Kansas City Southern Railway Co. v. Ark. Commerce Commission

Citations: 230 Ark. 392; 323 S.W.2d 193; 1959 Ark. LEXIS 635Docket: 5-1813

Court: Supreme Court of Arkansas; April 13, 1959; Arkansas; State Supreme Court

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The case involves the valuation of Kansas City Southern Railway Company's property in Arkansas for ad valorem tax assessment, with the Arkansas Commerce Commission determining a valuation of $4,330,680. The Railroad Company appeals, asserting the proper valuation is $1,439,965. The Department's valuation was based on a formula averaging three methods: 1) Reconstruction Cost New minus Depreciation (RCN-D), provided by the Interstate Commerce Commission; 2) adding the market value of corporate stock to funded debt; and 3) capitalizing net income to estimate asset value. The Department calculated a capitalized value yielding 5.75% after taxes, while the Railroad argues it should yield 8.12%, suggesting a lower total capitalized value.

The Railroad challenges the Department's figures in the RCN-D method, claiming a valuation of $136,187,875 should be $132,031,203, reflecting a $4,156,672 difference. The Railroad argues that the Department neglected to account for a 3.2% depreciation for 1956 despite acknowledging net plant additions of $1,462,657. The Department countered that the Railroad did not submit adequate documentation to support its claim for depreciation. The record indicates the Railroad asserted entitlement to the depreciation but was not credited for it, despite the Department accepting the valuation of new additions. Additionally, the Department suggested that the I.C.C. valuation from 1956 was significantly higher than from 1955, but the Court did not accept this as a universally acknowledged fact, emphasizing the need for specific evidence regarding depreciation for the tax year in question.

No depreciation was allowed for the year in question; therefore, the addition of $1,462,657 to the valuation is deemed inappropriate. The Railroad argues for a 25% deduction from the Replacement Cost New-Depreciated (RCN-D) value due to functional and economic obsolescence, asserting that if reconstructed, only 37% of stations and office buildings, 47.60% of other buildings, and 44.67% of shops and engine houses would be necessary. It also claims that 500,000 net tons of its annual revenue traffic is outdated and unprofitable, with 4.22% of its total trackage also considered obsolescent, leading to a total of 25% of its property being affected by obsolescence.

Functional and economic obsolescence is acknowledged in both the stock plus funded-debt method and the capitalized earnings method of valuation. A 1944 National Tax Association report indicated that railroads' earnings and stock/bond values reflect obsolescence due to over-optimism and competition from other transportation modes. In Bailey v. Megan, it was noted that computations reflecting average market prices and capitalized net earnings express the impact of obsolescence and competition on actual value.

If obsolescence is deducted from the RCN-D valuation, it must be considered alongside the other valuation methods. It would be inequitable for obsolescence to benefit the Railroad in one instance while not being accounted for in another. Although the RCN-D value exceeds the stock and debt value considerably, it only slightly surpasses the income value. The appellant contends that the RCN-D value should be approximately $30 million less than income value and $15 million below stock and debt value, which would misrepresent the actual value reflected by the other valuation components.

The Court affirmed that the valuation method combining cost value, capitalized earnings value, and stock and debt value is a fair "yardstick" for determining the system value of the Railroad’s property. The Railroad's assertion that cost value is overemphasized and should be minimally considered was rejected. The Commission's chosen "yardstick" has been consistently applied in prior cases and is utilized in other jurisdictions, as exemplified by the 1955 case Chicago, Northwestern Ry. Co. v. Department of Revenue, which was denied certiorari by the U.S. Supreme Court.

A fair and equitable method for valuing railway properties is emphasized, referencing Mr. Justice Butler’s statement that valuation is not purely arithmetical but involves various estimates and forecasts. The appellant contends that the Department erred by not deducting certain non-operating properties and improvements from the RCN-D valuation, although some deductions were permitted. The Department also included a working capital charge of $3,168,476, based on 12% of the Railroad's operating expenses, but the appellant argues that daily revenues negate the need for working capital. This necessity is treated as a factual matter, and evidence supports that the method for determining working capital is uniformly applied across Class I railroads. 

Additionally, the appellant disputes the use of a 5.75% capitalization rate, arguing that a prior case approved a 6% rate before taxes, suggesting the current rate is justified. Another significant point raised by the appellant is the inclusion of current liabilities and unadjusted credits in the stock and funded debt valuation, which the court agrees should not be counted as they do not contribute to the property's value. Current liabilities include various payable items and unpaid interests on bonds. The appellant also claims entitlement to a credit for the full valuation of the L.A. Railroad, which pays taxes on a $69 million valuation, but the Department only recognized an $18 million valuation for L.A.

The Department asserts that the appellant is entitled to a deduction solely for the value of the L.A. stock owned by Kansas City Southern, which is classified as a non-operating asset. The Department correctly concluded that Kansas City Southern should only be taxed on the stock's value. The Department allocated 16.21% of the railroad property’s value to Arkansas, while the appellant claims it should be 13.41%, citing factors that diminish the value of Arkansas property, including the 'Full Crew Law,' challenging terrain, and Arkansas’s low share of tonnage and population decline compared to other states.

The Department's allocation method aligns with previously approved methods in the Frisco case, emphasizing that railroad valuation lacks a fixed rule. The appellant also argues against the Department's equalization of the unit value at 20%, noting disparities in assessments across counties. The Frisco case acknowledged ongoing efforts toward equitable assessments, with Act No. 153 of 1955 aiming for a 20% assessment figure. The appellant has not demonstrated that the 20% figure is erroneous or would lead to confiscation.

Consequently, the circuit court's judgment affirming the Department's valuation is reversed, and the case is remanded to the Department for a valuation consistent with these findings, including deductions for $1,462,657 in new additions for 1957 and current liabilities.