Bailey v. Megan, No. 11242.

• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)
• Writing for the Court: SANBORN, WOODROUGH, and VAN VALKENBURGH, Circuit
• Citation: 102 F.2d 651
• Parties: BAILEY, County Treasurer, et al. v. MEGAN.
• Docket Number: No. 11242.
• Decision Date: 06 April 1939

102 F.2d 651 (1939)

BAILEY, County Treasurer, et al.
v.
MEGAN.

No. 11242.

Circuit Court of Appeals, Eighth Circuit.

April 6, 1939.

102 F.2d 652

Byron S. Payne, of Pierre, S. D. (Clair Roddewig and Windsor Doherty, both of Winner, S. D., on the brief), for appellants.

Irwin A. Churchill, of Huron, S. D., and Nelson Trottman, of Chicago, Ill. (Lewis Benson, of Huron, S. D., and William T. Faricy, of Chicago, Ill., on the brief), for appellee.

Before SANBORN, WOODROUGH, and VAN VALKENBURGH, Circuit Judges.

SANBORN, Circuit Judge.

This is a suit brought by the appellee, trustee in reorganization proceedings of

102 F.2d 653

the property of the Chicago and North Western Railway Company, against the appellants, members of the State Board of Equalization of South Dakota and the Treasurers of thirty-four South Dakota Counties in which portions of the lines of the Railway Company are located, to enjoin the collection of 50% of the 1935 taxes upon its railroad properties in each of those counties. The assessed value of all of the operating property of the Railway Company in South Dakota for the year in suit was $23,275,000. One-half of the total tax upon it was $312,829.26, which the appellee paid. His claim is that the taxes assessed were based upon a valuation which was so excessive, arbitrary and discriminatory as to violate the due process and equal protection clauses of the Fourteenth Amendment to the Constitution of the United States, U.S.C.A. Issues were framed; the case was tried; and the court filed findings of fact and conclusions of law resolving all issues against the appellants. From the decree granting an injunction against the collection of the unpaid one-half of the taxes, this appeal was taken

The Constitution of South Dakota provides that the valuation of property for purposes of taxation shall never exceed its actual value. Art. 11, Sec. 2. A law of the State provides that all property shall be assessed at its true and full value in money. Revised Code, S.D.1919, Sec. 6700, Compiled Laws, S.D.1929, Sec. 6700.

It is not necessary to describe the statutory method for the assessment of railroad property in the State. No question of procedure is involved. In 1935 the appellee furnished to the Director of Taxation of the State the required reports, statements and returns and an estimate showing that the value of the operating property of the Railway Company in the state of South Dakota was $8,548,694. On July 7, 1935, the Director of Taxation assessed the property at $23,400,000. A hearing upon the correctness of the assessment was had on July 17, 1935, before the State Board of Equalization. After the hearing, the Board of Railroad Commissioners, at the request of the Board of Equalization, furnished data with respect to the value of the property of the Railway Company in South Dakota together with a suggested formula for determining such value, the use of which produced a figure of $27,148,892.¹ On August 19, 1935, the Board of Equalization finally fixed the assessed value at $23,275,000. This was almost three times the amount of the appellee's estimate of the value of the South Dakota property of the Railway Company, and twice the figure which he contended could, by any reasonable stretch of a sound discretion on the part of the taxing authorities, be regarded as the value of the property.

There seems to be no very serious controversy as to the applicable rules of law², and little dispute as to the facts and figures

102 F.2d 654

from which the value of that part of the system of the Railway Company which lies in South Dakota must be ascertained

It is conceded that the only practical method for determining the value of that portion of an interstate railroad system lying within a state is to determine the value of the entire system and then to determine what percentage of that value is assignable to the state.

It is also conceded that the ascertainment of the value of railroad property is not governed by any definite formula, rule or method, and that consideration and weight may be given to all pertinent facts, estimates and forecasts in determining the value of such property; that overvaluation alone and mere errors of judgment on the part of the taxing authorities do not warrant injunction against taxes based on a challenged assessment; that "there must be something that in legal effect is the equivalent of intention or fraudulent purpose to overvalue the property and so to set at naught fundamental principles that safeguard the taxpayer's rights and property. Rowley v. Chicago & N. W. R. Co., 293 U.S. 102, 109-111, 55 S.Ct. 55, 79 L.Ed. 222;" Great Northern R. Co. v. Weeks, 297 U.S. 135, 139, 56 S.Ct. 426, 429, 80 L. Ed. 532; and that the action of the taxing authorities is surrounded by all of those presumptions which safeguard official action from unwarranted attack and place upon its assailant the burden of proving his assertions.

The appellee attempted to prove — and contends that he clearly and definitely did prove — that the taxing authorities knowingly and intentionally valued the property of the Railway Company in South Dakota for at least twice its actual value; while other property was not assessed at more than it was worth.

The method or formula used by the taxing authorities in arriving at their conclusion as to the 1935 value is not disclosed. This we do not regard as of controlling importance. If the result arrived at was clearly within the permissible limits of their discretion, the particular method used would seem unimportant. If the result was clearly wrong, the method used would not save it.

The appellee introduced evidence tending to show that the fair, reasonably accurate and most generally approved method of ascertaining system value is to take the value of the stocks and bonds of the railway company averaged over a period of five years and add to it the figure obtained by capitalizing at 6% the net income from operation for the same period, and average the two. This, in effect, gives a composite of the value at which investors have appraised the property during a period of years and the value upon which the earnings of the property during the same period would yield a rate of return which would be adequate to attract capital.

The stock and bond method of valuation, applied to the system of the Railway Company for the five years prior to 1935, produced a valuation of $240,821,316. The capitalized earnings method, applied during the same period, produced $121,205,470. The average of the two was $181,013,393.

The historical cost of the entire system was in excess of $618,000,000. The physical valuation of the entire system made by the Interstate Commerce Commission as of June 30, 1917, adjusted to December 31, 1934, less depreciation, was $572,611,294. (That part of the system lying in South Dakota was valued at $39,748,047, or 6.73% of the value of the entire system.) The face value of the bonds of the Railway Company at the end of 1934 was $345,769,100. Stocks and bonds together at face were $526,608,945, and current liabilities were $45,584,749.18.

The full and true value of the system, or of any part of it, is the amount which the owner would be entitled to receive as just compensation upon a taking by the State or the United States under the power of eminent domain — the money equivalent paid at the time of the taking. Great Northern Railway Co. v. Weeks, supra, 297 U.S. 135, 139, 56 S.Ct. 426, 80 L. Ed. 532. That equivalent is the market value of the property at the time of the taking. With respect to property not currently bought or sold, market value must be estimated and "may be deemed to be the sum which, considering all the circumstances, could have been obtained for it; that is, the amount that in all probability would have been arrived at by fair negotiations between an owner willing to...