#### The People of the State of New York ex rel. The Third Avenue Railroad Company, Appellant, *v.*State Board of Tax Commissioners, Respondent. The City of New York, Intervenor, Respondent. The People of the State of New York ex rel. James N. Wallace and Others, Appellants, *v.*State Board of Tax Commissioners, Respondent. The City of New York, Intervenor, Respondent. The People of the State of New York ex rel. Kingsbridge Railway Company, Appellant, *v.*State Board of Tax Commissioners, Respondent. The City of New York, Intervenor, Respondent.

First Department,

July 10, 1913.

Tax — assessment of special franchise tax on railroad — equalization with other assessments — assessments made in prior years — determination of State Board of Equalization not binding upon court —■ net earnings rule, when applicable—valuation under net earnings rule — assessment of tax where one railroad has acquired franchises of another — percentage of return allowable on tangible property— percentage allowable upon intangible property — equipment not used by railroad — cost of reproduction — development expenses—building, portion of which is leased — building and realty not used by railroad — fees paid to city — salary of receiver — interest received by railroad — cost of replacement, renewals and new equipment — costs.

On certiorari to review the assessment of a special franchise tax, the court should reduce the assessment to the same percentage of valuation as has been followed generally with respect to the assessment of other *732real property on the same roll. But the inequality of the assessment can only be determined from the roll of that year and not by assessments made in prior years.

On certiorari to review the assessment of a special franchise tax-the court determines *de novo*the value of the franchise and may modify or refuse to accept a determination made by the State Board of Equalization under section 174 of the Tax Law. It is the value of the franchise as found by the court and not as found by the State Board of Tax Commissioners which determines the relator’s right to a reduction for equalization.

Where a railroad company has been constructed, equipped and in operation for a long time and has had the full enjoyment of its franchise, the net earnings rule is *presumptively*the proper rule in determining the value of its special franchises for the purposes of taxation. Moreover, such rule will be applied where no evidence has been introduced tending to show that the net earnings rule is not applicable.

Under the net earnings rule the gross earnings for the year are first determined, and from this sum is deducted, *first,*the operating expenses and, *second,*a fair and reasonable return on that portion of the capital which is invested in tangible property. The balance is deemed to give the net earnings attributable to the special franchise, the value of which is then found by capitalizing such balance at a fair rate. The question of what is a fair rate on the tangible property is one of fact.

*It seems,*that where a railroad company has acquired the franchises of another company and has operated it, the assessment of both companies may be imposed upon the operating company, but it cannot object that the total assessment has been apportioned between them. The question, however, is not decided.

Where an account of its gross receipts filed by a railroad company showed the amount received from the operation of a company whose property and franchises it had acquired, it cannot object that an assessment is made against the latter company on account of the intangible element of its special franchise or that the assessment is apportioned between the two companies.

It is proper for the court to fix six per cent or the legal rate of interest as the reasonable return to be allowed upon the tangible property of such corporation.

But where a return of six per cent has been allowed upon the tangible property, seven per cent is the proper amount to be allowed on the intangible elements of the special franchise.

Where a railroad company did not use certain cars but rented some of

- them to other companies and loaned the use of others without rental, the value of all such cars should be excluded in determining the value of the tangible property, and, therefore, the rental received from the cars should be excluded from the gross earnings.

In determining the value of the tangible property of a railroad in city streets upon which a return is to be allowed, its depreciated or present value Should be taken and not the reproduction value.

*733In determining the value of the tangible property of such corporation upon which a return is to be allowed, the court should exclude so-called “development expenses,” consisting of the cost of promoting the company, obtaining property owners’ consents, etc., these being merely expenses incurred in developing the franchises to render them of value and are represented by the intangible element of. the franchise. The valuation of property as a whole, for the purpose of capitalization, embraces both tangible and intangible property.

Although a railroad company leased the upper story of its car barn to another company, it should be allowed a return upon the entire value of the building, for it had a right to build with a view to its reasonable future requirements. But such rule does not hold as to equipment and rolling stock which are not used or shown to be presently needed.

. A railroad company is not entitled to be allowed a return upon a building owned by it but which is rented for business purposes to third parties, and is not used in any way in connection with the operation of the special franchise. And the same is true as to unimproved realty.

Moneys paid by a railroad company to a municipality as license fees, etc., pursuant to section 48 of the Tax Law, should be deducted from the gross income before capitalizing the net income representing the value of the intangible element of the franchise.

