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November 1, 1939

MARTIN, State Tax Com'r, et al., and nine other cases.

The opinion of the court was delivered by: FORMAN

Historical Background

FORMAN, District Judge.

This litigation is a sequel to that brought by some of the present plaintiff companies involving taxes for the year 1932, the disposition of which, by this court, is reported in Lehigh Valley Railroad Co. of New Jersey et al. v. Martin, Tax Commissioner of State of New Jersey et al., etc., 19 F.Supp. 63 et seq., and involving taxes for the year 1933, as reported in Central Railroad Co. of New Jersey v. Martin, Tax Commissioner of New Jersey et al., and six other cases, D.C., 19 F.Supp. 82 et seq., affirmed, Lehigh Valley Railroad Co. v. Martin, Tax Commissioner, 3 Cir., 100 F.2d 139; certiorari denied, 306 U.S. 651, 59 S. Ct. 592, 83 L. Ed. 1049.

  The railroad companies had appealed each of the assessments here in suit to the State Board of Tax Appeals which in each case denied the contentions of the plaintiffs.

 Over opposition preliminary injunctions were granted in this court restraining the authorities from collecting above sixty per cent of the taxes for the years 1934 and 1935 as reported in Central Railroad Co. of New Jersey v. Martin, D.C., 19 F.Supp. 84. Similar restraining orders were entered to cover the year 1936.

 Answers were filed by the defendants and on final hearing all of the cases were consolidated for trial, upon which a huge volume of testimony was offered.

 The pertinent provisions of the Railroad Tax Act are as follows:

 "The state tax commissioner shall sit at Trenton on the first Tuesday of March in each year, and as often during the year and at such places as his duties may require for the purpose of ascertaining the true value, as of the first day of January preceding, of all property used for railroad or canal purposes of each railroad and of each canal company in this state, including its franchises, and he shall, in such ascertainment, ascertain:

 "I. The length and value of the main stem of each railroad, and of the waterway of each canal and the length of such main stem and waterway in each taxing district;

 "II. The value of the other real estate used for railroad or canal purposes in each taxing district in this state, including the roadbed (other than main stem), waterways, reservoirs, tracks, buildings, water tanks, waterworks, riparian rights, docks, wharves and piers, and all other real estate, except lands not used for railroad or canal purposes;

 "III.The value of all the tangible personal property of each railroad and of each canal company;

 "IV. The value of the remaining property, including the franchise." Revised Statutes of New Jersey 1937, 54:22-1, N.J.S.A. 54:22-1.

 For the purpose of valuing these properties for taxation the tax department maintains a separate inventory of all lands and structures of each subsidiary or owning company. These lands and structures are artificially classified and listed as first class or second class. In the first class are included all the lands and structures except depots and stations within the "main stem", which is defined as a strip of land not exceeding 100 feet in width. The second class includes all lands and structures appurtenant to the railroad outside of the 100 foot strip, but includes also the freight and passenger stations located within such strip. The inventories in use were made in 1911, and have been kept up to date by annual reports showing the addition of new and the retirement of listed facilities. There are also lists or records showing the locomotives, cars and special equipment of each railroad, and the number or percentages thereof used or present in New Jersey on certain selected test days as well as lists or records of ferry boats, tug boats, car floats, barges, etc., used in ferrying freight and passengers between New Jersey and New York.

 The State Tax Commissioner each year makes a "primary" valuation which is submitted to each railroad company for examination and criticism, and later he grants a hearing on any protests which may be filed against the proposed valuation. As a result, the valuation of one or more individual items may be changed, which will affect the total of the valuation, but the grand total of the assessment figures is not open to question or modification as such. After the state tax commissioner decides on his final valuations the taxes are computed thereon. From such valuation there is an appeal to the State Board of Tax Appeals, which has power to modify or correct the assessments. Power further to review, modify or correct the assessments under a writ of certiorari is conferred upon the State Supreme Court.

