Chicago & NW Ry. Co. v. Eveland

• Decision Date: 28 May 1926
• Docket Number: No. 7046.,7046.
• Citation: 13 F.2d 442
• Parties: CHICAGO & N. W. RY. CO. v. EVELAND et al., Tax Commission of South Dakota.
• Court: U.S. Court of Appeals — Eighth Circuit

13 F.2d 442 (1926)

CHICAGO & N. W. RY. CO. v. EVELAND et al., Tax Commission of South Dakota.

No. 7046.

Circuit Court of Appeals, Eighth Circuit.

May 28, 1926.

A. K. Gardner, of Huron, S. D., and Samuel H. Cady, of Chicago, Ill., for appellant.

Byron S. Payne, of Pierre, S. D. (Buell F. Jones, Atty. Gen., of South Dakota, on the brief), for appellees.

Before SANBORN, Circuit Judge, and MUNGER and JOHNSON, District Judges.

SANBORN, Circuit Judge.

The property of a railway company in the state of South Dakota, used and usable in the operation of its lines in that state, is required by its statutes to be assessed for taxation by its state tax commission as of the preceding May 1st on July 7th in each year. The railway company is required to furnish to the tax commission a statement of the amount and value of its property in that state of the character described as of the preceding December 31st. The tax commission is required to give the railway company 10 days' notice of its proposed assessment and a hearing regarding all matters relating to the correctness thereof. Revised Code of South Dakota 1919, §§ 6596-6601. The Chicago & Northwestern Railway Company furnished the tax commission its verified statement of the value of its property in that state, pursuant to the requirement of its statutes, as of December 31, 1921; the commission made an assessment based thereon, heard the railway company concerning that assessment, and finally fixed and assessed the value of its property for taxation in 1922, here in controversy, at $41,690,298, equivalent to $33,882 per mile.

Thereafter the railway company brought this suit against the members of the state tax commission and the auditors and treasurers of certain counties in the state for an injunction to prevent the collection of the taxes against its property on the basis of this assessment, on the ground that the assessment was excessive; that it was more than 40 per cent. above the fair value of its property in South Dakota and was on a basis far above that on which the assessment of other property in the state of similar value was made; that the collection of the taxes levied on its property upon this basis would constitute the taking of its property without due process of law, in violation of the Constitution of the United States; that the members of the tax commission in making the assessment had disregarded established rules of evidence and of law and the actual value of the property, and had arbitrarily and willfully made the assessment far in excess of the true value of the property. In its complaint the railway company made proper allegations in support of this claim, and the defendants in their answer denied the material averments of the plaintiff, and alleged that the assessment was the fair value of the property made by the commission in good faith. The case went to final hearing in the court below on the evidence produced by the respective parties, and it resulted in an opinion and a decree in favor of the defendants.

The assessment should have been the fair value of the property of the plaintiff in South Dakota, used and usable for the operation of its railroad lines in that state. In determining the value of the property of a railway company for the purposes of taxation, several classes of evidence are admissible; but the net earnings of the property and the market value of its stocks and bonds for a reasonable period antecedent to the making of the assessment constitute the most reliable and influential evidence of that value.

The amount of the assessment challenged was $41,690,298, or $33,882 per mile. The plaintiff insisted that the fair value of the property assessed did not exceed $22,000,000. Mr. C. F. Balsch was the statistician of the plaintiff. He testified that the nature of his work and his entire experience for 18 years had been in railroad accounting and valuation; that he was familiar with the methods of accounting practiced and approved by railway companies and the Interstate Commerce Commission, with the accounts and books of the plaintiff, and with the just and approved method of apportioning earnings, expenses of operation, and values of railroad property to the parts of it in different states and sections; and that he had prepared schedules and exhibits, which were introduced in evidence before the tax commission in its hearing upon the assessment of the plaintiff's property in South Dakota in 1922, which were correct, were made by the use of just and approved methods, and, in his opinion, truthfully represented the facts they disclosed. By these schedules and exhibits, and the testimony of Mr. Balsch and other witnesses, the plaintiff introduced substantial evidence of these facts. The number of miles of railroad operated by the plaintiff during the years 1917, 1918, 1919, 1920 and 1921, was about 8,000; the number of miles operated by it in South Dakota varied from 1,063.15 in 1917 to 1,230.45 in 1921. The value of the entire line of the plaintiff in the nine states in which it operated, as represented by the par value of its stocks and bonds in 1921, was $406,063,100; the average value of it as thus represented during the five years 1917, 1918, 1919, 1920 and 1921, was $387,556,920, and its average par value per mile was $47,171. The average market value of its stocks and bonds during the years 1917, 1918, 1919, 1920, and 1921 was $348,125,629, and its average market value per mile as thus represented was $42,423.

