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coment. Von Baumbacepletion of minit

now to decide. If the burden of taxation 267 F. 968, on the ground that no loss had under the Revenue Act of 1913, as inter- been actually ascertained, and that such preted by the highest court, should be con- amortization could not be regarded as desidered to bear more heavily upon the de- preciation, which, within the meaning of ferred dividend policy holders than the an- that act, had reference only to the wear nual dividend policy holders, that is an argu- and tear and obsolescence of property, and ment which may properly be addressed to did not even cover the depletion of mining the legislative branch.

property. Von Baumbach v. Sargent Land [2] 2. Plaintiff further contends that Co., 242 U. S. 524, 37 S. Ct. 201, 61 L. Ed. $283.10 of the tax in question was erro- 460. neously assessed, because the Commissioner The government contends that the lanof Internal Revenue refused to permit the guage of the act of 1913 on depreciation is plaintiff to deduct from its gross income even narrower than that of the act of 1909, commissions in the amount of $28,309.97 ad- except where express qualifications have vanced to agents prior to 1906 (in which been made, as in the case of mines. In New year the making of further advances was York Life Insurance Co. V. Anderson, 263 prohibited by the state of New York), and F. 527, the Circuit Court of Appeals for repaid or recovered in the year 1913. It ap- this Circuit permitted the insurance compears from the stipulation that these ad- pany to revalue its securities in accordance vances had, subsequent to 1906 and prior to with the prevailing market prices, and to January, 1913, been charged off by the com- deduct the loss as depreciation under the act pany as losses. Inasmuch as, under the un- of 1909. The government's position is that contradicted testimony, it appears that these the latter decision is not in accord with the debts had been written off prior to the en- views expressed by the Supreme Court, and, actment of the Act of August 5, 1909, c. 6, whether right or wrong under the act of § 38, 36 Stat. 112, imposing a special ex- 1909, which permitted "a reasonable allowcise tax upon corporations, including insur- ance for depreciation of property," would ance companies, and that no benefit in re- not hold under the act of 1913, which perspect of any deductions for losses on account mitted such allowance only "for depreciaof these debts had been retained under any tion by use.

o retained under any tion by use, wear and tear of property." federal tax law, the plaintiff should not be

uld not be

It has alres

It has already been pointed out, however, obliged to treat the amount of the repay- that

that the amortization in question is not a ment of these doubtful loans as income,

revaluation to reflect market changes. It is merely because it had prudently omitted some of its questionable assets from its bal

a computation to distinguish the payment ance sheet. Though a taxpayer cannot,

back of a portion of a capital investment while retaining the benefits accruing from

from the interest or yield. It need not be the deduction of its bad debts in previous &

assimilated to depreciation at all. years. disclaim the burdens resulting from [4] In computing the return or income the inclusion of the samewhat unexpected from bonds purchased at a premium, as a repayment of these bad debts in subsequent matter of economics an allowance must be years, yet if, as in this case, no such bene- made from the nominal interest paid to perfits have accrued, such repayments are prop- mit the amortization of the premium of erly to be treated as capital gains, and not maturity. In fact, a trustee for a life tenincome.

ant and a remainderman is obligated, if he [3] 3. It is a further contention of plain- purchases bonds at a premium, to reserve tiff that the Commissioner of Internal Rev- from the income accruing to the life tenant enue erroneously refused to permit the plain- sufficient sums to amortize the premiums tiff to deduct from its gross income the sum paid so that the capital may be kept intact. of $332,466.22, representing the amortiza- In re Stevens, 187 N. Y. 471, 80 N. E. 358, tion of the securities purchased by the plain- 12 L. R. A. (N. S.) 814, 10 Ann. Cas. 511; tiff at a premium. The amortization was bas- McLouth v. Hunt, 154 N. Y. 179, 48 N. E. ed on the actual purchase price, and mathe- 548, 39 L. R. A. 230. If, in accordance with matically computed in and from the books of sound business and accounting methods, the the plaintiff; it was not a revaluation of the plaintiff has consistently distinguished besecurities to conform to market prices. Such tween the yield of its investments and the amortization was not allowed as a deduction, amortization of its capital, I think that the under the act of 1909, by the Circuit Court Commissioner of Internal Revenue erroneof Appeals for the Seventh Circuit, in Fink ously treated the amounts amortized as in& Northwestern Mutual Life Insurance Co., come.