 Chronologically, if we take, for example, the taxes assessed for the calendar year beginning January 1, 1934, the railroads are required to report conditions as of that time to the State Tax Commissioner before March 1, 1934. These returns may be considered until November 1, 1934 when the result of the investigation and a report of the valuation is made to the railroads. The valuations are completed by the State Tax Commissioner before December 10, 1934, and they are subject to his review on the second Monday in January of 1935. Meanwhile, the average tax rate is struck from reports submitted by the local taxing districts to the State Tax Commissioner so that it may be applied to the valuations. Application may be made to the State Board of Tax Appeals to review the valuations on the third Monday of June 1935, and the taxes are due and payable on December 1, 1935. Thus, it is seen that a lapse of nearly two years occurs from the beginning of the taxable year to the date when the taxes for that year become due and payable.

 Plaintiffs' Contentions

 Plaintiffs complain that the practice of the State Tax Department in valuing these properties for taxation results in illegal and excessive valuation. Their complaints are generally as follows:

 All the lands are individually valued according to the ascertained market value of adjacent lands not used for railroad purposes.

 Structures are individually valued according to the local cost of reproduction less depreciation.

 The equipment, or that portion of it allocated or assigned to the State of New Jersey, is also valued according to cost less depreciation.

 The franchise valuation is an estimate based on no definite figures.

 Plaintiffs complain that the earnings of the railroads are not reflected in the valuations that the taxes are not computed upon true valuations of the property as required by the State Constitution and Laws, that they are excessive, discriminatory and violative of the due process and equal protection clauses of the Constitution and that the assessments impose an undue burden upon interstate commerce.

 Plaintiffs further complain that in so far as the instant assessments are concerned, no attempt has been made to value a railroad as such, or to value any of the New Jersey divisions as parts of the systems to which they belong, or to ascertain the values with reference to the earnings of the systems or with relation to the value of the stocks and bonds.

 Defendants' Contentions

 The defendants contend in these suits as heretofore that this court is without jurisdiction to dispose of the controversy. The reasons therefor are substantially the same as those urged upon the court in the 1932-33 and '34 cases; namely, that a three judge court should have been convoked for its determination that an injunction if granted would be violative of Section 265 of the Judicial Code, 28 U.S.C.A. ยง 379, that no irreparable injury has been demonstrated, that the plaintiffs have an adequate remedy at law, that the prior decisions of this court and of the New Jersey State Court are res adjudicata and a bar to these proceedings, and finally, that the suit is against the State of New Jersey, which is prohibited by the Eleventh Amendment, U.S.C.A.Const.

 We are not inclined to reconsider these jurisdictional problems in the absence of additional grounds for their application. The only new matters advanced by the defendants are founded upon the recent decision of the Supreme Court of the United States, Worcester County Trust Company v. Riley, 302 U.S. 292, 58 S. Ct. 185, 82 L. Ed. 268, and the decision of the Third Circuit Court of Appeals disposing of the appeal from this court of tax cases involving the years 1932 and 1933, Lehigh Valley R. Co. of New Jersey v. Martin, 100 F.2d 139. Worcester County Trust Co. v. Riley, supra, sustains the view that a suit against a state will not be justified unless there is a violation of constitutional rights. The Court was unable to find such an invasion and condemned the proceedings as being an infringement of the Eleventh Amendment of the Constitution, U.S.C.A. This case is not dispositive of the instant case unless there is no constitutional infringement involved herein.

 The Third Circuit Court of Appeals in the cases of Lehigh Valley Railroad Company et al. v. Martin, supra, made specific observations relative to the defense of res adjudicata. Those cases originated in this court (19 F.Supp. 63; Central R. Co. v. Martin, 19 F.Supp. 82) and as hereinbefore indicated involved assessments for the calendar years 1932 and 1933. The 1933 case was previously reviewed by the Supreme Court of New Jersey upon certiorari to the State Board of Tax Appeals, Central Railroad Co. v. Thayer-Martin, 114 N.J.L. 69, 175 A. 637, and then suits involving that same year together with cases involving the 1932 assessments were instituted in this court. The 1932 assessments had advanced in the state tribunals only as far as the State Board of Tax Appeals. The parties stipulated that the 1932 cases should be determined on the record which was made at the hearing before the State Board of Tax Appeals, and reviewed by the Supreme Court of New Jersey in the cases concerning assessments for the year 1933. Thus, it was agreed that the law and facts governing both years were the same. This court determined the 1932 controversy upon its merits, but for procedural reasons dismissed the controversy in so far as the 1933 assessments were concerned. On Appeal the court stated:

