Appeals from the Order of the Board of Finance and Revenue in the cases of In Re: Bessemer and Lake Erie Railroad Company, Docket Nos. R-23193, R-124, R-125, C-817, R-126, R-127, C-36500, R-941, R-3043, R-3045 and R-3047.
David McNeil Olds, with him Carl F. Chronister, Edward T. Baker and Donald J. Harrell, Reed, Smith, Shaw & McClay, for appellant.
Eugene J. Anastasio, Deputy Attorney General, for appellee.
President Judge Crumlish and Judges Mencer, Rogers, MacPhail and Palladino. President Judge Crumlish and Judges Wilkinson, Jr., Rogers, Blatt, Craig, Williams, Jr. and Palladino. President Judge Crumlish and Judges Mencer, Rogers, Blatt, Williams, Jr., Craig, MacPhail and Palladino. Opinion by Judge Craig.
[ 61 Pa. Commw. Page 123]
The Bessemer and Lake Erie Railroad Company (B&LE) and the Commonwealth have cross-filed exceptions to our opinion and orders of March 5, 1981, reported at 57 Pa. Commonwealth Ct. 340, 427 A.2d 699 (1981), in this capital stock valuation case under the Act of June 1, 1889, P.L. 420, and its repealer and successor statute, the Act of March 4, 1971, P.L. 88. We will first address B&LE's exceptions and then those of the Commonwealth.
B&LE's exceptions are twofold in substance.*fn1
First, B&LE submits that our methodology failed to discount its stated book equity. As we noted in our opinion on the merits, book equity cannot be said to be an exact measure of value, and we are cognizant that "exclusive reliance upon accounting figures is unacceptable." Commonwealth v. Penn Square Management Corp., 39 Pa. Commonwealth Ct. 127, 394 A.2d 1095 (1978). However, our determination of capital stock value did not rest upon book equity figures, but, rather, for consistency of methodology, merely gave equity equal weight in averaging it with the values derived by capitalization of earnings and dividends. Our approach obviously went beyond B&LE's accounting
[ 61 Pa. Commw. Page 124]
records. In six out of nine years,*fn2 the final value found was substantially less than book equity, ranging from 94% of equity (1970) to less than 70% (1974), thus discounting book equity to that substantial extent. The statute does not direct nor have the cases held that equity should be consistently discounted to a given proportion. All that the cases have held is that stated book values cannot be the sole determinant of actual value.
B&LE's remaining exception claim is addressed to our derivation of capitalization rates for dividends, and consists of two points: (1) because the Commonwealth relied on rates of 7% and 8% for capitalization of dividends and earnings respectively, we should have looked to that differential to derive the dividends rates from our adopted earnings rates, and not to the 8%/10% differential we did follow; and (2) that, for that derivation, we should have reduced the earnings capitalization rates by the numerical difference between the Commonwealth's rates, not by the proportionate difference we did use.
On the first point, as we noted in our initial opinion, the values indicated by capitalizing dividends and earnings at 8% and 10% respectively were, with few exceptions, substantially higher than the values claimed by the Commonwealth; that "unexplained magnanimity" in the Commonwealth's value claims was such as to weaken confidence in the whole approach. Obviously, using rates of 7% and 8% would yield values which would exceed the claimed values by even greater amounts; thus, although we declined to accept either pair of ...