der the net earnings rule, the court was not, tervened. From final orders of the Appelbound to accept, as true testimony of witnesses, late Division, First Department (157 App. that 8 per cent. was the reasonable return on Div. 731, 142 N. Y. Supp. 986), reversing on the company's tangible property, though uncontradicted, since, while the testimony of unimpeached, disinterested witnesses may not generally be ignored or discredited, this is not true as to witnesses not testifying to facts, but merely expressing an opinion.

[Ed. Note.-For other cases, see Taxation, Cent. Dig. §§ 625, 629-631; Dec. Dig. § 376.*resent the net earnings attributable to the intangible parts of the special franchises Cross-Appeals from Supreme Court, Ap- and capitalized at 6 per cent. to produce pellate Division, First Department.

the sum of their assessable value for the Three certiorari proceedings by the Peo- purpose of taxation, which was apportioned ple, on relation of the Third Avenue Rail- between the two companies in proportion to road Company, James N. Wallace, and the sum of the fares collected upon their others and the Kingsbridge Railway Com- respective roads. To each sum thus apporpany, respectively, against the State Board tioned was added the sum of the value of of Tax Commissioners, in each of which the tangible property of the respective comproceedings the city of New York in-panies producing thereby the taxable val

ue of the special franchise of each, which after equalization exceeded the values found by the state board.

ror.

The assessments do not conclusively establish their validity and exemption from erThey do not in and of themselves afThe Appellate Division orders, made up- ford proof of the method or methods used, on the appeals of the relators, reversed the or that they were legally and correctly made. orders of the trial court on the law and The relators have the right to have them Neither they nor the facts and made many new findings of reviewed by the courts. fact and modifications of the original find-the court can adopt or review the undisclosings and new conclusions of law, follow-ed and concededly indescribable methods ing the decision in Bonnette v. Molloy, 209 followed by the state board, because they N. Y. 167, 102 N. E 559. The able and comprehensive opinion of the Appellate Division, written by Mr. Justice Laughlin, is reported in 157 App. Div. 731, 142 N. Y. Supp. 986.

Thomas Carmody, Atty. Gen. (Wm. A. Mc-
Quaid, of New York City, of counsel), for
of tax commissioners.
Frank L. Polk, Corp. Counsel, of New York
City (Curtis A. Peters, of New York City,
Joseph
of counsel), for City of New York.
P. Cotton, of New York City, for relators.

COLLIN, J. (after stating the facts as above). [1, 2] The assertions and arguments of the state board and the city of New York under their appeal to this court will be first stated and considered.

1. The conclusions of the Appellate Division leading to the reduction of the assessments are erroneous because they resulted from the application of the net earnings rule. The argument is: The assessments of the state board are presumed to be correct. It was incumbent upon the relators attacking them to establish some error on the part of the state board in principle or Such error is not proven by showing the assessments excessive by the application of a particular rule unless that rule were one which the state board was bound to accept. In these cases the net earnings rule is not one which the state board was bound to follow and the results of its application do not establish error.

fact.

The state board in the returns to the writs of certiorari disclaim the adoption of any formulated or intelligible method of reaching their valuations. They state:

* * *

It was

"The board has availed itself of all tests of value within its reach and every fact and all information which, in its judgment, has any bearing upon such value and no certain or fixed rule or method has been adopted in making said valuation. It would be impossible at this time for the members of the board to more definitely state the modus operandi or mental operation which prompted the board in arriving at the valuation as fixed. the consideration of all these conditions and elements that fixed the determination as reached. It is quite impossible, at this time, to state which of these different elements, theories or methods most influenced the minds of the individual members of the board or to what exThe amount of the tent each test was used. valuation was finally fixed and agreed upon as the combined judgment of the board, irrespective of the individual methods of arriving at it." The defendants did not at the trial fürther enlighten the relators or the court as to the grounds or method of valuation.