 "The appellees also assert that every question presented by the nine appeals is res adjudicata by reason of the decision of the Supreme Court reported as Central R.R. Co. v. Thayer-Martin, supra. There is in fact an identity of parties, issues and subject matter presented by the suits at bar and Central R.R. Co. v. Thayer-Martin, supra. The records in these cases are identical in all pertinent respects. Examination of the reported decision in Central R.R. Co. v. Thayer-Martin, shows that questions concerning both the method of assessment and alleged discrimination in making the assessments were raised and adjudicated by the Supreme Court of New Jersey. While it is true that the provisions of the Fourteenth Amendment and the Commerce Clause [U.S.C.A.Const.] were not specifically adverted to, none the less all constitutional questions raised in the court below could have been raised and rights thereunder asserted in the proceedings in the Supreme Court of New Jersey. Therefore, whether asserted or not, such questions are res adjudicata now. Fidelity National Bank v. Swope, 274 U.S. 123, 130, 131, 47 S. Ct. 511, 71 L. Ed. 959; American Surety Co. v. Baldwin, 287 U.S. 156, 167, 53 S. Ct. 98, 77 L. Ed. 231, 86 A.L.R. 298; Grubb v. Public Utilities Commission, 281 U.S. 470, 479, 50 S. Ct. 374, 74 L. Ed. 972. It is also settled that in tax cases the doctrine of res adjudicata concludes parties to a subsequent proceeding upon all questions determined by an earlier decision. Tait v. Western Maryland Railroad Co., 289 U.S. 620, 53 S. Ct. 706, 77 L. Ed. 1405; Nachod Co. v. Helvering, 6 Cir., 74 F.2d 164; Henderson v. United States Radiator Corporation, 10 Cir., 78 F.2d 674.

 "There can be no question but that the courts of a state are competent to hear and determine questions arising under the Constitution and laws of the United States, Detroit, etc., R. Co. v. Michigan Railroad Commission, 235 U.S. 402, 35 S. Ct. 126, 59 L. Ed. 288; State Corporation Commission v. Wichita Gas Co., 290 U.S. 561, 54 S. Ct. 321, 78 L. Ed. 500; Dorrance v. Martin, D.C., 12 F.Supp. 746.

 "In our opinion the questions presented by the nine suits at bar are res adjudicata and this defense as asserted by the appellees is valid." Lehigh Valley R. Co. v. Martin, 3 Cir., 100 F.2d 139, 147.

 Counsel for defendants contend that we have here the same issues, subject and parties as were involved in the New Jersey Supreme Court in the 1933 cases, and in this court in the 1932 cases, and, hence, these suits are barred by the doctrine of res adjudicata notwithstanding the fact that different taxable years are involved herein, the above quoted language being cited to substantiate their position. This court is not impressed with this argument, because it does not agree with counsel as to the extent to which the doctrine of res adjudicata will conclude "parties to a subsequent proceeding upon all questions determined by an earlier decision".

 To understand the limitations of the doctrine the case of Cromwell v. County of Sac, 94 U.S. 351, 352, 24 L. Ed. 195, will furnish an excellent background. Therein the Court observed:

 "In considering the operation of this judgment, it should be borne in mind, as stated by counsel, that there is a difference between the effect of a judgment as a bar or estoppel against the prosecution of a second action upon the same claim or demand, and its effect as an estoppel in another action between the same parties upon a different claim or cause of action. In the former case, the judgment, if rendered upon the merits, constitutes an absolute bar to a subsequent action. It is a finality as to the claim or demand in controversy, concluding parties and those in privity with them, not only as to every matter which was offered and received to sustain or defeat the claim or demand, but as to any other admissible matter which might have been offered for that purpose. * * * The language, therefore, which is so often used, that a judgment estops not only as to every ground of recovery or defence actually presented in the action, but also as to every ground which might have been presented, is strictly accurate, when applied to the demand or claim in controversy. Such demand or claim, having passed into judgment, cannot again be brought into litigation between the parties in proceedings at law upon any ground whatever.