A railroad company is not entitled to a reduction for “ assessments paid for some sort of improvements ” where there is no proof showing that the improvement was upon property upon which it was entitled to a return.

Salary paid to a receiver appointed by Federal courts is an operating expense which should be deducted from the gross income, as the receiver takes the place of the officers of the company.

Sums shown by the statement of the railroad company to have been received for “interest and discount” should be included in the gross income, in the absence of evidence justifying its deduction.

In addition to deducting from gross receipts the ordinary expenses of operation, including ordinary repairs and ordinary renewals, replacements of parts of old appliances and equipment by new as distinguished from expenditures for new construction and new machinery and equipment, an annual deduction to cover current and future disbursements for new construction and new machinery and equipment is allowable.

A railroad company reviewing the assessment of a special franchise tax by certiorari is not entitled to costs under section 294 of the Tax Law, where the assessment was not found by the Special Term, and is not found by the Appellate Division to be excessive by one-half of that amount.

Appeal by relators, The Third Avenue Bailroad Company and James N. Wallace and others, from a final order of the Supremo Court, made at the New York Special Term and *734entered in the office of the clerk of the county of New York on the 15th day of Hay, 1913, confirming the assessment of the special franchises of the Third Avenue Bailroad Company, made by the State Board of Tax Commissioners for the year 1910, and dismissing writs of certiorari theretofore obtained by them to review said assessments; also an appeal by the relator, the Kingsbridge Bailway Company, from a like order, entered on the same day, confirming the assessment of its special franchises for the same year and dismissing a writ of certiorari obtained by it to review the same.

*Joseph P. Cotton, Jr. [George S. Franklin*with him on the brief], for the appellants.

*Curtis A. Peters [Addison B. Scoville*with him on the brief], for the respondent City of New York.

*William, A. McQuaid,*for the respondent State Board of Tax Commissioners.

Laughlin, J.:

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 *735the Third Avenue Company determined by the net earnings rule, so called, was $10,868,806.56, and of those of the Kings-bridge Company, $1,033,513.30, and that, therefore, the assessments as made only represented about seventy-three per cent of the actual value of the special franchises.

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 *736Board of Equalization for the year 1910, which showed that in the county of New York in the year 1909 the ratio of assessed valuations of real and personal property to actual values was eighty-nine per cent. It was received in evidence without objection, but it was subsequently claimed by counsel for the respondents that their attention was not drawn to it, and they objected to it on the ground that it was immaterial and irrelevant, and that it was no part of the duty of the State Board of Equalization to determine ratios and percentages or to prepare said table. Counsel for the respondents now make the further objection to that table, which they did not specifically take on the hearing, that it merely shows that in the year 1909, which is not the one in question, the ratio was eighty-nine per cent, and that there is no evidence that it was the same in the year 1910. The only right to equalization is with respect to" assessments on the same roll (Tax Law [Consol. Laws, chap. 60; Laws of 1909, chap. 62], § 290), and, therefore, that question was to be determined by the ratio of assessments for the year 1910. The court, in effect, accepted the excuse thus made for not timely objecting and reconsidered the ruling receiving the table in evidence and marked it for identification, reserving decision on its admissibility, and suggested that counsel might. argue the question in their briefs to be submitted. The court subsequently found that the ratio of assessed valuation to actual values of real estate, other than special franchises, in the borough of Manhattan for the year 1910 was ninety per cent; but the record does not otherwise indicate how the court ruled on the admissibility of the equalization table. Counsel for the respondents contend that this finding by the court is correct, but counsel for the relators claim that it is against the evidence, and that the court should have found that the ratio was eighty-nine per cent. This question became important on the hearing, and the objection to the equalization table was taken in ample time to enable the relators to make any further proof, if they were able to do so. They rested their case on the stipulation made with the Attorney-General, which contains the recital that the State Board of *Tax Commissioners*had stated that the ratio for 1910 would be eighty-nine per cent. That part *of*the stipulation, how*737ever, could have no probative force, because what the State Board of Tax Commissioners may have “stated55 would be of no consequence, even if they had jurisdiction in the premises; but no statute has been cited and we have found none conferring jurisdiction on that board to determine that question. Therefore, without expressing an opinion as to whether the determination of the State Board of Equalization with respect to the ratio would be authorized under section 174 of the Tax Law, or as to whether a table prepared by it was competent evidence thereof, we must, in the state of the record, assume that the court excluded the equalization table, or deemed it of little, if any, weight, inasmuch as it did not show the ratio for the year 1910.

