#### STATE OF NORTH CAROLINA Ex Rel. A. J. MAXWELL, Commissioner of Revenue, v. NORFOLK AND WESTERN RAILWAY COMPANY.

(Filed 18 September, 1935.)

1. Taxation O c — Commissioner of Revenue must follow statute in levying taxes.

In assessing income taxes against a corporation the Commissioner of Revenue must follow the statute, leaving the question of whether the result is arbitrary or unwarranted to the determination of the courts upon appeal of the corporation.

2. Taxation C f — The burden is on the appealing taxpayer to show alleged unconstitutionality of levy.

On appeal to the courts from the levy of taxes by the Commissioner of Revenue, on the ground that the result reached by the Commissioner is unconstitutional, the burden is on the appealing taxpayer to show such unconstitutional result.

3. Appeal and Error J d — The findings of the trial court are conclusive on appeal when supported by any competent evidence.

Where the trial court hears the evidence, overrules the findings and conclusions .of the referee, and makes contrary findings in support of his judgment, the Supreme Court, on appeal, will not weigh the evidence, but will affirm the findings of the trial court if they are supported by any competent evidence.

4. Reference C a — Trial court may review the evidence and make findings of fact contrary to those of the referee.

In reviewing a report of a referee, the trial court is not bound by the findings of fact by the referee, hut may review the evidence and make *398contrary findings, wfiicli findings by tbe trial court are conclusive upon appeal to tbe Supreme Court if supported by any competent evidence.

5. Taxation C f — Where taxpayer contends that result of computation of income for *taxation is*unconstitutional he may not prevail by assailing method of computing taxable income.

Defendant railroad corporation operated its railroad partly within and partly outside tbe State. Tbe Commissioner of Revenue assessed its income taxable by tbe State in accordance with tbe statutory formula. Section 312 of tbe Revenue Act of 1927 and 1929. Defendant contended that tbe acts, as interpreted and applied by tbe Commissioner, operated unconstitutionally in defendant’s case. *Held:*Defendant cannot prevail merely by assailing tbe Commissioner’s method of computing deductible items in ascertaining tbe taxable income, but must show that tbe result of tbe Commissioner’s computation of taxable income was unconstitutional as alleged, and in this case defendant *is held, to*have failed to make apparent any reversible error in tbe trial court’s conclusion, upon supporting findings of fact, that defendant had failed to show want of due process, or lack of equal protection of tbe laws.

Appeal by defendant from *Grady, J.,*at June Term, 1934, of Waice.

Proceeding to recover taxes paid under protest, and alleged to bave been erroneously or illegally assessed.

Tbe Norfolk and Western Railway Company, hereafter called tbe defendant, duly filed with tbe North Carolina Commissioner of Revenue income tax returns for tbe years 1927, 1928, and 1929. None of these returns showed any taxable income for the specified period. On 27 October, 1930, the Commissioner of Revenue made reassessments against the defendant, upon the basis of said returns, which resulted in tax levies, with interest thereon, for the respective years, as follows:

*Year Tax*

1927.$25,737.70

Interest. 3,989.34

Total.$29,727.04

1928.$25,097.32

Interest. 2,384.25

Total.$27,481.57

1929.:.,..$28,225.22

Interest ...’. 987.88

$29,213.10 Total.

*399Under protest, duly filed, tbe defendant paid these assessments, aggregating $86,421.71, and proceeded, agreeably to tbe terms of tbe statute, to recover tbem back. Its protest having been overruled by tbe Commissioner, tbe defendant appealed from said ruling to tbe Superior Court of Wake County. Here tbe matter was referred, on motion of defendant, to Hon. J. Crawford Biggs, as referee, to find tbe facts and report tbe same, together with bis conclusions of law, to tbe court.

Tbe defendant contended that tbe pertinent parts of tbe Eevenue Acts of 1927 and 1929, as interpreted and applied by tbe Commissioner, “operated unconstitutionally upon protestant.” With this contention, tbe referee, upon tbe facts found by him, agreed, largely upon authority of *Southern Ry. Co. v. Kentucky,*274 U. S., 76. On exceptions duly filed, tbe judge of tbe Superior Court disagreed with tbe defendant’s contention, overruled tbe determinative findings and conclusions of tbe referee, upheld tbe constitutionality of tbe statutes, as bad already been done in *A. C. L. R. Go. v. Doughton,*262 U. S., 413, found supporting-facts, and concluded that tbe defendant bad failed to show want of due process, or lack of equal protection of tbe laws.

From judgment dismissing defendant’s protest, it appeals, assigning errors.

*Attorney-General Seawell and Assistant Aitorneys-Generad Aiken and Bruton for A. J. Maxivell, Commissioner of Revenue.*

*Theodore W. Reath, F. M. Rivinus, W. W. Goxe, Murray Allen, and Burton Oraige for defendant.*

Stacy, C. J.,

after stating tbe case: It may be conceded, as appellant alleges, that, from a procedural standpoint, tbe record is not in very satisfactory shape. Much of it is beside tbe point. However, as we understand it, tbe issues involved are comparatively simple. Tbe case easily falls upon one side or tbe other of tbe constitutional line.

Tbe defendant is a railroad, or public service corporation, operating-in part within and in part without this State. It has three branch lines of railroad in North Carolina, with termini at Winston-Salem, Durham, and Elkland. Each of tbe three branches connects directly with tbe defendant’s main line in Virginia at Eoanoke, Lynchburg and Abing-don respectively.

