City of Louisville ex rel. v. Howard
| Decision Date | 17 June 1947 |
| Citation | 208 S.W.2d 522,306 Ky. 687 |
| Parties | CITY OF LOUISVILLE ex rel. v. HOWARD et al. |
| Court | Kentucky Court of Appeals |
Rehearing Denied March 12, 1948.
Appeal from Circuit Court, Franklin County; W. B. Ardery, Judge.
Proceeding by the City of Louisville against Orville M. Howard Commissioner of Revenue, and others, members of the Kentucky Tax Commission, for a mandatory order requiring the Commission to make a valid tax assessment on property of the Louisville Gas & Electric Company, which was made a party defendant. From a judgment against petitioner, it appeals.
Reversed.
Lawrence S. Posten and Gilbert Burnett, both of Louisville, for appellant.
Eldon S. Dummit, Atty. Gen., and Roy W. House, Asst. Atty. Gen and Charles W. Milner and B. Hudson Milner, both of Louisville, for appellees.
City of Louisville, now the appellant, filed in Franklin Circuit Court a petition against members of the Kentucky Tax Commission, now appellees, seeking a mandatory order to require the commission to make, upon property owned by Louisville Gas and Electric Company during the period ending December 31, 1942, a valid tax assessment in lieu of one previously made but alleged by the city to be invalid.
Louisville Gas and Electric Company, also an appellee, was made a party defendant in order to afford to it an opportunity to justify the assessment already made. And the main defense of this litigation has really been conducted by the company, although this was done in the name of the appellees, public officials.
The general demurrers of appellees to the petition of appellant having been sustained, the latter now prosecutes this appeal seeking reversal of the judgment against the city.
The question in issue is whether or not the city stated a legal cause of action in its petition, and a determination of this question depends upon whether the tax commission made upon this company's property a legal rather than an illegal tax assessment based upon the company's annual report as of December 31, 1942.
The city, in the process of making out its case by this pleading in controversy, filed with its petition, and as part of same the entire record accumulated before the tax commission upon the occasion of the commission's hearing of the city's protest against the assessment in question. In this manner, all the facts, figures, exhibits and evidence heard before the tax commission have been wheelbarrowed into this court upon our present consideration of this specific question as to the legal sufficiency of the city's petition to state a cause of action.
The city's petition alleged, in main substance, that the 1942 assessment is invalid (1) because the commission pursued an erroneous method in fixing this company's franchise value and (2) because the commission erroneously exempted from city taxation this company's machinery foundations, along with the machinery itself, and (3) because the commission erroneously exempted from city taxation this company's substation equipment and switching equipment, as if these were items of machinery used in manufacturing.
The city alleged that the commission erred in its method of fixing a value on this company's franchise. More specifically, the petition said, in substance, that the commission, after permitting deductions for all federal taxes, including income and excess profits taxes, and after permitting deductions for depreciation on the basis of figures previously accepted by the federal government, had taken the company's 1942 net income, viz., $3,426,709, and after having considered such net income as the equivalent of a 6% net return on invested capital, had then multiplied such net income by 16 2/3 in order to arrive at a value of the company's capital stock on a 100% basis. The city further alleged that the commission had then taken this determined value of the company's capital stock and had equalized it, that is to say had reduced it by such percentage as to make it equal to similar property values of other taxpayers, and that the commission had then deducted the assessed value, that is the unequalized value, of the company's tangible property, thus producing the resulting difference as the company's franchise value.
The proper method to be used by the state's taxing authorities in ascertaining the value of a franchise of a public service corporation is (A) to determine the value of the corporation's capital stock and (B) to deduct the assessed value of the corporation's tangible property from such determined capital stock value and (C) to designate the remainder or difference as the corporation's franchise value. KRS 136.160.
The very first requirement necessitates a determination of the value of a corporation's capital stock. This is ascertained from data delivered to the taxing authorities through reports required to be filed by corporations under the provisions of KRS 136.130 and KRS 136.140. From these reports, the taxing authorities pick out the corporate net income, which is universally regarded as the amount left in pocket after deducting all expenses. And expenses are universally regarded as including all taxes, big, little, hateful, obnoxious and worrisome. Expenses are also universally regarded as including depreciation, that disappearing wearout element of all property, on the basis of the rate of speed at which such property disappears or wears out. Thus, the corporate net income comes forth. Let us suppose that such net income is in the amount of $6. Now, reason out the taxing authorities, a piece of property, producing an average yearly income of $6 over a period of time, ought to be worth $100, since $100 hired out at legal rate of interest would produce exactly $6 per year. Therefore, taxing authorities usually capitalize, as the city alleged was done in the instant case, a corporation's net income on 6% basis in order to arrive at the corporation's capital stock value on 100% basis.
The legality of arriving at corporate capital stock valuation by the method set out above, which was the one followed by the commission in the instant case, has been recognized by this court in several cases. One of the very early cases recognizing the validity of this method of capital stock valuation is the case of Harger, etc., v. American Surety Co., 121 Ky. 791, 90 S.W. 550.
Although the city alleged that the commission had, in permitting deduction of the above mentioned taxes and the depreciation allowances, which had been accepted by the federal government, erred in thus arriving at this company's net income, and although the city further alleged that the commission had also erred in capitalizing such net income on 6% basis, instead of 4% basis, in these times of cheap money, yet we do not believe that these particular allegations, relating to taxes, depreciation and the percentage used in the capitalization process, made but either a legal cause of action or any showing whatever of an erroneous method pursued by the commission. The taxes had to be paid. The depreciation was allowed on a recognized basis. The capitalization percentage was one of standardized acceptation. Therefore, the commission committed no error in its method of arriving at this company's capital stock value, and accordingly the city's petition stated no cause of action in this particular respect.
However the city's petition further alleged that after the commission had determined the amount of this company's capital stock value, the commission had then equalized it, had thereafter deducted from such equalized capital stock value the assessed value of the company's tangible property in order to produce the difference as the company's franchise value. If this latter method was followed, as the city's petition alleges it was, then the commission did, we believe, pursue an erroneous method. Consequently, the appellant did, we think, state a legal cause of action in this latter respect. The law, KRS 136.160, says that the taxing authorities shall do two things in order to arrive at a tax value for a franchise. First, it says that they must fix, with no detailed method prescribed, a capital stock value, with no defined meaning attached. Second, it says that they must then deduct from such predetermined capital stock value the assessed value, with no clear...
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