3 F.(20) 285 [5] 4. The Commissioner of Internal tion to these so-called reserves were propRevenue also refused to allow the following erly deductible from the plaintiff's gross initems to be included in "the net addition, come. It is pointed out that a different rule if any, required to be made within the year as to unpaid losses is set forth in McCoach (1913] to reserve funds," which the law v. Insurance Co. of North America, 244 U. permits the plaintiff to deduct from its net S. 585, 37 S. Ct. 709, 61 L. Ed. 1333, and income:

Fink v. Northwestern Mutual Life Insur(a) $16,629 to meet the losses of future ance Co., supra. The decisions of the Supremiums under policies, waiving the right preme Court do appear conflicting, and until of the company to such premiums if the in- the conflict is resolved I follow the most sured should become totally and permanent- recent ruling. This rule, too, seems to me ly disabled.

to be in accord with sound accounting prac(b) $250,000 to meet plaintiff's liability' tice and the requirements of state law. The on losses which occurred in the year 1913, only serious question, it seems to me, arises but which had not yet been reported in regard to the reserve for unpaid or un

(c) $160,641 to meet the plaintiff's obli- reported losses. It is said that these are algations under so-called "Nylie" contracts of ready covered by the general reserve. While employment with its soliciting agents, which this may be true in a sense, I think it more entitled the agents, after 20 years of service, truly reflects the position of the company with certain prescribed minimum results, to to permit it to estimate all payments that an annuity for life, payable monthly. may have to be made on account of losses

All these so-called reserves were kept in during the year, whether reported or not. accordance with the requirements of the in- If an adjustment of the general reserves besurance laws of the state of New York. It comes necessary, this may be reflected in is, however, contended by the government subsequent income statements of the comthat they are not reserves required by law pany. within the meaning of the act of 1913. But It is questionable, in my mind, moreover, in Maryland Casualty Co. v. U. S., 251 U. whether, admitting that double reserves are S. 342, 40 S. Ct. 155, 64 L. Ed. 297, the required by state law as a matter of abunSupreme Court stated :

dant precaution, such reserves are not recog"The term 'reserve' or 'reserves' has a nized by the Revenue Act. special meaning in the law of insurance. While its scope varies under different laws, in general it means a sum of money, various- ' esc

no a 33 a ly computed or estimated, which with accretions from interest, is set aside, 'reserved,'

WESTINGHOUSE ELECTRIC & MFG. co. as a fund with which to mature or liqui

V. DENVER TRAMWAY CO. date, either by payment or reinsurance with STENGER V. CITY AND COUNTY OF other companies, future unaccrued and con

DENVER. tingent claims, and claims accrued, but con- (District Court, D. Colorado. December 13, tingent and indefinite as to amount or time

1924.) of payment. In this case, as we have seen,

No. 7114. the term includes ‘unearned premium reserve' to meet future liabilities on policies. 1. Evidence @mw 535-Expert witness must be liability reserve to satisfy claims, indefinte

shown to be specially qualified. in amount and as to time of payment, but it

Before a witness can testify as an expert,

hip to

cca 223 Us 659, 7 Led

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ment, but it must be shown that he possesses the necesaccrued on liability and workmen's compen- sary qualifications; that on account of special sation policies, and 'reserve for loss claims' knowledge, skill, or experience, possessed and accrued on policies other than those provid- enjoyed by him over others, his opinion on the ed for in the 'liability reserve, but it has

subject of inquiry will aid the court or jury tu

a correct conclusion. nowhere been held that 'reserve,' in this technical sense. must be maintained to pro- 2. Evidence Owo 543(0)-Economics student and

writer held not qualified to testify as expert vide for the ordinary running expenses of a

on valuation of street railway. business, definite in amount and which must A writer and student of economics, public be currently paid by every company from law, government, and sociology, holding degrees its income if its business is to continue, such of Bachelor of Arts, Master of Arts, and Docas taxes, salaries, reinsurance, and unpaid brokerage."

having never been employed by any street rail.

way in any capacity, and having little experiIt seems to me that, within the rules then ence in valuation of properties, held not shown laid down by the Supreme Court, the addi- to be qualified to testify as an expert as to

tor of

t an e

valuation of a street tramway system for rate- 10. Street railroads on 28(2)_Ordinances held making purposes.

to grant easements in perpetuity. 3. Evidence 584(1)-Nonexpert testimony

Ordinances granting easements and rights

of way to street railway company, its successof one not qualified as expert witness reject. ed, where inseparably affected by opinions of

of ors and assigns, held to have granted such ease

ments in perpetuity. witness.

