Consolidated Gas Co. v. Mayor of Baltimore

McSherry, C. J., delivered the opinion of the Court. The Consolidated Gas Company of Baltimore is a corporation duly formed under the laws of Maryland. In the year 1904 it was assessed by the Appeal Tax Court of Baltimore City, for the purposes of taxation, with sundry parcels of real estate valued at $2,697,791; with 79,000 services at $158; and with 455^ miles of gas mains at $1,131,640; making a total of $3,987,431. This total was increased for 1905 to $4,026,997.

On September the 23rd, 1904, the following notice was sent to the company by the Appeal Tax Court: “This is to notify you that it is the purpose of the Appeal Tax Court to increase the assessment on your mains, pipes and other construction located in, on, under or over the public highways of Baltimore City, so as to include the value of the easement enjoyed by you in said highways, and that on Thursday, September 29th, 1904, at 12 o’clock, you will be given an opportunity to make such statements and present such proofs as you may desire, to show why an additional assessment of $6,000,000 should not be placed on said real property. Thereafter the Court may enter an increased assessment thereof, according to its best judgment and information in the premises.” The company appeared by its counsel. No evidence was adduced by either side, but the company’s counsel insisted that the contemplated or projected assessment of six millions of dollars, could not be legally made in the form or by the method proposed. On the day following, the Appeal Tax Court entered its conclusions in these words: “Additional assessment on mains, pipes, and other construction located in, on, or over public highways of Baltimore City, so as to include the valuation of the easements enjoyed by said company in said highways, $6,000,000. ” From that action, or determination the Gas Company appealed to the Baltimore City ⁵⁴⁴ Court.

Upon the trial of that appeal evidence was offered with respect to the method pursued by the Appeal Tax Court in arriving at the sum of six millions of dollars as “the valuation of the easements enjoyed by said company in said highways;” and propositions of law, embodied in prayers, were presented, with a view of raising the question as to the right and authority of the city to tax the particular easement involved; and the further question as to the regularity of the mode adopted by the Appeal Tax Court in reaching the re-, suit to which it came. The Baltimore City Court rejected all the prayers of the Gas Company, but granted four out of the eight prayers presented by the city. The Court, sitting without a jury, passed an order sustaining the action of the Appeal Tax Court; and from that order this appeal was taken. There are two questions in the case.

First, had the city the power to increase the prior assessment on the mains, &c., by the addition of $6,000,000, so as to include, by that addition the taxable value of what the Appeal Tax Court describes as the easements enjoyed by the company in tha highways; and secondly, if it did have that power, has it properly and lawfully exerted it? It is not denied by the appellant that the Legislature could make provision for an independent assessment of the intangible, incorporeal right called by the company a franchise, but claimed by the city, in view of the facts, to be an easement— the right to occupy a certain space beneath the surface of the streets with gas mains and service pipes; but it is maintained, on behalf of the appellant, that the General Assembly did not intend by existing enactments to allow the Appeal Tax Court to assess as real property the right, privilege or franchise to occupy the streets with gas mains; because that right, by whatever name you call it, like the franchise to carry on business, forms part of the value of the company’s capital and is taxable only through its shares of stock. It is obvious, when these two contentions are brought into juxta-position, that, in order to determine the first inquiry with which we have to deal, the exact nature of the right in question, under existing ⁵⁴⁵ conditions, must be definitely ascertained. It must be ascertained, however, not as a mere abstraction nor purely from a philosophical standpoint, but especially and specifically with reference to, and in the light of, previous adjudications by this Court as applied to the actual facts in evidence.

It is a. question of taxation which is before us. “An easement is a liberty, privilege or advantage without profit which the owner of one parcel of land may have in the lands of another: * * * An easement, although only an incorporeal right and appurtenant to another, the dominant, tenement, is yet properly denominated an interest in land which constitutes the servient tenement, and the expression, “estate or interest in lands, ‘when used in a statute is broad enough to include such lights, for an easement must be an interest in or over the soil.” 14 Cyc. 1139. In every instance of a private easement—that is, an easement not enjoyed by the public—there exists the characteristic feature of two distinct tenements—one dominant and the other servient. On the other hand, a franchise is a special privilege conferred by government on individuals, which does not belong to the citizens of the country generally by common right. 2 Wash. Real Prop., 303.

A franchise does not involve an interest in land—it is not real estate but a privilege which may be owned without the acquisition of real property at all. The use of a franchise may require the occupancy, or even the ownership, of land; but that circumstance does not make the franchise itself an interest in land. To define the nature of a thing by the accidents which are employed in its use, is to confound the thing itself with the agencies applied in its adaptation. Because land may be required in putting a franchise into effective operation, it does not follow that the franchise is land, or an interest in land.

But an easement is quite a different thing. It is essentially and inherently an interest in land. It is an estate—a dominant estate imposed upon a servient tenement. To which of these two distinct and dissimilar classes does the right of the Gas Company to occupy with its mains the sub ⁵⁴⁶ surface of the streets belong, in the contemplation of the revenue and-tax laws of Maryland?

