Full opinion text
WEBSTER, District Judge. These causes are now before the court on exceptions to the report of the special master to whom the cases were duly referred. The exceptions go to the merits of the entire controversies involved in the eases respectively. Milwaukee eases Nos. E-4314 and E-4338 were consolidated, and all of the cases were tried together to the special master who has dealt with them in a single report. Since there are many fundamental questions to be considered which are common to all the eases, 1 shall treat them in a single memorandum, resorting to separate discussion where such course is imperative or deemed convenient. All of the eases have to do with the assessment and taxation of the operating property of the complainants, respectively, located in the state of Washington and properly subject to taxation therein. The Northern Pacific Company case assails assessments of its property for the years 1925 and 1926; the Milwaukee Company eases the assessments of its property for the years 1926 and 1927, and the Spokane, Portland & Seattle Company ease the assessment of its property for the year 1926 only. In each case the use of fundamentally erroneous principles and grossly excessive base valuation of the property is charged, and it is also claimed that there was unjust discrimination practiced in allocating base value to the several counties through which the railroads respectively run, in that the railroad property was assessed at a higher ratio of assessed to actual value than that used in the case of other taxable property. Hence both base value and county ratios axe involved, and independent consideration must be given to each. ’ It is insisted by the complainants that the state assessing authorities either proceeded upon fundamentally erroneous principles, or adopted fundamentally erroneous methods in valuing the property, or were guilty of fraud, actual or constructive. The special master found that there was no actual fraud on the part of the assessing officials in making the assessments complained of, but found constructive fraud both in fixing base values and in allocating such values to the counties entitled to share in the resulting taxes. -In respect of base value, he found that the properties of the complainants had been grossly overvalued, and in the ease of allocation found that such property had been valued on a grossly excessive ratio of assessed to actual value, as compared with the assessment of other property in the counties involved. With regard to the master’s finding that there was no actual fraud in fixing base value, it will suffice to say that' I entertain the same view, and no useful purpose would be served by elaborating on this feature of the cases. Whether there was constructive fraud, or the application of fundamentally erroneous principles or methods, in making the assessments complained of, is therefore the primary question presented for decision. I shall first consider base values, and then pass to the question of alleged discriminating county ratios. In the complaint of the Northern Pacific Company it is alleged that in 1925 and 1926 the value of its property was $85,000,000; that for 1925 it was assessed at $126,460,000, and for 1926 at $131,200,000. The consolidated complaints of the Milwaukee Company allege that the value of its property in 1926 was $19,968,000, and in 1927 was $20,081,-647, but was assessed for both years at $50,-100,000. The Spokane, Portland & Seattle Company alleges that in 1926 the value of its property was $24,010,446, but for that year was assessed at $36,000,000. At the threshold we encounter the question of, How is the operating property of a railroad in the state of Washington to be assessed for taxation therein, and by what standard shall the conduct of the state’s assessing authorities in valuing such property for taxation be tested when their official action is collaterally assailed in equity upon the ground of constructive fraud or the use of fundamentally wrong principles or methods? Section 1 of article 7 of the Constitution of Washington provides: “All property in the state not exempt under the laws of the United States, or under this constitution, shall be taxed in proportion to its value, to be ascertained as provided by law.” Section 2 of the same article provides: “The legislature shall provide by law a uniform and equal rate of assessment and taxation on all property in the state, according to its value in money, and shall prescribe such regulation by general law as shall secure a just valuation for taxation of all property, so that every person and corporation shall pay a tax in proportion to the value of his, her, or its property.” Section 3 of the same article provides: “The legislature shall provide by general law for the assessing and levying of taxes on all corporation property as near as may be by the same methods as are provided for the assessing and levying of taxes on individual property.” The statute of Washington under which the offending assessments were made is chapter 130, p. 227, Laws of Washington, Extraordinary Session 1925. Under this act, railroad operating property is assessed by the state tax commission between the 1st day of March and the 1st day of June in each year. Section 43 (page 253). This assessment is required to include “all franchises, rights of way, road beds, tracks, terminals, rolling stock equipment and all other real and personal property of such company, used or employed in the operation of the railroad or in conducting its business, and shall include all title and interest in said property, as owner, lessee or otherwise.” Section 36, par. 4 (page 245). Real property not adjoining a railroad company’s tracks, stations, or terminals, and real property not used in the operation of the railroad, are excepted, and shall be assessed in the same manner as like property of individuals. This act provides that all property shall be assessed at 50 per cent, of its true and fair value in money, and it further provides: “The true cash value of property shall be that value at which the property would be taken in payment of a just debt from a solvent debtor.” Section 52 (page 259). Section 44 of the act (page 254) in part reads: “In case of railroad or telegraph companies which own or operate railroad or telegraph lines lying partly within and partly without the state the said commission shall only value and assess the property within this state. In determining the value of the portion within the state, the commission shall take into consideration the value of the entire system, the mileage of the whole system, and of the part within this state, together with such other information, facts and circumstances as will enable the commission to make a substantially just and correct determination.” From the foregoing it will be seen that under the Constitution and laws of Washington all nonexempt property must be taxed in proportion to its value; that there must be a uniform rate of assessment and taxation of all property according to. its value in money, that is to say, that value at which the property would be taken in payment of a just debt from a solvent debtor, so that every person shall be taxed in proportion to the value of his property; that corporate property shall be assessed and taxed as near as may be by the same methods as those employed in the case of individual property; and that all property shall be assessed at not to exceed 