In re Chicago Rys. Co.

• Decision Date: 16 June 1949
• Docket Number: No. 9699,9732.,9699
• Citation: 175 F.2d 282
• Parties: In re CHICAGO RYS. CO. et al. PEOPLE OF STATE OF ILLINOIS v. SULLIVAN et al.
• Court: U.S. Court of Appeals — Seventh Circuit

175 F.2d 282 (1949)

In re CHICAGO RYS. CO. et al.

PEOPLE OF STATE OF ILLINOIS v. SULLIVAN et al.

Nos. 9699, 9732.

United States Court of Appeals Seventh Circuit.

June 16, 1949.

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John S. Boyle, State's Attorney, and Melvin F. Wingersky, Assistant State's Attorney, Chicago, Ill. (Gordon B. Nash and Meyer H. Goldstein, Assistant State's Attorneys, Chicago, Ill., of counsel), for appellant.

Thomas Dodd Healy and Harold Stickler, Chicago, Ill. (Thomas G. Bugan, Chicago, Ill., of counsel), for appellees.

Arnold R. Baar, Chicago, Ill., amicus curiae.

Before KERNER and DUFFY, Circuit Judges, and LINDLEY, District Judge.

LINDLEY, District Judge.

In the course of the consolidated proceedings for reorganization of the debtors comprising the corporations owning and operating the surface transportation system in the City of Chicago and commonly known as the Chicago Surface Lines, the State of Illinois filed its timely claim averring that the state tax authorities had duly levied against the tangible personal property of the debtors taxes for 1946 of $2,563,056.47 and that the debtors had paid $1,632,727.29, leaving a balance due of $950,329.20, plus accrued penalties of $76,026.33. The trustee objected, averring that the tax had been based upon assessed valuations totaling $93,205,214.00, consisting of the original assessment by the assessor of $58,619,631, which had then been multiplied by 1.5900, designated by the Revenue Department of Illinois as the proper multiplier under the tax laws of the State, thus increasing the assessment to $93,205,214; that the assessment was so grossly arbitrary and unfair as to be fraudulent, illegal and void and as to deprive the debtors of equal protection under the law as guaranteed by the Fourteenth Amendment of the Constitution; and that when the assessor made the basic assessment of $58,619,631 he failed and neglected to give the Trustee notice of the same as required by Section 104 of the Revenue Act of Illinois, as amended. Ill.Rev.Stat. Chap. 120, § 585. The objections set forth in detail other facts and circumstances under which the trustee asserted that the debtors had paid all taxes legally due and that the claim for the uncollected portion should be denied.

The court, after hearing the evidence, entered an order containing findings and conclusions and, subsequently, adopted additional and supplemental findings and conclusions, finding that the assessment was illegal and void in that it deprived the debtors of property without due process of law; that it was so grossly in excess of the fair cash value of the tangible personal property of the debtors as to be illegal, arbitrary, fraudulent and in violation of the Illinois statutes and Section 1 of Article IX of the State Constitution, Smith-Hurd Stats.; and that the amount previously paid by the debtors was more than was legally due and owing by them for personal property taxes for 1946. From the order denying the claim, the state has perfected this appeal.

Essentially the issues presented to us are, first, whether the bankruptcy court, under the facts and circumstances of the record, was endowed with lawful power to enter the order from which the appeal was taken; and, second, whether, if so, the evidence is sufficient to justify the court's findings, conclusions and order. These two questions, as will be seen from our later discussion, are inextricably interwoven because the answer to each is dependent upon the evidence, for there are, of course, limitations upon the power of the bankruptcy court to interfere with taxes levied by the state and that court is empowered to inquire into the validity of an assessment only if the proof is sufficient to bring the case within well established rules of law.

As required by law, Section 47 et seq. of the Ill.Revenue Act of 1939, Ill.Revised Stats. Chap. 120, § 528 et seq., the debtor filed tangible personal property tax returns for 1946 accompanied by supporting schedules showing full fair cash value of their tangible personal property, before any deduction, of $49,640,138. This return was not only in accord with the statute but also with the direction of the assessor as follows: "Schedules A, B, C and D call for owner's full valuation, and also provide for a column for the Assessor's valuation. This is the equalized assessed value and is to be filled in by the assessor. In returning their property, taxpayers must report full, fair cash values. Taxpayers failing to report a full, fair cash value do not furnish an adequate or uniform basis for determining the equalized amount."

