Source: https://www.law.cornell.edu/supremecourt/text/231/423
Timestamp: 2018-10-20 23:30:16
Document Index: 268297023

Matched Legal Cases: ['§ 207', '§ 20', '§ 20', '§ 20', '§ 20', '§ 450']

KANSAS CITY SOUTHERN RAILWAY COMPANY, Appt., v. UNITED STATES OF AMERICA and the Interstate Commerce Commission. | US Law | LII / Legal Information Institute
231 U.S. 423 (34 S.Ct. 125, 58 L.Ed. 296)
Argued: October 29 and 30, 1913.
Two methods of increasing the capacity of the road were presented: one by doubletracking, the other by lowering the grades and thus permitting traffic to be moved more rapidly. The road was in active competition with powerful rivals operating in the same general territory; among them, the Southern Pacific, the Missouri, Kansas, & Texas, the Missouri Pacific, the St. Louis Southwestern, the Texas & Pacific, the St. Louis & San Francisco, the Atchison, Topeka, & Sante Fe, and the Rock Island. The character of the road as a trunk line, having a long average haul and the prevalence of low-class traffic,timber, coal, oil, and like commodities, necessarily entailed a low average freight rate; its average rates per ton per mile being lower than those of any of its competitors above named.
Appellant, having paid the cost of the six improvements out of its issue of bonds, was confronted with the regulations of the Commission bearing on the method of recording the transaction in its books of account. Except for those regulations, it is said that the full cost of the improvements would have been charged to the account of 'Additions and Betterments,'a subdivision of the property accounts,and credited to the proceeds of the bonds, because that sum had been expended for additions and betterments, and because the bonds had supplied the funds. In the balance sheet the 'Assets' would have shown an increment of approximately $629,399 under the subdivision of Additions and Betterments, and, per contra, the 'Liabilities' would have shown a corresponding increase under the subdivision of 'Bonds.'
The text of the Classification of Additions and Betterments relative to revisions made on the original line is as follows: 'Grade Revisions.(Reducing of grades by cutting down summits and raising sags without materially changing the alinement).The amount to be charged to this account is the cost of additional grading done, including as a portion of such cost the rent and cost of operation of steam shovels and work trains; building temporary tracks for steam shovels and grading outfits; tools, etc., used in the work; raising or lowering existing bridges; increasing the length of culverts and replacing riprap at culvert ends; changing grade crossings for farm or country roads, highways, and streets, including crossing gates, highway crossing alarms, and watch houses.'
Relative to changes off the original line the regulation is as follows: 'Changes of Line.(Construction of new lines for the purpose of improving grade or alinement).The amount to be charged to this account is the difference between the cost of the new line and the cost of replacing in kind the line abandoned, exclusive of right of way.'
Argument of Counsel from pages 434-436 intentionally omitted
The authority conferred by Congress upon the commerce court (act of June 18, 1910, 36 Stat. at L. 539, chap. 309; Judicial Code, § 207 36 Stat. at L. 1148, chap. 231, U. S. Comp. Stat. Supp. 1911, p. 216) with respect to enjoining or setting aside the orders of the Commission, like the authority previously exercised by the Federal circuit courts, was confined to determining whether there had been violations of the Constitution, or of the power conferred by statute, or an exercise of power so arbitrary as virtually to transcend the authority conferred. Interstate Commerce Commission v. Illinois C. R. Co. 215 U. S. 452, 470, 54 L. ed. 280, 287, 30 Sup. Ct. Rep. 155; Interstate Commerce Commission v. Union P. R. Co. 222 U. S. 541, 547, 56 L. ed. 308, 311, 32 Sup. Ct. Rep. 108; Proctor & G. Co. v. United States, 225 U. S. 282, 297, 36 L. ed. 1091, 1096, 32 Sup. Ct. Rep. 671; Interstate Commerce Commission v. Baltimore & O. R. Co. 225 U. S. 326, 340, 56 L. ed. 1107, 1111, 32 Sup. Ct. Rep. 742.
