Under an Act authorizing condemnation proceedings to acquire
property for military purposes, the United States, on November 21,
1942, petitioned the District Court to condemn the temporary use of
a laundry, for a term ending June 30, 1943, subject to renewal
annually. The Government took possession of the property on
November 22, 1942, and the term was renewed annually until June 30,
1946. Meanwhile the laundry suspended service to its regular
customers. As just compensation to the owner, a jury awarded an
annual rental of $70,000 and $45,776.03 for damage to the plant and
machinery beyond ordinary wear and tear. The District Court entered
judgment on the verdict. Interest was allowed from November 22,
1942, on the amount due for the period ending June 30, 1943, from
the beginning of each annual term on the amount due for that term,
and from the date of the award on the amount of damage to the plant
and machinery. No compensation was awarded for diminution in the
value of the business due to the destruction of trade routes, a
proffer of evidence thereof having been rejected.
Held:
1. The award of compensation made for the temporary taking of
the land, plant, and equipment was correct. Pp.
338 U. S. 6-8.
(a) The proper measure of compensation for the temporary taking
was the rental that probably could have been obtained, not the
difference between the market value of the fee on the date of the
taking and its market value on the date of its return. Pp.
338 U. S. 6-7.
Page 338 U. S. 2
(b) The award for damage to the plant and machinery beyond
ordinary wear and tear was justified on the theory that such
indemnity would be payable by an ordinary lessee, though not fixed
in advance as part of his rent because not then ascertainable. P.
338 U. S. 7.
(c) The amounts awarded by the jury as rental value of the
physical property and as compensation for damage to the plant and
equipment in excess of ordinary wear and tear were adequately
supported by the evidence. Pp.
338 U. S. 7-8.
2. The basis for the award of interest was appropriate. The
Government was not liable for interest on the total amount of the
award from the date of the taking. P.
338 U. S. 21.
3. The Government having for all practical purposes preempted
the trade routes for the period of its occupancy, it must pay
compensation for whatever transferable value their temporary use
may have had, and the case must be remanded to the District Court
to determine what that value, if any, was. Pp.
338 U. S.
8-21.
(a) When the Government has taken the temporary use of business
property, it would be unfair to deny compensation for a
demonstrable loss of going concern value upon the assumption that
an even more remote possibility -- the temporary transfer of going
concern value -- might have been realized. P.
338 U. S. 15.
(b) In determining the compensable value of the temporary use of
the trade routes, the District Court should consider any evidence
which would have been likely to convince a potential purchaser as
to the presence and amount of the laundry's going concern value,
including (by way of example, and subject to certain cautions set
forth in the opinion) the record of past earnings and expenditures
for soliciting business. Pp.
338 U. S.
16-21.
(c) If the District Court should find petitioner's evidence
adequate to submit to the jury for a finding as to presence and
amount of the value of the trade routes, it must instruct the jury
as to computation of the compensation due, which must not exceed
the value of their temporary control. Pp.
338 U. S.
20-21.
166 F.2d 856 reversed.
A judgment of the District Court, entered on the verdict of a
jury in a condemnation proceeding, was affirmed by the Court of
Appeals. 166 F.2d 856. This Court granted certiorari. 335 U.S. 807.
Reversed and remanded, p.
338 U. S. 21.
Page 338 U. S. 3
MR. JUSTICE FRANKFURTER delivered the opinion of the Court.
On November 21, 1942, the United States filed a petition
[
Footnote 1] in the United
States District Court for the District of Nebraska to condemn the
plant of the Kimball Laundry Company in Omaha, Nebraska, for use by
the Army for a term initially expiring June 30, 1943, and to be
extended from year to year at the election of the Secretary of War.
The District Court granted the United States immediate possession
of the facilities of the company, except delivery equipment, for
the requested period. The term was subsequently extended several
times. The last year's extension was to end on June 30, 1946, but
the property was finally returned on March 23, 1946.
The Kimball Laundry Company is a family corporation the
principal stockholders of which are three brothers who are also its
officers. The Laundry's business has been established for many
years; its plant is large and well equipped with modern machinery.
After the Army took over the plant, the Quartermaster Corps ran it
as a laundry for personnel in the Seventh Service Command. Most of
the Laundry's 180 employees were retained, and one of the brothers
stayed on as operating manager. Having no other means of serving
its customers, the Laundry suspended business for the duration of
the Army's occupancy.
Page 338 U. S. 4
On November 19, 1943, a board of appraisers appointed by the
District Court, in accordance with Nebraska law, reported that
"the just compensation for the value of the use of the premises
taken by the United States of America is the sum of $74,940 per
annum. . . ."
