lic utilities. But where the enterprise is small, without any special future, and the amount of net profits during any year depend almost entirely upon the ownership and management during such year, a larger per cent of net return is allowed. It is, therefore, clear that the intangible assessments will vary not only with the actual amount of usual net profits, but also with the condition of the money market during such period. For instance, prior to the world war, money could be borrowed by well established railroads and some other public utilities for an interest rate of five or six per cent, while since the world war the rate has usually been as much as eight per cent per annum. It, therefore, follows that a public utility before the world war was worth an amount which its usual annual net profits would capitalize at six per cent, while since the world war it would be worth an amount which the usual net profits would capitalize at eight per cent. In other words, the fair market value of the property, which is, of course, what we are trying to ascertain, would be ascertained substantially along those lines.

It will thus be seen that usual net income is largely the determining factor in ascertaining the full assessable value of a public utility. The law provides that the intangible assessment may be arrived at by adding together the value of the bonds and other indebtedness carried by a public utility to the value of the capital stock, taking 60% thereof, and subtracting therefrom the amount of the tangible assessment; but this method is impractical and fails in practically every instance to get the full benefit of the intangible value. This is for a very palpable reason which is that, as a rule, it is impossible to find the market value of the majority stock, which controls the enterprise. This is seldom put upon the market and is greater always than the value of minority stock which is put upon the market. As has been said before, 60% of the real fair market value of the property of public utilities is what is being sought, and since most public utilities are monopolies to a large extent and their earnings are governed largely by the rates of charge for services allowed, the value of their property stands upon a different basis from that of ordinary private property and should not vary as does private property. According to the general understanding, they are entitled to a reasonable return upon actual infestment and no more. In times of stress, the rate making power should and does increase the rate so that such return may be made, and in prosperous times the rate making power should, and sometimes does, decrease the rate so that they may make only a reasonable return. If this rule is strictly followed by the rate making power, then there cannot be very great changes in tax assessments of the property of public utilities except as they are improved and extended, or as they are depreciated or dismantled in part or in whole.

We wish to say also that the properties of public utilities have been assessed for the past ten or eleven years at substantially 60% of their fair market value while other property has not on the average been anywhere near it until within the last three years. A great deal of it is still below that mark though the State Tax Commission has used its best efforts to equalize all assessments on a 60% valuation.

We have made the foregoing observation for the reason that there has been some criticism in letters from private persons published in some of the newspapers of the State upon the fact that the assessments of the property of public utilities has not been increased to the extent that the propery of private persons and corporations had been increased. In each letter of this kind that has come under our observation, the facts and figures were cited which apply to the express companies only, where the intangible value, which at one time was the largest in proportion to the tangible value of any public utility in the State, has entirely vanished. For instance, take the assessments for the years 1916, 1917, and 1918, against the Southern Express Company. For the year 1916 the assessment was, tangible $56,103.00, while the intangible based upon excess income was $600,000.00. In 1917 the

In

tangible assessment was $57,139.00, and the intangible $600,000.00. 1918 the tangible assessment was $63,186.00, and the intangible was $400,000.00. There was during that period only one other express company doing business in the State; this was the American Express Company. It did a very small business and owned very little property. Its assessment was for 1916, tangible $2,095.00, intangible, none; for 1917, $2,509, intangible,

none.

During the years 1916 and 1917 the Southern Express Company made a net profit of about $65,000.00 on about a $100,000.00 investment, hence the large intangible assessments.

On July 1st, 1918, the railroads then being under Federal control, a new corporation was then formed, viz.: The American Railway Express Company, and the properties of the American Express Company and the Southern Express Company were transferred to the American Railway Express Company. The two former went out of business and have been out of business ever since. No assessment has been made or could have been made against either the Southern Express Company or the Amercian Express Company since 1918, the year before the present administration began. For the year 1919 the American Railway Express Company made no report to the State Tax Commission and the State Tax Commission made a tentative assessment against it, tangible $60,677.00, intangible $400,000.00, the same being substantially the same as the combined assessments of the Southern and American of the year before. From this assessment the American Railway Express Company àppealed to a Board of Arbitration and there showed by competent witnesses, who were acquainted with the facts, that the company had made no profits anywhere since it began business July 1st, 1918, but had suffered loss. There could not be any intangible assessment, but by agreement the tangible assessment, together with penalty for failure to report to the State Tax Commission, was placed at $103,666.00. For the years 1920 and 1921, the reports of the American Railway Express Company have shown deficits as follows: for the year 1920, $173,536.39; for the year 1921, $284,452.28. For the year 1922 the report shows a net income after paying taxes of $2,628.78. From the foregoing it is clear that there was no ground upon which an intangible tax could at any time be levied against the American Railway Express Company. The tangible property of said express company is now assessed at $112,696.00 as against $63,186.00 for the Southern Express Company in 1918, the last year it was assessed. Besides, since the railroads were returned to private control, the Southeastern Express Company has been formed and has operated in the State. Its assessment for the present year is, tangible $42,444.00. So we see that the tangible assessment of the property of all express companies in the State in 1918 amounted to