 "But where the second action between the same parties is upon a different claim or demand, the judgment in the prior action operates as an estoppel only as to those matters in issue or points controverted, upon the determination of which the finding or verdict was rendered. In all cases, therefore, where it is sought to apply the estoppel of a judgment rendered upon one cause of action to matters arising in a suit upon a different cause of action, the inquiry must always be as to the point or question actually litigated and determined in the original action, not what might have been thus litigated and determined.Only upon such matters is the judgment conclusive in another action." 94 U.S. 351, 352-353, 24 L. Ed. 195.

 In Tait v. Western Md. R. Co., 289 U.S. 620, 53 S. Ct. 706, 77 L. Ed. 1405, the contention was made that a judgment in a suit concerning income taxes for a given year could not estop either of the parties in a later action touching liability for taxes of another year, because the scheme of the Revenue Acts is an imposition of tax for annual periods, and the exaction for one year is distinct from that for any other. Therein a deduction from gross income covering an amortized proportion of the discount on the sales of bonds was claimed for the years 1918 and 1919 which was disallowed by the Board of Tax Appeals, but ultimately allowed by the Circuit Court of Appeals, 4 Cir., 62 F.2d 933. Deductions on the same grounds were claimed for the years 1920-1925, and the District Court held that "no facts were presented which had not been before the Board of Tax Appeals in the litigation over the 1918 and 1919 taxes", and that the parties were concluded by the former decision. This conclusion was affirmed by the Circuit Court of Appeals. The court stated:

 "The scope of the estoppel of a judgment depends upon whether the question arises in a subsequent action between the same parties upon the same claim or demand or upon a different claim or demand. In the former case a judgment upon the merits is an absolute bar to the subsequent action. In the latter the inquiry is whether the point or question to be determined in the later action is the same as that litigated and determined in the original action. Cromwell v. County of Sac, 94 U.S. 351, 352, 353, 24 L. Ed. 195; Southern Pacific R. Co. v. United States, 168 U.S. 1, 48, 18 S. Ct. 18, 42 L. Ed. 355; United States v. Moser, 266 U.S. 236, 241, 45 S. Ct. 66, 69 L. Ed. 262. Since the claim in the first suit concerned taxes for 1918 and 1919 and the demands in the present actions embraced taxes for 1920-1925, the case at bar falls within the second class [ 289 U.S. 620, 623, 53 S. Ct. 706, 707, 77 L. Ed. 1405.]

 * * *

 "Is the question or right here in issue the same as that adjudicated in the former action? The pertinent language of the revenue acts is identical; the regulations issued by the Treasury remained unchanged, and of course the facts with respect to the sale of the bonds and the successive ownership of the railroad property were the same at the time of both trials. * * * the Circuit Court of Appeals has found that all the facts stipulated in the present cause were before it in the former one, and we accept this finding." 289 U.S. 620, 625, 626, 53 S. Ct. 706, 708, 77 L. Ed. 1405.

 The court concluded that the prior judgment relative to the years 1918-1919 was an estoppel to the suit for the subsequent years under consideration. It is significant to observe that the crux of the above case is that the facts presented in the former litigation were identical with those presented in the subsequent litigation.

 This court does not feel that the disposition made by the Supreme Court of New Jersey in the 1933 cases precludes a decision upon the merits of the cases involved herein. And for the same reason the disposition of the 1932 and 1933 cases by this court is not preclusive of an investigation of the merits of the methods used by the State of New Jersey in determing "true value". Indeed, this court therein expressly declined to approve or justify the method used in the following language: "It is desirable to emphatically point out that this opinion is not to be considered as a justification or an approval of the methods of the taxing authorities of this state in taxing plaintiffs' property. It is held here, rather, that in these cases involving the taxes for the year 1932 the plaintiffs at most have shown that the taxes imposed exceed what they feel they should be taxed, and, upon analysis, the method suggested by them appears as arbitrary as they charge that of the taxing authorities to be, unsupported by the necessary underlying proof of the accuracy of their calculations." Lehigh Valley R. Co. v. Martin, D.C., 19 F.Supp. 63, 82. Clearly, this court is not precluded from considering the merits of the method of assessment within the State of New Jersey, because of a prior decision in this same court involving different years which expressly declined to consider the merits of that method.

