Louis Brandeis

“ Nor is there evidence in the record to justify the master's finding that a business brought to successful operation 'should have a going concern value at least equal to one-third third of its physical properties.' Past losses obviously do not tend to prove present values. The fact that a sometime losing business becomes profitable eventually through growth of the community or more efficient management, tends to prove merely that the adventure was not wholly misconceived. ”

“ In determining the value of a business as between buyer and seller, the good will and earning power due to effective organization are often more important elements than tangible property. Where the public acquires the business, compensation must be made for these, at least under some circumstances. ”

“ But compensation for bankers' services is often paid in the lessened price at which they take the company's securities, and is thus represented in the higher rate of interest or dividend paid on the money actually received by the company as capital. ”

“ The reason given by the master for including the allowance for an assumed brokerage fee, is that a brokerage fee is 'a normal incident of large industrial investments and has not been amortized,' since 'the record shows that the plant has been operated at a loss.' If base value were to be fixed by the money expended, brokerage fees actually paid might with propriety be included, as are taxes paid pending construction. ”

“ If the rule were that a prescribed rate is to be held confiscatory in case net earnings are not sufficient to yield 8 per cent, on the amount prudently invested in the business, there might be propriety in counting as part of the investment such amount, if any, as was necessarily expended at the start in overcoming initial difficulties incident to operation and in securing patronage. ”

“ The going concern value for which the master makes allowance is the cost of developing the operating railway system into a financially successful concern. The only evidence offered, or relied upon, to support his finding is a capitalization of the net balance of alleged past deficits in accordance with what was said to be the Wisconsin rule. [5] The experts calculated this sum in various ways. One estimate placed the development cost at $2,000,000 ”

“ From this, interest paid or accrued on indebtedness is to be deducted before computing the net income on which the tax is payable. A large part of the capital of utility companies is ordinarily represented by interest-bearing bonds and notes; and there is evidence that such indebtedness of the appellant was 'in the neighborhood of $1,400,000.' The interest on this debt chargeable to the railway system would be at least $50,000. There is further an exemption from tax of $2,000 of the net income. So a 10 per cent. ”

“ The company's expert prophesied that the level would be 60 to 70 per cent. about 1913 prices; the master that an increase of 33 1/3 per cent. would prove fair; and the court accepted the master's prophecy of 33 1/3 per cent. [4] Thus both master and court assumed a reproduction cost, after deducting accrued depreciation, of about $1,625,000. On this sum the net earnings found by the court yielded-after deducting a 4 per cent. depreciation annuity on property subject to depreciation, a maintenance charge, and a charge for taxes, other than the federal income tax-a net return of 5 1/2 per cent. ”

“ The other item included by the master in determining base value, but disallowed by the court, is $67,078 for brokerage fees. There is no evidence that any sum was in fact paid as brokerage, and there was included, as above shown, the sum of $73.281 for organization and business management in calculating the historical reproduction cost. The finding of the master rests upon testimony that bankers customarily get, in some form, compensation equal to 4 per cent. ”

“ But the figure $67,076 was tacitly agreed by both parties to be the amount, if any, that should be allowed for brokerage.↑ It is difficult to see how, on the facts presented, so large a sum as $16,254 could have been paid on account of the year's operation. Indeed the court, in disallowing the item of federal income tax, deducted not $16,254, but $8,008. Even this seems too large, for the net earnings, without deduction of the $16,254 attributed to income tax, for the year ending June 30, 1920, as found by the master, were $66,503.60. ”