Louisville & N.R. Co. v. Bosworth

• Decision Date: 31 August 1915
• Docket Number: 768.
• Citation: Louisville & N.R. Co. v. Bosworth, 230 F. 191 (E.D. Ky. 1915)
• Parties: LOUISVILLE & N.R. CO. v. BOSWORTH et al.
• Court: U.S. District Court — Eastern District of Kentucky

230 F. 191

LOUISVILLE & N.R. CO. v. BOSWORTH et al.

No. 768.

United States District Court, E.D. Kentucky.

August 31, 1915

[Copyrighted Material Omitted]

Henry L. Stone, Helm Bruce, Ed. S. Jouett, Wm. A. Colston and Robt. E. Fleming, all of Louisville, Ky., for plaintiff.

James Garnett, Atty. Gen., M. M. Logan, First Asst. Atty. Gen., C H. Morris, Second Asst. Atty. Gen., O. S. Hogan, Third Asst Atty. Gen., and John L. Rich, of Covington, Ky., for defendants.

COCHRAN District Judge.

This suit is before me for final decree. The plaintiff seeks thereby an injunction against the enforcement of the assessment of its franchise in this state for the year 1913. The amount of the assessment is $45,658,630. When it was brought another suit was pending in which plaintiff sought an injunction against the enforcement of the assessment for the year 1912, which amounted, substantially to the same sum, to wit, $45,428,074, and I had sustained a motion therein for a preliminary injunction on condition that the taxes on $22,899,300 thereof be first paid, which condition was complied with. In that connection I delivered an opinion reported in 209 F. 380. That suit is also before me for final decree and is disposed of by a separate opinion. Before bringing this suit plaintiff paid the taxes for the year 1913 on that sum, which left the assessment for enforcement only as to the balance of the $45,658,630. A preliminary injunction was granted on filing the bill.

The details of the assessment, showing the manner in which the board arrived at $45,658,630 as the value of the franchise, are these: The board first found the fair cash value of plaintiff's capital stock, hereafter termed its unit, to be $262,252,566. This valuation it arrived at by capitalizing at 6 per cent. what it took to be plaintiff's net income from operations on its own account for the year ending June 30, 1912, as of which date the assessment speaks, less what it took to be its net income from certain property which it took to be nontaxable. Plaintiff's reports to the Kentucky Railroad Commission and to the Interstate Commerce Commission as of that date state plaintiff's net income for that year to have been $18,052,905.12. This included the net income from the operation by plaintiff of three railroads, two in and one out of Kentucky, on account of the owners, which amounted to $1,439,604. The board deducted this sum from the total, leaving a balance of $16,613,301.12 of net income from operations on its own account. It then deducted from this balance the sum of $878,147 on account of its net income from such nontaxable property. This left a balance of $15,735,154, which capitalized at 6 per cent. gave the sum of $262,252,566, at which it valued the unit. The nontaxable property, the income from which was thus deducted, consisted of stocks in other corporations which owned property in this state and which had paid the taxes thereon. The deduction was based on sections 4085 and 4086, Kentucky Statutes, and the construction thereof by the Court of Appeals in the cases of Com. v. Walsh's Trustee, 133 Ky. 103, 117 S.W. 398, and Com. v. Fidelity Trust Co., 147 Ky. 77, 143 S.W. 1037. It then apportioned $92,181,766 of this sum to Kentucky. The sum so apportioned was 35.15 per cent. thereof. The percentage which it took was the percentage which the mileage operated by plaintiff in Kentucky on its own account was of the entire mileage so operatedby it. The entire mileage so operated by it was 4,478.61, of which 1,574.41 was in Kentucky. It then added to the sum so apportioned $2,468,612, the excess in the value which it took that the portion of the unit in Kentucky was over such mileage proportion of the value thereof. It found this excess in value to be in the intangible part of the portion of the unit in Kentucky, and that in this way: The value of the tangible part it took to be $177,038,113, and that of the intangible $85,214,453. The proportion of the gross income derived from Kentucky of the entire gross income it took to be 38 per cent., or 2.85 per cent. in excess of such mileage proportion. It took it that this showed that the value of the portion of the intangible part of the unit in Kentucky was 2.85 per cent. of the value of such part, or the sum of $2,468,612 in excess of such mileage proportion thereof. Adding this sum to such mileage proportion of the value of the unit, to wit, $92,181,766, made the value of the portion of the unit in Kentucky $94,650,388. It then reduced this sum to that of $94,500,000 as the value. This reduction is not to be accounted for, except on the ground that it wanted to place the value of such portion in round numbers. This lessened the addition to such mileage proportion of the value of the unit on account of the excess in value of the portion of the intangible part of the unit in Kentucky over such mileage proportion thereof from the sum of $2,468,612 to $2,318,244, which latter sum was the difference between $94,500,000 and $92,181,766. But the board had no sooner made this reduction than it made a further reduction from this sum in round numbers to another sum, not in round numbers, to wit $75,139,402, as the value of the portion of the unit in Kentucky, and there it stayed. On the assumption that this sum was reached by reducing from $94,500,000, there is no accounting for how it reached it, rather than any other sum. The only account of it which it gave was that it so did 'to be conservative, and out of an abundance of caution, to the end that no injustice may be done respondent in arriving at the value of the corporate franchise of respondent in this state. ' And it noted the fact that this sum was 'less than 80 per cent. of that which it believes to be the fair cash value of Kentucky's proportion of the entire capital stock of respondent. ' It then deducted from this last sum the assessed value of the tangible property in Kentucky, to wit, $29,500,772, which left the sum of $45,658,630 as the value of the franchise. Such is what the board did on the face of things.

