Case Name: The People of the State of New York ex rel. Manhattan Railway Company, Appellant, v. Egburt E. Woodbury et al., Constituting the State Board of Tax Commissioners, Respondents. The City of New York, Respondent
Court: New York Court of Appeals
Jurisdiction: New York
Decision Date: 1911-10-17
Citations: 203 N.Y. 231
Docket Number: 
Parties: The People of the State of New York ex rel. Manhattan Railway Company, Appellant, v. Egburt E. Woodbury et al., Constituting the State Board of Tax Commissioners, Respondents. The City of New York, Respondent.
Judges: 
Reporter: New York Reports
Volume: 203
Pages: 231–240

Head Matter:
The People of the State of New York ex rel. Manhattan Railway Company, Appellant, v. Egburt E. Woodbury et al., Constituting the State Board of Tax Commissioners, Respondents. The City of New York, Respondent.
Tax — assessments upon special franchises — rule for ascertaining value of tangible property — method of ascertaining net earnings in assessment of special franchises — rate by which capitalization should be fixed.
1. In fixing the value of the relator’s special franchises the court applied the net earnings rule to the evidence. Held, that in ascertaining the value of the relator’s tangible property, upon which a return should be all< wed, there should have been included the value of the relator's interest in the subway, or subservice conduits, through which its power and light cables pass, the cash and cash items on hand, and the cost of relator's easements.
2. The rule as to net earnings is to ascertain the gross earnings of the corporation and then deduct the operating expenses, together with the annual taxes paid. From the remainder there should also be deducted a fair and reasonable return on that portion of the capital of the corporation which is invested in tangible property, the result becoming the net earnings eontributable to the special franchise; which, when capitalized at a certain fixed rate, becomes the value of the tangible property of the special franchise. The question of the fair and reasonable return is one of fact under the control of the courts below and one which this court should not review.
3. To provide against unforeseen contingencies that may arise in the prosecution of the business of a corporation, which may result in the impairment of the net earnings, a gross sum should be deducted annually for the purposes of reconstruction, and the rate of capitalization to meet depreciation should be at least one per cent higher than the rate of income allowed. (People ex rel. Jamaica V/ater Supply Co. v. State Board of Tax Commissioners, 196 N. Y. 39, followed.)
People ex rel. Manhattan Ry. Co. v. Woodbury, 143 App. Div. 905, modified.
(Argued June 5, 1911;
decided October 17, 1911.)
Appeal from an order of the Appellate Division of the Supreme Court in the first judicial department, entered February 10, 1911, which affirmed an order of Special Term reducing an assessment for purposes of taxation against special franchises of the relator.
The facts, so far as material, are stated in the opinion.
Richard Reid Rogers, Charles F. Kingsley, Ralph Norton and James L. Quackenbush for appellant.
The amounts paid for rights to maintain an elevated structure, acquired by the relator and its predecessors from the abutting property owners, are not a part of the value of the special franchise. (People ex rel. Panama R. R. Co. v. Comrs., 104 N. Y. 240; People ex rel. Manhattan Ry. Co. v. Barker, 146 N. Y. 304; People ex rel. D., L. & W. R. R. Co. v. Clapp, 152 N. Y. 490; People ex rel. Manhattan Ry. Co. v. Barker, 152 N. Y. 417; People ex rel. M. S. Ry. Co. v. Tax Comrs., 174 N. Y. 417; People ex rel. N. Y. C. & H. R. R. R. Co. v. Gourley, 198 N. Y. 486; People ex rel. Retsof Mining Co. v. Priest, 75 App. Div. 131; affd., 175 N. Y. 511; People ex rel. Abraham v. Perley, 67 Misc. Rep. 471; People ex rel. N. Y. El. R. R. Co. v. Comrs. of Taxes, 82 N. Y. 459.) The per ventages of return proved on behalf of the relator are properly applicable. (People ex rel. T. A. R. R. Co. v. Tax Comrs., 136 App. Div. 155; Mayor, etc., v. M. Ry. Co., 143 N. Y. 1.) Relator is entitled to a return upon “ subways ” and “cash” and “ cash items.” (C. G. Co. v. City of New York, 157 Fed. Rep. 849.) A sum equal to the average actual annual depreciation of the plant and property proved should be deducted. (Beale & Wyman on R. R. Rates, § 430; People ex rel. B. H. R. R. Co. v. State, 69 Misc. Rep. 646.) The assessments reviewed are erroneous by reason of inequality. (People ex rel. J. W. S. Co. v. Tax Comrs., 196 N. Y. 39.)