The appraisers made no award of damages for the loss of patrons
which they recognized to be probable because, at that time, the
amount of the loss could not be appraised. The Government and the
Laundry both appealed the appraisers' award, and the question of
just compensation was tried to a jury in March of 1946. The jury
awarded an annual rental of $70,000 -- a total of $252,000 for the
whole term -- and $45,776.03 for damage to the plant and machinery
beyond ordinary wear and tear. The rental award was intended to
cover taxes, insurance, normal depreciation, and a return on the
value of the Laundry's physical assets. Interest at the rate of 6
percent was added from November 22, 1942, the day on which the Army
took possession, on the amount due for the period between that date
and June 30, 1943, and on the rental for each year thereafter from
the beginning of the year until paid. Interest on the sum awarded
for damage to the plant and machinery was adjudged to run from the
date of the verdict, since the plant had not then been
returned.
The Laundry appealed to the Court of Appeals for the Eighth
Circuit assigning numerous errors in the admission and exclusion of
testimony and in the instructions to the jury. The Court of Appeals
affirmed the District Court, 166 F.2d 856, and we granted the
Laundry's petition for certiorari, 335 U.S. 807, because it raised
novel and serious questions in determining what is "just
compensation" under the Fifth Amendment.
These questions are not resolved by the familiar formulas
available for the conventional situations which gave occasion for
their adoption. As Mr. Justice Brandeis
Page 338 U. S. 5
observed, "[v]alue is a word of many meanings."
Southwestern
Bell Telephone Co. v. Public Service Comm'n, 262 U.
S. 276,
262 U. S. 310.
For purposes of the compensation due under the Fifth Amendment, of
course, only that "value" need be considered which is attached to
"property," [
Footnote 2] but
that only approaches by one step the problem of definition. The
value of property springs from subjective needs and attitudes; its
value to the owner may therefore differ widely from its value to
the taker. Most things, however, have a general demand which gives
them a value transferable from one owner to another. As opposed to
such personal and variant standards as value to the particular
owner whose property has been taken, this transferable value has an
external validity which makes it a fair measure of public
obligation to compensate the loss incurred by an owner as a result
of the taking of his property for public use. In view, however, of
the liability of all property to condemnation for the common good,
loss to the owner of nontransferable values deriving from his
unique need for property or idiosyncratic attachment to it, like
loss due to an exercise of the police power, is properly treated as
part of the burden of common citizenship.
See Omnia Commercial
Co. v. United States, 261 U. S. 502,
261 U. S.
508-509. Because gain to the taker, on the other hand,
may be wholly unrelated to the deprivation imposed upon the owner,
it must also be rejected as a measure of public obligation to
requite for that deprivation.
McGovern v. New York,
229 U. S. 363;
United States ex rel. TVA v. Powelson, 319 U.
S. 266.
The value compensable under the Fifth Amendment therefore is
only that value which is capable of transfer from owner to owner,
and thus of exchange for some equivalent. Its measure is the amount
of that equivalent.
Page 338 U. S. 6
But since a transfer brought about by eminent domain is not a
voluntary exchange, this amount can be determined only by a guess,
as well informed as possible, as to what the equivalent would
probably have been had a voluntary exchange taken place. If
exchanges of similar property have been frequent, the inference is
strong that the equivalent arrived at by the haggling of the market
would probably have been offered and accepted, and it is thus that
the "market price" becomes so important a standard of reference.
[
Footnote 3] But when the
property is of a kind seldom exchanged, it has no "market price,"
and then recourse must be had to other means of ascertaining value,
including even value to the owner as indicative of value to other
potential owners enjoying the same rights.
Cf. Old South
Association v. Boston, 212 Mass. 299, 99 N.E. 235. These
considerations have special relevance where "property" is "taken"
not in fee, but for an indeterminate period.
Approaching thus the question of compensation for the temporary
taking of petitioner's land, plant, and equipment, we believe that
the award made by the District Court was correct. Petitioner
insists, however, that the measure of compensation for a temporary
taking
Page 338 U. S. 7
which should have been applied is the difference between the
market value of the fee on the date of the taking and its market
value on the date of its return. But it was known from the outset
that this taking was to be temporary, and determination of the
value of temporary occupancy can be approached only on the
supposition that free bargaining between petitioner and a
hypothetical lessee of that temporary interest would have taken
place in the usual framework of such negotiations. We agree with
both lower courts therefore that the proper measure of compensation
is the rental that probably could have been obtained, and so this
Court has held in the two recent cases dealing with temporary
takings.
United States v. General Motors Corp.,
323 U. S. 373;
United States v. Petty Motor Co., 327 U.
S. 372. Indeed, if the difference between the market
value of the fee on the date of taking and that on the date of
return were taken to be the measure, there might frequently be
situations in which the owner would receive no compensation
whatever because the market value of the property had not decreased
during the period of the taker's occupancy.
The courts below also awarded compensation to petitioner for
damage to its machinery and equipment in excess of ordinary wear
and tear, the award of rental having been adjusted to include an
allowance for normal depreciation. The Government does not object
to this award, but we think it appropriate to point out that we
find it justified on the theory that such indemnity would be
payable by an ordinary lessee, though not fixed in advance as part
of his rent because not then capable of determination.
The petitioner makes numerous objections to the sufficiency of
the evidence in support of the amounts fixed by the jury as the
rental value of the physical property and as compensation for
damage to the plant and equipment
Page 338 U. S. 8
in excess of ordinary wear and tear. Suffice it to say that we
find these awards adequately supported.