It is undisputed that the assessor actually in the year involved did reduce and for many years previously had reduced the full value of tangible personal property of all other corporate taxpayers, including machinery and equipment, by 30%. In other words, all other corporate taxpayers' returned valuations at full fair cash value were reduced by 30%, yet, upon final assessment, the assessor did not accord to debtors the same treatment but, instead of assessing their property at 70% of its full cash value as he did that of other corporate taxpayers, assessed it at a full 100%. It matters not whether the assessor was justified, under the constitution and statutes of Illinois, in allowing to any corporate taxpayer such a deduction or debasement, for, as the Supreme Court of Illinois in People's Gas Light & Coke Co. v. Stuckart, 286 Ill. 164, 121 N.E. 629, 632, said: "Where assessors have disregarded the injunction of the law and made an assessment of property far below its real cash value, their misconduct must also follow the principle of uniformity, and their assessments of all persons must be at the same proportional value." This, as the court said, is true because "The great central and dominant idea of the Illinois Constitution is uniformity of taxation."

Again the same court said, in People v. Commonwealth Edison Co., 376 Ill. 70, 32 N.E.2d 902, 905: "Clearly, such a method of valuation, as compared with the method used as to other like property, violated the constitutional and statutory requirements as to uniformity. Section 24 of the Revenue Act, Ill.Rev.Stat. 1931, chap. 120, par. 24, as in force at the time this assessment was made, requires that the assessor, in valuing property of corporations, shall be governed by the same rule of uniformity that he adopts as to values in assessing other personal property. * * *" It is apparent, therefore, that there can be no legal justification for this discrimination, this inequality, arising from assessing plaintiff's property at its full value when that of other corporate taxpayers was assessed at 70% thereof.

Not only did the assessor thus discriminate against the debtors by failing to extend to them the benefit of the same adjustment allowed other corporate taxpayers, but he also added to the full fair cash value three other items aggregating $8,979,493. The first of these was an arbitrary addition of 5% and 10% to the original purchase price of machinery, material and equipment going into the capital account of debtors purely as an arbitrary addition made in pursuance of an ordinance of the City of Chicago of 1907 which had ceased to have any relevance or effect long prior to the making of the present assessment. That ordinance, originally adopted with the end in view of enabling the city to purchase the assets of the debtor corporations, had provided that, in making such a sale, this arbitrary addition to actual cost might be included in the purchase price, in view of the fact, apparently, that the expense had been incurred by the debtor in procuring the property. Such expense of course, under proper methods of accounting, is purely one of doing business. We are supplied with no authority that any justification exists in the law for the inclusion, years later, of such an item in the assessment of tangible personal property, which, under the constitution and laws of the state of Illinois, is to be assessed at its full fair cash value.

To the returned fair cash value, the assessor added also a sum for "foundation for paving" in the amount of $2,041,764, yet the record contains no justification whatever for the inclusion of this as tangible personal property of the debtor subject to taxation. Indeed, in the case of People v. Chicago Railways Co., 369 Ill. 128, 15 N.E.2d 705, 707, the court held that pavement supplied by the company under the laws of Illinois was not taxable, saying: "Although the companies pay taxes on the component material while in their possession prior to being incorporated into the paving strips, such material does not retain the character of taxable tangibles when laid in the street. It then becomes an integral part of the pavement and belongs to the city. Upon the termination of the contract, by exiration or any other means, the companies would have no right to remove the paving strips." What is true of pavement, as property, of course, must be equally true of its foundation, and if, as the Illinois Supreme Court has said, the company has no title to or right to remove the paving it certainly has no title to and no right to remove the underlying foundation, for to do so would destroy the pavement itself. In other words, pavement includes not only the surface but also the foundation for the surface.

Included in the more than eight million dollars added by the assessor was a decrease in the depreciation allowance of 1¼ per cent. The assessor deducted this of his own accord without any evidence; he made no inspection, examined no property, and had the benefit of no check-up of any character upon the depreciated property. He apparently merely concluded in his own mind that the depreciation taken was too large and, arbitrarily taking a figure out of the clear sky, reduced it. It was, as the Supreme Court of Illinois said in People v. Commonwealth Edison Co., supra, "arbitrary guesswork, lacking in...