confiscatory. But we are of the opinion that, exclusive of taxes, 22 per cent. per annum is a liberal income on such cost, and that is as far as it is necessary to go for the purposes of this case. § 121. Appreciation should be set off against depreciation.

In the brief of the City of New York before the special master in the 80 cent gas case, the theory that appreciation in land if allowed should be set off against depreciation is set forth as follows (at pages 230, 231):

That if the Court is going is allow the company appreciation on its land and the paving over its mains and services, this should be set off against the claim of the company that it should be allowed depreciation on renewals and repairs equal to or greater than the 10.6 cents per thousand feet spent for that purpose during the last twenty-one years.

The above mentioned appreciation claimed by witnesses for the complainants, of $10,531,781.66, is 6.4 cents per thousand feet. Consequently, if the company is to be allowed by the Court to capitalize its appreciation, which averaged 6.4 cents per thousand feet of sales during the last twenty-one years, then its net depreciation which had to be made up by repairs and renewals was not 10.6 cents, but only 4.2 cents. Since there is every reason to believe that real estate will continue to grow in value as rapidly in the future as it has in the past, the probable need of funds to meet depreciation in the future will likewise be small, if the policy is to be sanctioned by the Court of allowing the company to capitalize appreciation.

The Consolidated Gas Company in its brief before the Circuit Court states that, as to the suggestion that appreciation should be offset against depreciation, this has in effect been done since from the cost-of-reproductionnew there has been deducted depreciation amounting to over $600,000. This is of course a small sum in comparison with an appreciation of some $14,000,000 but it is contended that "if, through deterioration of localities

where complainant's land is located, such land had become less valuable than its original cost, complainant would have lost instead of gained in the balancing of appreciation and depreciation; and of course defendants would have insisted that this must be endured by complainant." This argument does not, however, reach the contention of the city that if there is to be an allowance in the expense account to cover future depreciation, that such allowance should in justice be reduced by the amount of existing or anticipated annual appreciation. This contention was not discussed in any way in the opinion of the special master or of the court. The court allowed the company eleven cents on each thousand cubic feet of gas sold to cover future depreciation.

§ 122. Appreciation treated as income.

Accepting the rule laid down by the United States Supreme Court (above, § 112) that as a general rule land should be included at its present or appreciated value, the New York Public Service Commission for the First District has adopted a method of treating appreciation as income and thus neutralizing to a certain extent the effect of appreciating land values in the determination of a reasonable rate of charge. In re Gas and Electric Rates of the Queens Borough Gas and Electric Company, 2 P. S. C. 1st D. (N. Y.) -, decided June 23, 1911, Commissioner Maltbie discusses this problem as follows:

Land differs from most property in that it generally appreciates in value, and the question has been raised, whether land should be included in "fair value" in rate cases at its original cost or at its estimated value at the time the rate is to be fixed. It is well settled that other property should be taken at its then value, but it has been argued that in the case of land the original cost should be used. While it is evident, therefore, that each case must be decided upon the facts peculiar

to it, the Commission believes it proper in this case to follow the general rule, as stated by Judge Hough of the United States Circuit Court (Consolidated Gas Co. v. City of New York, 157 Fed. Rep. 855):

Upon reason, it seems clear that in solving this equation the plus and minus quantities should be equally considered, and appreciation and depreciation treated alike. Nor can I conceive of a case to which this procedure is more appropriate than the one at bar.

Thus, land has been taken at its fair value and not at its original cost, and the annual appreciation of land has been treated as a profit. By this method, all property is treated absolutely alike, as Judge Hough suggests. No difference is made, except that as depreciation represents a decrease in assets, it is placed as a debit against operation, while appreciation is placed as credit because it is an increase in assets. Land has sometimes been treated like other property only to a degree; that is, each class has been appraised at its present worth or value. That has been done in this case. But if property is to be taken at its depreciated value where it has depreciated, an entry must regularly be made in estimated operating expenses equal to the average annual depreciation. Conversely, if land, or any other property which genuinely appreciates in value, is to be taken at its appreciated value, then an entry must be made in the estimated receipts equal to the average annual appreciation. Unless this is done, it is obvious that the consumer will be burdened with all the estimated decreases in assets but not credited with the increases in assets. If the principle laid down by the courts is to be followed in part, it should be followed in whole.

It is suggested that the annual increase in the value of land which is treated as income is not actually received. Increase in the value of unoccupied land is not realized until sold or put into use, but it is real, nevertheless, although payment may be deferred. Likewise, payments to the depreciation fund are not actually expended; yet they have been considered legitimate charges in practically every case. Furthermore,

the annual increment is no more indefinite than the total increment-the present value. But if the present value can be determined, it is possible to determine past annual appreciation with positive accuracy, for it is only a simple mathematical calculation. It is also probably as easy to estimate increases in the near future as it is to estimate what obsolescence, which is a form of depreciation, there will be in the future.

Indeed, the problem of handling appreciation is much simpler than depreciation. If the property is growing more valuable, the investor need not worry; and if the state recognizes his right to earn a fair return upon the increase, he is fully protected. It is not necessary that the increase be represented by stocks or bonds, for if the earning power is there, he will receive a return thereon, regardless of the amount of securities. In fact, the existence of an increase which is not represented by securities is an element of safety, a reserve fund of a valuable kind.

There is a further similarity. The exact amount of depreciation and the annual rate are not definitely known until the piece of property is actually replaced or has become useless. The total appreciation and the average annual rate are not known until the land is sold, but when it has been disposed of (and plants are continually being removed and the land sold), they become absolute certainties. Why should these matters be considered less definite when applied to land than when applied to the buildings thereon? The depreciation of the buildings is a charge against operation; why should not the appreciation of land be a credit?

The entries in the preceding tables representing the increase in land have been carefully computed. It has been possible to ascertain the approximate cost of the land and the date of purchase. Having these facts, one may easily compute the average annual rate of increase. The experts called by the company and the Commission were also examined upon the present trend of prices. The estimated increases used in the above computations are believed to be conservative.

Analyses have been made to determine the effect upon rates if the estimates of the real estate experts for the company

were to be used throughout, and it has been found that the gas rate would be lowered a few cents and the electric rate a few tenths of a cent.

Again in Mayhew v. Kings County Lighting Co., 2 P. S. C. 1st D. (N. Y.) —, decided October 20, 1911, Commissioner Maltbie says:

In determining the fair value of the property, the Commission followed the method of taking all property in useland as well as plant-at its present value. Depreciable property was depreciated, and appreciable property (land was the only instance) was appreciated, that is, the present value of each class was taken. . . . This process was followed for every year considered and, in the case of future years, it involved an estimate of the amount of depreciation and of appreciation from year to year. The former was deducted from the fair value upon December 31, 1910, and the latter was added. In determining operating expenses year by year, an allowance to meet such depreciation was included as a charge against income, for rates should be such that the consumption of capital may be offset by deductions from income. If these processes are correct, it follows that appreciation should be placed as a credit to the estimated income. It is indisputable that if depreciation is a debit, appreciation is a credit.

§ 123. Appreciation treated as income for purposes of United States corporation tax.

The United States Commissioner of Internal Revenue under date of December 15, 1911, issued a synopsis of decisions relating to the special excise tax on corporations.5 These rules provide that profits realized on the sale of real estate and also appreciation in the value of unsold property if taken up on the books shall be included in the income of the corporation subject to a special excise

'See Treasury Decisions, December 21, 1911, Vol. 21, No. 25, pp. 57-68.