which are attributable to its enjoyment of the special franchise. The method is thus applied: 1. Ascertain the gross earnings. 2. Deduct the operating expenses. 3. Deduct a fair and reasonable return on that The resulting balance gives the earnings attributable to the special franchise. If this balance be capitalized at a fair rate, we have the value of the special franchise. People ex rel. Jamaica Water Supply Co. v. State Board of Tax Commissioners, 196 N. Y. 39; People ex rel. Manhattan Ry. Co. v. Woodbury, 203 N. Y. 231. Deduction from gross earnings not allowed.-Debts repudiated unless it be shown that the debtor was not liable. People ex rel. Queens Co. Water Co. v. State Board of Tax Commissioners, 67 Misc. 490; aff'd 143 App. Div. 618. Eighteen hundred dollars for farm expenses claimed by a water company. People ex rel. Queens Co. Water Co. v. State Board of Tax Comm'rs, 67 Misc. 490; aff'd 143 App. Div. 618; but see to the contrary People ex rel. Queens Co. Water Co. v. Tax Comm'rs, 157 App. Div. 165. Deduction from gross earnings allowed.-Obsolescence.An allowance for future obsolescence or inadequacy of equipment as distinguished from depreciation from ordinary wear is proper where it is capable of reasonable ascertainment. People ex rel. B. H. R. R. Co. v. State Board of Tax Comm❜rs, 69 Misc. 646; aff'd 146 App. Div. 372; People ex rel Queens Co. Water Co. v. State Board of Tax Comm'rs, 67 Misc. 490; aff'd 143 App. Div. 618; People ex rel. Third Ave. R. R. Co. v. State Board of Tax Comm'rs, 136 App. Div. 155; aff'd 198 N. Y. 608. Depreciation.- In estimating net earnings, a reasonable amount should be deducted from the gross earnings to make good depreciation of depreciable property. People ex rel. Queens Co. Water Co. v. State Board of Tax Commissioners, 67 Misc. 490; aff'd 143 App. Div. 618; People ex rel. Third Ave. R. R. Co. v. Tax Comm'rs, 136 App. Div. 155. Uncollectible accounts.-A reasonable allowance for uncollectible accounts is proper. People ex rel. Queens Co. Water Co. v. State Board of Tax Comm'rs, 67 Misc. 490; aff'd 143 App. Div. 618. Franchise tax.-The amount of all taxes including any franchise tax actually paid is properly to be deducted from the earnings in determining the net earnings. People ex rel. Jamaica Water Supply Co. v. State Board, 197 N. Y. 33; modifying 196 N. Y. 39; People ex rel. Third Ave. R. R. Co. v. State Board of Tax Comm'rs, 136 App. Div. 155; aff'd 198 N. Y. 608. Reconstruction.-To provide against unforeseen contingencies that may arise in the prosecution of the business of a corporation, which may result in the impairment of the net earnings, a gross sum should be deducted annually for the purposes of reconstruction, and the rate of capitalization to meet depreciation should be at least one per cent higher than the rate of income allowed. People ex rel. Manhattan Ry. Co. v. Woodbury, 203 N. Y. 231. Sums paid for damages. Sums paid for injuries and damages are properly deductible from the net earnings and are to be treated as ordinary disbursements incident to the business. People ex rel. Third Ave. R. R. Co. v. State Board of Tax Comm'rs, 136 App. Div. 155. Rate of capitalization of net earnings.-In capitalizing the final returns to provide a sinking fund for unforeseen contin gencies, in view of the character of its business, the surplus earnings of the relator should be capitalized at seven per cent., i.e., one per cent higher than the rate allowed for the return on the tangible property investment. People ex rel. Jamaica Water Supply Co. v. State Board, 196 N. Y. 39; People ex rel. Manhattan R. R. Co. v. Woodbury, 203 N. Y. 231. Valuation of tangible property.-The value of land occupied by the relator should be taken at its present market value and not at what it costs the relator. People ex rel. Jamaica Water Supply Co., 196 N. Y. 39. The value of the relator's property in the streets crossed by its canal bears the same relation to the total value of the canal as the number of lineal feet of the canal in the street crossings bears to the total number of lineal feet in the canal. The bridges at the street crossings being necessary, for the maintenance of a canal are to be considered in determining its value. People ex rel. Niagara Falls, etc. Co. v. State Board of Tax Comm'rs, 65 Misc. 213; affirmed 140 App. Div. 881. Cost of engineering to be included.-The cost of engineering is one of the items that should be included in an estimate of the value of the structures belonging to a street railway system. People ex rel. B. H. R. R. Co. v. State Board of Tax Commissioners, 69 Misc. 646. Indestructible property-how valued.