State v. Nevada Central Railroad

28 Nev. 186 | Nev. | 1905

By the Court,

Talbot, J.

(after stating the facts):

In order that a clearer understanding may be had of the essential facts, we have detailed important parts of the testimony relating to the main issue in the case — the true cash value of the road in 1901. It not being shown or contended that the prospective is greater than the present value, it depends largely upon the amount of earnings and expenses of operation. Following decisions in other states, this court long ago laid down the rule that the cash value of a railroad for the purposes of taxation — which means the amount at which the property would be appraised if taken in payment of a just debt from a solvent debtor — must be determined mainly by its net earnings, capitalized at the current rate of interest, taking into consideration any immediate prospect of an increase or decrease in its earning capacity. The actual cost of the road may be shown, for, prima facie, that is the value. But if it appears that the actual cost was in excess of the necessary cost, the necessary cost is the proper standard. If it further appears that the net income of the road does not amount to current rates of interest on its necessary cost, and is not likely'to do so; or if, in short, the utility of the road is not equal to its cost, then its value is less than its cost, and must be determined by its utility alone. If the road does not pay current expenses, and cannot be expected to do so, then it is worth no more than the value of its movable material, less the cost of taking it up and getting it to market. (State v. C. P. R. R. Co., 10 Nev. 74; State v. V. & T. R. R. Co., 23 Nev. 295, 46 Pac. 723, 35 L. R. A. 759.) In the latter case it was said that railroads are bought and sold so seldom, and the value of each road depends so entirely upon its surroundings, that in determining the amount we must resort to principles other than those governing ordinary kinds of property which have a market value. It is apparent that a most important question here concerns the amount the road earns or ought to earn, and the necessary expenses of operation. As held by this court in State v. V. & T. R. R. Co., 24 Nev. 80, 49 Pac. 945, 50 Pac. 607, the net income of a railroad, when necessary to be determined for the purposes of taxation, is the difference-between the gross receipts and necessary expense under reasonably economical and prudent management. The gross receipts to be considered for this purpose are not necessarily those in fact received, but such receipts as would be received under a reasonably economical and prudent management; and, the expenses to be deducted in order to determine the net income are not necessarily the expenses which were in fact incurred, but such expenses as would be incurred under a reasonably economical and prudent management. It is earnestly claimed for the state that it was competent for the witness Maestretti to give the result of the items in defendant’s books which he deemed properly chargeable as the expenses of operation, and for him to reject or ignore in his answer other items that he did not consider so chargeable, and that he could give the amount that, in his judgment, the company ought to have earned beyond its actual receipts, and state the net amount that the company ought to have made that year. It is said in the brief that there are many things, such as a four-in-hand or the castle on the mountain at Austin, that even a stupid witness would know were not necessary in the operation of a railroad. For the defendant it is asserted that everything charged as expenses in its books is presumed to be necessary for its operation, and that the witness for the state could not give his conclusions which might overthrow this presumption. Are these contentions consistent with correct legal principles? If, as said by this court (23 Nev. 294, 46 Pac. 724, 35 L. R. A. 759), "it is reasonable to suppose that the owners of a road will operate it to their own best advantage; that they will obtain all the income possible, and keep the expenses of operation as low as possible,” this does not raise any presumptions, further than is shown by the transactions themselves as originally entered, that moneys paid out and items charged in the books were necessary for the operation of the road. Classification to expense or other accounts is in the nature of a written declaration in a party’s own favor, made without the sanctity of an oath or the opportunity of cross-examination. It is as natural to conclude that a railroad company will pay interest on its bonds and meet its fixed charges, if not also that it will lay betterments, as it is to believe that it will meet its operating expenses. If it were the rule of evidence that a binding or other presumption would attach in favor of a railroad company for any items it may classify or charge in its own behalf to operating expenses, the same self-interest which, in the absence of any contrary showing, may be presumed to result in an economical management, might prompt the charging • of doubtful and uncertain items to the expense account if a suit for taxes were anticipated. Unless admitted without objection, the nature of the items should be shown, or at least lumped into different classifications, in- order that the court may determine whether they are properly chargeable as expense of operation. (Home Ins. Co. v. Baltimore Warehouse Co., 93 U. S. 527, 23 L. Ed. 868; Abbott’s Trial Brief, Civil, 322.) This need not result in much delay or difficulty. Prior to the trial the accountant testifying may take the total of moneys received from fares, freights, or other sources, and classify and ascertain the amounts of the different kinds of expense, such as that shown by the pay roll for the usual employees of a road, for fuel, ties, and other material and supplies, which are admittedly or clearly necessary; and doubtful items can be separately listed or classified, and their amounts or totals brought to the attention of the court, and allowed to go to the jury or not, as the court, and not as the witness, may determine, unless a question of fact arise regarding the necessity for particular, expenditures.