*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 *738contend that the only element of value in these special franchises is in the tangible property hi the streets, and that, therefore, its value should be taken as their value for the purpose of taxation; and they further claim that the court did not* apply the net earnings rule properly. Counsel for the respondents argue that if the intangible element of the special franchises should be found- to be of no value, tested by the net earnings rule, then the value of the special franchises must be determined by the adoption of some other rule; and they cite in support of that contention *People ex rel. Jamaica Water Supply Co.*v. *Tax Comrs.*(196 N. Y. 39). In that case the court (atp. 59) said: “ If, as is suggested might occur in some supposed cases, 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 cases and would demand the adoption of some other method of valuation. ” On this point counsel for the respondents further claim that it is not competent for this court to interfere with the assessments, for the reason that the relators have not sustained the burden, imposed upon them by law, of showing that the assessments cannot be-sustained tested by any rule which the State Board of Tax Commissioners might lawfully have followed. (See *People ex rel. Hudson & Manhattan R. R. Co.*v. *Tax Comrs.,*143 App. Div. 26, 34, and cases there cited.) In the original returns, the State Board made no attempt to state the method by which they arrived at the valuations. They were required to make further returns to the writs procured by the Third Avenue Company and the Kingsbridge Company, in each of which they certified, among other things, “That from the information set forth in the alleged report and supplemental reports of the relator, filed with the State Board-, it is impossible to work out any satisfactory or correct basis of valuing special franchises herein under review. The Board.has availed itself of all tests of value within its reach and every fact and all information which, in its judgment, has any bearing upon such value and no certain or fixed rule or method has been adopted in making said valuation.” In their further return to the writ in the Third Avenue Company proceeding, for the purpose of showing the complications arising from attempting *739to apply the various rules and theories in determining the value of the special franchises, they gave at length as an illustration what they deemed would be the result of the application of the net earnings rule, based upon the receiver’s report of the.value of the property, which, however, they pointed out as not being satisfactory in many respects. Computed in that manner, they certified that the value of the special franchises of the Third Avenue Company would be $7,036,921.50. They also in their further returns gave illustrations as to what would be the assessable value if computed by the so-called “ sales value ” rule, *“*easement value ” rule, and by a method suggested by the receiver in his testimony before the Public Service Commission shortly before the assessments were made. They then certified that all of these valuations were regarded as unsatisfactory, and that they considered “all these conditions and elements,” and fixed the valuations in the exercise of their best judgment in the light of the conditions presented. At the opening of the hearing, counsel for the relators stated that he would show that the assessments were excessive, tested by the net earnings rule, and he stated what he deemed to be that rule. The Deputy Attorney-General appeared to acquiesce in the application of the net earnings rule as the proper test, and gave an illustration to the court of the manner in which it is applied in determining the value of a special franchise, and further stated that he and counsel for the relators, with a view to shortening the hearing, had entered into a stipulation with respect to the various items of value essential to the application of that rule, and that, therefore, principally questions of law were to be presented; and he stated that one of those questions was whether there should be deducted from the stipulated amount for operating expenses the money expended by the relators for renewals of plant, in view of the fact that a gross amount had been allowed by the stipulation for depreciation. Counsel for the city then addressed the court and said, among other things, in effect, that inasmuch as no part of the taxes when collected goes to the State, the city and not the State was the real party in interest; that the city did not concede that the validity of the assessments was to be determined by the application of the net earnings rule, and that it took the position that the assessments *740are presumed to be legal and valid, and that the burden was on the relators of showing error or overvaluation; that the city had not joined in the stipulation and reserved the right, if an examination of the books and property of the relators should show that the figures embraced in the stipulation were wrong, to prove the true facts. Counsel for the relators then announced as his understanding with respect to the stipulation, which had not then been offered in evidence, that the figures therein should stand as *prima facie*evidence, subject to correction, and to that no objection was interposed. The stipulation was subsequently received in evidence in effect, on that understanding. The appellants also contend that the proceedings were tried upon the theory that the net earnings rule was the proper test, but this is not conceded. Counsel for the appellants relies, on this point, on a finding made by the Special Term, to the effect that the proceedings have been tried “by all the parties thereto upon the theory that the basis for ascertaining the true value ” of the special franchises on the second Monday of January, 1910, the day as to which the valuation was required to be made, “would be what is known as the net earnings rule, as defined by the Court of Appeals of this State, in the *Jamaica Water Supply*case, and in subsequent cases.” The court, however, by the next finding, found that the relators tried the proceedings on the net earnings theory, but that neither the State Board nor the city tried them on- that theory, but upon the theory that the assessments were presumed to be correct. The learned counsel for the appellants argues, in effect, that his clients are entitled to the benefit of the more favorable of these conflicting findings, and that the record sustains the first finding but not the other. I am of opinion that the first of these findings should be construed as meaning that the only evidence offered on the hearing as a basis for determining the assessable values was evidence bearing upon the net earnings theory. That will harmonize the findings and render them consistent. It is unreasonable to infer, in view of the record as already shown, that the court attempted to preclude the city from contending on the appeal, as it clearly contended on the hearing, at the outset, at least, that the question was not to be determined *741by the net earnings rule, and that it was incumbent upon the relators to make all necessary proof to show invalidity. It may be, in view of the observations of the Court of Appeals in the *Jamaica Case (supra),*herein quoted, that, if tested by the net earnings rule, the special franchises would be found to have no value, it would be incumbent upon the relators to go further and show that they would not be of the value assessed, tested by any other rule which the State Board might have applied; but, as we view the evidence, it shows that the special franchises in question had a substantial value. Where, as here, the railroads had been constructed and equipped and completed and in operation, and the relators have been in the full use and enjoyment of all of their franchises for a considerable period of time, I am of opinion that the net earnings rule is *presumptively*the proper rule by which to determine the value of their special franchises for the purpose of taxation. (See *People ex rel. Brooklyn Heights R. R. Co.*v. *Tax Comrs.,*146 App. Div. 372; affd., 204 N. Y. 648; *People ex rel. Jamaica Water Supply Co.*v. *Tax Comrs., supra.)*Therefore, although we are not disposed to hold that the city is estopped by the proceedings upon the hearing, from claiming that the valuation should' be determined by the application of some other rule, the result is the same, for the reason that the city failed to offer any evidence tending to show mismanagement of the corporations by reason of which the net earnings were not what they should have been, or otherwise tending to show that the net earnings rule should not be applied.

