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.

tax. The following are abstracts from the Commissioner's synopsis of decisions:

43. Profits realized on sale of real estate during the year, also increase in value of unsold property, if taken up on the books of the corporation, to be included in income.

62. In the case of lands bought prior to January 1, 1909, and sold during any subsequent year, the profits arising from such sale, if no accounting of increased value of land was made in returns for previous years, should be prorated in accordance with the number of years the land was held by the corporation and the number of years the law was in effect.

86. Where increase or decrease during the year in the value of real estate acquired in previous years, sold or held for sale, is taken up on the books and the rate cannot be accurately determined with respect to individual years, such increase or decrease may be prorated as provided by regulations in cases of sale of capital assets.

96. In case of corporations whose business consists in part or wholly of mining, producing, and disposing of deposits of nature (ores, coals, gas, petroleum, and sundry minerals) the conduct of such business will be understood to comprehend two classes of gains or losses, viz.:

(a) The gain or loss resulting from the sale of capital assets, i. e., either the increment, or the loss, arising through possessing over a period of time the investment in the same.

(b) The trading or commercial gain attached to the conduct of the industry, the employment of working capital, the effort and risk involved.

§ 124. Income method considered.

The reproduction cost of structures and equipment fluctuates with changes in prices of labor and materials. The movement, however, is not one-sided. It is as likely to favor the consumer as the company. Experience has shown, however, that the general trend in city land values is toward appreciation. Under the reproduction

theory the movement is therefore entirely one-sided. It is always to the advantage of the company. If the relations between the consumer and the company are to be based on equity it would seem that, accepting the reproduction method in valuations for rate purposes, some exception should be made in the case of land. The company is entitled to a reasonable return on the property it devotes to a public use: but it is not equitably entitled to a reasonable return plus an additional return brought about by the appreciation of land. Such appreciation is clearly a part of the return that the company is receiving on its property. In treating the annual appreciation as so much income and permitting the company to earn a fair return on the present appreciated value of its property, the New York Public Service Commission has adopted a just and logical method.

§ 125. Actual cost v. present value.

The treatment of appreciation as income in a rate case is a necessary adjustment of the reproduction method to make it conform to fundamental principles of equity. Substantially the same result would be obtained but more directly and logically by making an exception of land and taking original cost instead of present value. As noted above (§§ 81-84) there is good authority for the rule that in applying the reproduction method, cost of reproduction shall be based on actual conditions under which the present plant was produced and not on present conditions. Carry this reasonable process a step further and the actual conditions can be assumed to include the actual conditions as to cost of land. Conceived in this way the reproduction method would still be true to at least one of the theories on which it is based and because of which it has received much of its authoritative support. The reproduction method receives much of its support

from the fact that it is difficult or impossible to determine actual cost owing to the complications arising from improvements, reconstruction, and supersession and the absence or unreliability of construction accounts. Therefore the only satisfactory substitute is an estimate of replacement cost. But these difficulties do not arise in connection with land values. It is not necessary, while adopting the reconstruction method for the determination of structural value, to apply it also to land in spite of the injustice to the consumer thereby produced. If, however, as is often the case, the theory of reproduction cost is based squarely on the investment that would be required at the present time to provide a given service, and this in absolute disregard of past investments, vested interests and equities of every kind, then of course land must be taken at its present value. (See above, §§ 7075, 96.) But if this theory is adopted it will still be just to include the probable income from land appreciation with other income in estimating returns under proposed rates.

2. COST OF REPRODUCTION OF RAILROAD RIGHT OF WAY § 134. Reproduction cost same as present estimated condemnation cost.

Usually in the general state railroad appraisals the value of land taken for right of way has not been limited by the market value of adjacent land. An allowance has been made for the higher price that the railroad would have to pay on account of damages to land not taken and on account of the fact that in condemning land for railway purposes the railway company is usually required to pay an amount in excess of market value. Certain instructions issued to appraisers by the Wisconsin State Board of Assessment in its valuation of