50 per cent, of its true and fair value in money. The makers of the state Constitution were not unmindful of the tremendous difficulties to be encountered in assessing corporate property, especially when such property consists of a portion of a vast interstate railway system, and consequently did not provide that exactly the same methods shall be employed in assessing such property as are used in assessing individual property. They were careful to say that in assessing and taxing corporate property the same methods as near as may be shall be used as in the case of property owned by individuals. As near as may be clearly does not mean in precisely the same manner, nor does it mean as nearly as is physically possible without regard to convenience, practicability,, or expense. Appreciating the inherent differences between vast corporate holdings and comparatively small individual ownerships, it meant to provide for a similarity of method only to the extent that such similarity is feasible, practicable, and reasonable — a similarity such as the nature and character of the two classes of property will sensibly permit. By section 44 of the act of 1925, the duty is imposed upon the tax commission to make a substantially just and correct determination of the value of railroad operating property in the state for the purpose of taxation, and in the performance of this task the commission is commanded to take into consideration system value, mileage of the whole system and the part thereof within the state, “together with such other information, facts and circumstances as will enable the commission to make a substantially just and correct determination.” The Legislature of Washington has not seen fit to define any method by which railroad property in this state shall be valued for taxation by the tax commission. It directs that certain things shall be considered by the commission, but it has not laid down any specific or definite method of ascertaining value. The method to he employed, therefore, is left to the quasi judicial discretion of the tax commission. Hence any lawful method by which a substantially just and correct determination of value can be arrived at is within the commission’s power to use, so long as it takes into consideration the things which the statute prescribes. In judicially reviewing the action of the commission, the legitimate exercise of this discretion must not be withdrawn or unduly curtailed. The matter of valuing property for taxation is not primarily a judicial function, and, when courts are called upon to examine an assessment of property for taxation by the duly constituted assessing and taxing officials, great care must be taken not unduly to interfere with the discretion which is confided to the assessing and taxing agencies set up for that purpose by legislative authority. To be sure, there must be no arbitrary or capricious exercise of discretion on the part of the assessing officials. Their quasi judicial discretion, like judicial discretion itself, must be exercised within legitimate limits. Taxation, however, is an intensely practical matter. It is not an exact science in which there is no room for the exercise of judgment and discretion. Valuing property for taxation is not a formulaic process. Much must be left to the knowledge, judgment, and discretion of the assessing officials, and this is true no matter what the character of the property to be valued may be. The facts and circumstances of the particular case must ever be kept in mind, and the performance of the task must be guided by legally permissible principles. The factors or indicia of value must be such as are recognized by law as proper criteria of value, and a substantially just and correct determination must be the objective or goal. So long as assessing officers confine themselves within, this field, their official conduct is immune from collateral judicial attack. The tax commission is created for the purpose of using its judgment and discretion, and "within its jurisdiction, except, as we have said, in the ease of fraud or a clearly shown adoption of wrong principles, it is the ultimate guardian of certain rights. The state has confided those rights to its protection and has trusted to its honor and capacity as it confides the protection of other social relations to the eourts of law.” C., B. & Q. Ry. Co. v. Babcock, 204 U. S. 585, 598, 27 S. Ct. 326, 329, 51 L. Ed. 636. “The findings of an official body such as the Board of Valuation and Assessment, * * '* are quasi-judicial in their character, and are not to be set aside or disregarded by the eourts unless it is made to appear that the body proceeded upon an erroneous principle or adopted an improper mode of estimating the value of the franchise, or unless fraud appears.” Louisville & Nash. R. R. Co. v. Greene, 244 U. S. 522, 536, 37 S. Ct. 683, 690, 61 L. Ed. 1291, Ann. Cas. 1917E, 97. In Templeton v. Pierce County, 25 Wash. 377, 381, 65 P. 553, 554, the Supreme Court of Washington said: “Where the assessing officer has exercised an honest judgment, and no fraud or arbitrary or capricious action in making the assessment is shown or can be presumed, the court will not interfere.” In Hillman’s S. C. L. & R. Co. v. Snohomish County, 87 Wash. 58, 61, 151 P. 96, 98, it is said: “In Templeton v. Pierce County, supra, the court reviewed many of its pri- or decisions, summarizing them to the effect that the court will grant relief against an arbitrary, fraudulent or maliciously excessive valuation by the assessing officer, and fraud may be presumed from a palpably exorbitant overvaluation, but where the assessing officer has exercised an honest judgment and no fraudulent, arbitrary or capricious action in making the assessment is shown or can be presumed, the court will not interfere.” In Weyerhaeuser Timber Co. v. Pierce County, 97 Wash. 534, 543, 167 P. 35, 38, we find this language: “It is well settled that the assessor and board of equalization act in a quasi judicial capacity, that the law presumes that they have performed their duties in a proper manner, that this presumption will be liberally indulged, and that the evidence to overthrow it must be clear. * * * But it is equally well settled in this state that, where the evidence shows arbitrary or capricious action on the part of the assessing officer, rather than the exercise of an honest judgment, or shows that he proceeded upon a fundamentally wrong basis or theory, in making the assessment, the eourts will grant relief against an overvalution of real property, and this regardless of the action of the board of equalization.” Additional cases to the same effect, both state and federal, might be cited almost without number, but. the foregoing will suffice to define the controlling principles by which the action of the tax commission is to be tested. There is no direct evidence in the record showing the methods which were employed by the tax commission in making the offending assessments. No member of the commission took the stand to explain the basis or bases upon which the commission acted in valuing and assessing the properties. No record of the commission shedding light on the method used was produced in evidence. It requires no argument to demonstrate that this attitude on the part of the commission does not foreclose all inquiry into the legality of their determinations. It merely serves to make necessary a different and obviously more difficult method of