Louisville & N.R. Co. v. Commonwealth

• Decision Date: 18 June 1918
• Parties: LOUISVILLE & N. R. CO. v. COMMONWEALTH. [a1]
• Court: Kentucky Court of Appeals

204 S.W. 94

181 Ky. 193

LOUISVILLE & N. R. CO. v. COMMONWEALTH. ^[a1]

Court of Appeals of Kentucky.

June 18, 1918

Appeal from Circuit Court, Franklin County.

Action in the County Court by the Commonwealth of Kentucky, on the relation of Earl C. Huntsman, Revenue Agent, against the Louisville & Nashville Railroad Company. Judgment for plaintiff, and defendant appealed to the circuit court, where judgment was also rendered for plaintiff, and defendant appeals. Reversed, with directions.

Chas H. Moorman and Henry L. Stone, both of Louisville, and Guy H Briggs, of Frankfort, for appellant.

Chas H. Morris, Atty. Gen., John C. Duffy, Sp. Asst. Atty. Gen., Hazelrigg & Hazelrigg, J. P. Hobson & Son, L. W. Morris, and W. C. Marshall, Co. Atty., all of Frankfort, for the Commonwealth.

THOMAS J.

This is a proceeding instituted in the Franklin county court by the commonwealth of Kentucky through Earl C. Huntsman, revenue agent, as relator, seeking to have assessed against the appellant here and defendant below, Louisville & Nashville Railroad Company, what the relator claimed was omitted intangible property for the fiscal years of 1907, 1908, 1909, and 1910. The right to maintain the proceding is claimed by the commonwealth to be given by the provisions of section 4241 of the Kentucky Statutes; the part of which it is claimed furnishes the remedy being:

"It shall be the duty of the sheriff or auditor's agent to cause to be listed for taxation all property omitted, or any portion of property omitted by the assessor, board of supervisors, board of valuation and assessment or railroad commission, for any year or years. The officer proposing to have such property assessed shall file in the clerk's office of the county in which the property may be liable to assessment, a statement containing a description and value of the property proposed to be assessed, and the value of corporate franchise, if any, and the name and place of residence of the owner, his agent or attorney, or person in possession of the property, and the year or years for which the property is proposed to be assessed."

Section 4260 of the statute also provides for this kind of remedy, but in slightly different phraseology. It, so far as pertinent, reads:

"It shall be the duty of the revenue agent, and the sheriff in each county, to cause to be listed for taxation all property omitted by the assessor, board of supervisors, board of valuation and assessment or railroad commission, for any year or years."

It will be observed that each of the sections provides for this character of proceeding to assess omitted property which had been omitted by any of the assessing authorities of the state, one of which is the board of valuation and assessment, whose duty is to assess what in the statute is termed the "franchise" of a corporation, but in reality is nothing more than the intangible property of the corporation. Section 4241 is somewhat more specific in prescribing the powers and duties of the sheriff or revenue agent by whom the proceeding may be instituted, in that it prescribes for the assessment in such proceeding of "any portion of property omitted" by any of the assessing authorities including that of the board of valuation and assessment. This, to our minds, clearly indicates that the Legislature recognized that there might be a portion of a corporate franchise or of its intangible property which might be omitted from assessment by the board of valuation and assessment, and it was such omitted portion that could be reached by the sheriff or revenue agent in this character of proceeding. This view of the meaning of the sections of the statute is strenuously combated by the defendant railroad company, and a number of cases, which, to say the least, seemingly support the position of defendant's learned counsel, are cited and relied upon. However, the question was put to rest in the recent opinion of this court in the case of Commonwealth v. Kentucky Heating Co., 180 Ky. 607, 203 S.W. 538, wherein a former opinion in that case which is reported in 176 Ky. 35, 195 S.W. 459, and in which the position of defendant's counsel was upheld, was modified in so far as the first opinion upheld the position now contended for, and that part of the first opinion was withdrawn. In the modified opinion it is said:

"The failure to report such item or species of property and the value thereof is an omission and not an undervaluation of its property by the corporation, and therefore the item or species of property which the corporation failed or refused to report may be assessed at the suit of a revenue agent, or the sheriff, in the manner provided in the statutes, and so much of the opinion as lays down a contrary rule is now withdrawn."