Archibald R. Watson, Corporation Counsel (Curtis A. Peters and Addison B. Scoville of counsel), for respondents.
The value of the easements owned by the relator were properly included in the valuation of the tangible property forming part of its special franchise. (People ex rel. M. R. Co. v. Barker, 165 N. Y. 305; People ex rel. Poor v. O'Donnell, 139 App. Div. 83; 200 N. Y. 519; People ex rel. Topping v. Purdy, 128 N. Y. Supp. 569.) No allowance should be made from annual earnings to provide for a fund to substitute modern for obsolete property. (S. V. W. Works v. City of San Francisco, 124 Fed. Rep. 574; Cotting v. K. C. S. Y. Co., 82 Fed. Rep. 839.) The trial court was justified in refusing to equalize the assessment against the relator’s special franchises in the borough of the Bronx. (People ex rel. Dexter v. Palmer, 86 Hun, 513.)

Opinion:
Gray, J.
In this proceeding the relator, the Manhattan Railway Company, in the city of New York, has sought to review a determination of the state board of tax commissioners assessing its special franchises in the borough of Manhattan at $75,000,000, and in the borough of the Bronx at $3,500,000. ' The trial court has reduced the assessment in the borough of Manhattan to $66,661,930.05 and has confirmed the assessment in the borough of the Bronx. In fixing the values of the relator's, special franchises, the court applied the net earnings rule to the evidence, as it was laid down in the case of People ex rel. Jamaica Water Supply Company v. State Board of Tax Commissioners (196 N. Y. 39). The Appellate Division has affirmed the order of the Special Term.
With respect to all the items, except those which will be referred to, I am of the opinion that the determination below was right. I think, in ascertaining the value of the relator's tangible property, upon which a return of six per cent, should be allowed, that there should have been included the value of the relator's interest in the subway, or subservice conduits, through which its power and light cables pass. .While it is true that this subway property, or structure, was owned by another corporation, the Consolidated Telegraph and Electrical Subway Company, nevertheless, the relator had invested in it the sum of $936,879. This investment was essential to the operation of the relator's road and there is no good reason why it should not be entitled to a return upon it.
I think, also, that there should have been included in the tangible property the sum of $537,139, consisting in cash and other cash items on hand. This item may, properly, be considered as a part of the relator's working capital, which it was entitled, in the prudent management of its business, to keep on hand. Whether or not it was, in fact, essential to the operation of the railroad is not material; but it was, nevertheless, an item of its property, which it may fairly claim to have considered with the rest of its tangible property, upon which the return should be estimated.
The inclusion of these two items in the relator's tangible property, of subways and of cash, would result, by the methods of computation adopted, in reducing the value of the special franchises • in the borough of Manhattan from $66,661,930.05 to the sum of $65,350,060:26. In the borough of the Bronx the reduction would he from $4,907,652 to $4,805,399. This difference, however, in the case of the borough of the Bronx, is not material and does not affect the determination; inasmuch as it was, very properly, held, as the sum fixed by the tax commissioners at $3,500,000 was less than the full value of the special franchise, that the relator was not aggrieved and that no allowance should he made for equalization.
Whether the rate of return to he allowed to the relator upon its tangible property, or whether the rate at which the net income should be capitalized, should be six per cent., as determined below, was a question of fact decided upon, concededly, conflicting evidence and is one with which, therefore, this court should not interfere. In the Jamaica Water Supply Company's Case, (196 N. Y. 39), the character of the plaintiff's business affected the question of the rate of capitalization of net income; a consideration which, I think, does not obtain in this case.
I think that the cost of the easements was properly included in ascertaining the value of the relator's tangible property. The structures in the street, upon the acquisition of those easements, became lawful as to the abutting property owners. They, then, became appurtenant to the railroad property and, necessarily, enhanced its value.
The courts below determined that the relator was entitled to make annual depreciation charges, amounting in the case of the borough of Manhattan to the sum of $360,613.65 and in the case of the borough of the Bronx to the sum of $37,435.67, for the purpose of creating a fund to provide for the depreciation of its various properties; upon which interest at four per cent., compounded, would produce a sum, at the termination of the ascertained physical life of the several classes of property, equal to the cost of the particular property. While I am, personally, of the opinion that the creation of such an amortization fund furnishes the best rule for adoption in .such a case as this, in working out the value of special franchises, the majority of my brethren entertain a different view. They think 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 and that will be the opinion of the court.
The orders of the Special Term and Appellate Division must, therefore, be modified and the proceeding is remitted to the Special Term for further action in accordance with this opinion; without costs as against either party.