approach. In order to determine whether their valuations were properly made or are tinctured with constructive fraud arising out of gross excessiveness, it becomes necessary to consider whether, under any legally permissible method or combination of methods recognized by law for ascertaining value, their action can be upheld as within the proper and legitimate exercise of their powers and discretion. This will be the standard of measurement which I shall apply in reaching my conclusions in this regard. The special master was of the opinion that the best, most scientific, and most logical method of ascertaining base value of railroad operating properties for taxation purposes is the so-called “stock and bond” method in all eases where such securities are freely bought and sold on the stock exchange. This method was used by him in the Northern Pacific and Milwaukee cases, but hi the Spokane, Portland & Seattle ease- he used the so-called “capitalization of net operating income” method, because the stock in this company is owned equally by the Northern Pacific Company and the Great Northern Company, and is not bought or sold on the stock market. In determining whether the valuations placed by the commission on the properties of the Northern Pacific Company and the Milwaukee Company were so grossly excessive as to warrant relief in equity, he applied the stock and bond method exclusively, averaging the market prices of these securities over a period of one year, and, in the case of the Spokane, Portland & Seattle Company, he used the capitalization of net income method exclusively, calculating this on a one-year period. In both instances he concluded that the commission’s valuations were erroneously made, were grossly excessive, and should not be upheld. Regardless of the result obtained, I am constrained to believe that in pursuing this course the learned special master fell into error. It is not the function of courts to see to it that taxing systems shall he the wisest and best that can be conceived or devised by economists or experts in the field of taxation. Assessment of taxation is essentially a legislative function. With the wisdom or propriety of tax laws courts can have nothing to do. The question with which T am now confronted is not the ascertainment of what is the best method of taxing railroad operating property. The precise question- presented is whether the tax commission has stayed within the bounds of the laws of Washington prescribing their powers and duties with respect to-the assessment of such properties for taxation. Inasmuch as the Legislature of Washington has not defined specifically how railroad property shall be valued for taxation, I am of the opinion that the proper way of testing whether the action of the state tax commission can be upheld is to inquire whether under any legally authorized method or methods its determinations can be justified and sustained. The method pursued by the special master greatly curtails, if indeed it does not completely withdraw from the commission, the exercise of its statutory discretion, whilst the method which I feel obliged to follow grants to the commission the fullest exercise of its legitimate discretion in dealing with the matters confided to it. The special master, in his exhaustive report, says: “The value of a railroad cannot be segregated into separate values for each of the many things which affect the desire to exchange money for it, nor is a railroad itself a divisible thing. It is a unit. It cannot be sold by the mile, nor the foot, or divided into miles or feet, as one mile of the road is of very little use of and by itself, and a division of a railway into its physical parts will destroy its value as a railway; nor, as I have said, can its value be segregated into separate values for the thousand and one things that affect the desire for it. The sum of the value of all the parts of a railroad unit does not necessarily equal the value of the whole as a unit. The demand is for the utility as a whole and not for the parts. We have a new entity whose value can only he found by reference to the new thing built up. A railroad can he valued only as a railroad; if torn asunder it ceases to be a railroad.” He concludes, therefore, that the first step to be taken in valuing that part of an interstate railway lying within any one state is to-find the value of the whole transportation system to which it belongs. I find myself in entire accord with these views. They are abundantly sustained in both reason and authority. “It has been as firmly established as anything can be by judicial determinations that all the property of a public service corporation, such as appellant, street and other railway companies, and public lighting companies, whether real, personal, or mixed, in the ordinary sense of those terms, including franchises other than the mere right to be a corporation, is one entire indivisible thing. * * In that view it would be the height of absurdity to consider value and impose a tax upon one part of such entire thing separate from the rest. There can be no separation without destruction. Therefore the separate value of the parts in the aggregate would not necessarily approximate to or be any legitimate measure of the value of all the parts, viewed as one complete machine, so to speak. * * * The great value is produced by the combination of parts into one complete working machine, adapted in a high degree to the service of man. One might as well endeavor to value one part of any mechanical device by itself as to so value the franchise of a public service corporation by itself, or so value its land, or likewise its movables. To do so leaves out of view the great and often chief element of value which is produced by the combination.” Northern Pac. Ry. Co. v. State, 84 Wash. 510, 533, 534, 147 P. 45, 53, Ann. Cas. 1916E, 1166. See, also, Pittsburgh, etc., Railway Co. v. Backus, 154 U. S. 421, 14 S. Ct. 1114, 38 L. Ed. 1031. In a task so great as the one now facing me, I cannot undertake to defend and justify settled principles of law. Their statement will have to be taken as sufficient. In valuing railroad operating property, the microscope eannot be employed. The undertaking :must be entered upon in a larger and broader conception of the problem, bearing in mind that there is no perfect method to be used and that reasonable approximation is all that can be accomplished or expected. If unit valuation of the utility is not to be used, the only remaining method would be that of inventory and appraisal, for which method in valuing a railway system I do not feel any one will have the hardihood to argue. It would require wizardry to conceive how the value of a franchise, as that word is used in revenue laws, could be ascertained by such a method of valuation. What, then, are the legally recognized ■evidential factors for determining the value of the operating property of a railroad’for the purpose of taxation, considering the system as a unit? In other words, what are the permissible methods, factors, or elements to be used in arriving at sueh value? The authorities recognize as a relevant and highly important factor the value of the corporation’s outstanding stock and bonds — the so- , called “stock and bond” method. Under this plan,, the average market, quotations of the stock and bonds over a more or less arbitrarily fixed period of time is found, and this figure is multiplied by the total number