Tbe statutory formula for ascertaining tbe net taxable income for such a corporation is set out in section 312 of tbe Eevenue Act, 1927, and substantially repeated in tbe same numbered section of tbe 1929 act, as follows: “When their business is in part within and in part without tbe State, their net income within this State shall be ascertained by taking their gross 'operating revenues’ within this State, including in their gross *400'operating revenues’ witbin tbis State tbe equal mileage proportion witbin tbis State of tbeir interstate business and deducting from tbeir gross 'operating revenues’ tbe proportionate average of 'operating expenses/ or 'operating ratio/ for tbeir whole business, as shown by tbe Interstate Commerce Commission standard classification of accounts. From tbe net operating income thus ascertained shall be deducted 'un-collectible revenue’ and taxes paid in tbis State for tbe income year, other than income taxes, and tbe balance shall be deemed to be tbeir net income taxable under tbis act. That in determining tbe taxable income of a corporation engaged in tbe business of operating a railroad under tbis section, . . . when any railroad is located partly witbin and partly without tbis State, then said net operating income shall be increased or decreased to tbe extent of an equal mileage proportion witbin tbis State of any credit or debit balance received or paid, as tbe case may be, on account of car or locomotive hire.”

Tbe defendant filed its returns for tbe years in question under tbe Revenue and Machinery Acts applicable at tbe time. They showed no taxable or net income, and no tax was tendered with the returns. Upon examination and investigation, tbe Commissioner of Revenue found that tbe statutory method of determining deductions from gross operating revenues witbin tbe State bad not been followed by tbe defendant in making out its returns. He thereupon applied tbe “yardstick” of tbe statute and revised tbe returns by deducting from “gross 'operating revenues’ witbin tbis State,” as ascertained by him, “the proportionate average of 'operating expenses/ or 'operating ratio/ for tbeir (its) whole business, as shown by tbe Interstate Commerce Commission standard classification of accounts,” thus producing a net taxable income for each of tbe years in question.

It is stated in paragraph three of tbe judgment, to which no exception is taken, that no question is raised as to tbe Commissioner’s method of computing tbe “gross operating revenues” of tbe defendant in tbis State. Only tbe method of computing tbe “gross operating expenses,” or “operating ratio,” as deductible items, is challenged. “Neither is any question raised as to tbe correctness of tbe taxes paid by tbe defendant, if tbe Commissioner be correct in bis interpretation of tbe statute.”

We may say, in passing, that tbe Commissioner of Revenue was under tbe necessity of following tbe statute, whatever tbe consequences. *A. C. L. R. Co. v. Doughton,*262 U. S., 413. If tbis produced an arbitrary or unwarranted result, by placing an unreasonable burden upon tbe defendant, tbe fault was not bis, but that of tbe law. Tbe burden of showing tbis alleged unconstitutional result was on tbe defendant. It carried tbe burden to tbe satisfaction of tbe referee *(Hans Rees Sons v. Maxwell,*283 U. S., 123), but not to tbe satisfaction of tbe judge of *401tbe Superior Court, wbo beard tbe matter on exceptions. *Maxwell v. Kent-Coffey Mfg. Co.,*204 N. C., 365, 168 S. E., 397, 291 U. S., 642. In tbis state of tbe record, according to our uniform practice, tbe finding of tbe judge of tbe Superior Court prevails over tbat of tbe referee. *Pickler v. Pinecrest Manor,*195 N. C., 614, 143 S. E., 8; *Kenney v. Hotel Co.,*194 N. C., 44, 138 S. E., 349; *State v. Jackson,*183 N. C., 695, 110 S. E., 593; *Justice v. Boone Fork Lumber Co.,*181 N. C., 390, 107 S. E., 232.

It was said in *Dumas v. Morrison,*175 N. C., 431, 95 S. E., 775, tbat tbe “findings of fact by a referee, tbougb entitled to weight, are not conclusive, and if not justified by tbe evidence may be disregarded, or set aside by tbe court and a decree entered according to its own view of tbe evidence. It must be remembered tbat a judge of tbe Superior Court in reviewing a referee’s report is not confined to tbe question whether there is any evidence to support bis findings of fact, but be may also decide tbat while there is some such evidence, it does not preponderate in favor of tbe plaintiff, and thus find tbe facts contrary to those reported by tbe referee. Tbe rule is otherwise in tbis Court, when a referee’s report is under consideration. *We*do not review tbe judge’s findings, if there is any evidence to support them, and do not pass upon tbe weight of tbe evidence.” See, also, *Wilson v. Allsbrook,*205 N. C., 597, 172 S. E., 217, and *Thompson v. Smith,*156 N. C., 345, 72 S. E., 379 (opinion in tbe latter case by *Walker, J.,*pointing out tbe difference between tbe duties of tbe trial court and tbe appellate court in dealing with exceptions to reports of referees).

Nor would tbe defendant be entitled to succeed by simply assailing tbe method of computing deductible items in ascertaining net income. It must show tbe unreality of tbe resultant taxable income. Such was tbe bolding in *Underwood Typewriter Co. v. Chamberlain,*253 U. S., 113, and *Bass, Ratcliff & Gretton, Ltd., v. Stale Tax Com.,*266 U. S., 271.

On tbe record as presented, tbe defendant has failed to make apparent any reversible error.

Affirmed.