of this state, and for the assessment of the same, or so much thereof as may be found to be in excess of the equalized valuation of the tangible property of such companies and associations, respectively, we, the State Board of Equalization, hereby adopt the following rules and principles:

"First. The fair cash values of the shares of capital stock (consideration being given among other things, to the value of the shares of stock and the quotations of such shares in the market over such a period of time as may be reasonable, also the books of said corporations and the returns made to the Auditor of Public Accounts, or such other information as the Board may have or may be able to obtain) and the amount of the indebtedness (except indebtedness for current expenses, excluding from such expenses the amount paid for the purchase or improvement of property) shall be combined or added together.

"Said State Board of Equalization shall then equalize said amount so obtained, so that said companies or associations shall be assessed as near as practicable upon the uniform basis with other property throughout the State.'

"Second. From the aggregate amount so determined and equalized as aforesaid, there shall be deducted the aggregate equalized valuation of all tangible property of such corporation or association, respectively, and one-third of the remainder, if any, shall be taken and held to be the assessed value of the capital stock of such corporation or association, including the franchise, over and above the tangible property thereof."

Constitutional Defects:

In addition to the objection that our statute is economically unsound it is objectionable for the further reason that it is unconstitutional. Minnesota had a statute similar to ours and in 1899 the supreme court of Minnesota in the case of the State vs. The Duluth Gas & Water Company, 76. Minn., 96, declared the statute to be unconstitutional, in so far as it authorized corporate indebtedness to be subtracted from stock value. On this point Justice Mitchell in a very able opinion used this language: "But in the latter section the legislature has gone a step further, and provided for the deduction from the value of the capital stock not merely of the value of the tangible corporate property otherwise specially taxed, but also the total amount of all indebtedness of the association, except indebtedness for current expenses. Such a provision is in direct conflict with the constitutional requirement that all taxes shall be as nearly equal as may be, and that all property on which taxes are to be levied shall have a cash valuation, and be equalized and uniform throughout the state. The indebtedness presumably affects the value of the stock as di

rectly as do the assets of the corporation. The former depreciates, while the latter appreciates, its value. The practical effect of this provision is to allow a double deduction of the amount of the corporate indebtedness. It would necessarily result in inequality of taxation, not only as between the associations themselves falling within the provisions of section 1530 (owing to differences in their financial condition,) but also as between all such associations and persons or associations taxed under the general provisions of the tax law, who are not permitted to deduct their indebtedness from the value of franchises owned by them." The language applies as well under the North Dakota constitution as under that of Minnesota.

Additional Defects:

The law is further defective in that it applies to "unincor porated companies" and "associations" as well as to corporations. The only difference between an unincorporated company or association which has stock and to which therefore this law is made applicable, and any ordinary partnership is that the in-. terest of the stockholder in any unincorporated company is more readily transferable than is the interest of a partner. No distinction should be made between the assessment of the good will of a partnership and the assessment of the good will of an unincorporated company. It is manifestly impracticable to assess the good will of an unincorporated company, the ownership of which is evidenced by shares of stock. This difficulty, however, might be somewhat lessened as to unincorporated companies for whose stock there is a readily ascertainable market value. We know of none such in North Dakota. If the good will of a company or association is to be assessed, why exempt the good will of the individual? Yet we do not assess the professional man or the business man on the value of his professional or business good will.

If this statute is to be of any value it must be made to apply to corporations alone, and only to such corporations as by reason of the corporate franchises under which they operate are able to capitalize their constant and prospective earning capacity. This manifestly does not apply to the ordinary business organization whose only franchise is a right to be or exist as a legal entity and which is subject to all of the vicissitudes which characterize the transaction of business in a competitive field. Under present conditions in this state it would apply peculiarly to public utility corporations alone.

A further defect of Section 1503 is that the rule therein laid down is expressly made in applicable to banking corporations. Experience shows that banking corporations are quite as likely to

have a corporate excess as are ordinary corporations. In fact, we believe that banks afford in peculiar degree an illustration of corporate excess. There are a number of factors which enter in making up the value of a certificate of bank stock. Among these factors are business advantages of being closely associated with financial interest in control of a particular bank and the reputation a bank has earned during a period of years, and other considerations often lead the purchaser to pay a sum in excess of that which a cold consideration of the assets of the bank alone would justify him in paying. We do not contend that the law should be made to embrace banks, but recite this merely as an illustration of the defects of the law.

Conclusions:

With reference to the statute hereinbefore discussed our conclusions are as follows:

1. That the law is defective in the method prescribed for measuring corporate excess-in fact, it is economically unsound.

2. That it is legally unconstitutional. If the statute is to remain upon the statute books at all it should be amended by providing that the fourth and fifth items should be added together, and from the sum of the fourth and fifth items the sixth and seventh items should be deducted.