Southern Express Company.
American Express Company.

Total..

$ 63,186.00 2,509.00

$ 65,695.00

while the tangible assessment of all express companies in the State for the year 1922 amounted to

American Railway Express.
Southeastern Express Company..

Total..

$112,696.00

42,444.00 $155,140.00

It will be seen from the foregoing that while all intangible values have been lost, due to the fact of the great reduction or total loss of net profits by the inroads of the parcel post, rate reductions and the effects of the

world war, still the assessment of the actual tangible property owned by express companies has been increased 136% during the present administration.

Again, the railroad mileage within the State subject to assessment by the State Tax Commission, has been on the whole, decreased. While the Alabama Great Southern Railroad has increased its second track mileage 30.46 miles, the Birmingham & Atlantic Railroad has discontinued and dismantled 22.90 miles of its main line, the Washington & Choctaw Railroad has discontinued and dismantled twenty miles of its main line, the Andalusia & Florida Railroad has discontniued and dismantled six miles of its main line, the 31.28 miles of main line formerly assessed to the Birmingham Southern Railroad by the State Tax Commission as a public utility, has been taken out of the class as a public utility, as it no longer operates for the public, and is now assessable by the tax assessor of the county where located.

FRANCHISE TAX

The Legislature of 1919 transferred the machinery for assessment and collection of franchise taxes from the probate judges to the State Tax Commission, the Attorney General and the State Treasurer.

The following tabulations showing the amounts collected under the old and current laws set forth the results obtained:

The machinery provided under acts prior to the 1919 Act was never adequate and the result was that many corporations entirely ignored their duty to the State in respect of this tax. However, under recent decisions of the Supreme Court the right of the State to collect past due franchise taxes is clearly determined, the statute of limitations not operating against the State. Further, according to these decisions, no judicial determination is required to fix the amount due by a domestic corporation as annual franchise taxes. The corporation must pay an amount based on its paid-up capital stock. In the case of a foreign corporation payment measured by "capital employed" is required. From 1916 judicial determination of capital employed was provided for. Prior to that year, even though the Constitution of the State required payment on "capital employed," no means of judicially determining the amount was ever provided by the Legislature and foreign corporations paid to the probate judges the amounts they considered due and there existed no power of review by any State authority.

The result is that four classes of delinquent corporations exist:

First. Domestic corporations that have failed altogether to pay franchise taxes, that is to say, for any year of their existence.

Second. Domestic corporations that have failed to pay franchise taxes for a portion of the years of their existence.

Third. Domestic corporations that have paid franchise taxes, but have paid an inadequate amount.

Fourth. Foreign corporations that between the years 1911 and 1915 inclusive, have paid an adequate amount, and foreign corporations which have failed to pay any tax at all.

The 1919 Revenue Act went far toward improving the machinery of assessment and collection of the tax. But this machinery is still inadequate with the result that enforcement of the law has not been and cannot be uniform until better machinery is provided. Those who have obeyed the law voluntarily, together with those whom the Commission has been able to reach through correspondence and through the personal calls of its field agents, bear the burden of this tax. The others proceed, or have in a great number of cases proceeded, in business in the possession of valuable corporate rights without bearing their required share of the burden of the tax. Manifestly the State suffers injustice and the law-abiding taxpayer is unfairly treated.