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 *742*question of fact,*and that in capitalizing the final balance, which represents the net earnings of the special franchises, for the purpose of ascertaining the value of the special franchises, such balance shall be capitalized at a rate one per cent higher than the rate allowed as a return on the tangible property. (P*eople ex rel. Manhattan R. Co.*v. *Woodbury, supra,*opinion of Haight, J., concurred in by majority.)

*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 *743Third Avenue Company, and it was stated by counsel for the relators in opening the case on the hearing, speaking of the Kingsbridge Company, “It is a company which is owned entirely by the Third Avenue Railroad Company.” It appears that other companies were spoken of on the hearing as having been controlled by the Third Avenue Company or as subsidiary to it. It must be, therefore, that the Third Avenue Company has purchased all of the stock of the Kingsbridge Company, and it would seem that both of these assessments might well have been imposed upon the Third Avenue Company, for in- that view it would own all the special franchises assessed (See Tax Law [Consol. Laws, chap. 60; Laws of 1909, chap. 62], § 32; since repealed by Laws of 1911, chap. 315); and it is scarcely in a position to be heard to object to the assessments against it being separated; and by virtue of section 894 of the Greater New York charter (Laws óf 1901, chap. 466; since amd. by Laws of 1911, chap. 455) the assessment would not be void on account of being made on the wrong party. If it was necessary, however, to divide the assessments, as has been done, then if the Kingsbridge Company, although nominally in existence, has failed to exercise its franchises for its own benefit or to collect rental therefor, it should not be heard to say that its special franchises are not worth what the evidence shows would be their value had it operated them or exacted the rental or other income from the Third Avenue Company for the use thereof. Counsel have not favored us with their views as to whether the law requires that the assessment be made in the name of the Kingsbridge Company, notwithstanding the fact that its stock is all owned by the Third Avenue Company, and, therefore, no decided opinion is expressed upon that point, but it may be further observed that if that be so, and if the Kings-bridge Company has failed to operate its line or to exact rent therefor, so that it has no income at all, then the net earnings rule would not, strictly speaking, be applicable; and, since the appellants offered no evidence to show that the assessment could not be sustained on any other rule, it would have to be allowed to stand as made. An accountant employed by the respondents made a tabulation of the accounts kept by the Third Avenue Company, which was received in *744evidence. It shows the gross passenger fares received from the operation of hoth companies, and that a specified amount thereof was received from the operation of the Kingsbridge Company. When this tabulation was received in evidence it was not questioned but that it truly represented what the books of the Third Avenue Company showed. The court evidently took these figures as a basis for apportioning the net income between the two companies. In the circumstances the Third Avenue Company should not be permitted to have the benefit of the exclusion of this part of the net income from the net income on which the value of its special franchises is determined, and at the same time, standing in the shoes of the Kingsbridge Company, be permitted to object to'any assessment whatsoever being made against that company on account of the intangible element of its special franchises. Counsel for appellants also argues that if the Kingsbridge Company’s special franchises are to be valued upon the theory that it had net earnings, then the net earnings of the two companies should have been apportioned on a mileage basis, which would make the assessment against the Third Avenue Company much less. On that theory part of the valuation would escape taxation, as it is now too late to increase the assessment against the Kingsbridge Company. I am of opinion, therefore, that the objections are without merit, and that since the Third Avenue Company kept its books in such a manner as to show the percentage of fares received on account of the operation of the Kingsbridge Company, the apportionment made of the net earnings between the two companies on that basis did not, in the circumstances, aggrieve either of them.

