THE PEOPLE OF THE STATE OF NEW YORK ex rel. JAMAICA WATER SUPPLY COMPANY, Respondent, v. THE STATE BOARD OF TAX COMMISSIONERS, Appellant.

THE CITY OF NEW YORK, Appellant.

Tax-franchise tax on corporations - power of Supreme Court to review action of state board of tax commissioners- rules for making assessments for special franchises-certiorari for reduction of assessment.

The power conferred upon the Supreme Court to review the action of the state board of tax commissioners in valuing a special franchise for purposes of taxation is wholly statutory. A certiorari proceeding under the Tax Law is very like a revaluation of the property, since the court is authorized to take further proof and must endeavor to reach a correct conclusion as to the proper valuation of the assessed property. When such a case has been heard before a referee and a determination had thereon by the court at Special Term, the Appellate Division, in reviewing the decision, must consider the return of the assessing officers, including all proofs and exhibits accompanying the same, as well as the testimony reported by the referee and his conclusions. The legislature has not seen fit to prescribe any rule by which the value of special franchises is to be ascertained, and it is beyond the province of the courts to lay down an exclusive rule of franchise valuation applicable to all cases, although in many cases the application of the net earnings rule would result in a fair and just valuation. There are many cases, however, to which it would not be applicable at all. When a particular assessment comes up for review, the duty of the appel. late courts is discharged when they inquire whether the rule whereby the value of the special franchise was ascertained was reasonably adapted to that end, and, if so, whether it was consistently and correctly applied to the facts.

It is only when undisputed facts are before the assessors, and by adopting some wrong rule or method they disregard such facts and thus enhance their assessments, or when, by adopting a wrong rule or method, they include in their assessments some element of value not belonging there, that the courts condemn assessments for the use of an improper rule or method.

The presumption is that the determination of the assessors is correct, and to relieve itself from assessment it is incumbent upon a relator, in proceedings by certiorari, to clearly show that the assessment was

erroneous.

The net earnings rule contemplates a valuation upon the basis of the net earnings of the corporation which are attributable to its enjoyment of the special franchise. The method is thus applied: (1) Ascertain the gross earnings. (2) Deduct the operating expenses. (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 this balance be capitalized at a fair rate we have the value of the special franchise. Where the net earnings rule is adopted the taxes should be deducted from the gross earnings in order to determine the net earnings of the taxpayer. The deduction to which the taxpayer is entitled on account of taxes, however, does not include the special franchise tax itself. In order to ascertain the true earning capacity of the property, a proportionate allowance should be made out of the gross earnings on account of the general depreciation of a plant which will ultimately require replacement.

While evidence as to what constitutes a fair and reasonable rate of return in the business of a corporation may properly be taken by the court, in the absence of such evidence it may adopt six per cent as a fair rate for the purpose of calculating the value of a special franchise under the net earnings rule.

The present value of the land occupied by the plant must be taken into account in applying the net earnings rule to the valuation of the special franchise. If this would result in giving a special franchise no taxable value at all, that would be a conclusive reason for rejecting the net earnings rule in such a case and would demand the adoption of some other method of valuation.

The state board of tax commissioners under the statutes as they now stand has no power to reduce the valuation of the special franchises for purposes of equalization; but the Tax Law authorizes the court on certiorari to reduce an assessment for a special franchise upon the ground of inequality, so as to equalize it with other assessments, where it has been assessed at a higher proportionate value than other property on the same roll.

Held, that in capitalizing the final returns to provide a sinking fund for unforeseen contingencies, in view of the character of its business the surplus earnings of relator should be capitalized at seven per cent.

People ex rel. Jamaica Water Supply Co. v. State Board of Tax Comrs., 128 App. Div. 13, modified.

(Argued April 10, 1909; decided October 19, 1909.)

APPEAL from an order of the Appellate Division of the Supreme Court in the third judicial department, entered Octo

ber 7, 1908, which reversed an order of Special Term confirming an assessment for purposes of taxation against the special franchise of the relator, annulled a determination of the defendant valuing such special franchise, and remitted the matter of such valuation to said board for further consideration and a new assessment.