The error in allowing the answer of Mr. Maestretti giving his result regarding the net earnings to stand after he -stated that he included such items as he deemed proper and rejected others which he thought improper is well illustrated by his failure to include the taxes as part of the operating expenses. It was equivalent to permitting the witness to tell the jury that the taxes ought not to be allowed as a part of the charges of operation for the year — a matter of law for the trial judge, and one previously determined by this court contrary to the opinion of the witness. The objection on the ground that it was a matter of law was promptly and properly sustained to the question put to Mr. Hiskey as to whether the company was liable for the taxes that the jury might assess for the year 1901. This witness was not permitted to testify for the defendant that the company was liable for its taxes, arid, inferentially, that they were a necessary part of its expenses; but the witness for the state was permitted to give a result which, in effect, said to the jury that the taxes could not be allowed as part of the charges of operation. He included as a part of the receipts which the company ought to have earned the amount in fares that would cover the distances traveled on passes. Although these amounts should be included in determining what the earnings of the company ought to be unless the defendant showed that the passes were used by its employees, or in connection with the business of the road, and if the company wishes to be generous and carry passengers or freight for less than schedule rates, the ordinary value of the service rendered would be allowed in the estimate of what the road ought to earn, whether they should be so considered was a question of law. The witness, as an accountant, could estimate- and give the amounts or totals of those or other items specified or classified, and then it would be for the court to determine which of these should be considered by the jury.

As to what other items the witness included or rejected in arriving at his result we are not informed, nor were the district court or the jury further enlightened. No doubt many of the transactions shown by the books were properly placed in his estimate; but whether others were improperly so, whether he allowed items for expenses that ought to have been rejected, or rejected others that ought to have been allowed, as he did the payment by the company of the taxes on its personal property, and whether he classed as receipts anything that cannot be legally considered such, cannot be ascertained from his testimony or the record, because the items on which his result is based are not specified.

