Florida East Coast Ry. Co. v. Green, F-380

• Decision Date: 02 September 1965
• Docket Number: No. F-380,F-380
• Citation: 178 So.2d 355
• Parties: FLORIDA EAST COAST RAILWAY COMPANY, a corporation, Appellant, v. Ray E. GREEN, Comptroller of the State of Florida, Richard W. Ervin, Attorney General of the State of Florida, and J. Edwin Larson, Treasurer of the State of Florida, as and constituting the Railroad Assessment Board of the State of Florida, and Ray E. Green, as Comptroller of the State of Florida, Appellee.
• Court: Florida District Court of Appeals

Page 355

178 So.2d 355

FLORIDA EAST COAST RAILWAY COMPANY, a corporation, Appellant, v. Ray E. GREEN, Comptroller of the State of Florida, Richard W. Ervin, Attorney General of the State of Florida, and J. Edwin Larson, Treasurer of the State of Florida, as and constituting the Railroad Assessment Board of the State of Florida, and Ray E. Green, as Comptroller of the State of Florida, Appellee.

No. F-380.

District Court of Appeal of Florida, First District.

Sept. 2, 1965.

Rehearing Denied Oct. 8, 1965.

J. Lewis Hall, Tallahassee, for appellant .

Earl Faircloth, Atty. Gen., and Joseph C. Jacobs, First Asst. Atty. Gen., for appellee.

CARROLL, DONALD K., Judge.

The plaintiff in a suit to declare illegal the assessment of its operating properties in Florida by the State Railroad Assessment Board has appealed from a final decree entered by the Circuit Court for Leon County, dismissing the plaintiff's second amended complaint and its supplemental complaint.

The propriety of such dismissal of the said complaints is the issue on this appeal.

By its second amended complaint the plaintiff seeks relief from an alleged illegal assessment for taxation for the year 1961 of its railroad operating properties. The said Board placed a value of $50,735,661.00 upon those properties, which, the plaintiff avers, had on the critical date (January 1, 1961) a full cash value of only $20,609,959. The grounds for relief are two-fold: (a) over-valuation and (b) discrimination against the plaintiff as compared to the assessment of other major railroads operating in Florida.

In its supplemental complaint the plaintiff seeks the same relief on the same grounds with reference to the Board's valuation of the plaintiff's said properties for the year 1962 at $50,730,387, the plaintiff alleging that on the critical date (January 1, 1962) its said properties had a full cash value of only $15,599,481.

The plaintiff filed its original complaint in the said Circuit Court on August 28, 1961, to which complaint the defendants timely filed a motion to dismiss. The court entered an order denying the said motion, and the defendants took an interlocutory appeal therefrom to our court. In that appeal we entered our opinion and judgment affirming the said order, as reported in Green v. Florida East Coast Railway Co., Fla., 141 So.2d 326 (1962). In our said opinion we took care to emphasize the fact that we were therein ruling upon 'allegata' and not 'probata' and that we were not passing upon the merits of the assessments involved, saying:

'It should be clearly understood that neither the Circuit Court nor this court in sustaining the plaintiff's complaint is ruling on the merits or passing upon the validity of the formula utilized by the Board in its valuation of the plaintiff's property.' (141 So.2d at page 327.)

In the present appeal, of course, unlike the situation in the earlier interlocutory appeal, we must pass upon the 'probata' and the merits of the appeal.

After the entry of our judgment in the interlocutory appeal and the remand of the cause to the Circuit Court, the plaintiff filed therein an amended complaint, which the said court dismissed on the motion of the defendants. In April, 1963, the plaintiff filed its second amended complaint and later its supplemental complaint, to which complaints the defendants filed their answers. The allegations in the said two complaints and the answers thereto thus framed the issues to be tried by the Circuit Court.

Proofs before the Circuit Court consisted of 66 interrogatories, with the answers thereto, voluminous documentary evidence, and extensive testimony taken before the court.

Based upon the above pleadings, the interrogatories with answers thereto, and the testimony and other evidence, the Circuit Court on March 27, 1964, entered the final decree appealed from herein, dismissing the said second amended complaint and the supplemental complaint at the plaintiff's cost.

If we were to detail in this opinion the pleadings, the interrogatories and answers thereto, the testimony, and the evidentiary documents before the Circuit Court, as reflected in the five volumes of the record-on-appeal, this opinion would likely consume most of the pages of a volume of the Southern Reporter, and such a massive opinion would serve no useful purpose. Consequently, we shall devote our opinion mainly to what we consider to be the heart of this appeal.