At the core of petitioner's claim that it has been denied just
compensation is the contention that there should have been included
in the award to it some allowance for diminution in the value of
its business due to the destruction of its "trade routes." The term
"trade routes" serves as a general designation both for the lists
of customers built up by solicitation over the years and for the
continued hold of the Laundry upon their patronage.
At the trial, petitioner offered to prove the value of the trade
routes by testimony of an expert witness based on the gross
receipts attributable to each class of customers, and the testimony
of one of its officers was offered to show that this value had
wholly disappeared during the three and one-half years of the
Army's use of the plant. [
Footnote
4] It further offered to show the cost of building up the
customer lists, which had not been capitalized, but charged to
expense, and losses which would be incurred after the resumption of
operations while they were being rebuilt. The petitioner also
attempted to introduce evidence of its gross and net income for the
eighteen years preceding the taking, the amount of dividends paid,
and the ratio of officers' salaries to capital stock and surplus,
on the theory that this evidence would shed additional light on the
value of the Laundry as a going business. The trial court rejected
these offers as not bearing upon the "fair market value or fair use
value of the property taken," and instructed the jury that it
should not consider diminution in the value of the business. The
Court of Appeals affirmed because, in its opinion, whatever may
have been the loss in value of the business or the trade routes
Page 338 U. S. 9
brought about by the taking, "The Government did not take or
intend to take, and obviously could not use, the Company's
business, trade routes or customers." 166 F.2d at 860.
The market value of land as a business site tends to be as high
as the reasonably probable earnings of a business there situated
would justify, and the value of specially adapted plant and
machinery exceeds its value as scrap only on the assumption that it
is income-producing. And income, in the case of a service industry,
presupposes patronage. Since petitioner has been fully compensated
for the value of its physical property, and separate value that its
trade routes may have must therefore result from the contribution
to the earning capacity of the business of greater skill in
management and more effective solicitation of patronage than are
commonly given to such a combination of land, plant, and equipment.
The product of such contributions is an intangible which may be
compendiously designated as "going concern value," but this is a
portmanteau phrase that needs unpacking.
Though compounded of many factors in addition to relations with
customers, that element of going concern value which is contributed
by superior management may be transferable to the extent that it
has a momentum likely to be felt even after a new owner and new
management have succeeded to the business property. But because
this momentum can be maintained only by the application of
continued energy and skill, it would gradually spend itself if the
effort and skill of the new management were not, in its turn,
expended.
See Paton, Advanced Accounting 427, 435 (1941).
Only that exercise of managerial efficiency, however, which has
contributed to the future profitability of the business will have a
transferable momentum that may give it value to a potential
purchaser -- that which has had only the effect of increasing
current income of reducing expenses of operation has spent
Page 338 U. S. 10
itself from year to year. The value contributed by the
expenditure of money in soliciting patronage, although likewise of
limited duration, differs from managerial efficiency in that it
derives not merely from the contribution of personal qualities, but
from original investment or the plowing back of income. As such, it
may sometimes be more readily recognized as an asset of the
business. [
Footnote 5] It is
clear, at any rate, that the value of both these elements, in
combination, must be regarded as identical with the value alleged
to inhere in the trade routes.
Assuming, then, that petitioner's business may have going
concern value as defined above, the question arises whether the
intangible character of such value alone precludes compensation for
it. The answer is not far to seek. The value of all property, as we
have already observed, is dependent upon and inseparable from
individual needs and attitudes, and these, obviously, are
intangible. As fixed by the market, value is no more than a summary
expression of forecasts that the needs and attitudes which made up
demand in the past will have their counterparts in the future.
See Ithaca Trust Co. v. United States, 279 U.
S. 151,
279 U. S. 155;
cf. 1 Bonbright, The Valuation of Property 222 (1937). The
only distinction to be made, therefore, between the attitudes which
generate going concern value and those of which tangible property
is compounded is as to the tenacity of the past's hold upon the
future: in the case of the latter, a forecast of future demand can
usually be made with greater certainty, for it is more probable on
the whole that people will continue to want particular goods or
services than hat they will continue to look to a particular
supplier of them. It is more likely, in other words, that people
will persist in wanting to have their laundry done than that
Page 338 U. S. 11
they will keep on sending it to a particular laundry. But, as
the probability of continued patronage gains strength, this
distinction become obliterated and the intangible acquires a value
to a potential purchaser no different from the value of the
business' physical property. Since the Fifth Amendment requires
compensation for the latter, the former, if shown to be present and
to have been "taken," should also be compensable. As Mr. Justice
Brandeis observed for the Court in
Galveston Electric Co. v.
Galveston, 258 U. S. 388,
258 U. S.
396,
"In determining the value of a business as between buyer and
seller, the goodwill 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."
See also Des Moines Gas Co. v. Des Moines, 238 U.
S. 153,
238 U. S. 165;
McCardle v. Indianapolis Water Co., 272 U.
S. 400,
272 U. S.
414.
