5. Examples of enhancement through unearned increment

It is an historic fact that enormous holdings of timber lands throughout the country have been assembled by speculators for considerations little less than gratuitous. Purchase from small farmers, non-residents and others, through options and intermediate contracts, before the true value of the products are known has been the rule, rather than the exception. For example, millions of acres of pine timber in Arkansas which were acquired a few years ago on the basis of from ten cents to twenty-five cents per thousand, for stumpage, would not now be sold for less than from five to ten dollars.

Moreover, after a given territory is sufficiently blanketed by the operator's holdings, his buying program usually stops, for the obvious reason that remaining stumpage tributary to the mill can, by waiting, be had at a price much less than its actual worth. Since it is left so scattered as to be desirable, from a manufacturing standpoint, by no competing interest, the market for the isolated tract is virtually destroyed.

It is a common practice, indeed, where two or more lumber companies enter a given timbered region, to immediately choke all competition by a division of territory among them, so that each operator may purchase at the mutually fixed maximum price for timber, knowing that it will not be exceeded by his friendly adversary. Thus there can be no clash of interest by reason of one company invading the other's territory.

The Aluminum Company of America, in twenty years, placed a hitherto unknown metal fourth in commercial rank. It has built up a dominant monopoly in its field, secure in its holdings of mineralized lands in Arkansas, affording a supply of bauxite for a half-century. This close corporation has managed to buy up or freeze out all competition, and has been enabled by adroit tactics to acquire, for less than a million dollars, a mining property whose book value today exceeds nine million dollars.

And yet, by the use of that fetich phrase "market value ", in a primitive statute, written years before mineral development was foreseen, the law ignominiously falls down. It fails to anticipate the scientific phases of potential value which private exploration has later brought to light. Am. Bauxite Co. v. Board of Equalization, 119 Ark. 362; 117 S. W. 1151.

6. Valuation should comprehend both present and prospective factors As stated by Prof. M. H. Hunter in the introduction to his recent Outlines of Public Finance"

"The march of progress in the development of government is from the simple to the complex, and the more complex the

organization the more numerous and difficult are the problems which present themselves."

In casting about for intelligent guidance in the difficult task of evaluating property, tax administrators may do well to heed the authoritative ruling of the supreme court of the United States.

In Cleveland C. & St. L. v. Backus, 154 U. S. 439, 445; 38 L.. ed. 1041, 1046, Mr. Justice Brewer laid down this forceful formula: "The rule of property taxation is that the value of the propery 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." See also Monongahela Navigation Co. v. U. S., 148 U. S. 312; 37 L. ed. 463 (value for condemnation).

7. The public's right to technical service

"market

What has already been said indicates that the true or value of mineral properties, and especially of those accumulations of natural resources which are hidden and underground, cannot be intelligently appraised by the untrained local assessor. Without special machinery or equipment for the scientific admeasurement of such secret values, they would remain undiscovered and sealed, so far as the public is concerned, and the real worth of this class of property, though well known in the industrial and commercial world, would never be reflected upon the tax books.

Yet such properties are freely bought and sold, hypothecated and transferred for a definite cash consideraion. Hence it is plain that some mode of reliable appraisement exists which is acceptable in financial and banking circles. It is for the employment of the same modes of evaluation, for the purpose of taxation, that economists and progressive statesmen are beginning to interpose a most earnest plea.

As aids in determinng the value "present and prospective" of basic material resources, the state should have at her beck and call the best talent of the scientific world. Two fields of modern research furnish the eyes whereby, with microscopic accuracy, technical values are identified in the marts of trade. These two eyes are the appraiser and the accountant. The appraiser's services are indispensable in ascertaining inventory values, while those of the accountant are equally necessary in interpreting books of account or the record of business transactions, and of profit and loss.

The disinterested auditor's and engineer's report, the balancesheet, the appraisal, and the profit and loss account all are "bills of

particulars," without which a valuer must grope in the darkwhether the conclusion sought is for purposes of condemnation, rate regulation, capitalization, taxation or for sale.

The state, in her sovereign role, is the author, creator and guarantor of property rights.. She is the mother-protector of all operations whereby natural resources are reduced to individual control. The state by her grace accords the usufruct. Should she not, in return for such invaluable support, be yielded her definite dues? Whether it be a share of the income from operations, or a rental charge for profitable forbearance to develop, the state should get hers first.

A well-organized appraisal company is equipped not only to cruise and value forest properties, but to appraise all classes of mining properties as well. They possess facilities for accurately evaluating both real estate devoted to such special uses and also the mining machinery, plant, tram-roads and operating facilities of any mill. They are, moreover, thoroughly capable of cruising and appraising undeveloped mineral deposits. In this respect, their working equipment is more adequate than that of the geologist, who is not usually prepared to place on property a commercial value.

