State Tax Commission v. Chesapeake & Potomac Telephone Co.

Collins, J., delivered the opinion of the Court. This is an appeal by State Tax Commission of Maryland, appellant (the Commission), from a decree of the Circuit Court of Baltimore City that the assessment made by the Commission against the Chesapeake and Potomac Telephone Company of Baltimore City, appellee (the.Telephone Company), for the year 1948 is invalid, and remanding the case to the Commission to redetermine the assessment. The 1948 assessment of the operating property of the Telephone Company as made by the Commission was $67,588,525. Code, 1947 Supplement, Article 81, Section 13 (a), provides as follows: ²²⁶ “Operating property, except land, of railroads, other public utilities and contract carriers shall be valued and assessed as follows: (a) The State Tax Commission shall determine in each case what operating property, located in this State, or partly within and partly without this State, shall comprise an operating unit.

An operating unit shall include all railroads, other public utilities and contract carriers for which separate operating accounts are not maintained. If separate operating accounts are maintained, an operating unit shall not include more than one railroad, other public utility or contract carrier unless the Commission finds that the same are under the same or commonly controlled management, and that such inclusion is necessary to ascertain the value of some of or all the operating property thereof located in this State. The Commission shall value each operating unit, as so determined, by considering its earning capacity and all other factors relevant to a determination of its full cash value.” (Italics supplied.) After the valuation has been made by the Commission under Section 13 (a), supra, by Section 15 (a), of Article 81, Code, 1947 Supplement, the Commission is to assess the shares of stock. This Section provides: “In computing the assessable value of shares of stock in any national bank located in this State, or in any domestic corporation (other than finance corporations) having a capital stock divided into shares which are subject to assessment and taxation under this article, the State Tax Commission shall first ascertain the total aggregate value of the shares of capital stock of such corporation by considering (1) the market value, if any, of the shares of such stock, without reference to ■ sales at abnormal prices, rendering market quotations not a fair index of actual value of the shares of stock as a whole; (2) the net earnings or income of such corporation, and (3) the net value of its assets; provided (a) that such aggregate value of the shares of capital stock shall never be ascertained to be less than the fair aggre ²²⁷ gate value of all the property and assets of such corporation of whatsoever kind and wheresoever situate, less the indebtedness or other liabilities of such corporation, exclusive of the capital stock, but with a fair allowance for contingent liabilities, (b) that such aggregate value of the shares of the capital stock shall never be ascertained to be less than the total value of the real estate and tangible personal property owned by such corporation in this State, and (c) that such aggregate value of the shares of the capital stock of a public service corporation shall never be ascertained to be less than the total value allocated under Section 13 to the operating property thereof, including operating land, located in this State, plus the value of its non-operating real estate and non-operating tangible personal property located in this State.” (Italics supplied.) The actual assessment here disputed was made by the Commission under Section 13 (a) of Article 81, supra.

Section 15 (a) of Article 81, supra, sets out the means by which a part of the valuation of the Telephone Company’s property is assigned to its shares. All the shares of the appellee are owned by the American Telephone and Telegraph Company and therefore there is no free market by which the market price of appellee’s shares can be measured. The appellant contends, and the chancellor found, that the assessment in this case under Section 13 (a) of Article 81, supra, was made in the following manner: Earnings Factor 1. Net Operating Income: Year 1947 ..................... $ 2,191,635 2. 1st 6 months................... 572,137 3.

Last 6 months.................. 1,619,498 4. Line 3 times 2.................... 3,238,996 5. Line 4 capitalized at 6%............ 53,983,265 ²²⁸ Plant Factor 6. Plant in Service (Account 100.1) December 31, 1947.............. 102,950,349 7.

Property Held for Future Telephone Use (Account 100.3) December 31, 1947 .......................... 173,625 8. Total (6 plus 7)................... 103,123,974 9. Depreciation Reserve (Account 171) December 31, .1947.............. 29,936,788 10. Net Plant (8 minus 9) December 31, 1947 .......................... 73,187,186 11.

Material and Supplies (Account 122) December 31, 1947.............. 2,407,951 12. Material and Supplies applicable to construction (50% of Line 11) December 31, 1947.............. 1,203,975 13. Material and Supplies applicable to operations (11 minus 12)........ 1,203,976 14. Line 10 plus line 13................ 74,391,162 Determination of Assessment 15.