of outstanding units of each class of securities. The result is supposed to reflect the value of all the stock and bonds outstanding, and consequently to evidence the value of all the corporation’s property or assets. From this amount is deducted the value of the nonoperating property of the corporation, and the residue is taken as the value of its operating property — the property to be assessed. There is no dispute amongst counsel that this is a proper element to be taken into account, but, if there were dispute, the authorities amply sustain it, and I shall leave it there. Yet it is by no means perfect. It is open to many just criticisms. It requires the fixing of a period over which the market quotations shall be averaged, and this of necessity must be a more or less arbitrarily fixed period of time; it assumes that the average value of the stock and bonds actually sold'reflects the value of the entire outstanding issues of 'each, when rarely ever is the controlling interest in stock and bonds of a railroad company bought or sold on the stock exchange, and, where control or ownership of a corporation is sought, it is common knowledge that the securities sharply advance in price; it assumes that the aggregate market value of the stock and bonds issued by a corporation 'is the same as the market value of the property owned by the corporation and which underlies the securities; it presupposes an idealistic knowledge and state of mind on the part of those who deal in sueh securities on the stock exchange, in that it assumes that the purchasers of the securities act upon an informed judgment based upon accurate information as to the character and extent of the assets of the corporation whose securities are involved; and it largely ignores the influence of pure speculation in the market on the part of those who do not even pretend to possess accurate information with respect to the assets and affairs of the corporation whose securities are bought and sold. As was aptly said recently in a public address by a distinguished executive of a large life insurance company : “What is the Stock Exchange? It is merely a place where public auctions are held. It differs from other auctions only in the articles sold, and in the volume of the transactions. It is no more true of this auction than of other auctions, that the priees bid are an infallible index of the real value of the articles dealt in. The quotations fluctuate with the optimism or the pessimism of the bidders. They are frequently much better evidence as to the bank accounts and credit of the bidders than of the value of the stocks bought and sold.” In the intensely practical and serious process of administering justice, it will not do to accept as true as a matter of theory that which one knows to be false as a matter of fact. The stock and bond method, to my mind, is much safer as a factor of value in a composite made up of that element together with other relevant factors operating as cheeks and balances than it is as an exclusive standard of measurement. The law also recognizes the capitalization of net operating income as an important element in ascertaining the value of railroad property for taxation. As this proposition is not disputed, I shall not pause to deal with the authorities whieh support it. By this method the net railway operating income is averaged over some more or less arbitrarily determined period of time, and the amount thus ascertained is capitalized at some more or less arbitrarily fixed rate of return. The result is supposed to fix the value of the property upon whieh the earnings are made. This, like the stock and bond method, whilst a recognized factor of value, is also subject to valid criticism. Both the test period for earnings and the rate of capitalization must be fixed with more or less arbitrariness, and by its use the future prospects of the road are reflected by past earnings exclusively. Usually it is not difficult to ascertain the net operating earnings of the railroad, but it is not always so easy to fix the test period, or to determine the proper rate of capitalization to be applied. It also assumes competent and economical management of the business. Obviously it cannot be used in the ease of a newly constructed road with no past history of earnings. It is, when available, however, a valuable guide in arriving at base value if it be applied with circumspection and without slavish adherence to it. The truth of the matter is that no single factor is a magic wand o.r an Aladdin’s lamp. I come next into the hotly contested field of whether cost of reproduction less depreciation is a relevant factor to be considered, and, if so, to what extent, in determining value for taxation. The special master rejected reproduction cost entirely. He was induced to this conclusion by two considerations: First, that reproduction cost bears no logical relation to value for taxation; and, second, that this method is proscribed by the statutes of Washington and the decisions of the Supreme Court of that state. Since, as I have said, my task is to determine what factors or elements of value may legally be taken into consideration, I am necessarily more concerned with the holdings of courts than with the theories of economists or the reasoning of logicians, whieh must be addressed to the lawmaking tribunals. It is familiar learning that reproduction cost less depreciation is a very important element in ascertaining the value of corporate property for rate-making purposes. Since the decision of 1898 by the Supreme Court in Smyth v. Ames, 169 U. S. 466, 18 S. Ct. 418, 42 L. Ed. 819, there has been little room for doubt on that point. But is it a proper factor in determining value of corporate property for taxation purposes? It is not sound to say that a given property can have but one value, and that that value must be taken in every instance where the value of such property is involved. To reach such a conclusion is to ignore fundamental considerations. In valuing railroad property for taxation, the value of the utility is the thing sought. In Cleveland, etc., Railway Co. v. Backus, 154 U. S. 439, 14 S. Ct. 1122, 1124, 38 L. Ed. 1041, Mr. Justice Brewer, speaking for the court, said: “The rule of property taxation is that the value of the property is the basis of taxation. It does not mean a tax upon the earnings which the property makes, nor for the privilege of using the property but rests solely upon the value. But the value of property results from the use to which it is put, and varies with the profitableness of that use, present and prospective, actual and anticipated. There is no pecuniary value outside of that which results from such use. The amount and profitable character of such use determines the value, and if property is taxed at its actual cash value it is taxed upon something whieh is created by the uses to whieh it is put.” In the same case this pertinent language is found: “Will it be' said that the taxation must be based simply on the cost, when never was it held that the cost of a thing is the test of its value?” In Oregon-Wash. R. & Nav. Co. v. Thurston County, 98 Wash. 219, 231, 167 P. 930, 935, the Supreme Court of Washington say: “It is, of course, a necessary rule that, in valuing a railroad, the first inquiry is as to its actual cost. That, prima facie, is its value. But if it appears that the actual cost was in excess of the necessary cost, the nee-es?ary cost is the proper standard. If it further appears that the net income of the road does not amount to current rates of interest on its necessary cost, and is not likely to do so, or if the business of the road is likely to be destroyed or impaired by competition or other cause, or if the utility of the road is not equal to its cost, then its value is less than its 'cost, and must be determined by reference to its utility alone.” In ascertaining a basis for a rate structure, the purpose is to fix a standard of value upon which the corporation is entitled to earn a fair return, if it can. This, however, does not establish the value of the utility of the property. It is not the taxable value of the property, unless the structure authorized is put into successful operation. When actual results equal permissible results, then, and then only, is the rate basis the actual and taxable value of the property. This is clearly pointed out by the Circuit Court of Appeals for the Eighth Circuit in Temmer v. Denver Tramway Co., 18 F.