' In this regard the testimony of Mr. Hiskey for the company is hardly more satisfactory. It is evident that his answer that the loss from operation that year was $634.99 was based either upon his judgment as to the items allowable or upon the way they had been classified in the books, neither of which, as we have said, should control the province of the court in determining which are for the consideration of the jury when objection is made. Notwithstanding the wide discrepancy in their respective results, the estimate of a loss by the witness for the defendant and that the company ought to have netted over $10,000 that year by the witness for the plaintiff, both may have been entirely correct in their additions, subtractions, and balances for which they had been called as expert accountants. So far as appears, they differed only in the items which they considered, and which were selected in the exercise of their judgment, instead of that of the court. If they had disagreed regarding the result or balanees from the same transactions, or if there had been a conflict in their testimony pertaining to anything tangible, it would have been for the jury to determine between them. As it is, the testimony relating to the important issue in the case is based upon the opinion of one witness for the state and the different opinion of a witness for the defendant, or the way the company classified its .accounts, as to whether the various items in defendant’s books for that year were legally allowable as receipts or expenses of operation — verily a foundation more uncertain and less stable than the air cushion that supports the abutment of the Brooklyn Bridge. As said in Hammersmith v. Avery, 18 Nev. 229, 2 Pac. 55, the law requires a party to establish his case by the best evidence of which it is susceptible. It is the first entries of transactions in daybooks, journals, pay rolls, stubs, and books of original entry, rather than the secondary entries, that make them admissible; and subsequent classifications of these into expense, ledger, or other accounts are not evidence in a party’s own favor, except as they are shown to be substantiated by the original entries which control. If the witness had classified these, and given the totals and remainders of the different groups, designating them by reference to the books or to tabulations which he had made from the books, the items from which he derived his results would have been apparent and fixed; so that, if any of these were in doubt, the court could determine in regard to their relevancy, instead of leaving this judicial, function to the witness. Not only was it error to permit the witness to give his opinion on questions of law, or, which was equivalent, a result based more or less upon his judgment in allowing or rejecting doubtful items, but it would have been improper for him to testify regarding the necessity for other items concerning which there was no doubt. That conductors, engineers, 'other ordinary employees, fuel, and ties were necessary in the operation of the road was a matter of common knowledge, concerning which the court and jury did not need the opinion of any witness. The presumption would arise that any money shown by the company’s books to have been expended for these or for other purposes generally connected with the operation of a railroad were prudently and economically expended, but if the costs for building a castle or the payment of interest on bonds were charged in the expense account no presumption would arise from the fact that they were so charged that they ought to be deducted from the earnings in estimating the annual net income. They would show for themselves the contrary, and no witness should be permitted to testify that, in his judgment, they ought to be allowed or rejected. Matters of law and of common knowledge are directly for the court and jury. Every one knows that money expended for coal to generate steam to propel a locomotive and for the wages of an engineer is a legitimate charge in the operation of a railroad, and the presumption would arise that any money shown by the books to have been paid out for these purposes was a necessary expenditure. If it were sought to overthrow this presumption, witnesses possessing special knowledge or skill could be called to give their opinion that the amount of coal necessary for propelling trains, or the market price of coal, or the ordinary wages for such engineers, were less than the charges made.