This is a certiorari proceeding under the Tax Law to review the action of the state board of tax commissioners in fixing the sum of $800,000 as the taxable value of the special franchise of the Jamaica Water Supply Company in the borough and county of Queens on the second Monday of January, 1907. The proceeding was instituted by a petition which alleged that said assessment of $800,000 was erroneous by reason of overvaluation in the sum of at least $250,000; and further that the assessment was unequal because other property in the county of Queens was assessed at 89% of its real value, whereas the state board of tax commissioners after valuing the special franchise of the petitioner determined $800,000 to be the full value thereof. A writ of certiorari was granted upon this petition, reciting overvaluation and inequality as the basis of the petitioner's claim for a reduction in the assessment. In a return to the writ the state board of tax commissioners alleged that when they made the assessment they had before them the report of the relator for the year 1906 filed by the relator at their request. This and all other reports, papers and documents relative to the assessment were made a part of the return. The state board further returned that they also had before them certain facts and information other than those communicated on behalf of the relator; that they had made inquiry, examination and investigation as to the value of the relator's special franchise through agents and employees who had obtained knowledge and information and formed opinion as to the value of the property of the relator, real and personal; and that from such inquiry, examination and investigation, together with the papers and documents already mentioned, the board had decided the value of the special fran

chise of the relator to be the sum of $800,000. To further elucidate their method of procedure, the state board of tax commissioners also made return that, in arriving at a valuation of the special franchise of the relator, they had considered the value of its real estate in the streets, the value of its right to use the streets, and the cost of the relator's property, the income derived therefrom and other facts going to show the value thereof. They further expressly alleged that they had not included in their valuation any property except such as was situated in, under, above, upon or running through the public streets and public places of the borough of Queens, including the franchise, rights, authority or permission to construct, operate and maintain its foundations, roadbed, substructures, superstructures, wires, pipes, mains and conduits, with their appliances, under, above, upon or through said streets and public places; nor had they included the value of the right of the relator to be a corporation, or the value of the good will of the business carried on by the relator.

Upon the filing of the return, it appearing to the court that testimony was necessary for the proper disposition of the matter, an order of reference was made to Thomas L. Feitner, Esq., to take evidence "as to whether the assessment of the relator's property liable to taxation as a special franchise is excessive, and if so, in what amount, and also whether the said assessment is unequal, and if so, in what amount." The referee was directed to report such evidence to the court with his findings of fact and conclusions of law.

The evidence taken before the referee consisted wholly of testimony adduced in behalf of the relator. No evidence was offered for the state board of tax commissioners. The referee reported as a matter of fact that the full value of the relator's special franchise on the second Monday of January, 1907, as defined by the Tax Law, was $906,053.75; and as a conclusion of law that the assessment made by the state board of tax commissioners in the sum of $800,000 was not erroneous by reason of overvaluation or by reason of inequality, and should, therefore, be affirmed. The Supreme Court at Special Term

adopted all the findings of the referee, and made an order declaring that the assessment of the special franchise of the relator in the borough of Queens in the sum of $800,000 was neither erroneous, illegal nor an overvaluation, and adjudging that the writ of certiorari be dismissed, with costs. This order has been reversed by the Appellate Division on the law and the facts; and the order of reversal adjudges that "the determination of the defendant, the state board of tax commissioners, be and the same hereby is annulled, and the matter remitted to the state board of tax commissioners for further consideration and a new assessment."

The following facts, among others, were found by the referee and the Special Term. The actual value of the rela tor's tangible property in the streets of Queens county on the second Monday of January, 1907, was $396,244.90. This represented what it would cost to reproduce the property new, less 5% depreciation. The cost of all the land owned by the relator on that date was $25,162.01. The value of this land was $71,018.28. The cost to reproduce three standpipes owned by the relator would be $40,000. The cost to reproduce two pumping stations would be $205,000. The total gross earnings of the relator for Queens county in the year ending December 31, 1906, were $102,055.62. The relator's expenses in that year were $32,005.91, leaving as total net earnings in Queens county $70,049.71.

The referee further found that the aforesaid total net earnings in Queens county amounting to $70,049.71 should be reduced to a final net return of $35,682.62. He arrived at that conclusion by aggregating the cost of reproducing the tangible real estate, the standpipes and the pumping stations already mentioned, calculating 5% thereon (which amounted to $34,363.09) and deducting such 5% from the total net earnings of $70,049.71. Capitalizing the final net return of $35,682.62 at the rate of 7% the referee found the value of the relator's intangible special franchises in the county of Queens to be $509,808.85. This, added to the value of tangible property in the street, made the total value of the