cannot know the mental processes or con-
clusions through which the members reached
the valuations. Hence, they can neither re-
ject nor approve them. Under such a con-
dition, in which it was impossible to know
and review the test or measure of the valua-
tions adopted by the state board, the relators
were free to measure them by any rule
which is legal and suitable to produce a fair
valuation for the purpose of taxation and
to show by it that the assessments imposed
by the state board were excessive. The de-
fendants were free to sustain them by the
processes by which they were made or by any
suitable or legal rule or method. The trial
court adopted without opposing argument, if
not with acquiescence, on the part of the de-
fendants, the net earnings rule which, in the
ordinary cases possessing no unusual or pe-
culiar characteristics, has repeatedly had the
approval of this court (People ex rel. Ja-
maica Water Supply Co. v. State Board of
Tax Commissioners, 196 N. Y. 39, 89 N. E.
581; People ex rel. Manhattan Ry. Co. v.
Woodbury, 203 N. Y. 231, 96 N. E. 420;
People ex rel. Hudson & Manh. R. R. Co. v.
State Board of Tax Commissioners, 203 N. Y.
119, 96 N. E. 435; People ex rel. N. Y. C. &
H. R. R. Co. v. Priest, 206 N. Y. 274, 99 N.
E. 547; People ex rel. Third Avenue R. R.
Co. v. State Board of Tax Commissioners,
136 App. Div. 155, 120 N. Y. Supp. 528, af-
firmed 198 N. Y. 608, 92 N. E. 1098; People
ex rel. Brooklyn Heights R. R. Co. v. State
Board of Tax Commissioners, 146 App. Div.
372, 131 N. Y. Supp. 49, affirmed 204 N. Y.
648, 97 N. E. 1113), and of which Chief
Judge Cullen said:

"It is true that no statute prescribes the net earnings rule as the method by which the value of a special franchise is to be computed, nor is there any decision of the courts that this method is to be exclusively adopted. It is also true that that method of computation is not universally applicable. Nevertheless, in ordinary cases it is the best practical method that the taxing officers and the courts have as yet been able to evolve." People ex rel. Hudson & Manh. R. R. Co. v. State Board of Tax Com'rs, 203 N. Y. 119, 130, 96 N. E. 435, 439.

The present are ordinary cases, and the relators properly invoked the net earnings rule in undertaking to affirmatively show, as they were bound to, that the assessments were excessive. It is our duty to see whether the rule has been consistently and correctly applied to the facts. The purpose sought is the true and correct valuation of the particular special franchises in question for the purpose of taxation.

[3] 2. The Appellate Division erred, under | ordinary renewals and replacements of parts the net earnings rule, in excluding from the of equipment, machinery, appliances, and income or earnings of the relator, the Third structures; and for renewals and replaceAvenue Company, the rental which it re- ments upon relator's property used in conceived from certain of its cars rented to sub- nection with the operation of relator's spe sidiary companies in the Third Avenue sys- cial franchise the sum of $41,990.05, which tem. Paragraph seventh of the opinion of the relator charged to operating expenses, but the Appellate Division relates to this claim. which, under the circumstances, might be We approve the statements and the reason- assumed to represent expenditures for exing and conclusions there given. traordinary repairs to or for new equipment, [4] 3. The Appellate Division erred, like-machinery, appliances, and construction, and wise, in including in operating expenses cer- a deduction should not be allowed therefor tain payments by the Third Avenue Company as operating expenses; that it was stipulated for percentages of gross earnings and for car or conceded on the trial that during the year license fees. Paragraph eleventh of the opin- 1909 "$336,695.99 was a reasonable depreion of the Appellate Division relates to such ciation allowance to cover the amount of the assertion. We approve the statements, rea- | annual depreciation and obsolescence of resoning, and conclusions given there. A clear lator's property, used in connection with the appreciation of the ultimate result sought re-operation of relator's special franchise which futes the assertion. The special franchises relator is entitled to deduct from relator's are to be assessed at their full and actual value for the purpose of taxation. The state board or the court must ascertain and state the sum of that value. The application of the net earnings rule is a method to that end evolved by those under the duty of reaching legal valuations of special franchises. It rests upon the fact that the net income from the use of the franchise to the owner and operator of it is a test and arbiter of its actual value -a fact not peculiar to a special franchise as distinguished from real estate. Manifestly the term "net earnings," as used in the rule, means what is left of the gross earnings produced by the property after the legitimate costs, expenses, and deductions connected with and arising from its use are paid. The percentages and license fees are costs or charges connected with the use of the property. Section 48 of the Tax Law has no part in or relation to the valuation of the franchise. It comes into operation after the assessment is made, and reduces the sum of the tax based thereon.