The books were not placed in evidence on the trial in the district court, but, as each party sought to prove a result from them through the examination and opinion of an expert, and each objected to the opinion of the opposing witness without making any objection to the books themselves, it is apparent that their introduction was waived. Without consent or waiver, it would have been necessary to lay the usual foundation for their introduction by proving that they contained correct and original entries of the transactions made at the time they took'plaee, or from permissive memoranda, before they, or evidence of their contents, could be received. To have secured their introduction, it would not have been necessary to prove that the various items scattered through daybooks or others of original entry had been carried to and properly classified in the expense or other accounts in the ledger, and such classification made by the defendant in its own behalf was not supported by any testimony as to its correctness, and was inadmissible, except so far as shown to be relevant by the transactions or charges themselves as originally entered. The mere classifications made by the defendant, or the conclusion of witnesses as to which items were properly allowable, were insufficient and incompetent to overthrow the presumption in favor of the correctness of the assessment made by the assessor under official oath, and presumably without interest between the state and the defendant, or to overthrow the burden cast upon the defendant to prove its allegation of overvaluation. By the admission of the books or the waiver of their introduction only such original entries as are material to the issue are to be considered as affecting the result. Until the contrary was shown by proof, there would be a presumption that charges for anything essential to the operation of the road, such as coal, ties, and ordinary supplies, and wages for usual employees, represented reasonable and economical expenditures. When no dispute exists, and no objection is made, it may be convenient to allow expert accountants to state the net earnings as shown by the books, and this testimony could stand as effectually as parol evidence given of a conveyance of real property, or a written contract where no objection is made to the non-introduction of the writing. (Vietti v. Nesbitt, 22 Nev. 397, 41 Pac. 151; Watt v. N. C. R. R. Co., 23 Nev. 154, 44 Pac. 423, 46 Pac. 52, 62 Am. St. Rep. 772.) If it were desired to supply the testimony of experts as to whether certain doubtful items were necessary for the operation of the road, or were for betterments, fixed charges, or useless expenditures, they should have been specified, so that the court and jury could have properly considered them. The witness Maestretti did not claim to be an expert other than as an accountant, but, if it had been shown that he or the witness Hiskey were the most experienced and eminent of railroad managers, it still would have been incompetent for either of them, whether on behalf of the state or the defendant, both of which should be governed by the same rules that apply to other litigants, to give their opinions on matters of law, which are for the court, or regarding commonly known facts concerning which the court and jury could determine as well as they. The duty of the accountant is to save the time of the court by striking totals and balances of such items as are relevant, but not to give his judgment as to what those items are without bringing them to the attention of the court. Section 427 of our practice act, being section 3522, Nev. Comp. Laws, is specific enough to exclude this opinion testimony. It provides that there shall be no evidence of the contents of a writing other than the writing itself, except: "First — When the original has been lost or destroyed; in which case proof of the loss or destruction shall first be made. Second — When the original is in the possession of the party against whom the evidence is offered, and he fails to produce it after reasonable notice. Third — When the original is a record or other document in the custody of a public officer, or officer of a corporation. Fourth — When the original has been recorded and a certified copy of the record is made evidence by statute. Fifth — When the original consists of numerous accounts or other documents which cannot be examined in court without great loss of time and the evidence sought by them is only the general result of the whole.” The rule at common law, or in states without this statutory enactment, is the same. (1 Greenl. Ev. 93; Burton v. Driggs, 87 U. S. 136, 22 L. Ed. 299.) The words "only the general result of the whole” naturally limit the answer of the witness to the whole of the accounts and vouchers or to the whole of particular accounts, tabulations, or items that are specified, and do not indicate that he may use his judgment in rejecting part of these without designating them. In State v. Rhoades, 6 Nev. 376, this court held that it was proper to ask an expert who had investigated the accounts in the state treasurer’s office: " What was the result of your examination as to the amount of money which should have been in the treasury on the 10th day of September, 1869?” In this question the word "should” had quite a different meaning and limitation than it had in the answer of the witness Maestretti. The amount that should have been in the state treasury was simply the difference shown by the books between all the receipts and all the disbursements, and did not imply that the witness was to exercise his judgment in excluding anything. It is a well-established rule that the opinions of experts cannot be received in regard to matters of inquiry that may be presumed to lie within the experience and knowledge of all men of average education moving in the ordi nary walks of life. When the facts can be placed before the jury, and they are of such a nature that jurors generally are competent to form opinions and draw inferences from them, then the opinions of experts are not admissible. (Rogers’ Expert Tes. 26; Franklin Ins. Co. v. Gruver, 100 Pa. 273; White v. Ballou, 8 Allen, 408; Hovey v. Sawyer, 5 Allen, 554; Perkins v. Augusta Banking Co., 10 Gray, 312, 71 Am. Dec. 654; Clark v. Fisher, 1 Paige, 171, 19 Am. Dec. 402; Monroe v. Lattin, 25 Kan. 351, 354; People v. Muller, 96 N. Y. 408, 48 Am. Rep. 635; Baltimore R. R. Co. v. Leonhardt, 66 Md. 77, 78, 5 Atl. 346; State v. Anderson, 10 Or. 448; New England Glass Co. v. Lovell,7 Cush. (Mass.) 319; Shafter v. Eveans, 53 Cal. 32; City of Chicago v. McGiven, 78 Ill. 347; Naughton v. Stagg, 4 Mo. App. 271; Cook v. State, 24 N. J. Law, 843, 852; Dillard v. State, 58 Miss. 368; Gavisk v. Pacific R. R. Co., 49 Mo. 274; Concord Railroad Co. v. Greely, 23 N. H. 237, 243; Nashville R. R. Co. v. Carroll, 53 Tenn. 347; Linn v. Sigsbee, 67 Ill. 75; Veerhusen v. Chicago R. R. Co., 53 Wis. 689, 694, 11 N. W. 433; 16 Cyc. 852; 3 Wig. Ev. sec. 1918, and cases there cited.)