What, then, are the circumstances under which the Fifth
Amendment requires compensation for such an intangible? Not,
indeed, those of the usual taking of fee title to business
property, but the denial of compensation in such circumstances
rests on a very concrete justification: the going concern value has
not been taken. Such are all the cases, most of them decided by
State courts under constitutions with provisions comparable to the
Fifth Amendment, in which only the physical property has been
condemned, leaving the owner free to move his business to a new
location.
E.g., Bothwell v. United States, 254 U.
S. 231;
Banner Milling Co. v. New York, 240
N.Y. 533. In such a situation, there is no more reason for a taker
to pay for the business' going concern value than there would be
for a purchaser to pay for it who had not secured from his vendor a
covenant to refrain from entering into competition with him. It is
true that there may
Page 338 U. S. 12
be loss to the owner because of the difficulty of finding other
premises suitably situated for the transfer of his goodwill, and
that such loss, like the cost of moving, is denied compensation as
consequential.
See Joslin Mfg. Co. v. Providence,
262 U. S. 668,
262 U. S. 676.
But such value as the goodwill retains the owner keeps, and the
remainder dissipated by removal would not contribute to the value
paid for by a transferee of the vacated premises, except perhaps to
the extent that the prospect of its loss would induce the owner to
hold out for a higher price for his land and building.
Cf.
United States v. General Motors Corp., 323 U.
S. 373,
323 U. S. 383.
When a condemnor has taken fee title to business property, there is
reason for saying that the compensation due should not vary with
the owner's good fortune or lack of it in finding premises suitable
for the transference of going concern value. In the usual case,
most of it can be transferred; in the remainder, the amount of loss
is so speculative that proof of it may justifiably be excluded.
See Sawyer v. Commonwealth, 182 Mass. 245, 65 N.E. 52, per
Holmes, C.J. By an extension of that reasoning, the same result has
been reached even upon the assumption that no other premises
whatever were available.
Mitchell v. United States,
267 U. S. 341.
The situation is otherwise, however, when the Government has
condemned business property with the intention of carrying on the
business, as where public utility property has been taken over for
continued operation by a governmental authority. If, in such a
case, the taker acquires going concern value, it must pay for it.
Omaha v. Omaha Water Co., 218 U.
S. 180;
see Denver v. Denver Union Water Co.,
246 U. S. 178,
246 U. S. 191;
Orgel, Valuation under Eminent Domain § 214 (1936), and cases there
cited. Since a utility cannot ordinarily be operated profitably
except as a monopoly, investment by the former owner of the utility
in duplicating the condemned
Page 338 U. S. 13
facilities could have no prospect of a profitable return. The
taker has thus, in effect, assured itself of freedom from the
former owner's competition. The owner retains nothing of the going
concern value that it formerly possessed; so far as control of that
value is concerned, the taker fully occupies the owner's shoes.
But the public utility cases plainly cannot be explained by the
fact that the taker received the benefit of the utility's going
concern value. If benefit to the taker were made the measure of
compensation, it would be difficult to justify higher compensation
for farm land taken as a firing range than for swamp or sandy waste
equally suited to the purpose.
But see Mitchell v. United
States, 267 U. S. 341,
267 U. S.
344-345. It would be equally difficult to deny
compensation for value to the taker in excess of value to the
owner.
But compare, e.g., McGovern v. New York,
229 U. S. 363;
United States ex rel. TVA v. Powelson, 319 U.
S. 266. The rationale of the public utility cases, as
opposed to those in which circumstances have brought about a
diminution of going concern value although the owner remained free
to transfer it, must therefore be that an exercise of the power of
eminent domain which has the inevitable effect of depriving the
owner of the going concern value of his business is a compensable
"taking" of property.
See United States v. General Motors
Corp., 323 U. S. 373,
323 U. S. 378;
cf. United States v. Causby, 328 U.
S. 256. If such a deprivation has occurred, the going
concern value of the business is at the Government's disposal,
whether or not it chooses to avail itself of it. Since what the
owner had has transferable value, the situation is apt for the
oft-quoted remark of Mr. Justice Holmes, "the question is, What has
the owner lost? not, What has the taker gained."
Boston Chamber
of Commerce v. Boston, 217 U. S. 189,
217 U. S.
195.
Page 338 U. S. 14
We think that the situation before us comes within this
principle. The Government's temporary taking of the Laundry's
premises could no more completely have appropriated the Laundry's
opportunity to profit from its trade routes than if it had secured
a promise from the Laundry that it would not, for the duration of
the Government's occupancy of the premises, undertake to operate a
laundry business anywhere else in the City of Omaha. The taking was
from year to year; in the meantime, the Laundry's investment
remained bound up in the reversion of the property. Even if funds
for the inauguration of a new business were obtainable otherwise
than by the sale or liquidation of the old one, the Laundry would
have been faced with the imminent prospect of finding itself with
two laundry plants on its hands, both of which could hardly have
been operated at a profit. There was nothing it could do,
therefore, but wait. Besides, though trade routes may be capable of
transfer independently of the physical property with which they
have been associated, it is wholly beyond the realm of conjecture
that they could have been sold from year to year, or that the
Laundry would have bound itself to give them up for a longer period
when, at any time, its plant might be returned. It is equally
far-fetched, moreover, to suppose that they could have been
transferred for a limited period and then recaptured.
