New-York tribune. [volume] (New York [N.Y.]) 1866-1924, 1909-10-23
SPECIAL FRANCHISE
TAX POWER DEFINED.
Court of appeals Makes Earn
ing Capacity a Basis.

H'G ~ I<s~SstH "a 80,
Francis X. Psndleton, Corporation coun-
sci explained yesterday the scope and eff
feet o. the recent decision OF the Court Of
Appeals relating 70 assessments for special
franchise taxes, which Is expressed by the
opinion OF Judge willard Bartlett IN the case
az the People ex rel Jamaica Water Sup
ply Company agt. State Board OF Tax Com
rnissiOnsTs. In applying the franchise tax
law TO the facts Of each case certain grave
difficulties arise which DO not exist in the
appraisal Of ordinary real or personal prop
srty. said Mr. Pendleton. who then con-
tinued as follows:
The case now decided by the Court Of
Appeals Is Of importance as being the first
case in which the highest court OF the state
has been called on to pass upon the many
questions arising in the course OF the ap-
praisal Of a special Franchise for taxation
The case was begun by a writ OF certioraTi,
by which the court commanded the State
Board % Tax Commissioners 20 make re-
turn OF their procedure I'm assessing the
special franchise under review.
The state board, IN certifying what they
had done. made a general statement or
their method OF waluing the special fran
'chise, but did not state the process show
ing the precise method Of valuation or
the items of the computation by which it
arrived az the sum OF $4,000 as the value
OF the special franchise of the Jamaica
water Supply Company. The Court Of APP
peals decides that there should be a more
complete eertihcation of the method
adopted. Il determines that the assessing
: officers are not bound to adopt any par
ficular rule OF method Of valuation, but
gives a general sanction 70 the method of
appraisal founded on the earning capacity
Of the property, and in this respect the
court sustains the contention advanced on
behalf % the city of New York in support
of these assessments
1T Is held that this method Is proper
one 70 be applied in cases similar to the
case OF the Jamaica Water Supply Com
pany, and there can be little doubt OF the
intention on the part Of the court to sane
zion that method as applied in every case
v-kere there has been continued operation
under the franchise and where the property
has been so managed that evidence is avail
able Of the fair earning capacity from prop
e. operation"
Mr.. Pendleton cited an exception 20 this
rule IN cases where the value of the prop
erty used IN connection with the operation of
q franchise has so increased that the earn
sngs from operation under the franchise do
not give a fair return upon the enhanced
value Of the property He looks upon the
decision Is favorable 20 the city, and said
that Il would go far toward sustaining the
amount OF the special franchise assess
rnents.
The problem 10 be solved, he said, was
the valuation of a part only of the plant
or property Of a public service corporation,
and the property Of such company may be
divided generally into four classes, as fol-
lows:
l. The intangible franchise right or per-
nit TO use streets and public places.
2. The tangible property situated in
streets and public places and used in con-
Eection with the operation under the fran
chise.
3. Other property of the company stu
ate6 outside the public streets but neces-
sarily used IN the operation under the fran
chise.
4. Property having relation TO the con-
duct of business under the franchise right
granted by the state.
Property Included In the first two classes,
according TO Mr. Pendleton, is the only
kind taxable as special franchise. He said
that the first essential under The decision
is 10 ascertain the amount OF annual net
earnings which can be derived from the
operation Of the franchise in connection
with the necessary tangible property. as
Stunning reasonably prudent management on
the part Of the company. He then went
on 10 say:
The amount actually earned by a par
tieular company is 10 be used as evidence
of its earning capacity, but I do not un-
derEtand that the court intends to restrici
the assessors to that evidence. Apparently
the assessors are left free TO analyze the
methods OF the company's management
and by any reasonable means at their dis
posal 20 ascertain the earning capacity as
distinguished from actual earnings. basins
their valuation upon the amount which
the property is capable Of earning, rather
than the amount which it mas earned.
1T then becomes necessary 10 determine
what tangible property is necessary fo
the proper operation OF the franchise, and
on this point Il is apparently held that il
ordinary cases the property in fact usec
IN connection with the franchise shall b,
considered as indicating what propert!
should he 50 used. II is then necessary Il
allow a reasonable annual return on thc
tangible property. and deduct the sum al
lowed from the total net earnings Tn,
balance OF net earnings resulting from this
computation may fairly be assigned TO IN,
use Of the franchise. and the court de-
cides that II may fairly serve as a basis
for appraisal of the intangible things
known as the franchise or right 10 op-
crate"
MT. Pendleton looks upon the decision as
dispOsing substantially OF all the contested
legal points which have thus far beer
raised in behalf OF the corporations. ano
SAID that he hoped II would be the mean:
of an early adjustment OF the entire mat.
ter. without The necessity of continuing
tha litigation.