 This court, therefore, sees no additional merit to these contentions and will proceed to a determination of the subject matter of these cases.

 Plaintiffs' Contention for System or Unit Valuations

 The plaintiffs contend that the true values of their properties cannot be ascertained without first determining their value as a whole regardless of state lines, and then allocating a portion of that sum to the State of New Jersey. This is based upon the fact that railroads are rarely sold on the market piecemeal but as a whole, and the fact that a section of a railroad is of no value unless connected with the whole -- in other words, it has no disjunctive value. A witness for the plaintiffs made the following observation in this connection -- "A railroad in two or more states must still be valued as a unit just as a house on the land between two states must be valued as a unit and values allotted between the two states."

 It is urged that the proposed method of valuation would tend to equalize values throughout the system, inasmuch as the State of New Jersey is one of geographical uniqueness. This uniqueness is due to the fact that there are relatively few railroad miles within the state, but this factor, it is argued, is fully balanced by the existence of large terminal properties, which serve as a depository and distribution point for goods shipped from and to all parts of the country and abroad.

 Plaintiffs' Method of Computing System or Unit Value

 In computing system values several methods have been proposed, namely

 A. By capitalizing the earnings.

 B. By an analysis of the stock and bond valuations.

 C. By a composite of the above two valuations.

 It is submitted that true value can best be determined generally by a determination of the net operating income and a capitalization of that income. An illustration of this method is as follows: If a railroad system earns $6,000 in a given year and if 6 per cent. is a fair rate of return on an investment in that year, the value of the system capitalized at such rate of return would be $100,000. In this method two problems appear. In the first place, the earnings of any one year do not reflect prospective earnings. Secondly, the method calls for judgment in the determination and application of a fair rate of return. Past and future conditions must be considered in determining whether the rate of return should be four, five or six per cent., et cetera. Thus, it becomes necessary for the statistician to look into the past and find earnings and rates of income in order that he may fairly predict the future.

 The statisticians tell us that if it were possible to forecast the net earnings of a property for each of the years in the future, it would be a simple mathematical calculation to obtain the present worth of those future earnings. Such a present worth figure would be almost conclusive as to value; but, unfortunately, the future cannot be accurately foreseen. We can only judge the future by the past, and so past and present earnings are more or less useful as the basis of estimating the future, but at best all that can be had as to future earnings is an estimate which, when, capitalized in a proper manner, gives an estimated earning value. If the estimate could be known to be perfect, it probably would be entitled to nearly 100 per cent. weight. But not being perfect it is submitted that all other factors and information must also be weighted in with it to fortify conclusions of value.

 It is said that a sufficient number of years should be taken into consideration to be fairly representative of future conditions. It is customary in railroad taxation to base this prediction upon the average of a five year period. What years to average is perplexing. Railroads like other enterprises have their good and bad periods. Their earnings seem to follow the business cycles of the nation. Therefore, to get a fair cross-section of the earning power of a railroad as indicated by its past operations, it would appear that for valuation purposes the net earnings should be as nearly as possible averaged over a period covering a complete business cycle.

 Having made an estimate of future earnings it becomes necessary to arrive at a rate of capitalization. This will generally be based on the prevailing rate of interest necessary to attract capital into the industry. The rate most frequently used is six per cent., but it may be a too high or too low rate for the company under consideration, depending on the type of company and the cost of borrowing money.

 Summarizing this method, it is seen that it calls for expert judgment, and even then the best that can be said of it is that it is mere estimate. It presents problems of what the rate of return shall be, and what past years shall be averaged in order to forecast the future.

 One particular objection is that the method assumes there is an income. We have throughout the country many railroad properties operating consistently with annual losses. Can it be contended that in such cases the property has no taxable value?

 A second method of computing present value is the so-called stock and bond method. This system represents theoretically what a buying public considers the property worth, and is assumed by some to be a very good indication of what the property is worth for purposes of taxation. As in the first method discussed, it is the general practice to average the value of the securities over a period of years in order to arrive at a figure more nearly representative of present value. Its virtue lies in the fact that it is usually easy to ascertain the number of shares of stock and the par value of bonds outstanding. It is also easy to obtain the market value of the actively traded issues, leaving problems of estimates to such items as closely held issues, bank loans, or other special items.