It is arguable, to be sure, that, since an equally suitable
plant might conceivably have been available to the petitioner at
reasonable terms for the same period as the Government's occupancy
of its own plant, and since that would have enabled it to stay in
business without loss of going concern value, it is irrelevant that
no such premises happened to be available, as it would have been
irrelevant, under a strict application of
Mitchell v. United
States, 267 U. S. 341, had
the Government taken the fee. When fee title to business property
has been taken, however,
Page 338 U. S. 15
it is fair on the whole that the amount of compensation payable
should not include speculative losses consequent upon realization
of the remote possibility that the owner will be unable to find a
wholly suitable location for the transfer of going concern value.
But, when the Government has taken the temporary use of such
property, it would be unfair to deny compensation for a
demonstrable loss of going concern value upon the assumption that
an even more remote possibility -- the temporary transfer of going
concern value -- might have been realized. The temporary
interruption, as opposed to the final severance of occupancy, so
greatly narrows the range of alternatives open to the condemnee
that it substantially increases the condemnor's obligation to him.
It is a difference in degree wide enough to require a difference in
result.
Compare United States v. General Motors Corp.,
323 U. S. 373,
with United States v. Petty Motor Co., 327 U.
S. 372. [
Footnote
6]
Page 338 U. S. 16
We conclude therefore that, since the Government, for the period
of its occupancy of petitioner's plant, has, for all practical
purposes, preempted the trade routes, it must pay compensation for
whatever transferable value their temporary use may have had. The
case must accordingly be remanded to the District Court to
determine what that value, if any, was. In making that
determination, the Court should consider any evidence which would
have been likely to convince a potential purchaser as to the
presence and amount of petitioner's going concern value, for this,
as we have pointed, out, must be considered identical with the
value alleged to inhere in the trade routes. Though we do not mean
to foreclose the consideration of other types of evidence or the
application of other techniques of appraisal, it may shed some
light on the problem to indicate as briefly as possible the
relevance of the evidence rejected at the trial to the
determination of the presence and amount of this value.
One index of going concern value offered by petitioner is the
record of its past earnings. If they should be found to have been
unusually high in proportion to investment in its physical
property, that might have been a persuasive indication to an
informed purchaser of the business that more than tangible factors
were at work. [
Footnote 7]
Page 338 U. S. 17
Such a purchaser might well have measured the value thus
contributed by capitalizing at a rate taking into account the
element of risk [
Footnote 8]
and the number of years during which these factors would probably
have effect, the excess of the probable future return upon
investment in the business over a return which would be adequate
compensation for the risk of investment in it. [
Footnote 9] If the figure chosen as representing
investment were
Page 338 U. S. 18
cost however, the possibility would probably have been
recognized that the capitalized value of the excess income might
involve duplication of value already reflected in the valuation of
the site. [
Footnote 10]
In addition to or as a substitute for net income as an index of
going concern value, a purchaser might have been influenced by such
evidence of expenditure upon building up the business as
petitioner's records of payments to deliverymen for the
solicitation of new customers. Instead of beginning with excess
earnings resulting in part from expenditure on solicitation and
then capitalizing them to reach going concern value, such
expenditure can be regarded as a direct contribution, in proportion
to the amount of its long-term effectiveness, to the capital assets
of the business. But the legitimacy of the inference that
expenditures for the purpose of soliciting business have resulted
in a value which will continue to contribute to the earning
capacity of the business in later years, and which is therefore a
value that a purchaser might pay for, necessarily depends on the
character of the business and the experience of those who are
familiar with it. [
Footnote
11] This at any rate, is a matter which is open to proof.
Page 338 U. S. 19
Though not capitalized and carried on the books, it is obvious
that such an asset may be present even in a business losing money
or, at any rate, not making enough to have any "excess" income. A
relevant measure of its value, however, would be the gross income
of the business, as is recognized by the method of estimating going
concern value that has been employed in cases dealing with the
excess profits tax base of laundry businesses.
See Appeal of
Metropolitan Laundry Co., 2 B.T.A. 1062;
Pioneer Laundry
Co. v. Commissioner, 5 B.T.A. 821. Petitioner offered proof of
the value of its trade routes based on just such a method and
further offered to show that it was a method generally used in the
laundry business. If so, it would also be relevant. [
Footnote 12]
But even though evidence in one or more of these categories may
tend to establish the value of petitioner's
Page 338 U. S. 20
trade routes, the consequence of its inadequacy may require
complete denial of compensation where that would not be the result
in the case of its tangible property. The reason is this: evidence
which is needed only to fix the amount of the value of the tangible
property is required to establish the very existence of an
intangible value, as well as its amount. Since land and buildings
are assumed to have some transferable value, when a claimant for
just compensation for their taking proves that he was their owner,
that proof is
ipso facto proof that he is entitled to some
compensation. The claimant of compensation for an intangible, on
the other hand, who cannot demonstrate a value that a purchaser
would pay for has failed to sustain his burden of proving that he
is entitled to any compensation whatever. This is a burden,
moreover, which must be sustained by solid evidence; only thus can
the probability of future demand be shown to approximate that for
tangible property. Particularly is this true where these issues are
to be left for jury determination, for juries should not be given
sophistical and abstruse formulas as the basis for their findings,
nor be left to apply even sensible formulas to factors that are too
elusive.
