out regard to other forms of business, and to do that you must deal with the earnings as a starting point in your problem.

CAPTAIN WHITE: I notice that the difficulty seems to be between the method of taxation and the method of distribution. I think we should all agree with the last speaker that the method of taxation should be on gross earnings rather than on net earnings. Now, in regard to the matter of distribution, that is dependent upon the service that might be rendered in a part of the community, and what may be justly allocated to that part of the community is dependent upon the property that is in the community that is used. for that service. In Massachusetts we have a very large property holding by the railroads for terminal purposes. The terminals are not for the purpose of handling the freight or the transportation. problems of Massachusetts, but they involve the transportation of a great deal of material that goes into other states. Now, if we tax the gross earnings of the railroad and simply distribute that according to mileage, Massachusetts would get her fair share of taxation, but if you are to take into consideration the value of the property that is involved in the state in that railroad and allocate it according to that, I think you will arrive at about as fair a distribution of the tax as can be obtained.

CHAIRMAN HAUGEN: The chair would call on Mr. Lord as to how the gross earnings tax is apportioned in the State of Minnesota.

MR. LORD: I would suggest to Mr. Haugen that there is a luncheon at a quarter after twelve. It is now three minutes after twelve.

CHAIRMAN HAUGEN: Then I will turn the gavel over to Mr.

Lord.

CHAIRMAN LORD: While there are a number of others who may desire to speak on this subject, I will recognize Mr. Moffett, of the local committee here, to make an announcement.

(Mr. Moffett makes announcements)

CHAIRMAN LORD: I think in order to avail ourselves of the invitation extended by the civic and commerce association, it will be necessary for us to adjourn at this time until two o'clock this afternoon, and while I know there are a number who would like to speak on this subject, we shall have to draw this meeting to a close at some time, so I think we will stand adjourned until two o'clock this afternoon.

(Adjournment)

SIXTH SESSION

WEDNESDAY AFTERNOON, SEPTEMBER 20, 1922

CHAIRMAN LORD: There is a sight-seeing schedule for five o'clock, and in order to give everyone an opportunity to take it in I am going to try to push things right along, although I do not see my good friend Captain White here on time.

MR. J. E. SAINT of New Mexico: Captain White is drumming them up. He pushed me in here.

CHAIRMAN LORD: The conference will be in order. I will recognize Mr. King. Unfortunately at the time we adjourned I had to decline to recognize him, and I think that he is entitled to that courtesy at this time. Mr. King of New York.

MR. WILLIAM H. KING of New York: Mr. Chairman, I should like permission to submit to the secretary some brief notes of the experience in New York on the subject of apportionment, and with respect to the report of the committee on the taxation of public utilities, as brought out in our situation there and in the litigation which we have conducted. I will hand that to the secretary without any further statement.

(Mr. King's statement is as follows.-Ed.)

The City of New York, which I represent at this conference as an assistant corporation counsel of the law department, in charge of the division of taxes, has a vital interest in the subject of taxation of public utilities; and in the litigation which I have conducted for the city, the courts have been called upon to consider the apportionment of property between different tax districts which has been referred to in this discussion.

In the State of New York the principal tax imposed on public utility corporations is known as the special franchise tax, fixed by the state board of tax commissioners but entered as real estate upon the tax books of the several tax districts of the state as against the special franchise of such corporations in the district and payable to the district. Thus any change in the law in force would materially affect the revenues of the cities.

The special franchise tax takes into consideration two elements, namely the value of the intangible right or permission to operate the franchise in the streets and public waters, and the value of the

tangible property of the corporations in such places. The value of the intangible right has generally been determined by what is known as the net earnings rule, namely by capitalizing at a fair rate the net earnings obtained after due allowances for depreciation, a fair return on value of property in operation, etc.

In addition to this tax the corporations pay locally the real estate tax on their real property such as offices, plants, etc., not in the streets and public places. They also pay a general franchise tax to the state.

The proposal made in the report of the committee that such corporations should pay an exclusive tax, fixed upon both gross and net earnings, leaves out of account the real estate tax and, as has here been suggested, meets with constitutional objections. It also meets with many practical objections.

The elimination of the local real estate tax would vitally affect local revenues and in many cities the debt limit and borrowing capacity. This is particularly true in large cities like New York, which is dependent not only upon the real estate tax on properties of such corporations not located in streets and public places, but also upon the real estate tax for a long period imposed on the special franchises of such corporations, including the tangible property in the streets and the value of the intangible right.

Certainly in no locality should such corporations be relieved of the ordinary real estate tax locally assessed and paid, even if any other tax be based upon gross and net earnings. In the case of an individual, he is required to pay a tax on his real estate and also a tax upon earnings or personal property in some form. Similarly business corporations pay a tax on their realty and also upon their income, franchise or personal property. There is no difference nor any valid reason for relieving public utility corporations of such real estate tax, even if it were constitutional and practicable; and the reasons assigned of many tax bills and many local assessors. can have no force whatever, apart from tangible property in streets and public places, rights of ways, etc., any more than with respect to an individual or business corporation owning real estate in various parts of a state.