- Where certain tangible property considered in valuing a special franchise is practically indestructible by use and much of it nearly new, the cost of reproduction would fairly indicate its value and its actual value need not be considered. People ex rel. Third Ave. R. R. Co. v. The State Board of Tax Comm'rs, 136 App. Div. 155. What included in tangible property.- Where the net earnings rule is used as the basis of assessment of a special fran chise, the value of the relator's interest in the subway or subservice conduits through which its power and light cables pass, the cash and cash items on hand and the cost of relator's assessments should be included in the value of the tangible property. People ex rel. Manhattan Ry. Co. v. Woodbury, 203 N. Y. 231. Apportionment of expense of operation.- In estimating the value of a special franchise by the net earnings rule where the company's lines are operated in connection with others by a holding company with a single set of general officers, power houses and repair shops an apportionment thereof among the different lines operated, upon the basis of car mileage is allowable; actual amount of earnings, etc., must form the basis of apportionment where the same can be ascertained. People ex rel. B. H. R. R. Co. v. State Board of Tax Comm❜rs, 69 Misc. 646; aff'd 146 App. Div. 372 Return on tangible property.—Six per cent. is a reasonable rate of return upon the tangible property of a water supply company in Queens County, used in the prosecution of its business. People ex rel. Queens Co. Water Co. v. State Board of Tax Comm'rs, 67 Misc. 490; aff'd 143 App. Div. 618. In the absence of evidence to the contrary, the court will regard 6% as a fair rate of return upon the property of a public service corporation in fixing the special franchise tax. People ex rel. Third Ave. R. R. Co. v. State Board of Tax Comm'rs, 136 App. Div. 155; aff'd 198 N. Y. 608; People ex rel. Jamaica Water Supply Co. v. Tax Comm'rs, 196 N. Y. 39. What is a fair and reasonable return upon tangible property is one of fact for the lower courts and will not be reviewed by the Court of Appeals. People ex rel. Manhattan Ry. Co. v. Woodbury, 203 N. Y. 231. Inapplicability of net earnings rule.-The franchises of a railroad may have a value which is effective to prevent its tan gible property from depreciating to a mere junk value and yet may not have a value upon which a franchise tax can be assessed. This occurs where the relator fails to receive a proper return upon its investment. People ex rel. Brooklyn Heights R. R. Co. v. Tax Comm'rs, 69 Misc. 646; aff'd 146 App. Div. 372. Where the value of a special franchise in a tunnel which has never been in operation is to be determined and the net earnings rule cannot be applied, the court may consider the physical conditions of the tunnel in relation to transportation lines and to other similar tunnels in operation, the population of a contiguous territory, the length and cost of the tunnel, the offerings of the relators to sell it and the facts bearing upon its probable earning capacity. Prospects of future profitable operation, unless such as add to its present value, are not to be considered. People ex rel. Bryan v. State Board, 67 Misc. 474. Where a special franchise (because of nonoperation) has not and cannot have present value, nothing should be added to the value of the tangible property connected therewith. People ex rel. Bryan v. State Board, 67 Misc. 474. The object of an assessment is not necessarily to produce a tax upon the intangible right, but is to determine what the special franchise is worth and if the basis of computation is right. It is quite immaterial for the purpose of fairness whether a tax on the intangible part of the franchise results or not. If there is no value, there is no tax. People ex rel. Brooklyn Heights R. R. Co. v. Tax Comm'rs, 146 App. Div. 372. The net earnings rule necessitates ascertainment of gross earnings, of gross operating expenses deductible therefrom, as well as a fair and reasonable return on the portion of the capital invested in tangible property. The balance, if any, capitalized at a fair rate, represents the value of the special franchise. To make this ascertainment, it is necessary to know the value of the land to which capital is appropriated suitably for corporate purposes. Without such data computation under this rule |