(2d) 226, 228: “An examination of the constituent elements which go to make up value for the purpose of determining a rate of fares to be charged in order to obviate confiscation discloses, aside from the practical difficulties of the situation, that the rating base value furnishes no proper or legal criterion on which to bottom actual value.” Again at page 229 of 18 F.(2d) it is said: “But nevertheless these differences of constituent elements illustrate the fairly clear distinction existing, between value for rate-making purposes, and fair, market, or actual value, and we think show that the former does not necessarily bear any conclusive, legal relation to the latter.” I have not overlooked the language of Judge Chadwick in State ex rel. v. Clausen, 63 Wash. 535, 116 P. 7, to the effect that property can have but one value whatever may be the purpose of the investigation, be it for rate making or for taxation. This statement, however, is pure dictum, and it involves the error of confusing maximum value allowable as a rate base and actual value enjoyed under the rate structure rested thereon. As said by Mr. Justice Brandéis in his separate opinion concurred in by Mr. Justice Holmes, in State of Missouri ex rel. v. Public Service Commission, 262 U. S. 310, 43 S. Ct. 544, 554, 67 L. Ed. 981, 31 A. L. R. 807: “Value is a word of many meanings. That with which commissions and courts in these proceedings are concerned, in so-called confiscation eases, is a special value for rate-making purposes, not exchange value. This is illustrated by our decisions which deal with the elements to be included in fixing the rate base.” In Chicago & N. W. Ry. Co. v. Eveland (C. C. A.) 13 F.(2d) 442, 447, Judge San-born made a careful examination of the authorities in an effort to ascertain the proper elements to be considered in valuing a railroad for taxation, and concluded that: “In determining the value of the property of a railway company * * * many classes of evidence are competent, but (1) the value of the use of such property in the operation of its railroads and its net revenue from such use, and (2) the current market value of its stocks and bonds are among the most persuasive and authoritative — far more so than the cost of the property or the cost of its reproduction new in eases in which the property is in operation and has been for many years.” In Standard Oil Co. v. So. Pacific Co., 268 U. S. 146, 45 S. Ct. 465, 467, 69 L. Ed. 890, involving the market value of a vessel destroyed in a collision, Mr. Justice Butler, writing, said: “And by numerous decisions of this Court it is firmly established that the cost of reproduction as of the date of valuation constitutes evidence properly to he considered in the ascertainment of value” — citing many eases including confiscation or rate cases. He proceeds immediately to say, however: “It is to be borne in mind that value is the thing to be found and that neither cost of reproduction new, nor that less depreciation, is the measure or sole guide. The ascertainment of value is not controlled by artificial rules. It is üot a matter of formulas, but there must be a reasonable judgment having its basis in a proper consideration of all relevant facts”— citing in support the Minnesota Rate Case, 230 U. S. 352, 434, 33 S. Ct. 729, 57 L. Ed. 1511, 48 L. R. A. (N. S.) 1151, Ann. Cas. 1916A, 18. Since in this case the court was dealing with market value, the holding must be taken to mean that cost of reproduction may be considered in the ascertainment of such value, provided it be not adopted as the sole guide to the exclusion of other relevant-facts. In Harris Trust & Savings Bank v. Earl, 26 F.(2d) 617, 618, the Circuit Court of Appeals for the Eighth Circuit said: “But it is not the law that the valuation of railroad or other property for taxation pur-„ poses is to be determined from any single factor. As bearing upon the proper result, many facts have evidential value. Certainly, among others, are to be considered original cost, cost of reproduction less depreciation,. bonded indebtedness, current market value of stock and bonds, and earning capacity. Of these the two last named are of the greatest significance. Chicago & Northwestern Railway Co. v. Eveland (C. C. A.) 13 F.(2d) 442. But earning capacity and actual earnings are by no means identical.” The reason for the last sentence is found in the fact that in the case competent and economical management was challenged. In Atchison, T. & S. F. Ry. Co. v. Collins, 294 F. 742, that distinguished jurist, the late Judge Dietrich, sitting as District Judge, had under consideration the California gross revenue statute. In discussing the factors of value properly to be employed in ascertaining the value of the property to be taxed, at page 749, he uses this language: “Through their experts and in the argument, plaintiffs exhibit studies under the ‘stock and bond’ method, and the ‘capitalization of net earnings’ method of valuation; and the defendant under the ‘appraisal’ or ‘reproduction cost’ method, taking as a basis mainly such appraisals as have been made by and under the direction of the Interstate Commerce Commission. Of the stock and bond method, often easy of application, it is to be said that here the process of computation is necessarily complex and in it there are factors of great uncertainty. With some qualification the same comment may be made upon’ the net income method. ® a * The appraisal or reproduction cost method always involves some factors of uncertainty, and here certain large factors in the nature of estimates; and generally in its application it entails exercise of judgment upon the part of him who applies it. It is commonly recognized that no one of' the methods, standing alone, gives assurance of a dependable result, and that it is safer to take the composite view resulting from a consideration and application of all of them. i a «■ pkg objection is, not that such appraisal is inaccurate or untrustworthy, but that it was made for rate-making purposes rather than for taxation purposes, and that therefore it is incompetent for use in these suits. I am aware that in certain quarters a wide difference of view exists touching this general question. While I am not of the opinion that properly there can be but 'one valuation, in the long run valuation for rate-making purposes and valuation for taxation purposes should closely approximate each other. There are common