United States v. N. Pac. Ry. Co., 288 U.S. 490 (1933)

The appellees urge that the decision in Atchison, Topeka & Santa Fe Ry. Co. v. United States, 284 U. S. 248, requires us to hold that the Commission’s refusal to reopen the proceeding was an abuse of discretion. That case, however, exhibited a substantially different state of facts. There the Commission conducted an investigation, pursuant to the Hoch-Smith Resolution, touching the p. 493entire structure of rates on export grain from the territory west of the Mississippi River and from Illinois. Here the inquiry embraced rates from origin points to a relatively small destination area. The diminution of carrier revenue consequent upon the new rates, while substantial, is far less than that effected by the order in the Santa Fe proceeding. In that case the record was closed in September, 1928, the matter submitted on argument July 1, 1929, and a report and order entered July 1, 1930, establishing rates to be charged on and after October 1, 1930. The effective date was postponed from time to time on account of the difficulty of adjusting the tariffs in accordance with the order. In September, 1930, the carriers requested a rehearing. Prior to action thereon the railroads brought to the Commission’s attention their changed financial condition due to the economic depression. In November, 1930, a rehearing was denied. On February 18, 1931, a second petition for rehearing was presented, which was in effect a bill of review. It averred that due to the nation-wide depression which,had its inception in November, 1929, the facts exhibited by the record as closed in September, 1928, were utterly unrepresentative of conditions existing at the effective date of the order some two and one-half years later.

The complaint attacked the existing rates as unreasonable, and did not charge undue preference or prejudice; but, it is said, the Commission based its order solely upon prejudice due to the relation of these rates with others in force in adjacent territory. The argument is that the relief granted was different from that invoked and so beyond the Commission’s power. The appellees also claim that when they discovered that the Commission p. 495was proceeding upon the basis of relationship, rather than reasonableness, they vainly sought an opportunity to show that the rates used as comparatives were unreasonably low, and therefore of no probative value. The Commission’s dismissal of certain petitions for further hearing upon consolidated records, presently to be described, is represented as a denial of a fair hearing, in that the carriers were prevented from showing the impropriety of the comparisons used. The examination of these contentions requires a detailed statement with respect to this and other proceedings before the Commission.

Prior to the filing of the complaint in this case (No. 17304) the Commission was engaged in an investigation (No. 15584) of rates on petroleum from midcontinent territory to western trunk line destinations and Indiana, Illinois, and northern Michigan. Midcontinent origins had been grouped for rate making purposes, and the principal contention in No. 15584 was that the rates from the different blanket origins were not properly related. In that proceeding, however, intervenors residing in North and South Dakota alleged that the rates from the midcontinent field as a whole to destinations in those states were unreasonably high and prejudicial when compared with the tariffs in force to other territory. Certain related complaints were consolidated with No. 15584 and all were heard on a single record. While the investigation was under way the complaint in the present case, No. 17304, was filed by North Dakota and western Minnesota complainants, and was heard on a separate record. There had also been filed a complaint known as No. 16309, by South Dakota consignees, attacking the rates to that territory as unreasonable and also as unduly prejudicial in their relation to rates to Iowa and southern Minnesota. In May, 1926, a report was filed in No. 15584 (112 I. C. C. 421) readjusting the rates from various origin blankets in p. 496the midcontinent field to western trunk line destinations and declaring the new rates to be just, reasonable and non-preferential. Referring to the interventions of consignees in North and South Dakota and to case No. 16309, affecting South Dakota, the Commission stated that the record was not adequate for a finding with respect to the rates to those destinations, and announced that No. 15584 would be held open for further consideration in connection with No. 16309. It subsequently consolidated No. 16309 and the present case, No. 17304, with No. 15584, and on March 5, 1928, filed a supplemental report establishing rates to the territory here in question, effective June 14, 1928, adjudging them reasonable and properly related to the rates to western trunk line territory theretofore prescribed (139 I. C. C. 605).

The required schedules having been put into effect, the carriers filed tariffs reducing the rates on petroleum from origins in Wyoming to points in North Dakota, South Dakota, and certain cities in Iowa, Nebraska and Montana—this upon the theory that these should be reduced to bring them into proper relationship with the new charges on petroleum from the midcontinent field. After p. 497hearing the Commission suspended the rates so promulgated (153 I. C. C. 363).

The petition in the District Court sets forth the matters above outlined and summarizes the action of the Commission in the various proceedings. The answers of the United States and the Commission admit the filing of the several complaints and the making of the reports and orders thereon; deny that the description of the Commission’s action set out in the petition is accurate or complete; and refer to the reports and orders for a correct statement of what the Commission did. At the p. 499trial none of the records in any of the complaints was put in evidence. The several petitions for rehearing and for consolidation are recounted and summarized in the petition, but are not set forth, nor included in the record. In considering the questions presented we are thus confined to the Commission’s reports supplemented by the averments of the pleadings as to the substance of the applications for reopening, consolidation and rehearing.