*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 *745respective amounts to the value of the tangible property of the respective companies in the streets, the total value of the special franchises of the respective companies was found to be as already stated.

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 *746estimating the tangible property upon' which a return was allowed, the value of the cars which were leased, and upon which a rental was received, was included, but *not the*value of the cars for which no rental was received; and the rental' received for the use of cars was included in computing the gross earnings. The appellants contend that the court erred in excluding from the value of the tangible property the value of the cars from which no income was derived, and in including in the gross earnings the rental received from cars leased. They want a return on the value of the cars but do not want the rent credited to gross receipts. This argument is made upon the theory that those cars were owned by the relators or one of them, and that, therefore, they formed part of the tangible property, but that inasmuch as they were not used in operating the special franchises the rental received therefor from other companies should not have been included in the gross earnings. This point requires a construction of the net earnings rule, as applied to these facts, for I have stated the substance of the material evidence. It merely appears that the company owned but evidently had no present use for the cars. Neither the circumstances under which they were purchased nor the future necessities of the company were shown. I am of opinion that the Court of Appeals did not intend to allow a deduction from the gross earnings for a return on tangible property not used in connection with the special franchises, the value of which is being determined. The reasonable construction of the rule is that an allowance from the gross earnings should first be made for a fair return on the tangible property necessarily used in operating or necessary for the operation of the special franchises. It would seem, therefore, that all of these cars should have been excluded in ascertaining the value of the tangible property; and it necessarily follows that the rental derived from the cars should also be excluded from the gross earnings. A further point somewhat similar is made. It appears that 205 of the 335 cars upon which a rental was received, consisted of two classes of cars, known as summer and winter cars. In the summer the summer cars were used by the lessee, and in the winter it used the others. Those not in use were stored by the owner. An argument based upon the fact *747that these cars were stored hy the owner part of the time, is made to the effect that in any event the relators are entitled to have one-half the value of these cars, viz., $400,805.01, retained in the value of the tangible property upon which they are entitled to a return. It is undisputed that none of these cars were in any manner used in the operation of the special franchises of the relators. For the reasons already assigned, therefore, their value cannot be retained in the value of the tangible property. It is claimed that the subsidiary companies have been allowed for the rent paid for the use of the cars and that if the rents received by the relators are not added to gross receipts, the State may be defrauded. The State and municipality can protect themselves by contesting any unreasonable or exorbitant rental claimed as a disbursement by lessees. These views require a deduction from the net income of the two companies, before division for capitalization, of $64,385.63.