factors, and necessarily there is a measure of interdependence. True, by statutory definition and declaration, the two may be entirely segregated, but such segregation would be artificial. It is further true that without the statutory definition, and where the effort is to ascertain a fair value for rate-making purposes and a fair value for taxation purposes, cases may and often do arise where theie are differentiating considerations. If the railroads could always make a fair net return upon the fair valuation established for rate-making purposes, and only a fair return, I see no reason why, genei’ally speaking, the fair valuation for such purpose should not also be taken as a fair valuation for taxation purposes. However that may be, considerations of public policy strongly argue for a constant endeavor to keep the two valuations close together.” I shall not undertake further discussion of the cases. From the ones already noticed I feel that the true rule can be fairly extracted. Valuation for rate-making purposes and valuation for taxation purposes are not necessarily the same; the former being a basis upon which the corporation is entitled to a fair return, if it can succeed in earning it, the latter valuation being that reflected by the use of competent factors and elements reasonably calculated to disclose the actual results in fact enjoyed in the practical operation of the utility or which ought to have been obtained under competent, honest, and economical management — the one measuring what is permissible, the other what is achieved or should have been achieved. With this fundamental distinction in mind, it is permissible to give consideration to reproduction cost in valuing railroad property for taxation, but in this field it is a far less influential factor than it is in the process of Axing a rate base. In the task of fixing a rate base in confiscation cases, “the value of the use, as measured by return, cannot be made the criterion when the return itself is in question.” Minnesota Rate Case, 230 U. S. 352, 461, 33 S. Ct. 729, 765, 57 L. Ed. 1511, 48 L. R. A. (N. S.) 1151, Ann. Cas. 1916A, 18. Since value of the utility is the objective sought in fixing value for taxation, the factor of reproduction, less depreciation, must not be allowed to play the part of establishing a purely theoretical value having no just or reasonable relationship to the actual value in fact enjoyed by the owner whose management of the utility is not questioned. It was this consideration no doubt which induced the court in the Eveland and Harris Trust & Savings Bank Cases, supra, to say in effect that, in valuing for taxation, reproduction cost is a factor of secondary importance. It was this same consideration, I have no doubt, which prompted Judge Dietrich in the Collins Case, supra, to say: “If the railroads could always make a fair net return upon the fair valuation established for rate-making purposes, and only a fair return, I see no reason why, generally speaking, the fair valuation for such purpose should not also be taken as a fair valuation for taxation purposes.” To be sure, if the value of the use equals the amount of the rate base, an ideal situation exists, and the property should be taxed accordingly. To say this, however, sheds little, if any, light on the evidential value of reproduction cost in an effort to ascertain the value of the utility. Where other means of finding value are not available, reproduction cost may exert great influence, but, where factors are at hand directly shedding light on what the owner actually enjoys in the use of the property for the purpose to which he has devoted it, reproduction cost may have very scant value. After all, its evidential worth as a factor in ascertaining market value must be found in the relationship which it bears to actual results or what ought to have been accomplished in the use of the property, and weight be given it in the light of such relationship, taking into consideration the peculiar facts of the ease in hand. Do the statutes or decisions of Washington forbid the use of reproduction cost? In 1905 there was established in Washington a regulatory board ealled the Railway Commission (Laws 1905, p. 145). The name of this administrative agency was changed in 1911 to the Public Service Commission (Laws 1911, p. 538). In 1907 the commission was directed by the Legislature, among other things, to value all railroad property in the state, and in that connection to ascertain the cost of reproducing such property in its then condition. Section 5 of this act (Laws 190-7, pp. 545, 548), provided: “The findings of the Commission so filed, or as the same may be corrected by the courts, when properly certified under the seal of the Commission, shall be admissible in evidence in any proceeding or hearing in which the public and the railroad or express company affected thereby is interested, and such findings, when so introduced, shall be conclusive evidence of the facts stated in such finding or findings asi of the date of filing under conditions then existing, and such facts can only be controverted or contradicted by showing a subsequent change in conditions bearing upon the facts therein determined.” In 1909, pursuant to the legislative mandate, the commission made and promulgated a valuation of the property of all railroads operating in the state, based upon reproduction cost. By act of the Legislature of 1907, it was made the duty of the state board of tax commissioners, created by the act of 1905, to malee an annual assessment of all the operating property of railroads within the state. In State ex rel. v. Clausen, supra, it was decided by the Supreme Court of Washington that the value of a railroad’s operating property within the state, as found by the railroad commission, was binding upon the tax commission, and that that commission had no power to fix a different value for the purposes of taxation. This case was decided in June, 1911. In 1913 (Laws 1913, p. 662) an act was passed making a change with respect to the force and effect of the findings of the Railroad Commission as applied to matters of taxation, the pertinent language in this regard reading: “The findings of the commission [Public Service Commission] so filed, or as the same may be corrected by the courts, when properly certified under the seal of the commission, shall be admissible in evidence in any action, proceeding or hearing, excepting with respect to matters of assessment and taxation, in which the state or any officer, department or institution thereof, or any county, municipality, or other body politic and the public service company affected is interested, whether arising under the provisions of this act or otherwise, and such findings when so introduced shall be' conclusive evidence of the facts stated in such findings as of the date therein stated under conditions then existing, except as a basis for taxation, and such facts can only be controverted by showing a subsequent change in conditions bearing upon the facts therein determined.” Section 1. Prom this legislative and judicial history the special master concluded that by the act of 1913 the tax commission was legislatively precluded from taking into consideration the element of reproduction cost in assessing railroad property for taxation. In his report he says: “By the act of 1913 I think the taxing officials were instructed how not to value a railroad.” After careful consideration, I