In the absence of the evidence before the Commission we cannot say that there was no adequate and sufficient p. 500proof on which to base a finding of the reasonableness of the rates prescribed.* It is true that in both reports touching the rates here in controversy the Commission used as comparatives rates from the midcontinent field to South Dakota points and those from Wyoming origins to South Dakota and North Dakota destinations. But it appears from the reports that the carriers themselves presented comparisons of these very rates in support of their contentions. Thus both the appellees and the Commission recognized what has long been settled—that existing rates for similar service to other destinations may be used for comparison as one test, though not a controlling one, upon the question of the reasonableness of the rates in issue. The Commission’s reports do not sustain the averments of the petition that the question of reasonableness was disregarded and the order based solely upon a comparison with rates which were unduly and unreasonably low.

But the appellees say that if the Commission intended to give weight to the relationship of the rates established in No. 16309, to South Dakota, it should, in fairness, have permitted that case to be reopened and should have afforded opportunity for proof that the South Dakota rates were fixed in relation to the western trunk line tariff, which was unreasonably low due to competitive conditions. The record in the District Court fails to support this argument. As above noted, the carriers had been parties to the record in No. 16309, and confessedly the p. 501rates there established for South Dakota destinations were made relatively higher than those to trunk line territory. Moreover the petition of January 14, 1930 did not specifically request the Commission to reopen No. 16309 for the purposes of proof as to the South Dakota rates.

The Alkali Company filed returns for income and profits taxes for 1918 and 1919 and paid the tax shown to be due. The Commissioner proposed certain changes in income and capital as reported, principally due to decreases in amortization and depreciation allowances. At some date not disclosed by the record the company asked that its profits taxes be computed pursuant to § § 327 and p. 504328 of the act. The request was denied and correspondence and conferences ensued between the Commissioner and the taxpayer in an effort to settle the disputed items. The demand for computation of the taxes pursuant to the special assessment sections was pressed by the company. Twice during the period of negotiation the Commissioner advised that until the true net income was ascertained the propriety of special assessment could not be determined. Finally, in July, 1927, as a result of audits and investigations, he found the company’s net income, and decided that, owing to abnormal conditions affecting its-capital or income, assessment according to the usual method under § 301 would work an exceptional hardship, and relief should be granted pursuant to §§ 327 and 328. He so notified the respondent, enclosing a calculation of the taxes made by him pursuant to § 328. The taxpayer protested on several grounds, amongst others, that the net income as determined under § 301 was excessive, and that the ratio of tax to net income obtained by the Commissioner by comparison with the taxes of other representative corporations, as provided in § 328, was too high. It did not, however, as was its right, appeal to the Board of Tax Appeals from the determination of net income.

In November, 1927, the Commissioner made an assessment in accordance with his findings and demanded payment of a deficiency thereby disclosed. The respondent paid under protest and filed claims for refund, asserting the same objections it had previously urged. The claims were rejected and the respondent brought suits to recover the alleged overpayments. The District Court found that additional amounts should have been allowed for amortization, reduced the net income as determined, thereupon recomputed the taxes on the reduced income by applying the rate per cent, used by the Commissioner in his p. 505computation, and rendered judgment in favor of the respondent. Both parties appealed. The Circuit Court of Appeals increased the amortization allowance, made additional deductions from gross income for depreciation, found a net income much less than that fixed by the District Court, and held that the tax should be recomputed by applying the rate used by the Commissioner to the new figure found as the net income. 60 F. (2d) 505.

In Williamsport Wire Rope Co. v. United States, 2T7 U. S. 551, it was decided that the allowance of special assessment is a matter of administrative discretion; and it p. 506was further said that the selection for comparison of representative corporations engaged in a like or similar trade or business is also a question of discretion. The Commissioner cannot make an administrative finding upon the question for decision under § 327 (d) or that under 328 until he has determined the net income of the taxpayer. See United States v. Henry Prentiss & Co., ante, p. 73. He must compare the income of the taxpayer with that of corporations he deems representative in order to determine abnormality or gross disproportion between capital and income. When he comes to compute the ratio or rate of tax to be applied to the taxpayer’s net income, as prescribed in § 328, he obviously will consider as a factor the ratio of tax to net income of the same representative corporations he examined for the purpose of deciding whether he should grant special assessment under § 327 (d).

We think the petitioners’ position is correct. The taxpayer’s true net income was an essential factor in the problem. Until that was known the Commissioner could make no proper or satisfactory comparison with conditions prevailing in other corporations similarly p. 507circumstanced. We cannot say that if the income had been substantially less than the figure he used he would have granted special assessment under § 327 (d). Moreover, with a different net income, he might well have had to compare the relevant conditions in respondent’s business with the operating results of corporations other than those he selected on the basis of respondent’s net income as found, and might have concluded that a different ratio of tax to net income was applicable in respondent’s case.