The petroleum and natural gas industries with their infinite ramifications and marvelous expansion in recent years present the most intricate problem from the taxation standpoint. Special treatment is more imperative perhaps than in any other natural product. Yet a standard appraisal offers proven services in the disinterested investigation and valuation of every type of oil and gas property. embracing the equipment for refining, transportation, distribution and marketing of petroleum and its by-products.

The appraisal establishes values through a careful analysis of every influential factor, including the worth of the improvements, age of production, past production records, state of development of lease, location of property with reference to continued production, thickness and nature of oil-producing sands, probability of deeper sands in unexplored depth to which additional wells could be drilled and their probable cost, the cost of lifting oil, salvage value of equipment on exhausted leases, existing market conditions in the oil industry, etc.

Through its engineering department, such a company conducts a constant research in every phase of industry. Its personnel is presumably thoroughly trained and has developed practical experience; its reports have been approved and utilized by a large and satisfied but cautious clientele in the most conservative fields.

One of these companies has appraised upwards of 20,000 diversified commercial properties, public utilities, mineral and petroleum resources, during the last quarter of a century, and enjoys a pres

tige in banking and financial circles and among the investing public. In financing the purchase or sale of properties and in the formation of mergers the appraisal today is indispensable. It should certainly be of incalculable service to the public in the difficult and technical process of taxing natural resources upon an ad valorem basis.

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By appraised values" is meant a valuation arrived at under the personal supervision of thoroughly qualified executives, whose skilled judgment is the result of many years' experience in valuation work, and who have the assistance of trained appraisers, using organized cost analysis records, statistical data, and being guided by checks of definite, predetermined and tested standards of valuation." An appraisal company is an executive organization, using established methods and records, which insures the testing of appraised valuations against well-established standards, and guarantees their uniformity and provability. The test of an appraisal organization is the extent to which it has reduced valuation work to an exact science.

Scientific valuations of mineral properties have been made by several of the more progressive mining states, and in every instance with enormous public gain. In Michigan the assessed valuation of the iron properties was increased pursuant to the appraisal of J. R. Finlay in 1911 from $27,000,000 to $85,000,000. And the 1921 assessment, in spite of the ten years depletion, due to new discoveries, reached the goodly total of $117,000,000.

The validity and effectiveness of a scientific appraisal is well illustrated by the experience of this state. In 1911 the board of tax commissioners, acting under authority of act No. 114 of 1911, employed Mr. Finlay, an expert mining engineer, to assist it in making an appraisal of mining properties. He was aided by Dr. C. K. Leith, Professor of Geology in the University of Wisconsin, and a corps of junior assistants. The total cost was less than $26,000. The concrete result-the fruit of enlightened legislation, coupled with fearless administration by an efficient tax commission shown in the following table:

is

The procedure, of course, was subjected to the acid test of judicial attack; but in the two test cases the assessments were fully

sustained: Sunday Lake Iron Co. v. Wakefield (1915), 153 N. W. 14; Newport Mining Co. v. Ironwood (1915), 152 N. W. 1088.

In the Sunday Lake case the plaintiff's property had been assessed by an inexperienced local assessor who, "proceeding in entire good faith," adopted a value which his predecessor had placed upon the property-$65,000. The state board, in the light of the Finlay appraisal, raised the assessment to $1,071,000. The taxes were paid under protest, and the company promptly sued to recover what it termed the excess taxes for the current year, amounting to $31,910.45.

The supreme court of the state, in a unanimous decision, sustained the final assessment and affirmed the decision of the lower court which had approved and confirmed it.

On appeal to the United States Supreme Court, the cause was affirmed, that court holding against the iron company on the two points urged, viz: (1) that the failure of the board, because of alleged lack of time and inadequate information, to cause a general survey of all property, did not invalidate its action with respect to the Sunday Lake mine; and (2) that a mere error of judgment, if existing, did not support the claim of discrimination, since the good faith of the taxing officials is presumed. Sunday Lake Iron Co. v. Township of Wakefield, 247 U. S. 350; 62 L. ed. 54; 38 Sup. Ct. 495.

In the companion case of Newport Mining Co. v. Ironwood, the total actual real estate value of Gogebic County was $56,467,012, and the assessment by the local assessors of both real and personal property was only $12,829,605. Among the properties was that of the Newport mine, whose assessment was at $2,188,640, and was appraised by Mr. Finlay at $13,400,000. The value finally fixed by the commission was $8,535,000. Taxes based on this revision, in the sum of $98,996, were paid under protest, and the suit for recovery followed.

In an exhaustive opinion the court sustained the scientific valuation, notwithstanding the contention that the expert appraisal related only to the mining property, leaving untouched all other real estate and personal property of the county, urged as under assessed to an equal extent.

It was further held in this case that the state is not limited to the capitalized royalty received by the owner of mining property, since the royalties themselves may be undervalued and the property may be worth more than the owner received. Says the court (p. 1093):

"It will be admitted that the availability and value of minerals, unmined, are not matters of common knowledge, nor to be correctly ascertained or estimated except by men possessed both of certain particular information and of expert knowledge."