 But it is not so easy to select a period of averaging prices of securities so that the result will be informative as to the value of property at any particular time. For example, nearly everyone will concede that market prices of September 1929 have very little significance in determining the value of a property today. On the other hand, it is doubtful that the 1929 security prices had any relation to the value of the property they represented even in 1929. Furthermore, it is apparent that all of the day-to-day fluctuations in stock and bond prices cannot be explained by current changes in the value of the property.

 Mr. Graham, witness for the defendants, made several objections to the stock and bond method --

 "The first objection is that it involves an arbitrary choice of the period of time or the number of years to be averaged, and a different period of years will yield a different result.

 "The second objection is more basic, and that is that averaging as a method of statistical procedure is useful only if on the one hand all the component figures are relative to the result you are seeking, and if secondly there is no reason to prefer one figure to another. (Record*6812

 * * *

 "The third difficulty is also a basic one, which is that the averaging of stock prices is in itself an admission that the stock prices do not represent a considered and dependable view of the value of the security, because if that were so, and if these prices were dependable, it would not be necessary to average prices at any particular time but it would be sufficient to take the price as of the date of the valuation, because in theory that stock price is supposed to represent not only the current earnings and current conditions, it is also supposed to reflect adequately the past record, and supposed to reflect adequately the future prospects of the securities. It is supposed to, and at some times it does, but the exceptions are so numerous that it cannot be said that the stock price really does reflect properly all the conditions which enter into the valuation of the security.

 "That is admitted necessarily by resorting to the process of averaging the stock price, the purpose being to get away from the deficiency of the stock price on any particular date, but when you do that you are simply selecting other stock prices which themselves may suffer from the same deficiency, and averaging them, and, as I said before as to the theory of averages, the averaging of a number of separately non-representative figures will not give you a representative result." (R. 6816)

 The ideology of the property being worth what the investing public considers its value is far from being infallible. The market value of securities does not in fact solely represent the investor's composite conception of the worth of the railroad property. In the case of bonds the maturity dates and whether or not the interest is guaranteed by another railroad will affect the price paid for them. Furthermore, one must bear in mind that there is a speculative interest in the security market as well as an investor's interest. When the speculation fever is rampant it runs far ahead of sound investment judgment. Conversely, when the market gets panicky, due to war-scares, political moves, or other forces which may or may not actually affect real values, then the security values plunge far below or soar far above the real worth of the property underlying the securities. Finally, the exchange market is very sensitive. A note of optimism in one branch of industry buoys up the securities in other branches wholly unrelated, and if something happens to adversely affect a certain industry, its securities are prone to plunge downward and carry other securities' values with it.

 Assuming that the market value of the stocks and bonds measures the value of the assets of a railroad company, it must be determined what assets the company has other than the operating property subject to assessment. This property is termed non-operating property. Many of these items are wholly unnecessary in the operation of the transportation business, and to the extent that the value of these assets influence the investing public in its appraisal of the outstanding securities, to that extent such influence should be eliminated from the market value of stocks and bonds. Also it is well known that some companies own considerable idle non-operating properties which produce no income. In these cases, it is conceivable that the investing public will consider such properties a liability rather than as an asset, and to that extent the ownership of such property acts as a drag on the market value of outstanding securities. The value of these properties, then, should be added to the value of the stocks and bonds.

 It will be observed from this analysis that it is not correct to assume that values are consistent with what the investing public pays for stocks and bonds. If one makes this assumption it must be decided what years in the past shall be averaged in order to predict the future. Finally, there is the perplexing problem concerning non-operating property. Aside from the problem of distinguishing between the two classes of property, the effect that non-operating property has upon the investing public is debatable, and resolves itself into a problem of judgment.

 A third possible way of determining system value is to find the average of a composite consisting of a capitalization of system earnings and the value of the stocks and bonds. This method, obviously, possesses all the vices and virtues of the methods already discussed. Therefore, it will be unnecessary to consider further the problem of system valuation.