The operated lines of the plaintiff in South Dakota were of much less value per mile than the average value per mile of the entire system. They lie in a sparsely settled portion of the country, without large cities. In Chicago the plaintiff has elevated tracks worth millions of dollars, one of the largest elevators in the world, 340 acres of very valuable land covered with shops, 500 miles of railroad and a terminal representing an investment of about $25,000,000. It has four tracks from Chicago to Milwaukee; a double track across Iowa from Council Bluffs to Clinton. In Wisconsin it has ore docks representing an investment of more than $5,000,000, and it has a double track from Chicago to Elroy, Wis. In Michigan it has extensive ore docks. The value per mile of the tracks, bridges, railway stations and other equipment in other states is much greater than is the value of the tracks, bridges, railway stations and equipment it owns in South Dakota. There are no such valuable parts of the plaintiff's railway system in South Dakota as these it owns in the other states. Mr. Balsch testified that in his opinion the part of the plaintiff's operated railway property in South Dakota was hardly worth one-half the value per mile of that without the state, and it does not seem probable that, if the average value per mile of the entire lines of the railroad was $42,423, as indicated by the market value of its stocks and bonds for the five years 1917, 1918, 1919, 1920, and 1921, that the value of that part of it in South Dakota in 1921 and 1922 could have been more than $22,000 to $25,000 per mile. Wallace v. Hines, 253 U. S. 66, 69, 40 S. Ct. 435, 64 L. Ed. 782.

By the schedules verified by Mr. Balsch and his testimony, the plaintiff showed the value of the part of its railroad property in South Dakota, as represented by the par value of its stocks and bonds and by the market value of its stocks and bonds, by apportioning to the state of South Dakota the latter's share of those values, first, on the basis of the company's railway operating revenues, and, second, on the basis of its transportation train miles. Mr. Balsch assigned to the state of South Dakota all such revenues that arose from the traffic moving on the plaintiff's lines from one point in South Dakota to any other point in that state and a mileage proportion of the revenues derived from freight shipments and passengers from traffic originating in South Dakota and terminating in other states and from that originating in other states and terminating in South Dakota. He testified that this method was that in use by the plaintiff in assigning its revenues to different states, was an approved method and one required to be practiced by the statutes of the state of Minnesota, and that thus apportioned the plaintiff's railway operating revenues from the state of South Dakota were 4.56 per cent. of its operating revenues from its entire lines in 1921; that on that basis the value of its operative railroad property in the state of South Dakota in 1921, as represented by the par value of its stocks and bonds, was $18,516,477; and that its average value as thus represented for the five years 1917, 1918, 1919, 1920, and 1921, was $16,390,568.

He testified that the passenger train miles, plus the freight train miles, plus the mixed train miles of traffic assignable to the plaintiff's property in South Dakota constituted 6.90 per cent. of the transportation train miles of the entire railway system in 1921, and on that basis that the value of the plaintiff's railroad property in South Dakota, as represented by the market value of its stocks and bonds, was $22,058,387 in 1921, and that the average value of that property as thus represented for the five years, 1917, 1918, 1919, 1920, and 1921, was $23,047,148. Mr. Balsch testified and introduced schedules showing that the plaintiff derived no net revenue from its operative railroad property in South Dakota in 1921, 1920, 1919, 1918, or 1917, but suffered a net loss therefrom in each year.

Mr. C. T. Dike, who testified that he was the engineer of maintenance of the plaintiff, had been such for 25 years and was familiar with its lines in South Dakota, and the physical condition and value of them, and Mr. George W. Hand, a civil engineer who had had 20 years' experience in valuation work with the plaintiff, testified on its call at length to the physical condition and value of plaintiff's property in South Dakota assessable...