,705,665.37, instead of the amount stipulated, and from this item the court deducted the sum of $206,735.89, on the ground that that amount of the total operating expenses represented sums expended for “ renewals and replacements,” which the court, according to the opinion delivered, understood was intended to be covered by the stipulated amount claimed by the Attorney-General to have been expended for replacements, and that it had not actually been expended during that year. It appears that the company during that year expended $118,557.58 for reconstruction, which was not included in the
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 seven 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
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 writer, which if erroneous may be corrected on settlement of the orders, that the orders should be reversed and the assessment against the Third Avenue Company should be reduced to $5,493,695.25, and that against the Kingsbridge Company should be reduced to $629,301.07, and as thus reduced affirmed, without costs.
Ingraham, P. J., Scott, Dowling and Hotchkiss, JJ., concurred.
Orders reversed and assessments reduced as directed in opinion, and as so reduced affirmed, without costs. Orders to be settled on notice.