[5] 4. The Appellate Division erred, like wise, in including in operating expenses the salary paid to the receiver of the property of the relators for services during the year 1909. Paragraph fourteenth of the opinion of the Appellate Division relates to this assertion. We approve the statements and reasoning and conclusion given there.

[6, 7] 5. The Appellate Division erred, likewise, in including in operating expenses the sum of $164,745.84 expended for the maintenance and renewal of property. The relators assert, on the other hand, that that court erred in not including in operating expenses an additional sum of $41,990.05 expended, as they argue, for the same purposes. The Special Term refused to allow as a part of the operating expenses any portion of the aggregate of the two sums, namely, $206,735.89. The Appellate Division found as facts that during the year 1909 the Third Avenue Company spent the sum of $164,745.84 for

said gross income from transportation of $2,367,346 in order to ascertain relator's net income or net earnings." The conclusion of the Appellate Division, in brief, was that the sum spent for the ordinary annual expenses for maintenance, renewals, and repairs of equipment, machinery, appliances and structures should be included in the annual operating expenses, and the sum spent for replacements thereof should not be so included, but should be deemed included or covered in the stipulated allowance for depreciation. Paragraph sixteenth of the opinion of the Appellate Division relates to the matter under consideration. The argument of the defendants is that the depreciation fund must be held to cover all expenditures for renewals and replacements of the various parts or units of the relator's tangible property, otherwise a double allowance (that of the operating expenses and that of the depreciation fund) would be made for the same depreciation. The argument of the relators is that the assumption by the Appellate Division that the $41,990.05 were spent for new equipment, machinery, appliances, and construction is directly contrary to the facts; that the evidence shows that whatever was spent by the relators during the year and charged to operating expenses was simply the ordinary annual expenses for maintenance, renewals, and repairs. In this the relators err. The finding of the Appellate Division is not arbitrary and without any evidence whatsoever in support of it, and must be

deemed conclusive as to the fact.

fendants. The finding of the Appellate DiviWe turn now to the argument of the desion, of which I have before spoken, was properly made, and is:

cover

"That during said year 1909 $336,695.99 was a reasonable depreciation allowance to the amount of the annual depreciation and obsolescence of relator's property, used in connection with the operation of relator's special franrelator's said gross income from transportation chise, which relator is entitled to deduct from of $2,367,346 in order to ascertain relator's

This is outside of the ordinary annual expenses for maintenance, renewals and repairs.'

The stipulation of the parties was made with full knowledge of those interpretations of the term "depreciation" and, presumptive

We approve the conclusions reached by the Appellate Division in the matter under consideration.

The relators under their appeal assert:

The meaning of the words "allowance to cover the amount of the annual depreciation and obsolescence" is indefinite. It may mean an allowance to cover the entire depreciation in the property producing the earnings from transportation; that is, the deterioration ly, used it with the meaning they gave it. through use and breakage of the renewable and repairable parts of the units or individual machines, implements, or appliances of production, as well as that deterioration which cannot be prevented by maintenance nor offset by repair, or arising from the inefficiency or uselessness of the units caused by changes in the methods or machinery, implements, or appliances for accomplishing results, necessitating the replacement of the old units with new, or it may mean the latter deterioration only. Of course the courts must effect the intention of the parties if expressed in the stipulation. The evidence does not aid, either directly or through inference or circumstance, in ascertaining that intention. At the time the stipulation was made the courts had clearly indicated their understanding of the meaning of those words 'when unaffected by context or facts. In People ex rel. Jamaica Water Supply Co. v. State Board of Tax Com'rs, 196 N. Y. 39, 57, 89 N. E. 581, 586, Judge (now Chief Judge) Willard Bartlett, writing for the court, said:

"In the deduction made by the referee for expenses there is an item of $3,789.37 under the head of maintenance, and it is clear that this does not include a proportionate allowance on account of the general depreciation of the plant which will ultimately require replacement. We suppose that judicial notice may be taken of the fact that in the conduct of many industrial enterprises there is a constant deterioration of the plant which is not made good by ordinary repairs, which, of course, operates continually to lessen the value of the tangible property which it affects. The amount of this depreciation differs in different enterprises, but the annual rate is usually capable of estimate and proof by skilled witnesses."

