Cumberland Pipe Line Co. v. Lewis

• Decision Date: 14 September 1926
• Docket Number: No. 1021.,1021.
• Citation: 17 F.2d 167
• Parties: CUMBERLAND PIPE LINE CO. v. LEWIS et al.
• Court: U.S. District Court — Eastern District of Kentucky

17 F.2d 167 (1926)

CUMBERLAND PIPE LINE CO. v. LEWIS et al.

No. 1021.

District Court, E. D. Kentucky.

September 14, 1926.

O'Rear, Fowler & Wallace, of Frankfort, Ky., John H. Gardner, of Winchester, Ky., and Frank L. Crawford, of New York, N. Y., for plaintiff.

Frank E. Dougherty, Atty. Gen., Overton S. Hogan, Asst. Atty. Gen., and S. D. Rouse, of Covington, Ky., for defendants.

Before MOORMAN, Circuit Judge, and COCHRAN and DAWSON, District Judges.

ANDREW M. J. COCHRAN, District Judge.

This is a three judge case. The interlocutory injunction sought is, in the main, to restrain the enforcement of the assessment of plaintiff's franchise for taxation for the year 1924, made April 29, 1925, as of date December 31, 1923, under section 4077 et seq., Kentucky Statutes.

The procedure followed was that required by section 4079. The value of plaintiff's capital stock was first fixed. The assessed value of its tangible property was then deducted from such value; and the remainder was the sum at which plaintiff's franchise was assessed. The value at which its capital stock was so fixed was the sum of $7,550,227. This was arrived at by the capitalization of net income method. The commission took plaintiff's net income for the years 1921, 1922, and 1923, and ascertained the average yearly net income for those three years. This it capitalized at 7 per cent. The net income for those three years was:

                  1921 ...........................  $  292,297.35
                  1922 ...........................     629,342.84
                  1923 ...........................     663,907.54
                                                    _____________
                  Total for three years ..........  $1,585,547.73
                

The average yearly net income was one-third of this, or $528,515.91. This, so capitalized, produced the sum of $7,550,227, at which the value of the capital stock was fixed. The assessment of plaintiff's tangible property was $2,066,179, of which $1,967,001 was on account of personalty and $99,178 on account of realty. This, deducted from $7,550,227, the value at which the capital stock was fixed, left the sum of $5,484,048, at which plaintiff's franchise was assessed, of which assessment complaint is made.

The particulars in which plaintiff complains of this assessment, and on the basis of which it seeks the interlocutory injunction, are two. One is in fixing the value of its capital stock at the sum of $7,550,227. The other is in assessing its franchise at more than 70 per cent. of the sum of $5,484,048. In order that plaintiff may be entitled to the interlocutory injunction, because of the commission's fixing of the value of plaintiff's capital stock at the sum of $7,550,227, it is essential, according to the decision of the Kentucky Court of Appeals in the case of Kentucky Heating Co. v. Louisville, 174 Ky. 142, 148, 192 S. W. 4, that the commission, in so fixing, acted "corruptly or fraudulently," or the valuation which it made must have been "so excessive" as to amount to "spoliation." In the case of Louisville & N. R. Co. v. Greene, 244 U. S. 522, 536, 37 S. Ct. 683, 61 L. Ed. 1291, Ann. Cas. 1917E, 97, it is said that it is essential that the commission "proceeded upon an erroneous principle or adopted an improper method of estimating the value." The matter was better put in the case of Chicago, B. & Q. R. R. Co. v. Babcock, 204 U. S. 585, 596, 27 S. Ct. 326, 51 L. Ed. 636, where it was said that it was essential that there was "fraud or a clear adoption of a fundamentally wrong principle."

There is no room to claim that there was any fraud on the part of the commission in fixing such value. It acted in good faith. Plaintiff's case here, therefore, is whether it is clear that, in so doing, it adopted a fundamentally wrong principle. If the fixing of the value of plaintiff's capital stock at the sum complained of was the result of the adoption of such a principle, then the assessment deprived plaintiff (i. e., potentially) of its property without due process of law, in violation of the Fourteenth Amendment, and this court has jurisdiction to grant such relief. The claim that the commission should not have assessed plaintiff's franchise at more than 70 per cent. of the sum of $5,484,048 is also based on the Fourteenth Amendment. Thereby the commission denied it the equal protection of the laws. This was so, because uniformly and systematically, and hence intentionally, all other property in Kentucky subject to ad valorem taxation is assessed by the assessing authorities at no more than that percentage of its fair cash value.

