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Illustration of tangible property upon which a return is allowable.— In People ex rel. Manhattan Railway Co. v. Woodbury, 203 N. Y. 231, the Court held,

“That there should have been included the value of the relator's interest in the subway, or sub-service conduits, through which its power and light cables pass. While it is true that this subway property, or structure, was owned by another corporation, the Consolidated Telegraph and Electrical Subway Company, nevertheless, the relator had invested in it the sum of $936,879. This investment was essential to the operation of the relator's road and there is no good reason why it should not be entitled to a return upon it.”

In the same case it was also held:

"That there should have been included in the tangible property the sum of $537,139 consisting in cash and other cash items on hand. This item may, properly, be considered as a part of the relator's working capital, which was entitled, in the prudent management of its business, to keep on hand. Whether or not it was, in fact, essential to the operation of the railroad is not material; but it was, nevertheless, an item of its property, which it may fairly claim to have considered with the rest of its tangible property, upon which the return should be estimated.”

The valuation of the tangible property. The tangible property is to be taken at its present value. On this point the Jamaica Water Supply Co. case holds as follows:

"Where, however, the value of a special franchise is to be ascertained by the net earnings rule, which involves a capitalization of the surplus, it must be assumed that the present owners are entitled to a reasonable return upon the value of their property now. A stockholder who has recently acquired his stock will probably have paid an increased price therefor by reason of the increase in the market value of the very land in question. The taxes upon this land are based upon the present value, not upon its cost to the corporation when originally acquired. So we think its present value must be taken into account in applying the net earnings rule to the valuation of the special franchise.”

In estimating the value of structures, the cost of engineering in the erection of the same is one of the items that should be included. People ex rel. Brooklyn Heights R. R. Co. v. Tax Comm’rs, 69 Misc. 646; aff'd 146 App. Div. 372.

Structures in the street become lawful by reason of the acquisition of the necessary easements from abutting property owners and the cost of such easements should be included in the value of the tangible property; they become appurtenant to the railroad property and enhance its value. People ex rel. Manhattan Ry. Co. v. Woodbury, 203 N. Y. 231.

The rate of capitalization of the net earnings.-Under the net earnings rule the rate of capitalization is one per cent. higher than the rate allowed for the return on the investment in the tangible property.

Upon the question of the rate of capitalization of the net earnings, the Court of Appeals in the Jamaica Water Supply case said,

“In capitalizing the final returns, the referee adopted the rate of 7% to provide a sinking fund for unforeseen contingencies while the Appellate Division, without giving any reason for the difference of opinion, said that the surplus earnings should be capitalized at 6%. In view of the character of the business of the relator we think the rate adopted by the referee is preferable.”

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In the People ex rel. Manhattan Railway Co. v. Woodbury, 143 App. Div. 905, the Appellate Division again held that the net earnings should be capitalized at 6%, although two justices dissented on the ground that 7% should be allowed as the basis of capitalization. Upon the appeal of this case, 203 N. Y. 231, Judge Haight, writing the concurring opinion, clearly stated the correct rule, saying,

"The courts below have also held that the net earnings should be capitalized upon the basis of six per cent, the same percentage that was allowed for income on the tangible property. In this determina

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tion I think the court failed to follow the net earnings rule. That rule is not a question of fact but a plan devised for the purpose of ascertaining the value of intangible property, which has met the approval of this court in cases of this character, for the reason that it seemed just and fair, and perhaps as furnishing as safe a rule as any that has thus far been devised. Prominent authorities in discussing this method of valuing special franchises have suggested that the rate of capitalization should be at least one per cent higher than the rate of income allowed. The purpose of this is to provide against unforeseen contingencies that may arise in the prosecution of the business of the corporation, such as unusual storms, floods, fires, explosions and accidents, which may result in the impairment of the net earnings, and cannot be foreseen and estimated in advance. This question was considered by this court in the case of People ex rel. Jamaica Water Supply Co. v. State Board of Taw Commissioners (196 N. Y. 39), and we then reached the conclusion that such a rule was reasonable and fair to the parties and should be followed, and we consequently revised the determination of the Appellate Division which fixed the rate of capitalization at the same percentage allowed for income and affirmed the rate adopted by the referee. This was done, not upon the ground that it involved any question of fact, but because it was part of the plan or rule which we approved for determination of a just result between the parties."

For full valuation add to the capitalized value of the intangible rights the value of the tangible property. The total value of the tangible property situated in, upon, under or above the public way being ascertained and then added to the value of the intangible right (Tax Law, Art. I, Sec. 2, Subd. 3) gives the full value of the special franchise.

Equalization.—The total value of the tangible and intangible property is then equalized with other assessments where other property on the same tax roll is assessed at a lower proportionate valuation. (Tax Law, Art. II, Sec. 45a.)

Application of net earnings rule in case of operation by a holding company:- Where a holding company operates the relator's lines in connection with others through one set of general officers, power houses and repair shops, an apportionment of such general operating cost among the various lines operated, based upon car mileage, is permissible. And in such circumstances, where the proof of gross earnings of the system as a whole is given, they must be taken; to adopt instead an estimate based upon gross earnings of the entire system apportioned on a car mileage basis, is improper. Neither should items for depreciation, obsolescence, power, repairs and other operating expenses be estimated in like manner. People ex rel. Brooklyn Heights R. R. Co. v. Tax Comm’rs, 69 Misc. 646; affirmed, 146 App. Div. 372.

Note: A convenient form for use in estimating an assessment under the net earnings rule is found in Union Rwy. v. State Tax Comm’rs, N. Y. Law J., April 17, 1913, as follows:

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Total gross earnings (brought forward)
Less operating expenses.....

$2,052,067.60 1,232,595.97

Net income from transportation....
Less taxes and other expenses..

819,471.63 82,319.12

$737,152.51

Less 6% return on the amount of relator's
entire property used in operation, including
(1) Property in the streets...

$1,636,738.89
(2) Property outside streets..

905,026.89 (3) Real estate

418,600.00

$2,960,365.78

177,621.68

Less depreciation fund.......

$559,530.73 151,366.18

Net earnings attributable to special franchise..... 408,164.55
Latter capitalized at 6% is the value of the intangible
right, or

$6,802,742.50 Add value of tangible property ..

1,636,738.89

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