Judge Campbell, in Evans v. People, 12 Mich. 35, said: "It is an elementary rule that, where the court or jury can make their own deductions, they shall not be made by those testifying.” Lord Mansfield, in Carter v. Boehm, 3 Burr. 1905: "It is an opinion which, if rightly formed, could only be drawn from the same premises from which the court and jury were to determine the cause, and therefore it is improper and irrelevant in the mouth of a witness.” "It is a good general rule that a witness is not to give his impressions, but to state the facts from which he received them, and thus leave the jury to draw their own conclusions; and wherever the' facts can be stated it is not to be departed from.” (Cornell v. Green, 10 Serg. & R. 16.) In Campbell v. Rusch, 9 Iowa, 337, it was said: "In answering this question the witness was not communicating facts, but his own conclusions, drawn from the language used in the written instrument. This was not permissible. It was the special duty of the jury under the instructions of the court to draw conclusions, and for the witness to state facts. The exceptions to the rule are to be found in these cases where a witness speaks of matters of science, trade, and a few others of the same character, but they cannot be extended to eases like the present.” Again, in Lime Rock Bank v. Hewitt, 50 Me. 267, and Lawson’s Ex. & Opin. Ev. 166: " It was wholly inadmissible for the witness to state his inferences and presumptions arising from what appeared upon the books. By the well-established rules of law these were for the jury.”

The exception to the rule as provided by the statute and the decision .lies in allowing the accountant to state the result of arithmetical calculations that could be made by the court. When accounts are numerous, the convenience and expedition of trials demand the admission of the testimony of competent witnesses who have perused the entire mass and will state summarily the net result. Regarding this there is a collation of decisions in 2 Wig. Ev. sec. 1230. In Adams v. Board, 37 Fla. 283, 20 South. 271, it was said: "The witness in answer to the question detailed at length divers facts that he asserted to be shown by the records examined by him. There was no error in excluding this evidence. The contents of records cannot be shown by parol where the record itself is extant and accessible.” In State v. Brady, 100 Iowa, 191, 69 N. W. 290, 36 L. R. A. 693, 62 Am. St. Rep. 560, a tabulated statement prepared by an agent of railroad companies from the records showing the sales of tickets at a station during the year was held to have been properly admitted.

It was shown on the trial that an offer of $200,000 for the road had been made to the general manager in 1900 by residents of Austin, or that he was asked whether the company would sell it for that amount. The witnesses who testified that they made the offer did not have that amount of money, and did not make it with any ability or expectation of buying the road for themselves, but pursuant to a statement made by a man named J. F. Mitchell, who was not present nor called as a witness, but who had previously said to J. A. Miller that "he had parties — good, responsible parties — to take it at $200,000.” There was no proof that Mitchell or the others to whom he referred had this amount of money, or were able to buy the road, nor that they knew anything regarding its value, nor that the general manager or any one with authority in reply to the offer said anything in the nature of a declaration against interest. Objection and exception were made to testimony of the offer on the ground that it "did not tend to prove the value in 1901.” Counsel for the state suggested that the exception is too narrow. It may have been intended to object only for the reason that the offer was made in 1900, instead of 1901; but it is stated more broadly as not tending to prove the value of the road in the latter year, the one in which it was essential to determine the valuation as a basis for the taxes sought to be recovered. If the offer were sufficient to prove the value of the road in 1900, in the absence of any contrary testimony that value would be presumed to continue during 1901. However, we believe that under the circumstances shown the offer was not sufficient to show the value in 1901, or at any other time, and that the objection ought to have been sustained. In Hammersmith v. Avery, 18 Nev. 229, 2 Pac. 55, it was said: "The evidence of the plaintiff as to the offer made him for the property should have been rejected, because, among other reasons, the person making the offer may not have known the value of the property;” and, quoting from Fowler v. Comrs., 6 Allen, 96: "The value of an offer depends upon too many considerations to allow it to be used as a test o'f the worth of property.” We do not wish to be understood as holding that cases may not arise in which it is permissible to prove an offer, or the declarations of a party in interest or authority in reply to one; but when, as here, it is not shown that the persons who made them had the means to meet them, or knowledge of the value of the property, we see no principle upon which they may be considered admissible. (Sharp v. U. S., 191 U. S. 341, 24 Sup. Ct. 114, 48 L. Ed. 211, and other eases cited in appellants’ brief.)