 Allocation of System Value

 The next problem is to break up this unit valuation and allot the proper portion of that value to the State of New Jersey. To do that we must determine what proportion of the whole is located within New Jersey. It is submitted that this proportion may be found by the use of certain allocation factors. A general discussion will follow describing the various factors that the railroads propose. All of these factors are not used in determining the true value of each of the various plaintiffs' railroads, but a portion of these factors or the average of a combination of such factors is utilized.

 It is the general practice to make the allocation not on the basis of any one allocation factor, but on the basis of a number of factors combined in some fashion into a composite allocation factor. The reason for that is that any one factor taken by itself will tend to over-emphasize a certain phase of valuation.

 The allocation factors to be discussed are as follows: (1) Road miles, (2) all track miles, (3) locomotive miles, (4) car miles (freight and passenger), (5) train miles (freight and passenger), (6) traffic units, ton miles and passenger miles, (7) reproduction cost and relative investment, and (8) gross revenue.

 Road Miles

 This is the lineal mileage of the center line of a railroad right of way, and represents the percentage that the miles of road located within the State of New Jersey bears to the miles of road of the whole system. Its virtue lies in the fact that it measures the territorial extent of the system. However, it is deficient and does not reflect the whole picture, because it assumes that a mile of road in one section of the system is equal to the value of a mile of road located anywhere within the system. At the present time a mile of road in one state may bear only slight resemblance to a mile of road in another state. More specifically, it has nothing to do with the width of the right of way, number of tracks, character or number of bridges, tunnels, stations, signals, grades, fills, terminals or other indicia of value. Lastly, it assumes that each mile of road earns the same income as any other mile of road.

  All Track Miles

 This factor represents the percentage that all of the miles of track within the State of New Jersey bears to all of the miles of track in the whole system. Much merit for its use in New Jersey is claimed by reason of the fact that it is said to reflect the value of the terminal properties due to the unusual amount of trackage surrounding the same. The theory underlying its use as an allocation factor is that the extent of the tracks measures the extent of the business. That, however, assumes that each mile of track produces the same amount of revenue. It may be further criticized because it gives equal weight to tracks in terminals and in yards as it gives to trackage on the main right of way, which may be much more expensive to construct.

 Locomotive Miles (Freight, Passenger and Switching)

 This factor represents the percentage of locomotive miles produced within New Jersey. It may be expressed separately in terms of freight, passenger and switching locomotive miles. As an allocation factor it is claimed to measure the extent and volume of the business. It does not take into account fully the difference between transportation productivity between one portion of a line and another. The factor is also objectionable unless it takes into consideration the difference between locomotive miles in passenger, freight and switching service.

 Car Miles (Freight and Passenger)

 The percentage of car miles attributable to New Jersey is another factor claimed to measure business activity. Its weakness lies in the fact that it does not include switching movement in the yards and in the fact that in the more congested areas car miles do not build up so rapidly. Miles of car per day cannot accumulate in areas like the New Jersey terminal district as compared with other districts where there is a freer movement of cars. It does not take into account the difference in revenue per car mile or in expense per car mile as between freight, passenger and commuting service.

 Train Miles (Freight and Passenger)

 The objection to the percentage of train miles is that they are credited whether a train is handling one car or one-hundred cars per train, one or two passenger cars or ten to fifteen passenger cars per train. A large amount of train mileage may be built up in certain districts of the same road which produces a small amount of ton miles, or car miles, while in other districts a small amount of train miles may produce a large amount of ton miles and car miles. If the number of cars and the type of goods transported were uniform this would be a better factor.

 A further objection is that train miles do not take into consideration the earnings and expenses of switching operations, nor the differences in gross and net earnings as between passenger and freight service, nor differences in gross and net earnings for a given service on various parts of the line.

 Traffic Units

 (a) Ton Miles (Gross or Net)

 (b) Passenger Miles

 Traffic units also are intended to measure the business activity and the use of the property. Net ton miles are the net weight of the car. The gross ton miles include both the lading and the weight of the car as well as empty cars. Passenger miles include the number of passengers multiplied by the number of miles. When a ton of freight moves one mile that is a traffic unit. When one revenue passenger travels one mile that is likewise a traffic unit. This factor is said to possess the virtue of uniformity among the states, that is to say, a ton is a ton, a passenger is a passenger, and a mile is a mile in every state. However, it does not reflect the relative earning power of the traffic transported. If every ton mile produced the same revenue over the whole system then this factor would measure accurately the relative gross revenue, and if passenger miles produced the same revenue on every part of the system, passenger miles would represent accurately the relative division of the passenger revenue.