In People ex rel. Manhattan Ry. Co. v. Woodbury, 203 N. Y. 231, 236, 96 N. E. 420, 422, we held:

"That the annual allowance for depreciation should be computed by dividing the values of the various kinds of tangible property by the number of years of their respective estimated physical lives."

Obviously the "lives," as there treated, are the periods of time through which the "various kinds of tangible property" will respectively, with ordinary and adequate annual renewals and repairs, continue efficient in and commercially adaptable to their respective processes and functions. In People ex rel. Third Ave. R. R. Co. v. State Board of Tax Com'rs, 136 App. Div. 155, 158, 120 N. Y. Supp. 528, 531, affirmed 198 N. Y. 608, 92 N. E. 1098, Mr. Justice Kellogg, writing for the court, said:

"The Jamaica Water Supply Company Case establishes that a public service corporation, with reference to its property which will become worthless by use and must be replaced, is enti

tled to set aside each year from its earnings a reasonable sum to provide for its replacement.

[8, 9] 1. The courts below erred in refusing to allow a rate of return to the relators upon the value of the tangible property greatA finding of fact is er than 6 per centum. that 6 per centum is the reasonable return to which capital is entitled in the city of New York in enterprises similar to that in which the relator is engaged, and in applying the net earnings rule to the evidence it is the rate of return to which the relator is entitled. In People ex rel. Manhattan Ry. Co. v. Woodbury, 203 N. Y. 231, 235, 96 N. E. 420, 422, Judge Gray, writing for the court, said: "Whether the rate of return to be allowed to the relator upon its tangible property, or whether the rate at which the net income should be capitalized, should be 6 per cent., as determined below, was a question of fact decided upon concededly conflicting evidence, and is one with which, therefore, this court should not interfere."

Judge Haight in a concurring opinion said: "But the question of the fair and reasonable return, we regard as one of fact under the control of the courts below, and one which this court should not review." 203 N. Y. 237, 96 N. E. 422.

The relators assert that the fair and reasonable rate of return is a question of fact which must be determined upon the evidence, and the finding of fact constitutes reversible error, because not only is there no evidence to support it, but the only evidence in the records is to the effect that the relators are entitled to at least 8 per centum. An engineer, competent and qualified to form an opinion, testified, as a witness for the relators, that in his opinion capital in the enterprise would demand at least 8 per centum, and another testified that he "should consider that at least eight per centum would be the return required for capital, and it might run to nine or possibly 10 per centum." The witnesses were not testifying to facts known to them through uncommon skill, learning, or experience, but to their opinions. Opinion testimony, even if uncontradicted, was subject to the exercise by the trial court of its independent judgment. While it is, speaking generally, true that a jury has not the right, arbitrarily, to ignore or discredit the testimony of unimpeached disinterested witnesses, so far as they testify to facts, and that willful disregard of such testimony will be ground for a new trial, no such obligation attaches to witnesses who testify merely to their opinion; and the jury may deal with it as they please, giving it credence or not as their experience or general knowledge of the subject may dictate. The Conqueror, 166 U.

3. The Appellate Division erred in excluding from the tangible property, upon the value of which the return was allowed certain real estate owned by the relator, the Third Avenue Railroad Company. The tenth paragraph of the opinion of the Appellate Division relates to this claim. We approve of the decisions contained in such paragraph.

[12] 4. The Appellate Division erred in refusing to deduct from the gross earnings of the year 1909 the sums of taxes and assessments for local improvements levied and due in years prior to 1909. This claim is considered in paragraph twelfth of the opinion of the Appellate Division and we approve of the reasoning and conclusion therein stated. The order in each case should be affirmed, without costs to any party.

