Grand Trunk Western R. Co. v. Brown

• Decision Date: 06 April 1940
• Docket Number: 8130,8441.,No. 7596,7596
• Citation: 32 F. Supp. 784
• Parties: GRAND TRUNK WESTERN R. CO. et al. v. BROWN, Auditor General of Michigan (three cases).
• Court: U.S. District Court — Western District of Michigan

32 F. Supp. 784

GRAND TRUNK WESTERN R. CO. et al. v. BROWN, Auditor General of Michigan (three cases).

Nos. 7596, 8130, 8441.

District Court, E. D. Michigan, S. D.

April 6, 1940.

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Victor Spike, of Detroit, Mich., and R. C. Beckett, of Chicago, Ill., for plaintiffs.

John S. McDonald, of Grand Rapids, Mich., and Howard H. Campbell, of Detroit, Mich., for defendant.

PICARD, District Judge.

This opinion covers the above entitled cases which were, by agreement of the parties and order of the court, consolidated for trial and heard as one. They involved the value for tax assessment purposes of plaintiffs' railroads as placed by the Michigan State Tax Commission.¹ Plaintiffs herein seek injunctive relief against Vernon J. Brown, Auditor General of Michigan, restraining him from collecting any taxes in excess of an assessment base of $14,000,000 voluntarily paid by plaintiffs.

The assessments questioned are

                   1935         1936         1937
                $20,400,000  $21,200,000  $20,350,000
                

Plaintiffs allege that assessments as made are illegal for the following reasons:

First, they violate the due process clause of the Fourteenth amendment to the Constitution of the United States on the theory that valuation by said Tax Commission in each year is so greatly in excess of any reasonable valuation that it could not have been arrived at by the use of reasonable methods and honest judgment;

Second, that said assessments were arrived at by methods fundamentally erroneous or by intentional fraud;

Third, that the assessments violate the equal protection clause of the Fourteenth Amendment to the Federal Constitution in that said Tax Commission assessed plaintiffs' railroads at more than their actual true cash value and failed and refused to equalize the same in comparison with other railroads generally throughout the State of Michigan, resulting in fraudulent discrimination;

Fourth, that said assessments were violative of the commerce clause of the Federal Constitution, art. 1, § 8, cl. 3, and since said plaintiffs are public utilities engaged in interstate commerce, said assessment of taxes constitute a burden on interstate commerce.

Four Issues Involved

As the case developed there were substantially four issues to be either agreed upon by the parties or decided by this court, three of which included mixed questions of law and fact:

First, what was the percentage of assessed valuation to true cash value used by the Tax Commission in relation to other property of the State in general;

Second, using the unit method, what percentage for each year should be applied in measuring the plaintiffs' system value within the State of Michigan;

Third, in the event this court finds that the assessments as made violate the due process, equal protection or commerce clauses of the Federal Constitution, amounting to confiscation of plaintiffs' properties, can and should this court interfere, unless plaintiffs have by their evidence proven a definite plan of fraud or discrimination; and

Fourth, what methods and factors were considered by the Tax Commission; or do results indicate that whatever methods and factors were used in arriving at the assessments, they must have been fundamentally erroneous?

As to First Question

This court was called upon to determine first the percentage of assessed valuation to true cash value of property in general throughout the State of Michigan. A good deal of time was consumed and the parties were hopelessly at variance.

Plaintiffs claimed that while their railroads were assessed at more than their true cash value, other property in Michigan was assessed on the basis of

                1935 at     1936 at     1937 at
                68.88%      67.97%      63.02%
                

This was vigorously denied by defendant, who maintained that other property throughout Michigan was assessed on a basis varying from 86.53 percent in 1937 to 92.25 percent in 1936.