find myself unable to subscribe to this view. At -the 1913 session of the) Legislature, other amendments were made to the laws relating to the assessment of railroad property. One provided that property shall be assessed at not to exceed 50 per cent, of its fair value, instead of at its full fair value, as theretofore. Laws 1913, c. 140, p. 438. At this same session (Laws 1913, p. 662) there was omitted from the Public Service Commission Act the provision that nothing less than the value fixed by the Public Service Commission should be taken as the value of property for taxation, as provided in the act of 1911. Laws 1911, c. 117, pp. 601, 604, § 92. In dealing with the question of what was the purpose and effect of the 1913 amendment, with respect to the findings of the Public Service Commission in their relation to matters of assessment and taxation, the Supreme Court of Washington, in Northern Pac. R. Co. v. King County, 93 Wash. 89, 95, 160 P. 8, 10, said: “We think the amendment of the Public Service Commission Act in the year 1913, to the effect that the findings of the Public Service Commission ‘shall be admissible in evidence in any action, proceeding or hearing, excepting with respect to matters of assessment and taxation, in which the state or any officer, department or institution thereof, or any county, municipality or other body politic and the public service company affected is interested, whether arising under the provisions of this act or otherwise, and such findings when so introduced shall be conclusive evidence of the facts stated in such findings as of the date therein stated under conditions then existing, except as a basis for taxation,’ refers only to the right of the tax commission to. put a different value upon railroad property than that fixed by the Public Service Commission; and that the amendment intended only to avoid the rule theretofore announced in State ex rel. Oregon R. & Nav. Co. v. Clausen, supra. This is plain when we come to consider that, at the same session of the Legislature, by chapter 140, Laws 1913 [Rem. 1915 Code, section 9112], the Legislature provided that property should be assessed at not to exceed 50 per cent, of its true and fair value in money. It was clearly not the intention of the Legislature to require railroad property to be assessed at its true value in money, and at the same time to permit other property to be assessed at 50 per cent, of its value.” With so plain a definition of the sole purpose and effect of the amendment' as this by the highest court of the state, it hardly seems permissible to conclude that the amendment had the effect attributed to it by the special master, of withdrawing from the tax commission the right to consider reproduction cost or any other proper element of value in assessing railroad property. If the Legislature had intended so important a thing as that, surely it would not have been content to leave its purpose to implication and inference. Furthermore, the act of 1925 (sections 39, 44), under which the assessments here complained of were made, gives the tax commission the privilege of demanding at the hands of railroad companies without restriction “such other facts and information as said commission may require” to aid it in assessing the property for taxation, and empowers it to “view and inspect” the property. By section 5, subd. 2, e. 18, Laws 1925, p. 35, the tax commission is given access to all records and files of state, county, and municipal officers whose duties make it possible to ascertain value, “including valuations of property of public service corporations for rate making purposes,” The implications of this act, to my mind, are vastly stronger that reproduction cost is not taboo as a matter of legislative enactment than they are under the act of 1913 that this element of value is proscribed. I am satisfied that there is nothing in the laws of Washington which precludes the tax commission from taking into consideration in valuing railroad property any proper and relevant factor which the law generally sanctions. Having now given consideration to the permissible factors or elements which may be used in ascertaining system base value, I shall pass to the problem of how such value may be allocated to the states. The special master, being of the opinion that the standard of allocation should be made up of factors governed largely by the basis upon which the system base value is determined, rejected relative reproduction cost as an element in allocation. Since the net value of the use of the property within the state in ratio to system net value was impossible of ascertainment, that element also was of course excluded. He then proceeded to make up a composite standard of allocation for each company for the years in question, using for this purpose the following elements: (a) Car and locomotive miles made within the state as compared to those made on the system; (b) revenue ton miles, plus revenue passenger miles made within the state as compared with the system; (e) gross earnings! derived from the use of the properties within the state as compared with those derived from system use; and (d) the proportionate part of the system’s operated track located in the state. To the relative mileage of track factor he gave 50 per cent, value, and to a composite of factors (a), (b), and (c) — so-called use factors — he gave 50 per cent, value. The resultant figure constituted the standard or measure by which he allocated system base value to the state. Obviously no mo.de of allocation would he permissible which in its practical application would result in assessing property not within the state, or in giving to a particular state a part of system value out of all reasonable! proportion to the comparative value of the property in the state to the value of the property of the entire system. So long as this principle is not ignored or violated, there is wide room for the exercise of discretion on the part of assessing officers in allocating system value to a state. Inasmuch as I am endeavoring to ascertain whether the assessments complained of can be sustained on any legal basis, I deem it necessary to inquire whether there is any recognized method of allocation more favorable to the validity of the assessments than the one adopted and used by the special m'aster. Patently the most exact method of allocating system value to a state is on the mileage basis. This method is frequently prescribed by statute, and, in the absence of special circumstances rendering its use improper, is upheld by the courts. It has received the repeated approval of the Supreme Court of the United States. It would seem to require no argument to sustain the proposition that what it is competent for the Legislature to prescribe in this regard it is competent for assessing officers to adopt, when the method of allocation is confided to their discretion. In Pittsburgh, etc., Railway Co. v. Backus, 154 U. S. 421, 14 S. Ct. 1114, 1118, 38 L. Ed. 1031, supra, it is said: “And, when the statute provides that such property shall be assessed at its 'true cash value/ it means to require that it shall be assessed at the value which it has, as used, and by reason of its use. • When a- road runs through two states, it is, as seen, helpful in determining the value of that part within one state to know the value of the road as a whole. * * * It is ordinarily true, that, when a railroad consists of a single continuous line, the value of one part is fairly estimated by taking that part of the value of the entire road which is measured, by the proportion of the length of .the particular part to that of the whole road. This mode of division has been recognized by this court several times as eminently fair. Thus, in State Railroad Tax Cases, on page 608 [of 92 U. S., 23 L. Ed. 663], it was said: 'It may well be doubted whether any better mode of determining the value of that portion of the track within any one county has been devised than to ascertain the value of the whole road, and apportion the value within the county by its relative length to the whole.’ ■ And again, on page 611 [of 92 U. S.] : 'This court has expressly held in two eases, where the road of a corporation ran through different states, that a tax upon the income or franchise of the road was properly apportioned by taking the whole income or value of the franchise, and the length of the road within each state, as the basis of taxation. Delaware Railroad Tax Case, 18 Wall. 206 [21 L. Ed. 888]; Erie Railway v. Pennsylvania, 21 Wall. 492 [22 L. Ed. 595].’ The mileage basis of apportionment was also sustained in Western Union Telegraph Co. v. Massachusetts, 125 U. S. 530, 8 S. Ct. 961 [31 L. Ed. 790]; Pullman’s Palace Car Co. v. Pennsylvania, 141 U. S. 18, 11 S. Ct. 876 [35 L. Ed. 613] ; Maine v. Grand Trunk Railway, 142 U. S. 217, 12 S. Ct. 121, 163 [35 L. Ed. 994]; Charlotte, Columbia, etc., Railroad Co. v. Gibbes, 142 U. S. 386, 12 S. Ct. 255 [35 L. Ed. 1051]; Columbus Southern Railway v. Wright, 151 U. S. 470, 14 S. Ct. 396 [38 L. Ed. 238]. It is true, there may be exceptional cases.” Wallace v. Hines, 253 U. S. 66, 40 S. Ct. 435, 436, 64 L. Ed. 782, was such) an exceptional ease. The Supreme Court pointed out that: “North Dakota is a State of plains, very different from the other States, and the cost of the roads there was much less than it was in mountainous regions that the roads had to traverse. The State is mainly agricultural. Its markets are outside its boundaries and most of the distributing centers from which it purchases also are outside. It naturally follows that the great and very valuable terminals of the roads are in other States.” The court therefore held that in such circumstances apportionment on the mileage basis could not be used because it would open to taxation propeity not within the state. Surely the conditions existing in the state of Washington do not call for the same application of the rule laid down in Wallace v. Hines. On the contrary, it is insisted that, because of the location in this state of valuable terminal properties, particularly in the case of the Northern Pacific Company, the relative mileage allocation method is not favorable enough to Washington. Reference will be made to this later. It may here be noted that in Wallace v. Hines main line mileage was involved. The statute of Washington directs that, in determining the value of the portion of a railroad within the state, the commission shall take into consideration the value of the entire system, the mileage of the whole system and of the part within this state, and, under another statute, in distributing the state value or assessment to the several counties entitled to share in the resulting taxes, relative mileage allocation is employed exclusively. This legislation would seem to indicate a decided preference on the part of the Legislature for the relative mileage method of allocation. Seeing that relative mileage allocation is more favorable to the validity of the action of the commission than is the composite factor made up by the special master, I shall use relative mileage in testing the validity of the assessment. In fact, relative mileage allocation is more favorable than any other factor suggested save relative reproduction cost alone. In view of what I have said concerning reproduction cost as an element of system base value, it must be obvious that l’elative reproduction cost cannot be accepted as the sole basis of allocation. If reproduction cost is an element of secondary importance in ascertaining base value, surely it may not be given first and exclusive importance in allocating such value, especially in view of the Washington statutes. I shall now take up the cases of the several complainants separately, and apply to each the principles which I have laid down for guidance. In their proper places and connections I shall consider the questions of non-operating property and the basis upon which the stock and bond method shall be calculated. First I shall take up the ease of the Northern Pacific Company. As I have already said, in the use of the stock and bond method there must be deducted from the total value of the securities the nonoperating property of the corporation. In making his calculations in the use of this method, the special master treated the stock of the Northern Pacific Company in the Northwestern Improvement Company, in the Spokane, Portland & Seattle Company, and in the Burlington Company as nonoperating property. At least this was the effect of his method of dealing with these 'holdings. To this the defendants take exception, contending that these stocks should have been treated as property used or employed by the Northern Pacific Company in the operation of its railroad, or at least “in conducting its business” within the definition of “property of the railroad company” found in paragraph 4 of section 36 of the act of 1925. Plainly the expression “in conducting its business” means “in conducting its railroad business,” paragraph 4 being a definition of operating property. With respect to the Northwestern Improvement Company, it appears that it is a New Jersey corporation, and its entire stock is owned by the Northern Pacific Company. The assets of the improvement company include properties of a variety of kinds. It owns valuable coal and timber lands, and furnishes coal in large quantities to the Northern Pacific Company, though it also sells coal commercially. It is the owner of a large amount of various kinds of securities, including United States bonds. It may be said with some reason that the coal mines are used by the Northern Pacific Company in conducting its railroad business, but surely the securities and moneys owned by the improvement company are not so used. Neither can it be said that its timbered and cut-over lands are used in connection with the operation of the railroad. I am of the opinion that, under the evidence, the stock holdings of the Northern Pacific Company in the improvement company are only incidentally and indirectly related to the operation of the railroad. Presumably the real property of the improvement company located in the state of Washington is subjected to taxation therein, but, whether this be so or not, the character of the holdings of the Northern Pacific Company would not be changed. I concur with the special master that the stock of the Northern Pacific Company in the Northwestern Improvement Company should be treated as nonoperating property. The question of whether in any circumstances the Northern Pacific Company’s holdings in the Spokane, Portland & Seattle Company and in the Burlington Company may be treated as operating property in using the stock and bond method of valuation, as an abstract proposition, is a difficult and perplexing one. It seems plain, however, that, if the stock in the Spokane, Portland & Seattle Company owned by the Northern