If the District Court, bearing in mind these cautions, should
find petitioner's evidence adequate to submit to the jury for a
finding as to the presence and amount of the value of the trade
routes, it will then be necessary also to instruct it as to
computation of the compensation due. Consistently with an approach
which seeks with the aid of all relevant data to find an amount
representing value to any normally situated owner or purchaser of
the interests taken, no value greater than the value of their
temporary control would be compensable. Since, as we have noted,
value of this sort can have only a limited duration, the value of
the trade routes for the period of the Army's occupancy of the
physical property might be estimated by computing the
discounted
Page 338 U. S. 21
value as of the beginning of the period of the net contribution
likely to have been made to the business during that period had it
been carried on; its value for each year would be the net
contribution for that year. [
Footnote 13] But here, as hitherto, we mean only to
illustrate and not to prescribe the course which may be taken upon
remand of the case.
Petitioner also protests against the basis chosen by the lower
courts for the award of interest. It argues that the Government,
having taken the whole property on November 21, 1942, should pay
interest from that day on the total amount of the award. We have
already rejected, however, the only possible theory upon which this
claim could rest -- that the proper method of computing the award
is to determine the difference between the value of the business on
the date of taking and its value on the date of return. It follows
from our holding that the proper measure of compensation was an
annual rental which came due only at the beginning of each renewal
of the Army's occupancy that interest should be payable on each
installment of rental only from that date.
For proceedings not inconsistent with this opinion, the case
is
Reversed and remanded.
[
Footnote 1]
The petition was filed under § 201 of Title II of the Second War
Powers Act of 1942, 56 Stat. 176, 177, 50 U.S.C.App. § 632.
[
Footnote 2]
U.S.Const. Amend. V: " . . . nor shall private property be taken
for public use, without just compensation."
[
Footnote 3]
Once taken, of course, property can have no actual market value
except as giving rise to a claim against the taker.
See 1
Bonbright, The Valuation of Property 414 (1937). In view of the
resulting necessity of postulating a hypothetical sale, care must
be taken to avoid the extremes on the one hand of excluding the
value of the property for special uses and on the other of
supposing the hypothetical purchaser to have either the same
idiosyncrasies as the owner,
compare Little Rock Junction Ry.
v. Woodruff, 49 Ark. 381, 5 S.W. 792,
with Producers' Wood
Preserving Co. v. Commissioners of Sewerage, 227 Ky. 159, 12
S.W.2d 292, or the same opportunities for use of the property as a
taker armed with the power of eminent domain,
see e.g., United
States v. Chandler-Dunbar Co., 229 U. S.
53;
McGovern v. New York, 229 U.
S. 363;
Olson v. United States, 292 U.
S. 246;
United States ex rel. TVA v. Powelson,
319 U. S. 266.
[
Footnote 4]
Although the theory upon which petitioner's various offers of
proof were made was not always well defined, their import is clear
enough to preclude rejecting them as meaningless.
[
Footnote 5]
[
Footnote 6]
The line drawn in these two cases between inclusion of removal
costs in compensation for a temporary taking of less than a
lessee's full term and their exclusion where the whole term has
been taken is likewise based on a recognition of a difference in
the degree of restriction of the condemnee's opportunity to adjust
himself to the taking. In
United States v. General Motors
Co., 323 U.S. at
323 U. S. 382,
the Court, comparing a temporary with a fee taking, observed:
"It is altogether another matter when the Government does not
take his entire interest, but, by the form of its proceeding, chops
it into bits, of which it takes only what it wants, however few or
minute, and leaves him holding the remainder, which may then be
altogether useless to him, refusing to pay more than the 'market
rental value' for the use of the chips so cut off. This is neither
the 'taking' nor the 'just compensation' the Fifth Amendment
contemplates."
In
United States v. Petty Motor Co., 327 U.S. at
327 U. S. 379,
the Court said:
"There is a fundamental difference between the taking of a part
of a lease and the taking of the whole lease. That difference is
that the lessee must return to the leasehold at the end of the
Government's use, or at least the responsibility for the period of
the lease, which is not taken, rests upon the lessee. This was
brought out in the
General Motors decision. Because of
that continuing obligation, in all takings of temporary occupancy
of leaseholds, the value of the rights of the lessees, which are
taken, may be affected by evidence of the cost of temporary
removal."