It is admitted that Michigan statutes require that all property in the state be assessed at its true cash value and much evidence was introduced by both parties to establish their respective claims. It appeared to this court, however, that the checking tests made by both the railroads and the Tax Commission, to prove their respective contentions by citing examples of actual exchange of properties within the several counties of the state during those years, were extremely fallible; that they were either lacking in quality or in quantity or directed towards ultimate presentation of evidence in a court of law to substantiate their respective positions. As a consequence, each party apparently put forth its best data. In the final analysis the so-called actual instances of real estate transfers were not of great aid to us except to emphasize the existence of an objective to which the Tax Commission might well direct its attention. I refer to the inequities between assessed value of property within urban centers where city assessors of Michigan are making a valiant attempt to live up to the letter and spirit of the law and certain other types or classes of properties within this state. The undisputed evidence proved that while the city property owner pays on an assessed valuation equal to 92 to 95 percent of the cash value of his fee, in other parts of Michigan that ratio runs as low as 40 percent. In the case at bar, we found it necessary to make a determination taking into consideration the weaknesses in the findings of the respective parties and decided that the ratio of the assessed valuation of property generally, throughout the State of Michigan, to the true cash value of that property, was

                In 1935      In 1936      In 1937
                79.08%        80.11%       74.78%
                

These percentages, which we believed fairly and equitably recorded the situation, were accepted without protest by the litigants and we then proceeded to the other issues involved.

As to the Second Question

The allocation factors to be applied in measuring the plaintiffs' system within the State of Michigan were amicably adjusted. It was first agreed that the "unit" method of taxation should be the base—that is, the value of the entire railroad system, whether located in Michigan or elsewhere, should be determined and that then that portion within the state be allocated for assessment. The percentage of the value of the railroads' properties within Michigan's borders, as finally agreed upon, was

                In 1935     In 1936      In 1937
                56.62%       56.63%       56.66%
                

As to the Third Question

We come then to the third question, which is fundamental, and now necessary for this court to determine unless we are prepared to find that some sort of Machiavellian scheme on the part of the Tax Commission to destroy plaintiffs through taxation was perpetrated. In short, what authority has this court to interfere with the quasi judicial findings of a state tax board under any circumstances, short of a definite and fixed plan of fraud against plaintiffs' properties?

And this court, acknowledging all presumptions in favor of the assessment as made, nevertheless believes it still has a right and a duty in connection therewith and accordingly some measure of control over final disposition of plaintiffs' causes of action, provided we find what amounts to "constructive fraud". The authority for this statement is found in the citation advanced as "controlling" by both parties, to-wit, City of Detroit v. Detroit & Canada Tunnel Co., 6 Cir., 92 F.2d 833, 836, first decided by one of our associate judges in this district and confirmed in essence by our own Sixth Circuit Court of Appeals. It was there held: "It is clear that if the assessments made by the taxing authorities were so grossly excessive as to be unreasonable, and were arrived at by the adoption of fundamentally wrong principles, they were not final and a federal court of equity has power to grant relief because taxation based upon such valuations deprives the Company of its property and denies it the equal protection of the law".

This is followed by a long line of decisions (92 F.2d at page 836) which to repeat here would be superfluous. See also Christiansen v. Hilber, 282 Mich. 403, 276 N.W. 495, and cases quoted therein; S. S. Kresge v. City of Detroit, 276 Mich. 565, 268 N.W. 740, 107 A.L.R. 1258.

It therefore is incumbent upon this court to determine whether the assessments were "grossly excessive as to be unreasonable" and whether they were arrived at "by the adoption of fundamentally wrong principles", and if so, to act accordingly.

As to the Fourth Question

This brings us to the fourth and final issue to discuss. Preliminary thereto, however, it is essential to make certain findings upon which we must determine if the assessments were so grossly excessive as to be unreasonable and must they have been arrived at by the use of fundamentally wrong principles?

Findings of Fact

(a) In Re Claims of the State.

It is admitted that the Tax Commission did not divulge the exact method or principles used in arriving at its results. However, it did through its chairman indicate that it has since applied a test based upon the chief contributing factors it did consider, which method it claims to be fair and equitable and within the purview of the Tax Commission's functioning as a taxing authority.

The test is as follows:

(1) It capitalized the plaintiffs' net railway operating income at 6 percent for a period of 10 years.

                  1935 at      1936 at           1937 at
                $44,636,450  $39,443,550  and  $32,994,300
                

(2) It then placed the net stock and bond values for

                  1935 at      1936 at      1937 at
                $51,244,068  $62,093,984  $52,449,521
                

(3) Third, it took the cost of reproduction less depreciation and arbitrarily eliminated therefrom some 500 miles of railroad that carried less than 2,000,000 ton miles of freight annually and arrived at the following result for

                  1935 at      1936 at      1937 at
                $66,460,600  $67,228,017  $68,863,770
                

and

(4) Finally, it then...