WERNER, HISCOCK, CHASE, CUDDE BACK, and HOGAN, JJ., concur. WILLARD BARTLETT, C. J., not voting.

Orders affirmed.

S. 110, 17 Sup. Ct. 510, 41 L. Ed. 937. The | convenience, of organization or of promoters' rate upon the value of the property used or financiers' profits add to the present cost constituting a fair return is inherently a of reproducing the tangible property or take question of fact to be decided upon the cir- part in producing the earnings attributable cumstances, conditions, facts, and opinions to the tangible property under the net earndisclosed by the evidence. The nature of the ings rule. We approve of the decision of the business, whether it be established or ex- Appellate Division concerning this matter perimental, the risks natural or proven at- which is considered in paragraph ninth of its tending it, are some of the many varying cir- opinion. cumstances which may enter into the determination of a rate of return which must, as a rule, be left to the good judgment of the tribunals which review the facts as proven. [10, 11] 2. The Appellate Division erred in refusing to allow a return to the relators upon the development expenses, or "overhead charges," consisting of expenses for legal and technical advice, of obtaining consents of public bodies and individuals completing the working organization and essentials preliminary to the beginning of the construction work, interest, and taxes during construction and promoters' and financiers' profits. This assertion involves a question of fact. The taxation of a special franchise is, under statutory provisions, at its full and actual value. The search of the state board is for a correct valuation for the purpose of taxation of the particular special franchise in question, not for the full and actual sum invested in the corporate property nor a fair return thereon. The sum of the value, and that of the cost or investment, may obviously differ through an appreciable range. The net earnings rule is one of the approved methods of getting at the taxable value of the special franchise. It is based upon the practical and commonly recognized principle that the earning capacity or power of an industrial property indicates its value. The sum of the earnings or income indicates, however, the value of the property only which produces it. In the application of the net earnings rule, the value of the tangible property used in producing those earnings upon which a fair and reasonable return is allowed should be the full and actual value of all the property essential to the operation of the enterprise or plant. But what that property is and its value are questions of fact. In the present case, the value of the tangible property was proven at the Special Term by evidence of the witnesses of relators of the cost of reproduction and of accrued depreciation. Such evidence was not disputed. Another witness of relators testified as an expert that there should be added to the valuation thus produced, on account of the development expenses as above enumerated, 20.05 per centum thereof. The trial court, by a finding of fact, held such testimony inadequate to increase the reproduction value as proven by the relators. The record or the brief of relators does not reveal any manner in which the expenses of obtaining the consents of public bodies or individual owners, or certificates of public necessity and

(212 N. Y. 488)

TRACEY DEVELOPMENT CO. v. PEOPLE

et al.

SAME v. COLUMBIA DISTILLING CO. et al. (Court of Appeals of New York. Sept. 29, 1914.)

1. PARTITION (§ 34*)—ACTION-WATER RIGHTS -JOINT ESTATE-WATER.

Code Civ. Proc. § 1532, provides that, where two or more persons are in possession of real property as joint tenants or tenants in common, any one or more of them may maintain an action for partition. Held, that a suit for partition can be maintained only by joint tenants or tenants in common having estates in land against cotenants having similar estates, and, as the rights of riparian proprietors in water flowing past their land are not owned as joint tenants or tenants in common, the right of a riparian proprietor being a mere right of user as the water passes his land, a suit for partition cannot be maintained to determine the various rights of riparian proprietors in the waters of a stream as between themselves.

[Ed. Note.-For other cases, see Partition, Cent. Dig. §§ 88, 90; Dec. Dig. § 34.*] 2. STATES (§ 191*) -ACTION AGAINST STATE— WATER RIGHTS-DETERMINATION.

A suit to determine the various rights of riparian proprietors in the use of the waters of a stream not being a suit for partition, the state could not lawfully be joined as a party under Code Civ. Proc. § 1594, providing that the people of the state may be made a party defendant to an action for the partition of real property in the same manner as a private person, etc. [Ed. Note. For other cases, see States, Cent. Dig. §§ 179-184; Dec. Dig. § 191.*]