Where a so-called expert on public utility 11. Constitutional law em 205(7) - Perpetual matters was not qualified as an expert on valu easements to street railway held not violative ation of street railways, his nonexpert testi of Constitution. mony as to facts shown by tramway company's

Const. Colo. art. 2, § 11, prohibiting any irbooks should be rejected, where so modified, revocable grant of sp

revocable grant of special privileges, franchises, enlarged, or restricted by his personal opinion

or immunities, held not applicable to the grant as to be inseparable from his opinion testimony.

of perpetual easements in streets to street rail4. Çarriers Em 12(5)-Reproduction cost new,

way company; such easements being in furless depreciation, is dominant factor in valua.

therance of public right in the use of public tion for rate-making purposes.

highways. In inquiry as to valuation of street railway 12. Street railroads 28(2)-Perpetual ease. system for the purpose of rate-making, ordi m ents grant not cut down by subsequent ornarily reproduction cost new, less depreciation, dinances expressly reserving rights of both is the dominant factor, and of necessity must city and railway under prior ordinances. be the rule, where there are no other sufficient

Perpetual easements in streets granted to data on the subject.

street railway company were not surrendered 5. Evidence 571 (7)-Opinions of eminently or cut down to a lesser term by the passage of qualified experts not to be lightly weighed.

subsequent ordinances, limited as to term of

grant, and their acceptance by the company, In the valuation of street railway property

which were applicable only to extensions on for the purpose of rate-making, opinions of ex

specified streets, and which expressly reserved perts who have given the subject long study and

all rights of both city and street railway comreflection, and whose continuous practical ex

pany under the earlier ordinances. perience for many years have informed them on every phase of the inquiry, ought not to be 13. Carriers 12(5)-Value of street ease. lightly weighed though they need not be literal ments not included in rate-making base. ly followed.

Value of perpetual easements of street 6. Carriers om 12(7)-In valuation proceed. railway company in city streets cannot be in

ings accrued depreciation is fact to be ascer. tained by inspection.

rate-making purposes. In valuation of street railway for rate-mak- 14. Street railroads Om58-Receiver not per. ing purposes, accrued depreciation is a fact to mitted to renounce ordinance creating binding be determined by inspection.

obligation.

In proceedings by receiver of street railway 7. Evidence 571 (7)-Evidence held to re

company for permission to increase rates and quire allowance of going concern value in

to enjoin city from enforcing inadequate rates, rate-making proceedings.

receiver held not permitted to renounce ordiIn proceedings for valuation of street rail

nance, which required, as one of the consideraway by receiver for rate-making purposes, ex

tions for its passage and acceptance, that the pert evidence on the question of value as going

company pay to the city specified sum of money concern held to require allowance of lowest

in monthly installments, which had theretofore amount testified to; the municipality opposing

been mutually performed, and had been conincrease in rates having offered no testimony strued as binding obligation on the railway to on the question.

make all installment payments. 8. Carriers 12(5)-Easements in streets of street railway held property of value.

In Equity. Suit by the Westinghouse Easements in streets, whatever their dura- Electric & Manufacturing Company against tion or terms may be, are property of value, the Denver Tramway Company. Petition indispensable to other property rights of street railway company, whether or not such value o

value by E. Stenger, as receiver of the Denver can be considered in fixing the base on which Tramway Company, to enjoin the City and rates are to be established.