As to the intent and meaning of § 20, it is first insisted that the power conferred upon the Commission to prescribe the forms of accounts, records, and memoranda to be kept by the carriers, recognizes a distinction between the form and the substance; and that while the Commission, in order to obtain full and accurate information concerning the affairs of each corporation, must have power to require any reports, schedules, and accounts necessary to show the true financial condition of each carrier; yet that the grant must by fair interpretation, and in order not to amount to an unconstitutional delegation of legislative power, stop short of the point where the regulation in its essence goes not to the form, but to the substance, and involves interference with the internal affairs of the corporation. We do not, however, think that any such distinction between the form and the substance is admissible with respect to the declared object of standardizing railroad accounts and obtaining therefrom full and accurate information concerning the affairs of the respective corporations. The very object of a system of accounts is to display the pertinent financial operations of the company, and throw light upon its present condition. If they are to truly do this, the form must correspond with the substance. In order that accounts may be standarized, it is necessary that the accounts of the several carriers shall be arranged under like headings or titles; and it is obviously essential that charges and credits shall be allocated under the proper headings,the same with one carrier as with another. Unless 'Additions and Betterments,' on the one hand, and 'Operating Expenses,' on the other, are to indicate the same class of entries upon the books of one carrier that they indicate upon the books of other carriers, there is no possibility of standardization. So far as such uniformity requirements control or tend to control the conduct of the carrier in its capacity as a public servant engaged in interstate commerce, they are within the authority constitutionally conferred by Congress upon the Commission. There is no direct interference with the internal affairs of the corporation; and if any such interference indirectly results, it is only such as is incidental to the lawful control of the carrier by the Federal authority, and to this the rights of stockholders and bondholders alike are necessarily subject.
It is said, however, that the meaning of the term 'operating expenses' was well defined at the time of the passage of the act of 1887, and that during the period intervening between the beginning of the work of the Commission thereunder and the passage of the Hepburn act in 1906, the term had never been construed to include any charge for property abandoned in the course of improvements; and that this settled construction, upon familiar principles, must be deemed to have entered into the purpose of Congress when it re-enacted the language of § 20 in the latter year, and added to it authority to the Commission to prescribe in its discretion the forms of accounts and a prohibition against keeping any others than those prescribed or approved by the Commission. But it will be observed that § 20, as originally enacted, authorized the Commission 'in its discretion, for the purpose of enabling it the better to carry out the purposes of this act, to prescribe . . . a period of time within which all common carriers subject to the provisions of this act shall have, as near as may be, a uniform system of accounts, and the manner in which such accounts shall be kept.' Congress, when it enacted the Hepburn act in 1906, must have known that the Commission had not as yet found occasion to enforce this provision; and at the same time may be deemed to have contemplated that the authority then for the first time conferred upon the Commission to determine and prescribe the maximum rates to be charged by the carriers for the services to be performed by them furnished a new and more cogent reason for establishing a uniform system of accounts.
The contention that the term 'operating expenses' had a well-understood and defined meaning, either recognized at the time of the passage of the act of 1887, or established by the constant practice of the Commission from that time until the Hepburn act, so that the use of the term in the latter act amounted to an express limitation upon the grant of power to prescribe the forms of the accounts, is not well founded. Congress, in authorizing the Commission to prescribe a uniform system of accounts, recognized that accounting systems were not then uniform; and in reiterating this authorization in 1906, and adding a prohibition against the keeping of other accounts than those prescribed, manifested a purpose to standardize and render uniform the accounts of the different carriers with respect to matters that entered into property and the improvements thereof, on the one hand, and the current operations of the company, on the other. By the very terms of § 20, Congress at least outlined the classification of the carriers' accounts, for it required the annual reports to show 'the amount of capital stock issued, the amounts paid therefor, and the manner of payment for the same . . . the surplus fund, if any, . . . the funded and floating debts, . . . the cost and value of the carrier's property, franchises, and equipments; . . . the amounts expended for improvements each year, how expended, and the character of such improvements; the earnings and receipts from each branch of business and from all sources; the operating and other expenses; the balances of profit and loss; and a complete exhibit of the financial operations of the carrier each year, including an annual balance sheet.' By the same section the Commission was authorized to require these annual reports from all carriers subject to the act, and to prescribe the manner in which the reports should be made, and for this and other purposes to require carriers to have 'as near as may be, a uniform system of accounts, and to prescribe the manner in which such accounts shall be kept.'