The district court erred in refusing defendant’s instruction No. 7, following: "You are instructed that in ascertaining the net income, if any, of the Nevada Central Railroad, for the year 1901, or the net loss, if any, you should add any taxes actually paid by the company for that year to the other necessary expenditures of the road and deduct the same from the receipts of the road for that year; and in order to determine whether there will be any net income whatsoever, or to determine the loss from operation of the road, if a loss is shown, you must consider and deduct from the receipts of the road for 1901 such an amount for the taxes for 1901 as you agree ought to be paid by the railroad company upon the property described in the complaint, which, in brief, consists of 93 miles of main railroad track and 2 miles of side track.” It was held in State v. V. & T. R. R. Co., 23 Nev. 297, 46 Pac. 723, 35 L. R. A. 759, that in determining the annual net income of a railroad the taxes should be deducted as a part of the expenses of operation. (State v. Railroad Co., 26 Nev. 357, 68 Pac. 294, 69 Pac. 1042.) In compliance with this rule, the instruction ought to have been given. But in determining the value of the road on the basis of its earning capacity capitalized at current rates of interest it should be given the benefit of the payment of its taxes only once, so that in ascertaining what the current rates of interest are the net yield on other investments after the payment of taxes on them should be taken as a guide. For instance, there was proof on the trial that 6 per cent or 8 per cent was paid on mortgages in Lander County. If the tax on these was paid by the mortgagee, and not by the mortgagor, they would be properly deducted from the interest rate in arriving at the net yield of the investment and the true earning value of the money placed in such mortgages. It could be shown whether the income from investments other than government bonds, which command a lower rate by reason of exemption from taxation, would be reduced by the usual tax rate.

Exception was taken to the evidence introduced on behalf of the state that the articles of incorporation of the Nevada Central Railroad Company provided for 7,500 shares of stock of a par value of $100 a share, and that the company had made a mortgage in 1888 for $750,000 on all its property to the Central Trust Company of New York, and that Lander County in 1879 issued $200,000 in bonds to aid the building of the road. As said before, a railroad is different from ordinary property having a market value, and its cost may be shown. Under the circumstances the giving of the mortgage was in the nature of an admission that the property was worth the amount of the loan, and the value of the corporate shares and the amount of the bonds issued by the county to aid in the construction of the road had a tendency to show that these sums were a part of its cost, for the same presumption would attach that these moneys were economically used in its construction that prevails in regard to its operation. Presumably its cost is its value until the time a lesser or different value is shown. The presumption that the road is worth its cost continues until it is shown that it is less by reason of insufficient earning capacity to pay 'net current rates of interest on its cost, or from other causes.

Defendant further contends that the levy of $1.57 for county purposes on each $100 of valuation made the whole levy void under the following provision of the revenue act: " The board of county commissioners in each county of this state are hereby authorized and empowered to levy annually, on or before the first Monday in March, an ad valorem tax for county purposes not exceeding the sum of two dollars on each one hundred dollars i value of taxable property in the county and such special taxes as may be authorized and required by law; provided, the total tax levy in any one year for'all purposes shall not exceed five dollars on each one hundred dollars value of taxable property in any county or part thereof; provided, no levy in excess of one dollar and fifty cents on each one hundred dollars value of taxable property therein shall be so levied in any county of this state for county purposes unless the county is indebted for liabilities contracted prior to January 1st next preceding the making thereof and not bonded or.funded.” It was not shown that the county was not indebted for liabilities contracted prior to 1901, and the presumption is in favor of official action and the levy. This makes it unnecessary to determine whether such levy would have been invalid if it had been shown that no such prior indebtedness existed.

The defendant sought to have their witness Hiskey state the amount of the receipts and earnings of the road for the previous ten years, as shown by the balances standing on the books. The testimony was properly excluded, because the witness had not made the computations, and did not know whether they were correct, nor what items they included, and did not bring them under the rule we have hereinbefore stated.

When the case is tried again, the court can determine whether there is evidence to cover or warrant the modification to instruction No. 5. We have examined the other specifications treated in the elaborate and interesting briefs, but find no error in regard to them.

The cause is remanded for a new trial.