It is conceivable that in time the field agents of the Commission could round up all delinquent corporations, but the process would be expensive and in the case of many corporations the outlay would not be justified by the return, and during the rounding up period many would escape payment through dissipation of assets before these field agents could reach them. This latter, in itself, makes the collection of the tax lack uniformity, but the expense to the State of personal visits of field agents each year to hundreds of small delinquent corporations is apparent and this method should not be employed, provided cheaper and more uniform methods can be found.

The franchise tax is not a license or privilege tax for doing business. It is a tax on corporations for the right to exist as corporations in Alabama. We can see no reason why any part of the tax should be distributed to the counties of the State. Such a distribution does not seem to have been contemplated by the framers of the State Constitution and it is a gift to the various counties from the general fund of the State which the principle of a fair distribution of State collections does not seem to require.

The rate for the franchise tax in Alabama is less than in any other state of which we have knowledge, and, in our opinion, it should be increased to not less than one dollar on each thousand dollars of capital.

While the present franchise tax law is much better than the one it replaced, it needs strengthening in many particulars.

The present law does not provide any penalty for failure to make returns on which this tax is determined and this omission has made the collection of this tax in many instances more difficult than it would otherwise have been. In other states, where there is a law levying franchise tax, there is generally a provision for a drastic penalty for failure to make the proper returns. The State of Delaware probably has had more experience in the levy and collecting of a franchise tax than any other state. In that state for failure to make a return there is a specific penalty of $200.00 to be collected from each taxpayer in an action of debt. In addition the law of that state provides that the officers and directors of corporations which fail to make the returns required by law shall be ineligible for re-election to their respective positions for a period of one year. We recommend that the omission of a penalty in our law be corrected.

It is sometimes difficult to get legal service on domestic corporations in this State. There are many corporations chartered under the laws of Alabama which do not maintain an office in the State. We suggest that

there should be added to our law a provision that service can be made upon the Secretary of State and that such service should be as effectual as if made upon the president or other officer of a corporation.

For the non-payment of the franchise tax within the time required by law our present law provides a penalty of five per cent per month. This penalty does not seem to be sufficient to insure the collection of the franchise tax in many cases, particularly where the tax is small. In other states where there is a franchise tax law, failure to pay the tax within the time required by law, after notice has been properly given, involves a possible forfeiture of charter and, in addition, in most of the states, there is a provision by which corporations can be enjoined from exercising all corporate rights until the franchise tax is paid. We think it would be well to embody both of these provisions in the law of this State in addition to the specific penalty now provided.

There is no provision in our law for assessments to be made upon information. There should be provisions for such assessments.

While section 21 of the present law confers upon the State Tax Commission authority for demanding information from corporations needed in the determination of the amount of the franchise tax, we think an amendment to this section should remove some doubts which at present appear to exist and should give to the State Tax Commission in explicit terms the right to require from corporations any information which may be disclosed by the books, including the right to demand balance sheets and lists of stockholders and to make an examination of the books of a corporation, whenever, in the judgment of this Board such examinations may be necessary.

The present law provides that returns for franchise tax shall be filed between November 1st and December 15th of the year preceding the year for which the tax is levied and collected. Our experience has shown that the period from January 1st to March 15th of the year of levy and collection is more practicable from every standpoint. This latter period follows the practice of the Federal government relating to income tax returns and its adoption would prevent the necessity of placing an additional burden on corporations in the matter of closing books and assembling date, since nearly all corporations close their books on December 31st of each year.

Many details involving changes in the present law suggest themselves from the experience of the Commission, but we recommend that these be handled by giving the Commission discretionary authority rather than that they be incorporated into the law itself. The reason for this suggestion lies in the fact that the levy of a franchise tax is a constitutional mandate to the Legislature and, since only the Legislature can provide machinery, it would seem wise to give the Commission all discretionary powers consonant with legality and the authority of the Legislature, rather than that rigid and binding machinery be provided. It is only necessary to call to mind the extensive litigation in the past over the franchise tax, due to the irreconcilability of legislative acts with the Constitution, in order to show the wisdom of proceeding where possible under rules of the Commission, which are less formal and more readily adaptable to conditions than are rigid legislative acts, which, if declared inconsistent with the Constitution, might endanger collection of the tax or, at least, delay it.

LICENSE TAXES

For the purposes of comparison and comment we submit below a statement showing the total collection of licenses for the last three years under the Revenue Act of 1915 and for the three years since the Revenue Act of 1919 has been in force.