County of Denver from enforcing rates 9. Carriers Om 12(1)-Constitutional law mo fixed by ordinance. An order granting tem319--City has police power to regulate fares porary injunction was affirmed by the Cir. and service of street railway, but cannot fix cuit Court of Appeals (277 F. 865), and confiscatory rates.

thereafter a special master was appointed City possesses at all times police power to

to take testimony. On exceptions to mas regulate fares to be charged and character of services to be rendered by a street railway, so ter's report. Exceptions sustained in part. long as such regulations provide a fair return and in part overruled. on capital investment and its preservation un See, also, 295 F. 809. impaired; but to allow a public utility less is confiscation, in violation of constitutional guar.

Gerald Hughes and H. S. Robertson, both anties.

of Denver, Colo., for receiver.

3 F.(20) 285 Rice W. Means and Harvey Riddell, both to 10 cents for adults and 5 cents for chilof Denver, Colo., for City and County of dren, as just and reasonable charges." Denver.

The City intervened and filed its answer

to the receiver's petition. As a first defense LEWIS, Circuit Judge. This proceeding it moved that the receiver's petition be disis on exceptions to the master's report. missed, because the petition did not contain The reference came about in this way: The facts sufficient to constitute a cause of acDenver Tramway Company was organized in tion in equity or at law, and because the court March. 1914, became the owner of and has was without jurisdiction to grant the resince operated a street-car system, largely lief prayed. In its answer it also denied within but in small part without the City of that the 6-cent fare was confiscatory, adDenver. In acquiring the property it suc- mitted that the City had refused to permit ceeded to the rights of predecessor compa- the company to charge more than six cents mies. In December. 1920. this court on a and alleged that Ordinances No. 3, Series of creditor's bill appointed a receiver of all 1885, and No. 36 of 1888, granted to the of its properties with power to continue op- predecessors and assignors of the Tramway eration. It had defaulted in payment of Company, contractually fixed the fare at five interest on a part of its mortgaged debt and cents, that the 6-cent ordinances later passed in payment of taxes. It was indebted to by the City Council were for temporary purunsecured creditors who were pressing for poses and did not change the contractual obpayment. This condition was brought about ligations under the prior ordinances to in large part by an increased wage scale charge not more than a 5-cent fare, and to which it had been compelled to pay for sever

which obligations the Tramway Company as al years theretofore, increase in the cost of

assignee was contractually bound. The ansupplies necessary to operation, and because

swer also set up the Ordinance of May 15, of a strike of its employés for higher wag

1906, as restricting the company to charge

not more than 5 cents for single passage to es during the summer of 1920. The strike

adults and half that amount for children. was accompanied by mob violence, property

The contentions of the City concerning the of the company of large value was burned

Ordinances of 1885, 1888, and May, 1906, up and otherwise destroyed, and some of

were resisted by the receiver. After hearing the new employés engaged to operate the

on the issue joined between the receiver and cars, as well as some of those who partici

the City the court entered an interlocutory pated in attacks upon them, were killed. Or

decree enjoining the City from enforcing or der was not restored and the street-car sys- attempting to enforce a maximum fare of 6 tem again put in fuil operation until Gov- cents for adults and :

cents for adults and 3 cents for children, ernment soldiers had been stationed in the and authorized the receiver to charge and City for several weeks as a means of protec- collect fares not in excess of 8 cents for tion. The company's credit was exhausted. adults and 4 cents for children between the The rate of fare which it was permitted to ages of 6 and 12 years, and to issue two tickcharge under a regulatory ordinance of 1919 ets or tokens for adults for not more than was 6 cents for adults and half that amount 15 cents and four tickets or tokens for chil. for children. The City refused to increase dren for not more than 15 cents, after givthe fares and the receivership followed. ing not less than 48 hours' notice of such