 A combination of ton miles and passenger miles, when utilized, does not take into account differences in operating expenses per mile unit as between freight and passenger service.

 Lastly, net tons do not take into account the number of cars in a train. It might happen that there would be so many empty cars in the train that the cost of pulling these cars would offset the income derived from the tonnage transported. A similar objection can be made to the gross tonnage factor, because the tonnage capacity of cars varies. A train consisting of cars of large capacities could transport a large amount of tonnage with less cars than a train consisting of cars of small capacity.

 Reproduction Cost and Relative Investment

 These factors seemed to be based upon valuations made by the Interstate Commerce Commission. Mr. Burpee, witness for the plaintiffs, stated that reproduction cost is not necessarily important, other than to determine whether the value based on earnings is consistent with the investment. The percentage of relative investment is claimed to reflect the difference involved in an investment on one part of the system as distinguished from another. Either of these factors would seem to give some weight to the terminal properties within New Jersey. But either factor used alone could not have much utility as the reproduction cost or investment in a property is no indication of its value. Dr. Badger, witness for plaintiffs, was of the opinion that a 25 per cent. weight accorded to the relative investment factor would be sufficient.

 The obvious objection to any cost factor is that it assumes an equality of value in each dollar of investment, or that an investment of $1,000,000 in one state is as valuable as a similar investment in another state.

 Gross Revenue

 The percentage of this factor attributable to New Jersey is used in the case of the Central Railroad of New Jersey, because this company is the only plaintiff which maintains separate accounting of its New Jersey operations. Gross earnings are of value to a road only in proportion as they produce net receipts. It may be criticized because it does not take into account the differences in operating expenses on different portions of the system, and because it is difficult to apportion properly the earnings derived from interstate commerce.

  The above discussion has been confined to separate analyses of the various allocation factors used in the plaintiffs' calculations. The court is not unmindful of the fact that the defects in a particular factor when used alone will be neutralized or diluted when arranged with other factors. On the other hand, the defects may be accentuated in combination with other factors. It, therefore, becomes necessary to consider what has been said of these factors when combined and arranged together in various combinations. It will be unnecessary to go beyond the testimony of Mr. Burpee and Dr. Badger, witnesses for the plaintiffs, to discern the weakness of the method. It appears that no combination of factors can be used universally. Conditions in one state or one railroad may demand the use of combinations different from those used in other railroads and states. Mr. Burpee stated that the best that could be hoped for was a reasonable approximation. Both these witnesses agree that system valuations as well as the selection of formulae or allocation factors is a matter of judgment. Even experts will disagree in their judgment, and as a matter of fact Dr. Badger and Mr. Burpee used different factors, and, of course, obtained different results. The following table indicates the amounts reached in some of the railroads under consideration, and that the differences are by no means nominal: 1934 1935 1936 (value) (value) (value) Lehigh Valley RR. Burpee $22,000,000 $22,000,000 $22,000,000 Badger 20,000,000 20,000,000 21,000,000 By other formulae 16,234,110 14,503,450 16,189,450 Delaware, Lackawanna & Western Burpee $47,000,000 $46,000,000 $47,000,000 Badger 45,000,000 43,000,000 40,000,000 By other formulae 33,563,280 27,654,220 26,396,510 N.Y. Central Burpee $ 9,000,000 $ 9,000,000 $1,000,000 Badger 8,370,000 11,040,000 11,280,000 By other formulae 9,484,670 8,468,380 8,942,370 Central of N.J. Burpee $70,000,000 $65,000,000 $58,000,000 Badger 52,000,000 48,000,000 49,000,000 By other formulae 59,709,780 52,835,820 52,444,060 Erie R.R. Burpee $21,000,000 $25,000,000 $27,000,000 Badger 24,500,000 26,620,000 29,040,000 By other formulae 26,075,830 25,065,280 26,632,330


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