Pennsylvania Rd. Co. v. Porterfield, 68-276

• Decision Date: 31 December 1968
• Docket Number: No. 68-276,68-276
• Citation: 243 N.E.2d 87,16 Ohio St.2d 136
• Parties: , 45 O.O.2d 474 The PENNSYLVANIA RD. CO., Appellant, v. PORTERFIELD, Tax Commr., Appellee.
• Court: Ohio Supreme Court

Page 136

16 Ohio St.2d 136

243 N.E.2d 87, 45 O.O.2d 474

The PENNSYLVANIA RD. CO., Appellant, v. PORTERFIELD, Tax Commr., Appellee.

No. 68-276.

Supreme Court of Ohio.

Dec. 31, 1968.

Syllabus by the Court

1. A determination of the valuation of a railroad for Ohio property tax purposes is unlawful where the method used to determine that valuation does not purport to consider the value of any of the railroad's property except by reference to its cost when acquired at various times over a long period of years, and where such decision gives no consideration to the market value of the debt of and ownership interests in the railroad, and where such decision gives no consideration to the earnings of the railroad.

2. A determination of the valuation of a railroad for Ohio property tax purposes is unlawful where it does not provide for valuing the real property of the railroad at the same percentage of true value at which the real property of others is valued for Ohio property taxation.

Squire, Sanders & Dempsey, John Lansdale, Jr., William H. Lutz, Jr., David A. Nelson, Cleveland, and Morris E. Knopf, Shaker Heights, for appellant.

William B. Saxbe, Atty. Gen., Edgar L. Lindley and W. Robinson Watters, Columbus, for appellee.

TAFT, Chief Justice.

This is an appeal from a decision of the Board of Tax Appeals determining at $153,455,000, the assessed value for Ohio taxation of the Pennsylvania Railroad Company for 1966 (i. e., its assessed value as of December 31, 1965).

In substance and effect, the method used by the Board of Tax Appeals, in reaching that conclusion for the tax year 1966, was to start with the amount of the tax valuation of the railroad for the tax year 1965, with certain adjustments thereto made by the Board of Tax Appeals and which are hereinafter explained. From this starting figure the cost of materials and supplies, included therein, was deducted (apparently upon the assumption they would be used up within the year). The resulting figure was then reduced by 3% (referred to as 'inferiority factor'). To the resulting balance, there was then added 80% of the book cost of additions and betterments made during the year 1965. Then there was deducted from the resulting total, 80% of the book cost of retirements (i. e., property retired from service) during 1965. The remaining amount of $153,455,000 represents the valuation complained of in the instant case.

As mentioned, the starting figure used by the Board of Tax Appeals in determining the 1966 tax valuation for the Pennsylvania Railroad was the amount of its 1965 tax valuation, with certain adjustments. In order to understand what those adjustments were, it is necessary to consider the method used by the Tax Commissioner in determining tax valuations for the Pennsylvania Railroad for years prior to the tax year 1966.

During those years, the Tax Commissioner had used substantially the same method used by the Board of Tax Appeals as described above, with the following variations:

1. His starting figure had been the previous year's tax valuation.

2. Two instead of three per cent had been used for the 'inferiority factor.'

3. Fifty instead of eighty per cent of the book cost of retirements for the previous year had been deducted.

4. The figure reached by following this method had been adjusted by negotiation between the railroad and the Tax Commissioner in each year.

These adjustments over the years since 1948 have resulted in a total of decreases of over $46,000,000 from the assessed valuation that would have resulted if the commissioner followed the method outlined above without such adjustments. The record does not disclose what, if any, relationship these adjustments had to the value of the property of the railroad.

To reach the starting figure that it used, the Board of Tax Appeals adjusted the amount of the tax valuation of the railroad for 1965 by determining what the amount of that tax valuation would have been if, for each tax year after 1954, the Tax Commissioner had used an 'inferiority factor' of 3% instead of 2%, and had deducted 80% instead of 50% of the book cost of retirements.

In a period of rising costs, the method used by the Board of Tax Appeals in determining the assessed value for Ohio taxation of the Pennsylvania Railroad, would probably be favorable to any utility that is a monopoly and enabled by rates, fixed by the Public Utilities Commission, to earn a fair return on the reproduction cost new less depreciation of the property used by it in rendering a public utility service.

The value of the property of such a utility, after a few years, would usually exceed its cost by a substantial amount. See General Telephone Co. v. Pub. Util. Comm. (1963), 174 Ohio St. 575, 191 N.E.2d 341. Also, its earning power would usually justify a much higher valuation for such utility than would the method used by the Board of Tax Appeals. See Adams Express Co. v. Ohio State Auditor (1897), 166 U.S. 185, 17 S.Ct. 604, 41 L.Ed. 965.

However, a railroad today is usually not that kind of a utility. Because of competitive forms of transportation, a railroad usually no longer enjoys a monopoly to any substantial extent, and no provision is made by law for its earning a fair rate of return on the reconstruction cost new less depreciation value of any of its property. See Toledo Edison Co. v. Pub. Util. Comm. (1954), 161 Ohio St. 221, 118 N.E.2d 531; Ohio Coal Assn. v. Pub. Util. Comm. (1955), 164 Ohio St. 108, 128 N.E.2d 39.

The method used by the Board of Tax Appeals is apparently based upon the premise that an 80% of cost, that is substantially reduced over the years by a 3% annual deduction for 'inferiority factor' and an 80% of cost reduction for retirements, can be equated with true value. Except by considering its cost, this method does not purport to even consider the value of any of the railroad's property.

Probably, with respect to a new utility, the method used by the Board of Tax Appeals in valuing the Pennsylvania Railroad for taxation in 1966 could be approved as reasonable. South Central Rural Electric Cooperative v. Evatt (1941), 139 Ohio St. 80, 38 N.E.2d 317. In other words, if a utility buys property during the year 1965 at a certain price, it would usually be reasonable to infer that the value of such property at the end of that year would be close to its cost.

However, the value of property may fluctuate up or down substantially over a period of years. In our opinion, the longer the method of tax valuation used by the Board of Tax Appeals in the instant case is used, the less chance there is that it will produce an amount representing true value.

The method, used by the Board of Tax Appeals in valuing the property of the Pennsylvania Railroad for taxation, does have features (such as taking in property at 80% of cost, and over-all annual depreciation of 3% and retiring property at 80% of cost) which will necessarily result over a period of years in tax valuations substantially below the book value of the railroad's property. However, as stated in paragraph nine of the syllabus in Opdyke v. Security Savings & Loan Co. (1952), 157 Ohio St. 121, 105 N.E.2d 9, 'The book value of an asset at any given time may be more or less than its value * * *.'

Nothing in the statutes providing for the taxation here involved (Chapter 5727 Revised Code) suggests a method of valuation such as that used by the Board of Tax Appeals. Some tax statutes either require or authorize use of book value as the basis for the tax imposed. National Tube Co. v. Peck (1953), 159 Ohio St. 98, 111 N.E.2d 11. R. H. Macy Co. v. Schneider (1964), 176 Ohio St. 94, 197...