It will be found upon examining some of the cases that there is occasionally, in the arguments of counsel, a want of exactness in the use of terms, and now and then the right to do a particular thing—which is the franchise—is confused with the results achieved in the exercise of the right, and those results are inaccurately spoken of as the franchise. The right to occupy the. streets with gas mains is a franchise—the actual occupation of them in that way pursuant to the franchise is the acquisition of an easement. You must distinguish between the right to do the thing, and the interest acquired in the soil ■by the exercise of that right. The right -of a railroad company to be, and to build a road, is a franchise from the State; the road-bed acquired by purchase or condemnation, is an easement altogether distinct therefrom, though obtained as a result of the exercise of that pre-existing franchise.

It is .strictly accurate.to say, “The right of a gas company to lay its pipes and to use the streets of a city for the purposes of laying pipes to convey gas is a franchise, and can only be conferred upon a corporation by the Legislature."” State of Ohio v. Cinn. Gas Co., 18 Ohio St. 262 . It is equally correct to declare, ‘‘The right to use the public streets of a city for the purpose of laying gas pipes therein is, in my opinion, a franchise which alone the State can confer.” Jersey City Gas Co. v. Dwight, 29 N. J. Eq. 242. In each of these cases, and in many more that might be cited, the right to do the thing spoken of, is the franchise.

And so in Tuckahoe Canal Co. v. Tuckahoe, &c., R. Co., 11 Leigh (Va.) 78 , it was said: ‘‘Now, I take a franchise to be (1) an incorporeal hereditament; and (2) a privilege or authority vested in certain persons by grant of the sovereign (with us, by special statute) to exercise powers or to do and perform acts which without such grant they could not do or perform. Thus, it is a franchise to be a corporation, with power to sue and be sued, and to hold property as a'corporate body. So it is a franchise to be empowered to build a bridge or keep a ferry over a public stream, with a ⁵⁴⁷ right to demand tolls or ferriage; or to build a mill upon a public river, and receive tolls for grinding, &c. But the franchise consists in the incorporeal right; the property acquired is not the franchise.

A bank has a right to purchase a banking house; when purchased is the house a franchise? Surely not, for it is corporeal, whereas a franchise is incorporeal.” In Bridgeport v. N. Y., &c., R. Co., 36 Conn. 266 , it was held that a franchise does not include property gained by the exercise thereof. The distinction is clear between a franchise, as such, and the property acquired for the use of the franchise. The naked, unused, slumbering franchise is property, but it is property concerning the assessment of which in that condition for purposes of taxation, the statutes do not make provision, otherwise than by including it as an element which enhances the value of the shares of the capital stock.

But when the franchise is brought into activity and is availed of to accomplish the ends it was designed to effect, the property acquired under it becomes amenable to the tax laws apart from the tax on the stock and its value, as an easement, if an easement it be, may be largely augmented by the use to which the franchise enables that property or easement to be put. “They,” said the Court of Appeals of New York in People v. Tax Comrs., 174 N. Y. 441 , “they (tangible chattels in the public highway) have no assessable value worthy of notice except through the actual and constant use made of them as incidental to the special franchises. The value of either resides in the union of both and can be practically ascertained only by treating them as an unit. Unless assessed together both cannot be adequately assessed. A man of judgment in valuing a wagon, and especially in estimating its earning capacity, does not pass upon the body, wheels, top and tongue separately.

We regard the tangible property as an inseparable part of the special franchises mentioned in the statute, constituting with them a new entity, which as a going concern can neither be assessed nor sold to advantage except as one thing, single and entire.” We cite this to show, if precedent be needed to support such ⁵⁴⁸ a self-evident proposition, that the use to which a franchise permits an easement to be put, is an essential element, to be considered in placing a valuation on that easement for purposes of taxation. What, then, is the thing assessed and taxed in this case ? Is is the mere right to occupy the streets below the surface with mains and pipes—which is the franchise; or, is it the easement acquired, through the franchise, by the actual occupancy of the highways in that manner? Ostensibly it is the latter; and- the right to include the value of that easement as an element in fixing an assessment on the tangible property employed in availing of that easement is, we think, no longer an open question in this State since the decision in The Appeal Tax Court v. Union R. Co., 50 Md. 274 .

In that case it appeared that the tracks of the Union Railroad Company, within the city of Baltimore were, to a considerable extent, constructed in a tunnel under the bed of Hoffman street, a public highway of the city, and another portion of the road within the city, not in a tunnel, was also to a considerable extent, within the limits of public highways. The company asked that the assessments of the road-bed in thetunnels be stricken from the property valued to it. The Court below granted the relief asked, and the Appeal Tax Court appealed. The specific contention was made in the argument here as to the tracks located in the tunnel and on the streets that the railroad company did not own the property, that is the road-bed, and ought not to be assessed for it, as though it was seized of it.