*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*748ing from the value of the tangible property an item for “ development expenses ” of $3,094,752.44. This claim is based upon the testimony of a witness, called by the relators, who described what he meant by development expenses, as follows: “Development expenses are usually taken to include the expenses that must be made for legal advice, technical advice, and obtaining consents of Public Service Commissions, or, rather, other public bodies, and completing your organization, preliminary surveys and all that sort of thing that is preliminary to the beginning of construction work itself, of the physical plant. Then there are also such items as the property owners’ consents, the rights to build your tracks in the streets, and which must be obtained from property owners. Then there is the item of interest during construction, that is the physical construction of the property must be paid for as it is erected or installed, and interest is accumulating on that outlay, which in property of this kind will reach a considerable sum of money before the property is ready to begin operation and produce an income. In the same way taxes accrue from the moment that the real estate is first purchased, usually some *time*in advance of the beginning of construction. Then, in addition, there is the profit that the promoter of the enterprise will look for, which has been recognized and allowed for by Public Service Commissions and courts, as well as the financial man’s charges or broker’s commissions, as it is sometimes called, generally charged for the raising of the necessary capital or underwriting the securities. All of those may be grouped as development expenses.” He estimated the amount of what he termed development expenses at twenty and five one-hundredths per cent of the reproduction cost of the property. He took the reproduction cost from other evidence as a basis, and then figured thereon six per cent for interest on the investment, five per cent for promoter’s profit, and two and one-half per cent for broker’s commissions, and these together with other items, not figured on a percentage basis, brought the total amount to the estimated percentage. I am of opinion that no error was committed in not adding an item for such development expenses in determining the value of the tangible property upon which a return was to be allowed. The elements which go to make

*749up the so-called development expenses, with the exception of taxes and interest, during construction, which are presumptively given proper consideration in determining the value of the tangible property as such, do not add to the value of the tangible property. We start with the full and true value of the tangible property and we are asked to add to such valuation an item that has no bearing on the value of the tangible property. For the so-called development expenses no tangible property is acquired. Those expenses are incurred in developing the franchises to render them of value. In so far as anything is obtained for such items of disbursements, it is represented by the intangible element of the special franchises, and if so, it is manifest that it could not properly be considered. Development expenses are taken into consideration in determining the value of railroad property as a whole for the purpose of capitalization *(People ex rel. Third Ave. R. Co.*v. *Public Service Com.,*145 App. Div. 318; affd., 203 N. Y. 299), but such valuation embraces both tangible and intangible property.

*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 *750for the reasonable future requirements of the company. With regard to the purchase of equipment and rolling stock it is quite different for presumptively there is no necessity for making such purchases until about the time their use is required. One of the relators owned another parcel of real estate situated on Amsterdam .avenue, between One Hundred and Eighty-fifth and One Hundred and Eighty-sixth streets, on which a stable had been erected. During the year in question, this stable, which was of the value of $65,000, had been rented for private business purposes, and was in no manner used in connection with the operation of the special franchises. There is evidence, of no practical probative force, for it does not appear that the witness was qualified to speak on the subject, tending to show that the company held it for its future needs, and on that theory it claims that the value of the property should have been included in the value of the tangible property upon which it is entitled to a return. I am of opinion that the court properly excluded this property, upon the ground that no part of it was used in connection with, or was necessary for, the operation or enjoyment of the special franchises. One of the companies also owned premises on the Bowery, on which a sub-station had been erected, and which was of the value of $405,000. It occupied and used part of this building, and rented seventy four hundred and fifths thereof for commercial purposes. The court excluded from the valuation of the tangible property the proportionate part of the premises which was rented. This falls within the ruling with respect to the car barn, and the company was entitled to a return on the entire value; but the rental should have been added to the gross income. Another parcel of unimproved real estate of the value of $1,200 was owned by one of the relators. It was excluded from the tangible property, and properly so, I think, for it was not used in any manner, and was merely held for possible future requirements. I recognize that there is room for a difference of opinion with respect to some of these items, and there is much force in the argument that the company should be allowed a return on property and equipment purchased and held for future use; but unless the rule which I have indicated is applied, railway companies may *751by such purchases avoid the payment of their just proportion of the taxes, and it is far better, I think, to establish a definite rule, even though it be somewhat arbitrary, than to lay down one which would involve an inquiry concerning the motive with which property was purchased or is- held for future use, or a review of the judgment of the officers in so doing. The rentals on these premises were not separately shown, but the total rental was $10,418.15. The same is true with respect to the taxes, and the total was $5,012.29 on that part of the property rented. According to these views the value of the tangible property should have been increased by $232,500, and the gross income should have been increased by the amount of rent received from part of the car bam and part of the sub-station, less the taxes paid on account of that part of those premises represented by such rentals. Since, however, neither rentals nor taxes were shown separately, this cannot be accurately determined, but it may be determined approximately, I think, by apportioning, according to the value of the respective parcels, the total taxes and total rents between the premises rented, the value of which we are adding to the value of the tangible property, and those premises which we hold were properly excluded in determining the value of the tangible property. On account of this increase in the value of the tangible property, there should be deducted from the gross earnings six per cent on such increase, or $13,950, as a reasonable return thereon, and there should be added $4,204.42 on account of increase in gross income. This results in a deduction from the net income, as found, of $9,745.58.