In making the assessment for 1912 what the board did on the face of things was this: In the preliminary assessment it valued the portion of plaintiff's unit in Kentucky at $81,670,377, the manner in which it obtained such value not appearing, and then deducted therefrom the assessed value of the tangible property, to wit, $29,170,377. This left $52,500,000, which it fixed as the value of the franchise. In the final assessment it valued such portion at $74,598,451, the manner in which it obtained such value also not appearing, and then deducted therefrom such assessed value, to wit, $29,170,377. This left $45,428,074, which it fixed as the value of franchise. In my opinion in the case involving that assessment I took note (209 F. 460) of the fact that it was possible, if not probable, that the board in making the preliminary assessment had obtained the value of the portion of the unit in Kentucky which it fixed at $81,670,377, not by first valuing the unit and then apportioning a part of such value to Kentucky, but by determining, in the first instance, that the franchise should be $52,500,000 and then adding the assessed value of the tangible thereto, and that in making the final assessment it merely made a reduction from the valuation so obtained to $74,598,451, at which it fixed it therein. In the case in hand one cannot avoid the suspicion, at least, that what the board really did was practically to adhere to the assessment for 1912 so reached-- the change being only from $45,428,074, to $45,658,630-- then to add the assessed value of the tangible property for 1913 thereto, which gave $75,139,402 as the value of the portion of the unit in Kentucky, deducting from which the assessed value of the tangible property gave the value of the franchise already fixed, and then to make the other figures to show that the sum at which it placed the value of the portion of the unit in Kentucky was less than 80 per cent. of its fair cash value. What lends color to this is the difficulty of determining how otherwise $75,139,402 was arrived at as the value of such portion. This tends to show that the assessment for 1913, as well as for 1912, was predetermined, and not the outcome of pursuing the method prescribed by the statute.

The particulars in which plaintiff attacks the action of the board and the grounds thereof come next for statement. But before presenting them a preliminary contention of defendants should be noted and disposed of. It is that the action of the board is final and conclusive unless fraud on its part has been shown. It is contended that such is the case, even though it appears that the board did not follow the method prescribed by the statute. That such is their contention I quote from their brief. They say:

'This board is the judge of both the law and the facts, and its judgment as to the method followed is conclusive, unless fraud be proven tending to show that the board was actuated by fraudulent motives. These proceedings are not appeals from the judgments of the board of valuation and assessment. This court is not seeking for errors committed by this board. This court does not have the power to say whether the board followed an erroneous method in making the assessments, except as an incident to one thing, and that one thing is fraud. If there has been evidence showing fraudulent conduct on the part of the board, the court must consider other evidence touching on values and methods; but this court must consider other evidence such things until after it is first shown that the assessment is void on account of fraud. If such state of facts should be shown, it would then be necessary for the court to take up the question of values, and in order to correctly

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