
    The People of the State of New York ex rel. Brooklyn Heights Railroad Company, as Lessee of the Brooklyn City Railroad Company, Respondent, v. State Board of Tax Commissioners of the State of New York, Defendant. (Assessment of 1905.) The City of New York, Intervenor, Appellant.
    Third Department,
    September 28, 1911.
    Tax — special franchise tax — assessment not covering tangible property — net earnings rule — accumulation for improvement of plant.
    The object in assessing a special franchise tax is not necessarily to produce a tax upon- the intangible rights of the corporation, but to determine what the special franchise is worth. If the basis of computation be right it is immaterial whether a tax on the intangible part of the franchise results or not.
    An assessment for a special franchise tax on a trolley railroad made under the net earnings rule will not be disturbed on appeal because a holding company controlling the railroad charged it, together with other railroads,, for power, furnished, for management, 'etc., upon a car mileage basis pursuant to an agreement, where it does not appear that the railroad is paying too much for such services.
    In assessing a special franchise tax on a railroad company it should he allowed the expense of maintaining a fund for keeping its plant'and machinery in a good and efficient condition, . and to improve its machinery in the future, if the sum he accumulated in good faith for such purposes and not to avoid taxation.
    . Appeal by The City of New York, intervenor, from an order of the Supreme Court, made at the Albany Special Term and entered in the office of the clerk of the county of Albany on the 16th day of December, 1910, as resettled by an order entered on the 9th day of January, 1911, reducing the assessment of the special franchise of the relator for the year 1905.
    
      Archibald R. Watson, Corporation Counsel [Curtis A. Peters and Addison B. Scoville of counsel], for the appellant.
    
      George D. Yeomans [John L. Wells of counsel], for the respondent.
   Kellogg, J.:

The Special Term finds that the parties, and referee proceeded upon the theory that the net earnings rule was the proper'method of assessment in this case. (69 Mise. Rep. 646.) The city now alleges that because that role produces no assessment for the intangible part of the special franchise, therefore, it is an improper rulé for this case and some other rule should be adopted.

The case discloses no reason as matter of fact why the net earnings rule does not equitably apply, and, as the case was tried upon that theory, the court will not give further attention to that matter.

The object of an assessment is not necessarily to produce a tax upon the intangible rights but is to determine what the special franchise is worth, and, if the basis of computation is right, it is quite immaterial for the purpose of fairness whether a tax on the intangible part of the franchise results or not. If there is no value, there is no tax. The assessing board and the courts cannot torture.facts and conditions to produce a tax — the tax follows a fair and just valuation.

The assessment for the tangible part of. the franchise is not adopted for determining the value of the intangible part of the franchise.

It appears that the relator and several companies are controlled by a holding company, the Brooklyn Rapid Transit Company. The holding company furnished to the other companies power from its power house, and the several companies are managed by the general officers of the holding’ company, and certain other expenses of the several companies are paid by that company. By mutual agreement, such expenses are borne by the operating companies upon a car mileage basis.

It is not urged that an improper plan was arrived at between the companies in bad faith for the purpose of affecting taxation. . This, apparently, could not be so, for if such a plan were favorable to some of the companies, it would be unfavorable to others and, in the end, the expenses ultimately falling, upon the holding company, on account of its subsidiary companies, would be the same.

The plan must, therefore, be considered as an agreement between the companies made in good faith, and there is no evidence to show that it is unfair or prejudicial to any company. By agreement certain service is paid for at a given price and the court, for the purpose of taxation, will not question the adequacy of the consideration, unless the agreement is shown to be collusive or in bad faith.

-In fact it is quite apparent that by paying for its power, supervision and the other expenses in the manner in which it does, the relator is saving considerable money on account of the various items going to make up such common expenses.

The road of the relator in Queens county, is through a more sparsely settled country than the roads in Brooklyn, contributing to the expenses of power and the other common expenses, and the traffic density is much less,.and it would- seem to be unjust to apportion these expenses among the roads according to the mileage of the roads. As a mere matter of theory, for the purpose of increasing its taxes, we cannot say that the-relator is paying too much on account óf these expenses, in the' absence of evidence to the contrary.

Criticism is made that expenses are charged with a- certain sum as up-keep of the property and a further sum for obsolescence. It is unnecessary to refine as to what charges may be called those for obsolescence and those for up-keep of plant. It is the right and duty of a public service corporation to create a fund from -the current earnings to keep and make good the machinery, appliances and such parts of its plant as from time and use ¡require replacement. In.the electrical field it is just as sure that -certain machinery now' in use will be superseded by better machinery and that the public service will require the better machinery as it is that the machinery will in time wear out. The creation and maintenance of a fund for the purpose of keeping good and efficient the plant and machinery of an electrical railway, if reasonable and made in good faith for that purpose and not for. the purpose of avoiding taxation, the court may well consider a step in . the- right direction. The name or manner of the division of the fund is immaterial. The question is, is it made in good faith and is it a reasonable fund to provide for the continued efficiency of the property. Earnings should provide for wear and obsolescence, and new capital should be resorted to for additions, enlargements and new property not already represented in capitalization. It does not appear that the amount set aside from earnings for the up-keep and obsolescence of the property is unreasonable.

We have considered the evidence carefully and also the able opinion- of Mr. Justice Le Boeuf at the Special Term. The facts, and conclusions he draws from them, fully sustain the result reached. The order is, therefore, affirmed, with costs to be paid by the appellant.

Order unanimously affirmed, with costs to be paid by the city, appellant; Betts, J., concurring in result.  