*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 *752payments were unavoidable. They should be regarded as any other disbursement incurred in operating the franchises. By virtue of the provisions of the same section, these items are deducted from the amount of the special franchise tax, and, therefore, it is contended by the learned counsel for the respondents that if those amounts are deducted from the gross income there will be a double allowance for the same expenditure. I am of opinion that this argument is not sound. The practical effect of failing to deduct those items from the gross income is to capitalize the amount of those disbursements in ascertaining the value of the special franchises upon which the tax is to be levied. The provisions of said section 48 of the Tax Law, so far as material, are as follows: “If, when the tax assessed on any special franchise is due and payable under the provisions of law "applicable to the city * * * in which the tangible property is located, it shall appear that the * "x" * corporation affected has paid to such city * * * for its exclusive use within the next preceding year, under any agreement therefor, or under any statute requiring the same, any sum based upon a percentage of gross earnings, or any other income, or any license fee, or any sum of money on account of such special franchise, granted to or possessed by such "x" * * corporation, which payment was in the nature of a tax, alii amounts so paid for the exclusive use of such city * * except money paid or expended for paving or repairing of pave - ment of any street, highway or public place, shall be deducted from any tax based oh the assessment made by the State Board of Tax Commissioners for city * * * purposes, but not otherwise; and the remainder shall be the tax on such special franchise payable for city * * * purposes.” By these provisions, the Legislature clearly recognizes that such payments are *in the nature of taxes.*The purpose of the Legislature in allowing such deductions on the payment of the taxes was to prevent inequality in taxation as between street railway corporations, which were required to make such payments, embracing the corporations which have received grants of late years, and those corporations which were not required to make such payments, embracing most of the older corporations. *(Heerwagen v. Crosstown Street R. Co.,*90 App. Div. 275; affd., *753179 N. Y. 99; *Matter of New York City Interborough R. Co.*v. *Moynahan,*148 App. Div. 908.) The rule is well settled that taxes are to he deducted *(People ex rel. Jamaica Water Supply Co.*v. *Tax Comrs., supra;*on reargument, 197 N. Y. 33; *People ex rel. Third Ave. R. R. Co.*v. *Tax Comrs.,*136 App. Div. 155; affd., 198 N. Y. 608; *People ex rel. Brooklyn Heights R. R. Co.*v. *Tax Comrs.,*69 Misc. Rep. 646, 653; affd., 146 App. Div. 372; 204 N. Y. 648), and there is no difference in principle in my opinion between ordinary taxes and those disbursements.

*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. *754The receiver, however, took the place of the president or general manager of the company, and the payment of his salary was a necessary disbursement, and presumably Saved the payment of salaries to others for the performance of the duties which he performed.

*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*755tion is a straight annual allowance. This contention appears to he sustained by the case of *People ex rel. Manhattan R. Co.*v. *Woodbury (supra).*That case, however, is not decisive of the question arising on the contention made by the appellants. In *People ex rel. Third Ave. R. R. Co.*v. *Tax Comrs.*(136 App. Div. 155; affd., without opinion, 198 N. Y. 608), Mr. Justice Kellogg, in writing the opinion for the Appellate Division, said that the fund which a public service corporation is entitled “to set aside each year from its earnings ” to provide for the replacement of its property is “ outside of the ordinary annual expenses for maintenance, renewals and repairs,” and that “The annual ordinary expenditures for repairs, replacements and renewals upon such a property cannot be assumed to make it unnecessary to provide a fund which will replace its engines, electrical equipment and other physical property which at some time must be replaced.” The court in that case also held that the State Board of Tax Commissioners and the city were at liberty to show that any items for replacements or renewals included in the accounts of the company’s operating expenses are such as would be covered by the depreciation fund. In the *Jamaica Water Supply Case (supra)*the Court of Appeals held that the court might take judicial notice of the fact that there is a constant deterioration of a plant, lessening the value of the tangible property, which is not made good “by ordinary repairs.” And with respect to the amount of such depreciation and the manner in which it should be provided for, said: “ The amount of this depreciation differs in different enterprises, but the annual rate is usually capable of. estimate and proof by skilled witnesses. No corporation would be regarded as well conducted which did not make some provision for the necessity of ultimately replacing the property thus suffering deterioration; and we cannot see why an allowance for this purpose should not be made out of the gross earnings in order to ascertain the true earning capacity.” In that case the Appellate Division, discussing the same point (128 App. Div. 18), said: “Perhaps the evidence would justify the conclusion that the amount allowed for maintenance is sufficient to replace from time to time as may be necessary, the mains, hydrants and some of the other tan*756gible property of the company. But it must have expensive pumps and machinery and other property which is liable to serious depreciation by use, and in time to actual destruction, so that prudence would require that each year a certain' reasonable sum be laid aside as a replacement or up-keep fund for such contingencies as are not covered by the ordinary maintenance charges. If such fund is not maintained the property is being robbed for the purpose of paying the dividends or exaggerating its paper value. ”