The further subject of apportionment referred to in this discussion but not reported upon by the committee, is one which the courts have passed upon in our special franchise litigation in New York. It arose particularly in two cases, one relating to the value of the special franchise in Park Avenue, including the terminal of the New York Central Railroad, and the other to that of the New York Telephone Company in New York City.

In the first New York Central case the court disapproved of the so-called track mileage basis of apportionment and upon lack of proof confirmed the assessments made. In the second New York

Central case, the railroad abandoned any method of showing error of apportionment, but claimed over-valuation of bridges and inequality of assessment, as compared with assessments of other real estate. The city, however, produced what the court regarded as the best evidence of value of the intangible right in the form of a lease by that railroad to another railroad-the New York, New Haven and Hartford, to operate over Park Avenue to the terminal, which lease capitalized on the theory that the right was worth as much to the New York Central as to the other road, showed that the intangible right alone was far in excess of the assessment.

In the New York Telephone Company case the city was prepared to show that upon the company's own methods of apportionment in its business, including that solely within the city and that extending beyond the city, the assessment, which exceeded any ever before or since imposed, was not excessive, but upon the trial the company abandoned any claim of error on the ground of wrong apportionment and rested on legal and technical grounds which were overruled, no appeal being taken from the confirmation of the

assessment.

It may be suggested, therefore, in the light of these two cases presenting the only questions of apportionment raised in such litigation, in one of which the mileage basis was expressly disapproved by the court, that instead of attempting to follow such a basis, the business dealings and methods of the public utility corporations be examined as to leases, accounting, allocation of profits and expenses, etc., in order to determine fair and just apportionments.

CHAIRMAN LORD: Unless there is objection, the communication will be received and referred. The luncheon, I know, has delayed the delegates somewhat. Captain, what success did you have?

CAPTAIN W. P. WHITE: Mr. Chairman, I think we might proceed with the meeting, because those who are out in the lobby are in the process of assimilation. Apparently they are very much like the cow and cud, so that the active minds might as well continue the meeting.

CHAIRMAN LORD: We have this afternoon for consideration the apportionment between states of taxes on interstate mercantile and manufacturing business. This is a matter of much importance, and I am going to ask to preside this afternoon a gentleman who for a great many years has been looking at the taxation problem from the standpoint of a great public utility corporation. It is a pleasure to state that my acquaintance with this gentleman justifies me in saying that he is one of the big open-minded men who deal with taxation problems in a broad-minded way. I take great pleasure in performing the entirely unnecessary duty of introducing to you the tax attorney of the Western Union Telegraph Company, Mr. Whitney of New York.

MR. FRANCIS N. WHITNEY, of New York, presiding.

CHAIRMAN WHITNEY: Gentlemen of the conference: I appreciate very much what Mr. Lord has said, and I also appreciate the compliment of calling upon a representative of the public service corporations to preside at one of the sessions of the conference.

The subject for discussion this afternoon is based primarily upon a report to be made by the committee of the association on the apportionment between states of taxes on interstate mercantile and manufacturing business. Mr. Lamb, the chairman of that committee, is here, and will make the report for the committee — Mr. Lamb of Pittsburgh.

MR. CARL S. LAMB of Pittsburgh: Mr. Chairman and gentlemen of the association: You will find in each of the chairs a little pamphlet which the committee has prepared showing the recommendations of your committee. The committee's report will deal largely with the development of these recommendations on the part of your committee. It was thought best to have in your hands a copy of the recommendations, so that while this report is being read you might be able to better follow the committee's recommendations.

REPORT OF COMMITTEE ON THE APPORTIONMENT BETWEEN STATES OF TAXES ON MERCANTILE

AND MANUFACTURING BUSINESS

This committee was appointed at the 1920 conference at Salt Lake City to assist the Model Tax Committee, by giving intensive study to the question of apportionment between states of income derived by mercantile and manufacturing business conducted in more than one state. This subject is dealt with in Sections 308, 309, 310 and 311 of the model business income tax.

Your committee has decided to recommend some departures from the methods of apportionment provided in those sections, but in doing so it desires to state that such is in no sense a criticism of the work of the Model Tax Committee. It is only because that committee has recognized the extreme difficulty of the question and the necessity for further study that this committee ventures to recommend certain changes, and these recommendations are made simply for the consideration of the conference and the Model Tax Committee, without assertion or assurance on the part of the members of the committee that it has reached the final or best solution. The methods of apportionment now provided in the model business income tax would make a substantially fair division of taxable income between the states and do substantial justice to the taxpayers, assuming that all states into which the taxpayer's business