Earnings Factor Weighted 1........ $ 53,983,265 16. Plant Factor ($74,391,162) Weighted 2 ............................. 148,782,324 17. Total (15 plus 16)..........'...... 202,765,589 18. Assessment (% of line 17) per State Tax Commission work papers..... 67,588,530 19.

Assessment per State Tax Commission Notice of Assessment........ 67,588,525 ²²⁹ The chancellor however found that the Commission gave less weight to earnings and to earning capacity than the law required and in this regard it discriminated against the Telephone Company as compared with other utility companies “and that in the valuation of the property without regard to earnings it discriminates against the Telephone Company as compared with other taxpayers generally, and is therefore invalid.” Hence the decree from which the appeal is taken. The appellee contends that its earnings have varied substantially from year to year and have been trending downward while book value of the plant has been trending upward and in spite of the assessment made by the Commission, it has been kept at approximately 90% of depreciated book value by adjusting the weight given earnings. In other words, the appellee contends that the Commission makes the assessment at 90% of depreciated book value and then figures backwards in order to arrive at this assessment, giving enough weight to earnings to produce an assessment which is approximately 90% of depreciated book value. Wells Fargo & Co. v. Johnson, 8 Cir., 1914, 214 F. 180 , L. R. A. 1916C, 522, affirmed 239 U. S. 234 , 36 S. Ct. 62 , 60 L. Ed. 243 .

Of course, the statute did not contemplate such a method and if such were proven in the case before us, which we do not think has been done, the assessment should be held invalid. Cleveland C. C. & St. L. R. Co. v. Backus, 154 U. S. 439 , 14 S. Ct. 1122 , 38 L. Ed. 1041 ; Schley v. Montgomery Co., 106 Md. 407 , 67 A. 250 . To substantiate this argument, the appellee, in its well prepared brief, sets up figures to show that its earnings have varied from $3,001,242.00 in 1942 to $2,191,635 in 1948 and its percentage of plant increase has varied from 12.72% in 1942 over 1941, to as low as 1.71% in 1945 over 1944, to 13.73% in 1948 over 1947. The appellee contends in spite of this its assessment has been approximately 90% of depreciated book value during all of those years.

The appellee strenuously objects to the fact that in making the 1948 assessment the appellant calculated the ²³⁰ “earnings factor” by using the net operating income realized by the appellee in the last six months of 1947 and then doubling it, while in previous years this “earnings factor” has been predicated upon an average of the five past years earnings. On the other hand, the appellant offered testimony to show that it uses no set formula in making the assessment. The appellant contends that the reason why it used the last six months of 1947 was that in its judgment it felt that that method more nearly measured the present earning capacity of the property than the methods used in the past, and that past net operating income should be used as a measure only as long as that income properly measures the current earning capacity. The Commission offered testimony to show that during 1946 and 1947 the appellee increased the net worth of its plant by the addition of $25,-732,000 and during those years the property was not earning at full capacity.

Also on account of a strike during 1947, which reduced the appellee’s net income during the first six months, and the general rate increase awarded the appellee by the Public Service Commission in 1947, the full result was not felt during the whole year of 1947. The pertinent part of Section 194 (b) of Article 81, Code, 1947 Supplement, providing for the appeal here, follows: “All such appeals shall be upon the record of proceedings before the State Tax Commission certified to the Court by said Commission, including a statement of all facts considered by said Commission on which its finding was based. Either side may introduce additional testimony or other evidence in the Circuit Court. Such petition of appeal shall set forth concisely the particulars in which the action of the Commission is claimed to be unlawful, unreasonable or against the substantial weight of the evidence.

If the Court finds such error it shall remand the case to the Commission for further proceedings in accordance with its opinion or order; otherwise the action of the Commission shall be affirmed.” ²³¹ As pointed out in the case of Seaboard Commercial Corportion v. State Tax Commission, 181 Md. 234 , at page 242, 29 A. 2d 294 , the function of the Court on appeal is to consider the record sent in from the Commission and such testimony as may be produced and with the testimony before it and the record to determine whether there was error. The burden is therefore upon the appellee to show that the Commission committed clear error in making the assessment under the provision of Section 13 (a), supra. Compare Fleischman v. Lacy, 191 Md. 648 , 62 A. 2d 561 ; Elgin v. Capitol Greyhound Lines, 192 Md. 303, 311 , 64 A. 2d 284, 288 . This Section distinctly provides that the Commission shall value each operating unit “by considering its earning capacity and all other factors relevant to a determination of its full cash value.” The statute, of course, does not specify any set percentage.

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