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 *757operating expenses. Witnesses called for the appellants testified that the amount charged on the books for operating expenses, which evidently was the basis for the stipulation, included only ordinary annual expenses for maintenance, repairs and renewals. The engineer in charge of maintenance of way for the Third Avenue Company testified that in the amounts charged to operating expenses the only items of expenditures that in his opinion constituted *renewals*as distinguished from *repairs*amounted to $80,880.96. The superintendent of car equipment of the Third Avenue Company testified that expenditures for replacements embraced only “complete units, such as a car body or electrical equipment and car trucks,” and that the only items in the operating account properly chargeable to *replacements*aggregated $661.67. The chief engineer of the Third Avenue Company testified that replacements applied only to replacements of “a complete principal part,” as, for instance, “the replacing of a dynamo complete or a boiler complete,” and that there were no replacements included in the operating expenses. The electrical engineer in charge of ducts and feeders testified that he did not consider the replacement of “ cables and ducts” as replacements; but that “in the place of channel rails, I should consider that renewals made on account of worn-out channel rails and so forth, should be replacements,” and that there were, in his opinion, expenditures for replacements in his department aggregating $10,497.42, which were charged to operating expenses. The total of these amounts which the appellants concede were expenditures for *renewals*and *replacements*but were charged to the operating account aggregated $41,990.05. The only evidence offered on this point by the city was a report made by a committee of engineers appointed by the respective parties to proceedings to review the assessment of the Metropolitan System, including the Third Avenue Company, for the year 1905, to determine what constituted renewals and replacements as distinguished from repairs. It shows that the committee for the purposes of that proceeding agreed upon certain items as chargeable to *renewal*account. One of the members of the committee called as a witness for the respondents testified, in effect, that the *758items therein specified as chargeable to renewals were properly so chargeable, and that at the request of counsel for the city, he made out a list of items which he deemed to be *renewals.*Prom that list an accountant made a tabulation from the books of the appellants by comparison, and testified, in effect, that .he found by such comparison that items aggregating $206,735.89 were charged to operating expenses, which were for *renewals*and *replacements.*The evidence given in behalf of the respondents, for the purpose of showing that there were included in the operating expenses items for which the allowance for depreciation was made, has but little probative force. Particular items were not selected and specified upon which the court could predicate its judgment. The mere tabulation of items by an accountant and comparison by corresponding names, as stated, was not sufficient to outweigh the testimony presented in behalf of the appellants, particularly that to the effect that no items other than those for *ordinary*repairs and renewals were charged to operating account. We are of opinion that the court erred in reducing the operating expenses by the amount specified, and that that item should be reduced only by said amount of $41,990.05, which, in the circumstances, may, we think, be assumed to represent expenditures for new equipment, machinery, appliances and construction, as distinguished from renewals of *parts*of such tangible property. On this theory, the net income should be reduced by $164,745.84.

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 *759of the Kingsbridge Company the value of its tangible property in the streets, found to be $488,643, shows a total value for that company of $699,223.42. These values are less than the assessments. The assessments as thus reduced must be further reduced by ten per cent in order to equalize them with other assessments on the same roll. It is thus found that the assessment against the Third Avenue Company should have been • $5,493,695.25, and that against the Kingsbridge Company should have been $629,301.07.

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.