Great Northern Ry Co v. Weeks 8212 1936

Decision Date03 February 1936
Docket NumberNo. 178,178
PartiesGREAT NORTHERN RY. CO. v. WEEKS, State Tax Commissioner, et al. Argued Jan. 6—7, 1936
CourtU.S. Supreme Court

[Syllabus from pages 135-137 intentionally omitted] Messrs. F. G. Dorety, of St. Paul, Minn., and C. J. Murphy, of Grand Forks, N.D., for petitioner.

Mr. Harold D. Shaft, of Grand Forks, N.D., for respondents.

Mr. Justice BUTLER delivered the opinion of the Court.

This suit was brought in the federal District Court for North Dakota by petitioner against the state tax commissioner and the auditors and treasurers of thirty counties to enjoin collection of about 40 per cent. of 1933 taxes laid upon its railroad properties in each county. The assessed value of all petitioner's railroad property in the state is $78,832,888. The total of the tax is $1,508,352.34, of which petitioner has paid about 60 per cent. The suit is grounded upon the claim that the tax § are based on a valuation that includes properties located outside the state and in other respects are so excessive and arbitrary as to be repugnant to the due process and equal protection clauses of the Fourteenth Amendment to, and the commerce clause (article 1, § 8, cl. 3), of, the Federal Constitution. Issues were joined, the case was tried, the court made findings of fact, concluded that petitioner was not entitled to relief, and dismissed the bill. The Circuit Court of Appeals affirmed. 77 F.(2d) 405.

The state law requires that all property subject to taxation be assessed at its true and full value in money. Comp. Laws 1913, § 2122, as amended by Laws 1925, c. 206, § 2. The state board of equalization is required in August of each year to assess at its actual value every railroad within the state and it is governed by the rules that apply to township assessors in valuing other property. Section 2242. 1925 Supp. § 2141a3. The average values per mile of main and branch lines, respectively, constitute the bases for assignment of value to counties. Section 2243. And on like mileage bases the value given to each county is distributed to its cities, towns, townships, and districts through which the railroad extends. Section 2244. The railroad property is taxed, as is personal property, by applying the local rate to 50 per cent. of the assessed value.1 Petitioner did not allege that other property was not assessed at its full and true value as required by state law and does not seek relief on the ground of discrimination.

Petitioner claims that the board made the assessment by attributing to North Dakota too great a proportion of a grossly excessive system valuation. More specifically its contentions are: (1) That, by reason of the methods employed for the ascertainment of the percentage of system value to be assigned to North Dakota, the assessment includes the value of property located in other states to the extent of approximately $20,000,000, and (2) that, even if the factors used to make the allocation be not condemned, the assessment must nevertheless be held arbitrary and excessive to the extent of $15,000,000.

The full and true value of the property is the amount that the owner would be entitled to receive as just compensation upon a taking of that property by the state or the United States in the exertion of the power of eminent domain. That value is the equivalent of the property, in money paid at the time of the taking. Olson v. United States, 292 U.S. 246, 254, 54 S.Ct. 704, 78 L.Ed. 1236. The principles governing the ascertainment of value for the purposes of taxation are the same as those that control in condemnation cases, confiscation cases, and generally in controversies involving the ascertainment of just compensation. West v. Chesapeake & P. Tel. Co., 295 U.S. 662, 671, 55 S.Ct. 894, 79 L.Ed. 1640.

In determining the amount of the assessment, the board was not bound by any formula, rule, or method, but for guidance to right judgment it was free to consider all pertinent facts, estimates, and forecasts and to give to them such weight as reasonably they might be deemed to have. Courts decline to disturb assessments for taxation unless shown clearly to transgress reasonable limits. Overvaluation is not of itself sufficient to warrant injunction against any part of the taxes based on the challenged assessment; mere error of judgment is not enough; 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. The assessment is presumed to have been rightly made on the basis of actual value. Its validity must be tested upon consideration of the facts established by the evidence and of those of which judicial notice may be taken.

There is controversy between the parties as to whether the evidence discloses how the assessment was made. Petitioner maintains that the record shows that the board found system value and apportioned it to North Dakota and also shows the methods by which these determinations were made. The District Court refused to find, and the Circuit Court of Appeals held that petitioner failed to prove, that the board made the valuation by methods which petitioner claims that it employed.

1. As to methods employed by the board. Respondents called as a witness Mr. Lyman A. Baker who had been with the North Dakota tax commissioner for nineteen years and during the last thirteen years, ending January 1, 1933, had been deputy commissioner in charge of the valuation of railroads and other utilities. He was engaged in this litigation in behalf of respondents and spent much time in making computations and in the preparation of exhibits that were put in evidence by respondents. In substance he testified:

The first step in the valuation of railroad property within a state is to determine the value of the entire system. There are two cases of evidence ordinarily considered: The average market price of stock and bonds, and the past earnings over a period of years. As the stock and bond prices reflect value of the entire railroad, it is necessary to eliminate the value of nonoperating property. The method requires a definite period over which to average price quotations and that must of necessity be somewhat arbitrarily fixed. It assumes that the average price reflects value, but rarely is controlling interest bought or sold on the exchange. Where control is sought, prices advance sharply. The method also assumes that purchasers act on accurate knowledge of conditions; it ignores the influence of pure speculation. In applying the method, taxing boards, economists, and railroad men have always adopted five-year periods immediately pre- ceding the assessment in order to give stability to the tax value. The depression resulted in a collapse in the stock and bond market. Forced selling brought prices down to a figure that did not fairly represent the value of the property. 'Despite all these objections to the stock and bond method of valuation, I still consider it as one of the best indices of value obtainable.'

He further testified: Capitalization of net railroad operating income is generally recognized as an important element in estimating the value of railroad operating property. The average net income, usually for five years, is capitalized at a reasonable rate of return. The method assumes the amount so ascertained to be the value of the property. The income of a single year is seldom, if ever, used. As 1931 and 1932 were the worst years in railroad history since the panic of 1893, the use of the three-year period ending in 1932 has but little justification. The five-year period has been given the same weight by the state board for a good many years. It is generally considered that the rate of return that a company is allowed to earn under state and federal law is a fair rate to use. A rate of 6 per cent. is justifiable under present conditions. Economic return from farm property, being about 65 per cent. of all that is taxable in North Dakota, decreased about 75 per cent. from the 19241928 average. Assessments on values indicated by capitalization of average net income for the five years ending in 1932 would result in giving preferential treatment to railroads as compared with other properties. Where properties have been operated at a loss over a period of years, there are no earnings to capitalize. Yet they have present and prospective value which would be reflected by use of the stock and bond valuation method. The criticisms made of these methods are not sufficient to render them valueless. 'On the contrary the two methods are universally approved as the two best evidences of the value of a railroad which are available.'

The answer alleges: In 1932 the tax commissioner made and presented to the board computations based upon a determination of system value by the use of a composite of the average stock and bond values of the petitioner for a period of five years preceding the assessment and the average value ascertained by capitalizing net earnings for the same period; by apportioning the system value to North Dakota upon the basis of the average of five factors: (1) Miles of all track, (2) physical property, (3) car and locomotive miles, (4) ton and passenger miles, (5) gross earnings, there was produced a value of $76,115,715; another apportionment on the basis of the three use factors, viz., car and locmotive miles, ton and passenger miles, and gross earnings, produced $79,417,825, and a third apportionment by the average of track miles and the three use factors produced $80,671,790. The answer further alleged that 'upon this evidence and upon all other evidence and matters of common knowledge before it the Board did in the year 1932 fix the valuation of plaintiff's property in North Dakota at $78,850,024'; that in 1933 the...

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