3. If the statute were repealed entirely no damage would result. In that the whole situation would be cleared up from a legal standpoint and we would continue to assess, as we do now, the real and personal property of ordinary corporations. Provision is elsewhere made for the assessment of the franchises of public utility corporations, the methods employed, except insofar as qualified by the law under discussion, resting within the discretion of the officers whose duty it is to assess. We believe the wisest solution of the whole matter would be to repeal the law.

2. BANKS.

The whole subject of the assessment of banks is discussed in a separate chapter of this report and requires no further discussion here.

3. ASSESSMENT OF RAILROADS, ETC.

The Law in North Dakota :

The law in North Dakota provides that the state board of equalization shall assess at its actual value the franchise and all property within the state, of all express companies, freight line

companies, car equipment companies, sleeping car companies, dining car companies, telegraph or telephone companies, and the franchise, roadway, roadbed, rails and rolling stock of all railroads operated in this state; that it shall be the duty of the tax commission, and it shall have power and authority to assess at their actual value all light, heat and power companies doing business in the state.

The state constitution provides that instead of assessing property as above, the legislature may pass a law providing for a gross earnings tax on all railroads. No authority is given to assess any other kind of public service corporations in this manner. All public service corporations of this class should be assessed by the same method. All should be assessed either on the ad valorem basis or on the basis of gross earnings. But under the unfortunate wording of our constitution, none of the above public service corporations can be assessed on the gross earnings basis except railroads. This leaves us the only other alternative, to assess all on an ad valorem basis.

Distribution of the Tax on Railroads, etc.:.

The constitution provides that, "All property, except as hereinafter in this section provided, shall be assessed in the county, city, township, town, village or district in which it is situated, in the manner prescribed by law. The franchise, roadbed, roadway, rails and rolling stock of all railroads operated in the state shall be assessed by the state board of equalization at their actual value and such assessed valuation shall be apportioned to the counties, cities, towns, townships and districts in which said roads are located, as a basis of taxation of such property in proportion to the number of miles of railway laid in such counties, cities, towns, townships and districts.

It seems to us that this method of distribution is indefensible from every standpoint. The property of a railroad company consists of long strips of land, used for right-of-way, stations, grounds and terminals. On this land it constructs its roadbeds, cuttings, viaducts, bridges, embankments and tunnels; depots, elevators, machine shops, round houses, coaling stations, etc. To this property must be added the various kinds of rolling stock and equipment. We find here, then, a vast system, extending over states within which are scores of taxing units upon and across which it extends. Adjacent taxing units, also, are benefitted by the system and from this it derives revenues although not actually within such units. The extent of territory covered in any given taxing unit and the expenditure involved in any such unit has little or no relation to the amount of service rendered within the area; neither does it have any relation to the amount of revenue derived from it. Nobody will con

tend that the township assessor should assess a railway corporation on the basis of a very expensive bridge, tunnel, or embankment, which might happen to be within his township, while an adjacent township through which the railway did not pass could not share in such taxation, although, perhaps, contributing a much greater amount of traffic and earnings out of which taxes must be paid. Or, perhaps, in an adjoining township through which such line of railway passes we find level country with no streams to cross. In the assessment of ordinary property, the controlling feature is the market value of the property taxed. Using the above illustration, it would be manifestly unfair to allow one township in which such heavy expenditures were made to collect, say ten times as much tax on the corporation as the township adjoining through which it passed and to allow nothing to the one through which the line did not pass, although it might be the heaviest contributor to the revenues of such railway. Without the continuous line of railway throughout the state, the values in the taxing unit in which the extraordinary expenditures were made would be greatly lessened if not absolutely destroyed; so, too, without the patronage of the country adjacent, values in the entire system would lessen.

But the law of North Dakota specifically states that the valuation per mile shall be fixed by the state board of equalization and apportioned to each county according to the number of miles of such line contained in such county, and then the county auditor of such county shall apportion such valuation to the cities, towns, villages, townships, and districts through which such lines. run, according to the number of miles contained in each as a part of the valuation of such city, town, village, township and district, for the purpose of taxation, and the same shall be taxed as personal property is taxed. But this is not fair to the township or district lying adjacent to one through which a valuable public service corporation passes and which, perhaps, contributes a much greater amount of traffic and hence earnings. This is one defect in our taxing system which should be remedied. But the defect is constitutional.

Gross Earnings Plan, No Recommendation:

However undesirable the existing method may be it will remain with us for some time to come unless the legislature sees fit to adopt the gross earnings method of assessing railroads. In which event, Section 179 of the constitution above quoted, would not apply, but the tax commission is not prepared at this time to endorse the gross earnings tax, even as a means of escaping the undesirable consequences of a distribution of the railroad assessment upon the mileage basis to the various municipalities or taxing units through which it runs.