In February, 1921, the receiver filed his change, and to cause to be issued to all paspetition in the creditor's suit alleging the sengers a receipt showing payments for facts that have been stated, that the wage fares in amounts in excess of 6 cents for scale of its employés had been increased ap- adults and 3 for children, upon request proximately 100 per cent. over what it was of the passenger, and to keep record thereprior to 1916, that conditions were such of. From this order the City appealed to that they could not be decreased, that the the Circuit Court of Appeals, and that court Tramway Company had appealed to the affirmed the interlocutory decree of this City, its mayor and council to permit it to court, as will be seen by its opinion in 277 charge a 7-cent fare, which was refused, that F. 865. the 6-cent fare which the City by ordinance Thereupon, for the purpose of final hearpermitted the company to charge, but not ing and decree, the court appointed a speexceed, was confiscatory, and the receiver cial master to take and report the testimony, prayed that the City be enjoined from en his findings of fact and such conclusions of forcing the 6-cent fare ordinance, that he be law as he might deem essential to the proppermitted to increase the fares to be charged er advisement of the court. The master heard the testimony, which consists of 6,- into the system since that time. The prop500 typewritten pages; and also considered erty that was taken over by the Denver and returned with the testimony a large Tramway Company from its immediate number of exhibits offered by each side, con- predecessor on its organization in 1914 had taining many hundred pages. After hearing been projected and built up by many comarguments of counsel on each side he filed peting companies covering many years, as his report. He stated therein the values as shown by the master's report. There had he found them on the different classes of been horse-car lines, dummy-engine lines, caproperty composing the entire electric street ble lines, experimental electric lines that had railway system within the City belonging to come and failed and were taken over by the Tramway Company and reached the con- some other company; and thus through a clusion, which he announced in his report, period of more than 30 years as the City that the 6-cent fare ordinance for adults grew in population the interests of the difand 3 cents for children was confiscatory ferent companies did not become consolidatand recommended to the court that the pre- ed and unified in one until the present comliminary injunction against the enforcement pany's immediate predecessor brought that of that ordinance be made permanent; sub- about some time around 1900. The record ject, of course, to the City's police power of leaves the clear inference that the predecesfuture regulation.

sor companies did not keep books in such The system has about 200 miles of track way that from them investment costs of within the City, street railway cars, an elec- property in existence that had been acquired trical power plant, electrical distribution and installed prior to 1914 could be ascersystem, shops and shop equipment, substa- tained; and that continued under the prestions and substation equipment, lands and ent company until about 1916, when what is right of way, buildings and other needed called the Work Order System was inauguproperty and structures in the operation of rated. The Work Order Sytem as made up such plant. It has about 1,500 employés in the permanent files consists of loose and owns and operates the only street-car leaves, one for each job, which shows cost lines within the city. It owns and operates of material and labor, and all incidentals of two suburban lines of about 25 miles each, installation except overheads. The books of but they are not considered here and were account did show property purchased and not valued. The master filed his report its cost but not the expense of installing it. June 25, 1924, and on July 14 following the That appears to have been covered by genreceiver filed exceptions and objections there- eral account and not separable to different to, 37 in all, challenging principally the find- installations. On this subject the master ings of fact as to valuations made by the says: "It is impossible to determine the master, because, as claimed, those valuations actual investment cost of the property with are too low, are not sustained by the proof any semblance of accuracy; and the witand are contrary thereto; and especially do nesses found this situation to exist." the exceptions challenge the ruling of the In 1918 the State Utilities Commission master in permitting Delos F. Wilcox to undertook to make a valuation of the proptestify as an expert witness.

erty for rate purposes, and the Woy inThere was no detailed inventory of the ventory was made for the hearing before property composing the system until 1918.' that Commission. The Commission made a In that year the Tramway Company em- valuation and ordered an increase of the ployed Mr. Frank P. Woy, a thoroughly fares to seven cents, but the Supreme Court competent and experienced engineer, to make of the State held that the Commission had up for it a complete inventory of all its no jurisdiction over the subject. Woy's inproperty. This he did with the assistance of ventory classified the property in accordance a large force, devoting several months to with the Interstate Commerce Commission's the work, the result of his labors being 30- system of accounting, and he placed valuaodd volumes made up in permanent form; tions on the different classes of property, so that when the hearing came on before the which, including overheads, in the aggregate master the Woy inventory was generally ac- amounted, according to Woy, to more than cepted as the true and correct inventory of $30,000,000 valuation as of January 1, 1918. the property making up the system, barring This he submitted to the Commission; and a few errors made by oversight, and subject at the Commission's request he also submitto the exclusion of items that had passed ted a valuation of $22,600,000 plus, based out since the inventory was made, and the on average prices for a series of years prior addition of new items that had been brought to 1918. The Commission's engineers made

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