There is evidence in the record that substantially the same method of distributing charges for so-called 'Additions and Betterments' between the Property Accounts and the Operating Accounts is and has long been pursued by important railroad carriers, and has received the sanction of at least one recent text-book writer,Whitten, Valuation of Public Service Corporations, §§ 450, 451, 458, etc. Nevertheless, it is insisted with emphasis that property abandoned as an incident to permanent improvements is not an operating expense, and, in effect, that no matter what practice may be pursued by railroad accounting officers, it cannot properly be treated as such.
The expressions quoted were properly employed with respect to the questions then presented for decision. As expressions of the general principle, we see no occasion now to qualify them. In both cases it was recognized that in so complicated a matter as the construction, maintenance, and operation of a railroad line, it is difficult to define and perhaps more difficult to consistently apply a precise distinction between capital and expense accounts; and while the propriety of distributing improvement costs over a series of years was recognized, the impossibility of scientific accuracy in that regard was acknowledged. The question now is, whether the regulations of the Commission under attack do violence to these general principles,rather, it is whether those regulations are so clearly contrary to these and other applicable principles that they should be set aside as being in excess of the powers conferred by Congress upon the Commission.
We are unable to see that there is substantial inconsistency with principle, much less gross violation thereof. The contention of the appellant that property, originally acquired because necessary in the construction of the road, and afterwards abandoned only because rendered unnecessary by the improvement and development of the property, should remain in the property account as a part of the stockholders' investment, will be found, upon analysis, to rest upon the unwarrantable assumption that all capital expenditures result in permanent accretions to the property of the company. This in effect ignores depreciation,an inevitable fact which no system of accounts can properly ignore. A more complete depreciation than that which is represented by a part of the original plant that through destruction or obsolescence has actually perished as useful property, it would be difficult to imagine. The fact that the original investment was necessary in order that the second investment might be made is not a conclusive test. Reference is made to the cost of the scaffolding used in the erection of a house, and discarded when the house is completed; and to the cost of the paper that goes to the waste-basket, rather than to the printer, in the preparation of a literary composition; but these are fanciful analogies, and do not assist us here, where the real question is not how shall original cost be ascertained, but, how shall subsequent depreciation in value be reckoned and accounted for?
The distinction drawn between grade improvements 'off the line' and those made 'on the line' rests upon the view that the discarding of sections of the original line of road is a loss or depreciation that in correct accounting should be taken out of the property account. If this is to be done, its value must be charged, directly or indirectly, as an expense incident to the operation of the road. Whether it should be charged against the accumulated profits of previous years, as reflected in the Profit and Loss Account, or against the profits of present and future years, may depend upon circumstances. The theory upon which the Commission has acted in formulating its regulations is fairly stated in its brief herein as follows: The abandonment of property incident to grade revision is 'depreciation,' and such depreciation is of two kinds,(1) that which is not replaced in kind, and (2) that which is replaced by improved materials, track, or equipment. If a trunk line of road has a branch extending into a territory not served by its main line, and, finding the branch unprofitable, abandons it, taking up the track, without constructing any substitute to serve the same territory, the abandoned branch ceases to be an earning instrumentality; the stockholders can thereafter derive no profit from it; it has served its purpose, and only past operations have benefited from it. So far as the profits of past operations have not been distributed to the stockholders, they are represented in the Profit and Loss Account, and therefore such an abandonment or depreciation is properly chargeable to that account unless a special depreciation account has been established in anticipation of such abandonments; and for such an account, provision is made in the regulations. The other kind of depreciation is the result of changes attributable to the inadequacy of the existing property to meet the demands of the future. The road or the structures have to be replaced with stronger or more efficient instrumentalities. Abandonments occasioned by changes of this character are therefore chargeable to future earnings, for the reason that the improved condition of the road is not only designed to meet the demands of the future, but presumably will result in economies of operation; and so the resulting benefits will be reaped by those who hold the stock of the company in the present and in the future. The railroad company may, if it sees fit, anticipate general depreciations, and make provision for them by establishing a reserve for the purpose; but if no such provision has been made, the abandonment should be taken care of by charging them to present or future operating expense. In case, however, the amount is so large that its inclusion in a carrier's operating expenses for a single year would unduly burden the operating expense account for that year, the carrier may, if so authorized by the Commission, distribute the cost throughout a series of years.
ATCHISON, T. & S.F. RY. CO. v. SCARLETT.
NORFOLK & W. RY. CO. v. UNITED STATES et al.
SKINNER & EDDY CORPORATION v. UNITED STATES et al.