The pleadings and evidence which were before the Circuit Court disclose that the defendants assessed the plaintiff's railroad properties for tax purposes by first applying a preliminary formula in which equal weight is given to each of the following three factors: (1) the cost of reproduction less 20 percent for obsolescence; (2) the five-year average of the stock and debt of the railroad; and (3) the five-year average of the net operating income of the railroad capitalized at six percent.

Under the assessment procedure utilized by the defendants, the members of the Board, the value reached by the use of the foregoing formula is then subjected to what is called a 'judgment factor,' which consists of any adjustment deemed by the Board to be proper in the light of the conditions peculiar to the particular railroad being assessed.

For 1961 the defendants applied the said formula to the plaintiff's properties and reached a formula value of $65,366,000, reduced this value by the 'judgment factor' in the amount of $14,630,339 and arrived at the assessed value of $50,735,661. Similarly, for 1962 the defendants reached a formula value of $59,124,000, reduced this value by the 'judgment factor' in the amount of $8,393,613, and arrived at the assessed value of $50,730,387.

The main force of the plaintiff-appellant's argument in this appeal seems to be directed against the defendants' consideration of the first element in the preliminary formula above described--the cost of reproduction less 20 percent for obsolescence.

The 'cost of reproduction' referred to in this first element of the preliminary formula is the Interstate Commerce Commission's annual estimate of the cost of reproduction of each railroad, which includes an allowance for depreciation so as to produce an annual estimate of the value of the railroad in its actual existing condition, based upon the current cost of reproduction reduced by the actual physical depreciation which the railroad properties have sustained. This cost of reproduction is then reduced by the Board by 20 percent for the purpose of making an allowance for the obsolescence of railroads as a means of transportation and the obsolescence of the property employed by reason of technological advances.

Briefly stated, the principal objection interposed by the plaintiff to the use of reproduction cost in evaluating its properties, is that the evidence shows that it had made a large and unnecessary investment that represents a very substantial part of the reproduction cost; and that the plaintiff had lost a considerable portion of its revenue because of the Cuban crisis.

At a hearing before the chancellor the plaintiff produced three expert witnesses who testified that the value of the plaintiff's operating properties on the critical dates (January 1, 1961, and January 1, 1962) was much lower than the assessed values reached by the defendants. The highest valuation of such witnesses for 1961 was $30,577,000, and the highest for 1962 was $24,500,000. Each of these three witnesses testified, however, that he gave no consideration to the cost of reproduction as an element of value, but considered only two basic factors: the capitalization of earnings and the market value of stocks and debts. The plaintiff also produced at the hearing evidence of the cost and the present lack of usefulness of the double track over much of its lines and the cost and obsolescence of shops, water stations, and other facilities.

Therefore, the first question presented for our determination in this appeal is whether in his final decree the chancellor correctly held that the defendants lawfully gave substantial consideration to the cost of reproduction, reduced by depreciation and obsolescence, in evaluating the plaintiff's railroad properties.

Highly respected judicial authority appears to support the inclusion of the cost of reproduction as one of the factors properly to be considered in evaluating railroad properties for taxation purposes. In addition, according to an uncontradicted exhibit introduced in evidence by the defendants, the taxing authorities of 31 of our sister states give some consideration to the cost of reproduction, 'book value,' or 'initial cost,' although they vary in the weight which they feel should be given to such a factor.

The leading case in the nation on the subject of the propriety of considering reproduction cost in evaluating railroad property appears to be Chicago and N. W. Railway Co. v. Department of Revenue, 6 Ill.2d 278, 128 N.E.2d 722 (1955), cert. den. 351 U.S. 950, 76 S.Ct. 844, 100 L.Ed. 1474, reh. den. 352 U.S. 859, 77 S.Ct. 22, 1 L.Ed.2d 69, in which the Supreme Court of Illinois was confronted with a question very similar, if not identical, to that before us in the present appeal.

In the just-cited case the Illinois Department of Revenue, in seeking to ascertain the full cash value of the railroad in question, first took the average of the railroad's net earnings for the preceding five-year period and then capitalized this average amount at six percent; determined the market value of the railroad's outstanding bonds and other indebtedness, and of its shares of stock; and determined the reproduction cost, less depreciation, of the railroad property as computed by the Interstate Commerce Commission. In reaching its assessment valuation the department averaged these three factors and then reduced this average figure by taking into consideration adverse trends, worsened business conditions, higher wages, competition,...