[
Footnote 7]
The Government argues that, if petitioner's testimony as to the
value of its physical property were accepted, it could have no
going concern value, because its average net earnings for the five
years preceding the taking were too low to establish any excess
return. The alleged value was about $650,000, and the average
annual earnings $39,375.39, a return on that value of about 6%. On
the other hand, the Government's own expert witnesses respectively
valued the physical property, after allowing depreciation at
$455,000 and $433,500, and, on that basis, the rate of return would
be about 9%. It is not for us, at any rate, to assume that 6%,
rather than 5% or some lower figure, is the lowest that would
compensate investment in the physical property.
[
Footnote 8]
The importance of varying in accordance with varying risks the
percentage at which income is capitalized to obtain business value
has been emphasized by the Securities Exchange Commission in
computing value for purposes of § 77B reorganizations.
See
Note, 55 Harv.L.Rev. 125, 133 (1941).
See also Fisher, The
Nature of Capital and Income c. 16, "The Risk Element" (1906);
Angell, Valuation Problems 14 (Practicing Law Institute, 1945).
[
Footnote 9]
See Yang, Goodwill and Other Intangibles cc. 5, 6
(1927); Simpson, Goodwill in 6 Encyc.Soc.Sci. 698, 699 (1931). For
a systematic discussion of the steps involved in making such an
estimate,
see Accountants' Handbook 869
et seq.
(Paton ed., 1944). It would be theoretically possible, of course,
to arrive at the total value of the business not by adding going
concern value obtained by capitalization of excess income to a
valuation of the physical property obtained in some other way, but
by capitalization of all income.
See 1 Bonbright, The
Valuation of Property cc. 11, 12 (1937); 1 Dewing, Financial Policy
of Corporations, bk. II, c. 1 (4th ed., 1941);
cf. Consolidated
Rock Products Co. v. Du Bois, 312 U.
S. 510,
312 U. S.
525-526;
Group of Institutional Investors v.
Chicago, M., St. P. & P. R. Co., 318 U.
S. 523,
318 U. S.
540-542. But a forecast of future earnings is subject to
inaccuracy resulting both from the difficulty of discounting the
nonrecurrent circumstances which entered into the record of past
earnings upon which the forecast is based (even if no projection of
future earnings is expressly made, past earnings can be used as a
basis of capitalization only on the assumption that they will
continue), and to the hazards of any prediction of future
conditions of business.
See May, A footnote on Value, 72
J. of Accountancy 225 (1941); Orgel, Valuation under Eminent Domain
§ 216 (1936). The consequences of inaccuracy are reduced by
confining the capitalization to excess income, but, of course, it
is a question of fact whether future excess income can be predicted
with certainty sufficient to persuade a purchaser of the business
to pay for its capitalized value.
See p.
338 U. S. 18,
post.
[
Footnote 10]
This possibility would arise wherever cost of the physical
property, because the neighborhood was undeveloped at the time the
business site was acquired or for some other reason, did not wholly
reflect enhancement in its market value by the advantages of its
location, since these advantages would increase total income. Such
duplication could be avoided, however, by using as the measure of
investment not cost but market value.
[
Footnote 11]
In the case of a business like the laundry business, which must
entice patrons from already established competitors in an area
confined by the range of delivery service, it may be that
expenditure upon solicitation is regarded as a capital expenditure
for part of a combination of income-producing assets quite as much
as investment in the land and building.
Compare Houston Natural
Gas Corp. v. Commissioner, 90 F.2d 814, holding the salaries
and expenses of solicitors of new customers for a public utility to
be a capital expenditure nondeductible from current income because
contributing to income in future years. The Tax Court, its
predecessor, the Board of Tax Appeals, and the Courts of Appeals
have frequently held such analogous expenditures as those made to
increase the circulation of newspapers and for certain forms of
advertising to be capital expenditures. For collections of such
cases,
see 4 Mertens, Law of Federal Income Taxation §
25.18 and § 25.27 (1942).
See also Dodd and Baker, Cases
and Materials on Business Associations 1125-26 (1940).
Compare the materials on valuation of goodwill as part of
a decedent's gross estate collected in 2 Paul, Federal Estate and
Gift Taxation § 18.16 (1942), and Paul, Federal Estate and Gift
Taxation § 18.16 (1946 Supplement).
[
Footnote 12]
Proceeding from the assumption that laundry businesses are a
class having uniform characteristics, this method presupposes
informed opinion both as to the normal ratio of a given volume of
expenditure on solicitation to a given volume of gross income and
as to the normal duration of the contribution to gross of a given
amount of such expenditure. The Board of Tax Appeals cases cited,
as well as petitioner's offer of proof, involved the further
refinement that the ratios chosen varied with the gross income
attributable to each class of customers.
[
Footnote 13]
That contribution would not, of course, continue from year to
year in a straight line, though it may prove more convenient to
treat it as if it did. The analysis of compound interest methods of
depreciation accounting in Paton, Advanced Accounting c. 12 (1941),
gives insight into ways in which the rate of decline in the value
of such an intangible might be computed.
See also id. at
435; Canning, The Economics of Accountancy, cc. 13, 14 (1929);
Yang, Goodwill and Other Intangibles 201
et seq.
(1927).
MR. JUSTICE RUTLEDGE, concurring.