The modified opinion from which the excerpt is taken was rendered after mature consideration of the question upon a petition for rehearing filed in that case, and it is now the settled law upon the subject.

To enable the board of valuation and assessment to properly value for purposes of taxation the franchise or intangible property of a railroad corporation, it is required to report to the auditor of public accounts. between June 30th and October 1st, each year, certain facts prescribed by sections 4078 and 4079 of the Kentucky statutes, and if the line or lines of the corporation extend beyond the limits of the state, there shall also be included in such report "the length of entire lines operated, owned, leased or controlled in this state, and in each county, incorporated city, town or taxing district, and the entire line operated, controlled, leased or owned elsewhere." It would serve no useful purpose to here set out all of the facts which the two sections referred to require to be reported by the corporation whose duty it is to make the report, and it would be equally valueless to set forth the various complaints made by the original statement and its amendments in this case concerning the items omitted in the reports for the respective years under consideration wherein it is claimed that portions of defendant's franchise were omitted, since on this appeal there are only two such complaints involved.

A demurrer to the statement and to it as amended was overruled by the county court, and appropriate pleadings made the issues. That court upon final hearing increased the franchise assessment against the defendant in the sum of $10,000,000 for each of the years in question. An appeal was prosecuted from that judgment by the defendant to the Franklin circuit court, and upon final hearing in that court judgment was rendered increasing the assessment for the year 1907 to $13,176,640.84, and a corresponding increase for the other years in question in accordance with the facts which the court found relative to those years.

The basis of the judgment appealed from is that in the report for the years involved which the defendant made to the auditor of public accounts is included the mileage of lines both in and out of this state which it leased, and also the lines which it controlled by stock ownership but which were operated by the company in which the defendant held its stock, since the court was of the opinion that neither such leased lines nor such controlled lines should have been reported or taken into account or considered in estimating the proportion of the intangible property of the defendant taxable in Kentucky. This was because the trial court took the view that, although section 4079 required the defendant to report to the auditor leased and controlled lines both in and out of the state, and that in fixing the franchise the board of valuation and assessment should, under the provisions of section 4081, consider such leased or controlled lines, the sections of the statute in reality meant that only owned and operated lines should be reported under the provisions of section 4079, and only such lines should be considered in apportioning the franchise tax to Kentucky under the provisions of section 4081. Because of this position of the trial court it increased the assessment of intangible property of the defendant in Kentucky for the year 1907 from 23.25 per cent. of its entire intangible property to 30.15 per cent. of such entirety, making an increase of $15,074,750.93, 80 per cent. of which the court adjudged to be Kentucky's portion of the omitted intangible property for that year. The other years involved were increased in like manner for the same reason; the amount being dependent upon the facts found with reference to them.

In the report which the defendant made to the auditor, forming the basis of the assessment for the year 1907, there was reported, among other things, under the head of "other expenses," an item of $277,820.92, which the revenue agent insisted was not only improperly reported but falsely reported, in that instead of that item being expenses which would go to decrease the amount of the defendant's franchise for assessment, it in reality was earnings of the company, or, at any rate, assets, since it was shown upon the trial of the case by the deposition of George W. Lamb defendant's comptroller, that that item consisted of amounts set aside for "charges against income and sinking fund charges," and a portion of it as a "reserve for doubtful accounts." The lower court held that that item should not enter into the expense account so as to reduce the net income of the defendant and correspondingly reduce the value of its intangible property, and it capitalized that item and assessed the capitalized sum as a portion of defendant's omitted intangible property. All the other contentions of the commonwealth were disallowed, and the only questions involved on this appeal concern the two items increasing the...