If, however, the first position taken by plaintiff is found to be well taken, it will not be necessary to consider the second, except in determining the amount at which plaintiff's franchise should be assessed. As stated, the commission, in fixing the sum of $7,550,227 as the value of plaintiff's capital stock pursued the capitalization of net income method. It ascertained plaintiff's average yearly net income for the years 1921, 1922, and 1923, and capitalized that average at 7 per cent. This yielded the sum at which it fixed the value of plaintiff's capital stock.

Defendants would have it that such was the only method which the commission was entitled to pursue. This position is based on the decisions of the Kentucky Court of Appeals in the cases of Commonwealth v. Kottmyer, 183 Ky. 163, 208 S. W. 823, and Bosworth v. Kentucky Highlands R. Co., 183 Ky. 749, 210 S. W. 671. In each of those cases the capitalization of net income method was pursued. But this was so because it so happened that this was the only method applicable thereto. The Kottmyer Case involved the assessment of a ferry franchise owned by an individual. The Kentucky Highlands R. R. Co. Case involved the assessment of a franchise of a railroad corporation, which operated 6.46 miles of railroad. It is not unlikely that its entire issue of stock and bonds was held and owned by the Louisville & Nashville Railroad Company. At any rate, there is no indication that they had any market value to which an appeal could be made in fixing the value of the corporation's capital stock. It is true that the court had this to say:

"By sections 4079 and 4080, Kentucky Statutes, the mode of finding and fixing the value of a franchise of a railroad organized under the laws of this commonwealth is pointed out, though not as clearly as it could or should have been. Reading these two sections together, we conceive the fair import to be: The board of valuation should fix the value of the capital stock by capitalizing the net income derived from the business in this state, and from the amount thus fixed shall deduct the assessed value of all the tangible property assessed in this state and the remainder thus found shall be the value of the corporate franchise subject to taxation."

But there was a slip in saying that the statute provided that the value of the capital stock should be fixed by the capitalization of net income. The statute contains no such provision. It simply provides that the board — as it was then; now commission — shall fix such value, without stating anything on the subject as to how it shall fix it. This left it to the board to adopt any reasonable method for fixing such value. It was in this particular only that it could be said there was any want of clearness in the statute. The Court of Appeals in the early case of Hager v. American Surety Co., 121 Ky. 791, 90 S. W. 550, referred to three methods of fixing such value, to wit: Stock and bond; addition of capital and surplus — i. e., book value; and capitalization of net income. It again referred to these three methods in the late case of Chesapeake & Ohio R. Co. v. Commonwealth, 190 Ky. 522, 228 S. W. 15, which followed the two cases in 183 Ky.

There is no indication, in the litigation which has grown out of such assessments, that the board or commission ever availed itself of the book value method. It has adopted either the stock and bond or capitalization of net income methods. In the early cases of Henderson Bridge Co. v. Commonwealth, 99 Ky. 623, 31 S. W. 486, 29 L. R. A. 73, and Commonwealth v. Covington & C. Bridge Co., 114 Ky. 343, 70 S. W. 849, it adopted the stock and bond method. In the railroad assessments, which gave rise to the litigation in this court, subsequently carried to the Supreme Court of the United States, whose opinions are to be found in 244 U. S., it adopted the capitalization of net income method. It is frequently the only method, apart from the book value method, which can be appealed to. In the case of Louisville & N. R. Co. v. Greene, 244 U. S. 522, 540, 37 S. Ct. 683, 61 L. Ed. 1291, Ann. Cas. 1917E, 97, it was said "that there are (at least) two recognized methods, known as the stock and bond plan and capitalization of net income plan."

It is not true, therefore, that the commission, in fixing the value of plaintiff's capital stock was shut up to the capitalization of net income method. Though plaintiff had no outstanding bonds it did have outstanding stock, which had a market value. But, as the method which it did adopt, to wit, the capitalization of net income method, is a well-recognized and approved method, how did it come about that, in adopting that method, the commission proceeded upon a fundamentally wrong principle? It is here that the crux of the question now before us is to be found. It can only have come about that it so did, if the commission had a wrong conception of that method and wrongly applied it to this case. And it must be said that such was the case. What the commission did was to shut its eyes to the probable net income which would accrue to plaintiff in the future. It took the position that all that was necessary to be considered was plaintiff's net income in the past. What that net income was it had the right to capitalize, without any regard to what might be plaintiff's net income in the future.

That this was fundamentally wrong can be easily established. It is...