As I understand the opinion of the Court, its effect is simply
to recognize that short-term takings of property entail
considerations not present where complete title has
Page 338 U. S. 22
been taken. Rules developed for the simple situation in which
all the owner's interests in the property have been irrevocably
severed should not be forced to fit the more complex consequences
of a piecemeal taking of successive short-term interests. Such
takings may involved compensable elements that, in the nature of
things, are not present where the whole is taken.
With this much I agree. But, having recognized the possible
compensability of intangible interests, I would not subscribe to a
formulation of theoretical rules defining their nature or
prescribing their measurement. What seems theoretically sound may
prove unworkable for judicial administration. But I do not
understand the opinion of the Court to do more than indicate
possible approaches to the compensation of such interests. Since
remand of the case will permit the empirical testing of these
approaches, I join in the Court's opinion.
MR. JUSTICE DOUGLAS, with whom THE CHIEF JUSTICE, MR. JUSTICE
BLACK and MR. JUSTICE REED concur, dissenting.
The United States took this plant in order to run a laundry for
the Army, not for the public. The trade routes were wholly useless
to it. It never used them. Yet it is forced to pay for them under a
new constitutional doctrine that is forged for this case.
Heretofore it was settled that the owner could not receive
compensation under the Fifth Amendment for the destruction of a
business which resulted from the taking of his physical property,
even though the business could not be reestablished elsewhere.
Mitchell v. United States, 267 U.
S. 341;
Bothwell v. United States, 254 U.
S. 231. That result followed from the rule that
consequential damages resulting from the taking were not
compensable.
See United States ex rel. TVA v. Powelson,
319 U. S. 266,
319 U. S.
281-283;
United States v. Petty Motor Co.,
327 U. S. 372,
327 U. S.
377-378
Page 338 U. S. 23
.
And so, in this case, if the United States had taken this plant
for a permanent laundry to run for the Army, and not for the
public, [
Footnote 2/1] it need not
pay for the trade routes. As Justice Brandeis said in
Mitchell
v. United States, supra, at
267 U. S. 345,
"[i]f the business was destroyed, the destruction was an unintended
incident of the taking of land." As much seems to be conceded by
the Court in the present case. That concession is necessary if
precedent is to control. For, in
United States v. General
Motors Corp., 323 U. S. 373,
323 U. S. 383,
we said that a temporary taking and a permanent taking were to be
treated alike in that respect. In that case, the cost of moving out
and preparing the space for the new occupancy was allowed insofar
as it bore on the market value of the temporary occupancy. But we
ruled that "proof of value peculiar to the respondent, or the value
of goodwill or of injury to the business of the respondent" must,
in that case, "as in the case of the condemnation of a fee," be
excluded from the reckoning, 323 U.S. at
323 U. S. 383.
The Court today repudiates that ruling when it holds that the
United States must pay for the trade routes of petitioner when its
taking of the laundry was only temporary. There would be a complete
destruction of the trade routes if the taking of the plant were
permanent, and a depreciation of them (I assume) where it is
temporary. Why the latter is compensable when the former is not is
a mystery. Even the academic dissertation on valuation which the
opinion imports into the Fifth Amendment from accounting literature
conceals the answer.
The truth of the matter is that the United States is being
forced to pay not for what it gets, but for what the owner loses.
The value of trade routes represents the patronage of the customers
of the laundry. Petitioner,
Page 338 U. S. 24
I assume, lost some of them as a result of the government's
temporary taking of the laundry. But the government did not take
them. There was, indeed, no possible way in which it could have
used them. Hence, the doctrine that makes the United States pay for
them is new and startling. It promises swollen awards which
Congress, in its generosity, might permit, but which it has never
been assumed the Constitution compels.
Petitioner has received all that it is entitled to under the
Constitution. It has obtained, after three years and seven months
of use of its plant by the United States, a sum of money equal to
almost half the market value of the fee. That award was based on
the market rental value of the plant [
Footnote 2/2] plus an allowance to restore the property
to its original condition. [
Footnote
2/3] Under the authorities, that award cannot be increased
unless we are to sit as a Committee on Claims of the Congress and
award consequential damages.
[
Footnote 2/1]
As respects payment for the going concern value when the
government takes over a business to run it as such,
see Omaha
v. Omaha Water Co., 218 U. S. 180,
218 U. S.
202-203.
[
Footnote 2/2]
That is the measure of compensation for the taking of a
temporary interest in property.
United States v. General Motors
Corp., 323 U. S. 373,
323 U. S. 382;
United States v. Petty Motor Co., 327 U.
S. 372,
327 U. S.
378.
[
Footnote 2/3]
Compensation for ordinary wear and tear is included in fixing
the market rental value of the property. But wear and tear above
that amount is separately compensable.
See In re Condemnation
of Lands, 250 F. 314, 315;
United States v. Certain
Parcels of Land, 55 F. Supp.
257, 263;
United States v. 5,901.77 Acres of Land, 65
F. Supp. 454;
United States v. 14.4756 Acres of Land, 71
F. Supp. 1005.