It had only the right to make use of the streets and the soil beneath the streets, and to receive the tolls authorized by its charter. But in disposing of that contention our predecessors said: “We do not concur in the position of the appellee that it should only be assessed with the superstructures on the bed of the road, irrespective of the road-bed itself, or any right or interest therein, because the road occupies a tunnel under a public street, or runs along' the highways of the city. The appellee has an easement in the way occupied by its road, and whether that easement be under or over the public street it is ⁵⁴⁹ an element of value to the road, and, as such, should be included in the valuation of the road itself. But few of the railroad companies of the country have anything more than a mere easement in the ways occupied by their roads, and we are not aware that it has ever been held that, because the company did not own the freehold estate in the bed of the road, nothing but the mere superstructures thereon could be assessed to the company.

The rule would seem to be clearly otherwise, and that an easement enjoyed in the bed of a public street may be assessed and taxed as real estate. People v. Cassity, 46 N. Y. 49 ; Appeal of N. B. & M. R. R. Co., 32 Cal. 499 ; Providence Gas Co. v. Thurber, 2 R. I. 21.” The last case cited, Pro. Gas Co. v. Thurber, 2 R. I. 21, is peculiarly apposite. The Supreme Court of Rhode Island there said: “What then is the nature of the right which the plaintiffs, the gas company, take under their charter?

We think, when exercised, it is an easement—an incorporeal hereditament—like the right of a railroad company to build and occupy their road, or a canal company their canal, under the provisions in their charter which grant the power to take the land upon rendering compensation to the owners.” Here is a specific decision that the right confered by the charter—the franchise—becomes, “when exercised,” an easement. But it is not necessary to go beyond Maryland in search of adjudged cases to support the proposition that the easement possessed by a corporation in a public thoroughfare may be assessed and taxed as real estate owned by the corporation. The Appeal Tax Court v. Union R. R. Co., supra, expressly so rules, as already indicated, and that case, though referred to as supporting various propositions, in eight subsequent decisions, has never been doubted, questioned or even distinguished in any particular. Swan v. Kemp, 97 Md. 692 ; Dundalk, &c., Ry.

Co. v. Gov. Smith, 97 Md. 181 ; United Ry. Co. v. Balto., 93 Md. 633 ; State v. N. C. Ry. Co. 90 Md. 473 ; Smith v. School Com., 81 Md. 516 ; State v. Falkenheim, 73 Md. 467 ; State v. Yewell, 63 Md. 121 ; P., W. & B. R. R. Co. v. Appeal Tax Court, 50 Md. 409 .

It is true that in only ⁵⁵⁰ one of the above eight cases was the inquiry with which we are now concerned, under discussion; but the frequent reaffirmance of the judgment in Union R. Co. v. Appeal Tax Court , as to other propositions covered by it, so thoroughly engrafts it, in its entirety, on the Maryland system of taxation that nothing short of a legislative enactment can now disturb or qualify it.- Can any one doubt that if the Consolidated Gas Company by purchase or condemnation had secured the right to lay its mains through private property, instead of under the streets, lanes and alleys of the city, it would have acquired an ease ment—an interest or estate in land—with which it could have been properly assessed as an owner of real estate? Surely no one would seriously contend that such a right of way through private property was a mere franchise to be considered, in fixing the company’s taxable basis, as included in the value of its capital stock. In what respect, looking alone to its legal attributes, would an easement of the kind just supposed, differ from the one actually enjoyed by the company? The fact that the pipes are laid in the bed of the street without compensation having been paid for the use of the ground occupied, cannot change the nature of the estate held by the company, nor convert the thing done—which is an easement— into a mere right to do the thing—which is the franchise.

From the views thus far expressed it follows, we think, that the property or estate which the gas company has in the highways of Baltimore is an easement which may be properly assessed to the company as real estate; and hence there was no error committed by the City Court in rejecting the appellant’s first prayer, nor in granting the appellee’s first and second instructions. We come next to the second inquiry, namely, did the Appeal Tax Court properly and lawfully exert the power which we hold that it possessed, to tax the easement in question? Before that question can be intelligently answered, the method actually pursued must be closely and critically examined. Now what did the Appeal Tax Court do? ⁵⁵¹ First, as will be remembered, the Appeal Tax Court sent the notice of September 23rd, 1904, giving the company an opportunity “to show why an additional assessment of $6,000,000 should not be placed” on its real property.

So, in advance of any hearing, the Appeal Tax Court apparently fixed upon a sum to be added to the company’s assessment unless the company could show that such an increase would be wrong. The amount ef six millions of dollars was arrived at by the following process: The Appeal Tax Court acted on the theory that the entire assets and property of the company and its securities, capital stock and obligations on which it was able to earn a dividend and to pay interest respectively, constituted the value of its total holdings. The stock was then selling at eighty dollars a share—the par being one hundred—but in the calculation it was put at seventy dollars. There are one hundred and seven thousand shares.

At seventy dollars a share the Appeal Tax Court carried out the aggregate as seven million, five hundred thousand dollars. In addition the company owed several millions of dollars represented by outstanding bonds which were valued at seven million, seven hundred thousand dollars. Then the company owed-a million and a half in certificates which were put down at one million, three hundred and fifty thousand dollars. Still another item was a million of dollars of four and a half per cent general mortgage bonds, which were included at par.

The aggregate of all these items footed up seventeen millions, five hundred and fifty thousand dollars, of which ten millions and fifty thousand dollars