APPEAL from the Circuit Court of Du Page County; the Hon. MEL.
ABRAHAMSON, Judge, presiding.
MR. JUSTICE SCHAEFER DELIVERED THE OPINION OF THE COURT:
Rehearing denied September 19, 1955.
This is a direct appeal by the Department of Revenue from a judgment of the circuit court of Du Page County, which found that the 1953 assessment of all of the real and personal property of the Chicago and North Western Railway Company in Illinois, in the sum of $86,750,000, was excessive to the extent of $36,750,000, and ordered a reduction to $50,000,000. Revenue and constitutional questions are presented.
The Revenue Act of 1939 imposes the duty of assessing the value of the operating property of railroads for the imposition of the general property tax upon the Department of Revenue, which ascertains the value of the property of each railroad as a unit and then certifies to each taxing district in which property of the railroad is located its appropriate portion of the total statewide value. (Ill. Rev. Stat. 1953, chap. 120, pars. 560-571.) The present controversy turns largely upon the following provisions of section 80 of the act:
"For the purpose of determining the fair cash value of the property of any railroad company the commission shall take into consideration the actual or market value of the shares of stock outstanding, the actual or market value of all bonds outstanding and all other indebtedness as shall be applicable, for operating the road, provided, in determining the market value of any such stock or indebtedness the commission shall consider quotations for the next preceding five years; the net earnings of the company during the five calendar years preceding the assessment date; and such other information as the Department may consider as bearing on the fair cash value of the property: Provided, that the facts hereinbefore named shall not be conclusive upon the Department in determining the fair cash value of the property of a railroad company."
Section 82 requires every railroad company in Illinois, in April of each year, to furnish the Department specific information, including
"(8) The reproduction cost of the property within Illinois and the total reproduction cost of all property of such company. Said reproduction cost, so far as applicable, shall be as last determined by the United States Interstate Commerce Commission, or other competent authority, plus additions and betterments, less retirements and depreciation to the December 31 next preceding the assessment. * * *
"(10) Any other information the Department may require to determine the fair cash value of the property of any railroad company, or necessary to carry out the provisions of this Act."
The formula used in assessing plaintiff's property was the same as that used in assessing all other railroads. The Department first took the average of plaintiff's net earnings for the preceding five-year period, which amounted to $7,668,000. Capitalized at six per cent, this amount indicated an estimated system value of $127,800,000. The Department determined that 28.32 per cent of plaintiff's total assets were located in Illinois, and the plaintiff accepted that allocation factor. Application of the allocation factor indicated a value of $36,194,000 for plaintiff's Illinois property, based upon capitalized earnings. The Department then determined the market value of plaintiff's outstanding bonds and other indebtedness and of its shares of stock, based upon high and low monthly quotations for the years 1948 to 1952, inclusive, which amounted to $227,234,000. From this figure, $71,881,000, the value of non-operating property, (intangible investments, $26,024,000; locally assessed property, $5,825,000; cash invested in U.S. Treasury bonds and certificates. $40,032,000,) was deducted, leaving a net market value, based upon the aggregate value of plaintiff's shares of stock and debt, of $155,353,000. Application of the allocation factor reduced this amount to $43,996,000, which represented the market value of plaintiff's outstanding shares and debt allocable to Illinois. The Department next determined that the reproduction cost, less depreciation, of plaintiff's property in Illinois, computed by the Interstate Commerce Commission, was $239,590,000. This amount was reduced by $22,880,000 for public improvements and $3,710,000 for uneconomic branch lines, leaving an estimated reproduction cost less depreciation of $213,000,000.
In arriving at its final assessment, the Department averaged these three factors in the case of plaintiff's property and the property of forty-five other railroad companies. This method was pursued prior to the enactment of the Revenue Act of 1939 and in each year thereafter. The three amounts entering into the calculations, so far as plaintiff is concerned, were: (1) Capitalized earnings value $36,194,000; (2) Stock and debt value, $43,996,000; (3) Reproduction cost, less depreciation, $213,000,000. The average of these three items is $97,730,000.
The railroad assessor of the Department frankly stated that there was no contention that the Department's findings were objectively correct in every detail; that the Department made no claim that any one or more of the evidences or appraisals before it were of conclusive validity; that doubts were resolved by the Department by reducing the assessed valuation of $97,730,000 shown by the formula calculation by the sum of $10,730,000 to arrive at an original assessment of $87,000,000; that in making this reduction factors which seemed to indicate adverse trends and worsened business conditions, higher wages, truck competition, and the like, were taken into account. At the hearing before the Department upon the plaintiff's application for correction of the assessment, the valuation was further reduced to $86,750,000.
The trial judge found that the disparity between reproduction cost less depreciation and plaintiff's earning power was so great that reproduction cost was unreliable as a measure of value of its railroad operating property; that the final assessment resulted from giving excessive and undue weight to reproduction cost and was more than 100 per cent in excess of the value resulting from the use of the "statutory standards" of capitalized earnings and stock and debt market values; that the value of plaintiff's operating property in Illinois, as determined by the Department, was excessive and not within the limits of the proper exercise of judgment or permissible discretion on its part, and that the fair cash value of plaintiff's operating property in Illinois did not exceed $50,000,000. Upon the basis of these findings, judgment was entered reducing the assessment to $50,000,000.
The Department first contends that the circuit court was without power to change the challenged assessment except upon a showing of fraud or wilful disregard, as distinguished from an erroneous application, of the statutory command of fair valuation, and that in any event the Department's valuation was sound and was neither fraudulently excessive nor in wilful disregard of the statute.
To justify the exercise of jurisdiction by the trial court in this case it is necessary only to refer to the settled principle that assessments of property may be so excessive and may have been made under such circumstances as to justify the conclusion that the assessment was not honestly made and was known to be excessive, and that under such circumstances assessments have been held to be subject to judicial review. (People ex rel. Hellyer v. Hendrickson, 373 Ill. 99; People ex rel. Little v. St. Louis Electric Bridge Co. 290 Ill. 307; People's Gas Light and Coke Co. v. Stuckart, 286 Ill. 164; Pacific Hotel Co. v. Lieb, 83 Ill. 602.) Whether an over-valuation is so excessive as to be fraudulent is largely dependent upon the circumstances of each particular case. (People ex rel. Nash v. Norton, 358 Ill. 272; Burton Stock Car Co. v. Tracger, 187 Ill. 9.) To set aside an assessment, it is not necessary to show fraud in its generally accepted meaning; if the taxing authorities have assessed the property at a valuation grossly in excess of its market value, and the assessment was deliberately and wilfully made, such conduct constitutes a constructive fraud, and the courts will protect the taxpayer against the wrong sought to be perpetrated against him. (People ex rel. ...